Paul Luther:

Thank you, Joe. Good morning, and welcome to the Howmet Aerospace second 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.

Ken Giacobbe:

Thank you, John. Good morning, everyone. Let's move to Slide 5. So markets continued to be healthy in the second quarter. On a year-over-year basis, performance was as follows

Operator:

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Doug Harned with Bernstein. Please go ahead.

John Plant:

Hey, Doug.

John Plant:

Well, Doug, I expect that to be the hot topic of today given the comments on the, I'll say, opening evening of the Farnborough Air Show last week and then followed up by an article in Bloomberg this weekend. And I guess my first reaction to it as an investor in the company. So that's really good news. Because here, we are pumping in a 27% increase in commercial aerospace revenues, and if that exactly is true, then we need to make more. And therefore, this is a really good condition for us. So just getting a little bit more specific than that. You've heard on the call that over the last three years, we've put in a 28% increase in commercial aerospace revenues followed by 24% year-to-date this year of 25%. And if you were to track those increases compared to any form of aircraft build or schedules then you can see that we are increasing significantly above any aircraft production rates. And therefore, it's unlikely that we are providing such constraints. And then just to peel it a little bit further is that we have significantly increased our production of turbine blade and hot section. And 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. And therefore, that's really good in terms of a rate increase for anybody in the aerospace industry. And probably effectively operating at capacity or possibly even above it on the current set of yields that we have. So the way I look at it is that we are producing well above engine build rates. And then we don't know, first of all, the outcome of what the subsequent processing is for our [indiscernible] and nor do we get to have any view about where do they go in terms of how we build versus MRO, so you'd be – sort of sales. And so I guess the way I look at it is, for Howmet, the opportunity appears to be there to sell even more if we're able to make a few more. But at the same time, there are adverse consequences upon us because if engine build is down, and you heard it in our guidance, that we've taken the engine build assumptions down to be in line with what we've heard from the engine manufacturers in recent times. And you've seen that those have been significant rate reduction, whereas previously, we've been prepared to meet those. And so when you get that, even though we have the demand opportunity to supply into the MRO market through our customer. We also suffer because if a lack of an engine build, then obviously, we're not able to supply any structural castings that we indeed manufacture. Nor are we able to supply parts in the low-pressure part of the turbine. And so given the recent, I'll say, build restrictions, we actually have some excess label short-term working in some of our French plants because of the LPT demand. So we're not unaffected. And clearly, we would like to make even more because there is the outlet into the service area which is not into the OE build. So it's a long way of saying to you, we are increasing. We have been – had a massive increase in the last few months and doing our best to satisfy everybody. And that's about as far as I can take it. And don't know what else to say to you to provide any further color.

Operator:

And our next question will come from Kristine Liwag with Morgan Stanley. Please go ahead.

John Plant:

Again, at the moment, nothing is that easy to explain. And so what I did want to present to you, complex pictures, it probably becomes necessary to do so. Clearly, the investment that I've talked about, both in the last two calls and then today, a third time. But today, introducing the fact that we are further increasing our capital expenditure to meet demand for a second engine manufacturer. Then that was previously mentioned and then mentioned as a result of additional contract and share that we are able to fulfill in the future – fulfilled with the introduction of that new capacity. When we bring that new capacity online, then we're going to take the next plant, so we're building out footprint in two particular plants at the moment. And that when we finish that footprint, the level of, I'll say, sophistication, automation and quality and use of, for example, AI and our tests [indiscernible] are going to be taken to another level because to achieve the levels of production that we see, the only way to do it with the consistency in yields that we do is automation because you can't easily do it using a lot of labor. And so yes, 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. So when the original developments and uplifts for the two most recent engines, they move from being more focused on from fuel efficiency to more robustness, and that's something that we're able to work with them to try to achieve. So all of that is in play. And you've read articles that some of those upgrades will be available subject to the certification requirements later in 2025. And then progressively, I'll say, launched with each of the aircraft manufacturers over the next couple of years. And it doesn't matter whether it's a LEAP-based engine or a GTF engine, and we're working on the upgrades for all of those. And again, we'll be providing those new products into the service market as well. So as an example, included or maybe it's over and above the increases in volumes that I've talked about, we've built already some tens of thousands of parts ready for the new improvements for engine manufacturers and those are currently sitting in inventory awaiting certification signoff, and then they'll be assembled into engines.

John Plant:

Thank you.

Seth Seifman:

Hey. Thanks very much and good morning. I wonder, John, if you could talk a little bit about 787. We've seen some mixed messages here. It seems like some of the Japanese structure suppliers may be preparing to increase 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?

Seth Seifman:

Great. Thank you very much.

Operator:

And our next question will come from David Strauss with Barclays. Please go ahead.

John Plant:

Hey, David.

John Plant:

Yes. We've have increased the balance of 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, principally coming from Europe, but also affecting Class 8 trucks in the U.S. as well. So that's how we've put that incremental into Q3. And essentially in Q4, Wheels should be rather stronger than that to end up the year at a higher level. Continuing the theme from our last earnings call, David, is that, if you look at the rate of increase in employee headcount, which I think last quarter, we said it's about a net – just over 400, which in itself was a slightly reduced rate. While we've still been hiring, it's now down to just fractioning below 200. And yet, if you look at the increase in revenue, and it's significantly above that in terms of percentage. So you can assume that productivity is being achieved and in the case of our Fasteners business on top of it, I think there's a 28% increase in revenue in Q1, 20% in Q2. We've actually taken zero incremental headcount. So, here we are pumping out 20%-plus revenues with no incremental peak, which obviously helps a lot towards the, I'll say, bottom line and the efficiency within the business. And so at the half year, on a net basis, we're up probably 600 people in the company, and all of that is in our Engine business. And that's because of both the demand level that we have, plus also we do need to begin to prepare for the increased capacity because headcount is going to be required or go through all the recruitment and training that we've talked about in the past, because it takes a lot of efforts to gain the skills that are requisite for it to be an employee in our engines business. So we're pleased with where we've got to, by way of efficiency. We're seeing it on the people side. We're seeing it also a slight calming in the inflation. And so in fact, in Q2, we had a tiny deflation in our metals input, which was good for the aerospace business, but it was not worth talking about in terms of probably wasn't even – I’ll say we didn't even get to 10 basis points. And so – but it was good that we didn't have a headwind. And then the only area we have a current headwind is the increase in price of aluminum which obviously affects our Wheels business. And so we'll see that small drag getting $1 recover for $1 of cost that always provides a margin drag, and we'll add that margin drag to the reduced sales affecting our Wheels business. So really signaling that Wheels revenues will be down and the margin will be down a little bit more in the third quarter because of seasonality and the demand factor plus the aluminum. But if you put together as a company, we are seeing, I was saying, good stability across the piece in terms of input metals and increase in labor productivity and good demand of parts with giving us I'd say, fairly, I'd say, good mix, which are reflected in the guidance where we're guiding at about 25% EBITDA margin in the second half as well.

Myles Walton:

Thanks. Good morning.

Myles Walton:

Hey, John, you stopped 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 take it at a higher level, you talked about the Airbus and Boeing not being able to achieve their production objectives. But it did seem like GE had more of a 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 engine as opposed to the airframe? Thanks.

Myles Walton:

Okay. All right. Thank you.

Operator:

And our next question will come from Sheila Kahyaoglu Jefferies. Please go ahead.

John Plant:

Yes. 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 because the average you'll get on, I'll say, your written down asset base compared to putting in new capital is very different. And in an earlier part of this call, I talked about, in fact, the extraordinary levels of automation to which we're having to go to basics to achieve this consistency of quality and yields that are so vital to being able to produce effectively for the, I'll say, new special requirements for these turbine types of products. And so I didn't really want to get into specifically pinpointing any particular margin. We can assume that it's satisfactory. Otherwise, we're going to achieve an adequate return on capital. And sufficient that I think will make our investors very satisfied. At the same time, the margin rates will be adequate. But I'll say, we'll be pumping them through with adding as little fixed cost as possible but at the same time, we recognize that we'll be adding depreciation costs. But it's a long way of saying it's okay Sheila.

John Plant:

Clearly, volumes are up because we said we'd be taking additional share as part of this. I don't really want to comment on specific market shares that we have on any particular customer. I don't think that's an appropriate thing to be talking about publicly. But the important thing is the share gain is pretty healthy. And it is similarly in line with the previous increase that in share that we 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 investment. And now clearly, our job is to try to place all of those new machine tools, get that as quickly as possible and place them and commission them as soon as possible because the demand is clearly there for them. And so our customers would like to see them come on as early as possible. And it's all going to be tied up with not just what they want for them, what they see is volumes today. But also the certification of the changes going on in the engine world, which the FAA and the EASA will have to sign off both for Airbus and Boeing where these new engine upgrades are – as they have to be certified as well. So we await that. It could be different for each of the manufacturers we feel.

John Plant:

Thank you.

Scott Mikus:

Hi. This is Scott Mikus on for Rob Spingarn. John, I hate to put you on the spot and ask for a long-term margin target here, but your operating margins were quite strong in the quarter. They're in the low-20s now and precision cash parts, there is always noise in the numbers due to metal pricing and LIFO reserves, but it's operating margins before it was acquired, we're in the high-20s. Do you think Howmet has the potential to eventually get there long-term?

Scott Mikus:

Okay. Got it. I'll stick with one. Thanks, John.

Operator:

And our next question will come from Noah Poponak with Goldman Sachs. Please go ahead.

John Plant:

Hey, Noah.

John Plant:

As you know, Noah, in commercial aero, nothing is ever exactly the same. Pre-pandemic, we were at time, I think, producing something like nine A350s a month and 13 or 14 787s a month. And as you know, we produce a completely different set of Fasteners for a composite-based aircraft than a metallic-based aircraft. And to some degree, you saw that when the 787 was halted at one point, we moved down to zero because of the clearing out of inventories, and we've been climbing back from there, both in terms of a favorable mix, but also the effects of trying to drive productivity in that business and also being probably a little bit better commercially. 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 the A350 would be the higher rating – wasn't for some also supply constraints, particularly in the structures area. And that's slated to go to, I think, is it 12 a month by 2027, which would be great because that will be above the previous rate. On 787, the only ambitious number I've heard is rate 10, which was slightly plus 2025, 2026, but then the thing is being modified now to 2026. But I think we've got to wait and see what happens in 2025 first. And getting up from where I think our current production is maybe 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. And I think that's tied up with maybe a few particular parts I've read about probably also the same thing as we had previously. I mean, supply chain is often quoted, but often, there's also issues within the assembly processes for some of these aircraft. And so that all needs picking apart in much greater detail. And let's see the rates progress during obviously, balance of 2024 into 2025 before we get to what's the real rate going to be in 2026 and 2027. But should we get back to, let's say, 14 a month of 787s and if it gets 12 a month, stated for the A350. And I guess it depends on – then what the volume of the metallic-based narrow bodies will be but that would be a very positive factor for us. But I don't feel like saying that we move back to any particular previous margin level. I think the most important thing is if you just look at the track of our margin for the fastener business during the recent quarters. I think it's been truly impressive in terms of sequential improvement and that's as far as I’ll go.

John Plant:

Thank you.

Gautam Khanna:

Hey, John, Ken and PT and congrats on the results.

Gautam Khanna:

Hey. Just, John, maybe to put a finer point on it, where, if anywhere, do you see excess inventory in the channel of your products? Has there been any deferral requests or anything incrementally that is weakening some of the outlook beyond maybe 2024. Obviously, you've raised 2024, but anything that gives you pause in 2025? And then lastly – relatedly I just wanted to ask that Asheville RTX facility, has that had any negative impact on the longer-term outlook for – after 135 or any other programs you service? Thanks.

Gautam Khanna:

Yes. Excess inventory.

Gautam Khanna:

Thank you.

Operator:

And our next question will come from Ron Epstein with Bank of America. Please go ahead. Ron, your line is unmuted.

John Plant:

Hi, Ron. I thought that was the best question all day because I thought I haven't going to answer it.

John Plant:

Yes. The easy one.

John Plant:

Yes. Again, you got to pick it apart between that which is the casting for structural castings, compare to high pressure turbine castings and low-pressure turbines. And the case of where we've seen OE engine cutbacks, and that's, I'll say, negatively affected to a small degree, our structural casting and the LPT castings we do. And so I guess that just goes to the territory. The capacity isn’t fungible. So you can't just say I'll now make high-pressure turbine castings and with that because there's different dyes, different I'll say, different casting techniques, et cetera. And so it's not immediately transferable at all. So the key to, let's say, is can we produce any further high-pressure turbine castings because the service demand seems to be high and possibly higher than certainly that we have been advised six months or a year ago. And so we put all our shoulders to wheel and trying everything we can to increase that while also stating that we know we're well above engine rates. I'm not giving you any specific quantities, but you can assume that, that seems absolutely correct, we're well above engine rate. And then it's – what goes to service at the MRO shops and what goes to the, I'll say, OE production, that's not our decision. So we're going to try to improve once again, and it will go to yield in the short-term that will go to fresh capital expenditure in that medium term. And so we've been clear that for us to put down fresh capital because of its high capital intensity, and you got to have a surety return is that's why we've struck agreements which lock in market share commensurate with those investment requirements for future. So we're positioned well for the future. But if you said to us, can we produce another 30% high-pressure turbine casting during the next two months? The answer would be, no, we can't. We'll be well above engine rate. And then that's about all we can say. And it's going to go, can we improve our internal yields, and obviously, we'll be talking to our customers about how they can help with that. And we've got some really good collaboration with our customers at the moment trying to achieve improvements over and above the improvements in volumes that we've already achieved. So I'm feeling pretty positive about it. I like the dynamic. I like the fact that we've got significant demand. But I've also got to be realistic. I just don't have a knob I can turn and say, I'll go and produce another 30%, it doesn't work like that. We've got new tools to put down. We've got new casting machines. We've got new presses, new everything to fundamentally change that. That's what I said. We'll bring that capacity on and we'll see the fruits of that in 2026.

John Plant:

It's going to be at the margin. Where we are – from where we are today, the only way is to where – sometimes this may be excessive requirements on drawing whether those can be relaxed anyway, which don't go to performance. But it's those sort of tiny things, which matter, but don't matter that to your product performance. There's possibly something in that, and call it, clearly, we will study that. But while always protecting the quality of the product that we produce.

John Plant:

Thanks, Ron.

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.

Ken Giacobbe:

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

John Plant:

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.

Noah Poponak:

Hello. Hello. Can you hear me?

Noah Poponak:

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.

Robert Stallard:

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?

John Plant:

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.

Operator:

The next question is from Robert Spingarn with Melius Research.

John Plant:

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.

John Plant:

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.

John Plant:

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.

Douglas Harned:

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.

John Plant:

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.

Operator:

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

John Plant:

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.

Operator:

The next question is from Myles Walton with Wolfe Research.

John Plant:

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.

John Plant:

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...

John Plant:

No [indiscernible] that knows that sort of stuff.

John Plant:

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

John Plant:

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.

Sheila Kahyaoglu:

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?

Sheila Kahyaoglu:

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

Gautam Khanna:

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. .

John Plant:

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.

Ronald Epstein:

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?

Paul Luther:

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.

