Hello and welcome to the Howmet Aerospace Fourth Quarter 2023 and Full Year Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the call over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you MJ. Good morning and welcome to the Howmet Aerospace fourth year and full year 2023 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.

Thanks PT and welcome everyone to the 2023 year-end results call. If you move to slide four, please. And I'll start off by saying Howmet's fourth quarter results were indeed very strong. Revenue, EBITDA, EBITDA margin, and earnings per share all met or exceeded the high end of guidance. More importantly, we continue to outgrow each of our respective markets. Specifically, revenue was $1.73 billion, an increase of 14% year-over-year, and with commercial aerospace up 22%. EBITDA was $398 million, which was an increase of 18% year-on-year, while EBITDA margin was in line with Q3 at a solid 23%. Second half EBITDA margin was 30 basis points greater than the full year average, and Q4 earnings per share increased by a significant 39%. For the full year, revenue was up 17%, driven by commercial aerospace up 24%, and EBITDA was up 18%. Earnings per share continued to improve annually and was a record $1.84 per share, which is an increase of 31% year-over-year. Moving to the balance sheet and free cash flow. Free cash flow was a record and above the high end of guidance at $682 million. And in the fourth quarter, Howmet continued with its balanced capital allocation strategy by buying back another $100 million of common stock and repaying another $100 million of debt as part of its reduction of the 2024 bonds. Moreover, we refinanced the $400 million of the 2024 bonds at a reduced interest rate. The combination of these actions further reduces annualized interest expense by $10 million going into 2024. This goes towards continued improvement in free cash flow yield and improved earnings per share. Lastly, net leverage improved to a record 2.1 times, which was in line with expectations. Each segment contributed with Engine Products and Forged Wheels delivering record profits. We were pleased with the pickup in faster margins to adjust in excess of 22% EBITDA margin. Ken's going to detail all of this in his commentary. Having completed a strong 2023, the majority of my comments today will focus on the outlook for 2024 and will be covered in the guidance section after covering the historical results. We look forward to a healthy 2024. And now over to Ken.

Thank you, John. Let's move to slide five for an overview of the markets. All markets continue to be healthy and we are well-positioned for future growth. Revenue was up 14% in the fourth quarter and up 17% for the full year. The commercial aerospace recovery continued throughout 2023 with revenue up 22% in the fourth quarter and up 24% for the full year driven by all three aerospace segments. Commercial aerospace has grown for 11 consecutive quarters and stands at just over 50% of total revenue. Growth continues to be robust, supported by the demand for new, more fuel efficient aircraft with reduced carbon emissions and increased spares demand. Defense aerospace was flat for the fourth quarter. However, defense aerospace was up 10% for the full year driven by legacy fighter programs and spares demand. Commercial transportation was up 5% year-over-year in the fourth quarter and up 9% for the full year driven by higher volumes. Finally, the industrial and other markets were up 21% in the fourth quarter, driven by oil and gas up 34%, IGT up 24%, and industrial up 9%. For the full year, the industrial and other markets were up 17% year-over-year, driven by oil and gas up 38%, IGT up 16%, and general industrial up 7%. In summary, another strong year across all of our end markets. Now let's move to slide six. Consistent with prior calls, we will start with the P&L and focus on enhanced profitability. For the full year, revenue, EBITDA, EBITDA margin, and earnings per share all met or exceeded the high end of guidance. For the full year, revenue was $6.64 billion, up 17% year-over-year. EBITDA was $1.5 billion, an outpaced revenue growth by being up 18% year-over-year, while absorbing the addition of approximately 1,850 net new hires. EBITDA…

