Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace First Quarter 2021 Results. My name is Shelby, and I'll be your operator for today. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.

Thank you, Shelby. Good morning, and welcome to the Howmet Aerospace First Quarter 2021 Results Conference Call. I'm joined by John Plant, Executive Chairman and Co-Chief Executive Officer; Tolga Oal, Co-Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John, Tolga 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've 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'd like to turn the call over to John.

Thanks, PT. Good morning, and welcome to the call. Similar to last quarter, I will give an overview of Howmet's first quarter performance, then pass to Tolga, who will talk to our markets, and then Ken will provide further financial detail. I'll return to the call to talk about guidance for the second quarter and the full year 2021. Please move to Slide 4. Let me start with some commentary on the first quarter. Revenue was $1.2 billion and in line with expectations while EBITDA, EBITDA margin and earnings per share exceeded expectations. Adjusted EBITDA was $275 million, and adjusted EBITDA margin was a healthy 22.7%, similar to the fourth quarter of 2020. Earnings per share, excluding special items, was $0.22, which was ahead of expectations and ahead of Q4 2020. Historically, Q1 has been a significant cash outflow for the company. However, with improved margins and enhanced working capital control, the outcome has noticeably improved. This will be followed by cash generation in quarters 2, 3 and 4. Lastly, in the first quarter, we focused on deleveraging, completing the early redemption of the 2021 notes at par for approximately $360 million of cash using cash on hand. The resulting quarter-end cash balance was $1.24 billion. Moreover, on May 3, we completed the early redemption of the $476 million of notes due in 2022 for approximately $500 million, inclusive of the accrued interest and fees. Both transactions were completed with cash on hand. Year-to-date, we have reduced debt by approximately $840 million, which reduces the 2021 interest expense by $38 million and $47 million on a run rate basis. In addition, in 2022, there will be a carryover interest savings of $10 million. Now let's move to markets and performance on Slide 5. Q1 revenue was the same as the Q2 to Q4 2020 average and in line with our expectations. On a year-over-year basis, commercial aerospace was down 52%, driven by the lingering effects of customer inventory reductions and fundamentally lower builds, starting with the Boeing MAX. Commercial aerospace continues to represent 40% of the total revenue of the company, compared to pre-COVID levels of 60%. The commercial aerospace decline is partially offset by continued strength in our other markets. Defense aerospace was up 12% year-over-year, driven by the Joint Strike Fighter new builds and spares. The industrial gas turbine business continues to grow and was up 35% year-over-year, also driven by new builds and spares. Lastly, the commercial transportation business was up 15% year-over-year, despite customer supply chain constraints. Although truck demand is very strong, our customers managed through supply chain issues with several commodities, which are in short supply, including semiconductors, tires, and glass, to name just a few. We are working closely with our customers to meet demand, which is showing some interruptions. At the bottom of the slide, you can see the progress on price, cost reduction and cash management. Price increases are up year-over-year and continue to be in line with expectations. Structural cost reductions are also in line with expectations, with a $61 million year-over-year benefit. Segment decremental margins continue to be good at 27%, driven by price, variable cost flexing and fixed cost management. CapEx was $55 million in the quarter and continues to be less than depreciation and amortization, resulting in a net source of cash. Adjusted EBITDA margin for the quarter was 22.7% and consistent with Q4 2020 on approximately $30 million of less revenue. Q1 revenue of $1.2 billion was consistent with the Q2 to Q4 2020 average. You can see the benefit of our actions since the start of the pandemic with a 300 basis point EBITDA margin expansion while revenue was approximately $45 million less than the same period, so good year-on-year performance. Now let me turn it over to Tolga to give an overview of the markets.