Ken Giacobbe:

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 margin for the year was strong at 22.7%, with a fourth quarter exit rate of 23%. Adjusting for the year-over-year inflationary costs pass-through, the flow-through of incremental revenue to EBITDA was approximately 31% in the fourth quarter, and approximately 26% for the full year. Earnings per share was a record $1.84, up 31% year-over-year. Additionally, Q4 earnings per share was a record at $0.53 per share versus the prior quarterly record of $0.46 per share. In the quarter, we had two minor benefits impacting earnings per share, $0.01 associated with the Q4 favorable tax rate, and $0.01 related to favorable foreign currency. The fourth quarter represented the 10th consecutive quarter of growth in revenue, EBITDA, and earnings per share. Now let's cover the balance sheet. The balance sheet's never been stronger. Free cash flow for the year was a record $682 million, which exceeded the high end of guidance. As we have done every year since separation, we continue to drive free cash flow conversion of net income to our long-term target of 90%. The year-end cash balance was a healthy $610 million with strong liquidity. For the full year, we reduced the 2024 debt tower by approximately $875 million. $475 million came from the balance sheet, and $400 million was refinanced at a fixed rate with an approximate coupon of 3.9%. Net debt to EBITDA improved to a record low of 2.1 times. All long-term debt is unsecured, and at fixed rates, which will provide stability of interest rate expense into the future Howmet's improved financial leverage and strong cash generation were reflected in S&P's December rating upgrade to BBB minus. With this upgrade, we are now rated as investment grade by two of the three rating agencies. Finally, moving to capital allocation. We continue to be balanced in our approach. For the year, approximately $800 million of cash on hand was deployed to debt paydown, common stock repurchases, and quarterly dividends. The previously mentioned debt reduction actions during the year lowers annualized interest expense by approximately $29 million. We also repurchased $250 million of common stock at an average price of $47.76 per share. This was the 11th consecutive quarter of common stock repurchases. Share buyback authority from the Board of Directors stands at approximately $700 million. The average diluted share count improved to a record low Q4 exit rate of 413 million shares. Finally, we continue to be confident in free cash flow. In the fourth quarter, the quarterly common stock dividend was increased by 25% to $0.05 per share. Now let's move to slide seven to cover the segment results for the fourth quarter. Engine products continued its strong performance. Revenue increased 16% year-over-year to $852 million. Commercial aerospace was up 14%, and defense aerospace was up 18%. Both markets realized higher build rates and spares growth. Oil and gas was up 25%, and IGT was up 24% as demand continues to be strong. EBITDA increased to 22% year-over-year to a record $233 million. EBITDA margin increased 120 basis points year-over-year to 27.3%, while absorbing approximately 180 net new employees in the fourth quarter and approximately 1,030 net new employees for the full year. For the full year, EBITDA was $887 million, and EBITDA margin was 27.2%. Both were records for the engines products teams, a significant accomplishment. 2023 EBITDA margin was up approximately 450 basis points from 2019 when revenue was at a similar level. Now let's move to slide eight. Fastening Systems revenue increased 26% year-over-year to $360 million. Commercial aerospace was 45% higher, including the impact of the wide-body recover. Commercial transportation was up 13%. General industrial was up 8%, and defense aerospace was down 9%. Year-over-year, EBITDA increased 38% to $80 million. EBITDA margin increased 180 basis points year-over-year to 22.2%. We are pleased with the continued performance of the fastening systems team with three consecutive quarters of revenue, EBITDA, and EBITDA margin growth. Now let's move to slide nine. Engineered Structures revenue increased 6% year-over-year to $244 million. Commercial aerospace was up 19% driven by build rates and the wide-body recovery. Russian titanium share gain was flat year-over-year at approximately $20 million due to timing of shipments. Defense aerospace was down 35% year-over-year driven by the F35 and legacy fighter programs. EBITDA was $33 million, down slightly from prior year. EBITDA margin decreased 130 basis points year-over-year to 13.5%, partially due to absorbing net new employees. However, sequentially, revenue, EBITDA, and EBITDA margin increased for the second consecutive quarter. In Q4, sequential revenue increased 7% and EBITDA increased 10%. Although production efficiencies are not yet back to targeted levels, we are making progress and expect continued recovery in 2024. Now let's move to slide 10. Forged Wheels year-over-year revenue increased 3% to $275 million. The $9 million increase in revenue year-over-year was driven by an 8% increase in volume, partially offset by lower aluminum prices. Sequentially, volumes were down 3% as we're starting to see signs of the commercial transportation market softening. EBITDA was flat year-over-year. EBITDA margin decreased 90 basis points primarily due to the timing of inflationary costs pass-through. Finally, let's move to slide 11 for more detail on debt actions. In the fourth quarter, we redeemed $500 million of our 2024 bonds. The $500 million redemption at par was funded with approximately $100 million of cash from the balance sheet and approximately $400 million draw from two term loan facilities. Both term loan are prepayable without penalties or premiums and mature in November of 2026. $200 million was drawn from a U.S. dollar-denominated term loan facility and approximately $200 million was drawn from a Japanese yen denominated term loan facility. We entered into interest rate swaps to exchange the floating interest rates of the term loans into fixed interest rates. The weighted average fixed interest rate is approximately 3.9%, which is lower than the 2024 bonds coupon of 5.125% [ph]. The combined impact of these Q4 actions is expected to reduce annualized interest expense by approximately $10 million. Moreover, debt reductions in Q1 through Q3 reduced annualized interest expense by an additional $19 million. We continue to leverage the strength of our balance sheet. Since 2020, we've paid down gross debt by approximately $2.2 billion with cash on hand and lowered our annualized interest cost by more than $130 million. Gross debt now stands at approximately $3.7 billion. All long-term debt continues to be unsecured and at fixed rates and our $1 billion revolver remains undrawn. Lastly, before turning it back to John, let me highlight a couple of additional items. As we continue to focus on improving Howmet's performance and capital allocation, I wanted to highlight our pretax RONA, or return on net assets metric, RONA, which excludes goodwill and special items has improved by approximately 400 basis points on a year-over-year basis from 29% in 2022 to 33% in 2023. You will find reconciliations in the appendix of the presentation. Lastly, in the appendix on slide 16, we have included 2024 assumptions. Interest expense is expected to improve to approximately $200 million. The guidance includes all debt actions completed to date. The operational tax rate is expected to continue to improve to a range of 21% to 22%. The midpoint of our guidance represents approximately a 600 basis point improvement in the operational tax rate since separation in 2020. We continue to be focused on further improvements in our operational tax rate. Pension and OPEB expense as well as contributions are expected to increase modestly by approximately $15 million year-over-year. Finally, we expect miscellaneous other expenses, which are below the line to be in the range of $5 million of income to $15 million of expense for the year, but are very volatile within quarters. So with that, let me turn it back to John.

Operator:

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

John Plant:

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.

John Plant:

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.

John Plant:

Thank you.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

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.

Robert Stallard:

That’s great. Thanks John.

Operator:

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

John Plant:

Good morning.

John Plant:

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.

John Plant:

Thank you.

Myles Walton:

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?

Myles Walton:

Okay. Thank you.

Operator:

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

John Plant:

Hi, Sheila.

John Plant:

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.

Ken Giacobbe:

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.

Operator:

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

John Plant:

Hey, Noah.

John Plant:

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 continue to grow as that fleet continues to expand. And the fleet, I think, is about 975 aircraft. And while we originally thought it's going to expand at like the 150 a year, as you know, currently Lockheed is not building or not building nor delivering at that rate. And so, to some degree, you have to be a little bit cautious. But you can expect a 50% increase compared to 2019 levels. In the case of the commercial segment, that did drop at the depths of COVID to half, so something just sub $200 million. And now that's fully grown back to $400 million, but with the run rate -- you see in the third and fourth quarters and then strengthening each quarter is that, that is now at a run rate above $400 million. And then obviously, to that, you also have to bake in the potential for additional schedules as these reported time on wing issues get, I'll say, addressed and serviced. And we do expect demand to be picking up in the second half of 2024 and then further strong demand -- a very strong demand going in '25 and '26. So that we see is very good. And so today, you can assume that our spares business for '23 is getting about, let's say, the $1 billion mark, and we expect it to be -- that is -- therefore, an increased percentage of our revenues and you could expect the percentage, therefore going into the aftermarket to continue to increase as we go into '25, '26 after a healthy year in '24. So, overall, a good picture and indeed, as I said in my commentary, that the thing which is -- it's not demand just to solve the immediacy of a time on wing issue. I mean, there is a structural shift in spares demand, which I don't think it's appreciated yet totally in the newer engines themselves essentially have increased service intervals because as you increase the temperature pressure in engine, the wearing part, so I think the high pressure turbine part of the engine. So, those initial Blade 1, Blade 2, vane one, et cetera, those become a wearable or wearing parts, a bit like brake pads on a car. And so, you can expect to see a structural shift as increased fitment of those engines is in the fleet and it replaces the predecessor CFM56 engine. So, you're seeing temporary strong demand for CFM56 just to running the fleet at existing fleet harder and a fundamental structural increase in replacement costs which is going to be there. And I think you're going to see additional, say, service shops built around the work to service these new engines, but that's seen that will unfold over the next, say, few years.

John Plant:

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.

John Plant:

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.

John Plant:

Thank you.

Scott Mikus:

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?

Scott Mikus:

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?

Scott Mikus:

Thanks for taking the questions.

Operator:

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

John Plant:

Hi, Seth.

John Plant:

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 is that they will adjust inventory. So, we've just taken that cautious view, prepared that against -- for example, against the conversion of straight 90% of net income, which is a long-term guide. You can see from what we've given you this morning, it's like 85% plus or minus and that provides the allowance for just in case we have not only the growth rate that we expect, but also if we get caught holding the having to hold the bag in terms of a little bit lower take the natural schedules as some of those MAX inventories are adjusted. We don't know that. It's just an assumption. I mean clearly what we hope for is that they build fully and at great quality levels of rate 38. That's what we want. That's what we hope for. We look for great success from our customers. We'd love to see that. And should they build and schedule and then increase schedules for an increase in rate in 2025 then that will be really good for us. And you could expect us to be further increasing our sales should those scenarios play out. But at the moment, we're not prepared to go there because we don't know.

John Plant:

Thank you.

David Strauss:

Thanks. Good morning.

David Strauss:

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.

David Strauss:

Great. You got both parts. Appreciate it.

Ken Giacobbe:

Thanks David.

Operator:

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

Paul Luther:

Thank you, Betsy. Good morning and welcome to the Howmet Aerospace third quarter 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.

Ken Giacobbe:

Thank you, John. Let's move to Slide 5. All markets continue to be healthy with revenue in the third quarter, up 16% year-over-year and 1% sequentially. As expected sequential revenue growth was impacted by normal third quarter seasonality. Commercial aerospace increased 23% year-over-year, driven by all three aerospace segments. Commercial Aerospace has grown for 10 consecutive quarters and stands at 49% of total revenue. Commercial Aerospace growth continues to be robust supported by demand for new more fuel-efficient aircraft as well as increased spares demand. Defense Aerospace was up 13% year-over-year driven by the F-35 and Legacy Fighter programs. Commercial Transportation which impacts both forged wheels in the Fastening Systems segment was up 7% year-over-year driven by higher volumes. Commercial Transportation remains resilient, despite normal seasonality. Finally, the industrial and other markets were up 10% year-over-year driven by oil and gas up 29%, General Industrial up 8% and IGT up 4%, in summary, another very strong quarter across all of our end markets. Now let's move to Slide 6, for more details on the third quarter results. Starting with the P&L and enhanced profitability revenue, EBITDA, EBITDA margin and earnings per share all exceeded the high-end of guidance. Revenue was $1.658 billion up 16% year-over-year. EBITDA was $382 million up 18% year-over-year, while absorbing near-term costs associated with net headcount conditions of approximately 645 employees. The Engine segment drove a majority of the increase by adding approximately 500 employees. Year-to-date net debt count additions are just over 1500 employees. We continue to increase headcount for the expected revenue ramp. EBITDA margin was strong at 23%, despite absorbing the headcount additions. Adjusting for year-over-year inflationary cost pass-through of approximately $15 million EBITDA margin was 23.3% in the flow-through of segment incremental revenue to EBITDA was at approximately 28% year-over-year which is right in line with our guidance. Earnings per share, was strong at $0.46 per share, up 28% year-over-year. The third quarter reason represents the ninth consecutive quarter with growth in revenue EBITDA and earnings per share. Next is the balance sheet. The balance sheet continues to strengthen, while returning cash to key stakeholders. The ending cash balance was $425 million after generating $132 million of free cash flow. In the quarter, $242 million of cash on hand was allocated to debt reduction, common stock repurchases and dividends. Net debt to EBITDA improved to a record low, of 2.3 times. All bond debt is unsecured and at fixed rates which will provide stability of interest rate expense in the future. Our next bond maturity of $705 million is due in October of 2024. Howmet's improved financial leverage and strong cash generation were reflected in Fitch's August credit upgrade from BBB- to BBB, two notches into investment grade. Moreover Moody's upgraded Howmet's outlook from stable to positive in September. The balance sheet continues to strengthen and is recognized with the rating agency upgrades. Finally, moving to capital allocation, we continue to be balanced in our approach. In the quarter capital expenditures were $59 million which continues to be less than depreciation and amortization. In the third quarter we reduced debt by another $200 million. Year-to-date, we have reduced debt by approximately $376 million, which will lower annualized interest expense by approximately $19 million. We also repurchased $25 million of common stock in the third quarter at an average price of $49.32 per share. This was the 10th consecutive quarter of common stock repurchases. Share buyback authority from the Board stands at $797 million. Since separation in 2020, we have repurchased more than $1 billion of common stock. We exited the third quarter with a diluted share count of 414 million shares. Finally, we continue to be confident in free cash flow. In the third quarter, the quarterly stock dividend was $0.04 per share. The quarterly stock dividend will be increased by 25% in the fourth quarter to $0.05 per share. Now let's move to slide 7 to go through the segment results for the third quarter. The Engine Products segment continued its strong performance. Revenue was $798 million, an increase of 17% year-over-year. Commercial aerospace was up 15% and Defense Aerospace is up 33% with both markets driven by higher build rates and spares growth. Oil and gas was up 33% and IGP was up 4% as demand continues to be strong. As expected, Q3 sequential revenue was down 3% driven by seasonal vacations. EBITDA increased 18% year-over-year to $219 million. The EBITDA margin increased 20 basis points both year-over-year and sequentially to 27.4%, while absorbing approximately 500 net new employees. We are pleased with the continued strong performance of the engines team. Now let's move to slide 8. Fastening Systems year-over-year revenue increased 20%. Commercial aerospace was up 34%, including the impact of the emerging wide-body recovery. Commercial Transportation was up 6%. General Industrial was up 7% and Defense Aerospace was down 5%. Year-over-year segment EBITDA increased 19% EBITDA margin was 21.8% and is improved 320 basis points over the last two quarters. Please move to slide 9. Engineered Structures year-over-year revenue was up 18% with commercial aerospace up 33%, driven by build rates and approximately $30 million of Russian titanium share gain. Defense Aerospace was down 20% year-over-year. Sequentially, Engineered Structures improved production rates and revenue was up 14%, which was in line with our expectation of 10% to 15%. Segment EBITDA increased 7% year-over-year. Sequentially EBITDA margin improved 320 basis points to 13.2% despite absorbing approximately 145 net new employees in the third quarter. Q3 was good recovery by the structures team and we continue to expect further improvement in margins. Let's move to slide 10. Forged Wheels year-over-year revenue increased 7%. The $19 million increase in revenue year-over-year was driven by a 13% increase in volume, partially offset by lower aluminum prices. Segment EBITDA increased 20% year-over-year driven by the higher volumes. EBITDA margin increased 290 basis points primarily due to the impact of higher volumes and lower aluminum prices. Finally, let's move to slide 11. Our balance sheet continues to be a source of strength with healthy cash flow supporting a $200 million debt reduction in Q3. The $1.25 billion October 2024 debt tower was inherited from Alcoa Inc. and has been reduced to $705 million with cash on hand. Since the separation in 2020, we have paid down gross debt by approximately $2.15 billion with cash on hand and have lowered annualized interest costs by more than $120 million. Gross debt now stands at $3.8 billion. All long-term debt continues to be unsecured and at fixed rates. We will continue to focus on improving our capital structure and liquidity. Lastly, before turning it back to John, let me highlight one item. In the appendix slide 18 covers our operational tax rate which was approximately 22.8% year-to-date. The midpoint of our guidance represents a 500 basis point improvement in the operational tax rate since the separation in 2020. Strong performance by the tax [Indiscernible] and we continue to be focused on further improvements in our operational tax rate. Now, let me turn it back to John for the outlook and summary.

Operator:

We will now begin the question-and-answer session [Operator Instructions] The first question today comes from Kristine Liwag with Morgan Stanley. Please go ahead.

John Plant:

Hi, Kristine.

John Plant:

Okay. I guess that's the big one Kristine. So let me just talk generally about the 7%, first of all. Within that, assumption is a mid-teens assumed increase in commercial aero. And more like single-digit increases in industrial, things like AGT oil and gas and general and other, while an assumed high single-digit decrease in commercial transportation. So basically, in our client solid defense solid general industrial markets healthy increase in commercial aerospace that reduced by a high single-digit assumption on commercial or transportation. That's roughly now applying. I'm going to say, we see assumed build rates in let's say forecasting agencies. For the most part, we can see that they're going to increase both wide-body and body fractional increase in mix next year. At the moment, specifically, for Boeing 737 is what you assumed. You asked a question about our assumption is that it's somewhere between the mid-30s and 40 somewhere in that region. We don't want to pit it specifically at this point, you can assume that's within the range plus or minus I gave. It's really important that we see Boeing achieved the rate 38, which we know is going to be prior to now it hasn't really happened that doesn't seem to be happening just yet, but we know it's going to be very soon. But we're not yet ready to believe and input into our guidance even though we can supply a rate 42 should Boeing be in a position to build at that rate.

John Plant:

Thank you.

Scott Mikus:

Hi. Scott Mikus on for Rob Spingarn. John or Ken, I wanted to ask you a little bit about pension contributions for next year. And also, just given the work you've done there, are you considering any sort of risk transfer to get rid of the pension liability and improve free cash conversion?

Scott Mikus:

Okay. Thanks. I'll stick with one question.

Operator:

The next question comes from David Strauss with Barclays.

David Strauss:

John, you mentioned your work on upgraded blades. I wanted to see if you could give a little more color there around the timing of when you when you think you'll be producing upgrading -- producing and delivering upgraded blades to both GE and Pratt?

David Strauss:

Okay. Fair enough. I'll ask them.