Thanks Ken, and let's move to slide 12, please. The commercial aerospace market continues to be strong. Airline load factors are good. International travel continues to strengthen and all this has led to significant orders for new aircraft and higher levels of aircraft backlog at both Airbus and Boeing. Demand for new aircraft is expected to be sustained due to the need for aircraft with substantially improved fuel efficiency and also to the commitments made by airlines of improvement towards carbon neutrality with two stages of 2030 and then 2050. Commercial aerospace spares are also growing not only due to the number of aircraft in service, but also in the case of narrow-body due to the increased service shop visit requirements of the newer fuel efficient engines. This is a long-term trend over the next decade and one which we look forward to. Defense budgets and hence the defense market continues to be strong in fighter aircraft, farmers, drones and helicopters. Tank turbines and Howmet systems are also strong. Specifically, we expect increased F35 engine spare requirements due to the shop visit requirements as the fleet continues to expand globally. Other markets of oil and gas and gas turbines continue to be healthy. We do see natural gas turbines to be the natural accompanying technology to the renewal segment of wind and solar. The market where we're cautious is that of commercial transportation, where we see potential for up to a 10% reduction in revenue as we move through 2024. We do envisage commercial transportation to resume growth in 2025 and into 2026. This is supported by the view that any potential reduction is mild due in part to the continued secular growth of our improved penetration of aluminum wheels compared to steel wheels for the needs of fuel efficiency…

We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Doug Harned with Bernstein. Please go ahead.

Good morning. Thank you. Hey, Doug. When you're looking at a situation with very high demand on the Engine Products side. And one thing I'm really interested is how you're seeing pricing. Given your very strong position there, you're looking at catalog spares prices from the engine OEMs up in the teens recently, what do you see for Howmet in terms of pricing over the next couple of years? And can you explain the differences there between what you're getting and what you're seeing is increases on the engine OEM side?

Yeah. We've noted that our engine customers have been raising prices into the MRO shops significantly. We don't have that opportunity, Doug, in the short-term. In that our long-term agreements provide for price stability during the duration of those agreements. However, when we get to the long-term agreement renewal, with the sophistication of the analysis we introduced a few years ago, we now split all of the parts into volume and variety and looking at the different trends within that and also when parts go to, let's call it, past model and become service only, but also noting the increased service demand for even current parts. And so at that time, we do differentiate between the increased pricing that we expect to receive at the LTA renewal and certainly look at the service requirements and the pricing and you can expect that as we renew those agreements, and I don't generally comment about when those agreements are renewed, but you can expect to see increased pricing associated with the service parts.

But from your standpoint, when you look at save in the short-term 2024. So, how do you think of your pricing relative to inflation? And is this a positive contributor to margins?

No, I don't think you can say that we're going to price per se on an individual service part. But what you can expect is that we will be moving on price once again in 2024. And you'll see when we issue our 10-K, which I believe is this evening, you'll see that trend continued in Q4. So, I expect to see continued positive contributions from pricing as we go forward. And you'll see that '23 was a healthy year and '24 should be an equally healthy year.

Very good. Thank you.

Thank you.

The next question is from Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Hey, Rob.

Hey, John. On your Boeing 737 rate assumption, are you currently shipping at 34 a month to the 737 line? And if Boeing should actually get to 38, do you have the head count in place to sustain that? Thank you.

Okay. So, we received demand signals from two principal sources. One is from, of course, the aircraft manufacturers for our structural products and then on a different sequencing, the demand signals from the engine manufacturers. If you look at 2023, we saw Boeing schedules increase to rate 38. And so, we were in a position and we're able to support them in that rate 38. We were cautious when they were talking about going up to 42, which as you saw was delayed and now that's not going to be the case. Our thoughts around 2024 is that this is going to continue to be choppy. And as the back class, it's not necessarily the stop start that we've experienced in quite the same degree as the last couple of years. But we're also prepared that maybe Boeing will not be building at rate 38 because indeed we don't believe that they have built at that rate, and we've seen various assumptions of what was actually built in Q4 and now we see they are restricted to -- by the FIA in terms of build in 2024. What, of course, we don't know is to what degree of any under-build in one month will be low to overbuild in another month or indeed, is it just going to be capped at the production for that month in terms of issuance of airworthed [ph] certificates. We have no idea. And therefore, we're still thinking that demand could be choppy and indeed given the balance sheet of Boeing, is that are they willing to continue to sustain building out at a higher rate than the actually building. And therefore, we've made some allowance within our working capital such that if they don't take the parts or scheduled is that, that's provided for in the free cash flow guidance that we've given you. And similarly, I mean, I'll get it all out there is that we saw our margin flow-through for 2024 at 28% plus or minus compared to our Q4 of 31%. And this also allowed to provide some allowance for the chop or choppiness that we may see, depending on how things go with Boeing.

