Hello and welcome to the Howmet Aerospace Fourth Quarter 2023 and Full Year Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to hand the call over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you MJ. Good morning and welcome to the Howmet Aerospace fourth quarter 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.

Thanks PT and welcome everyone to the 2023 year-end results call. If you move to slide four, please. And I'll start off by saying Howmet's fourth quarter results were indeed very strong. Revenue, EBITDA, EBITDA margin, and earnings per share all met or exceeded the high end of guidance. More importantly, we continue to outgrow each of our respective markets. Specifically, revenue was $1.73 billion, an increase of 14% year-over-year, and with commercial aerospace up 22%. EBITDA was $398 million, which was an increase of 18% year-on-year, while EBITDA margin was in line with Q3 at a solid 23%. Second half EBITDA margin was 30 basis points greater than the full year average, and Q4 earnings per share increased by a significant 39%. For the full year, revenue was up 17%, driven by commercial aerospace up 24%, and EBITDA was up 18%. Earnings per share continued to improve annually and was a record $1.84 per share, which is an increase of 31% year-over-year. Moving to the balance sheet and free cash flow. Free cash flow was a record and above the high end of guidance at $682 million. And in the fourth quarter, Howmet continued with its balanced capital allocation strategy by buying back another $100 million of common stock and repaying another $100 million of debt as part of its reduction of the 2024 bonds. Moreover, we refinanced the $400 million of the 2024 bonds at a reduced interest rate. The combination of these actions further reduces annualized interest expense by $10 million going into 2024. This goes towards continued improvement in free cash flow yield and improved earnings per share. Lastly, net leverage improved to a record 2.1 times, which was in line with expectations. Each segment contributed with Engine Products and Forged Wheels delivering record profits. We were pleased with the pickup in faster margins to adjust in excess of 22% EBITDA margin. Ken's going to detail all of this in his commentary. Having completed a strong 2023, the majority of my comments today will focus on the outlook for 2024 and will be covered in the guidance section after covering the historical results. We look forward to a healthy 2024. And now over to Ken.

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 recovery. 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 the 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 loans 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%. 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.

