Howmet Aerospace Inc (HWM) 2024 Q2 法說會逐字稿

Good day and welcome to the Howmet Aerospace second quarter of 2024 earnings call. Please note that today's event is being recorded. (Operator Instructions) Also, please be aware that today's call is being recorded.

I would like to now turn the call over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you, Joe. Good morning and welcome to the Howmet Aerospace second quarter 2024 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, 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, operating income and EPS mean adjusted EBITDA, excluding special items, adjusted operating income 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.

Thank you, PT, and welcome, everyone, to the Howmet second quarter earnings call. Q2 was a strong quarter for the company with metrics exceeding both guidance and prior year results. Year over year revenue growth of 14%, building on the 14% growth in the first quarter.

Within this number, commercial aerospace growth was an outstanding 27%, continuing a strong trend. Other revenue markets will be covered later in the call. EBITDA was $483 million with a margin rate of 25.7%, while operating income was $414 million with a margin of 22%.

Operating income was up 38% year over year and increased 370 basis points with Engines and Fasteners performing at a high level, supported by an increasingly strong set of results in our structures business. Wheels was essentially flat despite the market declines. Earnings per share were $0.67, an increase of 52% year on year.

Free cash flow was also strong at $342 million, resulting in a quarter end cash balance of $752 million after share buybacks of $60 million. And furthermore, a $23 million bond repurchases of the 2025 bonds and also dividends of $21 million.

Strong cash balance for an early retirement, at par, of the remaining $205 million of the 2024 bonds on July 1, one day after the quarter end. These actions will reduce annual interest costs by some $12 million and continue the march to reduce interest rate drag, which is now well below $200 million with its increase in free cash flow yield.

I'll provide commentary on the future dividend actions in the outlook section. You'll also note later in the increase in the capital expenditures in 2024 of a $30 million level. This takes the level towards $320 million for the year.

And these expenditures are mainly the deposits on future new machine tools, which are required to support even further new capacity growth for our Engines business. This is necessary as we have now secured additional market share at a second engine manufacturer.

These revenues will also commence during 2026, albeit at a quarter or so later than the previous discussions on this topic.

I'll now pass the call across to Ken to provide additional details by end market and by business segment.

Thank you, John. Good morning, everyone. Let's move to slide 5. So markets continued to be healthy in the second quarter. On a year-over-year basis, performance was as follows: total revenue was up 14%, driven by strong growth in commercial aerospace, which was up 27%. For the first half, commercial aerospace was up a healthy 25%. Growth continues to be robust this year on top of the 28% growth rate in 2022 and the 24% growth rate in 2023.

Moving to our other markets. First, defense aerospace was also strong, up 11%, driven by fighter programs and engine spares demand. Next is commercial transportation. As expected, the market has weakened with revenue down 4%, although Howmet continues to gain share from steel wheels with Howmet’s lighter and more fuel-efficient aluminum wheels.

Finally, the industrial and other markets were up 4%, driven by oil and gas up 14%, IGT up 6% and general industrial down 6%. In summary, continued strong performance in commercial aerospace, defense and industrial, partially offset by commercial transportation.

Now let's move to slide 6. So first, the P&L. For the second consecutive quarter, Q2 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. On a year-over-year basis, revenue was up 14% and EBITDA outpaced the revenue growth by being up 31% while absorbing the addition of approximately 190 net new employees in the quarter.

Incremental flow through of revenue to EBITDA was excellent at 50%. Moreover, the team delivered records for both EBITDA margin of 25.7% and earnings per share of $0.67, which was up a healthy 52% year over year.

Now let's cover the balance sheet and cash flow. The balance sheet and liquidity have never been stronger. Cash at the end of the quarter was $752 million and free cash flow was a record for Q2 at $342 million. The healthy cash balance at the quarter end was used to repay the remaining balance on the 2024 bonds of $205 million.

Payment was at par and was made three months early on July 1. Moreover, in Q2, we opportunistically repurchased $23 million of the 2025 bonds. The combination of these actions will reduce annual interest expense by $12 million annually, further improving free cash flow yield.

Finally, net debt to EBITDA improved to a record low of 1.7 times. All long term debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future. Liquidity is strong with a healthy cash balance and a $1 billion undrawn revolver, complemented by the flexibility of a $1 billion commercial paper program.

Finally, capital deployment, we deployed approximately $104 million of cash in the quarter to shareholders, of which $60 million was used to repurchase common stock. This was the 13th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low Q2 exit rate of 410 million shares.