That’s great. Thanks John.

Thank you.

The next question comes from Peter Arment with Baird. Please go ahead.

Thanks. Good morning, John and Ken.

Good morning.

John, you added, I think, roughly about 1,700 employees in 2023, if I have that correct. I was just wondering what your guidance kind of assumes around headcount growth expectations in '24. And yeah, maybe I'll leave it there. Thanks.

Yeah. We were expecting between 1,000, 1,500 people depending upon what the exit rate should finally be for the year. So, we are continuing to recruit albeit from those numbers, you can see that we're ingesting the labor at a reduced net rate to the last year -- over the last 18 months. And some of that's to do with the bringing now the experience of some of those operators who've been able to retain during that recruitment process and also the improvement in productivity that again we are planning to make. And so, a blend of all of those things plus some of the automation that we've talked about in the past coming on stream. So, let's call it 500 people plus or minus less than we took on last year and while at the same time, trying to improve our recruitment and retention statistics, which is really very important to us to gain that further stability of labor.

Thanks for that. Thanks John.

Thank you.

The next question is from Myles Walton with Wolfe Research. Please go ahead.

Thanks. Good morning. Hope to focus on Fastening Systems, if you could, John. The growth there obviously was pretty much on top of the Engine Products growth. Is there a leader in '24? Is it Fastening Systems? And then maybe just could you provide any color as it relates to where distribution sits with Fastening and where your wide-body recovery is versus pre-COVID?

Yeah. And one of the things that I've been particularly pleased with has been the improvements in our distribution business inside Fastening Systems. A couple of years ago, maybe three years ago now, we created a separate business within H1 [ph] amalgamated with our OE business. We provided dedicated management to that distribution business. And we've seen it indeed have outsized growth relative to the market, and that continued again in a significant way in 2023. So that's proven to be very good for us. In terms of like where does the final, I'll say, scorecard land for 2024 in terms of relative growth of Engine versus Fasteners, it's difficult to say at the moment, I expect very positive contributions from both. We have to recognize is that we still have to see wide-body demand come back and really be built with a propensity actually to grow higher because that wide-body demand mix should actually show improvements because the relative growth compared to narrow-body, especially given that Boeing is now capped is that, that should be good. At the same time, we note -- for example, take the LEAP range of engines is that the -- I'll say, growth of that segment has been reduced a little bit, both in the actual for 2023 and slightly lower build as the initial demands have dropped from. I'll say, a year ago, we saw a '24 was going to be looking at 2,200 engines then went to 2000 and I know it's in the range of, I think, something like 1,875 to 1,950, something like that. So, we've got to see how all that settles out and indeed, it's a balance of what goes to OE build versus service demand for those engines. So, I mean, the most important thing is both Engine and Fasteners are good. So, I don't want to handicap it at this point, but it will be -- I expect that we'll be having a good year for both.

Okay. Thank you.

Thank you.

The next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Good morning, guys. Thank you for the time.

Hi, Sheila.

I wanted to ask about margins. John, maybe you could talk about 2024 margins, just looking at Q1 and the full year, you're kind of pointing to 23%. And I guess I'm a little surprised that there's no really an improvement from your Q4 exit rate and you're still sub 30% on the incrementals. So, maybe if you could just shape that out for us, how you think about that with aero volumes getting better and maybe else troughing. And also, you mentioned something in the -- in regards to engine pricing and how you're locked into long-term contracts and as well as the F35, obviously, that's a long-term contract, too. So, how do you think about what percentage of your margins are locked in because of LTA?

