The Howmet Aerospace Second Quarter 2023 Earnings Conference Call began with Paul Luther, Vice President of Investor Relations, introducing John Plant, Executive Chairman and Chief Executive Officer, and Ken Giacobbe, Executive Vice President and Chief Financial Officer. Luther reminded participants that today's discussion would contain forward-looking statements and referenced non-GAAP financial measures. Plant reported that Q2 was another strong quarter for Howmet, with revenues up 18% year-over-year and 3% sequentially.

Howmet Aerospace reported a strong quarter with commercial aerospace increasing by 23% year-over-year, defense sales increasing by 17%, EBITDA increasing by 16%, and earnings per share increasing by 26%. The cash balance was at $536 million and free cash flow was at $188 million. The company amended and extended its $1 billion undrawn credit facility to 2028. It also settled a Lehman claim for $40 million, which was $25 million less than previously reserved. There was a 5-day production stoppage at the Wheels plant in Hungary due to a strike at Arconic Corporation, resulting in a $5 million loss in profitability. Howmet has filed a claim with Arconic and expects to gain resolution soon.

Howmet is evaluating its reliance on a single source of supply and experienced a margin rate drop for the first time in several quarters due to bottlenecks in production. The Paris Airshow was successful for Howmet with significant orders and production meetings with customers and investors. All markets remain healthy with commercial aerospace leading the growth for 9 consecutive quarters.

In the second quarter, TransDigm Group Inc. had strong performance across all of its end markets. Revenue was up 18%, EBITDA was up 16%, and earnings per share was up 26%. Commercial aerospace revenue is expected to increase due to a strong backlog of orders and spares growth. Defense aerospace was up 17% year-over-year, driven by the F-35. Commercial transportation was up 8% year-over-year and industrial and other markets were up 20%, driven by oil and gas, IGT, and general industrial. Net head count additions were approximately 865 and EBITDA margin was 22.7%. The second quarter represented the eighth consecutive quarter of growth in revenue, EBITDA, and earnings per share.

The company ended the second quarter with a healthy cash balance of $536 million, generated $118 million of free cash flow which was allocated to common stock repurchases and dividends, and improved their net debt to EBITDA to a record low. Capital expenditures were focused on automation, they repurchased $100 million of common stock, and issued a note to redeem $200 million of their 2024 debt tower. This will lower their annualized interest cost by approximately $19 million.

Engine Products had a strong performance in the second quarter with revenue increasing 26% year-over-year and EBITDA increasing 25% to a record for the segment of $223 million. Fastening Systems also had a successful quarter with year-over-year revenue increasing 19% and EBITDA increasing 14%. Engineered Structures saw an 8% increase in revenue, with commercial aerospace up 31%, however EBITDA decreased 23% and margins declined 410 basis points due to customer inventory corrections in the defense aerospace market. Bond repurchases are expected to decrease annualized interest costs by approximately $19 million.

In the third quarter, Structures' team finalized a new collective bargaining agreement at their Niles, Ohio facility, which drove Forged Wheels revenue up 7% due to a 6% increase in volume. Despite a nine-day strike at their Arconic Corporation supplier, EBITDA increased 8% and margin increased 30 basis points due to lower aluminum prices and inflationary cost pass-through. In July, they issued a notice to redeem $200 million of their 2024 debt tower with cash on hand, which is expected to be completed by the end of September. Since the separation in 2020, they will have paid down approximately $2.15 billion of debt and amended their $1 billion five-year unsecured revolving credit facility.

Ken highlighted the operational tax rate of 22.6% for the quarter, which is a 500 basis point improvement since the separation in 2020. John then outlined the outlook for Howmet, which is very strong due to the extraordinary backlog of commercial aircraft orders and increased sophistication of engine technology upgrades. The company also expects to see increased revenue in defense markets and industrial revenue in both IGT and oil and gas.

Wheels is expecting healthy demand in the current quarter, with seasonal effects reducing revenue by $50 million. Spares for commercial aircraft are expected to near 95% of 2019 levels by year-end, with defense and IGT spares at 130%. Guidance for the year has been raised, with the 737 MAX assumption being in the 30s, and Q3 revenue expected to be $1.9 billion with EBITDA of $360 million and earnings per share of $0.42. For the year, revenues are expected to reach $6.44 billion.

In Q2, Howmet's revenue increased by 18%, EBITDA by 16%, and earnings per share by 26%. EBITDA margin for material pass-through was strong at 22.7%, and servicing is heading in a healthy direction. Free cash flow generation is expected to be positive in the third and fourth quarters, and the company is aiming to reduce its debt-to-EBITDA leverage to two times by the end of the year. Additionally, the quarterly common dividend is expected to increase by 25% from $0.04 a share to $0.05 a share in the fourth quarter of 2023.

