Good morning, and welcome to the Howmet Aerospace First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and welcome to the Howmet Aerospace First Quarter 2024 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income, and EPS mean adjusted EBITDA, excluding special items, adjusted operating income, excluding special items, and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John.

Thanks, PT, and good morning, everybody. Q1 2024 was an outstanding quarter for Howmet. Revenue, profit, margin, and earnings per share were records and all improved versus guidance last year and sequentially. More specifically, Q1 performance and year-over-year improvements were as follows: Revenue was $1.824 billion, up 14%. EBITDA was $437 million, up 21%, with a healthy incremental of 35%. EBITDA margin was up 150 basis points to 24%. Operating income was up 27% with a margin rate of above 20%. Earnings per share were $0.57, an increase of 36% year-over-year and 8% sequentially. We'll recall that in Q4, the earnings per share benefited from an unusually low tax rate of 20.7% and also currency favorability and hence, the sequential improvement was indeed excellent. Free cash flow was $95 million and marks the first quarter with an inflow to be followed by further inflows in Q2, Q3, and Q4. We were particularly pleased with the positive cash flow since for many years, we've seen Q1 outflows, which had to be overcome in later quarters. A total of $150 million of cash was used to purchase shares, just over 2.2 million shares at an average price of approximately $67. Dividends of $0.05 per share were paid, and you'll recall that these had been increased by 25% in Q4 of 2023. Finally, net debt to EBITDA was a record low of 2x. I'll now turn the call over to Ken to cover the financials in more detail before returning to talk to the overall outlook for 2024.

Thank you, John, and good morning, everyone. Let's move to Slide 5 for an overview of the markets. All markets continued to be healthy in the first quarter. On a year-over-year basis, performance was as follows: Total revenue was up 14%, driven by very strong growth in the commercial aerospace market, which was up 23%. Commercial aerospace has now grown for 12 consecutive quarters and represents approximately 50% of total revenue. Growth continues to be robust, supported by demand for new more fuel-efficient aircraft with reduced carbon emissions and increased spares demand for engines. Moving to our other markets. First, defense aerospace was also strong, up 12%, driven by fighter programs and engine spares demand. Next is commercial transportation, which has been resilient in a challenging market. Revenue was up slightly as we continue to offset weakness in the market by taking share from steel wheels with Howmet lighter and more fuel-efficient aluminum wheels. Finally, the industrial and other markets were up 7%, driven by oil and gas up 15%; general industrial, up 10%, and IGT, which was flat. In summary, another strong quarter across all of our end markets. Now let's move to Slide 6. First, moving to the P&L. Q1 revenue, EBITDA, EBITDA margin, and earnings per share were all records and exceeded the high end of guidance. Revenue was up 14% and EBITDA outpaced revenue growth by being up 21%, while absorbing the addition of approximately 430 net new employees in the quarter. Incremental flow-through of revenue to EBITDA was a healthy 35%. EBITDA margin was a record at 24% and earnings per share was also a record at $0.57, which was an increase of 36% year-over-year. Now let's move to the balance sheet and cover the balance sheet and cash flow. The balance sheet and liquidity have never been stronger. Cash at the end of the quarter was $534 million, and free cash flow was a record for Q1 at $95 million. Net debt to EBITDA improved to a record low of 2x. All long-term debt is unsecured and at fixed rates, which provides stability of interest rate expense into the future. Howmet's improved financial leverage and strong cash generation were reflected in Moody's Q1 ratings upgrade to investment grade. With this upgrade, we are now rated as investment grade by all 3 rating agencies. Additionally, with the recent upgrades, we have established a $1 billion commercial paper program, which further strengthens our liquidity. Finally, we continue to have access to our $1 billion undrawn revolver. Total liquidity now stands at approximately $2.5 billion. Finally, let's move to capital deployment. We deployed approximately $170 million of cash in the quarter to shareholders, of which $150 million was used to repurchase common stock. This was the 12th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low Q1 exit rate of 411 million shares. Finally, we continue to be confident in our free cash flow. In the first quarter, we deployed approximately $20 million for the quarterly common stock dividend of $0.05 per share. Now let's move to Slide 7 to cover the segment results for the first quarter. Engine Products continued its strong performance. Revenue increased 11% in the quarter to $885 million. Commercial aerospace was up 14% and defense aerospace was up 13%. Both markets realized higher build rates and spares growth. Oil and gas was up 15% and IGT was flat. Demand continues to be strong across all of our engines markets. EBITDA increased 17% year-over-year to a record $249 million. EBITDA margin increased 140 basis points year-over-year to a record 28.1%, while absorbing approximately 435 net new employees in the quarter. Once again, the engines team delivered another strong quarter. Now let's move to Slide 8. Fastening Systems also had a strong quarter. Revenue increased 25% year-over-year to $389 million. Commercial aerospace was up 44%, including the impact of the wide-body recovery. Commercial transportation was up 5%. General industrial was up 14%, and defense aerospace was down 11%. Year-over-year EBITDA outpaced revenue growth with an increase of 59% to $92 million. EBITDA margin increased 510 basis points year-over-year to 23.7%, which reflects the improved commercial and operational performance complemented by the wide-body recovery. Now let's move to Slide 9. Engineered Structures performance continued to improve. Revenue increased 27% year-over-year to $262 million. Commercial aerospace was up 26%, driven by build rates and the wide-body recovery. Defense aerospace was up 27% year-over-year, primarily driven by the F-35 program. EBITDA was up $7 million year-over-year, and EBITDA margin decreased slightly to 14.1%. Sequentially, revenue, EBITDA, and EBITDA margin increased for the third consecutive quarter. The team is making progress, and we expect continued improvements throughout 2024. Finally, let's move to Slide 10. Forged Wheels revenue was essentially flat year-over-year in a challenging market. Although revenue was essentially flat, EBITDA increased 4%, driven by volume and productivity. EBITDA margin was a healthy 28.5%. With that, now let me turn it back over to John.

