Well, they, they're counting the clock down.
Ah, here we go. Okay, let's, let's get started. I'm Doug Harned, Bernstein's global aerospace and defense analyst, and I'm really happy to hear-- have here with us, John Plant, the chairman and CEO of Howmet. And I think, John, maybe just to start off, perhaps you could just give us an overview of how you're looking at-- how you look at the company right now, the markets, and what you see as sort of your biggest opportunities and challenges over the next five years.
I guess I'll start off with quite a broad comment, is that the last two or three years have been, I'd say, fairly turbulent in terms of, I'll say, the stop-start that we've seen, particularly on the commercial aerospace side. And through that period, we've done, I think, reasonably well. And the only good thing I can think about that's come of that, is that whatever demand hasn't been fulfilled by aircraft production, because we know it's been fairly intermittent, is that that demand has moved to the right. And so, whereas I always thought that 2022 or 2023 or 2024 were going to be like three years of, let's say, excess growth above a normal level of growth for the industry, and I peg that at maybe a 4% level, it's just moved to the right.
Now, it's 2023, 2024, 2025. Now, it's 2024, 2025, 2026, and maybe it's 2026, 2027, 2028. I don't really know. All I know is on commercial aero, the backlog is truly extraordinary. There's a thirst for new aircraft. The fleet is aged, and certainly, with the pressure on for fuel efficiency and for carbon footprint purposes, which is probably more significant in Europe than maybe the US, but the planes are global, so it really is a global phenomenon, that even if there was a dip in passenger demand, I still think there's a very robust demand for replacement commercial aircraft. So that really is the bigger picture I think that we're looking at.
So I still remain optimistic, you know, that we move through this period of, I'll say, difficulty, because we know that one of the aircraft manufacturers is, you know, struggling on output again. And all you just know is that, you know, at some point, that gets fixed, and tomorrow's gonna be better than today. That's how I comfort myself, as I said. You know, because everybody needs a little bit of, I'll say, you know, how does things look? And that's just tomorrow is better than today.
Well, yeah, it's interesting you say that, because if I look at how you all did in Q1, we're sitting here looking at that manufacturer, Boeing, with some real issues, you know, dropping their production rate on, on the MAX, dropping it on the 787. Yet, Howmet comes through and not only gives an impressive Q1, but you raise guidance, and that surprised a lot of people. Did it surprise you that your performance and your performance outlook is that good, even given the Boeing problems?
Well, I start off by saying, I mean, of course, I don't think Boeing knew that they were gonna have, you know, the difficulties that they had during that period of time, because they were still, I'd say, on narrowbody, still on 737 scheduling out at 38.
Yeah.
And originally, it may be struggling to build at rate 30, but the anticipation, they would be lifting production to, was it 42 or 47 later this year. And of course, it hasn't quite worked out like that. And but we were the beneficiary of, let's say, that, I'll say, robust level of part scheduling in the first quarter. And because of the, let's say, door plug issue with Alaska Airlines, which is well reported, so I don't really have any comments on that. It caused us to have to think about, "Let's replan our whole year." And those are the words I used on the earnings call. So all the things that we'd gone through in the fall of 2023 and looking at our year, we said, let's go back and just reexamine all of the assumptions from what was gonna be like in the defense business, which was strong in Q1.
It was a 12%, you know, stronger than we had imagined. Then we looked at our IGT business, and while it wasn't great in Q1, I still said, I think we're gonna be at least a mid-single digit growth this year. And then over and above that, the weakness which we thought was gonna happen in our commercial wheels business didn't happen, so that was strong. And then, of course, given the fact that if new aircraft aren't gonna be produced, therefore the existing fleet is gonna have to work that much harder, we reexamined all of our assumptions around the spares part of the business and, you know, thought fit that that would be at least.
Well, I think I called it out, maybe it's $120 million, which was more than the, you know, I used a loose, at least $100 million, but it's significantly more than that, was the effect of, you know, the Boeing cut I made in terms of our guidance assumption. You know, by redoing all of those assumptions, plus, you know, all our gas assumption on oil and gas, I mean, every one of those, you know, came together and said, you know, we think that given the strength of Q1, what we thought was going to happen in the second quarter, it led us to a logical conclusion that we could be bold enough or crazy enough, whichever one you want to pick, to say the year is going to be better than we originally thought.
Because you're—
Let's put it down to boldness, not crazy, because crazy doesn't sound so good.