I mean LTA certainly govern the most of our business for the company. And I guess momentarily the number of how much is [indiscernible], but it's -- I'm going to say somewhere up at that. So I'm going to say 75% to 85%, I believe, but can one refine that should need to, as I carry on talking here. Having said that, of course, there are certain agreements which have come up for renewal for 2024 pricing. And indeed, we are probably now 90% agreed for the price structures for 2024. And so, our expectation for the price commentary I've already given you is that you'll see that Q4 was healthy or mutual with 10-K, a very solid year and we expect 2024 to be similar. And within that, you will see some of our Engine Products to indeed be repriced during 2024 and have already been agreed. So that's also the good. In terms of margins, I mean, you never get like quarter-on-quarter straight line, you tend to plateau for a little while and then you move again. And our thought really has been that we stepped up to a 23% level in the second half of '23. And so what should we expect? And I think you're saying, well, let's play it again for Q1 and see how we go is the right assumption. I've already told you that we have assumed a 28% incremental versus what we converted at 31% in Q4. And this also provides some allowance for the choppiness that I've commented on them. So should for example, Boeing not take all the parts that they've scheduled out and those have to go into inventory. Therefore, we won't be taking the profit on them. And so, we've assumed that, I'd say, a 3% lower absolute number of conversion. And therefore, to me, just playing it out seems a very reasonable assumption for the near term. How it flows for the balance of the year? It's difficult to say at this point in time. In terms of up-to-date market commentary, we actually see wheels demand to be probably a little bit stronger than we had imagined in the short term, and that's within the numbers we've already given you. At the same time, what does the back end of the year behold? I don't really know at this point. Orders have been into take for -- truck manufacturers have been a little bit stronger. And therefore, it bodes well, but of course, those are cancelable depending upon how the general economy goes and we'll have to wait and see. For me, the most important thing, it's not like what happens this quarter or next. But indeed, that market of commercial transportation, we expect to resume growth in '25 and '26 and then that continued with, I think, strong continued demand from commercial aerospace and then continuing to defense and for the gas turbine business promises good growth beyond '24 as we going to '25 and '26.

Great. Thank you.

And Sheila, this is Ken. Just to build on your question around long-term agreements, right? John is right, somewhere in the 75% of the revenue is tied to long-term agreements. That could be plus or minus, say 5% depending on where we are in the renewal process. As you can imagine, on the aerospace side, much heavier on long-term agreements. So, on the engines side of the house, you could be up to 90% of that revenue, could be under long-term agreements.

Great. Thank you.

The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Hey, Noah.

John, just one clarification on the original equipment side of aerospace. I couldn't quite decipher where you're saying you are now on the MAX rate, if it's possible to quantify that? And then on the aftermarket side, can you baseline us on what percentage of aerospace is aftermarket at this point? And just how much growth can we expect there in the medium term given the work you're doing related to time on wing on the engine and elsewhere that's incremental?

Yeah. So, our assumption in terms of our guide -- of course, our guide is quite independent of what Boeing or indeed Airbus may build and what they may schedule, it's our financial assumption and one that I feel appropriate for Howmet. And for the large part, I feel is that we've tended to call the market fairly reasonably in the last few years. So, our assumption very clear was at 34% for the average for Boeing 737 for the year. Now what they actually build, I don't know and what they actually schedule at. I'm going to say at the moment, they say they're going to continue with their rate 38 assumption as best as we can detect from what we see from our demand schedules. So that's those specific numbers. In terms of spares, our exit rate for spares in the commercial aviation market, stepped up again. And so compared to 2019, which is the reference point we've used previously. And if you remember, in 2019 revenue from the spares market for -- on the commercial side is about $400 million, and it was about $400 million on the defense and gas turbine side. On the gas turbine and defense side, that continues to be steady and an increasing and now that increased to a level, we believe we'll see something like $600 million of demand in the defense sector and IGT sector. We're both growing but indeed, the spares for the F35 growing in particular. And in 2025, as an example, we expect the spares business for F35 to be as big as the OE business has been in recent years. So that's been good. We've seen demand increase in '23, we're expecting it in '24 and then '25. We should expect it to be a segment…

