Howmet Aerospace Inc. — 2024 Q1

Yes, I'd like to give you a real clear-cut answer, but I find it's a little bit confusing. In what we saw was, in the first quarter, schedules at rate 38. And I assume that Boeing had assumed that they would achieve that rate. I don't know. Whereas we note that actual bills were substantially less than that and probably well below 20%. And therefore, the increase in inventory, let's say, let's call it, I don't know, 15 to 38 per month, plus the 7 months of last year where rate 38 had been assumed, but more like a build of 30. Has resulted obviously in increased inventories in Boeing.

Yes. So we cut our assumption from 6 aircraft per month down to 5. I don't know that we're going to see parts, schedule changes for the sake of 2 aircraft a month, especially if they're going to get back up to rate 5 by the second half of the year.

Yes. And that's also part of our thinking is that previously, our assumptions have been going to rate 7, at the back end of this year ahead of where we'd assumed [ a 6 ] where we thought it was going to go and then probably with a higher rate sometime in 2025, on their March to 10 craft per month, which I know has now changed from 2025 to 2026.

Yes. So should Boeing produce rate 38. I'm very clear that we'll be at rate 38 with them. And should GE reinstate the planned increase to the 19 25 level of LEAP engines, which is obviously part of it into cadence to 1b that we'll be able to meet rate -- what the -- again, on labor, you can see while we've increased the overall guidance, and therefore, our labor recruitment will be fairly robust is that we have enough flexibility to be able to cope with those rate assumptions. Because, again, we'll know months ahead of they're actually achieving that. It won't be like go from, let's say, rate 15 to rate 38 in a month, it's going to happen slowly. And gradually if it occurs.

I think to some degree, it reflects the revenue potential and earnings potential of Howmet when it achieves the increased rates. And so while Boeing sales in the 787 might have been building a 3. But we were building in the first quarter of our parts at a rate significantly above that. So let's assume rate 6 or even in rate 7. And so this that's obviously a very good dynamic for the business and then showed with I thought, which was excellent margin improvement in the business, which was a combination of operational performance, commercial performance and the mix. And when that happened, we've put on 500-plus basis points in margin improvement year-over-year. And there's still -- I don't know what it was, 200 basis points sequentially.

Yes. I mean, what we've guided to you in Q2 is that, in fact, revenues would be slightly higher than Q1. So we're still expecting overall to be good. But very much for our year would be -- we're cautious because of the rate assumptions I've given you on the 737 and therefore, expecting to have the impact of that.

Okay. Maybe the best thing I can do is to give you a picture of the revenue walk for the company first and then return to the specific question, obviously improved durability as a second subject.

I see commercial aerospace sales going up in '25, '26 and '27. It's a bit too difficult to get up beyond that, but I see rising reducing the spares area during those years. I also see increased spares for the F-35. And in the past, I've said I think by the time we get to 2025, we could be seeing spares revenues almost as much as the current OE demand for F-35 turbine blades.

Certainly, the program that we put in 3 years ago of creating a separate segment within our fasteners business for distribution is notable success for us. And I'm going to say we've probably seen an almost doubling of that business in the last 3 years. We don't provide like all makes to everybody and try to manage all the logistics of people, but this is trying to capture that margin previously that we had effectively passed on to other distributors. Because we distribute those parts. And we mainly focus on those parts which are proprietary with technology moats around them from the Howmet say, suite of fastener brands.

I realized that. That's why I put it that way. That's why I try to not to put my head in that noose because I had no plan...

No [indiscernible] that knows that sort of stuff.

I actually don't think I quoted a number. You talked about the spares on commercial now?

Yes, I think it's about right. I'd have to go back to my notes to guide what a more precise number. I think it's well above the $400 million that we saw in 2019. So I think $550 million is probably a best approximation, and Ken can jump in if he wants to correct me on that number. The defense spares for last year, we're already growing from like 400 to 600, and that's continued. So it's all good on that front.

Inevitably, if you look at our rate of hiring, and we're also coming off a bigger base of experienced labor. So part of that is improved labor efficiency, Sheila. And notwithstanding, I'll say, the Boeing volatility, I'm hoping we can plan our way around because the overall revenue without -- obviously, it'll be a different mix and different plants, but I'm hopeful we can manage our way through to keep that the overall operating efficiency that we have had in Q1, and that's what we've guided to. You can see we've guided to a 24% EBITDA margin. So even though, let's say, we look to see that go down a little bit in the second half, and that's a, let's say, a 28% plus business. And therefore, we'll need to work the other harder just to keep it right 24% in terms of EBITDA margin percentage, which we believe we can, and we'll do otherwise, we wouldn't have guided there.

What I've said previously is that we thought that we were going to be able to essentially hold and match what we did in 2023 into 2024. I think where we are today is that we're absolutely clear that we're going to -- we're going to be able to hold much and maybe improve a little bit over 2023 levels on that front as well.

So we don't have, what I call, customer dedicated plants, more product focused. So we deliver to multiple customers from most of our plants. In the case of fasteners. Some are a little bit more wide-body narrow-body focused. And so that mix can make a big difference. So if you wind the clock back, a year, 18 months, where the -- I mean, essentially 787 was halted. I mean you could say, well, one a month, but I mean it wasn't really one a month. And I remember I'll say, I think Q4 '22, essentially or Q1 of '23, we were only producing the [ metallic ] fasteners. As that was having a negative effect on us because we had 2 or 3 plants which were grossly underloaded because the equipment required to make the fasteners going a composite aircraft is different to those on the metallic aircraft. So that was both the, I'll say, an idea in terms of both, I'll say, the mix and also the exposure that we had on plants. And obviously, we got massive on recovered fixed cost, that's a problem.

Yes. So what I said previously, maybe I'll just amplify a little bit today is that we said we were going to take back CapEx. And so if last year was probably just over $200 million. I think the midpoint of that guide now is around $300 million, it could be $290 million, but $300 million, give or take, I think, in that region. So maybe just below $300 million.