I agree with that. But, you know, your change in outlook for Boeing, from 34 a month to 20 a month for the year, I mean, that was a big change, and it, I found it surprising that that was only on the order of $100 million headwind.
Well, I said it's at least 100. I didn't give you the exact number, because I never want you to be able to reverse engineer our set values by aircraft. But, if you can assume it's not 200, but it's well above 100.
Okay.
I think I used the words well above, so-
Oh, okay.
Yeah, I did use those words. But I tried to steer people away from getting exact numbers around shipset values, so I don't really want people to, like, plug in models of what every, you know, what's our shipset value for each aircraft and then trying to work it all out. Because I think this leads them down to a level of detail that is not necessarily helpful. You know, keep in mind that what I'm saying about the big picture, what's developing in, you know, by segments and sectors that we serve. And, you know, we've tended to achieve that which we've said we've done.
So keep those things in mind rather than pore over the shipsets, you know, the shipset value, you know, $X, or is it 5% more than that, 5, you know, less? It's, it's like, it's like, don't bother.
Well, if you, if you consider, though, the 34-20, the 20 a month assumption, if you run that through the rest of the year for Boeing, that's a fairly negative outlook compared to what they're talking about now. Is that conservatism? Are you able to, i f you see that change, is it easy to flex in terms of what your rate is?
I think I must give the answer that should Boeing produce 38, that's great, and, you know, we'll be able to keep you in parts, so you're not gonna have production interruption on either the airframe or on the engine side because of how that, t hat doesn't mean to say we're relying on a lot of, you know, slot in terms of our manufacturing capacity. You know, we have inventory, we have the ability to flex overtime. We, you know, also, we carried on with our recruitment in the, in the first quarter. So trying to put ourselves in a position where we can, but as I, as I probably use the expression, you know, we, you know, we do treat guidance, you know, seriously and, and try to give something which we think we can do.
And so I just felt it appropriate in the lack of certainty, because I don't know how certain Boeing are themselves about exactly how many they're gonna produce. And that's not trying to do anything about saying it's difficult for maybe them to know exactly, given, you know, it seems as though maybe they're not doing traveled work anymore, and what are the consequences of that? Because it's been around for so long. And when you look at the deliveries and therefore reverse out what's the solve for inventory, I mean, production seems to be single digits. I don't really know exactly what the production is. So I can't tell you that 20 is right. I just don't know that. It's assumption that gave everybody the ability for, i f you think it's gonna be more than that, then you can be, it'll be additive to what we said.
Yeah.
If you think it's gonna be less, then you can decrement.
Yeah.
But it's just try to give you a framing of assumption that guided you where we'd pitch for our level of guidance, and it was no more than providing that as a benchmark for you to estimate from, because we don't know, you know.
Well, also, you're supplying into GE and Safran rather than o n the engine products, rather than direct to Boeing, too.
Yes, that's right.
There's sort of a governor in there in a sense.
Yes, and it's again, you know, while GE have taken the decision to downscale the production of the LEAP-1B, for, let's say, I would say roughly half of our business, it doesn't affect us because we have a large outlet of spares requirements, and therefore, we just keep on producing, particularly on the turbine blade side. For our structural casting business, clearly, we see the effect of that because the aftermarket is very small, like in by comparison, so it's mainly an OE business. So, you know, we try to balance all that. So we recognize that, you know, on the engine side, the rate will be above the 20.
Yeah.
And let's say, the airframe side, it could well be less than. So it's just trying to peg something. Like it's pretty inexact.
Well, well, I, if I think about on the interim product side and go back to, I think it was Q4, where you said that you had gained some market share.
Yeah
I was trying to figure out what that was, because you've, on the new products, you've got like a hot section, you've got very high market share. Where, where are you gaining share from?
I didn't identify the customer.
You did not.
You know, people have tried to, you know, make an assessment of that. You know, I've chosen not to, because we're still working and trying to improve our, you know, everywhere. But we have signaled that we're going to kick up our capital investment. And in saying that, we were going, let's say from, I don't know, just over $200 million to something closer to $300 million. And, you know, we'll obviously, you know, continue to assess that as we go through the year. But that's moving it up from, let's say, I don't know, 3.25% of revenue to 4%, so it's a significant step for us.
In doing that, I wanted to give some perspective because I don't think you're gonna make those sort of change of scale of growth investments without trying to provide context. And I think the context needs to be, it's not just on a whim, it's not just because we are hopeful. The answer is, this is backed by hard contracts.