David Strauss:

And then Ken I guess a two-parter for you. Just quick comments on working capital through the end of this year. It looks like you're kind of a pretty big reversal benefit in Q4 and thoughts on that into 2024? And then pension expense you brought down a little bit for 2023 but what are you looking at for 2024? Thanks.

Ken Giacobbe:

Yeah. Thanks David. So as John articulated their days are really the key on working capital. And then also depending on where we are in the cycle -- business segment. So as we exit this year, I think we've given everybody the walk in the assumptions tab of the deck to kind of walk through it. But that would indicate a working capital burn this year roughly about $190 million plus or minus. And it's really driven by -- we've increased the revenue guide once again so you have more AR that goes with that plus we're keeping inventory in the business to make sure that we're not the bottleneck for our customers, delivering on time in full at the right spec is really important for us. So we've got a little bit more inventory. Next year we've got another growth projection here. So I anticipate there'll be working capital burn again next year in 2024, probably be better than this year as we work down inventory in the business but it's again going to be dependent on where we are in the cycle. So I believe it's in really good order here driven by the growth of the business. On the pension expense side, as John mentioned I'll start at the top of the house. We've taken gross liabilities down by 45% since separation. That's a pretty big decline. Big significant part of that is the actions that we've taken to reduce gross liabilities. So as we get a bit of a help from the increase in discount rates but there's a lot of action around that gross liability. John mentioned cash, it will be up next year. We remeasure it at the end of the year. So that's pretty much of a volatile line. So we'll give you more guidance on the next call in terms of what the cash contributions would be. The expense side -- that's a little bit more visible right now. Again we strike it at the end of the year. If you look at our pension and OPEB expense right now it's $35 million on an annual basis. So next year based on asset returns, the market has been a little tougher. I'd say probably another $15 million plus or minus $5 million on either side of that. It's really not material. But I think that's all in good order as well.

Operator:

The next question comes from Scott Duco with Deutsche Bank. Please go ahead.

John Plant:

Hi, Scott.

John Plant:

Okay. I don't think we've given the third quarter detail on the commercial side. I think that would be in our 10-Q later when we file it, whilst I'd say that it's in good order and in line with what we previously said both for the quarter for the year. And I stand behind my comments regarding 2024 we made them on the last call. 787 at the moment we're a little bit below rate and fully expecting that to move up to grade seven next year. And as I've commented before we see very strong underlying demand for that aircraft. And I can see the need to go above rate seven as well. It's only a question of when.

Scott Deuschle:

Thank you.

Myles Walton:

Thanks. John I was hoping you could dig a little bit deeper into the fastening margin performance and obviously, sort of, troughed at the beginning of the year and has been showing some signs of resiliency and improvement. I think at the beginning of the year you told me to not expect much for a couple of years. Are we at a point where new management plus the rate increases on the wide-bodies we should start to think about getting back to 2018, 2019 Fastener performance?

Myles Walton:

Thanks John.

Operator:

Next question comes from Ronald Epstein with Bank of America. Please go ahead.

John Plant:

Hey Ron.

John Plant:

Well essentially the play on forged wheels for aluminum is that you start off with what's the big picture in terms of truck and trailer production essentially in North America and Europe, albeit we do play in some of the Asian markets so it's a significant share position as well. And then you factor in basically some -- so whatever percentage change that is in a new factor in as a positive against what I think will be a worse macro position next year. There'll be some penetration achieved against steel wheels particularly as fuel efficiency requirements that step up, a fractional contribution but nothing in a great node in terms of adoption of different I'll say powertrain hinting out there is move towards electrification or whatever but no big moves next year but that's a positive venture as well. And the manufactural share improvement on top of that. So, basically we see secular growth in the segment offsetting some macro decline in the assumed markets and that's why I guided as commented an idea about high single-digit reduction for the business is our assumption trying to be fairly cautious at this point in time until we've got a better read on what's the general economy going to do although I did see freight rates begin to stabilize and improve recently. So, there's a lot of factors yet to bring to bear in terms of what the final outlook for next year is I want to take a fairly cautious assumption. This year I don't really commented -- a more difficult second half as it is we've still been able to burn off backlog. And let's say even despite today we have -- is it Mac truck which is subject to the UAW strike. Our arrears are such that that's not going to affect us in the fourth quarter. And our assumption is that by Q1 next year by another couple of months at UAW dispute the Mac truck will be resolved and therefore they'll be back. So that's about it really. It's been pretty strong this year. I give you the general is into next year.

John Plant:

Yes. I'll start off with having to separate two issues I think on the GTF, because I think while it gets all and mashed together, I see them as quite separate and then the catalysts intertwining for convenience. So this contamination issue clearly that requires inspection that might take, I don't know, so many days, let's call it, 20, 30, 40 days or an off wing to achieve that inspection. And then, I guess longer if those risks turn out they required to be replaced or not. And I guess it is a small fraction of those that will require to be replaced. That's one item or separate item. Over, let's say, previously incentive field but I'll call it, left field there is the discussion about the time on wing issues that have been publicized by everybody regarding the GTF we're particularly in harsh climate countries or pollution countries the time working is a fraction of the predecessor engine and also what we originally thought for the GTF. So, the question then becomes for the problems around the combustor the filling of holes the higher temperature and then those temperatures and pollutants hitting the two blades in the high-pressure turbine those clearly require replacement. And the question is, what is the replacement interval for them? And so that stands alone as an issue. Pratt & Whitney will determine what frequency they want to replace those blades, again, more of a question for perhaps than for myself. We're able to stand behind them and supply what needs to be supplied within degrees. The question is, what's the requirement? Then, of course, you can intertwine them together. So maybe where those engines are off wing for the powder metal contamination issue maybe the opportunity will be taken to replace some of those high-pressure turbine laser and other components on the engine or maybe it won't. That's a practice issue. And the question I have in my mind is, do they go for full replacements for them as they really look at inspect and take the engines off the wing for the first time or do they stick them back on just because the lines will want the engines back on wing and only seek to replace those in harsh climates at that time. And so maybe that's the more of the while I read from MTU of the 300 days turnaround time. So I just don't know Ron, but it will finally turn out to be, because it's a choice by ratio [ph] or Pratt & Whitney to determine to what extent do they make improvements for the time on wing issue including the high-pressure turbine parts as they take those into serve. So why it's written about us almost one issue of power of metal, I think there are two distinct issues which may come together but just depending upon the pressure to get those engines back on wing and we are still in discussions with Pratt & Whitney regarding all of that. And they determined how many of our parts go to OE production and how many go to the spares market. And that's up to them and the aircraft manufacturers to decide that.

John Plant:

Thank you.

Noah Poponak :

Hey, good morning everyone. John I was hoping to get a little more color from you on your perspective on the broader aerospace new-build ramp-up. You've had good perspective. And as you mentioned you've been cautious and that it's been correct. It felt like in the middle of the year and kind of around the air show and into the summer you sounded more optimistic and sounded like the supply chain was kind of finally ready to go. And then we've had these incremental engine and aerostructures issues. Did Boeing especially -- and I guess Boeing and Airbus keep the underlying broader supply chain going towards the planned higher rates? And is everything kind of ready to ramp once after fuselage and the like are fixed. And you mentioned them giving you plans for next year. Are they incrementally more firm on that now with the master schedule than they've been recovery to date are things firmer? Or is that wishful thing?

Noah Poponak:

Okay. I appreciate it. Thank you.

Operator:

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

John Plant:

Hi Sheila.

John Plant:

Well, I am completely leaning today announce it is two-parts, three-parts so yeah sure. Go for it.

John Plant:

Generally forgings and castings have been a bit of a whipping below for a couple of years. With commentary I think maybe even before, it was any basis for it albeit, subsequently I think there has been a basis for a commentary where to replace the skill levels to produce some of these in particular the casting is really at a very high order. So the trade the recruitment and then trading lines to produce effective production workers in some of this certainly strain. I think all of the companies in that regard including Howmet. We did choose to start recruitment a bit earlier. And I know that I've cost the company probably 20 basis points of margin by being slightly ahead of the curve -- recruitment. But at the same time I think has paid dividends for us and the fact that we've been in a vision to produce generally on time, at rate and generally good quality. So I think it's been a good trade-off for us. I want to correct you on the structural casting side we're probably the number two in the market behind precision cast parts, but they are still, the big dog on the block in terms of production of structural castings. We do produce them and we're at a good rate for let's say, 98% of all of our structural castings. I mean early on we had a few moments things like fairings and is like shelling pieces and coming off at good rates and no cost [Ph] or whatsoever. And so should there be increased demand for structural castings obviously where we tool and if not the availabilities that to us for the next few years should engine manufacturers want to is that we're in a position to supply because we still have some available capacity and indeed are willing to invest commensurate with it being a good return of capital. And generally I've been quite positive about investing in our engine business and contrasting that to -- the our structures business is based upon returns. So it's one way of saying we're in a good state, restructure casting we are the significant supply to the industry on turbine blades. And I hope that gives you enough nuggets.

John Plant:

Pricing has been positive for us. And I think it reflects the value that we bring. When I look at some of the requirements for the increased temperature performance in the, let's say, narrow-body engines. We are bringing to bear some of the not all, but some of the technologies that we've deployed for the F-35 engine in terms of ability to manage both pressure thermal performance in the high-pressure turbine. And we're able to produce parts. We obviously work with the customers to engine into specification. But if they're specified at 2,500 degrees and operate higher we can take it higher because as you know for the F-35 we're up at 3,500 degrees and indeed the only company that well that can provide the turbine parts with that performance in that environment. We've already commented previously that we are working on the improvements for the currently 2028 upgrade to that engine to improve its thrust and time and air. And so again, we are able to take the temperature performance of those parts and elevate it further. And we've talked a little bit, but only a little bit in our Technology Day about some of the technologies that we'd be able to deploy for that. And so we're in a position to bring a degree of performance and capability at scale, which I think needs to reflect in value because in truth the turbine blade is a pretty small part of the value of the engine and to achieve the requirements for let's say lower carbon footprint continually taking up the pressure inside the engine to improve the optimization that you have fuel and therefore its burn characteristics for lower dilution and the whole say fuel efficiencies and carbon footprint presents great value to the industry.

John Plant:

Thank you.

Seth Seifman:

Hey, thanks very much. Good morning everyone. So John I know you said you wouldn't say this or haven't said this and so I'm not necessarily expecting a number in terms of the margin outlook for next year, but if we think about that sort of baseline incremental of 30% plus or minus 5%. How do we think about the puts and takes for where next year can come in relative to that 30%. Does the addition of headcount and the need for the learning to develop among your employees? Does that keep things sort of below that 30% range as it's been in recent years? Or are there other opportunities to be above it? What's the best way to think about that at this point?

Seth Seifman:

Excellent. Thanks very much. Helpful.

Operator:

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

Paul Luther:

Thank you, Kate. Good morning and welcome to the Howmet Aerospace second quarter 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 and EPS mean adjusted EBITDA 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.

Ken Giacobbe:

Thank you, John. Let's move to Slide 5. All markets continue to be healthy with revenue in the quarter up 18% year-over-year and 3% sequentially. Commercial aerospace continued to lead the growth with an increase of 23% year-over-year, driven by all 3 aerospace segments. Commercial aerospace has grown for 9 consecutive quarters and stands at 47% of total revenue. Commercial aerospace portion of total revenue is expected to increase due to the developing widebody recovery, strong backlog of commercial aircraft orders and spares growth. Spares for commercial aerospace continued to increase sequentially and are now trending to be approximately 95% of 2019 levels at year-end. Defense aerospace was up 17% year-over-year, driven by the F-35 in legacy fighter programs. Sequentially, defense aerospace was up 4% year-over-year, driven by engine products. Commercial transportation, which impacts both the Forged Wheels and Fastening Systems segments, was up 8% year-over-year and up 2% sequentially driven by higher volumes. Finally, the industrial and other markets were up 20% year-over-year, driven by oil and gas, up 36%; IGT, up 20%; and general industrial, up 11%. Sequentially, these markets were up 4% with general industrial up 9%; oil and gas up 4%; and IGT flat. In summary, another very strong quarter across all of our end markets. Now let's move to Slide 6. Starting with the P&L and enhanced profitability, revenue, EBITDA and earnings per share, all exceeded the high end of the guidance in the second quarter. Revenue was $1.65 billion, up 18% year-over-year. EBITDA was $368 million, up 16% year-over-year, including net head count additions in Q2 of approximately 380 employees, which builds on additions made in Q1. Year-to-date, net head count additions are approximately 865, which are in line with our targets. EBITDA margin was 22.3%. Adjusting for the year-over-year inflationary cost pass-through of approximately $25 million. EBITDA margin was 22.7% and the flow-through of incremental revenue to EBITDA was approximately 22%, while absorbing near-term recruiting, training and production costs. Earnings per share was $0.44 which was up 26% year-over-year. The second quarter represented the eighth consecutive quarter of growth in revenue, EBITDA and earnings per share. Moving to the balance sheet. The ending cash balance was healthy at $536 million after generating $188 million of free cash flow which was our best Q2 of free cash flow generation. We continue to expect strong positive free cash flow in the second half of 2023. $118 million of free cash flow generation was allocated to common stock repurchases and dividends. Net debt to EBITDA improved to a record low of 2.5 times, while bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future. Our next bond maturity is in October of 2024. Finally, we amended our $1 billion revolver through 2028, while realizing lower fees and a more favorable financial covenant. The revolver remains undrawn. Moving to capital allocation. We continue to be balanced in our approach. In the quarter, capital expenditures were $41 million with a focus on automation. Capital installed prior to COVID-19 puts us in a good position to support continued commercial aerospace recovery. In the second quarter, we repurchased $100 million of common stock at an average price of $44.52 per share, retiring approximately 2.2 million shares. This was the ninth consecutive quarter of common stock repurchases. Share buyback authority from the Board of Directors stands at approximately $822 million. Since separation in 2020, we have repurchased more than $1 billion of common stock. We continue to be confident in free cash flow. In the second quarter, the quarterly stock dividend was $0.04 per share after it was doubled in the fourth quarter of last year. Finally, we issued a note to redeem $200 million of our 2024 debt tower with cash on hand. The redemption is expected to be complete at the end of September and will lower our annualized interest cost by approximately $10 million. As you will recall, we repurchased approximately $176 million of bonds last quarter, which will lower annualized interest costs by an additional $9 million. Therefore, year-to-date, bond repurchases are expected to decrease annualized interest costs by approximately $19 million. Now let's move to Slide 7 to cover the segment results for the second quarter. Engine Products continued its strong performance since the second quarter represented the eighth consecutive quarter of year-over-year growth in revenue and EBITDA. Revenue was $821 million, an increase of 26% year-over-year. Commercial aerospace was up 23%, Defense/aerospace was up 41%, and both markets were driven by higher build rates and spares growth. IGT was up 20%, and oil and gas was up 36%, as demand continues to be strong. EBITDA increased 25% year-over-year to a record for the segment of $223 million. EBITDA margin was 27.2%, despite the addition of approximately 350 net new employees year-to-date and approximately 90 net additions in Q2. Across all of the aerospace segments, net headcount additions are needed for the continued revenue ramp, but do carry near-term recruiting, training and production costs. Finally, in the second quarter, the Engine's team finalized a new five-year collective bargaining agreement in our Whitehall, Michigan facility. Let's move to Slide 8. Fastening Systems year-over-year revenue increased 19%. Commercial aerospace was 19% higher as the widebody recovery starts to take effect. Defense aerospace was up 24%, commercial aerospace was up 17% and general industrial was up 16%. Year-over-year segment EBITDA increased 14% as volume increases were partially offset by the addition of 430 net new employees year-to-date and approximately 215 net additions in Q2. Now let's move to Slide 9. Engineered Structures year-over-year revenue was up 8% with commercial aerospace up 31%, driven by higher build rates in approximately $25 million of Russian titanium share gain. Defense aerospace was down 33% year-over-year, driven by customer inventory corrections. Segment EBITDA decreased 23% year-over-year, while margins declined 410 basis points. The lower EBITDA was driven by higher costs associated with additional headcount as well as operational costs for planned production rate increases, which were unrecovered due to production bottlenecks in one plant. Net head count additions in the quarter were approximately 50 employees. Finally, in the third quarter, the Structures' team finalized a new four-year collective bargaining agreement at our Niles, Ohio facility, which was ahead of schedule. Now let's move to Slide 10. Forged Wheels revenue year-over-year increased 7%. The $19 million increase in revenue year-over-year was driven by a 6% increase in volume. Segment EBITDA increased 8% year-over-year, despite the interruption of raw material for our Wheels plant in Hungary due to a nine-day strike at our Arconic Corporation supplier, which has now been resolved. Margin increased 30 basis points due to the impact of lower aluminum prices and inflationary cost pass-through. Finally, let's move to Slide 11. We continue to be focused on improving our capital structure and liquidity. In July, we issued a notice to redeem $200 million of our 2024 debt tower with cash on hand, which is expected to be completed by the end of September. The October 2024 debt tower would be approximately $705 million after the redemption. Since the separation in 2020, including the redemption just announced in July, we will have paid down approximately $2.15 billion of debt with cash on hand and lowered our annualized interest costs by more than $120 million. Gross debt is expected to be less than $3.8 billion after the redemption in September, while long-term debt continues to be unsecured in it fixed rates. Finally, we amended our $1 billion five-year unsecured revolving credit facility through 2028. The amendment provides lower fees and more favorable covenants. Details can be found in the 10-Q, which is expected to be filed later today. The revolver remains undrawn. Lastly, before turning it back to John, let me highlight one item in the appendix on slide 18. It covers our operational tax rate, which was approximately 22.6% for the quarter. The second quarter rate represents approximately a 500 basis point improvement in the operational tax rate since the separation in 2020. Now, let me turn it back to John for the outlook and summary.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

John Plant:

Okay. Thank you, Sheila. First of all, we don't have to wait, but the extraordinary levels of recruitment during the last couple of years have certainly weighed upon us. And probably of all the things that we've been doing, driving labor productivity has been amongst the most difficult. And it's certainly been more difficult than what we believe we've overcome by way of scrap and yield and also driving through on the volume. If you look at our midpoint of guidance, we believe we're going to raise the incremental to about 28% in Q3. And we are hopeful at about 34% in Q4. And that takes account of what we believe to be hopefully, a slowing of recruitment and an improved retention ratios and as the denominators got bigger of the employees we've taken on. And so, we're optimistic that the incremental drop-through begins to improve and then hopefully improve again in '24 with the combined volume, the pull-through from the automation programs, the -- I'd say, the bigger denominator of recently recruited employees and the mix effective widebody. So, it's a future statement. We're hopeful we're optimistic. We're planning for it, but I'll be very disappointed if we had to wait until we had stability for improvements in that drop-through.