Finally, we continue to be confident in free cash flow. In the first quarter, we deployed $21 million for the quarterly common stock dividend of $0.05 per share. John will discuss the increase in the Q3 dividend as well as our 2025 dividend policy.

Now let's move to slide 7 to cover the segment results for the second quarter. Engine Products delivered another record performance. Revenue increased 14% in the quarter to $933 million. Commercial aerospace was up 18% and defense aerospace was up 10%.

Both markets realized higher OE build rates and spares. Oil and gas was up 14% and IGT was up 6%. Demand continues to be strong across all of our Engine markets, driven by our differentiated products. EBITDA increased 31% year over year to a record $292 million.

EBITDA margin increased 410 basis points year over year to a record 31.3%, while absorbing approximately 315 net new employees in the quarter to support future growth. The Engines team delivered a record quarter for revenue, EBITDA and EBITDA margin.

Now let's go to slide 8. Fastening Systems also had another strong quarter. Revenue increased 20% year over year to $394 million. Commercial aerospace was up 36%, including the impact of the wide-body recovery.

Commercial transportation was up 10%, general industrial was up 3% and defense aerospace, which represents about 9% of Fasteners revenue, was down 20%. Year over year, EBITDA outpaced revenue growth with an increase of 58% to just over $100 million.

EBITDA margin increased 610 basis points year over year to a healthy 25.6%. The team has progressively improved results for four consecutive quarters through commercial and operational improvements complemented by the wide body recovery.

Now let's move to slide 9. Although Engineered Structures had a favorable comp year over year, performance continued to improve sequentially. Revenue increased 38% year over year to $275 million. Commercial aerospace was up 42%, driven by build rates and the wide-body recovery.

Defense aerospace was up 45% year over year, driven primarily by the F-35 program. EBITDA doubled year over year, while EBITDA margin improved to 14.5%. Sequentially, revenue, EBITDA and EBITDA margin increased for the fourth consecutive quarter.

Incrementals continued to improve sequentially at 23%. We continue to optimize the Structures manufacturing footprint, and we expect to exit two small plants in the UK this year. The team continues to make progress, and we expect continued improvements throughout 2024.

Finally, let's move to slide 10. Forged Wheels revenue was down 7% year over year as expected in a challenging market. EBITDA also decreased by 7%, driven by volume and regional mix. EBITDA margin continues to be healthy at 27%, which is essentially flat year over year.

With that, let me turn it back over to John for the outlook.

Thanks, Ken. And let's now move to slide 11 and I'll talk you through the end markets and provide some overview. Firstly, regarding commercial aerospace, our prior comments regarding strong demand for air travel throughout the world continues to apply.

Air traffic growth in Asia Pacific has strengthened in particular for international travel. In fact, international travel globally, has been increasing in the 20% range, plus or minus. Freight volumes have also been robust with increases of 10%-plus recorded.

Domestic travel continues to grow gradually in all markets. This travel demand, combined with an aging aircraft fleet, is leading to significant orders and an extremely high backlog of total aircraft orders, leading to a position where aircraft orders placed now cannot be fulfilled until the end of the decade and beyond in certain cases.

However, the issue being faced by Howmet is not the demand, but rather that sales are currently constrained to some degree by the ability of aircraft manufacturers to build and deliver aircraft on a consistent basis.

These facts are the subject of many press articles and there's little point in repeating those facts here. While Airbus is steadily increasing requirements, but building below desired levels and slowing its volume ramp, the larger concern is Boeing.

While parts orders directly from Boeing shows some trimming, they continue to be at levels above the actual 737 and 787 build rates. Engine orders have also been trimmed, albeit by a larger percentage. Given the situation, the question surrounding Boeing and its affiliates‘ inventory positions and liquidation of such inventory remains.

We've tried to derisk this to a large extent in our guidance. And notably, update our assumed 737 build rate to 22 aircraft per month in 2024 versus the previous view of 20 per month. Naturally, we hope for a higher build on this and also to future rate increases.

In the case of defense, the outlook continues to be a double digit increase for the year. Strength is seen in engine spares for the F-35 and for spares and new builds for legacy fighters. New orders are also being received for structural parts for Howitzers.

IGT demand is for significant single digit growth. It's worth noting there is a potential for increasing demand in the future for new IGT turbines as a result of increased requirements emanating from electricity demand for data centers and AI needs. This potential demand increase is being studied and is worthy of further commentary in the future.