Yeah.
And therefore, I think that's an important clarity to provide investors with. And secondly, because I also wanted to say, but while I truly believe organic growth is better than acquisitive growth, we still need to talk to you about cash flow. And so we also said, and, oh, by the way, it's not gonna deflect us from our 90% of net income, plus or minus. So we have had the last couple of years of 100%, last two years have been, like, 90% plus or minus. So it's not gonna deflect us for that. So I'm trying to give, like, an overall perspective as we can increase our growth rate, we can deploy this capital.
You know, yes, of course, we're gonna have to pay for it, but it's not gonna deflect us from our goals of free cash flow yield, and therefore, this is good for Howmet.
Yeah.
Trying to give you that overall, you know, rounded picture. So, and it's a long way from saying, and by the way, no, I didn't identify which customer. But, you know, it's clear, it's real, it's tangible, and I'm enthused by it.
Yeah.
But I get enthused by lots of things.
Yeah, but I guess what you're saying here is that you have a very rational way of determining that you have to raise production some because you've identified share, share gains that are real.
Yeah. It's not based upon. I've got some loose assumption about maybe there'll be additional service parts because of a, let's say, time on wing bubble or anything like that. It comes and it goes, and therefore, I'll be left with stranded capital. That's not the case. You know, it's clear eye, very deterministic, application of capital in what's a good return on capital business for us, even though I know that, you know, the-- I have to earn a good rate of return because of its capital intensity.
Yeah. Now, on the aftermarket, so you've got—I mean, as you mentioned before, you've got legacy airplanes staying in service longer 'cause people are behind. At the same time, you've also got LEAP engines, GTF engines, particularly those in harsh environments, coming in early for replacement blades. Can you characterize what you're seeing? And I know it, things aren't directly identified as aftermarket or OE when you deliver them. But what's, what are you seeing? What's your sense on each of those, on the new generation blades and the legacy ones, in terms of how, obviously, the legacy ones are all aftermarket, but, you know, what's happening with the aftermarket?
So my assessment is, I mean, it's not gonna be everybody's, but my assessment is the conditions that the engines are operating in, which is to gain that, ultimately, the fuel efficiency, then they're having to operate at temperatures and pressures, which are some more exacting than in the past. And the complexity of the turbine blade in terms of their airflow and necessary multiple cores inside are very different to yesterday's CFM56. And so that in itself is producing a different duty cycle. Now, when you say all of that, the current seeming experience, and again, I'm doing it from data reported, which is if you look at the number of cycles that were obtained or are obtained by a more mature CFM56 or a V2500, then today's numbers of cycles of use on the aircraft are much reduced.
And I know it's an average, and, you know, averages, you know, depend on, you know, in certain countries with, let's say, maybe less harsh environments, are higher, and in some of the countries, they're very much lower. And so I think about it as akin to like a car, which is being, you know, driving for fuel efficiency, where, you know, the pressure and the atomization of the fuel is such that you pressurize it, you ignite it, and then you get the outcome. But the conditions inside the engine are more exacting and harsh. And so I think of it as that the frequency of shop visits for the engines and new engines today are gonna be more frequent than in the past.
Now, it's an assumption, and none of us know exactly where we'll end up with this, you know, when LEAP matures, when GTF matures, because, I mean, they're still, you know, young in their lives. Where CFM's been around, I think, it's the fiftieth anniversary of the CFM, very shortly, maybe, you know, in the next this month. And so you've got that dynamic going on. So I think it's a long-term trend where the frequency of shop visits will be higher. Clearly, the turbine blades of today are at a different content level, price point to the content, the blades of yesterday.
Then we've got the particular, I call, moment in time, where because we're in that initial phase of those engines, where the robustness hasn't been quite what was imagined, and therefore, you've got this, a time on wing, which is, again, well reported.
Mm-hmm.
In terms of maybe that's just a little bit of a 2-year, 3-year bubble, which is probably on top of a long-term trend of increase. So that's how we look at it.
Yeah.
So, you know, where does that produce? I think if everything was normal growth, then maybe on average, we'd be probably seeing a higher aftermarket or higher service growth because of all of this than we've seen in the past. Having said that, because of the volatility of a, of aircraft build, and so for example, if Boeing were to go from, I don't know what number you pick, 20, 25, 30, you know, to, is it 50, or is it more?