John Plant:

So, I mean -- -- when I think about Howmet is more like a relentless machine. I was trying to bring color to my commentary. So the last time I tried to wet paper tissue and that didn’t work so well, as you know. But at this time, I think itself fairly relentless machine rolling forward and delivering results. We're not that flash bang and full of jumping noise like Chinese firecrackers. But within Q2, there is one thing we overcame, which I'm proud in the way we overcame it, which is the consequences of the strike in one of our suppliers of aluminum billet, that nine-day stoppage costs us heavy and yet we marked straight through and delivered really solid margins in our wheels business. So, I think that has really great performance by Howmet in that regard. Conversely, when I think of structures, we took a much bigger hit than the strike in the margin rate and the lack of achievement of the volume. And so I put that more in the, let's say, almost like a $10 million complete face plans by the business. And I just think myself, if you want to use the play on the taglines, I think, Howmet planted in our structures business. And I'm not proud of what we really didn't achieve there. We thought we'd prepped well. We thought we'd begun to put labor in place. We thought we'd got the, I'll say, improvements made to improve throughput in our furnaces and then rolling mills and basically completely bottlenecked in one area, and it didn't work well. So -- but despite all of that, so let's call it, if you want to -- and I never like, like the, excuse me, but a combination of structure space planting and a supplier strike, we out-delivered the guide on EBITDA. And when all said and done any one of those is multiples. So like when we talk about margin rate of 20 basis points difference, that's worth $3 million. We felt like it's hardly worth commenting on. And so it's a bit like me saying, yeah, we did really good apart from that. So I generally choose not to. But I'm trying to be responsive to your question. And I'll say, wheels did great and structures was a big face plant.

John Plant:

Thank you.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

John, it sound like I cut you off there. Is there something else you wanted to add?

Robert Stallard:

You can carry out how many firecrackers if you want.

Robert Stallard:

Okay. Thanks for the update you noted on the 737 MAX rate assumptions. But I was wondering if you made any further changes on either Boeing or Airbus build rates within your guidance? And whether this -- in relation to that, what Airbus said about direct and indirect risk from this latest GTF issue could have any flow through to Howmet? Thank you.

Robert Stallard:

And just to follow-up, anything to say on the GTF issues?

Robert Stallard:

That's great. Thanks a lot John.

Operator:

The next question is from David Strauss from Barclays. Please go ahead.

John Plant:

Hey, David.

John Plant:

It depends upon the parts. We supply some different parts. But while I recognize that we received schedule rate – schedules for parts increasing to rate 38 is that my -- I'd say my scenario, which I don't like is where should they not achieve that rate, then that the parts we've supplied, I think because that will be bloated inventories, they will then take them out just in the same way as they would -- parts were taken out September, October, November, December of 2022 is that I'm blending it all together and saying, my average assumption is -- I mean the 30 is, but being deliberately loose about it, but I'm very clear that our guidance is not based upon full rate increase of 38 from the 1st of July. That's not the case. I mean to say that I don't believe that Boeing can do it. I'd love them to do it, but do it and then I'll feel more comfortable about our guidance to -- because I mean our guidance, I tried to describe in the past, tends to be something that you can rely upon. And I want to see aircraft reduced. And then at that point, I feel confident that we're not going to be on the wrong side of inventory takeout during the remaining few months of the year.

John Plant:

Yes. I mean, Q4 last year was pretty good. The year was really good. And so it's not worrying. It's just -- I'm not putting it all out there. Why would I?

John Plant:

Yes. Well, don't really like using the so-called Chinese partners, but I don't really know where it's Chinese about. But the -- it begins with small steps. Our margin rate did increase in Q2, despite the large ingestation of labor for the balance of the year. It's always a bit of a hostage to fortune, but I'm feeling confident that we're going to see both revenue and margin accretion in the second half beyond Q2. So in that sense, I'm really pleased with the rate and direction of the business, I wouldn't have been able to say that six months ago. And so I'm feeling increasingly confident that, I mean, there's be saying to you publicly, our margin rate is going to increase. So that's pretty good.

Operator:

The next question is from Peter Arment of Baird. Please go ahead.

A – John Plant:

Hi, Pete.

A – John Plant:

In terms of demand, the previous metric I've given was $20 million for Q4 last year, multiply it by four for 2023 and then add on, I think, 25%. So that took you to around about $100 million mark. And therefore, implicit, if you did $45 million in H1, it's $55 million in H2. Right now, I'm actually feeling a little bit more confident than that. And so instead of about a 25% lift, I can see us potentially getting to a 40% lift. Certainly, I think the demand is there. So it's going to be above $100 million, well above $100 million. And the thing that I've got to see is the structure standing up and making the stuff. And then I think we're going to realize the market share we've -- and the business we've obtained and won commercially. So at the moment, demand and, I'll say, our commercial win position is healthy with that -- trying to repeat myself, we had say, a hiccup in Q2, of which neither the structures team or myself are proud of what we did or what they didn't do.

A – John Plant:

Thank you.

Q – Robert Spingarn:

Hey, good morning.

Q – Robert Spingarn:

Two follow-up things on what you just discussed. First, on the question of the improvements to GTF and LEAP, how are these affecting or impacting your Shipset content and how do those changes factor into your LTAs? That's the first question. And then just on the titanium. As we move further ahead, you talked about 40% uplift, But as the wide-body rates rise, let's talk about maybe 2025 when Boeing and Airbus are targeting these higher rates, I would imagine even greater uplift. Can you talk about that?

Robert Spingarn:

Thanks, John.

Operator:

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

John Plant:

Hi, Myles.

John Plant:

I didn't really break it down. I think my aggregate feeling is we see commercial and the move the 737 rates, that's a positive assumption. Defense is proving quite robust and strong. I mean, that 17% on top of what we printed in Q1 is really strong. And we are beginning to see the early stages of the defense spares increases, in particular, I think as we go through into 2024 and 2025, we'll begin to see spares increases for F-35 as an example. So defense has been really good for us. And I think we continue to see that. Wheels, we think, again, stronger than prior assumptions in Q3. Order books for 2023 are now closed. And so we're getting a much clearer picture for the final outcomes for the 2023 order book close out. And the truck manufacturers have not even opened the order book yet for 2024. So we haven't got a read on that. We're hoping that they're robust. But my guesstimated picture is there'll be in the coming, let's say, 12 months, there'll be some weakness in the trailer market, some distribution and relative strength in the European truck market and possibly some weakness in the North American truck market. But in aggregate, slightly better than I previously anticipated.

A – John Plant :

No.

A – John Plant :

No, we added people. We're adding more people. So we're optimistic that the -- everything we got a wish for by way of, I'll say, volume requirements for our customers are there. We added the people. We spent money to increase furnace capacity as an example, moving to triple sticks and double stick furnaces. We added some additional automation in what we thought we're improving our, I'll say, rolling mill capacity and throughputs. And as I said, it didn't work out. And so I just accept that sometimes in life, things don't go exactly as planned. I said, yes, we face planted. But at least we know it and don't pretend we didn't do it, and now it's for us to stand up and do it. It's not a volume issue. It's not a demand issue. It's just -- we've got to make the stuff. And we're expecting to do so in Q3. But I guess every management says that we think we're going to do better. I mean it's always better in the future than the past. But Q2 for that business, we cannot be proud. That's for sure.

A – John Plant:

Thank you. Operator

A – John Plant:

Hey, Kristine.

A – John Plant:

Well, first of all, absolutely no risk spreading to other segments. It was totally inside 1 segment, inside 1 plant. It's not like a disease, it's not contagious. It's just ease for that thing at a plant. I've sort of done my best to dance around every question on this topic. And as I think it's probably getting excessive airtime for what is like irrelevant in the total results of Howmet and what we achieved, which we already exceeded everything that we said we're going to achieve. But it does come down to -- there's a huge sequencing process within -- to make titanium and in one of the early stages of that, of that process, our work in progress, buffers broke down and we ended up with the labor. We recruited I'll say standing idle. The equipment wasn't working. And then subsequently we starved every subsequent process during the course of the three months. And so we believe we've got things back on track. I just detailed, there's like an analysis going into recently, again, we rereviewing it once again last week, which is my scrutiny of every work in progress, a buffer of every important production stage for that particular product. And so in terms of daylight being the bestest infectant and a high degree of engagement by the plant management, the head of operations, the business unit leadership -- and then for me to be scrutinizing, I'll say, work-in-progress buffers for each of their production stages, that's a pretty high level of scrutiny for something, which, again, while it's worthy of comment if that were to get too carried away about. So, I'm hopeful it's going to respond. If it's brute force alone, it will respond. and hopefully, with a bit of sophistication as well, we might make some improvements this quarter.

John Plant:

Yes, I don't want to give segment commentary. But I'd be upset if we're not doing at least 10% to 15% improved volume in Q3 in that business. And assuming we do that, then we'll see a large restoration of margin because we'd work long and hard to establish that 14% as the -- let's call it, the line for that business and held it no matter what was thrown at us by way of F-35 bulkheads, 787 drop into nothing and through thick and thin, we've done it. And then as soon as we got the volume to do what we did was not good. But at least I just think it's best to be straightforward about it and say, we didn't do good. We know what we've got to do. Everybody knows what they're going to do. And we've tracked long and hard to make sure that we succeed and make substantial improvement in Q3 and then we play it again and more in Q4.

John Plant:

Thank you.

Gautam Khanna:

Hey good morning. Thanks guys.

Gautam Khanna:

I wanted to follow-up, I think it was Sheila's question. Just directionally, looking at next year, in the past, you've opined on incremental margin potential, given you've already done a lot of hiring and incrementally, that's not as big of a headwind as those people get more productive and the like. And then the crosscurrents of Forged Wheels and what have you, do you have the same confidence in the 30% to 40% incrementals next year that you did kind of heading into this year? One that you opined on that?

Gautam Khanna:

I appreciate that. And just as part of that, how do you think pricing changes year-to-year, just

Gautam Khanna:

Thank you, John. Appreciate it.

Operator:

The next question is from Ronald Epstein of Bank of America. Please go ahead.

John Plant:

Yes. I think the most difficult thing that we've -- ultimately, if you look through all the issues we faced of stop start, stop start, supply chain, labor, COVID -- all post-COVID and all those things that have -- if they tested us over the last, let's say, two or three years, then I think when I bring it right down to how do we now see it as we've grappled each one of them that fundamental labor productivity has probably been the most difficult for us in what's -- parts of our business have extremely high learning curves and to stabilize that, deliver good quality to our customers, which is paramount we're trying very hard on that front. And to meet schedule. And I think that we've heard very little from the industry about any inability to Howmet not to meet customers' needs. So thing that labor productivity into place, seeing everything smooth out. And I'm hopeful that as Boeing moves towards achieving the 737 at rate 50, as Airbus move from the, let's call it, early 50s through to something towards rate 75 is that that's going to help smooth out things and will be in a much improved condition to deliver at a higher productive level. Similarly with the wide-body increases. So I've used a phrase which I'm not sure how apt it really is, but call it state of Grace. I do see that maybe as we move into the second half of 2024. We get close to that state of grace where productivity is smoothed out, production volumes increasing, content increasing, pricing in the right shape. And so then we begin to print optimal margins and cash flow and hopefully just continue to then improve as a further rate increase in 2025 and 2026. So everything tells me we should be fundamentally optimistic. At the same time, we've currently got issues to overcome, of which I think that labor is used -- is the most -- been the most protracted.

John Plant:

Thank you.

Paul Luther :

Thank you, Andrew. Good morning and welcome to the Howmet Aerospace first quarter 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 and adjusted EBITDA 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. So, with that, I'd like to turn the call over to John.

Ken Giacobbe :

Thank you, John. And good morning, everyone. Let's move to Slide 5 for an overview of the markets for the first quarter. Revenue was up 21% year-over-year and 6% sequentially. Commercial Aerospace continue to lead year-over-year revenue growth with an increase of 29% driven by engine products, engineered structures and fastening systems. Sequentially, Commercial Aerospace was up 4%. Commercial Aerospace has grown for eighth consecutive quarters and expanded 47% of total revenue, and although growing continues to be short of the pre-pandemic level of 60% of total revenue. Defense Aerospace was up 11% year-over-year, driven by the F-35 program and growth in legacy spares. Sequentially, Defense Aerospace was flat due to strong year-end seasonality. Commercial Transportation which impacts both the forged wheels and fastening system segments was up 17% year-over-year, and up 9% sequentially driven by higher volumes. Finally, the industrial and other markets were up 16% year-over-year, driven by oil and gas which was 53%, IGT up 14% and General Industrial up 1%. Sequentially, these markets were up 15% with oil and gas up 25%, IGT up 15%, and General Industrial of 10%. In summary, strong growth across all of our end markets. Now let's move to Slide 6. We will start with the P&L and the focus on enhanced profitability for the first quarter. Revenue, EBITDA and earnings per share all exceeding the high end of guidance. Revenue was $1.6 billion or up 21% year-over-year. EBITDA was up 20% year-over-year and EBITDA margin was 22.5%. Adjusting for the year-over-year, inflationary costs pass through of approximately $35 million, EBITDA margin was 23% and the flow through of incremental revenue to EBITDA was approximately 25%, while absorbing near term recruiting, training, and production costs for approximately 500 net headcount additions. Earnings per share was $0.42, which was 35% year-over-year. The first quarter represented the seventh consecutive quarter of growth in revenue, EBITDA and earnings per share. Moving through the balance sheet, the ending cash balance was $538 million, after approximately $218 million of capital allocation, debt reduction of $176 million, common stock repurchases of $25 million and quarterly dividends of $17 million. Free cash flow for the quarter was a negative $41 million, driven by higher revenues in the first quarter. Finally, net debt-to-EBITDA remained at a record low of 2.6 times. All bond debt is unsecured and its fixed rates which will provide stability of interest rate expense into the future. Our next bond maturity is in October 2024 and the $1 billion revolver remains undrawn. Moving to capital allocation, we continue to be balanced in our approach. Capital expenditures were $64 million in the quarter and continue to be less than depreciation. Capital installed prior to COVID-19 puts us in a very strong position to support the continued commercial aerospace recovery. Regarding debt, we reduced the 2024 debt tower in the first quarter by approximately $176 million with cash on hand. These repurchases will lower our annualized interest cost by approximately $9 million. The October 2024 debt tower now stands at approximately $900 million, which is below our revolver. Our continued progress on debt reduction, EBITDA growth and healthy liquidity has resulted in an upgrade to our outlook from S&P last week from stable to positive. You can find our remaining debt towers in the appendix. Moving to share repurchases. The first quarter was the eighth consecutive quarter of common stock repurchases. Since the separation in 2020, we have repurchased approximately $928 million of common stock with an average acquisition price of $31.79 per share. Share buyback authority from the board of the directors stands at $922 million. Lastly, we continue to be confident in free cash flow. In the first quarter, the quarterly common stock dividend remained at $0.04 per share after it was doubled in the fourth quarter of last year. Now let's move to Slide 7 to cover the segment results for the first quarter. Engine Products continued its strong performance. Revenue was $795 million, an increase of 26% year-over-year and an increase of 9% sequentials. Year-over-year, commercial aerospace was up 31% and Defense Aerospace was up 19% with both markets driven by higher build rates and spares growth. IGT was up 14% and oil and gas was up 57%. EBITDA increased 23% year-over-year to a record for the segment of $212 million. EBITDA margin was 26.7% despite the addition of approximately 260 net new employees and the associated near-term recruiting, training and production costs. Please move to Slide 8. Fastening Systems year-over-year revenue increased 18%. Commercial Aerospace was up 15% driven by the narrow-body recovery. Defense Aerospace was up 38% and Commercial Transportation was up 19%. The year-over-year segment EBITDA increased 4% as volume increases were partially offset by inflationary costs and the addition of approximately 215 net new employees and the associated near-term recruiting, training and production costs. Now let's move to Slide 9. Engineered Structures year-over-year revenue was up 14% with Commercial Aerospace up 39%, driven by higher build rates and approximately $20 million of Russian titanium share gain. Defense Aerospace was down 23% year-over-year driven by some legacy programs. Segment EBITDA increased 30% year-over-year, while margin improved 190 basis points. Finally, let's move to Slide 10. Forged Wheels year-over-year revenue increased 17%. The $42 million increase in revenue year-over-year was driven by 18% increase in volume. Segment EBITDA increased 18% year-over-year, in line with the higher volumes. Margin increased 20 basis points as the impact of lower aluminum prices was mostly offset by inflationary cost pass-through and unfavorable foreign currency. Lastly, before turning it back over to John, one item of note, in the appendix, we've added Slide 16 and have updated the improved interest rate expense assumption for 2023 from $227 million to $222 million. This change reflects the 2023 impact of reducing debt by $150 million late in the first quarter. As you may recall, we had already included the impact of reducing debt by approximately $26 million in January before we published our original 2023 guidance. Now let me turn it back over to John.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Noah Poponak with Goldman Sachs. Please go ahead.

