In the Third Quarter 2023 Howmet Aerospace Earnings Conference Call, the operator introduces Paul Luther, Vice President of Investor Relations, who is joined by John Plant, Executive Chairman and CEO, and Ken Giacobbe, Executive Vice President and CFO. They discuss the company's third quarter results, which exceeded their previous guidance and showed solid sales and EBITDA growth. They also mention the non-GAAP financial measures used in their discussion and highlight the company's margin rate improvements.

In the second paragraph, the speaker notes that there has been a sequential quarterly improvement of 230 basis points in fasteners and a 320 basis points recovery in the structure segment. Howmet's revenue increase has also resulted in a 28% incremental EBITDA margin, in line with guidance. The company's operating income and operating income margin have also seen a significant increase. Additionally, the speaker mentions the company's healthy free cash flow and shareholder-friendly actions, such as debt retirement, share buyback, and a 25% increase in dividends. The call is then passed to Ken, who discusses the revenue by end market, with all markets showing growth, and the results by business segment, with commercial aerospace, defense aerospace, and commercial transportation all seeing increases.

In the third quarter, the company saw a 16% increase in revenue and an 18% increase in EBITDA, exceeding the high-end of guidance. Despite absorbing near-term costs for net headcount additions, the company maintained a strong EBITDA margin of 23%. Adjusting for inflationary cost pass-through, the EBITDA margin was 23.3%. Earnings per share also saw a 28% increase. The balance sheet continues to strengthen, with a record low net debt to EBITDA ratio of 2.3 times. Cash on hand was used for debt reduction, stock repurchases, and dividends. The next bond maturity is not until October 2024.

Howmet's financial leverage and cash generation have improved, leading to credit upgrades from both Fitch and Moody's. The company continues to maintain a balanced approach to capital allocation, with a focus on reducing debt and repurchasing common stock. In the third quarter, the Engine Products segment saw strong performance, with revenue and EBITDA increasing year-over-year. However, sequential revenue was down due to seasonal factors.

The EBITDA margin for the company increased by 20 basis points year-over-year and sequentially, despite absorbing new employees. The engines team had a strong performance, while the Fastening Systems segment saw a 20% increase in revenue. Engineered Structures also saw an increase in revenue and improved production rates. Forged Wheels had a 7% increase in revenue and a 20% increase in EBITDA. The company's balance sheet remains strong with a reduction of $200 million in debt in the third quarter.

In summary, since the separation in 2020, the company has made significant progress in paying down debt and lowering interest costs. The focus remains on improving the capital structure and liquidity. The operational tax rate has also shown improvement since the separation. Looking ahead, the commercial aerospace market is showing signs of recovery, particularly in Asia, and the demand for engine spares is expected to remain strong due to increased use of new engine technologies. The defense market also presents opportunities for the company.

The market for engine spares is strong due to the growing F-35 program. Other markets, such as IGT and oil and gas, also remain healthy. Commercial truck and trailer orders are good, but there is caution due to potential cancellations and the economy. Overall, there is limited risk in aircraft demand for both commercial and defense markets. Revenue for 2024 is expected to be around $7 billion, with more details to come in February. For the fourth quarter of 2023, revenue is estimated at $1.635 billion, with EBITDA at $375 million and earnings per share at $0.45.

In 2023, the company saw a $100 million increase in revenues, a $40 million increase in EBITDA, and a $0.07 increase in earnings per share. They also had strong performance and healthy liquidity, despite choppy conditions in the commercial aerospace industry. The company expects a 26% increase in earnings per share for the full year and has improved their net leverage. They have also repurchased debt and brought back common stock to reduce their interest rate burden. The company's initial outlook for 2024 suggests a 7% increase in revenue, but it is not specified what this implies for aircraft production rates for specific models.

John Plant discusses the visibility of the ramp for the company's customers. He mentions a 7% increase in overall markets, with a mid-teens increase in commercial aerospace and single-digit increases in industrial markets. However, there is a high single-digit decrease in commercial transportation. The company is assuming build rates for wide-body and body fractional increases next year, with a specific assumption for the Boeing 737 in the mid-30s to 40 range. They are not yet ready to include a rate of 42 in their guidance, even though it is expected to happen soon. A question is asked about pension contributions for next year.

John Plant, speaking about the company's pension liabilities, stated that they have been working on reducing them for several years and have managed to decrease them to about $750 million. He also mentioned that they are not currently considering any risk transfer to get rid of the liability, as there are better uses for their cash at the moment. However, he did not completely rule out the possibility in the future. Their assumption for next year is that the cash contributions for the pension will be slightly higher, but not significant. David Strauss then asked a question about the company's work on upgraded blades.