Thanks Ken, and let's move to slide 12, please. The commercial aerospace market continues to be strong. Airline load factors are good. International travel continues to strengthen and all this has led to significant orders for new aircraft and higher levels of aircraft backlog at both Airbus and Boeing. Demand for new aircraft is expected to be sustained due to the need for aircraft with substantially improved fuel efficiency and also to the commitments made by airlines of improvement towards carbon neutrality with two stages of 2030 and then 2050. Commercial aerospace spares are also growing not only due to the number of aircraft in service, but also in the case of narrow-body due to the increased service shop visit requirements of the newer fuel-efficient engines. This is a long-term trend over the next decade and one which we look forward to. Defense budgets and hence the defense market continues to be strong in fighter aircraft, farmers, drones and helicopters. Tank turbines and Howmet systems are also strong. Specifically, we expect increased F35 engine spare requirements due to the shop visit requirements as the fleet continues to expand globally. Other markets of oil and gas and gas turbines continue to be healthy. We do see natural gas turbines to be the natural accompanying technology to the renewal segment of wind and solar. The market where we're cautious is that of commercial transportation, where we see potential for up to a 10% reduction in revenue as we move through 2024. We do envisage commercial transportation to resume growth in 2025 and into 2026. This is supported by the view that any potential reduction is mild due in part to the continued secular growth of our improved penetration of aluminum wheels compared to steel wheels for the needs of fuel efficiency or increased payloads. Also, as truck engines move to alternate means of propulsion other than fossil fuels, the adoption of aluminum wheels should gradually move towards 100%. Moving now from general market commentary to specific numbers. We expect Q1 revenue to be up 9% year-over-year and EBITDA up approximately 11%. For Q1 of 2024, we expect revenues of $1.74 billion, plus or minus $10 million, EBITDA of $400 million, plus or minus $5 million and earnings per share of $0.51 plus or minus $0.1. This is similar to Q4 after excluding the one-off benefits of the tax rate and below the line items, which contributed about $0.02. Regarding the full year 2024, we see revenue at $7.1 billion plus or minus $100 million; EBITDA of $1.635 billion plus or minus $35 million; and earnings per share of $2.15 plus or minus $0.05. Free cash flow, we see a $735 million plus or minus $35 million and CapEx of $290 million plus or minus $15 million. I'd like to comment further on the capital expenditures, seen as these are expected to be above depreciation for the first time in many years. Essentially, this is due to investment opportunities materializing the Engine Products business. We see this as a very good sign to be able to deploy capital with high returns and rapid future growth. In fact, let me expand. In fact, 2023, which was another year of above-market growth in each of our segments, in fact, above 5% above market served. This engine investment is viewed as excellent and speaks to the continued market growth in the business with 27%-plus EBITDA margins and a 33%-plus return of capital. And this continued growth is seen as the investments come on stream in approximately 18 months' time. Underpinning all of this is an agreement with one of our engine manufacturer customers for increased business and increased market shares. This does not change our long-term commitment to deliver average free cash flow conversion of 90% of net income. And as you can see from our guide, free cash flow after all costs is approximately 45% of EBITDA which is best-in-class. We based our guidance on Boeing 737 MAX production of 34 aircraft per month and six 787 aircraft per month. Our Airbus assumptions are in line with their plans. As an example, Airbus A320s are at 56 aircraft per month. We are prepared and can be prepared should volumes increase above current customer assumptions. In the case of the A320 we're anticipating the build rate increasing in 2025 to approximately 60 to 65 aircraft a month and that will require us to do some prebuilds or parts in 2024, and that explains the average we've given. Please now move to slide 13. 2023 was another good year for Howmet. Sales increased by 17% and were above each of our segments end markets. EBITDA was up 18% and EBITDA margin increased to 23% in the second half of the year. Earnings per share was up 31%. Cash flow exceeded guidance and was in line with our long-term view of converting 90% of net income into cash flow. The balance sheet was strengthened with significant debt paydown repurchases with cash on hand and record low net leverage of 2.1 times. The outlook for next year or for 2024 has already been outlined in the numbers given. But let me give you some qualitative terms to look at 2024 as it demonstrates the following features. We have further revenue growth, which we expect will be proven to be again in excess of our end markets served. Free cash flow continues to improve with the higher EBITDA margins and we expect further reduced debt and interest expense burden. And we take into 2024 a reduced share count. And you can expect further shareholder-friendly actions of increased share buybacks and further dividend growth. And now I'll close my prepared remarks. I now hand over and get ready for questions. Thank you.

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

Good morning. Thank you. When you're looking at a situation with very high demand on the Engine Products side. And one thing I'm really interested is how you're seeing pricing. Given your very strong position there, you're looking at catalog spares prices from the engine OEMs up in the teens recently, what do you see for Howmet in terms of pricing over the next couple of years? And can you explain the differences there between what you're getting and what you're seeing is increases on the engine OEM side?

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.

But from your standpoint, when you look at save in the short-term 2024. So, how do you think of your pricing relative to inflation? And is this a positive contributor to margins?

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.

Very good. Thank you.

The next question is from Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Hey, Rob.

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.

We received demand signals from two main sources: aircraft manufacturers for our structural products and engine manufacturers. In 2023, Boeing's schedules increased to a rate of 38, and we were able to support that. However, we were cautious about their plans to increase to 42, which has now been delayed. Looking ahead to 2024, we anticipate continued fluctuations in demand. The backlog situation is not expected to be as erratic as in previous years, but we are also prepared for the possibility that Boeing may not be operating at rate 38, as they have faced various assumptions about their actual production in Q4. Additionally, they are constrained by the FAA regarding production in 2024. We don't know how an under-building in one month may affect over-building in another month, or if production will be restricted to the monthly limits based on airworthy certificate issuance. Consequently, we believe demand may remain inconsistent, and we are mindful of Boeing’s financial position and whether they will sustain higher production levels. We have accounted for this in our working capital, factoring in potential situations where they do not take parts or adjust schedules, as reflected in our free cash flow guidance. Furthermore, we project our margin flow-through for 2024 to be around 28%, compared to 31% in Q4, allowing for expected fluctuations depending on Boeing's activities.