John Plant:

Yeah. Before I comment specifically on any aircraft build guide. Let me just back up. And we talk how we thought about the balance of the year. And I think this is really important in setting the tone because managing through an upturn has many more dimensions, especially when you have one major segment, which is commercial aerospace having such significant potential volume increases. And as you know, volumes for aircraft builds have been taken up, down, delayed with some regularity over the last year, two years. And so how we thought about is that we see essentially Q2 playing out very similar to Q1 and preparing for, I say, the improvement in build. And in doing so, we need to add to our costs. And so in Q1, as you saw from Ken's commentary, we recruited some 500 people. And we're heading probably to a similar sort of run-rate of employee addition in Q2 and all expecting that we are receiving and will be receiving the schedules to meet these potential lifted second half volumes. And of course, you will know, as everybody else knows, is that Boeing has announced that for the 737 that they will take their production rate up to 38 at some time later in the year without specifying exactly when that is. And the cost of these headcounts are clearly are not matched by revenues in the second quarter. So we're prepared to support our customers where they may go in volume. And so we're confident that those parts are going to be scheduled, both by the engine manufacturers and the airframe manufacturers. But as I said in my prepared remarks, is that we're also cognizant of what happened in the last four months of last year when cutbacks occurred because people did not achieve or our customers were unable to achieve some of their more ambitious increases that they had thought about. And I did say about all marching to the place of the weakest link and whether that's in the supply base or in the final assembly of aircraft, it doesn't really matter. So we set ourselves up. We want to be cautious about the second half and we'll maintain that stance until we see actual increases in production. And when we see those increases, I think we're going to have a lot more confidence that we're not going to get cut back. And hopefully, that might produce a good outcome and possibly even better than we currently see. But say, who knows and we are one of the few almost the not quite one, but say the handful of aerospace suppliers, who are actually increased guidance. So in summary, what -- our thinking is whether it's commercial aero, whether it's strength in the oil and gas, increased strength in our commercial truck and pushing back some of the potential for any cutbacks there and also the strength in defense. It's a guide up across many of those sectors, which also have to be taken into account while still maintaining that for the year, we need to be suitably cautious because we're only one quarter in. And we're going to see how this plays out, even though we are optimistic that everybody achieves their plans. At the same time, I don't want to put ourselves in and give you a sense of robustness, which may not occur in the end. So hopefully, that gives you the way we thought about it, Noah. And I've also referenced the only public change in production rate, which is for the 737 later in the year. And essentially, we are not calling out any changes in any other specific numbers because we don't know of any.

John Plant:

Okay. Thank you.

Operator:

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

John Plant:

Yeah. So passing Systems margin is not where I'd like it to be. And at the same time, we also need to recognize exactly where we are in terms of the production mix, which is still very much metallic focused of narrow bodies for the main. And we've seen really no demand change for -- or no -- essentially no demand change for our widebody business currently-- except for something on Airbus say, A350. We do expect that, that mix will change and improve in the balance of the year. And preparing ourselves, if you look at the net recruitment, I think we called out like 250-260 net people in Engine, which, of course, is 2.5 times larger our faster business, say we were at 215-220 people. So we recruited disproportionately in fasteners preparing for that improvement. So essentially, when I think about the year and margin rate is that I don't see much change, a little bit of change positively, maybe in Q2, but essentially, having absorbed the costs of raising production and stabilizing the workforce, plus the increase in volume plus the improvement in mix, I do think that we will see some margin rate improvement in the second half of the year. So basically, don't expect much in Q2, and we've been positioning ourselves optimistically for improvement in the back end of the year, Myles.

John Plant:

Company. Well, I'm hopeful that they're going to go up. But then you can say, well, everybody hopes for that sort of thing. But generally, our hopes for Howmet tend to come to reality. But I have no comments specifically about saying does it match this segment as well on average. What I know is that I'll be somewhat disappointed if we're not earning a margin rate in 2024 above our current Q1 level and we don't expect it to be like that.

John Plant:

Thank you.

Robert Spingarn :

Hi, good morning.

Robert Spingarn :

John, you had this very strong sequential growth in industrial, but some peers have suggested that that's just a matter of a lot of inventory that was available to ship in this first quarter. So how does that trend as we go through the year?

Robert Spingarn :

So just to tie the loop on this, should we expect sequential growth in industrial throughout the year?

Robert Spingarn :

Okay. Thanks so much, John.

Operator:

The next question comes from Kristine Liwag with Morgan Stanley. Please go ahead.

John Plant:

Well, really, I don't have any comments regarding any specific knowledge about Boeing's production. And it's up or down except that I'm very supportive and I know that we can support them, whether it's directed for airframe parts or through parts supplied by the engine manufacturer. And I don't have any specific information if there are supply challenges in any specific suppliers. Obviously, we've all read about the tail plane tail section issues and it's passing to the fuselage. And obviously, my guess and as I guess is the finite amount of parts that they can get and how many of those parts are directed to original equipment build for the 737 and how much are for retrofit of the aircraft, which are out with airlines or even the inventory they've got, we don't know and we don't control any of that. So we're just hopeful that our customers keep to their statements and their plans. And as I said, I think they will absolutely will schedule the parts of the partners. And then should they build at that rate, they'll have a pass. But if they fail to build at those rates, then of course, there is the potential to be cut back as they rebate their inventories for parts they've had, which they didn't use. And so -- it's a very difficult question for us to answer. And so I think the takeaway really is we are ready, we're committed to support our customers. At the same time, we're not willing to get ahead of ourselves. We are willing to do the recruitment necessary, but I hope that we don't end up with what we did last year and in the fourth quarter, where we shed some employees because we were a little bit too far ahead of where our customers were. And so that's how we think about it. But I can't call out anything specific of there is this issue if that was fixed, that would solve the problem. And I guess it's all wrapped up in the statement later in the year. And I guess you can ask Boeing specifically which month that is.

John Plant:

When we talked about this a year or so ago, we did say we'd probably see a couple of years at 35% incrementals, plus or minus 5%. And you've seen all of that play out in terms of being in the low-30s to the high-30s in Spain, might have been dependent upon the change of volume by quarter. And when we're prepared -- and I'll say it's a reasonable growth. We convert really well. When it's been excessive growth, we've struggled because we had to ingest more labor it's untrained for the -- and going to all that gross cost and real cost and scrap, et cetera. So that's how it play out the last couple of years. In the first quarter of this year, here we are again, we're preparing for volume and taking people on. And all of that is good because we know at some point, it's going to happen because the demand is so strong. And adjusting for them is a metal and non-metal inflation flow-through, it's 25%. And if you reverse engineer from our guide for the year, you'll see that it's around about 29%. And so if you got a 29% for the year and you start off at 25%, that then implies just by the math is that the second half, we anticipate to be over 30%. And again, you can reverse engineer that from the numbers already given without recalling a specific percentage of. So should that continue? And then obviously, it depends on the growth rate going into 2024 as to what the incrementals will be, but it should be in a good zone. And at the moment, I'm voting for the higher volume and because ultimately, having those higher volumes with our leverage of applying our margin rate to the higher volumes clearly overcomes the working capital drag and the capital expenditure drag. And so it all ends up improving free cash flow, Kristine.

John Plant:

Thank you.

Sheila Kahyaoglu :

Thank you. Good morning, John and Ken and PT, thank you. Hi, just the 23% EBITDA margin. You guys had a nice base at the midpoint 10 bps, but down 10% on the high end. So maybe if you could just update us on your working assumptions for the margin mix and the $70 million to $100 million of incremental inflation that you had previously called out. Any progress there and changes given commodity prices have come in a little bit. Thank you.

Sheila Kahyaoglu :

Okay. Thank you very much.

Operator:

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

John Plant :

Okay. So you're absolutely correct. The $20 million was the increase in the fourth quarter '22 volume. And the way to think about 2023 is you take that $20 million multiply by 4 and then add on to that, about a 25% plus or minus growth for 2023. And currently, I think you just take that '23 number and you probably add another 25% to 30% in for 2024. That's the way I'm thinking about it. And we've taken a lot of very positive steps with the order intake notably from Airbus but also from Embraer and also more recently, our first orders with Boeing and that's both for meal product and some forgings. And we continue to work actively on quotations particularly with Boeing who are getting, I'd say, more engaged given the fact that they've known they've had a very large inventory of titanium given the restricted build of the 787 and other wide-bodies. But we see them preparing for ordering and release of gradually increasing those requirements to win the back end of this year and into 2024. So it's all playing out as expected and see the titanium opportunity is very positive. It's only blemish at the moment by reverts. It'll be very tough to get hold of. It's expensive. So we've laid in for additional sponge requirements and are seeking really to ramp up our production in our titanium furnaces during the balance of 2023. That's nothing important to us.

John Plant :

Thank you.

Robert Stallard :

Thanks, John. Good morning.

Robert Stallard :

I'd like to ask you about lead times. If Boeing does move ahead with this move to 38 per month on the 737, wouldn't you have to start producing these parts considerably in advance? And more importantly, for you, I suppose, wouldn't you have to start ordering the metal sooner as well, almost like now if you're going to hit that by the end of the year?

Robert Stallard :

Okay, just -- sorry, just to follow up on that. So how much lead time would you need from an OEM customer to, say, theoretically move your production or deliveries from where you are at the moment, low-30 to 38.

Robert Stallard :

Yeah, thanks a lot, John.

Operator:

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

John Plant :

Hey, David.

John Plant :

Okay. So in Whitehall, we continue to be in negotiations with the UAW and have extended the agreement with no work interruptions. So that's just going on as normal. And in fact, we've been discussing that again in the last few days. So I'd say normal sort of negotiations around that topic. Just remind me, David, your second one, got focused on the ---

John Plant :

Change in leadership, yeah, we made a -- we actually changed out the leadership of the Fastener Group at the fourth quarter of 2022, and have been managing through, let's say, a temporary solution there with an acting, let's say, President of Fasteners. And it's also given me the opportunity of even being a more intimate with that business, and now appointed what we think is going to be a great leader for that business. And you've started -- the person has started. They were engaged with us the week before starting that quarterly business operating reviews. And so that -- I think that was a good learning and information exchange. And so I'm optimistic that with the changes that we've made and the increased focus on performance orientation of the business that the things that I see possible become not just possible, but probable. And you heard me talk already in response to a question, I think it's for Myles about the faster margin rate, which I'm optimistic for the second half of this year, especially if we carry on recruiting in the second quarter and taking those costs aren't getting ready. And the improvement in volume and then the improvements in mix with wide-body coming more to the fore in particular we are beginning to see stirrings of life in the I'll call the subtiers of the 787 suppliers around the world, which will require the fastest from us to be able to produce their parts, which they then ship to Boeing. So it's a long supply chain, and we do see that wide-body mix beginning to improve in the second half and then improve again in 2024, both for the requirements of Airbus for the A350 anticipated increases and further increases in 787 because those are quite dramatic, the change, which you get from those wide-body aircraft and the degree of composites they can plan.

John Plant :

If it is as we think, we should be at rates in the first half be there's always some attrition. And so there is a replacement. And the case for hiring in the second half will be, I will say, basically predicated on two factors is, one, what is the actual rate of production required in the second half? And secondly, particularly when we get to the fourth quarter, we'll have to be anticipating to some degree, the rate of growth into 2024, which, as I said, we expect '24 to be another very positive year for particularly on the commercial aerospace side. And so it's difficult to be precise until I know more about the final requirements for the second half and then what's the angle of increase for '24?

John Plant :

Thank you.

Gautam Khanna :

Hey, guys. Good morning.

Gautam Khanna :

I promise I'll keep it to one this time.

Gautam Khanna :

I deserved it. Just wanted to get your pricing expectations over the next couple of years? And if you could specify price opportunities, I should say. And then if you could specify where -- at which segments the pricing opportunity is greatest. Thank you.

Gautam Khanna :

Okay. Any segment that stands out with the greatest pricing opportunity over the next couple of years?

Gautam Khanna :

Thank you, guys.

Operator:

The next question comes from Matt Akers with Wells Fargo. Please go ahead.

John Plant :

Well, I don't think anything in terms of the narrative of change from all the words that I've expanded on this topic over the last two or three years, starting with Pratt & Whitney deciding to sell oil castings business, which is in Poland in 2016. And then deciding in '17 that they would re-enter, but with using new core technologies from a company they bought and they've been obviously did continue to develop that. And I think it's like because most of our -- I mean, you take both GE and I think we've coexisted with them for many, many years with them having their own development and collection capabilities. But in terms of when you get to, I would say, real production of high volume of very complex parts. And I'd say Howmet did really good job. And I'm not going to use the word leg of its own. But I mean in terms of the achievement of the complexity with the yield rates, that's really important to the whole economics of the casting business. The information I have is that the $650 million that's still being applied to machining, coating, hole drilling and testing. The only inflation I got is that I read or heard from an earnings call that they were on the machining side that they were now 63% completed in terms of that investment. As you know, the machining investments are very expensive for machining turbine parts and they're expecting first pass off some qualification for those machine parts in May of this year. And so I guess it's proceeding to plan. At the same time, I've also noted with you the extension of our long-term agreements with Pratt. And I've also shared with you conceptually without giving you detail of the further technology improvements we are making both for the Block 4 Joint Strike Fighter with 28 improvements in the requirements for efficiency and trust in that program and also on the advantage engine. So there's a lot going on and we're intimate with those developments with our customer.

John Plant :

Thank you.

Phil Gibbs :

Hey, good morning.

Phil Gibbs :

Hey. You pointed to strength in spares demand in engine products in both commercial aero and defense. Can you give us an idea about where that business is relative to pre-pandemic levels and whether or not you'd expect that to continue?

Phil Gibbs :

Thanks, John.

Operator:

This concludes our question-and-answer session and the Howmet Aerospace First Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect. Thank you.

Paul Luther:

Thank you, Joe. Good morning, and welcome to the Howmet Aerospace fourth quarter and full year 2022 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 and EPS mean adjusted EBITDA, 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.