Yeah.
Or Airbus go up to 65, 75.
Mm-hmm.
I mean, that's a significant increase in rate of growth also. So which one wins that race aftermarket or we, we don't know.
Yeah.
All we know is that it seems like tomorrow we're gonna have more aircraft produced than today, more engines produced, and probably the aftermarket is gonna see a growth as well, you know, more than historically.
Well,
It's all good outcomes, you know, I think.
Yeah, and it's interesting. I mean, this morning, Larry Culp talked about, you know... I asked him about, long term, where he thought LLPs would be on, on the LEAP, and they believe that those will be similar to, ultimately to CFM56. However, whether that's true or whether it's not true, that's with blades that aren't in service yet. So in the next few years, I would think you're gonna continue to have these coming in at a much more rapid clip than we saw in the CFM56.
I think we think so. Of course, CFM's had 30, 40, 50 years of development through multiple cycles of improvement, and I don't think for one second, you know, it's like one and done with today's engines. I think they're going to be, you know, maybe there's been an increased focus on robustness compared to fuel efficiency, that then there's gonna be fuel efficiency. I think there's gonna be multiple developments to come over the next few years, next, maybe once every five, six years of development, and so all that's to come. And then maybe there's also technology change as well, you know, I don't know which year it'll be, like, things like the RISE and, or is it the MTU solutions that you know, for the GTF engine, et cetera. So there's lots of changes that are gonna occur.
Well, so I look at you as in a very unique position right now, in terms of where you are in the hot section of the engine on the new platforms. And it seems, and even if you go to defense, certainly on F-35, where you have sort of 100% of the engine, how do you think about pricing? Because it seems like you have tremendous pricing power here, given the unique position you're in. So what I'm interested in is how you think about pricing, you know, the negotiations with the customer, where you're in a pretty good position.
We just try to have a balanced discussion. I mean, I don't think at any point, you know, if you go back over the history of the F-35, originally we were not planned at 100%. We were like a 70%, our competitor was at 30%. As it was, the competitor wasn't certified, and we filled in for that 30%. And then because of, say, parts were never qualified, you know, we concluded with our customer that we'd be at 100%, and we created the conditions for the dual source for the DoD or for that customer by having split production, with so much of the production being in one Howmet plant in one state and another Howmet plant in the other state, therefore, producing that security of supply by having them, you know, completely dislocated from each other.
So if something, if there's a fire or there was other, some other external incidents, that we would be able to maintain some production capability. And we've done that through several other programs since, trying to be respectful of a DoD dual source ideal compared to the capability. But going back to the original question, which was, you know, trying to maintain, you know. I don't think that we should do anything apart from saying, you know, I'd say, I think we're not in a price deflationary situation, but being modest and consistent year- to- year.
So, you know, where we've called out in our Qs and Ks and originally in earnings calls, where we don't talk about it now, you know, we've just applied a consistent policy of refresh and renewal, never being overly aggressive, never being, you know, too timid, but trying to be balanced in that approach and saying, you know, these are things for us to be able to reinvest in the business, to keep driving the technology. And that's really important to us and I think to the industry. So we're doing things like how we can, for example, eliminate hole drilling on turbine blades, which is significant for our customers because it can eliminate a whole raft of inventory in the system. But that's not where we start.
We actually start with the complexity of some of the shapes. It actually you're unable to bring a drill or an EDM machine in to actually create the hole. And therefore, if we can cast them in, then that produces a level of sophistication of airflow, which otherwise has been unattainable. So to have those level investments, some which we're deploying in what's coming up in the next few years in, particularly on the military side, is that that's an extraordinary level of capability, which takes, again, a reinvestment in R&D, which you need to have the right returns to be able to do. And so we look at that, we look at our coatings, and then we bring it all together by trying to create the conditions whereby we can cast and shape the hole.
So if you drill a hole, they're always round, you know, and that's not necessarily the optimal flow for air. We want to create the creation where air comes out of the turbine blade and actually clings to the surface of the blade. And you do that by shaping the hole or the exit paths, you know, and the rate of velocity of the airflow. And so those things are really, I think, at the cutting edge of what can be done. To do that, it requires investment. To do that, you've got to earn the right return. So I think trying to do that consistently, not go crazy in a particular point in time, that's what we're trying to do, Doug.