Okay. That's really interesting. I appreciate all that detail. Just to make sure I have the MAX assumption correct, are you delivering to about 34 right now and you assume you stay there through the year? Are you in the low 30s right now, and you assume you actually click into that stated 38 without any rate breaks above and beyond that.

So if I give you, let's say, the fourth quarter, we believe we delivered at rate 38, while Boeing build, let's say, rate 30. So, in Q4, let's assume that 8 aircraft sets per month went into inventory. So, there's 24 sets of parts which are sitting in Boeing inventory for the structural part, that our estimation. I don't think it's just quite the same on the engine side. Because what wasn't built in engines, let's say, the reduced engine build, which you've already had commentary from the engine manufacturers about that then the balance of the majority of the part, certainly on the turbine side, but not necessarily on the structural side, essentially went into service parts delivery into the MRO shops to account for what I already just talked about.

Okay.

And so if you think about it, assuming that Boeing taking Q1 at 38, depending on what the final thing is, then there is -- if they build up, my assumption is 34, maybe they'll bill at 38. That's why I've allowed for some choppiness as I already commented on, and allowed for some inventory that we may end up carrying as that gets ironed out and with how many people will recruit or we have already commented on that. And so, it's allowed for that, and it's allowed for some of that choppiness within the margin rate incrementals that I've given, calling out 28 versus 31 in Q4.

Okay. Super helpful. Thanks so much.

Thank you.

The next question comes from Robert Spingarn with Melius Research. Please go ahead.

Hi. Scott Mikus on for Rob Spingarn. John, I wanted to ask you, the last time you had mentioned this, it was -- I believe you had 1.5 times the relative market share of your closest competitor in the airfoils market. So just with the upgrade to the GTF and then also thinking about the new engine agreement with an engine OEM customer that you referenced, where does your relative market share stand now in the airfoils market?

Okay. We have grown about 1% share a year in the turbine airfoils market over the last, let's say, four or five years. And so, it's been a consistent march, and we believe we're just around that 50% mark currently. And we see that continuing to grow commensurate with some of the, I'll say, extraordinary levels of technology that we bring in that segment. And also I've commented here, we would not be considering, let's say, investing further in the scale that I've referred to, without knowledge of that share being there and indeed, I did say very clearly and unequivocally that we've also contracted additional share within that. So, we continue to drive that improve it. And as you did here, hopefully, is that's not changing our free cash flow guide metric, the conversion of net income.

Okay. And then as a follow-up, I wanted to ask, did you see any pickup in spot sales in 2023? And do you have any assumption for spot sales baked into the 2024 guide?

Yeah. We did see the spot market pick up further in '23. You can never be sure. So, we've just assumed it's played again in 2024. And we did put in some security stock of material such that we could respond to the spot market and our balance sheet could take it. But we not assume that it's like a further significant step-up because it's also in that unknown area of indeed what hadn't been previously scheduled, what additional demands are there and sometimes the opportunity for an increased share if somebody else is not able to deliver. So, it's not an easy number to say. We assume that we're going to get more. I don't think that's a sensible way to plan.

Thanks for taking the questions.

Thank you.

The next question comes from Seth Seifman with JPMorgan. Please go ahead.

Hey, thanks very much and good morning.

Hi, Seth.