Ken Giacobbe:

Thank you, John. Please move to slide 5 for an overview of the markets. Revenue was up 18% year-over-year for the fourth quarter and up 14% for the full year. The commercial aerospace recovery continued throughout 2022, with fourth quarter commercial aerospace revenue up 29% year-over-year and up 28% for the full year, driven by engine products, engineered structures and the narrow-body recovery. Commercial aerospace has grown for seven consecutive quarters and stands at 48% of total revenue, but continues to be short of the pre-COVID level, which was 60% of total revenue. Defense Aerospace was up 13% in the fourth quarter, driven by year end seasonality and down 3% for the full year, driven by customer inventory corrections for the F-35. Commercial transportation, which impacts forged wheels and fastening systems, was up 12% year-over-year in the fourth quarter and up 14% for the full year, driven by higher aluminum prices and higher volumes, partially offset by foreign currency. Finally, the industrial and other markets, which is composed of IGT, oil and gas and general industrial, was essentially flat for the fourth quarter and for the year. For the fourth quarter, within the industrial and other markets, oil and gas was up 22%, IGT was up 2% and general industrial was down 10% on a year-over-year basis. Now let's move to slide 6. We will start with the P&L with a focus on enhanced profitability. For the fourth quarter, we had six consecutive quarters of growth in revenue, EBITDA and earnings per share. Revenue, EBITDA and earnings per share exceeded or were in line with guidance. For the full year, revenue was up 9% year-over-year excluding material pass-through of approximately $225 million. EBITDA was $1.28 billion or up 12% year-over-year. Adjusting for the year-over-year material pass-through, EBITDA margin was 23.5%, and flow-through of incremental revenue to EBITDA was strong at approximately 30%. The full year operating tax rate was 22.5%, an improvement of 250 basis points year-over-year. Earnings per share was $1.40 for the year and up 39% year-over-year. The average diluted share count improved to a Q4 exit rate of 418 million shares. As John mentioned, the strong operating EBITDA and favorable tax rate in the fourth quarter were mitigated by a few items below the line. The impact of foreign currency and deferred comp was $9 million pretax charge, as these items fluctuate based on market conditions. For the year, the impact of foreign currency was essentially breakeven and deferred comp was favorable. Final note on earnings. As expected, we did not have significant net headcount additions in the fourth quarter. However, we hired approximately 1,000 new employees to offset Q4 attrition and absorbed incremental training and production costs. Moving to the balance sheet. Free cash flow for the year was a record $540 million, including an inventory build of approximately $235 million, primarily for the commercial aerospace recovery. For 2022, as well as in every year since separation, we achieved free cash flow conversion of net income in excess of our long-term target of 90%. Year-end cash balance was a healthy $792 million after approximately $513 million of capital allocation to common stock repurchases, 2024 bond repurchases and the quarterly dividends. Year-over-year net pension and OPEB liabilities were reduced by approximately $180 million, and cash contributions were reduced by approximately 50% or $56 million. Since 2019, net pension and OPEB liabilities have been reduced by approximately $470 million and gross pension and OPEB liabilities by approximately $1.4 billion. Net pension and OPEB liabilities now stand at less than 5% of Howmet's market capitalization. Finally, net debt to EBITDA improved to a record low of 2.6 times, all bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense in the future. Our next bond maturity is in October of 2024, and the $1 billion revolver is undrawn. Moving to capital allocation. We continue to be balanced in our approach. Capital expenditures were $193 million for the year and were approximately 75% of depreciation. Capital installed prior to COVID-19 puts us in a very strong position to support the expected commercial aerospace growth. Fourth quarter was the seventh consecutive quarter of common stock repurchases. For the year, we repurchased approximately 11.4 million shares of common stock for $400 million with an average acquisition price of $35.22 per share. Share buyback authority stands at $947 million. Moving to debt. We repurchased $69 million of our 2024 bonds last year with cash on hand. These repurchases will lower our annualized interest costs by approximately $4 million. Moreover, we continue to repurchase 2024 bonds in January, with another $26 million of repurchases at a slight discount to par. Repurchases were made with cash on hand. Lastly, we continue to be confident in free cash flow. In the fourth quarter, the quarterly common stock dividend was doubled to $0.04 per share, dividends in 2022 were $44 million, and we expect to increase to approximately $68 million in 2023. Let's move to slide 7 now to cover the segment results. Q4 was another solid quarter for engine products. Year-over-year revenue was 21% higher in the fourth quarter with commercial aerospace up 30%, driven by the narrow-body recovery. Defense Aerospace was up 17%, IGT was up 2%, and oil and gas was up 19%. EBITDA increased 26% year-over-year and margin improved 110 basis points to 26.1% despite the addition of new employees and the associated near-term training and production costs. Let's move to slide 8. Fastening Systems year-over-year revenue was 11% higher in the fourth quarter. Commercial aerospace was 17% higher, driven by the narrow-body recovery. Defense Aerospace was up 21% and Industrial was down 13%. Year-over-year segment EBITDA decreased 3% due to the addition of new employees and the near-term training and production costs. In the fourth quarter, Fasteners added approximately 200 new hires to offset 200 exits. Now let's move to slide 9. Engineered Structures year-over-year revenue was up 21% in the fourth quarter, with commercial aerospace up 40%, driven by the narrow-body recovery was approximately $20 million of Russian titanium share gain. Gains were partially offset by the impact of production declines for the Boeing 787. Segment EBITDA increased 10% year-over-year despite the inventory burn down of the F-35, and the continued zero to low build of the Boeing 787. Structures 2022 full year EBITDA margin was 14.1%, and was on par with 2019 levels when revenue was 37% higher. Finally, let's move to slide 10. Forged Wheels year-over-year revenue was 14% higher in the fourth quarter. The $32 million increase in revenue year-over-year was almost entirely driven by higher aluminum prices. Commercial transportation demand remained strong, but volumes continue to be impacted by customer supply chain issues, limiting commercial truck production. Segment EBITDA was flat year-over-year as higher volumes were offset by the impact of unfavorable foreign currency, and primarily driven by the euro. While the pass-through of higher aluminum prices did not impact EBITDA dollars, it did impact margin by approximately 300 basis points. Lastly, in the appendix on slide 15, we've included some assumptions around 2023. We expect non-service pension and OPEB expense to increase approximately $20 million year-over-year to approximately $40 million. The increase will unfavorably impact year-over-year earnings per share by approximately $0.04 per share and is mainly due to low asset returns impacting non-service costs, which are non-cash. In addition to the increase in pension expense of $20 million, we continue to expect miscellaneous other expenses, which are below the line be minimal at approximately $8 million for the year, but can be volatile within quarters. Pension and OPEB cash contributions are expected to be flat with 2022 and approximately $56 million for the year. CapEx should be in the range of $230 million to $260 million, which continues to be less in depreciation and amortization, resulting in a net source of cash. Now let me turn it back over to John.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Robert Stallard with Vertical Research. Please go ahead.

John Plant:

Hey, Rob.

John Plant:

I think when you look back over the last few quarters, when we've had steadier build increases, drop-through has been significantly higher compared to those quarters where we've seen, I'll say, urgent or rapid demand changes and also where we've been asked by customers to chop and change on production schedules to meet maybe availability of parts they have rather than a positive scheduled. And so you can see, I think, in our third quarter, drop-throughs were probably in the high 30s, maybe 39%. And you saw the -- if you look at the tracker revenue changes in those quarters compared to the revenue changes in the higher quarters, then I think in the fourth quarter, it was -- I can't know exactly number let's call it in the -- below 30%. So I think steady as you go does help us. At the same time, because of the base of employment that we have has been growing, then the increments -- or incremental each step of the demand gets that much easier to accommodate compared to what we saw was, I think, extreme volatility in 2022. And I mean, in one sense, I'd like to expand the question a lot more broadly and talk about that volatility, but I don't want to miss the point of your question, but essentially, I think steady plan for rate increases are really helpful to us. And that's when we convert best, albeit we're setting ourselves up to do that and hopefully take also advantage of additional demand should it come towards us.

Kristine Liwag:

Hey, John, I just want to follow-up on Rob's question on production rates here. I mean, when we look at where the other supply chains are – is in production rates, you've got periods gearing towards 42 per month by year-end. I mean, Boeing reiterated their outlook of 50 per month for 2025 plus 2026. We saw, obviously, Monster Air, India order today. So why do you see so much volatility? I mean, historically, the engine supply chain needs to ramp up before the airframers. And so what am I missing? I would have thought that you guys would get more of a priority and you would get the orders in now in order to support 50 per month.

Kristine Liwag :

That's great color, John. Thank you.

Operator:

And our next question comes from Myles Walton with Wolfe Research. Please go ahead.

John Plant:

Yes. So obviously, because of the amount of people recruited last year, we are set up pretty well for the first quarter to be able to produce at this level or above. Should it reach those heavy rates of 38 and 42 as an example, or if Airbus are in the 57, 58? Provided we know that they're heading that way, and we've got about six months lead time, we'll be in good shape to meet it. We've been particularly good at being able to recruit labor to meet our needs. I'll recognize that sometimes the stability of that labor hasn't been everything we'd wanted, but getting the headline numbers has been something which we've been very comfortable with. We've put increased disciplines around our own recruitment process to make sure we have a higher level of retention, improved training routine, et cetera. So I think we're doing all the right things in the same way as we set ourselves up for the initial aerospace ramp to be in a good condition. And so fundamentally, I believe that we'll be able to respond to meet those customer demands. Clearly -- for example, if Airbus got a hit rate 65 for A320s in mid-2024s that's still the current number. Then, again, knowing it sooner rather than later is highly beneficial to us and also the commensurate engine rate builds from our customers. I think you saw last quarter my commentary that, we were able to produce at a fundamentally higher rate only to get cut back, because the other parts of the supply chain were there. So I feel reasonably confident, Myles, in there to do that.

John Plant:

Thank you.

Seth Seifman:

Hey, thanks very much and good morning, everyone.

Seth Seifman:

John, I wonder if you could talk a little bit about the profitability in engine products, and we saw kind of in the first half kind of mid-27% type of margin and then, it's come down in the second half and kind of makes sense that new hires would weigh on the profitability there. But, I guess, when we think about what's the level setting on the right margin for this business, I think there was a thought that maybe the 27% we saw in the first half was a good margin and then with growth, you'd see incrementals above that, and there'd be some expansion. But, I guess, from a long-term perspective, how should we think about where that shakes out?

Seth Seifman:

Okay. No, that's very helpful. And maybe -- so just to clarify, the margin, when we think about company-wide, the margin -- the sort of flattish EBITDA margin company-wide expected for '23, that's not a function at this point of having excess labor above the production rates that are in your guidance. You're kind of appropriately sized for what's in your guidance. And to the extent that there is revenue upside, then with the appropriate lead time, you'll be able to bring in the cost structure that you need to produce at that rate?

Seth Seifman:

Great. That’s helpful. Thank you.

Operator:

Our next question will come from David Strauss with Barclays. Please go ahead.

John Plant:

Hey David. How are you?

John Plant:

Good.

John Plant:

Yes. Let me deal with the latter part first, because I tend not to comment too much on individual segments growth anticipation thereof. For wheels, as an aggregate next year, my best assumption at this point in time is a $50 million to $60 million revenue decline and with the volume element of that being in the second half. I mean, it doesn't have to be that way, David. It's an assumption of what if there is a recession, its impact in Europe. I could get more optimistic about it, given I'll say the labor strength and recent strength in Europe. But at this point in time, much will be cautious. Right now, build rates in the commercial truck and trailer business are pretty healthy and healthier probably than we thought going into the year. Maybe that's because now the supply chain issues that the commercial truck manufacturers have faced beginning to ease and they can be able to build that some of the really high backlog that they've got. So it's no more an assumption, but if you can assume that we've got $50 million to $60 million of revenue decline in our numbers, in our guide at this point. In terms of the commercial aerospace percentage by segments, actually haven't got in my mind, that will have to be a follow-up with Ken and let’s kind of go to him, but we tend not to pull it out anyway.

John Plant:

If anything, at the moment, I would expect as we move from Q1 into Q2 and Q3, actually, our engine business will probably show a higher rate of commercial revenue growth because I think the engine manufacturers have a job of catch-up from 22 to accomplish as well as look forward to future rate increases. So at this stage, a very rough assumption against 17%, I wouldn't be surprised to see it's a little bit higher, maybe 20% in our engine business and a little bit lower elsewhere. And then I think we haven't covered is the titanium that level obviously factor into 2023, as we go through it again, increasing as we go through the year.

David Strauss:

Great. Thanks, guys.

Operator:

Our next question will come from Gautam Khanna with Cowen. Please go ahead. Gautam Khanna, your line is open.

Operator:

Our next question will come from Robert Spingarn with Melius Research. Please go ahead.

John Plant:

Hey, Rob.

John Plant:

Yes. So first of all, where we file our K, which I think we are anticipating to be this evening, you'll see the final outcome for price in 2022. And the -- and that just evolve straight, if you could almost like take Qs one through three and the pro rata for the year. So it's a good outcome there. In 2023, I think you can expect a similar number in terms of price increase. So it is part of the methodology that I talked about for some years now, and it was not a one-off correction but more of the ongoing ability that we have to reflect value for the Howmet products that we bring to the marketplace. Our LTA cadence is pretty well set. We've already been in to now into the 2024s and so on because we are probably 85% to 90% complete already for 2023. So that's in good shape. Most of our conversations have been – it's and conversation as I call it, it's share because of our resiliency in terms of ability to build. And we started to see now an increase in spot business availability to us. So that's again good. And, clearly, we've always sought in recent times to protect ourselves for, let's call it, those inflation elements which are not part of that 95% plus raw material. So we're in good – an improving condition there as well, Rob. So, across the whole sector or questions that you're in good shape.

John Plant:

What I'd love to do one day is to call out for you, this is the aircraft build rate, and this is the amount of rates that should – a higher rate for Howmet. I haven't done it yet. I've just felt, we've got so many different segments to cover. And so it's been a particular skew of fundamentally relative differential rates of growth between Boeing and Airbus between narrow-body, wide-body, I felt that there have been so many elements of volatility of those demand pattern changes that come the day. And it will happen, Rob. One day, we'll be in that more – equanimity, where Boeing and Airbus settle into a future pattern, narrowbody and widebody will settle into that future pattern. I think production rates are going to come up and steady. And then that will be like the golden days, which are yet to come for all aerospace and aerospace suppliers at Howmet, in particular. So I think those conditions are coming, they're not yet here. I don't know I'm not saying, they're here for 2023. That's very clear what I talked to you earlier in this call about, but those things are going to happen. And I know, whether it's back half of 2023 or is it 2024, or is it 2025? I don't know yet. But at some stage, it will happen. And I think prior to that then I'd like to be able to say, this is the Howmet growth rate and to give you the percentage above aircraft build. And at that point, I feel confident in giving it to you rather than have it muddied by these – really these fundamental instability of narrow-body, wide-body Boeing, Airbus, et cetera, et cetera. So I think that's the appropriate time, Rob.

John Plant:

Thank you.

Ron Epstein:

Hey. Yeah. Good morning, John.

Ron Epstein:

Just a lot of the questions are focused on the company's new supply, but let's kind of go the other way. How is the health of your supply chain? And what are you seeing there? To help some of those suppliers out, I mean, what's going on there, if you can give us a feel for that?

Ron Epstein:

Got it. Got it. Thank you very much.

Operator:

Our next question will come from Gautam Khanna with Cowen. Please go ahead.

John Plant:

Can hear you now, Gautam.

John Plant:

Okay. We were below -- I think we were below 50% on the Airbus platforms just fractionally, let's call it 48%, 49%. And I'm going to call it, high 20s -- mid to high 20s on Boeing is my best guess. So, these are just guesses at this point.

John Plant:

Compared to one a month, you can call it, more like half a month.

John Plant:

That's tough for me to picture all of that going back to last quarter. I think widebody was a particularly notable lower number for our fastener business in the fourth quarter. So, I know we were below whatever we built on the 787. I can't do from memory across every platform in the last quarter, however, they just think about it or may it must be a follow-up question.

John Plant:

Yes, 350, that's been much more stable for us. Again, built fractionally below this year. We're optimistic in that I think our rates between five and six. And I actually think there's a good case for fundamental demand to be well above six. And so I don't know where Airbus will finally plan that second half rate and rating to 2024. But from what I could see of airline demand and particularly, the amount of 747s, which are flying around A380s, I think if they could access 787s or A350s, they would be desperate to do so. And so I think airlines need them not only for their own profitability, but also for their own carbon footprint. And I really do think there's a case for looking at that carbon footprint, and we need those composite based aircraft. And so I think we should be very optimistic on that twin engine wide-body demand in the back end of 2023 going into 2024 and I can see clear reason for higher rates. And so when Boeing talked about the rate 10 787s, is it 2026? I think that's definitely really very realistic and similarly taking Airbus up into that same sort of A350 that number. I really believe it's that strong, if not stronger.

John Plant:

It's always difficult to really know, because we're not part in privy to the detailed plans from Raytheon. What the big that we do know is that we are intimate on the improved, let's say, advantage engine, and we're providing -- or going to provide more content and sophisticated product there to allow higher thrust and fuel efficiency. We are also -- in my comments earlier on the call, I spoke to 2028 Block 4, and we're intimating in that. We're deep into with both US engine manufacturers for the potential next-generation fighter programs in terms of engine. And so I think we’re well-positioned and every one of those products I'm talking about is a level of sophistication higher than is in the market today and bringing what is not only, I mean, today's uniqueness, where we're the only supplier able to do it. We're taking that further by considerable margin to enable those upgrades to happen. And the cost of, therefore, by comparison to the benefit provided by, I'll say, increased flying time and less fuel usage and increased path of the avionics is just enormous.

John Plant:

I think that will disappear very readily during the first part of this year. So -- and maybe if volumes begin to get -- we take a more optimistic volume, it may well be we might choose to hold some of that inventory by the end of the year, because we'll be looking at 2024. But at the moment, our going in assumption is that the rates I've given will burn some of that off. And we'll see where we go for the second half, Gautam. I mean, part of me would like to be optimistic, but I've chosen to be -- let's keep our feet on the ground and give you the guidance we've given.

John Plant:

Thank you.

Matt Akers :

I wanted to ask on CapEx. It looks like you guys are expecting a step up this year. I know it's still below D&A and below kind of what it was a few years ago, but just what's driving the uptick and how we should think about that kind of as we ramp up aero production here?