Thanks, Ken, and let's move to Slide 11 to show our progress on greenhouse gas emissions. We continue to leverage our differentiated technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints. Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2023, we continue to progress against our 2024 greenhouse gas emissions goal by achieving a 20% reduction in total greenhouse gas emissions from 2023 compared to 2019, which is our baseline year. We're tracking well to our 2024 goals of a 21.5% reduction. I would like to draw your attention to the issuance of our annual ESG report in April, which details the good progress we've made. Additionally, in the report, we reflect 2027 goals for Howmet, which shows the continued progress on our baseline year of 2019 with a full 33% reduction in greenhouse gas emissions. Now let's turn to Slide 12 and start to talk about the outlook for the business. Firstly, I'll address commercial aerospace, which represents our largest revenue market. Demand for air travel continues to be very strong. And if anything, will be constrained during the summer season by the availability of new aircraft, especially narrow-body aircraft. Asia Pacific travel, which has been lagging in the U.S. and Europe, has been increasing rapidly and is now back to approximately 90% of pre-pandemic levels. International Asia Pacific travel was up approximately 50% in the recent months and speaks well to future aircraft demand, especially wide-body aircraft. Freight requirements also continue to be robust. The one item that needs to be said is the fact of the FAA restrictions on the Boeing 737 MAX production of 38 per month in light of continuing quality problems at Boeing. These facts are extensively reported in the press and have resulted in lower production, well below the prior levels of approximately 30 aircraft per month, which in itself was well below the 2023 targets of 38 aircraft per month. Clearly, the prospect of going up to rate 42 and rate 47 per month is now unlikely in 2024. This has caused Howmet to completely replan our year. And we've concluded that a further reduction in build to approximately 20 aircraft per month average for the year is a more secure assumption than that previously reported of 34 aircraft per month. As we replan our year, we should take into account this revenue adjustment, while replanning other areas of our business. For example, Spares, Defense, and Wheels revenues, and we net all of this replanning out to an overall increase of approximately $200 million of revenue for 2024. This guide reflects continuing strong Airbus production in line with our overall planned percentage increase of aircraft of approximately 9%. We now envisage, as an example, Wheels revenue being higher than previously expected in Q1 and Q2, whilst continuing to expect a reduction in the second half of the year. In the second half, we expect this to be offset by higher wide-body build especially in preparing to move into 2025, complemented by robustness in Spares, Defense, and IGT sales. However, we do expect Boeing to trim back production part schedules for the 737 MAX to lower levels than previously envisioned. In terms of specific numbers in Q2, we expect revenue to be $1.35 billion, plus or minus $10 million, EBITDA $440 million, plus or minus $5 million, earnings per share of $0.58, plus or minus $0.01. For the year, we see revenues around $7.3 billion, plus or minus $75 million. EBITDA of $1.75 billion, plus or minus $30 million, earnings per share of $2.35, plus or minus $0.04 and free cash flow of $800 million, plus or minus $50 million. Clearly, the diversity of Howmet product revenues and solidity of performance can be seen in these numbers. We're pleased with the resulting increased outlook and our free cash flow in particular. Therefore, we expect to increase our dividend payout in the second half of the year, starting with the payment in August pending Board approval. Specifically, the expected dividend increase is $0.02 per share to a total of $0.07 per share, which is a 40% increase. This notably maintains the 2023 dividend yield. The balanced capital allocation plan continues. Capital expenditures are elevated over 2022 and 2023 levels and are now a little ahead of depreciation. The main thrust continues to be the expansion in our engines business to achieve the market share increases that I already talked about on the last call. The majority of the other uses of free cash flow in terms of capital allocation will be share buyback in 2024, while still preserving the ability to pay down the debt of the 2024 bond of $200 million should we decide to do so. I'm also sure that we will focus on refinancing the 2025 bonds later in the year or the latest in early 2025. I thought it useful to provide more of an extensive road map to our capital allocation thoughts during this call. In terms of net leverage, we're also envisaging getting closer to our minimum leverage target of towards 1.5x net debt to EBITDA by year-end from the 2x that we currently have at the end of Q1. In summary, moving to the summary slide. We have a strong start to the year. We have incremental EBITDA margins of 35% and an operating margin now over 20%. We have the ability to withstand the reduced narrow-body build notably from Boeing. We have a complete replanning of our year. We've increased the guide by $200 million of revenue at midpoint and the margin rate from 23% to 24%. And we've increased cash flow just under $100 million. We also noted that we expect to raise the dividend by 40% in the second half of the year. And that we have a clear plan for the balance of 2024 in terms of capital allocation plans.

