Good morning, and welcome to the Howmet Aerospace First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and welcome to the Howmet Aerospace First 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.

Thanks, PT, and good morning, everybody. Q1 2024 was an outstanding quarter for Howmet revenue, profit, margin, and earnings per share were records and all improved versus guidance last year and sequentially. More specifically, Q1 performance and year-over-year improvements were as follows: Revenue was $1.824 billion, up 14%. EBITDA was $437 million, up 21%, with a healthy incremental of 35%. EBITDA margin was up 150 basis points to 24%. Operating income was 27 -- was up 27% with a margin rate of above 20%. Earnings per share were $0.57, an increase of 36% year-over-year and 8% sequentially. We'll recall that in Q4, the earnings per share benefited by an unusually low tax rate of 20.7% and also currency favorability and hence, the sequential improvement was indeed excellent. Free cash flow was $95 million and marks the first quarter with an inflow to be followed by further inflows in Q2, Q3 and Q4. We were particularly pleased with the positive cash flow since for many years, we've seen Q1 outflows, which had to be overcome in later quarters. A total of $150 million of cash was used to reach purchase shares. Just over 2.2 million shares at an average price of approximately $67. Dividends of $0.05 per share were paid, and you'll recall that these had been increased by 25% in Q4 of 2023. Finally, net debt to EBITDA was a record low of 2x. I'll now turn the call over to Ken to cover the financials in more detail before returning to talk to the overall outlook for 2024.

Thank you, John, and good morning, everyone. Let's move to Slide 5 for an overview of the markets. All markets continued to be healthy in the first quarter. On a year-over-year basis, performance was as follows: Total revenue was up 14%, driven by very strong growth in the commercial aerospace market, which was up 23%. Commercial aerospace has now grown for 12 consecutive quarters and represents approximately 50% of total revenue. Growth continues to be robust, supported by demand for new more fuel-efficient aircraft with reduced carbon emissions and increased spares demand for engines. Moving to our other markets. First, defense aerospace was also strong, up 12%, driven by fighter programs and engine spares demand. Next is commercial transportation, which has been resilient in a challenging market. Revenue was up slightly as we continue to offset weakness in the market by taking share from steel wheels with Howmet lighter and more fuel-efficient aluminum wheels. Finally, the industrial and other markets were up 7%, driven by oil and gas up 15%; general industrial, up 10% and IGT, which was flat. In summary, another strong quarter across all of our end markets. Now let's move to Slide 6. First, moving to the P&L. Q1 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. Revenue was up 14% and EBITDA outpaced revenue growth by being up 21%, while absorbing the addition of approximately 430 net new employees in the quarter. Incremental flow-through of revenue to EBITDA was a healthy 35%. EBITDA margin was a record at 24% and earnings per share was also a record at $0.57, which was an increase of 36% year-over-year. Now let's move to the balance sheet and cover the balance sheet and cash flow. The balance sheet and liquidity…

Thanks, Ken, and let's move to Slide 11 to show our progress on GHG. We continue to leverage our differentiated technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints. Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2023, continue -- we continue to progress against our 2024 greenhouse gas emissions goal by achieving a 20% reduction in total greenhouse gas emissions from 2023 compared to 2019, which is our baseline year. We're tracking well to our 2024 goals of a 21.5% reduction. I would like to draw your attention to the issuance of our annual ESG report in April, which details the good progress we've made. Additionally, in the report, we reflect 2027 goals for Howmet, which shows the continued progress on our baseline year of 2019 with a full 33% reduction in greenhouse gas emissions. Now let's turn to Slide 12 and start to talk about the outlook for the business. Firstly, I'll address commercial aerospace, which represents our largest revenue market. Demand for air travel continues to be very strong. And if anything, will be constrained during the summer season by the availability of new aircraft, especially narrow-body aircraft. Asia Pacific travel, which has been lagging in the U.S. and Europe has been increasing rapidly. And is now back to approximately 90% of pre-pandemic levels. International Asia Pacific travel was up approximately 50% in the recent months and speaks well to future aircraft demand especially wide-body aircraft. Freight requirements also continue to be robust. The one item that needs to be said that is the fact of the FAA restrictions on the Boeing 737 MAX production of 38 per month in the light of continuing quality problems at Boeing. These facts are…

[Operator Instructions] The first question is from Noah Poponak with Goldman Sachs.

Hello. Hello. Can you hear me?

We can hear you now. Please go ahead.