Matt Akers :

Okay. Great. Thanks.

Operator:

This concludes our question-and-answer session and also concludes today's call. Thank you very much for attending today's presentation. You may now disconnect your lines.

Paul Luther:

Thank you, Cole. Good morning, and welcome to the Howmet Aerospace Third Quarter 2022 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 and EPS, meaning adjusted EBITDA, 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 would like to turn the call over to John.

Ken Giacobbe:

Thank you, John. Please move to Slide 5 for an overview of the markets. Third quarter revenue was up 12% year-over-year. The commercial aerospace recovery continued in the third quarter, with commercial aerospace revenue up 23% year-over-year and 7% sequentially, driven by the Engine Products segment and the narrow body recovery. Commercial aerospace has grown for sixth consecutive quarter and stands at 47% of total revenue but continues to be far short of the pre-COVID level, which was 60% of total revenue. Defense Aerospace was down 4% year-over-year, driven by continued customer inventory corrections for the F-35, which was in line with our expectations. Commercial Transportation, which impacts both the Forged Wheels and Fastening Systems segment was up 13% year-over-year driven by higher aluminum prices and higher volumes, partially offset by foreign currency. Finally, the industrial and other markets, which is composed of IGT, oil and gas and general industrial was down 2% year-over-year. Within the industrial and other markets, oil and gas was up 11%, IGT was down 2% and general industrial was down 9% on a year-over-year basis. Now let's move to Slide 6. As usual, we'll start with the P&L and the focus on enhanced profitability. In the third quarter, revenue, EBITDA, EBITDA margin and earnings per share were all in line with guidance. Revenue was up 12% year-over-year, including material pass-through of approximately $70 million. EBITDA was $323 million, and EBITDA margin was a healthy 22.5%. If we exclude the $70 million impact of higher material pass-through, EBITDA margin was 120 basis points higher to 23.7%. Adjusting for material pass-through, the flow-through of incremental revenue in the quarter to EBITDA was strong at 39%. During Q3, we continued the recruitment of headcount by approximately 350 employees primarily in engines. Year-to-date, we have increased headcount by approximately 1,575 employees focused in engines and fasteners. In Q4, we do not expect significant headcount additions. Adjusted earnings per share was $0.36, up 33% year-over-year. For the quarter, the impact of foreign currency was minimal. Moving to the balance sheet. Free cash flow year-to-date was $130 million, including an inventory build of approximately $270 million primarily for the commercial aerospace recovery. Cash on hand was healthy at $454 million after buying back $100 million of common stock and funding the quarterly dividend. The average diluted share count improved to a Q3 exit rate of 419 million shares. Year-to-date, net pension and OPEB liabilities were reduced by approximately $85 million and cash contributions were reduced by approximately 45% or $35 million. Discount rates continue to be favorable and will be remeasured at the end of the year, which should further reduce net pension liabilities. We continue to expect annual cash contributions to be approximately $60 million versus expense of $20 million. Finally, net debt to EBITDA remains at 3x, all bond debt is unsecured and at fixed rates, which will provide stability of our interest rate expense. Our next bond maturity is in November of 2024. Moving to capital allocation. We continue to be balanced in our approach. Capital expenditures continue to be less than depreciation at approximately 65% in the third quarter. Productivity CapEx continues to focus on automation products, projects in the engines and fasteners business to improve yields, enhance quality, reduce outsourcing and mitigate labor risk. We purchased approximately 2.8 million shares of common stock in the quarter from $100 million. Year-to-date, we have repurchased approximately 9.7 million shares of common stock for $335 million with an average acquisition price of $34.60 per share. Share buyback authority from the Board of Directors stands at $1 billion. Lastly, we continue to be confident in free cash flow. The quarterly dividend was doubled to $0.04 per share per quarter with the first higher payment to be made in November of 2022. Now let's move to Slide 7 to cover segment results. Q3 was another solid quarter for engines. Year-over-year revenue was 14% higher in the third quarter with commercial aerospace up 30%, driven by the narrow body recovery. Defense Aerospace was down 5%, IGT was down 2% and oil and gas was up 11%. EBITDA increased 23% year-over-year and margin improved 200 basis points to 27.2%, despite adding approximately 260 employees in the third quarter. Year-to-date net headcount additions for the engine business was approximately 1,040 employees. While the headcount additions are preparing us for the future commercial aerospace growth, it does unfavorably impact near-term results due to the time and cost required to train new employees, which could take several months depending on the position. Now let's move to Slide 8. Fasting Systems year-over-year revenue was 15% higher in the third quarter. Commercial aerospace was 24% higher driven by the narrow-body recovery, somewhat offset by continued production declines for the Boeing 787. Defense Aerospace was up 16%. Year-over-year segment EBITDA increased 8% despite the addition of employees to support future growth. Year-to-date headcount additions for fasteners was approximately 410 employees. Sequentially, EBITDA margin improved 180 basis points to 22%. Now let's move to Slide 9. Engineered Structures year-over-year revenue was down 3% in the quarter. Defense Aerospace was down 14% year-over-year, driven by customer inventory corrections for the F-35 as expected. Commercial aerospace was 5% higher as the narrow-body recovery offset the impact of production declines for the Boeing 787. Segment EBITDA increased 8% year-over-year. EBITDA margin improved 140 basis points to 14.5% despite the inventory burn down of the F-35, continued 0 to low build on the 787 and inflationary cost pressures. Structures Q3 2022 EBITDA margin of 14.5% was greater than the 2019 annual rate of 14.2% and when 2019 revenues were over $1.25 billion. Finally, let's move to Slide 10. As expected, Portsville's year-over-year revenue was 15% higher in the third quarter. The $35 million increase in revenue year-over-year was almost entirely driven by higher aluminum prices. Commercial transportation demand remained strong, but volumes continue to be impacted by customer supply chain issues, limiting commercial truck production. Segment EBITDA decreased 11% due to the impact of unfavorable foreign currency, primarily driven by the euro. While the pass-through of the higher aluminum prices did not impact EBITDA dollars, it did unfavorably impact margin by approximately 340 basis points. The impact on EBITDA margin increases to more than 550 basis points if you also include the unfavorable margin impact of passing through higher inflationary costs like the European energy costs and the unfavorable impact of foreign currency. Before turning it back over to John, I will remind you that the impact of foreign currency to Howmet in total is minimal as the Aerospace segments provide a natural foreign currency hedge against the Forged Wheels segment. Lastly, in the appendix, we've updated assumptions, including an improvement in the annual operational tax rate to approximately 23.5%, which translates into a Q4 operational tax rate of approximately 22%. Also, we have updated annual assumptions to reflect improvements in our cash tax rate, net pension liabilities, depreciation and amortization, CapEx and diluted share count. Now let me turn that back over to John.

Operator:

[Operator Instructions] And our first question today will come from Robert Spingarn with Melius Research.

John Plant :

Okay. So First of all, let me agree with you that it is confusing, I think it's confusing for everybody at the moment. But let's start off with the broad picture and then talk about Howmet before any commentary on a wider basis. So I think the big picture is commercial aerospace continues to grind higher. Everybody is trying to do the right things. And airlines are improving. I think aerospace manufacturers are improving their throughputs and the engine manufacturer supporting those aircraft builds are also doing their part of the whole thing. I guess not everything is going perfectly, as we've seen from some of the numbers and some of the disconnects apparent from commentary on calls last week. Let me deal with Howmet first and say, we've been really well prepared through the last year and beyond. As you know, we started recruitment of labor in the second quarter of last year and hired almost 1,000 people last year. Through year-to-date, I think we're approaching now something like 1,500 people through the end of the third quarter. And then I think the most salient factor for ourselves was that during September is that compared to the schedules and delivery requirements that we thought we would see for both September and the fourth quarter, we saw a complete rebasing of those requirements where we've had arrears which should be built up according to, I think, the anticipated engine mills, in particular. And as we know, the anticipated engine builds were not as high as -- the actual is not as high as anticipated. And you saw Airbus commenting on the fact they had lied us in the like 70 at one point, then it was down to maybe 10 or 20. So while I'll say deliveries of engines did improve, I don't think anybody believes that the quantity of engines that was originally envisaged to be built were built. In terms of the splits of whatever was delivered on LEAP between 1A, 1B, 1C, we don't have any visibility into that. I mean we do note that from the call last week from GE Aviation, which provides a lot of those engines is that they were significantly up with an improved deliveries, I think, in the near 350 engines. How many went to Airbus, how many went to Boeing, COMAC. And indeed, how many of those engines, which we also -- you sometimes forget they go to airlines or spares and also aircraft leasing companies or spares, I don't really know, it's difficult to judge. Certainly, you feel as though there was enough engines in the whole system, but maybe they were out of parts of the -- difficult to really know. Nevertheless, the big picture is those actual builds both by CFM engines and LEAP engines were less than a bit envisaged. And I think we've heard in the past about restrictions around structural castings in particular, probably not confined just to that. And therefore, when customers looked at where they were and what they expected to finish the year with and also where they had received from ourselves, for example, all of the airfoils they required and more maybe is to balance their own inventories for the end of the year is that they were cut back. And so despite still sequential growth quarter-on-quarter that growth is not as high as we had envisaged. So right now, we've drawn our labor recruitment down significantly. So we'll be -- probably recruit selective in a few areas in the fourth quarter. Essentially, the rest will go to 0. And because we don't want to certainly stop production, we're going to carry about $70 million of additional inventory, which will hit our cash balance at the end of the year. And as we need that that inventory to carry us through into the first quarter where we do expect those requirements will be placed back on us significantly, engine build will improve, and hopefully, aircraft production will improve. And so we're trying to smooth ourselves out. So we'll utilize all of the labor that we've recruited, carry on with production, put it into inventory. So we have a smooth startup into the start of next year. So we keep all of our customers happy. But it does enable us to stop ourselves hiring a lot of people, and so we will eliminate some of that cost, albeit, as you can imagine, we were holding that cost in the month of September than we are into the balance of the year.So that's the big picture. In terms of exactly what the rate of production of the 737 is and the A320, I don't think we are best placed to answer and I believe that most people are heading off on the sell side to Seattle this week so you really get a clearer picture during those visits. So I don't know, whether that covers it out for you, rob, but just trying to give you a sweep through the whole situation.

John Plant :

We have a revised skyline for next year. We don't have much for this year. I think it's going to be de minimis of any production on the 87. My guess is it's probably just about month that we've seen previously. I don't really know. It's pretty opaque to us. And I'm assuming there's inventory in the system for that. We do have skylines showing clear improvements on the 787 build during the course of next year. And I think from memory, it's probably the back end of the year at around about 5 aircraft per month. And I do have confidence that there is a market requirement for that because when I look at the return of international demand for travel, just look at, I'll say, the cutbacks that were made in widebody during the last few years, then if anything, my guess is that there's going to be a higher demand on wide-body, which will support a rate for both Airbus and for Boeing for their A350s and 787s above that rate. So I'm actually tending towards the optimistic side of fundamental demand. And then the only question that we have is, in terms of our own guidance is how conservative should we be because we do hear this noise that you referred to about exactly how many were made and where that parts are and what are the constraints. And so that also causes us to be just a little bit cautious given the factors that we've encountered in the last month or 2 enrolling into the end of the year, albeit against we see that spiking up in the first quarter.

Gautam Khanna:

I wanted to ask if you could talk about share gain opportunity. So anything incremental on titanium? And are any of these pinch points on engines accruing to your benefit where customers are engaging on castings reported. If you could speak to that?

Operator:

And our next question will come from David Strauss with Barclays.

John Plant :

Yes. We've been building at rates. So we've taken the requirements from our engine customers and the airframe manufacturers, and we've just been more or less in line with that, I'll say, 50-plus for A320s as an example. Probably with some attempted inventory for the infill rate build increases next year. And in the case of Boeing, we were fully planning on the 31 a month and had anticipated that those according to, let's say, verbal communication, not any scheduled commitments, originally, were planned to rise during the first quarter of 2023. As we all know that those production levels probably have not been achieved and the airframe manufacturers and certainly on the engine side, and so where we've been in line at or even, I would say, meeting for rate increases next year is that, that inventory is being taken back out of the system to bring it down to what actually has been produced and the requirements seen for, in particular, the engine manufacturers towards their own year-end and the inventory that they're carrying. So there’s point in carrying say, additional air flows when you have some of the other parts to go with the engine. It's pretty -- simple, David.

John Plant :

Not from our side. We think our tight quantity in structural castings have been or are being addressed and so that's in good shape. We are going to pull back on our hiring, as I said, again, selectively. So we will continue, for example, hiring and training in our structural casting plants. But at the moment, if you take our airfoils, we will just stay with the labor we had at the end of the third quarter and pause it to balance our own requirements. So far, we've been able to increase our quantity of people, and it hasn't really presented a great impediment to us. Sometimes the turnover of those people has been higher than we'd like, but the quantity of labor has not been an issue for us so far.

Myles Walton :

Looking sequentially into 4Q, it looks like you're looking for a $4 million EBITDA growth on the $40 million of sales growth. Just curious, is that lower incremental driven by something like FX or mix, it sounds like labor is probably a help and raw material pass-through might be a push?

Myles Walton :

Yes, sure thing, John. So if I just look sequentially from 3Q to 4Q, you've got pretty minimal EBITDA growth, about $4 million on the $40 million sales growth. I'm just curious the holding you back if labor and raw materials and pass-through aren't the issue?

Myles Walton :

Okay. Fair enough. And then in that 10% growth sales in '23, do you have a flavor for what we should think about from incremental margins there?

Operator:

Our next question will come from Seth Seifman with JPMorgan.

John Plant :

Okay. So in terms of the defense business and oil and gas and the industrial gas turbine, I think all of those will see at this point, a low single-digit growth. And my guess is that maybe oil and gas will be higher, maybe defense below, but still expecting some growth in those. So if you plan for that and lay it across with the commercial aero, then the 1 segment where I think we're going to see a revenue decrease will be in the forged wheel business for the Commercial Transportation segment. So let me try to explain what we see there. I mean the first thing is, of course, the headline number is affected by the price of aluminium, because as aluminum has fallen during the course of this year from its peak of $4,500 a ton, including Midwest premiums or Rotterdam premiums is that it's more like probably $2,800 now. And as we rebalance the pricing because we will pass that back, then you get a couple of effects of those new prices going into effect on the 1st of January is that there is a revenue decline, which doesn't affect the EBITDA dollars, and therefore, there is a margin rate improvement from that. At the same time, let me think about what do we expect by way of volumes? We do note that the order intake, for example, for Class 8 truck was the highest it's ever been in a September, I think, 53,000 plus trucks, which is really, I'd say, great number, probably inflated by the fact that many say, the truck manufacturers haven't been willing to take orders for next year until they were clearer regarding the input prices of their materials. So it's difficult to separate out what's really going on, except that the fourth quarter should see solid production improved compared to we've been, and I think that will continue in the first and second quarters next year. And my caution at the moment is in the second half of next year when I think we'll see the effect of the higher interest rates bear on the economies, in particular in Europe, which is overlaid with energy prices. And so I think there will be a dampening of demand. And it's probably around more the distribution and the trader segment of the business. And so my anticipation is that second half of next year will be a tougher comparison to the second half of this year. And I mean, obviously, it's only speculative at this stage because I want to be cautious about it. But I think the correct planning assumption is solid performance through the next 3 quarters then anticipate a bit of a drawdown depending on how the economy is really doing. And does it go into a recession or not and then try to make the assessment. So the best I can do at this stage is that when I look at it, my guesstimate has been something like on a volume basis that we could be, let's say, I just -- can you give an example of the thought at the moment is on the year, maybe 300, 000 or 400,000 wheels down in volume. We will probably pull half of that back by additional penetration of aluminum versus steel, and I'll say another I'll say, programs, we have to increase our share. But net, I'm thinking that a little bit of volume caution in the second half plus with the effect of the aluminum reduction, we'll produce a drawdown of revenue albeit the only effect on EBITDA will be that net drawdown of volume should it occur. And I don't think there's a reason to be optimistic and say, all is great, and it will continue. I don't think it's going to -- we are going to be affected by the emissions legislation for '24 because there's an inability to build ahead. And so it's all down to that second half assumption of next year or so, which is just to guess on commercial wheels at this stage, nothing -- nobody knows. But the way I put it out there, it's going to be good. If you -- so if you put that wheeling as a down at the other single digit in commercial, I think you can get to the guidance range of that 8% to 12%.

Kristine Liwag :

John, you've been clear that you now have the labor in place to ramp up next year. So when you think about their training, you said 6 months or so, how much have they pressured margins to have labor this early. And how should we think about incremental margins next year when we actually get the benefit of volume coming through?

Kristine Liwag :

And maybe following up on the inventory build, the castings and the shortage in castings and forgings have been well publicized and the OEMs have been very clear that the strong demand for aircraft out there. I guess I would have thought that we'd be in an environment of full steam ahead for demand for your product. What's causing the uncertainty? And also with the $80 million inventory headwind that you highlighted in this quarter, when does this unwind? And where could peak balance be?

