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spk03: Good morning and welcome to the HALMET Aerospace second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Lusser, Vice President, Investor Relations. Please go ahead.
spk01: Thank you, Kate. Good morning and welcome to the HowMet Aerospace second quarter 2023 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 today's presentation, references to EBITDA and EPS mean adjusted EBITDA excluding special items and adjusted EPS excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John.
spk06: Thanks, BT, and good morning, everyone. Q2 was another strong quarter for HOMAP. Revenues were up 18% year-over-year and 3% sequentially. albeit Q2 is traditionally a stronger quarter seasonally than Q1 due to more effective production and sales days. Commercial aerospace increased by 23% year over year and continues to be the highlight of the quarter and reflects some of the schedule increases for the anticipated Boeing 737 build rates, which are slated to increase very soon. Defense sales were also strong at plus 17%. EBITDA was up 16% year-over-year and up sequentially. Earnings per share increased to $0.44 per share and exceeded the high end of guidance. This was an increase of 26% year-over-year. The cash balance was a healthy $536 million and free cash flow was strong at $188 million, which started at consecutive quarters of cash generation. $100 million of cash flow was used to buy back shares at an average price of $45 per share. Net debt to EBITDA further improved to 2.5 times leverage, and all bond debt is at a fixed rate, which provides predictable interest rate expenses into the future. HMF has negligible exposure to floating interest rates. Regarding our revolver, we amended and extended our $1 billion undrawn credit facility to 2028, while realizing lower fees and a more favorable net debt to EBITDA governance. Lastly, another notable item was the commercial settlement of Lehman claim, $40 million, which is $25 million less than previously reserved, with a cash settlement to be paid in July 2023 and a further settlement in July 2024. This litigation was the most significant of all residual claims for HOMET, namely RemainCo, and dates back to 2008. Before turning it over to Ken, I want to cover three additional items. Firstly, in Q2, Hermet was impacted by approximately five days of production stoppage at that wheels plant in Hungary due to a nine-day strike at Arconic Corporation, which is now resolved. The interruption of supplies of aluminum billet had an unfavorable effect of about $5 million to profitability. for which a claim has been lodged with Arconic under the terms of the supply agreement, and we expect to gain resolution shortly. Additionally, Hamet is assessing its significant reliance upon this source of supply. Secondly, while segment commentaries, including the finance portion of our call, let me address structures. The margin rate fell back for the first time in several quarters. The profit miss was essentially the result of adding costs for production rate increases, which we did not achieve. The costs of additional people, furnace preparation, and other rolling mill facilities preparation were unrecovered due to the production rate increases not being achieved. The main issue was bottlenecks in production at one plant. The backlog did increase since there was not a demand issue. Naturally, our plan is to achieve production rate increases and burn down the increased backlog as we move into the second half. This reduced production combined with F-35 bulk and inventory burned down was also not helpful, but it was in aggregate not material in the context of the Hamet overall results, which were again up, as I commented earlier. Finally, the Paris Airshow was held in June with the largest significant orders ever at an airshow for commercial aircraft, which adds to the backlog of orders to be fulfilled once production rates are able to be further increased. The show was very successful for Hamet, with a combination of production meetings with both customers and investors, all reflecting the huge optimism for both the industry generally and for Hamet in particular. I'll now turn the call over to Ken, who will provide further market and segment commentary.
spk09: Thank you, John. Let's move to slide five. All markets continue to be healthy, with revenue in the quarter up 18% year over year and 3% sequentially. Commercial aerospace continued to lead the growth with an increase of 23% year-over-year, driven by all three aerospace segments. Commercial aerospace has grown for nine consecutive quarters and stands at 47% of total revenue. Commercial aerospace portion of total revenue is expected to increase due to the developing wide-body recovery, strong backlog of commercial aircraft orders, and sparse growth. Spares for commercial aerospace continue to increase sequentially and are now trending to be approximately 95% of 2019 levels at year end. Defense aerospace was up 17% year over year, driven by the F-35 and legacy fighter programs. Sequentially, defense aerospace was up 4% year over year, driven by engine products. Commercial transportation, which impacts both the forged wheels and fastening system segments, was up 8% year-over-year and up 2% sequentially, driven by higher volumes. Finally, the industrial and other markets were up 20% year-over-year, driven by oil and gas, up 36%, IGT up 20%, and general industrial up 11%. Sequentially, these markets were up 4%, with general industrial up 9%, oil and gas up 4%, and IGT flat. In summary, another very strong quarter across all of our end markets. Now let's move to slide six. Starting with the P&L and enhanced profitability, revenue, EBITDA, and earnings per share all exceeded the high end of the guidance in the second quarter. Revenue was $1.65 billion, up 18% year over year, EBITDA was $368 million, up 16% year over year, including net headcount additions in Q2 of approximately 380 employees, which builds on additions made in Q1. Year to date, net headcount additions are approximately 865, which are in line with our targets. EBITDA margin was 22.3%. Adjusting for the year-over-year inflationary cost pass-through of approximately $25 million, EBITDA margin was 22.7%, and the flow-through of incremental revenue to EBITDA was approximately 22%, while absorbing near-term recruiting, training, and