Thank you, John. Please move to Slide 7. Now to year-over-year revenue performance. Q1 revenue was down 26%, driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter. Commercial aerospace was down 52% year-over-year, in line with our projections, as we continue to see customer inventory corrections as expected. Defense aerospace continues to grow and was up 12% in Q1 as we are on a diverse set of programs, with the Joint Strike Fighter being approximately 40% of the total defense business. Commercial transportation, which impacts both the Forged Wheels and Fastening Systems segments, was up 15% year-over-year with a very strong market demand. Finally, the industrial and other markets, which consist of IGT, oil and gas and general industrial, was up 1%. IGT, which makes up approximately 45% of this market, continues to be strong and was up a healthy 35% year-over-year. I will now turn it over to Ken to give a more detailed view of the financials.

Thank you, Tolga, and good morning, everyone. Now let's move to Slide 8 for the segment results. As expected, Engine Products year-over-year revenue was down 32% in the first quarter. Commercial aerospace was down 55%, driven by customer inventory corrections and reduced demand for spares. Commercial aerospace was partially offset by a year-over-year increase of 18% in defense aerospace and a 35% increase in IGT. IGT continues to be strong, and we will continue to make investments in this business as demand has been increasing for cleaner energy. Decremental margins for engines were 26% for the quarter as segment operating profit margin was approximately 19%. In the appendix of the presentation, we have provided a schedule which shows each segment's decremental margins for Q3 2020 through Q1 2021. Now let's move to Fastening Systems on Slide 9. Also as expected, Fastening Systems year-over-year revenue was down 29% in the first quarter. Commercial aerospace was down 42%. Like the engine segment, we continue to experience inventory corrections in the commercial aerospace market. The industrial and commercial transportation markets were down 2% year-over-year but up 19% sequentially. Decremental margins for Fastening Systems were 45% for the first quarter as furloughed workers returned to work. Please move to Slide 10 to review Engineered Structures. For Engineered Structures, year-over-year revenue was down 36% in the first quarter. Commercial aerospace was down 57%, driven by customer inventory corrections and production declines for the 787 and 737 MAX. Commercial aerospace was partially offset by a 10% year-over-year increase in defense aerospace. Decremental margins for Engineered Structures were 18% for the quarter, compared to 24% in Q4. Lastly, please move to Slide 11 for Forged Wheels. Forged Wheels revenue increased 19% year-over-year despite customer supply chain constraints. Forged Wheels revenue grew faster than the overall market, in part due to Howmet's new innovative 39-pound wheel. Segment operating profit margin was another record at almost 31% as year-over-year incremental margins were 56%. The improved margin was driven by continued cost management and maximizing production in low-cost countries. Please move to Slide 12. We continue to focus on improving our capital structure and liquidity. First, we completed 2 early redemptions of our bonds. The first transaction was on January 15. We used cash on hand to complete the early redemption at par of the 2021 bonds due in April 2021. By paying down the bonds 3 months early at no additional cost, we saved $5 million of interest. The second transaction was earlier this week on May 3. We used cash on hand to complete the early redemption of the bonds that are due in February 2022. The bonds were redeemed at a cost of approximately $500 million. As a result, the interest costs have been reduced by approximately $47 million year-over-year. Moreover, as John has mentioned, in 2022, we'll get an incremental $10 million of carryover interest savings. Gross debt stands at $4.2 billion. All debt is unsecured, and the next maturity is in 2024. Finally, our $1 billion revolver remains undrawn. Before I turn it back to John to discuss the 2021 guidance, I would point out that there's a slide in the appendix that covers special items in the quarter. Special items for the quarter were a charge of approximately $16 million after tax, and the charge was primarily related to 3 items: first, we had fire costs at 2 of our plants of $7 million; second, we had an impairment of assets associated with an agreement to sell a small manufacturing business in France of $4 million; and third, we had a pension settlement charge in the U.S. of $3 million. Finally, we continue to work on reducing legacy liabilities and improving asset returns for the pension plan. I would highlight 2 significant items: first, we had announced a planned administration change of certain prescription drug benefits that is expected to reduce cost and reduce our OPEB liability by approximately 20% or $39 million; second, we are benefiting from pension asset investment returns of over 13% that we realized in 2020. The combination of the asset returns and the liability reduction have decreased annual pension and OPEB expense by 37% or $13 million annually. So now let me turn it back over to John.