Howmet is well-placed in the IGT market being the largest supplier of turbine blades in the world to our customers of Siemens, GE Vernova, Mitsubishi Heavy and Ansaldo. Indeed, further production capacity will be added by Howmet into the IGT market in 2025 to support this increased demand.

Oil and gas continues to be strong with double-digit increases. Spares for commercial aerospace, defense and IGT continue to grow in aggregate at a pace of approximately 17% year to date, with further rate increases expected in the balance of the year.

Commercial truck builds are beginning to abate and the long predicted slowdown, particularly in Europe, has started and will weigh on the second half at maybe a 10% reduction in addition to the more normal European summer vacation seasonality. This normal seasonality is also noted in our European aerospace operations and is fully baked into our third quarter guidance.

Before I talk to specific financial numbers, I'd like to cover three topics. First, the capital expenditure required for 2024 has been increased by a further $30 million to the midpoint of $320 million. This is reflective of additional customer contracts achieved with share gains for our Engines business. A further exposé will be provided on this topic in our next call.

Despite the additional capital expenditure, the free cash flow guide has been increased by $70 million, having taken account of this expenditure and also the increase for working capital in the revenue guide. The conversion of net income is maintained at the prior guide of approximately 85% and ultimately this expenditure leads to further future revenue growth. It's a great outcome with revenue starting to accrete in late 2025. The guide for capital expenditures for 2024 and 2025 is approximately 4% of revenue.

The next topic is the dividend. We will increase the common stock dividend, starting with the August payment to $0.08 per share. This is an increase of 60% and a further increase from our expectations discussed during our call in May. Moreover, for 2025 common stock dividends are expected to be in the 15% of net income, excluding special items plus or minus 5%.

Finally, share buyback authorization has also been addressed by the Board and increased by $2 billion to approximately a total of $2.5 billion.

Now moving to specific numbers. In Q3, we expect revenues of $1.855 billion plus or minus $10 million. EBITDA of $465 million, plus or minus $5 million. And earnings per share of $0.64, plus or minus $0.01. It should also be noted that we have increased revenue guidance for the year, both incorporating the Q2 beat and the further additional uplift to the previous assumed second half revenues.

For the year, we now expect revenues to be at $7.44 billion, plus or minus $40 million, which is an increase of $140 million from the prior guide. EBITDA is guided to $1.865 billion plus or minus $10 million, which is an increase of $115 million from the prior guide.

Earnings per share are increased to $2.55 plus or minus $0.02, an increase of 39% year over year. And free cash flow is guided to $870 million, plus or minus $30 million, an increase of $70 million from the prior guide, and that's after increasing our CapEx requirements by $30 million and the revenue of $140 million.

You can see from the numbers show that revenue, profit and free cash flow have lifted again for 2024. And our total annual revenues increased to a 12% growth rate year over year.

Now I'll move to provide a summary. First statement is we’re pleased with our second quarter results. The guide for the year has been raised again on all fronts. We believe we've taken account of the commercial aircraft build rates and the inventory positions which is centered on Boeing.

And thank you very much. And now I'll move to the questions.

(Operator Instructions)

Doug Harned, Bernstein.

Good morning. Thank you.

Hey, Doug.

John, I wanted to see if you could help a little bit of understanding what's been happening at Airbus on the LEAP-1A, they talked about slowing of engine deliveries. It's our understanding that relates to airfoils in the hot section at GE and it's a supplier issue. Howmet's obviously a -- lead supplier for airfoils in the hot section. Has this -- have you had any issues on delivery to GE? And if not, does this shortfall by others provide any kind of an opportunity to capture share?

Well, Doug, I expected that to be the hot topic of the day, given the comments on the, I'll say, opening evening of the Farnborough Airshow last week and then followed up by an article in Bloomberg this weekend. And I guess my first reaction to it as an investor in the company, is that's really good news.

Because here, we are pumping in a 27% increase in commercial aerospace revenues. And if that exactly is true, then we need to make more. And therefore, this a really good condition for us. So just getting a little bit more specific than that.

You've heard on the call that over the last three years, we've put in a 28% increase in commercial aerospace revenues, followed by a 24% and a year to date this year of 25%. And if you were to track those increases compared to any form of aircraft build or schedules, then you can see that we are increasing significantly above any aircraft production rate. And therefore, it's unlikely that we are providing such constraints.

And then, just to peel it a little bit further is that we have significantly increased our production of turbine blades in the hot section. And if you look at it six months ago and over the last few months, we've probably put a 40% increase through in terms of production.