John, I appreciate all the detail there. I wonder if you could just talk a little bit more about the MAX. What underlying rate did you actually deliver to in the quarter? And how are you assuming it moves through the year? And I guess, listening to some other suppliers in Boeing through the earnings season, it kind of sounded like Boeing kept the supply chain moving along somewhere near 30 despite their deliveries and then would plan to start to -- hope to start to ramp back up in the back half of the year. Your comments sound like maybe that didn't happen or that's not what you're seeing. So -- if you could just provide a little more clarity around that? That would be great.

Yes, I'd like to give you a real clear-cut answer, but I find it's a little bit confusing. In what we saw was, in the first quarter, schedules at rate 38. And I assume that Boeing had assumed that they would achieve that rate. I don't know. Whereas we note that actual bills were substantially less than that and probably well below 20%. And therefore, the increase in inventory, let's say, let's call it, I don't know, 15 to 38 per month, plus the 7 months of last year where rate 38 had been assumed, but more like a build of 30. Has resulted obviously in increased inventories in Boeing. We've heard statements to the effect that if you go back to January -- absolutely no, we'll keep rate 38 in terms of production scheduling to more recent commentary, whereby we've advised the suppliers or will be advising suppliers of trimming our requirements according to our rate needs. And of course, it's very difficult to know exactly what that means in terms of what the assumed rate needs are. So we're trying to be fairly cautious in that because while they say that they're going to achieve rate 38 in the second half, I guess we'd like to see that absolutely, but are unclear that it's going to be done. So in terms of, for example, in our fastener business where we operate more to a min-max system, whereas Boeing had probably been wanting to increase the minimum levels we've assumed and dropped our assumptions down to deliver no more than to the absolute minimum, which is where our contract with them lies. And so we could be trying to prevent the case where we get caught with a lot of, say, change of schedule on a rapid basis and…

The next question is from Robert Stallard with Vertical Research.

John, maybe to follow on from Noah's question on the rates. Boeing has also seems to have slipped behind on the 787. So I was wondering if you could give us an idea of what you're now expecting for that. I think they're saying they want to get back up to 5 and supply chain is shipping at 5, but they're not producing at 5, you know what I mean?

Yes. So we cut our assumption from 6 aircraft per month down to 5. I don't know that we're going to see parts, schedule changes for the sake of 2 aircraft a month, especially if they're going to get back up to rate 5 by the second half of the year. So we recognize that we've been producing ahead at the current actual build rate because of the supply constraints that Boeing say that they've had, which clearly have not been from Howmet. But we've not taken it down to 3. We just assumed 5 for the year. So that's where it stands for 787.

And is this the one that's also going to be ramping up a bit further in the second half, anticipating further rate increases for 2025?

Yes. And that's also part of our thinking is that previously, our assumptions have been going to rate 7, at the back end of this year ahead of where we'd assumed [ a 6 ] where we thought it was going to go and then probably with a higher rate sometime in 2025, on their March to 10 craft per month, which I know has now changed from 2025 to 2026. So the assumptions seem to be a little bit slow and taking a little bit longer. And -- but nevertheless, we are thinking that will be -- there will be an increase above rate 5 as we go into 2025 and trying to build that into -- that's why we said we'd only move from 6 per month down to 5 in 2024.

The next question is from Robert Spingarn with Melius Research.

John, I'm going to ask again about the 737. You've been crystal clear that the situation is unclear. Having said that though, I'm curious if somehow Boeing gets above 20 later this year, is there enough inventory in the channel, whether you have it or they have it or GE has it to support higher production rates at Boeing? Or can you ramp quickly? How do we think about when you'd need to signal? And how you might respond?

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

Okay. Okay. And then just as a follow-up. When we look at the commercial aero sales at fasteners and its structures, they outpaced versus the Engine Products segment despite the issues at Boeing. I was wondering if you could add some color on how you managed to decouple your commercial aero growth from Boeing's bill rates.

I think to some degree, it reflects the revenue potential and earnings potential of Howmet when it achieves the increased rates. And so while Boeing sales in the 787 might have been building a 3. But we were building in the first quarter of our parts at a rate significantly above that. So let's assume rate 6 or even in rate 7. And so this that's obviously a very good dynamic for the business and then showed with I thought, which was excellent margin improvement in the business, which was a combination of operational performance, commercial performance and the mix. And when that happened, we've put on 500-plus basis points in margin improvement year-over-year. And there's still -- I don't know what it was, 200 basis points sequentially. So all really good. And obviously, we're trying to work out exactly what that will be. As the assumption I made is that we get down to rate 5 on the 787 and obviously, a much lower rate on the 737. Albeit as you know there's a metallic fasteners, they don't quite have the richness of mix that we will get on a composite aircraft. At the same time with Airbus, as you know, the A350 is a composite-based aircraft. And so the rate increase that we've seen there and also as we prepare for a further rate increase in 2025, then again, that's all looking positive for Howmet.

