The Howmet Aerospace Fourth Quarter 2023 and Full Year Earnings Conference Call begins with an introduction from the operator, followed by a welcome from Vice President of Investor Relations, Paul Luther. The call will feature comments from Executive Chairman and CEO John Plant and Executive Vice President and CFO Ken Giacobbe, followed by a Q&A session. The discussion will include forward-looking statements and non-GAAP financial measures. John Plant highlights the company's strong fourth quarter results, which exceeded guidance and showed growth in all markets.

In the second half of 2023, Howmet saw an increase in revenue, EBITDA, and earnings per share, with commercial aerospace driving most of the growth. They also had a record-breaking free cash flow and improved their balance sheet through buybacks and debt repayment. Each segment of the company contributed to record profits, and the markets they operate in remain strong. The focus now is on the outlook for 2024 and continued growth.

In the fourth quarter, revenue and EBITDA were up 14% and 18% respectively, while for the full year, they were up 17% and 18%. The commercial aerospace segment saw the most growth, with a 22% increase in the fourth quarter and a 24% increase for the full year. The defense aerospace segment was flat in the fourth quarter but saw a 10% increase for the full year. Commercial transportation and the industrial and other markets also saw growth in both the fourth quarter and full year. Overall, the company had a strong year with revenue, EBITDA, EBITDA margin, and earnings per share meeting or exceeding the high end of guidance.

In the fourth quarter, the company saw record earnings per share of $0.53, with minor benefits from a favorable tax rate and foreign currency. The balance sheet also showed strong performance, with record free cash flow of $682 million and a healthy cash balance of $610 million. The company reduced its debt and improved its financial leverage, leading to a credit rating upgrade from S&P. The company also maintained a balanced approach to capital allocation, with $800 million deployed for debt paydown, stock repurchases, and dividends. The company has continued to repurchase common stock and still has authority to buy back approximately $700 million.

In the fourth quarter, the average diluted share count improved to a record low of 413 million shares and the quarterly common stock dividend was increased by 25%. Engine products had a strong performance with a 16% increase in revenue, driven by higher build rates and spares growth in the commercial and defense aerospace markets, as well as strong demand in the oil and gas and IGT markets. EBITDA also increased by 22% and EBITDA margin improved by 120 basis points, despite adding over 1,000 new employees in the year. Fastening Systems also had a strong quarter with a 26% increase in revenue and a 38% increase in EBITDA. Engineered Structures saw a 6% increase in revenue, primarily driven by the recovery in the wide-body market.

The Russian titanium share gain remained flat at $20 million due to shipment timing, while defense aerospace saw a 35% decline due to the F35 and legacy fighter programs. EBITDA was slightly down from the previous year, with a decrease in EBITDA margin. However, there was a sequential increase in revenue, EBITDA, and EBITDA margin for the second consecutive quarter. Forged Wheels saw a 3% increase in revenue, driven by volume, but a decrease in EBITDA margin due to inflationary costs. In the fourth quarter, $500 million of 2024 bonds were redeemed, with $100 million in cash and $400 million drawn from two term loan facilities. Interest rate swaps were also entered into to exchange floating interest rates for fixed rates.

The actions taken in Q4 are expected to reduce annualized interest expense by $10 million, in addition to the $19 million reduction from debt reductions in Q1-Q3. The company has paid down a significant amount of debt and lowered its annualized interest cost, and currently has $3.7 billion in gross debt. The company's return on net assets has improved by 400 basis points year-over-year. The company has provided guidance for 2024, including improvements in interest expense and operational tax rate, and a modest increase in pension and OPEB expenses. Miscellaneous other expenses are expected to be volatile.

The commercial aerospace market is strong, with high demand for new aircraft due to improved fuel efficiency and commitments towards carbon neutrality. The defense market is also strong, particularly for fighter aircraft, drones, and helicopters. The oil and gas and gas turbine markets are healthy, with potential for growth in natural gas turbines. However, the commercial transportation market may see a 10% reduction in revenue until 2024, but is expected to resume growth in 2025 and 2026 due to the continued adoption of aluminum wheels for fuel efficiency and the shift towards alternative propulsion for truck engines.

In the first quarter of 2024, the company expects a 9% increase in revenue and an 11% increase in EBITDA compared to the previous year. For the full year of 2024, they anticipate revenue of $7.1 billion, EBITDA of $1.635 billion, and earnings per share of $2.15. The company plans to invest in their Engine Products business, which is expected to lead to above-market growth and high returns. They have also secured an agreement with a major engine manufacturer for increased business and market share. Despite these investments, the company remains committed to delivering an average free cash flow conversion of 90% of net income. Their guidance is based on the assumption of Boeing 737 MAX production of 34 aircraft per month and six 787 aircraft per month, in line with Airbus's plans.

The paragraph discusses the strong performance of Howmet in 2023, with sales and earnings increasing above end market levels. The company is also prepared for potential increases in demand, such as for Airbus A320s, and expects further revenue growth, improved cash flow, and shareholder-friendly actions in 2024. The questioner asks about pricing in the high demand Engine Products segment.

