Howmet Aerospace Inc (HWM) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace Second Quarter 2020 Results Conference Call. My name is Beverlyn, and I will be your operator for today. As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.

Thank you, Beverlyn. Good morning, and welcome to the Howmet Aerospace Second Quarter 2020 Results Conference Call. I'm joined by John Plant, Executive Chairman and Co-Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John, 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 addition, we've included some non-GAAP financial measures 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.

Good morning, everyone, and thank you for joining the call. Today, with Ken, I also have Tolga Oal, who's on the call, and Tolga is our Co-CEO. Tolga has been immersed in the business since his announcement as Co-CEO back at Howmet's Investor Day in February.

Now let's move to Slide 4 to cover second quarter results. First, let me paint a picture of the quarter. As you'll recall, we saw the first significant disruptions related to COVID-19 in the last 3 weeks of March. The initial effects were quarantine-related disruptions within Howmet plants and certain customers that ceased production, for example, Boeing, Airbus, Safran, et cetera. The full impact was felt in Q2 with customer shutdowns, scheduled cancellations and Howmet plant disruptions. The results reflecting this impact, show sales reduced year-over-year by some 31% and operating income, excluding special items, by 42%. Nevertheless, we were pleased with the absolute numbers, our 14.4% operating income margin and a 19.7% EBITDA margin. This reflects the swift cost containment actions undertaken starting at the end of the first week of April. And you may recall that we took our initial restructuring charge in the first quarter results.

These cost reductions continue to take effect each month in the second quarter and will continue into Q3 and Q4. Later in my remarks, I'll begin to focus more on our exit rate trajectory for 2020 as we move into 2021.

Further to the second quarter EBITDA margin at 19.7%, Howmet also generated earnings per share of $0.12.

Now let's move to the balance sheet and cash flow. Adjusted free cash flow in Q2 was $76 million, excluding $11 million of separation costs. I also point out that the $76 million of cash generation included the effect of 3 items. Firstly, we reduced our AR securitization for the second time in 2020 and a customer supplier financing program by some $30 million. Second, we made $12 million of cash restructuring payments. And third, we made additional voluntary cash contributions to our U.K. pension plan of approximately $45 million to make a large reduction in the gross pension liability. For the absence of doubt, our free cash flow is after everything. And if we had not paid down the accounts securitization, the U.K. pension and the restructuring, the cash flow of $76 million would have been higher by some $87 million, out over $163 million in the quarter.

The cash balance for Q2 improved. After the separation of Arconic Corp. on April 1, the opening cash balance of Howmet was approximately $800 million. At the end of the second quarter, the cash balance was $1.3 billion. The increase was due to approximately $65 million of cash generation after separation costs and the net addition of $420 million as a result of refinancing bonds from 2021 and 2022 to 2025.

Net debt-to-EBITDA was 2.73x. Revolver capacity of $1 billion is undrawn.

Now let's move on to Slide 5. We made rapid response to COVID-19 and the market declines.

First, with regard to our employees and customers. Employee safety is a top priority, and we are actively managing employee health risks. Programs meet or exceed local standards. All of our sites are now up and running. We are a reliable partner to our customers who are critical to the national defense, to commercial aviation and to the global economy.

Regarding profit and liquidity, management has undertaken the following actions: furloughing some of the hourly workforce and reducing overtime; permanently reducing all types of labor, both hourly and salaried; the elimination of temporary workers; flexing of materials and services; reducing capital expenditures; and reducing our working capital.

Lastly, as I mentioned, we refinanced our 2021 and '22 bonds into 2025 and added $420 million of cash to the balance sheet. And the revolver is undrawn.

Now let me turn it over to Ken to give more details on our second quarter performance. And then I'll begin to speak to the outlook for the second half of the year.