Does that mean that possibly the first quarter is a high point with regard to some -- something like a 787 fasteners or if you were a rate 7 and they're at rate 3 and you get the point.

Yes. I mean, what we've guided to you in Q2 is that, in fact, revenues would be slightly higher than Q1. So we're still expecting overall to be good. But very much for our year would be -- we're cautious because of the rate assumptions I've given you on the 737 and therefore, expecting to have the impact of that. Plus, also, as you heard me talk about on my prepared remarks is that we are expecting weakness in our commercial wheels business in the second half of the year. So far, we've been pleasantly surprised by the strength in that segment. Clearly, we hope it continues, but our planning again for some reduction because we've already heard customers like PACCAR reducing their commercial Class 8 truck build as they go forward. So again, it's a different number in the U.S., maybe a 10% truck build reduction we're thinking of in North America and maybe something a little bit higher in Europe, offset by whatever penetration we can achieve in terms of aluminum versus steel. So -- but the important thing I thought in this quarter was that we were able to really operated a really -- a good level and achieved a rate increase, let's say, 26.5%, 27% EBITDA margin, doing like 28.5%. And that's really good because obviously it's a supply -- it's more leverage at the operating margin and the EBITDA margin level. So it was all good. So it's a cautious assumption on commercial truck in the second half, cautious assumption around Boeing MAX production coming off, as I talked about earlier, a rate 38 scheduling in Q1.

The next question is from Doug Harned with Bernstein.

I want to switch away from Boeing here for a moment. And earlier this year, GE started making the first shipments of its redesigned LEAP-1A, HPT blades to Airbus. These are intended to last longer in harsh environments. And we expect to see that similarly for the LEAP-1B eventually a year from now, we're going to see something done in the geared turbofan. When you look at these new designs, for blades, how do you see that affecting your outlook in terms of -- presumably, these are more expensive. The amount of turnover you might have in the aftermarket and better pricing potential on these new designs.

Okay. Maybe the best thing I can do is to give you a picture of the revenue walk for the company first and then return to the specific question, obviously improved durability as a second subject. So in our assumption, is that we are thinking that we'll have a, let's say, a hit from the MAX reduction assumption from the 34 rate we'd assume in Q1 to the 20 rate. And so that's something well over $100 million of a hit. And then we see that being offset with an increased reimbursements of our defense sales. And you saw those up 12% in Q1, which was significantly higher than our assumption, which was mid-single digits. So I think that's $60 million-ish, give or take. On Wheels, we think the first half is going to be stronger than we thought. So let's call that $50 million-ish on wheels. And then with our other sectors that we serve, for example, like oil and gas, you heard us talk to a 15% increase there. And while IGT was flat in Q1, we're thinking of a mid-single digit increase for the year. for IGT and Industrial, there's another $60 million. So essentially, all of all of the Max [indiscernible] and more it gets covered by those items. And then the big one, I think, is our assumption around spares, which is we've put in an increased revenue assumption of over $120 million plus on our spares lift. And that reflects, let's say, a further aggregate 25% lift in our spares business year-on-year and more like 35% on commercial aero. So it's pretty significant. And now the rate -- the spares revenues are substantially above 2019 levels, a 2019 was about $800 million, I think $1.1 billion plus in that area. So the -- if…

The next question is from Ken Herbert with RBC Capital Markets.

John, I appreciate all the color there on the aftermarket you just provided. It sounds like you're seeing as part of that 100-ish million plus in the commercial spares business this year. What's your visibility on that beyond this year? Do you think we get a point assuming Boeing and Airbus start to clean up, Boeing in particular, deliveries of new aircraft that moderates fairly quickly? Or do you get a sense that, that could have substantial room to run even beyond this year, just considering increased use of some of the legacy aircraft? I know you went through maybe CFM56 peak is pushed to the right. But how do you view that flowing into your business on the spare side?