Thank you, Ken. Let me move to Slide 13 for the Q2 and annual guidance. The good news is that we're progressing towards the recovery of the commercial aerospace market, which will significantly aid profitability and support growth in the defense aerospace, IGT, and commercial transportation sectors. We are seeing positive indicators, including increased flight inquiries, bookings for flights, hotels, and car rentals, along with rising TSA numbers and flight takeoffs, especially in the U.S. and China. Europe is still somewhat subdued due to the pandemic and slower vaccine rollout. This trend should begin to benefit airlines in terms of aircraft production, particularly for narrow-body aircraft, while demand for wide-body aircraft might not return until mid-2022 or even 2023. We anticipate that by the end of the second quarter, we’ll reach a turning point that will initiate production increases for Howmet in the latter half of the year, though the exact timing is still to be confirmed. We plan to bring back from furlough or hire several hundred workers in the next two quarters to prepare for this demand, similar to what we accomplished in the third quarter of 2020 for the commercial wheels business. I expect the associated costs, along with the expenses related to restarting idle plants and equipment, will keep EBITDA margins around 22% until we achieve further stability. We're also aware of the impact on the commercial transportation market due to parts shortages, particularly semiconductors, which is affecting shifts and production in the second quarter. As mentioned earlier, our focus has been on cash generation. Instead of the usual substantial outflow in Q1, which typically would need to be compensated for later, the first quarter was nearly breakeven, and we expect subsequent quarters to generate cash. Specifically, for Q2, we anticipate sales around $1.2 billion, with a variance of $30 million; EBITDA of $265 million, with a margin of 22.1% and earnings per share of $0.20, each with minor fluctuations. For the full year, we expect sales of $5.1 billion, where the EBITDA baseline will increase by $50 million to $1.15 billion, with the margin increasing to 22.5%. Earnings per share is projected to rise to $0.95, a significant uptick from earlier guidance, with our cash flow baseline expected to be $425 million. In the second half, we forecast revenue to rise by 12% for the entire company, fueled by growth in commercial aerospace, defense, and IGT, with price increases surpassing 2020 levels. Expected cost reduction carryover is around $100 million, alongside pension and OPEB contributions of $160 million. We will continue to assess how the American Rescue Plan Act influences pension contributions later this year. Capital expenditures are projected to be between $200 million and $220 million, compared to depreciation and amortization of $270 million, with adjusted free cash flow conversion anticipated to be near 100% of net income. We plan to reinstate the quarterly dividend of $0.02 per share in Q3 2021, pending final Board approval. Now, please turn to Slide 14. To summarize, Q1 has been a positive start to the year, and the company's liquidity remains strong. The guidance provided has been raised from what we shared in early February, reflecting our robust first-quarter profitability. The redemption of bonds for cash and the reinstatement of the dividend are all aimed at delivering value to our shareholders. More broadly, our attention is now shifting towards revenue recovery starting in the second half of the year, beginning with commercial aerospace, and the growth trajectory for revenues and margins as we conclude 2021 and head into 2022, where we expect further improvements in leading indicators. Thank you, and we will now take your questions.

Our first question comes from Seth Seifman of JPMorgan.

Looking at the different segments and how aerospace has performed, it seems like there are increases expected for the second half. Regarding fasteners, do you have insight into the level of destocking? What we've observed in the first quarter appears to be nearing the bottom. Is this also the case for structures?

Yes. I view the transition in terms of sequence, noting that the end of the second quarter marks a shift from our current holdings and the recent decline in demand, along with the inventory adjustments needed for our customers. We already see that commercial transportation is performing well, though it is affected by supply shortages. The significant growth in commercial aerospace is expected by the end of the second quarter, primarily driven by the engines business, followed by structures, while fasteners may lag behind by about another quarter. For the year, I anticipate that commercial aerospace will show a year-on-year increase of 15% to 20% in the third quarter compared to the second. The second quarter will reflect a smaller decline relative to the current 52%. The anticipated increase will start with engines, supported by structures, and fasteners may catch up by the fourth quarter or the end of the year as inventories get eaten up, leading to a notable rebound in the early part of 2022. This outlines the progression I expect for the commercial aerospace markets and their impact on our segments over the next three quarters.