production costs. Earnings per share was 44 cents, which was up 26% year-over-year. The second quarter represented the eighth consecutive quarter of growth in revenue, EBITDA, and earnings per share. Moving to the balance sheet, the ending cash balance was healthy at $536 million after generating $188 million of free cash flow, which was our best Q2 of free cash flow generation. We continue to expect strong positive free cash flow in the second half of 2023. $118 million of free cash flow generation was allocated to common stock repurchases and dividends. Net debt to EBITDA improved to a record low of 2.5 times. All bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future. Our next bond maturity is in October of 2024. Finally, we amended our $1 billion revolver through 2028 while realizing lower fees and a more favorable financial covenant. The revolver remains undrawn. Moving to capital allocation, we continue to be balanced in our approach. In the quarter, capital expenditures were 41 million with a focus on automation. Capital installed prior to COVID-19 puts us in a good position to support continued commercial aerospace recovery. In the second quarter, we repurchased 100 million of common stock at an average price of $44.52 per share, retiring approximately 2.2 million shares. This was the ninth consecutive quarter of common stock repurchases. Share buyback authority from the Board of Directors stands at approximately $822 million. Since separation in 2020, we have repurchased more than $1 billion of common stock. We continue to be confident in free cash flow. In the second quarter, the quarterly stock dividend was $0.04 per share after it was doubled in the fourth quarter of last year. Finally, we issued a notice to redeem $200 million of our 2024 debt tower with cash on hand. The redemption is expected to be complete at the end of September and will lower our annualized interest costs by approximately $10 million. As you will recall, we repurchased approximately $176 million of bonds last quarter, which will lower annualized interest costs by an additional $9 million. Therefore, year-to-date bond repurchases are expected to decrease annualized interest costs by approximately $19 million. Now let's move to slide seven to cover the segment results for the second quarter. Engine products continued at strong performance as the second quarter represented the eighth consecutive quarter of year-over-year growth in revenue and EBITDA. Revenue was $821 million, an increase of 26% year-over-year. Commercial aerospace was up 23%. Defense aerospace was up 41%. And both markets were driven by higher build rates and spares growth. IGT was up 20%, and oil and gas was up 36% as demand continues to be strong. EBITDA increased 25% year-over-year to a record for the segment of $223 million. EBITDA margin was 27.2%. despite the addition of approximately 350 net new employees year-to-date and approximately 90 net additions in Q2. Across all of the aerospace segments, net headcount additions are needed for the continued revenue ramp, but do carry near-term recruiting, training, and production costs. Finally, in the second quarter, the engines team finalized a new five-year collective bargaining agreement and our Whitehall, Michigan facility. Let's move to slide eight. Fastening systems year-over-year revenue increased 19%. Commercial aerospace was 19% higher as the wide-body recovery starts to take effect. Defense aerospace was up 24%. Commercial aerospace was up 17%. And general industrial was up 16%. Year-over-year segment EBITDA increased 14%. as volume increases were partially offset by the addition of 430 net new employees year-to-date and approximately 215 net additions in Q2. And let's move to slide 9. Engineered structures year-over-year revenue was up 8%, with commercial aerospace up 31%, driven by higher build rates and approximately $25 million of Russian titanium share gain. Defense aerospace was down 33% year-over-year, driven by customer inventory corrections. Segment EBITDA decreased 23% year-over-year, while margins declined 410 basis points. The lower EBITDA was driven by higher costs associated with additional headcount, as well as operational costs for planned production rate increases, which were unrecovered due to production bottlenecks in one plant. Net headcount additions in the quarter were approximately 50 employees. Finally, in the third quarter, the structures team finalized a new four-year collective bargaining agreement at our Niles, Ohio facility, which was ahead of schedule. Now let's move to slide 10. Forged wheel revenue year over year increased 7%. The $19 million increase in revenue Year-over-year was driven by a 6% increase in volume. Segment EBITDA increased 8% year-over-year despite the interruption of raw material for a wheels plant in Hungary due to a nine-day strike at our Arconic Corporation supplier, which has now been resolved. Margin increased 30 basis points due to the impact of lower aluminum prices and inflationary cost pass-through. Finally, let's move to slide 11. We continue to be focused on improving our capital structure and liquidity. In July, we issued a notice to redeem 200 million of our 2024 debt tower with cash on hand, which is expected to be completed by the end of September. The October 2024 debt tower would be approximately 705 million after the redemption. Since the separation in 2020, including the redemption just announced in July, we will have paid down approximately $2.15 billion of debt with cash on hand and lowered our annualized interest costs by more than $120 million. Gross debt is expected to be less than $3.8 billion after the redemption in September. All long-term debt continues to be unsecured and at fixed rates. Finally, we amended our one billion-dollar five-year unsecured revolving credit facility through 2028. The amendment provides lower fees and more favorable covenants. Details can be found in the 10-Q, which is expected to be filed later today. The revolver remains undrawn. Lastly, before turning it back to John, let me highlight one item. In the appendix on slide 18, it covers our operational tax rate, which was approximately 22.6% for the quarter. The second quarter rate represents approximately a 500 basis point improvement in the operational tax rate since the separation in 2020. Now let me turn it back to John for the outlook and summary.