Operator:

Our next question will come from Elizabeth Grenfell with Bank of America.

John Plant :

Okay. No, we treat every customer, their requirements with equal respect. So there's no prioritization, I don't think that would be appropriate. You're either a customer and we make a commitment and when we do that, we deliver to you to the very best of our abilities.

John Plant :

No, I don't think so. I think we should, again, respect that there's a requirement our customers have placed on us. I don't think that we have a policy nor a plan nor even the ability. So if you think about our shipping docs, they operate to the MRP schedule, the customer demand and they ship. They don't say I'll stick a few extra boxes of parts to some because they're more profitable. The people who do that, they don't have that information. So no, we supply to that which we've committed and with no instruction to say, please send to this customer because they're more profitable now.

Noah Poponak:

John, could you maybe just give us a broader update on where your market share gain efforts stand? It seems like that's maybe happening in part related to these supply chain challenges across the engine supply chain and then also titanium sourcing. And I know you've talked about sort of being in different RFP processes and trying to write long-term contracts? And I'm curious how that's going.

Noah Poponak:

Okay. And last quarter, I think you specified adding $20 million of revenue to the fourth quarter fairly specifically related to titanium sourcing. Any update on that specifically and how that looks beyond this year?

Operator:

And our next question will come from Matt Akers with Wells Fargo.

John Plant :

Yes. So our assumption is that Lockheed do produce somewhere in that $1.45 to $1.55 range this year. And if anything, probably let's say, just take the $150 million or a little bit less, is probably the -- our assumption, which will be an increase on the production in last year. We do note that the order intake for F-35 seems particularly strong. And so that 150 plus rates should continue, we think, probably for the rest of the decade. And so that's all good news. For us specifically, because for the last 2 years of 2020 and 2021, we did produce at a higher rate for the customer sort of schedule requirements anticipating as they did, I think they would make closer to the 150 aircraft. And as we know they produced probably in that 130 to 140 range and therefore, they carry the inventory into this year, which we said we would correct for the most part, during 2022. So in particular, for the airframe and bulkheads part of the aircraft is that we've seen that downdraft, and we've commented on that affecting our structures business, and Ken called it out again in Q3 as the major factor on the impact on defense sales that continued the inventory correction. Our view is that, that will continue in Q4 and into Q1 next year, and we're hopeful that by the second half of next year, the latest is that we are in balance. And so our production will be coming up on the F-35 to match rate, which will obviously be a significant improvement for us. And if that's combined with the increase in rates for the 787 then we should see some very positive demand requirements for our structures business in particular. And that's also part of my expectation within that range of guidance given to you for 2023?

John Plant :

Yes. I'll pass that across to Ken to give you a little bit more color on that. But essentially, as interest rates have moved up, then that provides a downdraft on the liability side significance. Asset returns this year are lighter and lower than last year, and I don't have the exact numbers to hand, that will be a negative for that situation. And then when you put 2 together, is that along with the cash contributions we have made, we have a net liability reduction. And my anticipation is that we'll show further reduction of liability in the fourth quarter to make a meaningful change in the reduction of those legacy liabilities. And I think on a net basis, we're probably down to I mean, I guess, around $700 million-ish plus or minus. So it's a pretty diminish number for the company now, very different than it was 2 or 3 years ago. But let me pass you across to Ken to comment specifically on the expected liabilities and assets.

John Plant :

Maybe I'll just add to give you a bit of a broader perspective. So when I think about the environment we're in where interest rates are going up rapidly, and it's possible this week we'll see a further 75 basis points increase in federal funds rate. I mean that generally is bad news for most companies. In the case of ourselves on a net basis is that if I look at our debt then essentially all of our debt is fixed rate. And so it only can impact the refinancing of an exchange of bonds depending on what we've paid down of those bonds as well. So I'm not anticipating that our interest rate costs go up at all in the next 2 or 3 years. So that's good. Our pension liabilities will go down, and that's good. And when I think about the markets we serve, I think we've already had our recession in the time of 2020, 2021 and the effects of COVID and then overlay that with the specific issues that Boeing had regarding production of C-737 and 787. And so we should be set for -- maybe uniquely as a sector set for growth for the next 2 or 3 years. And that growth should come through and our balance sheet should improve as a result of the interest rate movement. So it's a pretty unique and good set of circumstances. That's my optimism coming through.

Paul Luther:

Thank you, Ian. Good morning, and welcome to the Howmet Aerospace Second Quarter 2022 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 addition, we have 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 would like to turn the call over to John.

Kenneth Giacobbe:

Thank you, John. Please move to Slide 5 for an overview of the markets. Second quarter revenue was up 17% year-over-year. The commercial aerospace recovery continued in the second quarter, with commercial aerospace revenue up 34% year-over-year and 7% sequentially, driven by the Engine Products segments and the narrow-body recovery. Commercial aerospace 45% of total revenue, and although an improvement from 2021, we continue to be far short of the pre-COVID level, which was 60% of total revenue. Defense aerospace was essentially flat year-over-year as well as sequentially, driven by continued customer inventory corrections for the F-35. Commercial transportation, which impacts both Forged Wheels and Fastening Systems segment, was up 19% year-over-year and 11% sequentially, driven by higher aluminum prices and higher volumes. Finally, the industrial and other markets, which is composed of IGT, oil and gas and general industrial, was down 4% year-over-year. Going deeper into this market, IGT was essentially flat, oil and gas was up 24% and general industrial was down 20% on a year-over-year basis. Now let's move to Slide 6. So let's start with the P&L with a focus on enhanced profitability. In the second quarter, revenue and adjusted EBITDA were at the high end of guidance as both metrics were up 17% year-over-year. Adjusted EBITDA was $317 million. Adjusted EBITDA margin was also at the high end of guidance as it increased 10 basis points sequentially to 22.8%. Excluding the $60 million year-over-year revenue impact of higher material pass-through, EBITDA margin was 100 basis points higher at 23.8%. Adjusting for material pass-through, the flow of the incremental revenue to EBITDA was in-line with expectations at approximately 33%. We have been able to maintain our strong margins despite the impact of higher material pass-through and inflation as well as headcount additions to support future growth. During the second quarter, we continued the recruitment of headcount by approximately 740 employees, including net additions of approximately 455 in engines and 245 in fasteners as preparations are made for continued growth in the second half, adding to the growth already experienced in Q2. Year-to-date, we have increased headcount by more than 1,200 employees, and that has been focused in engines and in fasteners. Adjusted earnings per share exceeded the high end of the guidance at $0.35 per share, up 59% year-over-year. For the quarter, the impact of foreign currency on earnings was minimal. Moving to the balance sheet. Free cash flow in the second quarter was a positive 114 million, which excluded 44 million of proceeds generated from the sale and associated leaseback of our corporate headquarters in Pittsburgh. Cash on hand increased to 538 million after buying back 60 million of common stock, repurchasing 60 million of our 2024 bonds and funding the quarterly dividend. The average diluted share count improved to a Q2 exit rate of 421 million shares. Net pension and OPEB liabilities were reduced by approximately $60 million in the first half of 2022, and cash contributions were reduced by approximately 65% to 13 million on a year-over-year basis. Discount rates continue to be favorable, and we will remeasure at the end of the year, which should further reduce the net pension liabilities. Annual cash contributions are estimated to be approximately 60 million versus expense of 20 million. Finally, net debt to EBITDA improved to three times. As John mentioned earlier, we expect net debt to EBITDA to accelerate by year-end and move towards 2.5 times. Moving to capital allocation. We continue to be balanced in our approach. Capital expenditures continued to be less than depreciation at approximately 67% in the second quarter. Productivity CapEx continues to be a focus on automation in both the engines and the fasteners business to improve yields, enhance quality, reduce outsourcing and mitigate labor risk. We purchased approximately 1.8 million shares of common stock in the quarter for 60 million. In the first half of 2022, we repurchased approximately 6.9 million shares of common stock for 235 million. I would also note that we purchased 0.9 million shares of common stock in July, which increases the July year-to-date repurchases to $265 million for 7.8 million shares with an average acquisition price of $33.76 per share. Board authorization for share repurchases is currently $1,082,000,000. Moving to debt. We repurchased 60 million of our 2024 bonds in the quarter with cash on hand, and this will reduce our annualized interest cost by approximately 3 million. Lastly, we continue to be confident in free cash flow and paid a quarterly dividend of $0.02 per share of common stock. Now let's move to Slide 7 to cover the segments. Q2 was another solid quarter for the Engine Products segment. Year-over-year revenue was 20% higher in the second quarter, with commercial aerospace up 39%, driven by the narrow-body recovery. Both IGT and defense aerospace were essentially flat year-over-year while oil and gas was up 24%. Adjusted EBITDA increased 38% year-over-year and margin improved 360 basis points to a record 27.5%, despite adding approximately 455 employees in the second quarter. Year-to-date, net headcount additions for Engines was approximately 780 employees. Please move to Slide 8. Fastening System’s year-over-year revenue was 6% higher in the second quarter. Commercial aerospace was 20% higher, driven by the narrow-body recovery but somewhat offset by continued production declines for the Boeing 787. Industrial was down 26%, driven by a strong Q2 last year. We expect growth in industrial in the second half. Segment adjusted EBITDA decreased 11% in the quarter and was impacted by inflationary cost and the addition of approximately 245 employees to support future growth. Year-to-date, headcount additions for Fasteners was approximately 380 employees. Now let's move to Slide 9. Engineered Structures' year-over-year revenue was 16% higher in the second quarter. Commercial aerospace was 37% higher as the narrow-body recovery more than offset the impact of production declines for the Boeing 787. Segment adjusted EBITDA increased 8% year-over-year despite the inventory burn-down of the F-35 and continued zero to low builds on the Boeing 787 and inflationary cost pressures. The Structures team delivered a Q2 EBITDA margin of 14.1%. I would note that the Q2 adjusted EBITDA margin was equal to the 2019 annual margin despite revenue being down approximately 40% using this quarter's annualized revenue. This was solid performance by the Structures team. Finally, let's move to Slide 10. As expected, Forged Wheels' year-over-year revenue was 22% higher in the second quarter. The $50 million increase in revenue year-over-year was driven by higher aluminum prices of 36 million and volume increases of 14 million or 7%. Commercial transportation demand remains strong but volumes continue to be impacted by customer supply chain issues, limiting commercial truck production. Segment adjusted EBITDA increased 7% despite the impact of unfavorable foreign currency, driven primarily by the Europe. While the pass-through of higher aluminum prices did not impact adjusted EBITDA dollars, it did unfavorably impact EBITDA margins by approximately 400 basis points. Before I turn it back to John to discuss guidance, you will note that we called out unfavorable foreign currency in the Wheels segment as a good portion of that segment's revenue has production cost and revenue in local currency. For Howmet in total, the aerospace segments provide a natural foreign currency hedge, while the aerospace segments also have a portion of their production costs in local currency, the majority of the revenue is in U.S. dollars. For the quarter, Howmet's overall foreign currency earnings impact was less than $1 million. Now let me turn it back over to John.

Operator:

[Operator Instructions] Our first question comes from Kristine Liwag of Morgan Stanley. Please go ahead.

John Plant:

Well, certainly, it is a tough balance at the moment. And so far, we have tried to invest in adding people and training to get ready for the production increases. And as you have seen from the last quarter, continued to do so in preparing for the second half. But as I noted in my comments, the backlog is pretty choppy. We saw in May, the 737 production halted for maybe 10-days or so, then maybe 20 Airbuses cut from the second half, and now next year, maybe a delay in the ramp of the A320 to, as you say, 2024. So we find ourselves constantly having to readdress the, I will say, the slope of the recovery, albeit you have seen we have been pretty consistent in how we have been able to deliver against that backlog and hope to do so in the future. I still think it is important to consider the fundamental premise of where we are, which is we are in a period of recovery, particularly for commercial aerospace. And defense is solid and hopefully improving for us. And then we have seen the recent buoyancy in the oil and gas sector plus the anticipated recovery, although I did say it, more muted in commercial trucks. So what we are continually doing is balancing between how we see the addition of, in particular, headcount. It is not really affecting our fundamental capital expenditure plans at this point, given we have capacity, latent capacity from previous investments. But we adjust and trying not to get too far ahead but trying to be in-line for our requirements to customers. When I think about one of the fundamental questions in the sector, which is the availability of castings and forgings, which you didn't mention but implied in your question was that point. Again, if you think back to the investments we made in two new engine plants in the 2019 period, then that has largely solved or if not completely solved the issue, which was very significant and present in 2017, 2018 and 2019, which was the capacity available for airfoil castings. And I think one thing we have heard and increasingly heard is that the focus is more on availability of structural castings rather than turbine airfoil castings. And so we have been able to step up to that. At the same time, as I have tried to say on previous calls, we have tens of thousands of parts. Inevitably, we are tight on a few and that would apply to also a few structural casting parts. But nothing that we are aware of that is fundamentally holding engine production or delivery of engines to an airframe manufacturer. So we are trying to balance, be ahead of it, again investing in people, equipment, training to be ready. But I recognize that we do keep readdressing that labor intake as we see our customers' plans do change and then the anticipated slope of recovery. But importantly, we have broadened it out one stage further is that we are clear that 2023 is going to be another growth year for Howmet and we look forward to that. And I will give more, I will say, guide on that towards the end of the year, if not in the early next year. But essentially, what we are playing for is the angle of the increase, not the fundamental principle. Hope that covers it, Kristine.

John Plant:

Thank you.

Noah Poponak:

Hi good morning everyone. It looks like the updated guidance for the year implies that the EBITDA margins would be relatively flat in the back half versus the first, and I think the business segment margin actually down a little, the way the corporate and D&A shake out. And that would be on higher revenue and I assume you are passing through cost while pricing, you keep. So maybe just if you could walk me through why that would be the case.

Kenneth Giacobbe:

Yes. Noah, I would add to that as well. We did bring down the 787 guide as well. That is a very profitable program for us. Now we did replace with some titanium. That is sort of lower margin so you have got a bit of a mixed component there. But also, I just wanted to clarify as well. So we said for Q3 EBITDA, 326 million. It is minus 6 million on the down to 320 million, up 5 million for the high side in Q3. That is all on Slide 11. And then the earnings per share, I just want to clarify, we have it on the slide there. $1.41 is the mid or down $0.03 on the low and up $0.01 on the high, but just want to clarify.

John Plant:

We added 20 million to revenue for the fourth quarter. I chose not to provide a guide for 2023 at this point because we are still in the process of order acquisition. And also even acquisition and completion of contracts with customers, then the next part is to balance out the inventory against new titanium supplies as that is on stream. So again, we are trying to get a more accurate picture of what inventory is held at customers as they bank security stocks from, say, VSMPO. And so we have got to assess that. And when we provide you with a 2023 number. And if I gave you one today, I wouldn't feel confident in doing so.

John Plant:

No. I mean, the important thing is the fact that we are gaining orders. We are well in the game. And clearly, it will be more than that in 2023, but just want to get all of that sorted before we - and clearly, it is more of a discussion to for the end of the year, early next year.

John Plant:

Thank you.

Gautam Khanna:

Yes. I have a multipart question, trying to stick with the one. But your comment on -.

Gautam Khanna:

Yes, I know. It is kind of unfair. But the question is on share gain broadly and the opportunity. So on the forging side, you guys don't seem to be a pinch point. Are you seeing emergent demand there? And did that benefit the quarter or just bookings, given lead times? And secondly, on the titanium share opportunity, the 20 million you referenced, is that just one OEM, is it across several and have you seen any change in urgency for Airbus and Safran to source, given that you sanction was taken off of the VSMPO?

Gautam Khanna:

Yes, I appreciate it. Thanks.

Operator:

Our next question comes from Robert Stallard of Vertical Research Partners. Please go ahead.

John Plant:

We would certainly like that to occur. I mean, you have seen some small improvements in metals and the most notable of which has been aluminum. So as that price has come down, say, peaked at about $4,500 a ton, including Midwest premiums in the U.S. and has probably fallen closer to, let's say, 3,100, 3,150 at the moment. So a significant move down, albeit still significantly above where it started at less than $2,000 a ton 18-months ago. Assuming it stays there and of course, none of us know exactly what is going to happen, but if it stays there, then certainly, when our price resets occur on the first of January, then if it stays where it is, then you will see, for example, our Wheels business gain margin expansion as those prices are reset. And if it comes down across the board elsewhere, where again, it is fairly small at this point, then there would be some other tailwinds to margin as well. But we haven't really called those out on the way up. And so I doubt I will call them on the way down. The most significant has been the aluminum move which is impacted, as Ken talked about, in our Wheels business by over 400 basis points from where we started. And clearly, to go down the other side of that would be very welcome. And so that would impact Howmet overall and you begin to see margin benefit if metals stay where they are or continue to further improve, which we obviously we are hoping for but we don't know if it is a future event.

John Plant:

Thank you.