Good morning, and welcome to the Howmet Aerospace Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Please go ahead.

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.

Thanks, PT, and good morning, everyone. Q2 was another strong quarter for Howmet. Revenues were up 18% year-over-year and 3% sequentially, albeit, Q2 is traditionally a stronger quarter seasonally than Q1 due to more effective production and sales days. Commercial aerospace increased by 23% year-over-year and continues to be the highlight of the quarter and reflects some of the scheduled increases for the anticipated Boeing 737 build rates, which are slated to increase very soon. Defense sales were also strong at plus 17%. EBITDA was up 16% year-over-year and up sequentially. Earnings per share increased to $0.44 per share and exceeded the high end of guidance. This was an increase of 26% year-over-year. The cash balance was a healthy $536 million, and free cash flow was strong at $188 million, which started consecutive quarters of cash generation. $100 million of cash flow was used to buy back shares at an average price of $45 per share. Net debt to EBITDA further improved to 2.5 times leverage, and all bond debt is at a fixed rate, which provides predictable interest rate expenses into the future. Howmet has negligible exposure to floating interest rates. Regarding our revolver, we amended and extended our $1 billion undrawn credit facility to 2028, while realizing lower fees and a more favorable net debt to EBITDA covenant. Lastly, another notable item was the commercial settlement of the Lehman claim, $40 million, which is $25 million less than previously reserved, with a cash settlement we paid in July 2023 and a further settlement in July 2024. This litigation was the most significant of all residual claims for Howmet, namely RemainCo, and dates back to 2008. Before turning it over to Ken, I want to cover three additional items. Firstly, in Q2, Howmet was impacted by approximately 5 days of production stoppage at our Wheels plant in Hungary due to a 9-day strike at Arconic Corporation, which is now resolved. The interruption of suppliers of aluminum billet had an unfavorable effect of about $5 million to profitability for which a claim has been lodged with Arconic under the terms of the supply agreement, and we expect to gain resolution shortly. Additionally, Howmet is assessing its significant reliance upon this source of supply. Secondly, while segment commentaries including the finance portion of our call, let me address structures. The margin rate fell back for the first time in several quarters. The profit miss was essentially the result of adding costs or production rate increases, which we did not achieve. The cost of additional people, furnace preparation, and other rolling mill facilities preparation were unrecovered due to the production rate increases not being achieved. The main issue was bottlenecks in production at one plant. The backlog did increase since it was not a demand issue. Naturally, our plan is to achieve production rate increases and burn down the increased backlog as we move into the second half. This reduced production combined with F-35 bulk and inventory burn down was also not helpful. But it was, in aggregate, not material in the context of the Howmet overall results, which were again up, as I commented earlier. Finally, the Paris Airshow was held in June with the largest significant orders ever at an airshow for commercial aircraft, which adds to the backlog of orders fulfilled to be fulfilled once production rates are able to be further increased. The show was very successful for Howmet with a combination of production meetings with both customers and investors all reflecting the huge optimism for both the industry generally and for Howmet, in particular. I'll now turn the call over to Ken, who will provide further market and segment commentary.

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. The 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 and 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 headcount 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 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.