spk06: Thanks, Ken, and let's move to slide number 12. The outlook for HMET continues to be very strong and supported in particular by the extraordinary backlog of commercial aircraft orders of both Boeing and Airbus. Demand increases have moved further to the right, constrained by current aircraft production, but all go well for revenue increases to come in 2024, 2025, and beyond. This growth in absolute aircraft quantity is further enhanced by the increased sophistication of engine technology upgrades being brought to market by both GE and Pratt & Whitney to the narrow-body market. These turbine improvements address fuel efficiency and time on wing issues, which enhance the value of how much differentiated products. This combines well with the upcoming improvement in wider body production, which increasingly features composite technology, which again increases the value of how much differentiated products of titanium structures and fasteners. Wide body aircraft also feature improved aerospace engine content for the company. Defense markets continue to be robust. and we envisage increased revenue growing into 2024 as the destocking for bulkheads is completed and engine spares continue to increase significantly as shop visits increase. The F-35 backlog continues to increase to approximately 420 aircraft, with recent orders of 126 aircraft for the U.S. Government Joint Program Office, plus 25 for Israel and a further 25 aircraft for the Czech Republic. Industrial revenue continues to grow for both IGT and oil and gas in particular. The outlook for wheels is also healthy for the current quarter, and in Q3, underlying demand continues to be strong, albeit Q3 is notably the weakest quarter for revenue due to European vacations, which are also a feature of our aerospace plants in Europe, in both France, Germany, and Hungary in particular. This seasonal effect The seasonal offset is seen to be approximately $50 million of revenue between Q2 and Q3. My final markets comment is regarding spares, where we see spares of commercial aircraft closing in on 95% of the 2019 levels by year end, and approximately 130% of the defense and IGT market at 2019 levels. This puts aggregate spares for this year in excess of 2019 levels with higher rates to come as we see the rates increasing as we close out the year. A cautious stance has been taken relative to Q4 until the demand is more clear for commercial trucks in the quarter and aircraft parts for the first half of 2024. While the backlog is there, we find difficulty in planning for rate increases and the inventory impact if that's not achieved. Specifically, We are raising guidance once again for the year by another significant step. To give you an example of guidance assumptions, we have lifted our 737 max assumption from 30 per month and nudged it into the 30s, but not anywhere near the rate 38 for the second half. This number is intentionally loose given all the moving parts for the business and also the lack of clarity over very soon. And when we plan for the second half, We are increasing people recruitment further, but at a reduced rate in the first half, as we hope to use the productivity improvements to come. Regarding Q3, revenue is expected to be $1.59 billion, plus or minus $10 million. EBITDA, $360 million, plus or minus $5. Earnings per share, $0.42, plus or minus a penny. Regarding the year, revenues increased from $6.25 billion to $6.44 billion, a significant increase, and let's say then plus or minus $30 million, $40 million, around that range. And then EBITDA was increased to $1.45 billion, plus or minus $10 million. Earnings per share is increased to $1.70, plus or minus a penny. And free cash flow is held at $6.35 billion, having absorbed the settlement for the Lehman Brothers claim. In conclusion, to my outlook commentary, we're pleased to demonstrate both excellent Q2 achievements supplemented by further optimistic outlooks with very solid increases to come in the future. Let's move to the summary on slide 13. Q2 was another strong quarter for HMET. Revenue is up 18%, EBITDA 16%, and earnings per shares, 26%. And EBITDA margin adjust for material pass-through was strong at 22.7%. And so everything continues to be heading in a healthy direction. Liquidity is healthy with very positive free cash flow with more to come in the second half. And we've continued to deploy that cash both to share repurchase in the second quarter. And as you can see, we've turned to debt repayment in the third quarter. Guidance has been increased, and we expect year-over-year improvement in annual revenue, EBITDA, and earnings per share, as stated. Also, we expect very positive free cash flow generation in the third and fourth quarters. Regarding debt, I already mentioned the $200 million, and as we complete that with the EBITDA improvements, Then we'll be improving net debt to EBITDA leverage from the two and a half times record that we talked about at the Q2. And we'll see improvements in Q3 and Q4 and heading towards two times levered by the end of the year. And then finally, we expect to increase the quarterly common dividend by 25% from $0.04 a share to $0.05 a share in the fourth quarter of 2023. Thank you all very much. Let's move across to question and answer.