That’s great. Thanks John.

Thank you.

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

Thanks. Good morning, John and Ken.

Good morning.

John, you added, I think, roughly about 1,700 employees in 2023, if I have that correct. I was just wondering what your guidance kind of assumes around headcount growth expectations in '24. And yeah, maybe I'll leave it there. Thanks.

We anticipated adding between 1,000 and 1,500 people based on our expected exit rate for the year. While we continue to recruit, it's evident that we're hiring at a lower net rate compared to last year over the past 18 months. This is partly due to retaining some experienced operators throughout the recruitment process, as well as planned productivity improvements. Additionally, we are implementing some automation we've discussed previously. Overall, we expect to bring in around 500 fewer people than we did last year, all while focusing on enhancing our recruitment and retention metrics, as achieving greater labor stability is crucial for us.

Thanks for that. Thanks John.

Thank you.

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

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?

I've been very pleased with the progress in our distribution business within Fastening Systems. A few years ago, we established a separate business combined with our OE operations and appointed dedicated management to oversee it. This decision has resulted in significant growth for that distribution sector, which continued strongly in 2023. Looking ahead to 2024, it's challenging to predict how Engine and Fasteners will compare in growth; however, I anticipate positive contributions from both. It's important to note that we need to see a resurgence in wide-body demand, as this should lead to improved growth compared to narrow-body aircraft, especially now that Boeing's production is limited. On the other hand, we have observed a slight decrease in the growth of the LEAP engine segment, with projections reducing from around 2,200 engines in 2024 to approximately 1,875 to 1,950. We will need to monitor how this evolves, balancing OE builds with service demand for those engines. Ultimately, both Engine and Fasteners are performing well, and I expect a strong year for both.

Okay. Thank you.

Thank you.

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

Good morning, guys. Thank you for the time.

Hi, Sheila.

I wanted to ask about margins. John, could you discuss 2024 margins, particularly in terms of Q1 and the full year? You're estimating around 23%, which surprises me since it doesn't show improvement from your Q4 exit rate, and you're still below 30% on the incrementals. Can you elaborate on this, especially with increasing aerospace volumes and possibly hitting a low point? Additionally, you mentioned engine pricing being affected by long-term contracts, including the F35 contract. How do you view the percentage of your margins that are secured due to these long-term agreements?

LTA certainly governs the majority of our business. I estimate that it accounts for around 75% to 85%, though I can refine that as we continue. We have certain agreements coming up for renewal for 2024 pricing, and we are about 90% agreed on the price structures for next year. Our expectation is that the pricing commentary I previously shared indicates a healthy Q4 and a strong year overall, with 2024 expected to be similar. Some of our Engine Products will be repriced in 2024, and those adjustments have already been agreed upon. In terms of margins, they typically don't follow a straight trajectory; they tend to plateau before increasing again. We reached a 23% level in the second half of '23. For Q1, we assume an incremental margin of 28%, compared to 31% in Q4, which accounts for potential fluctuations. For instance, if Boeing doesn't take all scheduled parts, those will go into inventory, impacting profits. We've estimated a 3% lower absolute conversion number, making that a reasonable near-term assumption. Predicting performance for the rest of the year is challenging at this moment. Currently, we see demand for wheels as somewhat stronger than expected in the short term. However, future orders for truck manufacturers show strength but remain cancelable based on economic conditions. The key takeaway for me is that our focus isn't strictly on this quarter or the next. We anticipate growth in the commercial transportation market in 2025 and 2026, alongside strong demand in commercial aerospace, defense, and the gas turbine business, suggesting promising growth beyond 2024 into 2025 and 2026.