In this paragraph, the speaker, John Plant, discusses the timing of when upgraded blades will be produced and delivered to GE and Pratt, as well as the progress of the project. He mentions that the timeline has been pushed back slightly due to increased complexity, but that they are in good shape and have been working closely with the engine manufacturers. He also suggests asking the manufacturers for specific timing. The next speaker, David Strauss, asks for comments on working capital and pension expenses, which Plant defers to Ken to answer.

The speaker is discussing the company's working capital and how it is tied to the specific operations and status of each business unit. They mention that accounts receivable and accounts payable move based on the days assumption, and with increased revenue, there are more dollars tied up in receivables. The speaker also notes that inventory is a wildcard and is currently elevated due to production not being at the desired level. They mention that the Wheels segment has shown improvement in inventory days, while the engine business is gradually improving. Fasteners and structures have different situations.

The fasteners business has been recruiting and improving margins, but is still in recruitment mode. The Structures business has the worst days on hand, but the company is using inventory as a buffer to stabilize operations and improve margins. The company is not yet prepared to add heads or inventory due to high costs, and is being disciplined in allocating capital.

The company is not currently focused on driving working capital in one of its businesses, but it is expected to improve next year as production and responsiveness improve. Working capital is expected to decrease this year due to increased revenue and inventory. Next year, there will likely still be a decrease in working capital, but it will be less than this year. The company has also taken actions to reduce pension liabilities, resulting in a 45% decrease since separation. Cash is expected to increase next year.

The company will remeasure their expenses at the end of the year and provide more guidance on cash contributions. The pension and OPEB expense is currently $35 million and is expected to increase by $15 million next year due to market conditions. Price realizations have not been disclosed for the third quarter, but are in good order and in line with previous expectations. The company expects to reach rate seven on the 787 next year and may need to increase production beyond that.

John Plant, the CEO of the company, is discussing the performance of the fastening margin, which has shown signs of improvement after a low point at the beginning of the year. He cautions against expecting a return to 2018 or 2019 levels due to the different market conditions, but sees potential for improvement in the future. He mentions increased efficiency and discipline in the business, as well as an expected increase in volume and mix for commercial aircraft production. However, he emphasizes the need for continued efforts to improve productivity and efficiency. Overall, he remains cautiously optimistic about the future performance of the fastening margin.

John Plant, CEO of the company, discusses their business outlook for the upcoming year. He mentions that they have not yet provided guidance for next year due to uncertainty in the market, but their revenue is expected to increase. He also mentions their success in the forged wheels segment, which is expected to continue to grow due to increased demand for fuel efficiency and potential adoption of electrification in the truck and trailer industry. However, overall they are being cautious and predicting a high single-digit reduction in the business due to potential macroeconomic declines. Plant also notes that freight rates have recently stabilized and improved.

The speaker discusses various factors that will affect the company's outlook for the next year, including a potential UAW strike and the GTF situation with Pratt & Whitney. They mention a separate issue of contamination that will require inspection and potentially replacement, as well as longer-term concerns about the time on wing performance of the GTF engine. The speaker remains cautious about the company's performance in the coming year.

The paragraph discusses the issue of replacing high-pressure turbine blades in engines manufactured by Pratt & Whitney. It mentions the potential replacement interval for these blades and the decision-making process for determining whether to replace them during off-wing maintenance or during regular operation. There is also mention of discussions between Pratt & Whitney and MTU regarding the production and distribution of replacement parts.

The speaker is being asked about the aerospace new-build ramp-up and whether Boeing and Airbus are ready to increase production rates. He mentions that Boeing has had firm plans throughout the year, but there have been issues with realizing those plans due to supply chain difficulties, changes in personnel, and production issues. There have also been management changes at Spirit Aerospace, which may have a positive impact.

John and Ken are hopeful that the fuselage and component problems will be resolved soon, which will allow for Boeing to increase production rates and retrofit faulty sales. They are also optimistic about engine demand increasing next year. Sheila has two questions for them.

The speaker discusses the challenges in the supply chain for castings and forgings, and notes that Howmet has been proactive in recruiting and training workers to meet demand. They also clarify that Howmet is the second largest producer of structural castings and has had good success in producing them at a high rate with good quality.

John Plant discusses the increased demand for structural castings in the engine business and the company's ability to supply due to available capacity and willingness to invest. He also mentions the positive pricing and contract structures, as well as the company's ability to bring value through technologies used in the F-35 engine. Plant also mentions the company's work on improving the thrust and time in air for the engine.

John Plant, CEO of GE Aviation, discusses the potential for increased value and performance in the industry through the deployment of new technologies. He mentions the small role of turbine blades in the overall value of an engine and the importance of improving fuel efficiency and reducing carbon footprint. He declines to provide a specific margin outlook for next year, but notes that production may continue to be volatile for a few more months.

The speaker discusses the current state of the industry and predicts that things will improve in the second half of next year or by 2025. They mention the challenges they are facing and express optimism for the future. The conference call has now ended.

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