I see commercial aerospace sales going up in '25, '26 and '27. It's a bit too difficult to get up beyond that, but I see rising reducing the spares area during those years. I also see increased spares for the F-35. And in the past, I've said I think by the time we get to 2025, we could be seeing spares revenues almost as much as the current OE demand for F-35 turbine blades. And then what happened after depends upon the rate of production and the rate of usage for the F-35 around the world. Clearly, in recent months it has been an extraordinary list of, I will say, time in the air for F-35s. On the other hand, I've also read articles about the plan that we know to run them a little bit less. But nevertheless, we see F-35 spares being very strong over the next few years. And the -- I think the aircraft park at the end of last year was just under 1,000 aircraft and now it's over 1,000, but will be increasing, assuming that Lockheed delivers, let's call it, about 150 aircraft a year, which looks like doing 150 every year for probably the next 10 years. But so -- by which time, the fleet of F-35s around the world will be very large and the spares will be extraordinary. And then in between of that, let's call it in around the 2028 mark, I think we'll see improved turbine componentry to meet the requirements where additional thrust is required to offset the current draw from the weapon systems and avionics that is currently the issue being addressed.

The next question is from Myles Walton with Wolfe Research.

John, on the fastening unit, the commercial aero underlying growth there was pretty outstanding and the acceleration in the last 4 quarters. I think about 1/3 of that business is distribution. Is it -- the distribution business growing faster than that average? Are they pulling because they see scarcity coming? And also, just to round out, are you feeling better about fastening eclipsing prior peak margins at this point yet?

Certainly, the program that we put in 3 years ago of creating a separate segment within our fasteners business for distribution is notable success for us. And I'm going to say we've probably seen an almost doubling of that business in the last 3 years. We don't provide like all makes to everybody and try to manage all the logistics of people, but this is trying to capture that margin previously that we had effectively passed on to other distributors. Because we distribute those parts. And we mainly focus on those parts which are proprietary with technology moats around them from the Howmet say, suite of fastener brands. So that is growing faster than the OE business for us, and therefore, again, that's been another thrust for us. It's also an improvement in fastener margins. So far, any commentary that I've given, Myles, I've never been willing to say that we'll achieve 2019 levels of margin rates because I think those were the very different conditions. I mean there, we had 787 running at 13 or 14 a month, as an example. And the A350 also at a higher rate. So the -- I mean, as you know, what we talked about on this call is that those rates are way -- it may be 1/3 of that. And so it's all wrapped up in our own progression of efficiency, but also what's the mix of aircraft come 2027? I might be a bit more bullish if you'll guarantee to me that Boeing will be making 14 787 and now I think I read that Airbus is going to make 15 a month of A350. I mean, if that happened, it's all great. It's really good for us.

Yes, no guarantees from me, John. And just one clarification. The...

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

I'll keep line it up for you.

No [indiscernible] that knows that sort of stuff.

One clarification. Are you saying that the commercial air foils are now close to $550 million in '24? Is that what the math gets to?

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

Yes, exactly.

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

The next question is from Sheila Kahyaoglu with Jefferies.

Thanks, John and Ken. Maybe can you talk about margins? You raised margins by 100 basis points at the midpoint. And we don't typically think about you guys having a different economic value on OE versus spares. So you're still hiring to have to flex on -- to match rates. And so I guess, what got better on the profit line? And how do you think about that trending throughout the year?

Inevitably, if you look at our rate of hiring, and we're also coming off a bigger base of experienced labor. So part of that is improved labor efficiency, Sheila. And notwithstanding, I'll say, the Boeing volatility, I'm hoping we can plan our way around because the overall revenue without -- obviously, it'll be a different mix and different plants, but I'm hopeful we can manage our way through to keep that the overall operating efficiency that we have had in Q1, and that's what we've guided to. You can see we've guided to a 24% EBITDA margin. So even though, let's say, we look to see that go down a little bit in the second half, and that's a, let's say, a 28% plus business. And therefore, we'll need to work the other harder just to keep it right 24% in terms of EBITDA margin percentage, which we believe we can, and we'll do otherwise, we wouldn't have guided there. But I think it's been one where nothing ever moves in an absolute straight line. Like on a graph, you make little steps this quarter. It was a significant step for us we've made, I'll call it, a reasonable half a step in the second half of last year. And then we saw a lot of the things that we've been doing come to fruition. And achieve that margin rate assisted by the -- say, the step-up in demand and essentially, we've also been able to achieve a lot of that without taking labor on. So for example, all of the $400 million effectively were in our engine business because the way we see that going forward. And the net -- even though we have a net increase in revenue across fastener structures and wheels is that essentially, where is a [indiscernible] in terms of labor. So all of that came out of productivity. And so we think that we're going to be able to maintain that productivity during the second half and then improve ourselves in Engine a bit to offset the -- I'll say, the revenue volatility that we're going to get, which is basically up in aerospace, up in defense, still net up in commercial despite the voting assumption to put down in commercial wheels?

You did mention price in that, John. Can you sustain the Q4 net price drop through? Or does it actually get better?