Thank you, Ken. Let's move to slide number 12. The outlook for Howmet remains very strong, particularly due to the significant backlog of commercial aircraft orders at both Boeing and Airbus. Increased demand is anticipated, although it is currently constrained by aircraft production, which will positively affect revenue in 2024, 2025, and beyond. The growth in aircraft quantity is further supported by advancements in engine technology from both GE and Pratt & Whitney targeting the narrow-body market. These innovations improve fuel efficiency and extend time on wing, enhancing the value of Howmet's unique products. This situation aligns well with the expected rise in widebody production, increasingly incorporating composite technology, further elevating the value of Howmet's titanium structures and fasteners. Additionally, wide-body aircraft are expected to feature improved aerospace engine content for the company. The defense market remains strong, and we anticipate higher revenue in 2024 as the destocking of bulkheads concludes, while demand for engine spares grows significantly with increasing shop visits. The F-35 backlog is rising to nearly 420 aircraft, which includes recent orders of 126 aircraft for the US government joint program office, 25% for Israel, and an additional 25 aircraft for the Czech Republic. Industrial revenue is also expanding for both IGT and oil and gas. The outlook for Wheels remains positive for the current quarter, although Q3 is typically weaker for revenue due to European vacations affecting our aerospace plants in France, Germany, and Hungary. This seasonal effect appears to result in about $50 million of lost revenue between Q2 and Q3. I want to mention that spares for commercial aircraft are nearing 95% of 2019 levels by year-end and about 130% in the defense and IGT market compared to 2019. This positions total spares for this year above 2019 figures, with additional growth anticipated as we approach year-end. We are taking a cautious approach for Q4 until commercial truck demand and aircraft parts needs for the first half of 2024 become clearer. Although the backlog is substantial, we face challenges in planning for rate increases and managing inventory impacts if not realized. Specifically, we are raising our guidance significantly once again this year. For instance, we've adjusted our 737 MAX assumption slightly into the 30s, but still below the rate of 38 for the second half due to the various dynamics at play and the uncertainty in timing. As we prepare for the second half, we will be increasing our recruitment but at a reduced rate in the first half, as we aim to leverage expected productivity improvements. For Q3, we project revenue to be around $1.9 billion, with an EBITDA of $360 million and earnings per share of $0.42. For the full year, revenues have increased from $6.25 billion to $6.44 billion, a notable rise of around $30 million to $40 million. EBITDA has risen to $1.45 billion, with earnings per share growing to $1.70. Free cash flow is maintained at $635 million, following the settlement for the Lehman Brothers claim. In conclusion, we are pleased to report solid Q2 results, complemented by an optimistic forecast for the future. Moving on to slide 13, Q2 was another successful quarter for Howmet, with revenue up 18%, EBITDA up 16%, and earnings per share increasing by 26%. The EBITDA margin for material pass-through was robust at 22.7%, and service performance continues to improve. Our liquidity position remains healthy, with strong free cash flow expected to continue in the second half, allowing for cash deployment towards share repurchase in Q2 and debt repayment in Q3. We have increased our guidance, projecting year-over-year growth in annual revenue, EBITDA, and earnings per share. Furthermore, we anticipate positive free cash flow generation in the third and fourth quarters. Regarding our debt, as we complete the $200 million reduction aligned with EBITDA improvements, we expect to enhance our net debt-to-EBITDA ratio from the 2.5 times level noted in Q2, aiming for improvements in Q3 and Q4, targeting two times leverage by year-end. Lastly, we plan to raise the quarterly common dividend by 25% from $0.04 to $0.05 in the fourth quarter of 2023. Thank you all very much. Now, let's proceed to the question-and-answer session.

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

Good morning, guys, and thank you. John, maybe first one for you here. Just on the incrementals as we go forward, obviously, 22% in the quarter, given structures after 25% in Q1. And you commented last quarter about how difficult it is to convert at a 30%-plus rate, just given where aerospace build rates are and you'll be climbing through at least the middle of the decade here. How do you think about when you put costs into the system, when it converts into higher profitability? Do you have to wait to build rates peak for that to convert to a higher operating profit than revenue?

Thank you, Sheila. We don't have to wait, but the high levels of recruitment over the past couple of years have certainly impacted us. Driving labor productivity has been among the most challenging of our tasks. It has proven more difficult than what we expected to improve in terms of scrap and yield, as well as increasing volume. Looking at our guidance midpoint, we believe we will raise the incremental to about 28% in Q3, and we are optimistic for around 34% in Q4. This takes into account our expectation of a slowdown in recruitment and better retention rates as our overall employee base grows. We are hopeful that the incremental drop-through will begin to improve and continue to do so in 2024, supported by combined volume, benefits from automation programs, a larger number of recently recruited employees, and the effective mix of widebody. This is a forward-looking statement; we are hopeful and optimistic while planning for these outcomes, but I would be very disappointed if we had to wait for stability to see improvements in that drop-through.

Thank you for the color. Just a follow-up. In terms of the structures margins in the quarter, how do we think about that bumping up in the second half? How quickly does it improve?

When I think about Howmet, it operates like a relentless machine. I previously tried to illustrate this with a metaphor that didn't land, but I believe we are consistently pushing forward and achieving results. We're not flashy or overly dramatic, but in the second quarter, I am particularly proud of how we navigated the impact of a nine-day strike at one of our aluminum billet suppliers, which significantly affected us. Despite this setback, we managed to maintain strong margins in our wheels business, demonstrating excellent performance from Howmet. On the other hand, our structures business faced a much larger setback than the strike, affecting our margin rate and volume achievement. I would categorize this as a significant failure for the business. We believed we had sufficiently prepared, with plans in place for labor and improvements in our production processes, but ultimately it resulted in a bottleneck that hindered our performance. Nonetheless, despite these challenges – if we consider both the structural setbacks and the supplier strike – we exceeded our guidance on EBITDA. Ultimately, any one of these issues is quite significant. The margin rate difference of just 20 basis points represents about $3 million, which hardly seems worth dwelling on. So, while I could say we performed well overall, I prefer to acknowledge that wheels performed excellently while structures faced considerable difficulties.