Great. That's very helpful. And then just as a quick follow-up, can you talk about your level of visibility on the 737 MAX versus, I guess, when we were on the call 3 months ago?

Yes, we believe it will continue to align with Boeing's production rate, currently at 7, increasing to 14 by late summer, then to about 22 per month at the start of 2022, and eventually reaching 30 per month. Everything looks positive at this point. As mentioned on the previous call, we have been supplying below the 7 rate per month overall, with varying levels across different product lines. We expect to align shipset values with production and increase production as we progress. This aligns with our projected 20% growth in commercial aerospace starting in the third quarter, which is also supported by the increased production of the A320 narrow-body from Airbus.

Your next question is from Robert Spingarn of Crédit Suisse.

John, just following up on Seth's question there on the MAX, maybe just to ask it slightly differently. But with Boeing or other suppliers talking about 160 aircraft being produced in 2021, can you tell us where you are relative to that number given the inventories in this already in the supply chain and so on? In other words, how much production do you need to do to match to their 160?

I believe we are approaching the 120 level, so we estimate being around 25% below that for the year. We anticipate a significant turning point as we enter Q3. If we lacked confidence, we wouldn't be hiring and bringing back staff in the second quarter, and we wouldn't expect to see considerable employment growth in the following two quarters.

Okay. And just on that, I guess, on the other question that Seth asked, and you talked about the second half improvement earlier led by engines. When will you actually know how far in advance of the shop visits? Are they scheduled? And are parts ordered? And what are the lead times for structures and fasteners as well? So in other words, when will you know what your second half looks like?

Okay. We have already begun to receive order intake now from our customers, particularly on the engine side, with letters of commitments on the, I'll say, schedule releases and EDI transmission. So what we're seeing is all the things which have been stated appear to be materializing as we speak to. Even in the last week, we received letters from, let's say, Safran or CFM and meetings with GE Aviation, et cetera. So it's gone from what we think may happen to, I can say, a lot more confidence. And the question is one of just the final degree to be determined. So there's other stuff which has to be filled in, but an increasing level of confidence compared to 3 months ago.

And is it different for fasteners? It's much more book and burn, so the lead times are shorter and you won't yet have a firm view on that?

We work with some of our customers using min-max systems, so the averages take time to adjust. Currently, as we are re-adjusting those systems downward, it takes a while for the effects to be noticeable, but eventually, we expect it to rebound significantly. I anticipate there will be about a two-quarter delay for that segment, which is why I believe fasteners will lag behind what we are observing in other areas by a quarter or two.

Your next question is from David Strauss of Barclays.

John, can you discuss how an inflationary environment may impact your business, particularly regarding pricing and raw material costs? Do you foresee that an inflationary environment could ultimately be beneficial for the business?

For the next few years, I don't see significant changes because material inflation will be passed on to our customers through our escalator agreements. We're more focused on the impact of labor inflation. For some key areas of our business, labor agreements are already established for the next two to four years. However, some workforce elements are reviewed annually. It’s essential for us to achieve the productivity needed each year to counteract labor inflation. In an inflationary environment, I don’t anticipate this being an issue for us. Moreover, our customer agreements and aspects covered within our ongoing LTA negotiations will help manage this situation.

As a follow-up on the capital deployment front, I know you've taken out a fair amount of debt to reinstate the dividend, but it still appears that your cash balance will exceed $1 billion by year-end without any additional actions. Given that there seems to be little to address on the debt side, how are you considering share repurchases going forward?