Great. Thank you, John. Before getting started, I wanted to make a few comments on our basis of presentation. As a result of the separation on April 1, 2020, Howmet Aerospace has reported the results of the separated entity, Arconic Corporation, as discontinued operations for 1Q 2020 and prior periods. Per GAAP, it's important to note that corporate cost for the pre-separation periods were only allocated to Arconic Corporation if the costs were specifically attributable to the entity. Therefore, for pre-separation periods, Howmet retained 100% of all shared corporate costs. For 2019, Howmet statements will show approximately $190 million of corporate costs, excluding special items, since the shared costs were not allocated to Arconic Corporation. For clarity, we've provided a schedule on Slide 20 in the appendix, which is consistent with Howmet's 2020 Investor Day and shows an estimate of historical operational corporate costs. For 2019, the comparable annual operational corporate costs were estimated to be $100 million rather than $190 million. Looking forward into 2020, operational corporate costs are expected to be approximately $75 million.

So let's move to Slide 6. In the second quarter, commercial aerospace was 54% of total revenue; defense aerospace was 18%; commercial transportation was 12%; and industrial, combined with our other end markets, was 16%. COVID-19 and 737 MAX production declines most severely impacted the commercial aerospace and commercial transportation markets, which were down 36% and 54% year-over-year, respectively.

We continue to expect defense aerospace to grow year-over-year due to the strong demand for the Joint Strike Fighter on both new airplane builds and engine spares. In the second quarter, defense aerospace was up 3% year-over-year. And within the industrial and other markets, IGT was up 25% year-over-year.

Now let's move to Slide 7. On this slide, we provided historical information for the combined segments with an estimated operational view of corporate. Howmet Aerospace will present financial information for 4 segments: Engine Products, Fastening Systems, Engineered Products and Forged Wheels.

Compared to the prior year, 2Q revenue declined approximately $570 million, with a corresponding segment operating profit decline of $160 million. The associated segment decremental margin for 2Q 2020 was approximately 28% year-over-year. Included in the results are price increases of $9 million, which are expected to continue in the second half. Additionally, cost reductions were $55 million in the quarter as we benefited from actions taken in early April as well as last year. Without the price increases, the cost reductions and the flex of a variable cost in line with the significant and sudden revenue decline. Segment operating profit decrement would have been more in the 37% range rather than the 28% range reported. In the appendix, we provided historical information for each of the segments.

Now let's move to Slide 8. For each of the segments, we provided historical revenue, segment operating profit and segment operating profit margin. We have also provided the revenue by market split for the current quarter as well as commentary on performance.

First, we'll start with the largest segment, engines. For the second quarter, year-over-year revenue was down 30%. Commercial aerospace was down 44%, driven by COVID-19 and 737 MAX production declines. Commercial aerospace was somewhat offset by a 7% year-over-year increase in defense aerospace and a 25% increase in IGT as that market rebounds from a weak level in 2019. Price increases continued in the segment. Moreover, the team was able to quickly flex variable spending to mitigate the impact in the quarter of the significant decline in commercial aerospace revenue. The decremental margin for 2Q was 23% year-over-year.

Now let's move to fasteners on Slide 9. For the fasteners segment, second quarter year-over-year revenue was down 18%. Commercial aerospace was down 15%, driven by COVID-19 and 737 MAX production declines. Fasteners shipped overdues in the second quarter, and we expect a steeper revenue decline in 3Q as inventory levels are being adjusted at our customers, and we expect seasonal revenue declines driven by European operations. The fasteners commercial transportation business was down 43%. Cost reductions across the segment helped mitigate the decrease in revenue, but higher absenteeism and the delay in European cost reductions resulted in a 40% year-over-year decremental margin.

Now let's move to Slide 10 to review structures. For the structures segment, second quarter year-over-year revenue was down 31%. Commercial aerospace was down 40% driven by COVID-19 and the 787 production declines. Decremental margins were 6% year-over-year. Price increases, cost reductions and exiting unprofitable businesses in 2019 allowed structures to increase operating margin by 70 basis points year-over-year despite the 31% decline in revenue.

Lastly, let's move to Slide 11 for wheels. In the second quarter, the Wheels segment was the hardest hit with a 56% reduction in revenue year-over-year. Decremental margins were 47%. For the month of April, almost all of our OEM customers were shut down with a gradual recovery in May and June. Despite the significant and rapid revenue decline, the segment was profitable due to the rapid cost reductions as well as their ability to quickly flex variable spending.