The first question is from Noah Poponak with Goldman Sachs.

Hello. Can you hear me?

We can hear you now. Please go ahead.

John, I appreciate all the detail there. I wonder if you could just talk a little bit more about the MAX. What underlying rate did you actually deliver to in the quarter? And how are you assuming it moves through the year? And I guess, listening to some other suppliers in Boeing through the earnings season, it kind of sounded like Boeing kept the supply chain moving along somewhere near 30 despite their deliveries and then would plan to start to hope to start to ramp back up in the back half of the year. Your comments sound like maybe that didn't happen or that's not what you're seeing. So if you could just provide a little more clarity around that? That would be great.

I would like to provide a straightforward answer, but I find it somewhat confusing. In the first quarter, schedules were at a rate of 38, and I assume Boeing expected to reach that rate. However, actual bills were significantly lower, probably below 20%. As a result, the increase in inventory, which I estimate at 15 to 38 per month, added to the 7 months of the previous year where rate 38 was expected but we saw more of a build at 30, has obviously led to increased inventories at Boeing. We have heard statements indicating that going back to January, they were committed to maintaining rate 38 for production scheduling, but more recent comments suggest that we will need to adjust our requirements according to our rate needs. It is challenging to determine exactly what that means regarding the expected rate needs. We are exercising caution because, while they assert they will achieve rate 38 in the second half, I would like to see that happen, but I am uncertain if it will be accomplished. In our fastener business, we operate under a min-max system, while Boeing has been looking to increase the minimum levels we assumed, resulting in us minimizing our own assumptions to meet the lowest possible requirements set by our contract with them. We're trying to avoid situations where rapid schedule changes lead to excess inventory. Our cash flow projections also assume that these schedules will be adjusted, and we’ll maintain a backlog of orders for long lead time items that our suppliers need to uphold. This means we might receive materials that won't be delivered until 2024. We're navigating the best assumptions we can make. We know GE has altered their requirements for the LEAP-1B engine, as noted in their announcement. Instead of the expected 20% to 25% increase from approximately 1.75 million engines to around 19.25 million, we now anticipate a smaller increase of about 10% to 15%, leading to roughly 1,700 engines. However, these changes will reflect in the latter part of the year, resulting in a complex situation for us. We’re preparing for both cutbacks and increases expected in 2025. For instance, if Airbus raises production of the A320 from about 55 to 65 units a month, that demand will need to be met in the second half of this year. Similarly, if Boeing raises their production rates, we’ll need to adapt to that as well. We’re carefully considering all these factors as we adjust our assumptions. During the Q&A session, I will provide more details comparing previous projections to our current expectations, particularly concerning Boeing and Spirit Aerospace.