Great. Thank you.

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.

Great. Thank you.

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

Hey, good morning, everyone.

Hey, Noah.

John, just one clarification on the original equipment side of aerospace. I couldn't quite decipher where you're saying you are now on the MAX rate, if it's possible to quantify that? And then on the aftermarket side, can you baseline us on what percentage of aerospace is aftermarket at this point? And just how much growth can we expect there in the medium term given the work you're doing related to time on wing on the engine and elsewhere that's incremental?

Our guidance is mostly independent of what Boeing or Airbus might manufacture or schedule. It's our financial assumption for Howmet, and I believe it has accurately reflected market conditions over recent years. We expect the average for Boeing 737 production to be around 34% for the year. Currently, Boeing plans to maintain its rate of 38, based on our observations of demand schedules. Regarding spare parts, we've seen a continued increase in our exit rate in the commercial aviation market compared to 2019, which serves as our reference point. In 2019, revenue from the commercial spares market was around $400 million, matched by the defense and gas turbine sector. Demand for spares in the defense sector, especially for the F35, is on the rise, and by 2025, we anticipate the F35 spares business to match the output of the OE business in recent years. Demand has continued to grow in 2023, and we expect this trend to persist in 2024 and 2025, aligning with the expansion of the fleet, which currently stands at about 975 aircraft. While we initially projected an annual growth of 150 aircraft, Lockheed hasn't been able to deliver at that rate recently, so we need to remain cautious. Nevertheless, we anticipate a 50% increase over 2019 levels. The commercial spares segment dropped significantly during COVID, falling to just below $200 million, but it has now fully recovered to $400 million. The current run rate exceeds $400 million, and we expect this to continue, particularly as we address reported time on wing issues. We foresee demand increasing in the latter half of 2024 and significantly in 2025 and 2026. Overall, our spares business for 2023 is projected to reach around $1 billion, indicating a growing proportion of our revenues from the aftermarket, which should continue to rise as we move into 2025 and 2026, following a healthy 2024. It's important to note that this demand addresses immediate time on wing issues as well as reflects a broader structural shift in spare parts demand. Newer engines have longer service intervals due to improved performance, causing components such as high-pressure turbine parts to become more wear-prone, much like brake pads on a car. As the newer engines gradually replace older CFM56 models, we expect a significant and structural rise in replacement needs. This trend will lead to an increase in service facilities developed to support these new engines, which will evolve over the next few years.

Okay. That's really interesting. I appreciate all that detail. Just to make sure I have the MAX assumption correct, are you delivering to about 34 right now and you assume you stay there through the year? Are you in the low 30s right now, and you assume you actually click into that stated 38 without any rate breaks above and beyond that?

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’s 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.

Okay.

If you consider that Boeing is estimating Q1 at 38, depending on the final outcome, my assumption is 34, although they might bill at 38. That's why I've anticipated some fluctuations, as I mentioned earlier, and accounted for some inventory that we might carry as things get sorted out and as we assess how many people we will hire or have already discussed. So, I planned for that and included it in the variability of the margin rate increments I've mentioned, highlighting 28 versus 31 in Q4.

Okay. Super helpful. Thanks so much.

Thank you.

The next question comes from Robert Spingarn with Melius Research. Please go ahead.

Hi, this is Scott Mikus filling in for Rob Spingarn. John, I wanted to ask you about your market share in the airfoils market. Last time you mentioned having 1.5 times the relative market share of your closest competitor. With the upgrade to the GTF and the new engine agreement with an engine OEM customer that you referenced, where do you currently stand in terms of relative market share in the airfoils market?