Now let's move to Slide 12 for special items. Special items totaled $171 million on a pretax basis, which included 3 main items: first, a $64 million charge for pension plan settlements primarily due to a voluntary action in the U.K. to reduce our gross pension liabilities by approximately $320 million; second, a $65 million charge related to the early redemption of 2020, 2021 and 2022 notes in the second quarter; and the third item was a $46 million charge related to severance programs that are tied to the 2020 cost reduction actions as we continue to navigate through a period of demand uncertainty.

So let's now move to Slide 13. In the second quarter, we completed a good deal of work to improve our capital structure and liquidity. We completed the following actions. We redeemed all of our 2020 bonds for $1 billion. We redeemed $889 million of our 2021 bonds, leaving $361 million, which will mature in April of 2021. We redeemed $151 million of our 2022 bonds, leaving $476 million that will mature in February 2022. Lastly, we completed a new bond issue for $1.2 billion, which is due in May of 2025. Our next significant debt maturity is in October of 2024. We also amended our revolving credit facility in the second quarter. As a result of these actions, we were able to increase our cash position by approximately $420 million. We also took pressure off the balance sheet by reducing the near-term maturities and increased our available liquidity.

Before turning it back over to John to discuss the 2020 outlook, let me cover some assumptions on Slide 14. Corporate overhead is expected to improve to $75 million for the year based on further cost reductions. Annual operational tax rate remains in the 28% to 30% range for the year, but we could have volatility in the quarters based on the current environment. Lastly, pension and OPEB cash contributions remain at $210 million for the year and include the discretionary 2Q payment of $45 million, which reduced the U.K. gross pension liability by $320 million.

So now let me turn it back over to John.

Thanks, Ken, and let's move to Slide 15. We are providing you an outlook, and that really is to give the best possible visibility to the company. Of course, we have been monitoring air traffic around the world and the best estimates of aircraft builds. And this leads us to provide this view to you for the balance of the year given that we're well into the second half. However, we do recognize that there remains significant uncertainties regarding the external environment. For example, spikes regarding COVID-19, visibility of customer inventory corrections and aircraft build rate changes in the face of any further COVID spiking.

Here are the salient points. Full year revenue is expected to be $5.2 billion for the year, plus or minus $100 million. Commercial aerospace is expected to be down 35%, consistent with our previous view. Commercial transportation is expected to be down 45%, which is a modest improvement from our prior view. Defense aerospace and industrial are expected to be up with defense aerospace up 10% and industrial up 5%. The consolidated annual revenue for all of our markets is expected to be down approximately 25% to 28% year-over-year. EBITDA is expected to be $1.03 billion for the year, plus or minus $35 million, but it is made up of very different quarters. For example, in Q1, we had, I think, a good level of revenues nevertheless offset by disruption in the latter part of March. And then, of course, the transition quarters, as I call them, are the second and third quarters and then to the fourth quarter to new operating cost levels. Naturally, the outlook remains our best estimate at this stage given the volume variability due to the complete airline and aircraft build environment, as previously mentioned.

Q3 revenue is expected to be the low point for the year based upon the current view and is approximately $1.1 billion, plus or minus $50 million, as we expect significant commercial aerospace customer inventory corrections in the quarter and a normal seasonal slowdown in Europe. Cost reductions continue throughout the third and fourth quarters as we approach run rate. Fourth quarter revenue is expected to recover somewhat, and EBITDA margins are expected to return to similar levels of the second quarter. This trajectory is important to note, especially since the operations methodology has been cost elimination and not cost deferral.

Q2 to Q4 adjusted free cash flow is expected to be $400 million, plus or minus $50 million. For the year, we expect free cash flow to be in the $300 million range including a modest working capital benefit of less than $50 million. And of course, these cash flows I've just mentioned are after the reduction and paydown of approximately $50 million of our accounts receivable securitization program and a customer supplier financing program, plus over $60 million of cash severance payments. Moreover, the cash flow includes a voluntary U.K. pension payment made in the second quarter of approximately $45 million to reflect the $320 million of reduction in gross pension liabilities that Ken already mentioned. Earnings per share is expected to be in the range of $0.60 to $0.72 per share.