Yes. So we described the potential for capital allocation strategies in some detail on the last call. In fact, I think I called it a smorgasbord of opportunity to do various things. What we considered is the first order of battle was to deal with the next couple of maturities of our bonds. We did that easily from cash on hand. And that obviously produces a lower interest burden for the company, lower gross debt. And therefore, it's also seen some improvement from the rating agencies. So that's been, I think, a good step for us. And now the next thing you have to address at some point, but not, I don't think, just now is the October 2024 at some point. So that's 3.5 years away in terms of bonds. So I'd say that part of the balance sheet is dealt with. We felt confident in the cash flows of the business to reinstate the dividend. That's an expression of our confidence and, again, part of our plan to return money to shareholders. And then the other 2 aspects that we have to consider is what about share repurchase and also to what degree, if anything, do we participate in any M&A activity, which may materialize over the next, say, year or so as the commercial aerospace market solidifies into, let's say, skylines and the confidence that we all can believe in. Clearly, that's beginning to happen given what I said about the inflection point that we see coming. And I guess, we're in that position, David, that you said, is that if all things work out as planned, is that we'll have a very significant cash balance at the end of the year and have the ability to make other decisions in capital deployment in the future. So I think it's always well in terms of, let's say, the whole capital allocation strategy that we set out for ourselves in the recent months.

Our next question is from Carter Copeland of Melius Research.

One question. David is in trouble. I guess I got to stick to one, right, John?

Well, you never do anyway, Carter. So I just think it’s one of those aspirational things, but yes, you go for the multiple 5-part question.

That's fine. I'll do 1-parter. So obviously, the shift in focus is moving to going back up in production and then bringing people back from furlough, training and the like. But one of the things that we used to talk about before this all went down was yield, whether that's first pass yields or rolled throughput yields in some of those key spots in your facilities. When you look at yields and production facilities today versus where those were when we were talking about shortages and engine OEM factories 2 years ago or so, how does that stand today? And how does that play into your confidence and conviction around going up without hiccups?

When I reflect on the past couple of years in our aerospace sector, I believe one of the lesser-known achievements is the enhancement in delivery performance and our quality standards, which have led to a decrease in backlogs, including parts per million defects and internal scrap in our manufacturing facilities. Our yields have certainly improved for both the defense and commercial aerospace segments. I am focused on maintaining our reputation and reliability with customers, which involves bringing back and training our workforce. The actions we took last year in the third quarter for our wheels business have significantly boosted our production capacity while maintaining excellent quality and allowing us to achieve notable incremental margins in that segment. Instead of reacting to circumstances, we aim to proactively manage labor and acknowledge the necessary training period for staff to deliver consistent yields. Therefore, I want to approach the upcoming quarters with careful planning as we expect a substantial labor increase. We will adjust as needed to navigate this process. I am committed to being ahead of potential issues, avoiding yield problems and backlogs, because of the negative impact they can have on the business. If it costs us a few hundred basis points in margin for a quarter, I believe that investment is worthwhile as it will benefit our margins as we finish this year and move into 2022. We are focused on planning the next phase of our business rather than merely reacting after the fact and appearing disorganized. This approach is part of the value we contribute to the industry and our customers.

Your next question is from Gautam Khanna of Cowen.

Forgive a two-question ask. But first, I was curious about lead time discussions with customers, are you having those? I mean, I imagine it's chicken or egg if the lead times are short. They don't have the urgency to place orders. But then we have as the order books pick up, the lead times extend, and there's a queuing effect. I mean, do you think that plays out over the next 1.5 years where we see kind of a bullwhip effect? I know you just talked about the second half being above the first half. But I mean, could we see kind of outsized growth as we move in? Or do you think it will be just feathered in gradually in terms of the recovery? And then I have a follow-up.