And therefore, that's really good in terms of a rate increase for anybody in the aerospace industry. And probably effectively operating at capacity or possibly even above it on the current set of the yields that we have.

So, the way I look at it is that we are producing well above engine build rates and then we don't know first of all, the outcome of what the subsequent processing is for our castings and nor do we get to have any view about where do they go in terms of a rebuild versus MRO, so you'd be -- sort of sales.

And so I guess the way I look at it is for Howmet, the opportunity appears to be there to sell even more if we're able to make a few more. But at the same time there are adverse consequences upon us because if engine build is down and you’ve heard the guidance that we've taken, the engine build assumptions down to be in line with what we've heard from the engine manufacturers in recent times.

And you've seen that those have been significant rate reductions, whereas previously we'd been prepared to meet those. And so when you get that, even though we have the demand opportunity to supply into the MRO market through our customer.

We also suffer because if a lack of an engine build, then obviously, we're not able to supply any structural castings that we indeed manufacture. Nor are we able to supply parts in the low-pressure part of the turbine. And so given the recent, I'll say, build restrictions, we actually have some excess labor of short-term working in some of our French plants because of the LPT demand.

So we're not unaffected and clearly we would like to make even more because there is the outlet into the service area if not into the OE build. So it's a long way of saying to you. We are increasing. We have had a massive increase in the last few months and doing our best to satisfy everybody. And that's about as far as I can take it. And don't know what else to say to you to provide any further color.

Okay. That's very helpful. Thank you.

Kristine Liwag, Morgan Stanley.

Hey, thank you for the question. John, very helpful color regarding the LEAP engine blades. As you spelled out, I mean, I guess if we take a step back with the new engine technology, both for the GTF and for the LEAP, it's clear that the hot section is getting a lot more, it’s getting used more, it's hotter, higher performance and from our visit at Whitehall, you've clearly invested in this space.

Can you quantify how much more market share you could potentially get? It seems like you're not a bottleneck for production and you've got content. And then also as a follow-up in terms of the new build, you said that you're not seeing the reduction there. Does that mean that one for one, you're seeing our spares pickup too, or the OEs maintaining the rate at a higher level?

It's again, at the moment, nothing is that easy to explain. So while I don’t want to present to you complex pictures, it probably becomes necessary to do so. So clearly, the investment that I've talked about, both in last two calls and today a third time.

But today, introducing the fact that we are further increasing our capital expenditure to meet demand for a second engine manufacturer. Then, that as I previously mentioned and then mentioned as a result of additional contract and share, that we are able to fulfill in the future -- fulfill with the introduction of that new capacity.

When we bring that new capacity online, then we're going to take the next plant, so we're building out footprint in two particular plants at the moment. And that when we finish that footprint, the level of, I'll say, sophistication, automation and quality and use of, for example, AI in our test sets, that’s going to be taken to another level because to achieve the levels of production that we see the only way to do it with the consistency in yields that we do is with automation because we can't easily do it using a lot of labor. And so yes, we are taking the technology to another level in terms of manufacturing, and we're also able to help our customers in meeting what they would like to see by way of elevated temperature performance and increased pressures.

So when the original developments and uplifts for the two most recent engines, we know they move from being more focused on from fuel efficiency to more robustness. And that's something that we're able to work with them to try to achieve.

So all of that is in play and you've read articles that some of those upgrades, will be available subject to certification requirements later in 2025. And then progressively, I'll say, launched with each of the aircraft manufacturers over the next couple of years.

And it doesn't matter whether it's a LEAP based engine or a GTF engine, and we're working on the upgrades for all of those. And again, we'll be providing those new products into the service market as well so as an example included, well maybe it's over and above the increases in volumes that I've talked about, we've built already some tens of thousands of parts ready for the new improvements for engine manufacturers. And those are currently sitting in inventory awaiting certification sign-off and then they'll be assembled into engines.

Great. Thanks, John.

Thank you.

Seth Seifman, JPMorgan.

Thanks very much and good morning. I wonder, John, if you could talk a little bit about 787. We've seen some mixed messages here seems like some of the Japanese structures suppliers may be preparing to increase their rates. Boeing deliveries are low, one of the European suppliers shutting down for a little while. When you think about the trajectory in the Fasteners and Structures business, how are you thinking about 787?

On the Structures side, so far, we've been seeing our deliveries from Howmet in line with the previous guidance. At the same time, we do note that one of the European manufacturers is now they're saying they're going to cut back over the summer. And we've taken account of that in our -- in the guide that we provided to you in the same way, as I said, we covered out the reduction in LPT turbine blades and also some structural castings.