John Plant discusses how the recruitment of employees over the last few years has weighed upon the company and made it difficult to increase labor productivity. He states that the company is hoping to increase incremental drop-through to 28% in Q3 and 34% in Q4, due to slowing recruitment and improved retention ratios. He also mentions that automation programs, mix effectiveness, and widebody aircrafts could help to improve the drop-through in the future. Sheila Kahyaoglu then follows up by asking how the structure margins will bump up in the second half.

John Plant discusses the performance of Howmet in Q2, noting that they overcame the consequences of a strike from one of their suppliers of aluminum billet, delivering solid margins in their wheels business. However, their structures business took a bigger hit in terms of margin rate and lack of volume. Despite this, they still managed to out-deliver the guide on EBITDA.

John Plant is responding to Robert Stallard's question about changes in the rate assumptions for Boeing and Airbus build rates. Plant notes that Airbus has been struggling to reach their production numbers, but they are getting close. He believes that rates will increase soon, and Howmet has prepped for it by building capability, capacity, and labor. However, they are being cautious due to the delayed increase in production for the 737 MAX, which will take place on January 1st, May 1st, and July 1st.

John Plant discusses the powder metal issue, which is historical, and the impact of the improved high-pressure turbine blades, which have been seeing elevated temperatures from combustors that don't have enough holes. He also talks about the increased demand for replacement parts due to the time on wing issue of current narrowbody engines and how these improvements are prepping for their introduction in accordance with customer needs. He also mentions the increased demand for wide-body engines moving to 2024.

John Plant is discussing the demand for aircraft production and the need to increase capacity rapidly in the coming months. He states that they are being cautious and are in deep commercial discussions with their customers to ensure that they do not take capacity up and then take it back down. He then states that they are shipping parts to Boeing at a rate of 30-38 per month, depending on the parts.

John Plant is being cautious about giving guidance on the rate increase of 38 for parts from July, due to his experience in Q4 of the previous year. He is also discussing the Fasteners business, where revenue has increased but margins have not dropped as much as expected. He does not like using the term "Chinese partners" but does not know why it is considered Chinese. He believes that the solution to the issue begins with small steps.

John Plant is feeling more confident in the Engineered Structures business' margin rate and revenue accretion in the second half of the year. He expects to see demand higher than the previously estimated $100 million, with the potential to reach a 40% lift. He is confident that the business will realize the market share and business they have obtained commercially.

John Plant discussed the improvements to GTF and LEAP and how they are impacting Shipset content and LTAs. He also discussed the 40% uplift in titanium with the increase of wide-body rates, and how this could potentially increase even further with Boeing and Airbus targeting higher rates. He noted that this would be beneficial for both the Structures and Fastener businesses and would increase the value proposition of the Fasteners due to the additional sophistication of the personal sets.

John Plant is optimistic about the demand for Howmet's products, especially in terms of wide-body jets and engines. He mentions that they are able to provide solutions for the GTF issues and upgrades for the LEAP engines every five to six years. He also mentions that they need to provide enhanced solutions to improve time on wing.

John Plant discussed the $190 million guidance raise on sales, with the majority coming from aero. He also discussed the strength of the defense sector and the order books for 2023, and the expected weak trailer market, but overall better than anticipated. Lastly, Plant discussed the structures bottleneck, which was not a result of hesitation to go up in rates, but rather due to the need to add more people.

John Plant explains that the problem with the Engineered Structures segment was contained to one plant and that there is no risk of it spreading to other segments. He also states that they have done their best to address the issue and that they are expecting to recover in the third quarter.

John Plant explains that Howmet experienced a breakdown in their sequencing process which caused labor to stand idle and starve subsequent processes for three months. Plant is hopeful that the issue can be resolved with brute force and sophistication, and when asked about the pace of recovery, he refuses to give segment commentary.

John Plant is hesitant to make predictions for 2024, but he will likely provide an outlook on demand when they announce Q3 results. He also plans to address whether they can achieve 2019 levels of revenue.

Gautam Khanna asked a question about the revenue drag for the mix of wide-body and narrow-body planes in 2024. The speaker believes that content, price, and share improvements could help overcome the drag, but it is too early to know for sure. He suggested that margins could be 35% plus or minus 5% for 2021-2022, and 30% plus or minus for 2023. He believes that the benefits of a more stable workforce and improved productivity could help, but it is too early to give a definitive answer.

John Plant discussed the company's pricing changes, which were in line with what they had said before, and that negotiations for 2023 are completed. He also mentioned that 2024 is coming into focus and will be similar and good. He then discussed the difficulty of labor productivity and how they are trying to stabilize it in order to deliver good quality and meet schedules.

John Plant believes that labor productivity issues will be resolved by 2024, allowing for increased production volumes, content, and pricing, leading to optimal margins and cash flow. He is optimistic that further rate increases in 2025 and 2026 will continue to improve the situation.

This summary was generated with AI and may contain some inaccuracies.