John Plant, CEO of Howmet, discusses the company's position in the market and their outlook on pricing for the next couple of years. He notes that the engine OEMs have been raising prices significantly, but Howmet's long-term agreements provide for price stability. However, when these agreements are renewed, they will differentiate between parts and service requirements and expect increased pricing for service parts. Plant also mentions that they will be moving on price in 2024 and expects continued positive contributions from pricing in the future.

The speaker discusses the demand signals they have received from aircraft and engine manufacturers for structural products. They were able to support Boeing's rate of 38 in 2023, but are prepared for potential fluctuations in production in 2024. They are unsure of the impact of any under-build in one month on overbuilding in another month or if production will be capped at the issuance of airworthiness certificates.

John Plant and Ken Parks discuss the possibility of choppy demand in the future and how this could affect their working capital. They also mention their margin flow-through for 2024 and how it allows for potential choppiness in their business due to their relationship with Boeing. In terms of headcount growth, they expect to add 1,000-1,500 employees in 2024, but at a reduced net rate due to retaining experienced employees and implementing automation.

John Plant discusses the growth of Fastening Systems and the importance of the distribution business within it. He expects positive contributions from both Engine Products and Fastening Systems in 2024, but notes that wide-body demand still needs to recover. This recovery should lead to improved growth in the wide-body market compared to narrow-body, especially with Boeing's recent issues.

In the paragraph, the speaker discusses the company's margins for the upcoming year. They mention that the LEAP range of engines has seen a slight decrease in growth, but both the Engine and Fasteners segments are expected to have a good year. The speaker also mentions that the company is locked into long-term contracts, which govern most of their business. They do not provide a specific percentage, but it is a significant portion of their margins.

The speaker estimates that 75% to 85% of agreements have been renewed for 2024 pricing, and expects a similar performance to Q4 for the year. Some Engine Products have already been repriced for 2024. Margins tend to plateau before increasing again, and the speaker expects a 28% incremental for Q1. They also predict a stronger demand for wheels in the short term, but are unsure about the rest of the year.

The speaker discusses the current state of the commercial transportation market, stating that orders for truck manufacturers have been stronger. However, these orders are cancelable depending on the general economy. The speaker emphasizes the importance of long-term growth in the market, particularly in commercial aerospace, defense, and gas turbine businesses. They also mention that the majority (around 75%) of their revenue is tied to long-term agreements. In terms of the aerospace sector, the majority of their revenue is from aftermarket services, with potential for growth due to their work on increasing engine time on wing.

The speaker discusses their assumptions for the market and their financial outlook for Howmet. They mention a 34% average for Boeing 737 for the year and a 38% rate assumption for Boeing. They also mention an increase in demand for spares in the commercial aviation market, particularly for the F35. They expect this segment to continue to grow as the fleet expands, with a 50% increase compared to 2019 levels.

The commercial segment of the company's business dropped to half during the depths of COVID, but has fully recovered to $400 million, with a run rate above that. The company expects demand to pick up in the second half of 2024 and continue to be strong in 2025 and 2026. The spares business is expected to reach $1 billion in 2023 and become an increased percentage of the company's revenues. The increase in demand for spares is not just due to immediate time on wing issues, but also a structural shift in demand as newer engines have increased service intervals. This will lead to a higher demand for replacement parts in the future.

The speaker discusses the potential for new service shops to be built to service new engines, and clarifies that they are currently delivering at a rate of 34 and assume they will reach 38 without any additional rate breaks. They also mention that inventory may be affected and that there may be some choppiness in margin rate incrementals.

During a conference call, a question was asked about the company's market share in the airfoils market. The CEO responded that they have been consistently growing their market share by 1% each year and are currently around 50%. They expect it to continue growing due to their advanced technology and have also secured additional market share. The CEO also mentioned a potential increase in spot sales in 2023, which they have factored into their 2024 projections. The company has prepared for this by stocking up on materials to meet demand.

John Plant discusses the potential impact of the 737 production rate on Howmet. He explains that it is difficult to predict the exact impact because it is an unknown area and depends on additional demands and opportunities for increased market share. He also mentions that they supply the majority of their products directly to Boeing, but also supply other suppliers who provide subassemblies to Boeing. Overall, they have assumed a certain number of aircraft sets for their planning purposes, but it could vary depending on Boeing's production rate.

The company operates on a min-max system for inventory levels, but it can be affected by changes in schedules and production rates. They have based their assumptions on a rate of 34 and are prepared for a potential increase in rates in the future. They are also cautious and have allowed for the possibility of lower inventory levels due to cash strain or adjustments in schedules. The ideal scenario is for production to continue at a rate of 38 with high quality.

The speaker discusses the potential for success from customers and an increase in sales in 2025. They also mention a 5% free cash flow conversion and $50 million in working capital or inventory build. They then address a question about working capital usage and capital deployment, stating that there is a natural 15-20% working capital drag on the projected revenue increase and adding $100 million for potential scenarios.

In the paragraph, the speaker discusses the company's plans for deploying their funds in the future. They mention the possibility of retiring a large amount of debt and using the interest savings for share buybacks. They also mention the potential for a small refinancing in 2025. They assure that the company's balance sheet will continue to improve, despite the focus on share buybacks. The speaker then thanks the audience and ends the conference.

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