The next question is from Robert Stallard with Vertical Research.

John, maybe to follow on from Noah's question on the rates. Boeing has also seems to have slipped behind on the 787. So I was wondering if you could give us an idea of what you're now expecting for that. I think they're saying they want to get back up to 5 and supply chain is shipping at 5, but they're not producing at 5, you know what I mean?

Yes, so we cut our assumption from 6 aircraft per month down to 5. I don't know that we're going to see parts, schedule changes for the sake of 2 aircraft a month, especially if they're going to get back up to rate 5 by the second half of the year. So we recognize that we've been producing ahead at the current actual build rate because of the supply constraints that Boeing say that they've had, which clearly have not been from Howmet. But we've not taken it down to 3. We just assumed 5 for the year. So that's where it stands for 787.

And is this the one that's also going to be ramping up a bit further in the second half, anticipating further rate increases for 2025?

Yes. And that's also part of our thinking is that previously, our assumptions have been going to rate 7 at the back end of this year ahead of where we'd assumed a 6 where we thought it was going to go and then probably with a higher rate sometime in 2025, on their March to 10 craft per month, which I know has now changed from 2025 to 2026.

The next question is from Robert Spingarn with Melius Research.

John, I'm going to ask again about the 737. You've been crystal clear that the situation is unclear. Having said that though, I'm curious if somehow Boeing gets above 20 later this year, is there enough inventory in the channel, whether you have it or they have it or GE has it to support higher production rates at Boeing? Or can you ramp quickly? How do we think about when you'd need to signal? And how you might respond?

Yes. If Boeing reaches a production rate of 38, I am confident that we will align with that rate. If GE decides to proceed with the planned increase to the 19-25 level of LEAP engines, which is integral to our cadence for 1B, we will be prepared to meet that rate. Regarding labor, although we have raised our overall guidance and our recruitment efforts will be strong, we have sufficient flexibility to manage these rate expectations. We will have advance notice months ahead of when those rates will be achieved. The transition to a higher rate, such as moving from 15 to 38, will occur gradually rather than abruptly.

Okay. And then just as a follow-up. When we look at the commercial aero sales at fasteners and its structures, they outpaced versus the Engine Products segment despite the issues at Boeing. I was wondering if you could add some color on how you managed to decouple your commercial aero growth from Boeing's bill rates.

I believe this reflects the revenue and earnings potential of Howmet as it reaches higher production rates. While Boeing's sales for the 787 may have been at a rate of 3, we were producing our parts in the first quarter at a significantly higher rate, around 6 or even 7. This presents a positive dynamic for the business, which was highlighted by substantial margin improvements resulting from operational and commercial performance, as well as product mix. We've achieved over 500 basis points of margin improvement year-over-year, and approximately 200 basis points sequentially. Overall, everything looks positive. We are still determining the exact outcomes, but my assumption is that production for the 787 will reduce to rate 5, while the 737 will see a much lower rate. However, it's worth noting that metallic fasteners don’t offer the same mix richness as composite aircraft.

Does that mean that possibly the first quarter is a high point with regard to something like a 787 fasteners or if you were at rate 7 and they're at rate 3 and you get the point?