It's like you read my mind. I'm going to go with a relentless march rather than a face plant. So thanks for that.

Thanks so much. Good morning.

Hey, Rob.

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

Obviously, probably on a roll and I was getting carried away. So no, I'm done.

You can carry out how many firecrackers if you want.

Yes, I don’t like asking questions so, no, please start over and dish down this.

Thank you for the update on the 737 MAX rate assumptions. I would like to know if there have been any further changes to the build rates for either Boeing or Airbus within your guidance. Additionally, could the recent comments from Airbus regarding direct and indirect risks associated with the latest GTF issue impact Howmet in any way? Thank you.

Yeah. First of all, no rate assumption changes for elsewhere. I mean, Airbus has been, I'll say, plowing ahead, but struggling to get to their production numbers. But getting close, certainly, the Q2 delivery was much healthier. And so I think things are getting better generally, and I think everybody is believing that we're going to see higher rate increases. And really, it's a question of when trying to get ready for it. We think we've prepped for it. We have built capability and capacity and labor terms. We had, say, machine capacity. But as you know, on 737, originally, it's going to be Jan 1st, then May 1st and July 1st. And we just want to be cautious. That's why I say all we've done is just nudging into the early 30s and see where it goes and be ready, capable of supplying, but not willing to be clear we're not going to put rate 38 until it's achieved.

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

The powder metal issue we've heard about appears to be a thing of the past. We have a solid plan in place for inspecting the engines that need to be taken down from aircraft wings. Currently, the performance of the new engines, compared to the older models like the V2500 and CFM56, is better, and they haven't reached the exit point of the previous engines. This is expected to increase the demand for replacement parts. Additionally, we've made improvements to address some issues, particularly with high-pressure turbine blades experiencing elevated temperatures due to combustors that aren't functioning optimally. We are familiar with these enhancements and are preparing to implement them according to our customers' requirements. We're also evaluating how this rising demand coincides with the growing need for wide-body aircraft into 2024. Good demand typically comes from increased aircraft production, while demand for replacement parts is less favorable over a certain period. We're focusing on ramping up capacity responsibly to avoid fluctuations in production levels. We're currently engaged in detailed discussions with our customers to manage this transition effectively. To summarize, we face no issues with the GTF powder metal, which has no impact on us. The powder metal wing contributes to the overall growth in content as we improve turbine blades and adopt advanced technologies, ensuring the future reliability and fuel efficiency of the engine. This is also beneficial for Howmet.

That's great. Thanks a lot, John.

Thank you.

Thanks. Good morning.

Hey, David.

Hey, John. So I just wanted to clarify on the MAX. So while you've upped the guidance from 30 into the 30s, are you actually at 38 a month in terms of what you're shipping to Boeing today?

It depends on the parts we supply, which vary. I recognize that we've received schedules indicating an increase to a rate of 38. My concern is that if they fail to reach that rate, the parts we've supplied could lead to bloated inventories, similar to what happened in September, October, November, and December of 2022. I'm trying to synthesize all of this, and while I'm suggesting an average of 30, I'm intentionally being a bit flexible about that. However, it's important to note that our guidance is not contingent on achieving the full rate increase to 38 starting July 1. I don’t think Boeing can reach that rate, although I hope they do. If they do achieve it, I would feel more at ease regarding our guidance. Historically, our guidance has been something you could rely on. I want to see a reduction in aircraft numbers, and if that occurs, I will feel confident that we won't face issues with inventory reductions in the remaining months of the year.

Okay. I got it. It sounds like after what you went through in Q4 of last year, you're just erring on the cautious side, I got it.

Yes, I think Q4 last year was quite strong. Overall, the year went well, so I'm not overly concerned. I'm just holding back a bit for now.

Okay. As a follow-up, can you dig in a little on what's going on at Fasteners? I mean, we've seen a pretty good revenue pickup here on the aero side. I know 787 rates are still low, but kind of the drop through that we've seen there or the lack thereof in terms of the margin drop through in Fasteners?