spk03: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question. The first question is from Sheila Kayaglu of Jefferies. Please go ahead.
spk04: Good morning, guys, and thank you. John, maybe first one for you here. Just on the incrementals as we go forward, obviously 22% in the quarter given structures after 25% in Q1. You commented last quarter about how difficult it is to convert at a 30% plus rate. Just given where aerospace build rates are, and you'll be climbing through at least the middle of the decade here, how do you think about when you put costs into the system when it converts into higher profitability? Do you have to wait till build rates peak? for that to convert to higher operating profit than revenue.
spk06: Okay, thank you, Sheila. First of all, we don't have to wait, but the extraordinary levels of recruitment during the last couple of years have certainly weighed upon us, and probably of all the things that we've been doing, driving labor productivity has been amongst the most difficult, and it's certainly been more difficult than what we believe we've overcome by way of scrap and yield and also driving through on the volume. If you look at our midpoint of guidance, we believe we're going to raise the incremental to about 28% in Q3 and we're hopeful at about 34% in Q4 and that takes account of what we believe to be hopefully a slowing of recruitment and improved retention ratios and as the denominator has got bigger, the employees we've taken on. And so we're optimistic that the incremental drop through begins to improve and then hopefully improve again in 24 with the combined volume, the pull through from the automation programs the bigger denominator of recently recruited employees and the mixed effective wide body. So it's a future statement. We're hopeful, we're optimistic, we're planning for it. But I would be very disappointed if we had to wait until we had stability for improvements in that drop-through.
spk04: Thank you for the comment. Just to follow up, in terms of the structures, margins in the quarter, how do we think about that bumping up in the second half? How quickly does it improve?
spk06: So, I mean, when I think about how Matt is more like a relentless machine, I was trying to bring color to my commentary. So last time I tried a wet paper tissue and that didn't work so well, as you know, but this time I think to myself, you know, hammer, we're fairly relentless machine rolling forward and delivering results. We're not that flash bang and, uh, full of jumpy noises like Chinese firecrackers. But within the Q2, there is one thing we overcame, which I'm proud in the way we overcame it, which is the consequences of the strike in one of our suppliers of aluminum billets. That nine-day stoppage cost us heavy, and yet we marched straight through and delivered really solid margins in our wheels business. So I think of that as a really great performance by Hammett in that regard. Conversely, when I think of structures, we took a much bigger hit than the strike in the margin rate and the lack of achievement of the volumes. And so I put that more in the, let's say, almost like a 10 million complete face plant for the business. And I just think to myself, you know, if you want to use the play on the taglines for the thing, you know, how many face plants are in our structures business? And, you know, I'm not proud of what we really didn't achieve there. Yeah. we thought we'd prepped well, we thought we'd begun to put labour in place, we thought we'd got the, I'll say, improvements made to improve throughput in our furnaces and then rolling mills, and basically completely bottlenecked in one area, and it didn't work well. So, but despite all of that, so let's call it, if you want to, and I never like the excuse me's, but with a combination of a structures face planting and a supplier strike. We out-delivered the guide on EBITDA and when all said and done, you know, any one of those is multiples. Like when we talk about margin rate of 20 basis points difference, that's worth 3 million. It's not like it's hardly worth commenting on. And so it's a bit like me saying, yeah, we did really good apart from that. So I generally choose not to, but, I'm trying to be responsive to your question, and I'll say wheels did great, and structures was a big face plant.
spk04: It's like you read my mind. I'm going to go with relentless march rather than face plant, though, so thank you. Thank you.
spk03: The next question is from Robert. Oh, I'm sorry. The next question is from Robert Stallard of Vertical Research. Please go ahead.
spk08: Thanks so much. Good morning. Hey, Rob. John, it sounded like I cut you off there. Was there something else you wanted to add?
spk06: I was probably on a roll and I was getting carried away, so no, I'm done. You can carry on about Chinese firecrackers if you want. I don't like asking questions you haven't asked me, so no, please start over and do your damnedest.
spk08: Okay. Thanks for the update you noted on the 737 MAX rate assumptions, but I was wondering if you made any further changes on either Boeing or Airbus build rates within your guidance and whether this, in relation to that, whether what Airbus said about direct and indirect risk from this latest GTF issue could have any flow through to Hamet. Thank you.