Yes. In our Q2 guidance, we indicated that revenues would be slightly higher than in Q1. Overall, we still expect good performance, but we are cautious due to the rate assumptions for the 737, which we anticipate will have an impact. Additionally, as mentioned in my prepared remarks, we expect some weakness in our commercial wheels business in the second half of the year. So far, we've been pleasantly surprised by the strength in that segment, and we hope it continues, but we are planning for a potential reduction, as we've heard from customers like PACCAR about their decreasing commercial Class 8 truck builds. We anticipate a reduction of around 10% in truck builds in North America, with possibly a higher reduction in Europe, balanced by whatever market share we can gain in aluminum over steel. Importantly, this quarter, we operated at a strong level, achieving an EBITDA margin of around 28.5%, which is positive as it indicates better leverage at the operating margin and EBITDA levels. Overall, we are cautiously assuming a weaker commercial truck market in the second half and a conservative outlook on Boeing MAX production, as mentioned earlier regarding our rate scheduling.

The next question is from Doug Harned with Bernstein.

I want to shift the conversation away from Boeing for a moment. Earlier this year, GE began its initial shipments of the redesigned LEAP-1A, HPT blades to Airbus. These blades are designed to endure longer in tough environments. We anticipate that we will see similar advancements with the LEAP-1B, and in about a year, we expect to have updates on the geared turbofan as well. When considering these new blade designs, how do you think they will influence your forecast? Presumably, these designs come at a higher cost, which could impact your aftermarket turnover and pricing potential.

Okay. Let me first provide an overview of the revenue projections for the company before addressing the specific question about improved durability. We anticipate that the reduction in the MAX rate from 34 in Q1 to 20 will result in a hit exceeding $100 million. However, this will likely be offset by increased reimbursements from our defense sales, which saw a 12% rise in Q1, significantly above our mid-single-digit expectations, contributing approximately $60 million. For Wheels, we expect a stronger performance in the first half than previously estimated, adding another $50 million. In other sectors, like oil and gas, we mentioned a 15% increase. While IGT was flat in Q1, we project a mid-single-digit increase for the year, bringing in another $60 million. Overall, the total impact of the MAX reduction and more will be balanced by these factors. Notably, we revised our revenue assumptions for spares to over $120 million, reflecting a year-on-year lift of about 25% and closer to 35% in commercial aerospace. This represents a significant increase, with spares revenues now well above 2019 levels, moving from around $800 million to approximately $1.1 billion. So, when looking at the OE side, it’s all about net offsets, and our total anticipated increase is around $200 million, largely driven by the spares projection. That's the breakdown. Considering the current situation, we have not yet reached the peak for the existing CFM56 engine spares business. The pause in new narrow-body production by Boeing means airlines are pushing their fleets hard, likely leading to a peak in CFM56 spares around 2025 or 2026, and that figure continues to rise. The 737 MAX is experiencing an increase in Maintenance, Repair, and Overhaul shop visits as well. For the current LEAP engine version, I anticipate that peaks will not occur until well after 2030. We're already seeing this upward trend, and I previously mentioned the urgent time-on-wing concerns that are contributing to some additional revenue. While I may have exaggerated calling it a bubble lasting three to four years, we can expect this trend to continue, particularly for the LEAP engine and the geared turbofan. Gradual improvements in turbine blade durability are expected, becoming more notable after 2025 rather than in 2024, assuming they perform as anticipated, which I believe they will. This will impact future shop visits leading into 2030 and beyond. In the meantime, we'll benefit from the ongoing production of the LEAP engine and the geared turbofan, which will enhance our growth trajectory.

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

John, I appreciate all the color there on the aftermarket you just provided. It sounds like you're seeing as part of that 100-ish million plus in the commercial spares business this year. What's your visibility on that beyond this year? Do you think we get a point assuming Boeing and Airbus start to clean up, Boeing in particular, deliveries of new aircraft that moderates fairly quickly? Or do you get a sense that that could have substantial room to run even beyond this year, just considering increased use of some of the legacy aircraft? I know you went through maybe CFM56 peak is pushed to the right. But how do you view that flowing into your business on the spare side?