Well-
To be a good partner to our customers and to the industry need, and to enable us to achieve the fuel efficiency and carbon footprints that we all want for the future.
Well, in Engine Products, you've-
I'm getting quite wistful then.
What?
I was getting quite wistful about, you know.
I can tell that.
Yeah. Which stuff I believe in, you know, because I do think we need to pay attention to.
Well, you know, in Engine Products, you've been getting margins sort of in the 23%-24% range. But if you think about opportunities from pricing, and you think about operating leverage as your volumes grow, and then I would add to this, and we talked about it before, the fact that your automation can allow you yields that potentially are much higher than you got before. You think of those levers, can you at all quantify what the opportunities can be in terms of margin expansion?
Well, well, well, not really, no. Because I really have never, in my history of trying to lead companies, and I've done a couple, three now, and I've always resisted the opportunity provided to predict what margins might be in the future, because I genuinely don't know all the circumstances which we'll face. You know, you certainly face exogenous events that you have no control over, and it can make you look very foolish. I don't control how many planes are going to be made, you know? So there's so much which we don't know, and therefore, why should I assume a level of prescience and knowledge that I just don't have? So we keep working our way to try to make things better. And there's things which were really important to us.
So, you know, I really believe the application of of automation into aerospace is vital for the industry, because everything that requires a, let's say, an artisanal skill, that's going to therefore introduce that human variability into the production process is probably not the best. And so for us to drive quality and repeatable performance, then we do have to automate. And, you know, having lines of people with fine scalpel tools, trimming wax, parts coming out of molding, that's not really how things should be, because then the downstream yields, as we come to the final process before, you know, you know, after we've cast, you know, those yields and the defects appear then.
And so it's really important to go all the way back upstream and keep focusing and automating, whether it's your, let's say, the molding machines, the application temperature of the waxes, the, I'll say, casting process itself or the shell process, doing it by robot control. And then at the end of the process now, we, I've got to fit the word AI in somewhere because I'm told that's good these days.
Yeah.
And so, you know, we're using a lot of AI in terms of both some of the developments we're doing in terms of material science, but also in our test sets. So now, rather than scan them by camera and then, you know, project or X-ray, we just move the files digitally, and we have people now not employed to look at them, because the success of doing it by digital means is such that, of course, the AI system and computer control means that it never gets tired. It doesn't need to go to the bathroom. There's no errors made, and so it's proving to be very effective for us in terms of improving those yields.
But it's hard work, and it's more capital intensive, and then go back to, if it's capital intensive, you've got to earn the right returns, et cetera, et cetera. But ultimately, it makes the product, the repeatability, our delivery performance, and consistency of quality that much better. Now, we have our moments, you know, we're not free of defects, you know, because it's still there. But, you know, my goodness, we are trying to improve and keep driving ourselves technologically, on the product of technology I've talked about, like casting holes, et cetera, and also on the manufacturing side. And it's evident not in just our turbine airfoils, but also in our rings plants and indeed in our fastener plants. In the emphasis on repeatability, automation, and trying to take the human error out of the system is really important to us.
Now, on fasteners, I remember back 2007 787, one of the biggest problems on the 787 that delayed its introduction was fasteners.
Oh, no.
And those were the fasteners of what was then Alcoa, now you. And it was the development of the fasteners to deal with electromagnetic issues on the wing. So you developed Howmet, and, and as Alcoa, developed these fasteners for composites that, you know, is now a pretty, I think, powerful product set. You've talked about growth in wide bodies. Can you talk about kind of the importance of the 787, which is a little slower than it should be right now, and the A350, in terms of growth in your fastener demand?
Yeah. Well, well, first of all, I actually did not know that we had caused problems in 2007. You know, it's like, that's, to me, the past, and the only thing that I can ever-
But you solved the problem. That was the key.
Okay.
That's the key.
Okay. Well, we're glad we solved it, but the only thing we can ever do is to change the future, and that's why, you know, it's done, it's over, and it applies to so many other things as well. All you can ever do is to change the outcome of tomorrow. And so when you look at it, we do have a range of flight-type fasteners. They do provide the connectivity for, to the structure where we, you know, create the Faraday cage around the composite-based aircraft like the 787 or the A350. The thing about those modern wide bodies is that they are of composite structure, which does mean for us, we increase the titanium content to the structures, and also the fastener suites we apply are at a higher value.
