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    Howmet Aerospace (HWM)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025
    Pre-Earnings PriceN/ADate unavailable
    Post-Earnings PriceN/ADate unavailable
    Price ChangeN/A
    • Howmet has increased its market share in turbine blades to around 50%, growing approximately 1% per year over the last 4-5 years, and has contracted additional share with an engine OEM due to their advanced technology.
    • The Fastening Systems segment, particularly the distribution business, has experienced outsized growth relative to the market, and Howmet expects positive contributions from both Engine and Fastening segments in 2024.
    • Significant growth in aftermarket spares revenue is expected, with defense spares (including F-35) projected to be 50% above 2019 levels, and commercial spares demand exceeding pre-pandemic levels, driven by a structural increase in replacement parts due to newer engine designs.
    • Howmet is unable to immediately capitalize on higher pricing in the Maintenance, Repair, and Overhaul (MRO) market due to long-term agreements, limiting short-term margin expansion.
    • Margins are expected to remain flat in 2024, with EBITDA margins at 23% as per Q4 exit rate, showing limited margin improvement despite increased aerospace volumes.
    • Uncertainty around Boeing's 737 MAX production rates could lead to inventory buildup and working capital impacts, as Howmet may produce parts at higher rates than Boeing's actual production, potentially leading to choppy demand and increased inventory levels.
    1. Boeing 737 Production Rates Impact
      Q: Are you shipping at 34 per month to the 737 line, and can you sustain 38?
      A: We supported Boeing at rate 38 in 2023 and are prepared for potential choppiness in 2024, allowing for possible fluctuations in Boeing's production rates. We've made allowances in our working capital and margins to account for these uncertainties.

    2. Aftermarket Business Growth
      Q: What percentage of aerospace is aftermarket now, and how much growth can we expect?
      A: Our spares business is about $1 billion in 2023, with commercial spares returning to pre-COVID levels and growing. We expect strong demand picking up in the second half of 2024 and continuing into 2025 and 2026 due to structural shifts in spares demand.

    3. Pricing Outlook and Margins
      Q: How do you see Howmet's pricing over the next couple of years compared to engine OEMs?
      A: While we can't raise prices in the short term due to long-term agreements, we expect increased pricing upon renewal of these agreements, particularly for service parts. Customers can expect increased pricing associated with service parts as we renew agreements.

    4. Margins and Long-term Agreements
      Q: With better aero volumes, why no improvement from Q4 exit rate, and what percentage of margins are locked due to LTAs?
      A: About 75% to 85% of our revenue is tied to long-term agreements. We expect 2024 margins to be similar to 2023, factoring in a 28% incremental margin assumption, slightly lower than Q4's 31%, to account for potential choppiness in demand.

    5. Capital Deployment Plans
      Q: How are you thinking about capital deployment given the cash guidance and share repurchases?
      A: With revenue increasing by $0.5 billion, we expect a working capital drag of about $100 million. We may retire some debt and plan for elevated share buybacks in 2024 compared to 2023, contributing to further leverage improvements.

    6. Air Foils Market Share
      Q: Where does your relative market share stand now in the air foils market?
      A: We've grown about 1% market share per year over the last 4–5 years, now holding around 50% of the market. We expect to continue growing our share due to our advanced technology and have contracted additional share accordingly.

    7. Fastening Systems Growth and Wide-body Recovery
      Q: Is fastening systems leading growth in 2024, and where is wide-body recovery versus pre-COVID?
      A: Our fastening systems have seen outsized growth, particularly in distribution. Both engines and fasteners are expected to contribute positively in 2024. Wide-body demand still needs to recover, which should improve the mix compared to narrow-body demand.

    8. Headcount Growth Expectations
      Q: What are your headcount growth expectations in 2024?
      A: We're expecting to add between 1,000 and 1,500 employees in 2024, about 500 fewer than in 2023, focusing on improving productivity, retention, and bringing automation online.

    9. Spot Sales Pickup
      Q: Did you see a pickup in spot sales in 2023, and what's assumed for 2024?
      A: We saw the spot market pick up in 2023 and have assumed it will repeat in 2024, but haven't planned for a significant further increase due to unpredictability of unscheduled demands.

    10. Clarification on MAX Rate Assumptions
      Q: Are you delivering to about 34 now and assuming the stated 38 rate?
      A: In Q4, we delivered at rate 38, while Boeing built at rate 30, leading to inventory buildup. We've allowed for potential choppiness and possible inventory carrying in our margin assumptions.

    11. Engine Production Levels and Supply Chain
      Q: What's the expected engine production level in 2024, and how much content goes directly to Boeing vs. Tier 1 suppliers?
      A: We supply the majority directly to Boeing but also to suppliers like Spirit. We base our assumptions on a rate of 34, accounting for possible variations in supplier build rates and inventory adjustments.

    12. Working Capital Usage in Guidance
      Q: Is there $100–150 million working capital usage in free cash flow guidance, and what is it?
      A: With revenue increasing by $0.5 billion, there's a natural working capital drag of about $100 million due to a 20% usage rate. We've also added allowances for potential inventory build related to Boeing's demand fluctuations.

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