Now I'll provide some additional commentary for the year and the second half. We are increasing our in-year cost reduction program to $100 million. Moreover, we expect an additional $50 million of structural cost savings in 2020 from the 2019 actions. These cost reductions are permanent and will help accelerate margin expansion when markets eventually recover. We are continuing to flex variable costs in addition to this with the revenue decline.

We are reducing CapEx further. Annual capital expenditure is now expected to be $175 million or approximately 3% in revenue. Our previous target mentioned on the first quarter call was $200 million. We do expect pricing to remain favorable for the year. Q3 is expected to be weaker than the second quarter due to significant customer inventory adjustments and the seasonality already mentioned. However, in the fourth quarter, we do expect some modest recovery of volumes, with adjusted EBITDA margin similar to the second quarter.

And now let's move to Q&A.

(Operator Instructions) Our first question comes from the line of Carter Copeland of Melius Research.

John, can you just give us a sense of the reduction in the run rate kind of build rates on the OEM side, what we should be thinking as you've kind of laid out here for the next, I don't know, 18, 24 months, if that's level loaded at down 35% or 40% or 50%? Any color you can help us on how you've thought about that build plan and how that fits in with your cost plan?

Yes. I mean the most visibility that we have currently is, I think, for Airbus, where they've given clear indications of build rates, which are well-publicized through certainly for narrow-body through, I think, April of next year at a rate of 40 with wide-body being down, I think reductions of like the A350 down to 5 per month.

On Boeing, as I say, we've -- as I think everybody knows, we've had several demand forecasts over the last few months. And currently, the build rate there is projected to be very low at 7. So it's difficult to discern that at the moment in terms of where we are relative to inventory takeout, et cetera, et cetera. And also, we recognize or we have to recognize that the amount of, I'll say, for us in our engine business, what then flows through by way of engine demand and then the inventory levels in, for example, in GE, et cetera, et cetera.

So essentially, the way we think about it is we've taken that which Boeing and Airbus have published, run that out through as best we can into -- through 2021. And then just note to ourselves is that, well, we have no visibility of like when we would expect recovery to occur but the -- I guess the flip side that we have of where we're taking, I think, inventory reductions as part of our, I'll say, top line sort of degradation at the moment. Then as builds do eventually begin to recover, then we will see some inventory build in advance of that to prepare the pipelines for that demand recovery.

So I know -- we're choosing not to call out when we say demand will return. The one thing we've done is to recognize that it's a difficult environment. The mantra has been cost elimination, not cost deferral, such that as and when we do begin to see a demand pull, then given, say, the EBITDA margins that we achieved in the quarter and where we think we'll be for the year and at the end of the year, then we're well positioned to take advantage of any demand recovery as and when it occurs.

The only thing we're consciously doing is that if we see a particularly low point, and we have called out Q3 in that, I don't plan to chase cost reduction for a quarter because I also want to make sure that we are well positioned to be able to meet recovery as and when it occurs, and trying to define what that sort of loading is. And then should the future not turn out to be as we currently believe it to be, then obviously, we'll further adjust our cost base as necessary.

So I don't know whether that gives you a pretty good picture, Carter, of how we're thinking about it and what we know and compared to what we don't know at the moment.

Yes, certainly does. And with respect to the inventory reduction in the channel that you're hinting at and -- or that you see coming in Q3, any color you can give us on -- if that's in one area more than another, whether that's engines versus fasteners or whatnot? Any color there would be helpful.

It's both. It's one of the most difficult things that we have to try to get that in terms of visibility because clearly, we're not privy to exactly, for example, how many engines are there, how many spares are being held. And indeed, what the inventory levels exactly were. We did note that we did have significant arrears as we went out of 2019. But as -- I think as I've said on the earlier call, I mean those arrears can evaporate when the builds are no longer required. So we just believe that we are seeing -- and we're in this period of inventory reduction. We can't be certain of exactly how much will be cleared in the third quarter. There may still be some lingering into the fourth quarter and even beyond, depending on what the outlook looks like.