I see commercial aerospace sales going up in '25, '26, and '27. It's a bit too difficult to get beyond that, but I see rising reducing the spares area during those years. I also see increased spares for the F-35. And in the past, I've said I think by the time we get to 2025, we could be seeing spares revenues almost as much as the current OE demand for F-35 turbine blades. And then what happened after depends upon the rate of production and the rate of usage for the F-35 around the world. Clearly, in recent months it has been an extraordinary list of, I will say, time in the air for F-35s. On the other hand, I've also read articles about the plan that we know to run them a little bit less. But nevertheless, we see F-35 spares being very strong over the next few years. And the aircraft park at the end of last year was just under 1,000 aircraft and now it's over 1,000, but will be increasing, assuming that Lockheed delivers, let's call it, about 150 aircraft a year, which looks like doing 150 every year for probably the next 10 years. But by which time, the fleet of F-35s around the world will be very large and the spares will be extraordinary. And then in between that, let's call it around the 2028 mark, I think we'll see improved turbine componentry to meet the requirements where additional thrust is required to offset the current draw from the weapon systems and avionics that is currently the issue being addressed.

The next question is from Myles Walton with Wolfe Research.

John, regarding the fastening unit, the underlying growth in the commercial aerospace sector has been exceptional, especially with the acceleration over the last four quarters. Approximately one-third of that business is in distribution. Is the distribution business growing at a rate faster than that average? Are they experiencing an increase in demand due to anticipated shortages? Additionally, are you optimistic about fastening surpassing previous peak margins at this stage?

The program we initiated three years ago to create a separate segment within our fasteners business for distribution has been a significant success. We've likely seen nearly double the growth in that business over the past three years. While we don't provide all products to everyone and manage all logistics, this initiative aims to reclaim margins that we previously allowed to go to other distributors. We focus on distributing proprietary parts with technological advantages from our Howmet fastener brands. This segment is growing faster than our original equipment business and has also improved fastener margins. I've refrained from predicting that we'll reach 2019 margin levels as the conditions are quite different now. Back then, for instance, we had 787 production at 13 or 14 units per month, and the A350 at a higher rate as well. Currently, those rates are likely around a third of those figures. Our progress in efficiency and the mix of aircraft expected by 2027 are key factors. I might be more optimistic if I could be assured that Boeing will return to producing 14 787s monthly, and I believe Airbus plans to make 15 A350s a month. If that scenario develops, it would be very beneficial for us.

Yes, no guarantees from me, John. And just one clarification. Are you saying that the commercial air foils are now close to $550 million in '24? Is that what the math gets to?

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

Yes, exactly.

Yes, I think it's about right. I'd have to go back to my notes to guide what a more precise number. I think it's well above the $400 million that we saw in 2019. So I think $550 million is probably a best approximation, and Ken can jump in if he wants to correct me on that number. The defense spares for last year, we're already growing from like 400 to 600, and that's continued. So it's all good on that front.

The next question is from Sheila Kahyaoglu with Jefferies.

Thanks, John and Ken. Can you discuss margins? You increased margins by 100 basis points at the midpoint. Typically, we don’t see you differentiating the economic value between original equipment and spares. You're continuing to hire to adjust rates. What improved on the profit line, and how do you see this trend developing throughout the year?

If you consider our hiring rate, it's important to note that we are building off a larger base of experienced labor, which contributes to improved labor efficiency. Despite the fluctuations with Boeing, I’m optimistic we can navigate these challenges, keeping our overall operating efficiency consistent with what we achieved in Q1. We've set our guidance for a 24% EBITDA margin. While we anticipate a slight decline in the second half, we’re working hard to maintain that 24% margin. This quarter has shown significant progress, and even though we faced challenges earlier, we’ve seen positive results from our efforts, particularly with the increase in demand. Most of our $400 million growth is from our engine business, which we believe will continue to thrive. Our revenue increase across fastener structures and wheels stems from productivity rather than a rise in labor costs. We expect to sustain this productivity in the second half and improve in our engine sector to counteract potential revenue fluctuations, particularly in aerospace and defense, even while navigating challenges in commercial wheels.

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

What I've said previously is that we thought we would be able to maintain what we achieved in 2023 into 2024. I believe we are now certain that we will not only hold our position but possibly enhance it compared to 2023 levels. So, if we assume a reasonable price along with a good product mix and spares, while also accounting for the negative impact from Wheels, we expect to maintain a high margin rate. That's why we feel comfortable guiding toward a 24% margin.

The next question is from Gautam Khanna with TD Cowen.

I have two questions, John. One is a follow-up clarification regarding the flexibility of your production operations. Specifically, if Boeing or GE requests a destock in a certain quarter or month, how capable are you in responding to that, particularly in relation to your subcontract manufacturers for Boeing? It seems like you are able to shift and adapt from one program to another. Is that correct?