And so we do that whenever there's a composite, whether it's on a drone or a fighter jet, or whether it's a commercial wide-body airliner. And so, you know, should the 777X be certified next year, and it's got composite wings, then you're gonna see a value uplift because, you know, it's got flight types on there, and therefore, providing that connectivity on those composite wings. So again, it's part of, you know, the thing we try to do is to add value to each, you know, successor in a product.
But is this also, as you see, a wide-body recovery, and both Airbus and Boeing are targeting to get to 10 a month on each, the A350, the 787. We'll see when that exactly happens. But, so there's a big ramp there. But, is it also correct that this should be a margin benefit, given the higher sophistication of these fasteners and the fact that you're building them in dedicated facilities where you should get operating leverage?
Yes. I mean, first of all, wide bodies, generally, it's a different volume variety conversation compared to the narrow body production, and therefore, that volume variety does inherently produce a different set of values and also, you know, different economic outcomes. And wide body is a little bit more, you know, I'll say, rich on the margin side than the narrow body, but it also needs to be. And you know, it is good. So the demands from the airline seems particularly strong, whether it's for the 787 or the A350. And, you know, the A350 was going up from 5 to 6. Now, is it somewhere going up to towards... Was it-- Is it now 10 by 2027, as I saw?
Yeah.
Or-
Right.
And obviously, there's intervening steps in between. It doesn't just jump from one number to the other. And Boeing, likewise, I mean, their stated intent was to have 10 a month. It's not, you know, we, we thought we were gonna see an increase this year, whereas I don't think we are now.
Right.
So that's obviously, you know, a concern. But again, it's only demand, which has moved to the right. I mean, the order book is very robust. You know, maybe it's gonna be more production now in 2025 and, you know, step ups in 2025 and 2026. I don't know when they get to 10, but neither do I need to know. That is like, it's a level of certainty, which is not that important to us, and it's not trying to be sloppy or anything, but the answer is, providing it's going in the right direction, that's good enough for us at the moment. You know, it's that leverage of volume, shipset value, you know, it's all good.
And there's not really much investment associated with that, I would think. Is that correct?
Yeah, that's correct. I mean, if you go back to 2019, we were producing at a rate, 13 or 14 a month on the 787, as an example. And if there's one mistake we did make, is that when we did introduce that suite of fasteners, we have two plants, which is unusual for us. Normally, we make all of our plants multi-product, multi-customer. In this case, we have a couple of plants which were more focused on wide-body applications. And of course, when those went down to 5 in the case of Airbus and the 350, and then 0 effectively, for the 787. Then the fixed cost structures were such that it was very difficult. So the volume increments that we've been seeing until right now have been very welcome because we've seen, you know, the value and also the operating leverage, you know, the covering the fixed costs, which is obviously very good for us, and which we saw in the first quarter.
Well, one area where I would think you might have to invest is when you look at the new back-end engine products, when you look at the airfoils for the new—I mean, GE is gonna be delivering these new blades, like, end of the year to Airbus for the A320s. Following year, supposedly, they'll also be for the MAX, GTF, similarly. For those, do you—Because they're new blade designs, does this involve, for you, significant investment to ramp up, to do?
All of that's already in place because, you know, we've been working on this for some time. So there's no specific investment to introduce those new technologies because we'd be, you know, by the end of this year, we'd be too late.
Yeah.
So for us, we're looking at more the end of 2025 into 2026, about when we need to bring additional capacities on to meet what we think the market demand is and the share change that referred to earlier.
Yeah.
Because for us, it takes an absolute minimum of 18 months or more like two years to bring fundamental machine tool capacity on, which involves for us investing in sophisticated presses, automation. You know, one of the differentiating factors for us is, for example, we make our own casting machines because we wanna keep the level of knowledge inside the company. So nobody ever knows, you know, what exact casting temperatures we can cast at, or materials flow, nor temperature control of cooling and how we, you know, do the gradients of cooling and all of those things, which are very sophisticated. So we do that in-house so that we keep in a tight control of not only technology for the future, but even how we're gonna manufacture. So we, you know, we're very clear-eyed about how we control that.
Now, if we jump over to Engineered Structures, this is one where I think you've. You know, last year, you were disappointed in the margin performance there. You've made a leadership change. Can you talk about, for that business, where you see the opportunities to bring the margins up? What should happen there?