In the case of Fasteners, again, we note that Boeing are not building 787 at the stated rates that they wanted to have in their skyline. And so in the same way, as we've done with the 737 in using fasteners, which are on a min-max system rather than, I'll say directly scheduled part is that we've taken those inventory levels down to the minimum, such that we are in accordance with our contract with Boeing, but not seeking to put inventories above that level, such that we get caught with inventory takeout and later in the year or next year should that happen.

Great. Thank you very much.

Thank you.

David Strauss, Barclays.

Thank you. Good morning.

Hey, David.

Hey, John. So in the past John, I think you've talked about targeting a 30% or so incremental margin, plus or minus 5% it looks like this year, your revised guidance implies something in the 40% to 45% range. So just wanted to get some updated comments about how to think about incremental margins for the business. Thanks.

Yeah, we have increased the balance of the year. I think it's just fractionally over 40% in Q3, and that takes account of both the seasonality, plus the reduction in our Wheels business that we envisage at the moment, principally coming from Europe, but also affecting Class 8 trucks in the US as well.

So that's how we've put our incremental in for Q3 and essentially in Q4, Wheels should be rather stronger than that to end up the year to the higher level. Continuing the theme from our last earnings call, David, is that if you look at the rate of increase in employee headcount, which I think last quarter we said to you it's about a net -- just over 400, which in itself was a slightly reduced rate.

While we've still been hiring, it's now down to just fractionally below 200. And yet if you look at the increase in revenue, and it's a significantly above that in terms of percentage. So you can assume that productivity is being achieved and in the case of our Fastener business on top of that, I think is a 28% increase in revenues in Q1, 20% in Q2.

We've actually taken zero incremental headcount. So here we are pumping out 20%-plus revenues with no incremental peak, which obviously helps a lot towards the, I'll say, the bottom line and the efficiency within the business.

And so at the half year on a net basis, we are up probably 600 people in the company and all of that is in our Engine business, and that's because of both the demand level that we have, plus also we do need to begin to prepare for the increased capacity because headcount is going to be required or go through all the recruitment and training that we've talked about in the past because it takes a lot of effort to gain the skills that are requisite for it to be an employee in our Engines business.

So we're pleased with where we've got to, by way of efficiency. We are seeing on the people side, we're seeing also a slight calming in the inflation. And so in fact, in Q2, we had a tiny deflation in our metals inputs, which was good for the aerospace business but it was not worth talking about in terms of probably wasn't even -- I'll say with it being up 10 basis points. And so -- but it was good that we didn't have a headwind.

And then the only area we have a current headwind is the increasing price of aluminum which obviously affects our Wheels business. And so we'll see that small drag and getting a $1 recovery for $1 of cost that always provides a margin drag. And we'll add that margin drag to the reduced sales effect in our Wheels business.

So really signaling that Wheels revenues will be down and the margin will be down a little bit more in the in the third quarter because of seasonality and the demand factors plus the aluminum. But if you put together as a company, we are seeing, I’ll say good stability in across the piece in terms of input metals and increasing labor productivity and good demand of parts with giving, as I say, fairly good mix, which are reflected in the guidance where we're guiding at about 25% EBITDA margins in the second half as well.

Myles Walton, Wolfe Research.

Thanks. Good morning. Hey, John.

Hey, Myles.

You stopped specifying pricing, but I have to imagine, given the sort of breakaway moment here in the quarter pricing must be accelerating. Can you give any comment on that front. And also just to take it at a higher level, you talk about the Airbus and Boeing not being able to achieve their production objectives, but it did seem like GE had more of a material shortfall on their own. And I'm curious, do you see this as a blip in their ability to get production up and maybe the risks are shifting to the engine as opposed to the airframe? Thanks.

Okay. So rate changes, the aircraft manager, manufacturers are well publicized. So in the case of Airbus, I think they've taken their annual expectations of deliveries down by 30 aircraft, of which are I assume the majority are narrow bodies.

They did talk about some engine availability issues on their discussions at Farnborough last week. In the case of Boeing, again, it's all well publicized and we took a little bit of encouragement from what the Head of Boeing Commercial Aerospace said, by way of increased stability within their manufacturing plant in Seattle.

And so with the expectation of them achieving rate 38 by the end of the year which is great. And clearly, we haven't assumed that they get that far, but we did feel bold enough to go from a previous assumption of 20 production to 22 rate albeit probably still significantly below where the majority were expecting that to be.