We don't have dedicated plants for specific customers; instead, we focus on delivering products to multiple customers from most of our plants. In the case of fasteners, some plants are more focused on wide-body versus narrow-body aircraft, and that mix can significantly impact operations. If we look back a year or 18 months, the 787 program was essentially halted. While there were some production numbers, it wasn't truly one a month. I remember that in Q4 of 2022 or Q1 of 2023, we were only producing metallic fasteners. This situation negatively affected us because we had two or three plants that were significantly underutilized. The machinery needed for fasteners on composite aircraft differs from that for metallic aircraft, which contributed to our challenges regarding plant utilization. We faced considerable unrecovered fixed costs, and while we've been managing through those issues, it is part of the reason we've seen some margin rate improvements in our fasteners business, although there are other factors contributing as well. For the most part, in other areas, there are variations within our engine business. Our core manufacturing facilities are not specifically aligned with the types of aircraft or customers. The material used in these cores is important. Over the past two to three years, core manufacturing has seen significant changes due to increased demands for ceramic-based components. Regarding structures and wheels, we maintain control over the brand and design, allowing our wheel plants to be flexible without being tied to specific end markets or customers. This flexibility is advantageous, particularly as we navigate challenges from narrow to wide ranges in the fastener business. The second part of your question was about my plans. At the moment, I can't say that I have any specific plans. As I've mentioned before, I have always wanted to see Howmet through what I refer to as the aerospace recovery. Unfortunately, we haven't quite reached the positive recovery phase yet. I believe there will be a time when, as I mentioned in the press, we experience a significant improvement, possibly in the second half of 2024 or early 2025. However, that hasn’t happened yet. None of us anticipated the impact of the Alaska Airlines incident on production, as well as the current situation with the 787. Things are not progressing smoothly, especially for Boeing and Airbus. I am convinced that conditions will improve, and I will share my plans when I have them. How does that sound?

Next question is from Ronald Epstein with Bank of America.

A question we get and we've heard maybe from some of the engine OEMs is that the supply chain needs to make more investment to have the capacity for the upcoming ramp, right? As you highlighted in your remarks that when Boeing does get back to rate, the number of leaps is a huge amount of growth. And one of the areas that they've suggested that investment needs to be made is in tooling. Just curious your view on that and how you're thinking about CapEx for this potential ramp going forward?

Yes. So what I said previously, maybe I'll just amplify a little bit today is that we said we were going to take back CapEx. And so if last year was probably just over $200 million. I think the midpoint of that guide now is around $300 million, it could be $290 million, but $300 million, give or take, I think, in that region. So maybe just below $300 million. And I think that we're going to spend all of that this year. And there will be elevated investment requirements in 2025 as well. And essentially, that's because, yes, there's a large increase in aircraft engine, both, I think, for commercial and for defense. Because defense you've also got all the new rotor graft programs or re-engining of certain things, I think you heard of it, we talked about before. And so those investments are absolutely required. And so you can assume that the investment is a lot more than the $100 million increase that I talked about, and let's assume it's something getting close to the $200 million, which if you think about that plus all of the additional facilitization and hiring, it's a big bill. And that was essentially focused to one of the engine companies. I talked about last time because of our increased share that we've locked in for the next few years at that company. And hopefully, more to come. It's because of good, strong, solid business. You're seeing margin rates improve year after year, and you've seen another step forward this year. And I think in which we're trying to hold it now and then maybe we'll make further improvements as we go into next year. But given the demand profile. But at the moment, it's clearly one where there's a willingness to invest because of the, I think, returns in that business. And I think the industry needs it as well. So that's where we are on that. And probably a little bit more of a muted investment, for example, in our structures business. So you've heard me talk about titanium where to answer the question you haven't asked, we're still increasing production. You've seen that in the revenue numbers. We're taking the share we've talked about and the increments we talked about as a result of the sanctions on VSMPO. So less occurring. But again, I'm not willing to put fresh capital in the ground for that given its long duration to come on stream and also the geopolitical risk that I've talked about in the past because we don't know what's going to happen, not even what happened after the election this year.

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