Yes. The way I see it at the moment is everybody is aware there's plenty of metal in the system, and that gives people, I'll say, the ability to drop in a little bit later than would have been normal. If you looked at the demand levels of 2019 where lead times were, let's say, to get metal for some of our products was over 12 months. So we need to recognize the situation we're all in with carrying some trapped inventory. And we still have trapped inventory, which we plan to liquidate during the balance of 2021. And it's really interesting. Because when we look at our inventory levels as we move through the year, one of recent discussions in our quarterly review has been to what degree do we hold on to some of those in the latter part of the year just so again we're in a really strong position as we enter 2022 with what we think will be a fairly strong year for us in terms of demand. So where we find ourselves at the moment is our customers know that there's metal in the system, we know there's trapped inventory. And so we're more on that 3 to 6 months of lead times. And people have been holding off, and we've been seeing that fill in very significantly in the last few weeks. And then obviously, it's like everything is going to depend. But I do see, if we look at 6 months from now, then those lead times are going to be significantly increased. And therefore, orders are going to have to be placed. Otherwise, with some of the production increases on narrow-bodies, in particular, that Airbus and Boeing are looking at for 2022 and certainly later in 2022, I mean they won't occur unless orders are placed because the availability of that inventory and the current excess of metals has just been in the system for the last year just won't be there.

That is helpful. And then I just wanted to ask, last quarter, we talked about how the Boeing schedule is a little bit more in flux than the Airbus production schedule. But we heard Spirit yesterday talk about 9 to 10 A350s coming out of the plan this year and next. So I was curious, how stable is it now on the Airbus side? Did you see much in the way of changes over the past 3 months? And is that in...

No, we've seen no changes on Airbus. It's been solid. Solid all the way through, meeting what they've said, reinforcing what they've said, issuing both skyline and production schedules. So no changes for Airbus at all. And in fact, in the more recent past, we have not seen changes from Boeing either, which in last years have tended to be towards the downside. Again, none of that has been occurring.

Your next question is from Robert Stallard of Vertical Research.

John, we're seeing some pretty positive things about what we could be seeing in 2022 and beyond. But I was wondering, as we feed this volume through the system, what your thoughts might be on incremental margins as volumes recover? Can we say, for example, take your experience in wheels and apply that to aerospace?

I think we have a different profile for our engine and structures businesses, so it will vary by segment. However, I have previously stated that we anticipate fairly strong incremental margins moving forward. Throughout this crisis, we managed to keep our decrementals around the 20% mark compared to the usual 40%. We are pleased with how we have handled our structural cost reductions and variable costs. Our objective is to prevent fixed costs from creeping back into our system and to maintain control over our variable costs as production volumes increase. We are expecting healthy incremental margins, which also depends on bringing in and training our workforce at the right time to avoid any missteps. We are purposefully planning this, understanding it could cost us around 20 or 30 basis points of margin. I’m projecting just over 22% for the second quarter, and I prefer to have the labor in place before looking ahead to those strong increments in margins.

That's helpful. And just a quick follow-up. That margin impact from extra labor, that's baked into your 2021 guidance?

Yes, it is.

Your next question is from Noah Poponak of Goldman Sachs.

John, having Q2 revenue be down year-over-year a little bit, despite that lapping a largely pandemic-impacted quarter, the low end of the 2Q guide being down a little sequentially, that's pretty surprising given your mix. I kind of expect that in aerospace original equipment as that's longer cycle, but aerospace aftermarket, defense, truck, industrial would think would all be up year-over-year and sequentially. Is there just more destocking in aerospace original equipment or a longer time for you to link up to Boeing and Airbus than maybe I had appreciated? And so if you could help me understand that and maybe just get specific on how much inventory destock left and anywhere where you're not yet linked up to Boeing and Airbus would be really helpful.

In the second quarter of 2020, our customers were slow to adjust some of their production requirements, which became more prominent in the third quarter compared to last year. Looking at the second quarter of this year, production schedules haven't changed as much, even though there were reductions and plant shutdowns, making it a challenging quarter to compare against. I believe that sequentially, commercial aerospace was down 52%, but I expect the comparison to improve. The only other factor we need to consider is that we are being cautious with the commercial truck build plans due to part shortages. We're seeing reductions in production schedules with customers taking weeks out in the second quarter, which we are incorporating into our estimates. Therefore, we have a conservative outlook for the commercial transportation sector in the second quarter. On the positive side, our global order intake has been strong. Class 8 truck and trailer orders are at levels that secure our backlog for the rest of 2021 and most of 2022. Initially, we thought we had a solid growth trajectory, but now we see that demand is much stronger. For instance, if a customer orders a new trailer today, they won't expect delivery for a year, indicating long lead times in the commercial transportation sector. This situation is beneficial for us and sets a solid foundation for 2022 and the remainder of this year. While we are being cautious about potential supply disruptions affecting short-term truck builds, the robust economy and transportation activity provide a strong backlog outlook for the next 18 months.