At the same time, what we recognize in our own cash flows is that this year, our own working capital will not be as good as it could be, particularly regarding the inventory itself. Because we will have, even at the end of the fourth quarter, some trapped inventory, whereby given what we previously understood demand to be, we had scheduled materials. And some of those we'll have to take and some of the things that we have in our plants today, we will not be able to deliver, even though we are holding our customers to account is that there will be some significant few tens of millions of trapped inventory throughout the year, which will take, again, some time to burn off in the following year.

So again, to summarize, inventory is the most difficult thing to get visibility around. And all we can do is look at the current schedules, and we just see that, that third quarter will be impacted further as our customers reassess their requirements.

Your next question comes from the line of David Strauss of Barclays.

So, John, I guess wanted to follow up on Carter's questions around destocking. The decline that you saw in commercial aero in the quarter, 36%, I know is different across different businesses but overall was much better than pretty much all your peers, your supplier peers that saw a bigger decline and are calling for destocking to go on now for several quarters. It sounds like you're calling for a Q3 destock, and then we're back kind of in line with production rates.

I guess what kind of visibility do you have? Or what are you seeing that could be different than what everyone else seems to be indicating?

I'm not saying we'll have everything cleared in the third quarter for sure because we just don't have that level of certainty or visibility that we'd like to have so we're making some allowance for that. That will continue throughout the year, but I think it will get more intense in the third quarter. The other thing, which we are noting and I'm going to say it again because I think I surprised you a little bit on the first quarter call when I think I said something to the effect that I saw commercial transportation recovering a little bit more quickly than commercial aerospace. And indeed, we are seeing that is that while second quarter was quite dramatic as most commercial truck plants were closed -- I mean completely closed during April and part of May, but we are seeing improved demand, both in North America and in Europe. And we think that, that will strengthen as we go into the fourth quarter.

So the way we're sort of trying to map out our year is that we -- CT is still fairly low in Q3, but we believe to be getting better than what the visibility we have from our customers. And you see a further inventory reduction in commercial aerospace in Q3, making some allowance for that to continue into Q4 and then it's like a bandwidth that we've tried to give you in terms of guidance to where we believe we'll end the year. So I wish it was more certain. I think the one thing that I think should be recognized and we have done our best to give you guidance, and we just do recognize that it is imperfect, for sure.

Okay. And then moving over to the margin side of things. So you've talked about the cost savings being permanent and further pricing opportunities as we go forward here. Where would you kind of peg incremental margins once volume starts to come back or we stabilize here? Where do you think incremental margins can shake out? And when do you think you can get segment margins back to that kind of 20% range, above 20% range that we were at in Q1 before pre COVID?

Yes. I mean that's a sort of, I'd say, a noose flow that I don't really want to put my head in, in terms of calling a margin guidance for the future. I think the way I approach it is to say we've chosen not to defer things. So -- because I'm always concerned about cost deferral being something that as and when you do see improvement, costs flood back into your business. And I don't think that's the way to go forward. So I think it's a pure cost elimination. And I think the very best periods of time, indeed, I think many industries you saw this to some degree, in the few sector companies in -- after the 2008, 2009 is that when you've made the very serious attempt to reduce structural costs, then some of those -- most of those, maybe all of those won't go back into the business. And so then you really are just taking variable cost back on to meet future revenues. So margin rates do begin to improve at that time. I mean it's all a question really is when do -- when does volume and that inventory build that I talked about earlier, when does it occur? And that's the bit none of us know, and I'm just trying to make sure that we position Howmet as best as we can, such that as and when volume does come back, then -- if we cannot print those sort of EBITDA margins that I talked about for Q2 and for Q4 when things are tough, then hopefully, that leads you to the belief that we can do that when volumes improve. And that's what it's all about. It's like preparing Howmet for the upswing, which will come. But I think none of us know when it is, but I think our job is to make sure that we've positioned it as best as we can, as quickly as we can such that we can generate cash throughout, and that's what you're seeing.

Yes. David, what I would add to that, too, is you saw that we increased our structural cost out target in year to $150 million in year. And when you look at where we are year-to-date, we had $26 million in the first quarter. That was really related to the 2019 actions that came into this year. In the second quarter, we had $55 million. So year-to-date, that puts us at about $81 million. So good track record if we have $81 million already in the bank, and we're targeting $150 million for the full year.