spk06: Yeah. First of all, no rate assumption changes for elsewhere I mean, Airbus have been, I'll say, plowing ahead but struggling to get to their production numbers. But, you know, getting close and certainly the Q2 deliveries was much healthier. And so, you know, I think things are getting better generally. And I think everybody is believing that we're going to see higher rate increases. And really it's a question of when. and trying to get ready for it. We think we've prepped for it. We've built capability and capacity in labor terms. We had, I'd say, machine capacity. But as you know, on 737, originally it was going to be Jan 1st, then May 1st, then July 1st. And we just want to be cautious. That's why I say all we've done is just nudge into the early 30s and see where it goes and be ready. capable of supplying, but not willing to be clear, we're not going to put rates 30, 80 until it's achieved.
spk08: And just to follow up, anything to say on the GTF issues?
spk06: Well, certainly this power to metal issue that we read about, It seems to be historical. I'm sure that Pratt & Whitney have got a good plan about taking those engines down from aircraft wing and looking at them in detail because I think borescopes don't work for that sort of level of crack. I think the bigger impact for Hamas is... When I say impact, I mean... positive not uh because the impact the word impact with it has negative connotation is the time on wing issue which um is is present for both uh current narrow bodies engines of the the gtf and the the leap 1ab um where while each of them i think are doing better for that relative point in their life cycle compared to the predecessor engines of uh I'll say V2500 and the CFM56 is that they're still well below the exit point of the predecessor engines. And so that in itself is leading to what we believe will become increased demand for replacement parts. And also it's combining with what I referred to maybe not in sufficient detail, which was the improvements that we have worked on to help resolve the issues. So where the high-pressure turbine blades have been seeing elevated temperatures from, let's say, combustors that don't have sufficient holes left after particulates have blocked them up and then causing degradation issues and, let's say, other issues, particularly in, I'll say, Far East and Middle East climates for leap is that we are i describe intimate with those improvements we have worked on them we are prepping for their introduction and commensurate with our customers needs and and then we are now assessing how that demand combines with the increased demand for wide bodies moving to 24 the increased wide bodies moving to 24 and so it's all setting up well In terms of what I think is good demand is clearly where aircraft production increases. Less good demand, you can call it bad if you want to, is where it's a replacement part for a period of time. And then we are rather more cautious on that and where we need to increase capacity rapidly to achieve that in the coming months into 2024. and maybe in 2025, is that we certainly don't want to take capacity up and then take it back down. Therefore, we're in, I'll say, deep into commercial discussions with our customers to ensure that doesn't happen. So a long way of saying DTF, power to metal, no issue for us, nothing to do with us, and time on wing. It's leading to the sort of content improvement growth that we talk about as we make improvements to those turbine blades and introduce some pretty sophisticated technologies and certainly in the case of GTF, looking at things we've done elsewhere on those engines and the more advanced engines and seeking to deploy that, which is great for the future robustness of the engine, its fuel efficiency, and also good for how it maps.
spk08: That's great. Thanks, Arjun.
spk06: Thank you.
spk03: The next question is from David Strauss of Barclays. Please go ahead.
spk07: Thanks. Good morning. Hey, David. Hey, John. So I just wanted to clarify on the MAX. So while you've upped the guidance from 30 into the 30s, are you actually at 38 a month in terms of what you're shipping to Boeing today?
spk06: It depends upon the parts. We supply so many different parts. Well, I recognize that we receive schedules for parts increasing to rate 38. I think my scenario, which I don't like, is where should they not achieve that rate, then that the parts we've supplied, because there will be bloated inventories, they will then take them out just in the same way as parts were taken out September, October, November, December of 2022, is that I'm blending it all together and saying my average assumption is, I'm in the 30s, but being deliberately loose about it, but I'm very clear that our guidance is not based upon full rate increase of 38 from the 1st of July. That's not the case. It doesn't mean to say I don't believe that Boeing can do it. I'd love them to do it, but do it, and then I'll feel more comfortable about our guidance. I mean, our guidance, I've tried to describe in the past, tends to be something that you can rely upon. And I want to see aircraft produced, and then at that point I'll feel confident that we're not going to be on the wrong side of inventory takeout in the remaining few months of the year.
spk07: Okay, I got it. Sounds like after what you went through in Q4 of last year, you're just erring on the cautious side. I got it.
spk06: Yeah, I mean, you know, Q4 last year was pretty good. The year was really good. And so, you know, it's not worrying. It's just, you know, I'm not putting it all out there. Why would I?
spk07: Okay. As a follow-up, can you dig in a little on what's going on at Fasteners? I mean, we've seen a pretty good revenue pickup here within the business on the aero side. I know 787 rates are still low, but kind of the drop-through that we've seen there or the lack thereof in terms of the margin drop-through in Fasteners?
spk11: Yeah.
spk06: Well, I don't really like using the so-called Chinese provost, but I don't really know what he's Chinese about. And then it begins with small steps. Our margin rate did increase in Q2, despite the large ingestation of labor to prep for the balance of year. It's always a bit of a hostage to fortune, but I'm feeling confident that we're going to see both revenue growth and margin accretion in the second half beyond Q2. So, you know, in that sense, I'm really pleased with the rate and direction of the business. I wouldn't have been able to say that six months ago. And so, you know, I'm feeling increasingly confident that, I mean, there's me saying to you publicly, margin rate's going to increase. So that's pretty good.