Yes. I prefer not to refer to them as Chinese partners, but I'm not sure where the association comes from. It starts with small steps. Our margin rate did increase in Q2, despite the significant labor intake planned for the rest of the year. It's always a bit uncertain, but I am optimistic that we will see both revenue and margin growth in the second half beyond Q2. In that regard, I am very pleased with the progress and direction of the business; I couldn't have said that six months ago. Therefore, I am increasingly confident that, as I mentioned publicly, our margin rate is set to increase. That's quite positive.

I got it. I’ll take the hand. Thanks.

Yes, thanks. Good morning, John, Ken.

Hi, Pete.

Hi, John. Just within Engineered Structures, the $45 million year-to-date gain on the Russian titanium share, it seems like it's tracking right towards your expectations. So just maybe any of your updated thoughts on that? And how should we think about that as we go into next year? Thanks.

In terms of demand, the previous metric I provided was $20 million for Q4 last year. If you multiply that by four for 2023 and add about 25%, it brings you to around the $100 million mark. Therefore, if we did $45 million in the first half, we expect $55 million in the second half. Currently, I feel a bit more confident than that. Instead of a 25% increase, I see the potential for a 40% increase. I'm certain that the demand is there, so it will be above $100 million, significantly above $100 million. What I need to ensure is that our structure supports production. I believe we are going to capture the market share we have secured and achieved commercially. At this moment, both demand and our commercial position look strong, despite saying we had a setback in Q2, for which neither the structures team nor I are proud of our performance.

Appreciate the color. Thank you.

Thank you.

Hey, good morning.

Hi, Rob.

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 a 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?

I'll address your question in reverse order. You are correct that as wide-body production increases, it significantly benefits both our Structures and Fastener businesses in terms of delivered value. For Fasteners, the value is notably higher due to the complexity of the parts involved, especially with the combination of composite skins and titanium structures. If Boeing raises its production rates from 3% to 5% and potentially even higher in 2024, we will feel much more positive about the market since fundamental demand appears to exceed a rate of 10. Similarly, the A350 production is expected to increase to at least 9 per month to meet market demands, which is favorable for our titanium business. Along with straightforward sheet and plate, I anticipate increased demand for forgings as well. Overall, if the projected volume and wide-body mix materialize, our structures margins could move towards the high teens by the middle of the decade. We have the capability to meet this demand, which is not an issue. We are leveraging opportunities in titanium despite challenges related to VSMPO and tariffs, and we also see increasing demand from wide-body production. Regarding the sophistication I mentioned earlier, this impacts shipset value. As we progress, Howmet's engine value will rise as we supply products needed to address GTF issues, particularly the advantage engine, which should also increase shipset value. Similar improvements are happening with the LEAP engine. Typically, engine upgrades occur every five to six years. We have upgrade plans with our customers, but some upgrades may be more extensive due to durability issues identified in the first generation turbine parts. These challenges result from elevated temperatures and particulate contamination, which necessitate enhanced solutions to extend time on wing.

Thanks, John.

Thank you.

Thanks. Good morning. Hey, John.

Hi, Myles.

I know the guidance raise on sales, you gave some color, but I was hoping you'd put a finer point on it. The $190 million did you imply as maybe $40 million or $50 million add back on wheels, a little bit on industrial and the bulk from aero, is that the way to think about the $190 million?

I didn't really break it down. I think my aggregate feeling is we see commercial and the move in 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, 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.

And just a quick one on the structures bottleneck. It's good to have the assumptions that are conservative and not counting on the OEMs coming through the purchase orders. But was the bottleneck in any way a result of some hesitation to go up in rates and having to quickly then.

No.

Okay.

No, we added people and are continuing to do so. We're optimistic that we have met the volume requirements requested by our customers. We invested in increasing our furnace capacity, for example, by transitioning to triple sticks and double-stick furnaces. We also implemented additional automation to enhance our rolling mill capacity and throughput. Unfortunately, it didn’t go as planned. I acknowledge that sometimes things don’t work out as expected. While we faced challenges, we recognize them and are determined to overcome them. This is not an issue of volume or demand; we simply need to produce the product. We anticipate doing that in the third quarter. Of course, management typically believes that future performance will improve. However, we cannot take pride in our second quarter performance for that business.

Thanks for the color.

Hey. Good morning, guys.

Hey, Kristine.

John, on the issue that you called out on Engineered Structures, can you just provide more specific details on what caused the plant bottleneck? And then how do we think about recovery? And the other part to that would be depending on what the problem actually is, is there a risk that we could see this spread to the other segments? Like how do we think about all that?