On top of that, if you look at back to the first quarter, we took a severance charge at the beginning of COVID-19 of about $20 million, and then you're seeing another severance charge in the second quarter of about $46 million. So there's a good trajectory on the cost out, the prices continuing. And also, we've exited some unprofitable businesses last year as well so that should help us.

Your next question comes from the line of Robert Spingarn of Crédit Suisse.

First, I'd like to thank you for the level of detail here and, frankly, for the willingness to guide because not many have. I wanted to -- on that, I wanted to ask you about -- you've talked about visibility, and I just wanted to get a sense, especially on the MAX, how well you can see what your customers have in terms of inventory. Are you building MAX engines now at a rate of 7 per month or 14 for the engine, 7 for the shipset? And can you tell what kind of inventory the engine manufacturers have on hand?

Our schedules for any LEAP-1B engines currently are at a very low level, not surprisingly, given the engine inventory, which is there, which we don't have exact numbers because it's proprietary to GE Aviation. And obviously, they had a level of part flow that was assuming much different build levels compared to where we find ourselves at the moment. So we're at a very low point of airfoil build for the LEAP engines and LEAP-1B in particular for the tender at Boeing. And so I think that will continue at a very low level throughout 2020. And then assuming that the recertification goes ahead, which we have no reason to believe that it won't, that will be good news. And then Boeing plans to resume deliveries and then increase build rates as we go into 2021. And that's the time that we're looking forward to because we have been essentially without a MAX build for a long period of time now. And so I think it's -- maybe not just us, but the whole industry is looking forward to that time. Because we do think that narrowbody is where the demand will be in the future.

Is there any way you can give us some sense of your content on that program on a per aircraft basis? Is there anything you can say?

Well, we've never given -- or not in recent times given shipset values by aircraft. And I don't really want to do that on today's call. But I mean, clearly, if you look at the impact that we had in our first quarter where we do call out MAX more specifically, and then you can see, obviously, it's essentially not present at all in our second quarter. You can see that the combined effect of that MAX and the COVID-related impacts of aircraft assembly plants being down because of employee quarantine and also just the whole demand level from airlines, I mean it's a very, very difficult picture for the commercial aerospace aspect of that business. But I don't really want to call out the shipset value at the moment.

Okay. Fair enough. And just a clarification, I don't think you said this before. But in terms of the commercial aerospace revenue decline in the quarter, I think 36%, can you specify how much that was down for OE versus aftermarket? And I'm not just thinking about airfoils and aftermarket, but all of your commercial aero aftermarket? And then what's contemplated in the second half guide for those 2 buckets?

So last quarter, we gave a little bit more granularity regarding our spares sales. And for the most intents and purposes, it sits around that $800 million, $850 million level for the whole company. So let's use a round sum, $800 million. And in 2019, it was approximately $400 million for defense aero and for industrial and therefore, $400 million for commercial aerospace. I'm thinking that this year that the $400 million for defense aerospace and the industrial business will be a little bit higher. So given the build, the OE build and the spares packages, which you need to go with those, so think of that a 10%-plus increase in that. So let's call it at $450 million. It could be a bit more. We don't know yet.

And then for the balance, I see a very severe contraction in the commercial aerospace. From that $400 million, probably down to the $150 million, plus or minus, from that $400 million. That's on a year, therefore, obviously, a massive reductions in the -- like in Q2, Q3, for the aftermarket. So it all balances out, probably in that region, maybe just shy of the $600 million range for total spares for Howmet in 2020, but with very different quarters, as you can imagine, given the lack of requirements for, say, repair and overhaul at the moment.

Your next question comes from the line of Gautam Khanna of Cowen.

Can you hear me?

I can.

Okay. Perfect. I was -- forgive the question, but I have to ask.

You want absolution?

Exactly. So here we go. Earlier, I think you'd said maybe last quarter that pricing would -- or you implied, pricing would be better than $20 million this year. I wanted an update on that. I wanted an update on your '21 view on pricing. And I'm trying to answer the question. Do you think earnings per share will be up next year over this year? So maybe you can also address the carryforward of structural cost out next year. Pricing and obviously, understanding revenue is -- pricing is a function of volume shipments, so I get that's maybe just directional for next year. But if you can opine on whether you think earnings per share will be up next year given the tough Q1 compare and all the other moving parts. And then I have a follow-up.