Okay. That's really helpful. Could you just put a little more detail around where, if anywhere, you're not yet linked up to Boeing and Airbus or where in the business there's more inventory destock yet to occur?

We are still working on reducing inventory in the second quarter and we believe that process will conclude by the end of that quarter. In the second half of the year, we expect to see growth in our structures business as we plan for increased production. I have previously mentioned the engine-based business, and the only area that will lag behind for a few quarters is our fastener business. We anticipate balancing our inventories in that segment by the end of the third quarter, although it could extend into the fourth quarter. Each segment has its own timeline based on lead times, and we are making efforts to stay ahead of potential supply constraints, especially with engine parts, which have long lead times and are experiencing similar supply challenges as seen two years ago.

Your next question is from Paretosh Misra of Berenberg.

I'm guessing structures have the highest wide-body exposure, and probably engines have the highest narrow-body exposure. Is that correct? And if any way you could further quantify it as to what's the wide-body versus narrow-body split in engine versus structures.

Certainly, you are correct regarding the basic structures of our fastener business due to the composite materials in wide-body aircraft. For instance, when considering the Airbus A350 or the Boeing 787, the increased use of titanium in these composite structures requires a different range of fasteners, which is reflected in our revenue expectations. As we've mentioned, there's a gradually improving situation with the engine business. Traditionally, if we look back to 2019, the split between narrow-body and wide-body has been around 60-40 or perhaps 55-45. This has shifted similarly to how Boeing and Airbus have changed over the last year. To illustrate, Boeing was typically 60 and Airbus 40, but they may rebalance slightly in 2021 as the MAX returns to operation. For engines, I don’t have the exact split in mind, but over the next 12 to 18 months, we anticipate that the narrow-body engines, such as LEAP-1A and LEAP-1B, along with the aftermarket services for CFM engines, will start to come back towards the end of this year and into 2022. That's about the best estimate I can provide at this point regarding the engine split.

This is great, John. I really appreciate all the details. And maybe as a follow-up, with regard to the industrial and other end market, I'm sorry if I missed this, but have you given out what sort of full year growth rate is baked in your revenue guidance for the year?

For the gross industrial markets, we haven't provided specific details. However, the part of the business related to IGT is currently strong and improving. At this point, we could sell all the products we can produce, and we are working on increasing production, which is quite encouraging. The oil and gas sector has been relatively quiet over the past year and the first half of this year. However, we anticipate that there may be improvement in that sector by the fourth quarter or at least by the first quarter of next year. Currently, Texas crude is around $66, and natural gas prices have risen. Additionally, the rig count in the Gulf has increased significantly, all of which is positive for our partnerships in oil and gas. Overall, the industrial market is also showing signs of strength as we look towards the second half of 2021. To summarize, IGT is doing well, oil and gas may experience another couple of quarters of weakness followed by strength, and the general industrial sector is progressively improving as well.

Your next question is from Phil Gibbs of KeyBanc Capital.

It's Mike on for Phil. I wanted to get an update on price increases here. You're getting good traction there and you expect to be greater than what you saw in 2020. But do you have visibility into when you expect the lion's share of those price increases to be seen in the year? Or should we expect fairly steady benefits quarter-over-quarter?

I believe we will observe a fairly consistent trend throughout the year. All of our agreements for 2021 have been renewed, and we don't anticipate much in terms of spot business unless there is a significant shift in demand later in the year that contrasts with our previous schedule. That's the situation at hand. We will provide more detailed information in our upcoming 10-Q report, which we aim to release later today. Overall, everything appears to be in good standing compared to our earlier statements.

Your next question is from George Shapiro of Shapiro Research.