There is absolutely no risk of the issue spreading to other segments; it was contained within one segment at a single plant. It's not a disease or something that is contagious. The situation arose due to a breakdown in work in progress buffers during the manufacturing of titanium, which led to idle labor and malfunctioning equipment. This, in turn, affected subsequent processes over the course of three months. We believe things are back on track now. I've been closely analyzing every work in progress buffer at each significant production stage for that product. With high engagement from plant management, operations heads, and business unit leadership, along with my careful oversight, we are ensuring a thorough review of the situation. I am optimistic that the operations will respond positively. If we apply brute force, we should see results, and with some strategic improvements, we hope to achieve even more this quarter.

Thanks, John. That's really helpful color. I mean it sounds like a very isolated issue for that specific segment. In terms of the recovery pace, like how long does this issue like this usually get resolved, like by 4Q? Is this largely resolved in your back to where you were for margins like last quarter, it was 400 to 500 basis points higher. How should we think about that pace of recovery?

I don’t want to provide detailed commentary on specific segments, but I would be disappointed if we don’t achieve at least a 10% to 15% increase in volume for Q3 in that area. If we reach that goal, we should see a significant recovery in margins, as we have worked hard to maintain that 14% threshold despite challenges such as F-35 bulkheads and the drastic decline of the 787 program. It hasn’t been easy, and we acknowledge that our recent performance hasn’t met expectations. However, I believe it’s important to be clear about our situation; we recognize where we fell short and everyone knows their responsibilities moving forward. We have been diligently planning to ensure substantial improvement in Q3, and we will continue our efforts into Q4 as well.

I really appreciate the detail you provided John. Thanks.

Thank you.

Hey good morning. Thanks guys.

Hey Gautam.

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?

It's soon to be looking ahead to 2024, and we typically don't comment much on that year. I expect to provide some kind of demand outlook when we report our Q3 results in November, as we have done in the past. The most intriguing question when we present our Q3 results and consider sharing insights for 2024 is whether we can reach 2019 revenue levels. This is particularly interesting as there will be a significant mix impact; wide-body aircraft numbers might be down a couple of hundred, while narrow-body aircraft could see a similar increase, potentially leading to about a $0.5 billion revenue drag. The question is whether we can address these issues by focusing on content, pricing, and improving our market share. So, for me, the key question about 2024 is whether we can achieve that goal. It’s still early, and I’m posing the question without providing an answer just yet. Regarding margins, the appropriate range was around 35% plus or minus 5% when we discussed this in 2021 to 2022. Now, I believe it might be closer to 30% plus or minus for 2023. Again, it's too soon to tell, as it will depend on seeing positive volume alongside improved productivity from a more stable workforce. To me, 25% of our challenges stem from recruitment and retention issues, while the rest relates to the fundamental productivity of our team. Some of our components are so complex that our production times are extended, but we should start to see benefits from that, combined with wide-body demand. There are many variables at play, but right now, I think we're looking at a range closer to 30%, give or take, though this is a directional estimate without detailed financial analysis.

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

We haven't told you Q2 yet. Nobody's asked the question, but Q2, everything was in line with what we've said before and the year is in line with what we said before in our Q will be published this afternoon, and you'll be able to see it. And so everything is in order on that front. 2023 now is essentially completed for negotiations. So, again, all in order, and 2024 is coming rapidly into focus and commensurate with what I said on the last call is that 2024 is going to be similar and good; it's similar and good.

Hey, good morning guys. So, I think pretty much everything has been asked. So maybe just a quick follow-on here. When rates actually get to 38 or maybe way down the road, they get to 50 or higher on 737s, how should we think about the evolution of incrementals then? Because I think that's on the top of a lot of investors' minds because it can help draw out the trajectory of where earnings and cash flow for the company could ultimately go as the ramp goes?

Yes. The most challenging aspect we've faced has been related to labor productivity, especially as we've dealt with various issues like supply chain disruptions and the effects of COVID over the past couple of years. It has tested us significantly. We've been working hard to stabilize operations and maintain high-quality delivery to our customers, which is our top priority. We haven't received any feedback suggesting that Howmet is unable to meet customer demands. I'm optimistic that as Boeing increases production of the 737 to rate 50 and Airbus gradually ramps up as well, we will see improvements in our operations. I believe we are approaching a phase where productivity levels will smooth out, production volumes will rise, and pricing will align favorably. This should enable us to achieve optimal margins and cash flow, with further rate increases anticipated in 2025 and 2026. Overall, I remain fundamentally optimistic, though we still have some challenges to address, particularly with labor. So you could be in a good position to hit that trajectory.

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