spk07: I got it. I'll take the hint. Thanks.
spk03: The next question is from Peter Arment of Baird. Please go ahead.
spk11: Yeah, thanks. Good morning, John, Ken, PT. Hi, John. Just within engineered structures, the 45 million year-to-date gain on the Russian titanium share It seems like it's tracking right towards your expectations. So just maybe any of your updated thoughts on that and how should we think about that as we go into next year? Thanks.
spk06: In terms of demand, the previous metric I'd given was $20 million for Q4 last year, multiply it by four for 2023, and then add on, I think, 25%. So that took you to around about the $100 million mark. And therefore, implicit, if you did 45 in H1, it's 55 in H2. Right now, I'm actually feeling a little bit more confident than that. And so instead of about a 25% lift, I can see us potentially getting to a 40% lift. Certainly, I think the demand is there. So it's going to be above 100 million, well above 100 million. And the thing that I've got to see is structures standing up and making the stuff. And then I think we're going to realize the market share and the business we've obtained and won commercially. So at the moment, demand and I'll say our commercial win position is healthy. And with that, I'm trying to repeat myself. We had, I'll say, a hiccup in Q2, of which neither the structures team nor myself are proud of what we did. or rather didn't do.
spk11: Appreciate the follow-up. Thank you. Thank you.
spk03: The next question is from Robert Spinger of Mellius Research. Please go ahead.
spk10: Hey, good morning. Two follow-up things on what you just discussed. First, on the question of the improvements to GTF and LEAP, how are these affecting or impacting your ship set content And how do those changes factor into your LTAs? That's the first question. And then just on the titanium, as we move further ahead, you talked about 40% uplift, but as the wide body rates rise, let's talk about maybe 2025 when Boeing and Airbus are targeting these higher rates, I would imagine even greater uplift. Can you talk about that?
spk06: Yeah, I'll do it in reverse order. So you're absolutely correct. As wide body moves up, then that is highly beneficial for us, both for our structures business and for our fastener business, both in terms of the value delivered. And I'm going to say in the case of fasteners, the value proposition of what's delivered, where I'll say the value set is substantially higher just from the additional sophistication of the fastener sets that go with combining composites and composite skins and titanium structures. So assuming that Boeing at a, from rate three to four to four to five, and then I think higher than that in 24 and assuming they get close to the 10 or maybe by then we'll be feeling a lot more optimistic, you know, because I think fundamental demand is above rate 10 and so many for the A350 that's got to go up to at least, at least a nine. a month I think to meet market demand all that is really healthy for our titanium business and I'm expecting not just the more I'll say straightforward sheet and plate but also some of the forgings which we are able to bring to bear for that and so there's an optimism for that and again if everything that we see is potentially could happen by way of volume wide body mix then our structures margins and I have commented that I do see moving towards the high teens as we move to the middle or second part of the decade and everything is there for us to do and now you've just got to make it and demand is not the issue neither for what we've won from the titanium opportunity because of the BSMPO and tariff and Restriction issues, but also the the increasing demand for my body in terms of the Increased I'll say sophistication that I refer to yeah that goes to ship set value so as we move forward the engine value for Hammett will increase as we move to to supply the products for the changes required for the I'll say the solution and for the GTF issues for which the part we're playing in it, which is on the advantage engine, and we'll see ship set value increase there. And similarly for the improvements we're making on the leak blades. As you know, normally in engines, while very long run items, we normally do upgrade about every five to six years. And so we had an upgrade planned with our customer but the upgrades are, I'll say, a little bit more, given the issues in terms of durability that have been found on, let's call it the Generation 1 parts of the turbine. Not necessarily issues with our part per se, but because of, basically, as you drive, the temperature is up, and then shop last and with particulates that have got through, And those are problems which require even enhanced solutions to be able to improve time on wing. Thanks, John. Thank you.
spk03: The next question is from Miles Walton of Wolf Research. Please go ahead.
spk12: Thanks. Good morning. Hey, John. I know the guidance raise on sales, you gave some color, but I was hoping you'd put a finer point on it. The $190 million, did you... Did you imply it was maybe $40 or $50 million add-back on wheels, a little bit on industrial and the bulk from aero? Is that the way to think about the $190?