Well, I'm not into giving 2021 reference or guidance at this point in time. I feel as though that's way too early to be talking about that. We've tried really hard. We tried to give you the visibility that we have done today. And I think someone earlier recognized that we either have the courage to give that to be in the second half or we don't understand 1 of those 2. So I don't think I'm going to talk to 2021 at the moment. I mean I have a view, but we've tried to think about that very clearly for ourselves in terms of what is our run rate in terms of revenues, what are our run rates in terms of margins, how does it pan out. And so we certainly have that uppermost in our mind about the trajectory into '21 and also into '22. So we're trying to think a lot about that, but I don't really want to give guidance at this point. I think the most important thing was to try to give you a steer for exit rate trajectory, which you've got, and trying to give you some view of how we are seeing some inventory issues that have to be worked through. And hopefully, those are largely done by next year, but there's no guarantee. I've tried to give you a view about maybe the sort of recovery in commercial transportation and, as I say, to move towards the latter part of the year.

And then in terms of pricing, clearly, absolute dollars are going to be a function of revenue. We know that revenue is not going to be what we had in 2019. But -- and we've also recognized that the environment and our customers, we're all suffering at the moment. We're all in a world of hurt, but we also believe that the trajectory in terms of the price we've talked about is largely intact, albeit it can't be exactly the same, given the current pressures of the industry. And we've tried to call that out again in Q2 and give some steer for in our words for the balance of the year.

So at the moment, as best as you can be, I think we're largely on track for doing what we said we'd do and positioning the company as best we can in terms of cost structure and trying to give you the flow -- ebbs and flows regarding inventory, albeit called out the imperfect nature of the visibility that we have and at the same time, really try to give ourselves the absolutely best positioning that we can such that as and when revenues do begin to pull as they always do and they will and in advance of that, I guess, we should see inventory climb, is that Howmet is really well positioned to be able to manufacture those parts and also get the right levels of profitability given what we've done, the way we approached our cost planning for 2020.

Yes. I appreciate that. I guess there are a couple of notable things, the structural cost out next year versus this. So how does the $150 million this year compared to what you anticipate for next? And maybe just directionally, if pricing will be better in -- pricing realization will be better in '21 versus '20 because that was the plan at the Investor Day. I wondered if at least directionally, that's still the plan.

If I was going to walk away from the direction I would have set, and I didn't. So the second point is, clearly, there's going to be a part year effect carryover into '21, of the cost reductions that we are carrying through at the moment, given the fact that essentially, they commenced in April in the face of the demand that we see. So I think the thing that you should think about is the words that we've chosen that we would eliminate cost, not defer it because I think those companies which defer -- I mean you can see across the whole industrial space, there is a phenomenon to deferral. And I don't want cost to flood back in when programs are reinstated. So that's the way we've approached this.

And my follow-up is inventory plans through the first half of next year or beyond, you mentioned there's going to be some trapped inventory at year-end. Do you think inventory will be a source of cash maybe for the next year? Or can you give us a time frame as to when that might abate? Because it obviously is in the second half. How long...

Obviously, it all depends upon the angle of the demand line. Let's assume that if all things were flat, then the fact we have trapped inventory at the end of this year would mean that would be a source of cash in 2021. Obviously, if 2021 were to show some form of demand increase, then all things being equal, normally, you had some working capital build against that. But obviously, it'd be muted by whatever inventory we carry out of 2020 into 2021. And all I've said so far, without giving a specific number, some tens of millions that we'll be having in excess at the end of this year.

Your next question comes from the line of Seth Seifman of JPMorgan.

I was wondering -- appreciate the fact that the recovery in commercial aerospace, we're all kind of groping around in the dark. But I wanted to ask about commercial transportation since I don't really know anything about that, that end market. When we think about when it's realistic to think about getting back to the 2019 level in that end market, is there a little bit more visibility there or forecasting ability?