Well, I probably sequenced through the things we should focus on in Howmet and in the years post-2019 of the, you know, COVID and the collapse of wide body and international travel. And then, of course, given Lockheed's production, where they didn't quite meet their stated goals, and therefore, because we'd supplied the parts, we ended up with excess inventory in the system. So we've been burning that down. And so for us to-
This is on F-35, right?
Yeah, F-35, I should have said. Yes, sorry.
Yeah.
You know, we've so in the face of that demand destruction, to be able to hold, roughly hold margins where they were, was like, I think it turned out to be more of a profit improvement plan than fundamental strategic change in the business. And as we took on some of the additional opportunity in the titanium business that was coming as a result of the sanctions on Russia-
Mm-hmm.
You know, we made a bit of a stumble in a quarter last year, and we've been coming up since then, and the margins are respectable, but not as good as I think they can be. And so, yes, we did make leadership change. I'm optimistic now because I think wide body does begin to come back. You know, it's started already, but, you know, once you get to the other side of some of these latest Boeing seven eight seven build things, you know, it's clearly going to come back. The demand is huge. Then we look at the burning off of the excess inventory for the F-35 bulkheads with Lockheed, and so that should be exhausted during the balance of this year, and therefore, rate improve.
So with volume, with throughput, with additional efficiency in manufacturing, you know, and I'm convinced that the leadership will, you know, change, will also help us in focusing on someone who knows in detail aerospace, familiar with, you know, the manufacturing disciplines. So, you know, , w ell, I said, I didn't really give margin predictors for the future. I'm convinced that that business will be better.
Yeah.
I don't think it's in the. It's not, it's not like an engine or a fastener business. It won't be those sort of levels but it will be better than today, I think. So I have a level of optimism that it improves. And I'm good with that because I think we'll see progressive improvement over the next 18 months in that business.
And the portion that is, that's tied to Russian titanium, is that something that's fairly should be fairly stable from here?
Well, we, we're achieving the growth rate increase that we said we'd do, which we did in 2023, the uptick in 2024 and into 2025. I mean, so far there's been little demand on the Boeing side because of the pressed wide body and also the inventory levels, given the collapse of the 787 production, where they stopped production-
Right
... let's say, for a year. So they're still burning off the inventory, but Airbus has been quite robust. So we are, we're on the amount increase that we predicted on that line. But I'm also not really, well, I'm not really. I'm absolutely not willing to increase fundamental capital investment in the business, until I have a like a surety regarding geopolitical risk.
Yeah.
Because I think, as you know, I mean, as we face an election this year, we could have an administration which is more friendly toward Russia. I don't know if it's true or not true, but seems like it could be. I don't wanna put capital down, which takes years to introduce with a working capital profile, which makes, you know, any return on capital nowhere near as good as I can deploy capital, for example, in our engine business. It's just a clear example of how we're very clear-eyed capital allocators, which I think is important. I mean, if you don't do that as a CEO, what do you do? The answer is, you gotta be clear where you can, higher return, and therefore, you know, not treat every business as equal. I don't like, you know, fundamental geopolitical where I'd be investing in things which is like, then I'd say it's out of my control. Why, why would I do that?
Yeah.
You know, I don't know. But am I willing to break bottlenecks? Yes. You know, increase, yes, but from what I've got capacity available today.
But does it-
It's substantial.
Is it also helpful that in a sense, or at least if things don't change, to have VSMPO in Russia, sort of out of the picture?
Yes. Yeah, because they were always the low-cost producer, or maybe it was-
Yeah
... some, I mean, as you know, countries have different systems, and, you know, not everybody maybe measures return on capital and things like that in quite the same way.
At least the low price producer, I guess.
They, yes, they're low. Yeah. So, I mean, taking them out of the market, I think is helpful to us.
Yeah.
Yeah.
You know, just quickly on Forged Wheels. It just seems like, I mean, in a good business, doesn't seem to have much to do with your other markets. You know, is it something that you think should always be part of Howmet?
First of all, I like the business. It's always helpful that you like a business, and I think while you have any business, you should nurture it and support it and drive it and, and, and all the rest of it. So it has all the characteristics of a business, which I really like. So first of all, you know, we control the brand. So, I mean, it makes me sound like a throwback, but we use the Alcoa brand, which is like, like a Michelin tire. So in trucking world, it's the premium brand by far. We have a market share, which is—gives a scale of four times our nearest competitor. We control the design, very different to a car wheel. So we controlling brand, design, you've got scale, and it's a good margin business. So...