In the case of engine manufacturer, those rates are far less really discussed. And from what I saw and read is that the expectation is that LEAP engine output will increase significantly in the second half of the year, which is really good.

So that will mop up some of our current, inventory in structural castings and the low-pressure turbine combined with obviously still the very high rates of production in the high-pressure turbine. So I think that covers that part of the question adequately.

In terms of price, we haven't given any further guidance to the price topic and from what we gave at the end of last year, which was that instead of 2024 being of a similar level plus or minus 2023 and that level had reached just about $100 million across the whole of the company.

Then we said it would be that or a little bit more. And no change from that guidance at all that we've given. And so you can assume it's exactly as we previously indicated, but really not commenting further on the topic.

Okay. All right. Thank you.

Thank you.

Sheila Kahyaoglu, Jefferies.

Thank you. Congrats guys on a great quarter and securing the second engine win. So John, maybe you could help elaborate on the terms there and what Ken agreed on that. So if you could just talk about how we think about that second engine OEM.

I think you said the volumes start up a quarter later than the first OEM in 2026. So how do we think about that incremental volume that comes through the return profile with the additional CapEx? And I'm guessing it's better than the 31% Engine margins you have today? And any thoughts on the first versus the second deal?

Yeah. It's obviously good business, otherwise we wouldn't take it. At the same time whenever you put down new engine capacity, as you know, engine manufacturing is very capital-intensive. And so we will be facing elevated depreciation charges because the average, you'll get on on I’ll say your written down asset base compared to putting in new capital is very different.

And in the early part of this call, I talked about in fact the extraordinary levels of automation to which we are having to go to in essence to achieve this consistency of quality and yield that are so vital to being able to produce effectively for the, I'll say, new special requirements for these turbine types of products.

And so I didn't really want to get into specifically pinpointing any particular margin, but you can assume that it's satisfactory. Otherwise, we're going to achieve an adequate return on capital, sufficient that I think will make our investors very satisfied.

At same time, the margin rates will be adequate. But I'll say, we will pumping them through with adding as little fixed cost as possible while at the same time, we recognize that we'll be adding depreciation costs. But it's a long way of saying, it's okay Sheila.

Thank you so much. Can you comment on the volume?

Clearly volumes are up because we said we'd be taking additional share as part of this. I don't really want to comment on specific market shares that we have on any particular customer. I don't think that's an appropriate thing to be talking about publicly.

But the important thing is the share gain is pretty healthy and it is similarly in line with the previous increase in share that we've talked about for the earlier investments. So basically, this one is the investments are about six months, kicking off them six months later than the previous investment.

And now clearly our job is to try to place all of those new machine tools, get them as quickly as possible and place them and commission them as soon as possible because the demand is clearly there for them. And so our customers would like to see them come on as early as possible.

And it's all going to be tied up with not just what they want for them, what they see in volumes today. But also the certification of the changes going on in the engine world, which the FAA and the EASA will have to sign off both for Airbus and Boeing, where these new engine upgrades are -- as they have to be certified as well. So we await that it could be different for each of the manufacturers we feel.

Thank you.

Thank you.

Robert Spingarn, Melius Research.

Hi. This is Scott Mikus on for Rob Spingarn. John, I hate to put you on the spot and ask for a long-term margin target here. But your operating margins were quite strong in the quarter. They're in the low 20s now and Precision Cast Parts, there was always noise in the numbers due to metal pricing and LIFO reserves, but it's operating margins before it was acquired were in the high 20s. Do you think Howmet has the potential to eventually get there long term?

Well, first of all, I wasn't quite sure whether those Precision Cast Parts were operating margins or EBITDA margins, but it doesn't really matter because I don't really comment on margin at all. Aerospace is a cyclical industry and anybody who has the absolute knowledge and prescience to know exactly what volumes will be next year and the year after the year after that and what the rate of increase will be is something that I don't have and therefore have never been comfortable talking about what I think margin rates will be in the future.

I think all we can do is to say this is what we're doing -- these are the changes we're trying to make to improve our company. And I don't follow some, I'll say, false god of whatever happened over a decade ago, one company, whether those were real or not real margins at the time and what type of margin rate was covered.

So I choose not to do it, Scott. So I don't think I ever have and I don't think I ever will comment on margin rates. It's something which like, how do you know? And so I recognize that some companies do say what their margins are going to be two or three years from now. Whether they're achieved or not seems to get lost, but you won't find me doing it.