We've got a view at the moment. I'm not claiming given everything that's going on there that it's a well-informed view. But I am thinking that in 2022, we're going to be pretty close in terms of volume of wheels produced against 2019. Now a question is what do I mean by pretty close, but I'm not saying it's going to be above, but getting close to. So I'm feeling a little bit more confident there. And then commensurate with the fact that I think as we've told and informed the markets that each year, we do take a little bit of share from the steel wheels. We have introduced, as you know, that new 39-pound wheel and therefore, lever at the market-leading forefront. And that's also witnessed by our market shares across the world in wheels.

I'm thinking that, actually, as we go into 2023, we're going to see above 2019 volumes. Now it's what -- just as I said, this is what we think. Doesn't mean to say that's where it will be, but this is how we're thinking about the business. And even more importantly, what we're doing at the moment, we are repositioning our capacity in that business such that when volume pull does occur is that we're able to manufacture at an even more efficient rate than we've previously done. But that's going to require that volume pull to be there -- to be seen in terms of our results.

So I think this is things that we could not have done if we'd have had the demand levels of '19 just flowing through '20 and '21. We are going to take the opportunity to proactively profile some of our production to enable that future, I'll say, improved cost levels to occur. So '22 for the volume and '23 for above 2019 is how we see it.

It's a long way out when you -- it's a long way out, Seth, when you're battling in the individual weeks and quarters at the moment.

Yes. No. Fully appreciate that. And then I guess maybe speaking of 2023, when -- at the Investor Day earlier this year, you talked about a plan to sort of remain for 3 years. Obviously, nobody knew what was coming. And so just to kind of confirm or ask you any change in your thinking as a result of everything that's happened over the past 5 months or so?

I think you're just asking me, am I old and worn out now by the current travails that we're going through? And the answer is no. I mean Tolga is giving a huge -- assist in the business getting into it across the piece. And the plan is exactly as stated. I made a commitment. I always see a commitment through and no diminution in that regard at all. It's just that we're working through some issues of a business, which we hadn't really expected. But it's just business. It's just the normal thing you go through and accept that life is not totally smooth.

Your next question comes from the line of Josh Sullivan of The Benchmark Company.

Curious on the financial conditions of your smaller suppliers as well as maybe some other adjacencies to yourself. Is there any conversation of increased consolidation, just given the very challenged financial conditions for everybody, but particularly the smaller suppliers? Are your customers coming to you saying -- suggesting any tie-ups at this point?

No. I -- my take -- in fact, I was asked this question by one of our management teams in a recent quarterly business review, and my take on it is that right now, there's no companies which are in a -- we have enough clarity and confidence to be able to take aggressive steps given that none of us know the shape of future aircraft demand, according to what airline loading factors are. Of course, as always, as time goes by, things change. I mean today, if any proposals were made to any company, my view is that no Board could possibly ever evaluate anything at this point because on what basis would any evaluation be made because the visibility is so low.

On the other hand, give it -- when you get to 2021 or sometime, could be '22, but I think that there will be increased clarity. And I think that it's going to be during that time period when -- if there is M&A activity across the, let's say, the wider industrial space and then aerospace as a subsector of that is that I'd expect those sort of moves to occur during that period of time when there will be more visibility so that any time that companies want to make an acquisitive step or when any acquisitive steps are received, it just depends upon then your Board's evaluation.

So that's my guess. But no, we've not been approached by any of our customers to consider acquiring anybody or anything like that.

And then just relatedly, I mean, given the lack of clarity, I mean are there any areas that you're concerned about suppliers and their financial condition or ability to supply you?

We've scanned our supplier base. And out of all of our suppliers, there has just been one, which we thought we need to keep a good eye on just to make sure that they are in a position to supply. And by and large, we've tried to put the supplier base into a condition where we are not totally dependent upon any single supplier of parts because that's not a good place to be. But -- so I'm not going to call out the one particular one, which may cause us angst, if it's a problem. But so far, so good and I'm not seeing any problems that are going to cause us a problem.

Ladies and gentlemen, we have reached our allotted time for questions. Thank you for participating in today's conference. You may now disconnect.

Thank you.