spk06: I didn't really break it down. I think my aggregate feeling is We see commercial and we say move the 737 rates. That's a positive assumption. Defense is proving quite robust and strong. I mean, that 17% on top of what we printed in Q1 is really strong. And, you know, we are beginning to see... the early stages of the, um, defense spares increases, uh, in particular, you know, I think as we go through into 24 and 25, we'll begin to see, uh, uh, spares increases for F 35 as an example. And, uh, so, so defense has been really good for us. And I think we continue to see that wheels. We think, uh, again, stronger than private assumptions in Q3, uh, order books for 23 are now closed. And so, you know, we're getting a much clearer picture for the final outcomes for the 23 order book closeout. And the truck manufacturers have not even opened the order books yet for 24. So, you know, we haven't got a read on that. We're hoping that they're robust. But my guesstimated picture is there'll be in the Coming, let's say, 12 months, there'll be some weakness in the trailer market, some distribution, and relative strength in the European truck market, and possibly some weakness in the North American truck market. But in aggregate, slightly better than I'd previously anticipated.
spk12: And just a quick one on the structures bottleneck. You know, it's good to have the assumptions that are conservative and not counting on the OEMs coming through the purchase orders, but Was the bottleneck in any way a result of some hesitation to go up in rates and having to run more quickly? No.
spk06: We added people. We're adding more people. So we're optimistic that everything we could have wished for by way of, I'll say, volume requirements for our customer are there. We added the people We'd spent money to increase furnace capacity. As an example, moving to triple sticks and double stick furnaces. We added some additional automation in. We, in what we thought we improving our, I'll say rolling mill capacity and throughputs. And as I said, it didn't work out. And so, you know, I just accept that sometimes in life things don't go exactly as planned. You know, I said, yeah, we face plant it, but at least we know it and don't pretend we didn't do it. Now it's a process to stand up and do it. It's not a volume issue. It's not a demand issue. It's just we've got to make the stuff and we're expecting to do so in Q3. But I guess every management says that we think we're going to do better. I mean, it's always better in the future than in the past, but Q2 for that business, we cannot be proud, that's for sure.
spk11: Thanks for the call. Thank you.
spk03: The next question is from Christine Lewag of Morgan Stanley. Please go ahead.
spk02: Hey, good morning, guys.
spk09: Hey, Christine.
spk02: You know, John, on the issue that you called out on engineered structures, Can you just provide more specific details on what caused the plant bottleneck? And then how do we think about recovery? And the other part to that would be, depending on what the problem actually is, is there a risk that we could see this spread to the other segments? Like, how do we think about all that?
spk06: Well, first of all, absolutely no risk spreading to other segments. It was totally inside one segment. inside one plant. It's not like a disease. It's not contagious. It just is for that singular plant. I've sort of done my best to dance around every question on this topic because I think it's probably getting excessive air time for what is irrelevant and the total results of how met and what we achieved, which we already exceeded everything that we said we were going to achieve. but you know it does come down to you know there's a huge sequencing process within to make titanium and in one of the early stages of that uh of that process um our work in progress buffers broke down and we ended up with uh the labor we recruited uh after standing idle the uh the equipment wasn't working And then subsequently we starved every subsequent process during the course of the three months. And so, um, you know, we believe we've got things back on track, you know, just detailed as like an analysis going into as recently again, as we've been re-reviewing it once again last week, which is, you know, my scrutiny of every work in progress, but the buffer of every important production stage for that particular product. And so, um, In terms of daylight being the best disinfectant and a high degree of engagement by the plant management, the head of operations, the business unit leadership, and then for me to be scrutinizing also work-in-progress buffers for each of the production stages, that's a pretty high level of scrutiny for something which, again, while it worthy of comment. It's not worthy of getting too carried away about. So I'm hopeful it's going to respond. If it's brute force alone, it'll respond. And hopefully with a bit of sophistication as well, we might make some improvements this quarter.
spk02: Thanks, John. That's really helpful color. I mean, it sounds like a very isolated issue for that specific segment. In terms of the recovery pace, like how long does this issue like this usually get resolved? Like by 4Q? Is this largely resolved and you're back to where you were for margins like last quarter, about 400 to 500 basis points higher. How should we think about that pace of recovery?
spk06: Yeah, I don't normally give segment commentary, but I'd be upset if we're not doing at least 10% to 15% improved volume in Q3 in that business. And as soon as we do that, then we'll see a large restoration of margin because we'd worked long and hard to establish that 14% as the, let's call it, the line for that business and held it no matter what was thrown at us by way of F35 bulkheads, you know, 7, 8, 7, dropping to nothing. And, you know, through thick and thin, we'd done it. And then as soon as we got the volume to do what we did,
spk13: It was not good.
spk06: But, you know, at least I just think it's best to be straightforward about it and say, you know, we didn't do good. We know what we've got to do. Everybody knows what they've got to do. And we've prepped long and hard to make sure that we succeed and make substantial improvement in Q3. And then, you know, to play it again and more in Q4.
spk02: I really appreciate the detail you provided, John. Thanks.
spk06: Thank you.
spk03: The next question is from Gotham Khanna of Cowan. Please go ahead.