Yes, John, it looks like sequentially commercial aero was maybe down about 2%, if you could validate that. And if you could also break out what you think the mix is now between OE and aftermarket. And then the improvement you're looking for in the second half, is that primarily OE or aftermarket?

In the second half, we expect some benefits from original equipment, with a modest improvement anticipated in commercial aerospace, though still fairly limited. To provide context, in 2019, we recorded $800 million from spare parts, mainly engines, along with fasteners and structural components. We also had $400 million from defense and industrial sectors that experienced about 20% growth over the past year. However, demand for spares, which we provide to MRO shops through our customers, drastically declined in the latter half of last year. Currently, demand remains limited, although there is some activity in the commercial business jet sector and a slight level of spare parts sales. The performance in the first half of this year closely resembles the second half of last year. Previously, we were at around $100 million per quarter, but now we see it closer to $20 million per quarter, fluctuating slightly above or below that. For the second half of this year, we anticipate a small increase but are not expecting anything substantial in the spare parts sector right now, projecting more in the range of $25 million to $30 million per quarter. However, this is not significant for us at this moment but may have an impact in 2022. Overall, our guidance reflects that the balance in commercial aerospace is driven by demand in original equipment.

Your final question is from Noah Poponak of Goldman Sachs.

John, the last time commercial aerospace was in a similar point in its cycle sort of looking at the early part of the recovery, the fasteners market was just volatile and it turned out that because of a lot of use of distributors and just kind of maybe a long path from the part OEM to the airplane OEM, it ended up just taking a long time to recover and was just kind of messy. And hearing you talk about the inventory destock maybe lasting a little longer there, maybe you could just help us get comfortable that the issues that drove that last time around aren't in the system again. And I guess, how worried are you about that in that business?

I can't offer much more reassurance. I wasn't around during the last major cycle, so I'm not sure. We've made significant efforts in our business to promote growth, not only in OE demand but also through distribution. Currently, it's evident that we're a few quarters behind where we believe some other areas of our commercial aerospace business are starting to respond. I think this provides a thoughtful and accurate perspective on the market right now. I understand we are experiencing extended changes. For instance, if we focus specifically on the North American business, we supply directly to Boeing, which is part of the demand, but we also supply to Spirit, adding another layer to the supply chain. We recognize that our supply has been at a low rate for some time. We're not being overly optimistic by predicting a recovery in Q3 or Q4. We've indicated it's a couple of quarters behind, but we do expect it to start recovering. It might even align with Gautam's comment about a bullwhip effect or snapback. I anticipate significant demand increases for our fastener business in 2022. That's the best guidance I can provide for now without the ideal visibility that we all desire.

Yes. Okay. That's helpful. And just one more while I'm on here. The cost you've referred to, to sort of prepared to have growth come back, hiring, et cetera, is there any range of an absolute dollar number you could put on that just so we could then compare that to the cost-out number you've had?

The cost reduction we are discussing is primarily related to structural expenses rather than variable costs. The new employment I'm referring to falls within our variable cost structure. It’s important to recognize that these are different categories within the profit and loss statement. Direct labor will align with our production needs. For the second quarter, we anticipate adding around 400 to 500 people during April, May, and June to prepare for the growth we’ve mentioned, acknowledging that many of those hours may not be highly productive. By applying an average direct labor cost per employee to those numbers and averaging over the quarter, you can get an idea of the associated costs. However, I believe this step is crucial for us to achieve the yields and incremental margins we are aiming for, which are fundamental to our business focus.

So I should just think of it as your structural cost-out number you've spoken to, then obviously variable cost tethered to revenue, but that you're going to have some variable costs lead the revenue recovery as you anticipate it.

Exactly. Production work will be underway. We're getting ready to start waxing and preparing the slurry tanks, as well as reactivating our casting machines and lines. This will allow us to ramp up production as we move into the third and fourth quarters. Thank you very much. I believe that wraps up today, and I will let the operator finish it for us.

We have no further questions in queue. Ladies and gentlemen, thank you all for your participation. This concludes today's conference call. You may now disconnect.