Okay. Got it. I'll stick with one. Thanks, John.

Okay, thank you.

Noah Poponak, Goldman Sachs.

Hey, good morning, everyone. John, you had explained that the incrementals were strong in the first half because you didn't have to hire as fast while the revenue growth is still pretty good. I guess that begs the question of when you suspect you'll be back to hiring?

And then I guess when you look through how the segments have evolved, Engine is up, but like a 1,000 basis points versus pre-pandemic Fastening still lower than pre-pandemic. Obviously, that's we know why that has a lagged revenue recovery, I guess does Fastening have as much potential as Engine as it continues to get its revenue recovery?

As you know, Noah in commercial aero, nothing is ever exactly the same. And pre pandemic, we are at the time, I think producing something like 9 A350s a month and 13 or 14, 787s a month. And as you know, we produce a completely different set of fasteners for a composite-based aircraft than a metallic-based aircraft.

And to some degree, you saw that when 787 was halted at one point, we were down to zero because of the clearing out of inventories and we've been climbing back from there both in terms of the favorable mix, but also the effects of trying to drive productivity in that business and also being probably a little bit better commercially.

At this point, I don't know what eventual rate wide body will get to and therefore, the future mix is going to be different. I note the increase in A350, and I suspect that A350 would be in the higher rating – if it wasn't for some, I'll say supply constraints, particularly in the structures area. And that's slated to go to I think, is it 12 a month by 2027, which would be great because that will be above the previous rate.

On 787, the only ambitious number I've heard is rate, 10, which was slated for us '25, '26, but everything has been modified now to '26. But I think we've got to wait and see what happens in 2025 first. And getting up from where I think it current production is maybe three a month, four a month levels From what I've read and it would be great to get back to five and then seven next year.

And I think that's tied up with maybe a few particular parts I've read about probably also the same thing as we had previously. I mean, supply chain is often quoted, but often there's also issues within the assembly processes for some of these aircraft.

And so that all needs picking apart in much greater detail than. Let’s see the rates progress during the balance of '24 into '25 before we get to what's the real rate going to be in '26 and '27. But should it get back to say 14 a month of 787s and if it gets 12 a month stated for A350.

And I guess depends on -- then what the volume of the metallic base narrow-bodies will be, but that would be a very positive impact for us. But I don't feel like saying that we’ll be back to any particular previous margin level.

I think the most important thing is if you just look at the track of our margins in the Fastener business during the recent quarters. I think it's been truly impressive in terms of sequential improvement and that's as far as I'll go.

Okay. Thank you.

Thank you.

Gautam Khanna, TD Cowen.

Hey, John, Ken and PT and congrats on the results. Hey, just John, maybe to put a finer point on it, where, if anywhere do you see excess inventory in the channel of your products? Has there been any deferral requests or anything incrementally that is weakening in some of the outlook beyond maybe 2024?

Obviously, you've raised '24, but anything that gives you pause in '25. And then lastly -- relatedly, I just wanted to ask that Asheville RTX facility, has that had any negative impact on the longer-term outlook for the F135 or any other programs you service? Thanks.

Okay. So maybe I'll deal with the Asheville question first. I haven't heard any commentary coming out of RTX in the last year or so on that facility. I believe it's coming up to rate on machining work, and that's probably necessary to get through the disk inspection and recall.

On the investment castings process I hadn't really heard anything that's material in that area. And so I'm still all of my previous comments about that facility, just stand there on the record as is. At the moment, we're not seeing that reflected in any change of our requirements over the next few years.

And at this point, don't expect it to -- I mean, what happens lets that say after, I don't know 2030 compared to the $650 million, that was the announced investment, which doesn't go far across coating and machining and building online in investment castings.

I think you've got a few more billion, several billions to go yet to for that to become sufficiently equipped at scale to be cost effective. And it's not clear to me that Pratt & Whitney are emphasizing that investment compared to getting through the, I'll say, current GTF issues and servicing the cash costs of that provision that was made last year of I think it's $6 billion, obviously shared between them and some partners.

But that's a big nugget to absorb. So I don't know more than that. And just because I've been spending so much time focused on that question. What was the first part of it? Sorry was it excess inventory in the channel?

Yeah. Excess inventory.

Not really. I mean, there's bits appeared. So as I said, we were a little bit surprised when we got cut back recently on the low pressure turbine parts because those LEAP engines weren't assembled. And so we've probably got more than we would like, and therefore trying to manage that through the next quarter or so.