Good morning. If I could ask maybe a two-part question, just about all this 737 and just understanding that dynamic. You spoke, I guess, extensively about Boeing and the production rate there. Can you talk about at the -- on the engine side, and kind of where that level of production is expected to be in 2024? And then on the airframe side, how much -- I assume most of the 737 content on the airframe side is in fasteners? And I guess, so how much of that goes directly to Boeing versus how much would be going to other suppliers like maybe Spirit especially. And so that would imply that your expectation in terms of the demand pull for Howmet would be more -- not even necessarily a demand pull from Boeing directly, but the demand pull from the, let's say, Tier 1 in the Boeing supply chain.

Yeah. So, we do supply, I going to say, in terms of commercial -- for Boeing's requirements, we supply the majority directly to Boeing. But we also do supply Spirit as an example and others that are also providing subassemblies to Boeing. And so again, it's never an absolutely clear picture. But we just assume like we've taken an assumption of a number of aircraft sets. It could be that Boeing build at one level. And maybe another supplier might build at a different level, and it's also compared to what they want to hold and also indeed what Boeing have by way of their minimum, maximum inventory holdings as well. So, we operate on a min-max system, just roughly correlated to build, but as times when it breaks that correlation. So, it's never quite straightforward, Seth, I don't want to burden you is, I'll say, unnecessary detail, but the best assumption is just we've based that on 34 and all of the other suppliers of rate 34 and knowing that at some point, that if Boeing have been scheduling at a higher rate and build the inventory has to come out and so there be held because there's going to be -- maybe the rate assumption will go up, maybe it will be 42, maybe be 47 in 2025. And therefore, because it's really important that all the parts are there, so you avoid traveled work, which has been set a lot of commentary recently. So having supply security and all the parts available is really important. And therefore, it could well be that all of that will be held, which we don't know that. And at the same time, there's also the possibility is that given the cash strain that either Boeing or other suppliers may be under…

Great. Thanks very much.

Thank you.

The next question comes from David Strauss with Barclays. Please go ahead.

Thanks. Good morning.

Hi, David.

So, John, I guess, following up on that. So, if I take 5% on the free cash flow conversion, it looks like it's about $50 million that you have assumed in working capital or inventory build related to conservatism around what Boeing takes. But even with that, it looks like or I guess on top of that, it looks like you've got maybe $100 million, $150 million of working capital usage in that free cash flow guidance. Is that correct? And if so, what is that? And the other part of the question is capital deployment. I know you don't have anything baked in, but how are you thinking about that given -- I know you have $200 million you've got left to retire this year, but that -- given the cash guide gives you a fair amount of room to use coming on the share repurchase side. Thanks.

Yeah. So, you can -- it's always these multipart questions, which we get here. So, first of all, of course, given that revenues are increasing, let's call it $0.5 billion in the guide, there is a natural 15% to 20% working capital drag on that. So, let's use the 20% because the math becomes so much easier. There's $100 million of working capital for you to which we added the sort of number that you talked about in terms of that propensity which might happen. So that's where we are on that assumption. And in terms of how we deploy, we haven't actually fixed anything at this point, but it's hardly likely that we're going to enter a refinancing for a couple of hundred million. So, it's quite possible that we may decide just to retire that and take those interest rate savings into, let's say, end of the fourth quarter and into 2025. And therefore, you can assume that's all we're going to do probably. I mean, we could do a bit of a refi around the '25s, that's on a TBD basis, but that's not going to be a big drag either which way a platform any fee structure and breakage cost. But then the majority then you can assume it's going to be share buyback. So position all wise, you can assume that 2024 will be a bigger year for share buybacks compared to 2023 where you can see the majority of the action was further on the debt side to put our balance sheet into the great shape that it's currently in. And so, roughly speaking, you can assume further leverage improvements despite the share buyback thoughts that we have at the moment, which are going to be elevated compared to 2023.

Great. You got both parts. Appreciate it.

Thank you.

Thanks David. End of Q&A:

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.