Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Year-over-year revenue growth of 14%, with commercial aerospace growth at an outstanding 27%.
- EBITDA was $483 million with a margin rate of 25.7%, and operating income was $414 million with a margin of 22%.
- Earnings per share increased by 52% year over year to $0.67.
- Free cash flow was strong at $342 million, resulting in a quarter-end cash balance of $752 million.
- Net debt to EBITDA improved to a record low of 1.7 times, with all long-term debt being unsecured and at fixed rates.
Negative Points
- Commercial transportation revenue was down 4%, reflecting market weakness.
- Forged wheels revenue decreased by 7% year over year due to challenging market conditions.
- The company faces constraints in sales due to the ability of aircraft manufacturers to build and deliver aircraft consistently.
- There are concerns about Boeing's build rates and inventory positions, which could impact Howmet's future performance.
- Increased capital expenditures of $30 million for 2024, raising the total to $320 million, which could impact free cash flow.
Q & A Highlights
Q: John, I wanted to see if you could help a little bit of understanding what's been happening at Airbus on the LEAP-1A, they talked about slowing of engine deliveries. Has this -- have you had any issues on delivery to GE? And if not, does this shortfall by others provide any kind of an opportunity capture share?
A: Well, Doug, I expect that to be the hot topic of today. We have significantly increased our production of turbine blades and the hot section. If you look at it six months ago and over the last few months, we've probably put a 40% increase through in terms of production. We are producing well above engine build rates, and the opportunity appears to be there to sell even more if we're able to make a few more.
Q: John, very helpful color regarding the LEAP engine blades. Can you quantify how much more market share you could potentially get? And then also as a follow-up in terms of the new build, is that you're not seeing the reduction there. Does that mean that one for one, you're seeing our spares pickup to or the OEs maintaining the rate at a higher level?
A: We are further increasing our capital expenditure to meet demand for a second engine manufacturer. We are taking the technology to another level in terms of manufacturing, and we're also able to help our customers in meeting what they would like to see by way of elevated temperature performance and increased pressures. We are working on the upgrades for all of those. And again, we'll be providing those new products into the service market as well.
Q: I wonder, John, if you could talk a little bit about 787. We've seen some mixed messages here seems like some of the Japanese structure suppliers may be preparing to increased their rates. Boeing deliveries are low one of the European suppliers shutting down for a little while. When you think about the trajectory in the fasteners and structures business, how are you thinking about 787?
A: On the structure side, so far, we've been seeing deliveries from Howmet in line with the previous guidance. In the case of fasteners, again, we note that Boeing are not building 787 that they stated rates that they wanted to have in their skyline. We have taken those into inventory levels down to the minimum, such that we are in accordance with our contract with Boeing.
Q: So in the past, I think you've talked about targeting a 30% or so incremental margin, plus or minus 5% it looks like this year, your revised guidance implies something in the 40% to 45% range. So just wanted to get some updated comments about how to think about incremental margins for the business.
A: We have increased the balance of the year. I think it's just fractionally over 40% in Q3, and that takes account of both the seasonality, plus the reduction in our wheels business that we envisage at the moment. We are seeing good stability in across the piece in terms of input metals and increasing labor productivity and good demand of parts with giving, as I say, fairly good mix, which are reflected in the guidance where we're guiding at about 25% EBITDA margins in the second half as well.
Q: You stop specifying pricing, but I have to imagine, given the sort of breakaway moment here in the quarter pricing must be accelerating. Can you give any comment on that front? And also just to taken at a higher level, you talk about the Airbus and Boeing not being able to achieve their production objectives, but it did seem like GE had more of material shortfall on their own. And I'm curious, do you see this as a blip in their ability to get production up and maybe the risks are shifting to the end as opposed to the airframes?
A: In the case of Airbus, I think they've taken the annual expectations of deliveries down by 30 aircraft. In the case of Boeing, again, it's all well publicized and we took a little bit of encouragement from what the Head of Boeing Commercial Aerospace said, by way of increased stability within manufacturing plant in Seattle. In the case of engine manufacturer, those rates are far less really discussed. And from what I saw and read is that the expectation is the LEAP engine output will increase significantly in the second half of the year, which is really good.
Q: John, maybe you could help elaborate on terms there and what Ken agreed on that. So if you could just talk about how we think about that second engine OEM. I think you said the volumes start up a quarter later than the first OEM in 2026. So how do we think about that incremental volume that comes through the return profile with the additional CapEx? And I'm guessing it's better than the 31% engine margins you have today? And any thoughts on the first versus the second deal?
A: It's obviously good business, otherwise we wouldn't take it. At the same time whenever you put down new engine capacity, as you know, engine manufacturing is very capital-intensive. And so we will be facing elevated depreciation charges. The share gain is pretty healthy and it is similarly in line with the previous increase. But in share that we've talked about for the earlier investments. So basically, this one is the investments are about six months, kicking off them six months later than the previous investments.
Q: John, you had explained that the incremental were strong in the first half because you didn't have to hire as fast while the revenue growth is still pretty good. I guess that begs the question of when do you suspect you'll be back to hiring? And then I guess when you look through how the segments have evolved, engine is up, but like a 1,000 basis points versus pre-pandemic fastening still lower than pre-pandemic. Obviously, that's we know why that has a lag revenue recovery, I guess does fastening have as much potential as engine as it continues to get its revenue recovery?
A: At this point, I don't know what eventual rate wide body will get to and therefore, the future mix is going to be different. I note the increase in A350, and I suspect that A350 would be in the higher rating -- wasn't for some, I'll say supply constraints, particularly in the structures area. On 787, the only ambitious number I've heard you right, 10, which was slated for us '25, '26, but everything has been modified now to '26. But I think we've got to wait and see what happens in 2025 first. And getting up from where I think it pump production is be three a month, four a month levels. What I've read and it would be great to get back to five and then seven next year.
Q: Where, if anywhere do you see excess inventory in the channel of your products? Has there been any deferral requests or anything
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