And according to what we can do by way of changing the employment, I'll say hours in our facilities in one plant in France. But it's nothing of great note and, as I said earlier, if you think about it. There's so many moving parts going on at the moment in the industry, like we see what aircraft manufacturers delivery rates are, how much comes out of production compared to how much comes out of inventory, what's the state of how many aircraft have started to count in your roll out plans, that's pretty opaque.

And we don't really have and you don't have good production level information. And then you get from that all of the engines, you've got all the inventory they’ve got. So there's so many different aspects to it, and it must be really difficult for you to model because it's difficult for us.

And so what I would advise you to do is just take our guide in the way we've tried to set it out. We've been cautious where we need to. We've called out reductions, for example, in the Wheels business where we see now that reduction in market activity very clearly started in Q2 and is going to be significant in Q3, exacerbated by the seasonality because as you know, European plants tend to go off for several weeks in July and August.

And so we've got all of that. And the best I think we can do is to say, look at the guide, it takes account the best level of knowledge it keeps faith with all of the previous production quantities we talked about on the first quarter earnings call and adjusted for the Boeing rate only and what we've taken engine rate down to match what we've been advised in the case of the engine manufacturers.

Thank you.

Thank you.

Ron Epstein, Bank of America. Ron, your line is unmuted.

Hey, guys. Sorry about that. I was muted.

Hi, Ron. I thought that was the best question all day because I thought I haven't got to answer it.

Yeah, the easy one right?

Yeah. The easy one.

The ones that don't show up. So just a quick, just a broad one. A lot of stuff's been asked, but one of the feedback we picked up over at Farnborough in probably every meeting we went into was just a shortage of castings across the industry.

So maybe more broadly you do casting, right? I mean, what kind of opportunity is that for Howmet to pick up share or more business because of what's going on in the casting world. But it is an opportunity, is it not? Do you see it resolving itself? If you could talk on that.

Yeah. Again, you got to pick it apart between that which is the castings for structural castings, compared to the high-pressure turbine castings or low-pressure turbine. And the cases where we've seen engine OE engine cutbacks that I'll say negatively affected to a small degree our structural castings and the LPT castings we do.

And so I guess that just goes with the territory. The capacity isn’t fungible. So you can't just say I'll now make a high-pressure turbine castings with that because it's different dies, different I'll say different casting techniques, et cetera.

And so it's not immediately transferable at all. So the key to let’s say, can we produce any further high-pressure turbine castings because the service demand seems to be high and possibly higher than certainly that we had been advised six months or a year ago.

And so we put all our shoulders to the wheel and trying everything we can to increase that while also stating that we know we’re well above engine rate. I'm not giving you any specific quantities, but you can assume that, that statement is absolutely correctly, that we’re well above engine rate.

And then it's what goes to service in the MRO shops and what goes to the I'll say OE production that's not our decision. So we kind of tried to improve once again, and it will go to yield in the short term and that will go to fresh capital expenditure in that medium term.

And so we've been clear that for us to put down fresh capital because of its high capital intensity and you've got to have a surety of returns is that's why we've struck agreements which lock in market share commensurate with those investment requirements for future.

So we are positioned well for the future. But if you said to us, can we produce another 30% high-pressure turbine castings in the next two months? The answer would be no, we can't. We'll be, we’re well above engine rate.

And then that's about all we can say it's going to go, can we improve our internal yields and obviously, we're talking to our customers about how they can help with that. And we've got some really good collaboration with our customers at the moment trying to achieve improvements over and above the improvements in volumes that we've already achieved.

So I'm feeling pretty positive about it, I like the dynamic, I like the fact that we've got significant demand, but I've also got to be realistic. I just don't have a knob I can turn and say I'll go and produce another 30%, it doesn't work like that.

We've got new tools to put down -- we've got new casting machines. We've got new presses, new everything to fundamentally change that. And that's why I said. We'll bring that capacity on and you'll see the fruits of that in 2026.

Got it. And if I may, just on that along that same question. How much better could you get yields? Because my understanding already is you guys are pretty good.

It's going to be at the margin. From where we are today, the only way is to where -- sometime there may be excessive requirements on a drawing whether those can be relaxed anyway, which don't go to performance.

But it's those sort of tiny things which matter but don't matter to affect your product performance. There's possibly something in that, and call it, clearly, we will study that. But while always protecting the quality of the product that we produce.

Got it. Thank you.

Thanks, Ron.

That is all the time we have today for questions. Thank you all for attending and participating in today's conference call. You may now disconnect your lines and have a great day.