Okay. We have grown about 1% share a year in the turbine airfoils market over the last, let's say, four or five years. And so, it's been a consistent march, and we believe we're just around that 50% mark currently. And we see that continuing to grow commensurate with some of the, I'll say, extraordinary levels of technology that we bring in that segment. And also I've commented here, we would not be considering, let's say, investing further in the scale that I've referred to, without knowledge of that share being there and indeed, I did say very clearly and unequivocally that we've also contracted additional share within that. So, we continue to drive that improved it. And as you did here, hopefully, is that's not changing our free cash flow guide metric, the conversion of net income.

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?

Yeah. We did see the spot market pick up further in '23. You can never be sure. So, we've just assumed it's played again in 2024. And we did put in some security stock of material such that we could respond to the spot market and our balance sheet could take it. But we not assume that it's like a further significant step-up because it's also in that unknown area of indeed what hadn't been previously scheduled, what additional demands are there and sometimes the opportunity for an increased share if somebody else is not able to deliver. So, it's not an easy number to say. We assume that we're going to get more. I don't think that's a sensible way to plan.

Thanks for taking the questions.

Thank you.

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

Hey, thanks very much and good morning.

Hi, Seth.

Good morning. I have a two-part question regarding the 737. You discussed Boeing and its production rate extensively. Can you provide insights on the engine production levels expected in 2024? Additionally, on the airframe side, I'm assuming that most of the 737 content involves fasteners. How much of that production goes directly to Boeing, and how much is allocated to other suppliers like Spirit? This leads me to think that the demand pull for Howmet may not come directly from Boeing, but rather from the Tier 1 suppliers in the Boeing supply chain.

We supply most of Boeing's requirements directly, but we also provide components to other suppliers like Spirit, who assemble parts for Boeing. It's a complex situation since we base our assumptions on a number of aircraft sets, which can vary between Boeing and other suppliers regarding their inventory levels. We follow a minimum-maximum system aligned with production rates, but there are times when this relationship doesn't hold. Our best estimate is based on a rate of 34, along with knowledge that Boeing might schedule production at a higher rate in the future. Ensuring that all necessary parts are available is crucial to avoid delays. While we aim for a positive outcome with full production quality at a rate of 38, we remain cautious about potential inventory adjustments due to financial pressures on suppliers. Our long-term guidance anticipates a conversion of around 90% of net income, but currently, it's around 85% as a buffer against uncertainties. We hope for success in production rates, which would lead to increased sales, but we aren’t ready to make firm predictions yet.

Great. Thanks very much.

Thank you.

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

Thanks. Good morning.

Hi, David.

So, John, following up on that, if I consider 5% on the free cash flow conversion, it seems like it's about $50 million that you have factored in for working capital or inventory build due to conservatism regarding what Boeing takes. However, it appears that you also have around $100 million to $150 million of working capital usage in that free cash flow guidance. Is that correct? If so, what does that entail? Additionally, regarding capital deployment, I understand that you don't have anything planned, but what are your thoughts on that? I know you have $200 million left for retirement this year, but given the cash guidance, it seems you have considerable room for share repurchase. Thanks.

Certainly. First, with revenues increasing, we're looking at approximately $0.5 billion, which leads to a natural working capital drag of about 15% to 20%. For simplicity, let's use the 20%, resulting in around $100 million of working capital. We've considered various factors, including the propensity for usage that you mentioned. Currently, we haven't made any fixed decisions regarding our deployment strategy, but it's unlikely we'll pursue refinancing for a couple of hundred million. Instead, we may opt to retire that debt and benefit from interest rate savings by the end of the fourth quarter and into 2025. Thus, you can expect that to be our primary action. While we might consider a slight refinancing around 2025, it won't significantly impact our overall strategy or incur major costs. The majority of our efforts will be directed towards share buybacks, and 2024 is expected to be a more active year for this compared to 2023, when we focused more on improving our balance sheet through debt management. Overall, anticipate improvements in leverage despite the elevated share buyback plans we are considering for 2024 compared to 2023.

Great. You got both parts. Appreciate it.

Thank you.

Thanks David.

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