spk13: Hey, good morning. Thanks, guys. Hey, Gotham. I wanted to follow up. I think it was Sheila's question. Just directionally looking at next year, in the past you've opined on incremental margin potential. given you've already done a lot of hiring and incrementally that's not as big of a headwind as those people get, more productive and the like, and then the cross-currents of forged wheels and what have you, do you have the same confidence in the 30% to 40% incrementals next year that you did kind of heading into this year? What do you find on that?
spk06: It's pretty... I'll say soon to be imagining 24s, and so we don't normally comment much on 24. I suspect that I'll give you some sort of demand outlook when we get to November time and give Q3 results. We've done that the last couple of years. And I think the most interesting question for, I'll say, for when we deliver our Q3 results and decide about giving some color for 24 is like, do we achieve 2019 levels of revenue? That's the most interesting question. And bear in mind, as we all know, is that there's a significant mixed drag, you know, because it's not all things being equal. It's going to be all things being unequal where, you know, wide body will be, let's say, I don't know, a couple of hundred planes down and now everybody might be a couple of hundred planes up and that's probably getting towards a half a billion dollar revenue drag. But can we overcome all of that with all the stuff we've been talking about in terms of, I'll say, content, price, you know, just driving through and improving our shares and all the rest of it. And so that for me is the most interesting question about 24 is that do we get there and therefore it'll be like a whole year early. That's so fascinating. Of course, I'm asking the question. I'm not giving you the answer because it's too early. In terms of margins, you know, 35% plus or minus five was appropriate for when we were talking that clearly in, I think it was in 21 for 22. And I'll say heading that way, maybe it's more like a 30 plus or minus for 23. Again, too early to say, and it's going to depend upon, hopefully, seeing positive volume combine that with productivity coming through from a more stable workforce and you know having really I'll say bore down on that problem which for me it's only like 25 percent of the problem belongs in the whole recruitment retention and the rest is just in fundamental productivity of the workforce as some of our parts are so sophisticated that the trading times are elevated and therefore we should start to see some of the benefits you know come through on that add together with the wide body demand so a lot of moving parts gotham but at the moment you know i think it's more like a 30 plus or minus range around it but i i don't know that yet i mean that's no more than me thinking directionally Where are we without any benefit of any detailed financial analysis? And therefore, it's just talking with you.
spk13: I appreciate that. And just as part of that, how do you think pricing changes year to year? Year to year?
spk06: Well, we haven't told you Q2 yet. Nobody's asked the question. But Q2, everything was in line with what we'd said before and the year. is in line with what we said before. Now Q will be published this afternoon and you'll be able to see it. And so everything's in order on that front. And 23 now is essentially completed for negotiations. And so again, all in order. And 24 is coming rapidly into focus. And commensurate with what I said on the last call is that 24 is going to be similar and good. It's similar and good.
spk13: Thank you, John. Appreciate it. Thank you.
spk03: The next question is from Ronald Epstein of Bank of America. Please go ahead.
spk05: Hey, good morning, guys. I think pretty much everything's been asked, so maybe just a quick follow-on here. When When rates actually get to 38 or maybe way down the road, they get to 50 or higher on 737s, how should we think about the evolution of incrementals then? Because I think that's on the top of a lot of investors' minds because it can help draw out the trajectory of where earnings and cash flow for the company could ultimately go as the ramp goes.
spk06: Yeah. I think the most difficult thing that – we've ultimately looked through all the issues we've faced of stop-start, stop-start, supply chain, labor, COVID, all post-COVID and all those things that have, let's say, tested us over the last, let's say, two or three years. Then I think when I bring it right down to how do we now see it as we've grappled with each one of them, that fundamental labor productivity has probably been the most difficult for us in what parts of our business have extremely high learning curves. And to stabilize that, deliver good quality to our customers, which is paramount. We're trying very hard on that front and to meet schedule. And I think that we've heard very little from the industry about any inability not to meet customers' needs. so putting that labor productivity into place and seeing everything smooth out and i'm hopeful that as boeing moves towards achieving the 737 at rate 50 as airbus move from the let's call it early 50s through to something towards rate 75 is that that's going to help smooth out things and we'll be in a much improved condition to deliver at a higher productive level. Similarly with the wide body increases. So, you know, I've used a phrase which I'm not sure how apt it really is, but called state of grace. And I do see that maybe as we move into the second half of 24, we get close to that state of grace where productivity is smoothed out, production volumes increasing, content increasing, prices in the right shape. And so then we begin to print optimal margins and cash flow and hopefully just continue to then improve as the further rate increase in 25 and 26. So everything tells me we should be fundamentally optimistic at the same time. You know, we've currently got issues to overcome, of which I think that labor issue has been the most protracted.
spk05: Got it. Thank you.
spk11: Thank you.
spk03: This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.
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