We have increasing penetration every year against steel wheels because of light weighting, which is then also supported by the new move to alternate, I'll say, propulsion system. So if trucks move away from fossil fuels to more battery, electric or hydrogen, then they move from, let's say, like in Europe, it's 30% fitment of aluminum wheels, 70% steel, by increments. If you go to an alternative propulsion system, it goes to 100% immediately. So if all, if half the trucks in by 2030 go to this, then we have 100% of half and 30% of the remainder. So it's, it's got inherent growth characteristics. So it's like: how could you describe a better business? It, it's tough to do. Now, are, are we the single best owner of it?
Well, of course, we own it, but I mean, it's like everything else, you know, part of what you should do is always say, you know, "What's the value?" So if, for example, if Doug Harned were to put a big enough bag of gold in front of me, I'm clear-eyed enough to think, you know, you could be the counterparty, but I, you know, I don't want to do anything with the business. I like it.
Yeah.
I really like it. But, you know, back 10 years ago now, I, I did sell what was then, you know, an $18 billion revenue public company because it's the right transaction for shareholders. So I, I always put what's the right return for the shareholder? What's the risk-adjusted future returns? And the answer is: It was right to do so. And, you know, I take that attitude with all of our businesses. And so it's a long way of saying I, I really like it, but, you know, if you were to put a lot of billions down, you know, I, I guess I'd-
Yeah
... consider the opportunity. If I thought you were a solid, upright citizen.
Yeah, I wouldn't hold your breath for this.
Okay. I don't know.
So, you know, if you sort of put it all together and go back to cash, you know, you had, I would say, a surprisingly good Q1 for cash.
Okay.
And should we think in the future, you mentioned it earlier, but should we continue to think of this as sort of a 90% type, cash conversion business going forward?
I think so. I mean, it's gonna be plus or minus. Nothing's ever precise as a single point, so there's always a range around it. I mean, the first quarter's cash flows didn't surprise our CFO, so that was good.
Yeah.
You know, you know, I always start with optimism, but, you know, you know that things can happen, but we produced a good result. Means we'll generate cash every quarter this year. It puts us in a great position of choice above a capital allocation, and so, you know, it's fine.
How do you expect to be thinking about capital allocation? You talked a little bit about CapEx earlier. But, you know, when you start to prioritize CapEx, potential acquisitions, buybacks, dividend, how do you think about the mix?
Well, I always start off with, you know, I'll say, pride yourself on organic growth first, if you're very clear-eyed about what you wanna do. So we've said we're gonna kick up CapEx between our engine business. So that's good. So you need to satisfy the internal needs of the business. Then, in recent years, we've paid off probably, I know, $1.5 billion of debt, which is appropriate. So now we're 2x levered. Probably don't wanna get better than 1.5x, and so we've been on that journey, and, you know, we don't need to do anything on the debt side, even though we may and prefer to reserve the capacity for the remaining sum of 2024s, if we don't refinance it, so before they're due.
You know, we pay a dividend, we've been increasing that. We've been buying back shares, so we've been doing something of everything. I think we may speak a little bit more to, you know, what dividend policy is. We're not a 2%-3% company, but maybe we'll, you know, indicate what, you know, dividend progression for the future, maybe a payout ratio, which will be modest, because I think the majority of cash flow will go to buyback. We have the capacity, I think, to consider acquisitions, but not right now, there's nothing that we see that's particularly appealing that would warrant us to step out and take such a step. You know, we just see a lot of attraction in what we have in hand now.
Well, I think we have to wrap up here, so, but just I'll ask you just to finish up. Like, when you look at the next year, what are you gonna focus your time on?
I suppose just to make sure that all the dimensions of the business are in, we're moving forward, you know, so we don't... I tend not to pick out a single thing. We all, we do talk about the very few things which make a successful company. We do talk about all the things we're not gonna do, because that's probably even more important. But, of the things we're gonna do, whether it's focus the conversations on that growth, the cash flow returns, the development of technology, you know, we keep them very, very focused, and so we keep everything going in a consistent way.
It may not be, you know, we don't have, like, this wow idea we're gonna kill the world with and all the rest of the answer is it's gonna be more of the same steady progression of the company in, in several dimensions, but we restrict it probably no more than half a dozen things. You know, we focus on them religiously. We keep our conversations inside the company very focused, and I, I think it would be better off for it, Doug.
Well, great. Well, thank you very much, John.
Thank you.