What I've said previously is that we thought that we were going to be able to essentially hold and match what we did in 2023 into 2024. I think where we are today is that we're absolutely clear that we're going to -- we're going to be able to hold much and maybe improve a little bit over 2023 levels on that front as well. So again, if you put, I'll say, a fairly good price assumption with good mix with good spares and then offset the negative from Wheels. We just got that high margin rate. That's why we sort of balance it all out, given you the guide we have at a 24% margin.

The next question is from Gautam Khanna with TD Cowen.

I had 2 questions, John. One follow-up clarification from what was just asked. On just the fungibility of production within your operations, i.e., if in a quarter or a month, Boeing asks, or GES for a destock, I'm talking about the subcontract manufacturers to Boeing. Just -- how able you guys are to respond. It sounds like you're able to just move and navigate from one program to the next. And so it is pretty fungible. . And then my second question is, just longer term, John, you've done a great job. I'm just curious what your longer-term plans are at the company. I hope you plan to stick around, but just wanted to get you to opine on your future plans.

So we don't have, what I call, customer dedicated plants, more product focused. So we deliver to multiple customers from most of our plants. In the case of fasteners. Some are a little bit more wide-body narrow-body focused. And so that mix can make a big difference. So if you wind the clock back, a year, 18 months, where the -- I mean, essentially 787 was halted. I mean you could say, well, one a month, but I mean it wasn't really one a month. And I remember I'll say, I think Q4 '22, essentially or Q1 of '23, we were only producing the [ metallic ] fasteners. As that was having a negative effect on us because we had 2 or 3 plants which were grossly underloaded because the equipment required to make the fasteners going a composite aircraft is different to those on the metallic aircraft. So that was both the, I'll say, an idea in terms of both, I'll say, the mix and also the exposure that we had on plants. And obviously, we got massive on recovered fixed cost, that's a problem. And obviously, we've been moving through that well, and that's why you've got some part of the margin rate improvement that we have in our fasteners business. It's only part of it, as I think I described many other things in it. For the most part, elsewhere, I mean, there are flavors across our engine business, pretesentially, again, like our core making facilities, they don't really know, what type of aircraft they go to or what customer they go to. It does matter what type of material are used in those cores. And therefore, as you, I think, know, is the core manufacturing has been taking on quite a different completion over the last…

Next question is from Ronald Epstein with Bank of America.

A question we get and we've heard maybe from some of the engine OEMs is that the supply chain needs to make more investment to have the capacity for the upcoming ramp, right? As you highlighted in your remarks that when Boeing does get back to rate, the number of leaps [indiscernible] -- it's a huge amount of growth. And one of the areas that they've suggested that investment needs to be made is in tooling. Just curious your view on that and how you're thinking about CapEx for this potential ramp going forward?

Yes. So what I said previously, maybe I'll just amplify a little bit today is that we said we were going to take back CapEx. And so if last year was probably just over $200 million. I think the midpoint of that guide now is around $300 million, it could be $290 million, but $300 million, give or take, I think, in that region. So maybe just below $300 million. And I think that we're going to spend all of that this year. And there will be an elevated investment requirements in 2025 as well. And essentially, that's because, yes, there's a large increase in aircraft engine, both, I think, for commercial and for defense. Because defense you've also got all the new rotor graft programs or re-engining of certain things, I think you heard of it, we talked about before. And so those investments are absolutely required. And so you can assume that the investment is a lot more than the $100 million increase that I talked about, and let's assume it's something getting close to the $200 million, which if you think about that plus all of the additional facilitization and hiring, it's a big bill. And that was essentially focused to one of the engine companies. I talked about last time. because of our increased share that we've locked in for the next few years at that company. And hopefully, more to come. It's because a good, strong, solid business. You're seeing margin rates improve year after year, and you've seen another step forward this year. And I think in [indiscernible] ,which we're trying to hold it now and then maybe we'll make further improvements as we go into next year. But given the demand profile. But at the moment, it's clearly one where there's a willingness to invest because of the, I think, returns in that business. And I think the industry needs it as well. So that's where we are on that. And probably a little bit more of a muted investment, for example, in our structures business. So you've heard me talk about titanium where to answer the question you haven't asked, we're still increasing production. You've seen that in the revenue numbers. We're taking the share we've talked about and the increments we talked about as a result of the sanctions on VSMPO. So less occurring. But again, I'm not willing to put fresh capital in the ground for that given its long duration to come on stream and also the geopolitical risk that I've talked about in the past because we don't know what's going to happen, not even what happened after the election this year.

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