Good day, welcome to the Howmet Aerospace first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Please go ahead.
Thank you, Andrew. Good morning and welcome to the Howmet Aerospace first quarter 2023 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer, and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release, and in our most recent SEC filings. In today's presentation, references to EBITDA and EPS mean adjusted EBITDA excluding special items and adjusted EPS excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John.
Thanks, PT. Good morning, everyone. Howmet's Q1 results speak loudly for themselves. Revenue was $1.6 billion, an increase of 21% year-over-year, and an increase of 6% sequentially. Commercial Aerospace increased 29% year-over-year and 4% sequentially. Revenue was above guidance by a significant amount, which was in itself an increase quarter-over-quarter. Naturally, the increased revenues require some working capital. EBITDA was $360 million, an increase of 20% year-over-year, and an increase of 7% sequentially. EBITDA margin was healthy at 22.5%, again, an increase sequentially. Earnings per share were up 35% year-over-year. Free cash flow was negative $41 million, driven by the higher revenues, and will now be followed by three successive quarters of substantial cash inflow.
During the quarter, debt was reduced by $176 million from the 2024 bonds with cash on hand. This will further reduce future interest payments by $9 million annually, hence increasing free cash flow yield. In addition, $25 million of common stock was repurchased. During the balance of 2023, shareholders can expect further steps regarding the application of cash flows thereby creating shareholder value. All of the above, growth, margin rate, free cash flow, the application to create value all speak to the business and financial model of the company. I will comment further on the outlook after Ken has outlined the growth by markets and performance by each business segment.
Thank you, John, and good morning, everyone. Let's move to slide five for an overview of the markets for the first quarter. Revenue was up 21% year-over-year and 6% sequentially. Commercial Aerospace continued to lead year-over-year revenue growth with an increase of 29%, driven by Engine Products, Engineered Structures, and Fastening Systems. Sequentially, Commercial Aerospace was up 4%. Commercial Aerospace has grown for eight consecutive quarters and stands at 47% of total revenue, and although growing, continues to be short of the pre-pandemic level of 60% of total revenue. Defense Aerospace was up 11% year-over-year, driven by the F-35 program in growth in legacy spares. Sequentially, Defense Aerospace was flat due to strong year-end seasonality.
Commercial transportation, which impacts both the Forged Wheels and Fastening Systems segments, was up 17% year-over-year and up 9% sequentially, driven by higher volumes. Finally, the Industrial and Other markets were up 16% year-over-year, driven by oil and gas, which was up 53%, IGT up 14%, and general industrial up 1%. Sequentially, these markets were up 15%, with oil and gas up 25%, IGT up 15%, and general industrial up 10%. In summary, strong growth across all of our end markets. Let's move to Slide six. We will start with the P&L and the focus on enhanced profitability for the first quarter. Revenue, EBITDA, and earnings per share all exceeded the high end of guidance. Revenue was $1.6 billion or up 21% year-over-year.
EBITDA was up 20% year-over-year, and EBITDA margin was 22.5%. Adjusting for the year-over-year inflationary cost pass-through of approximately $35 million, EBITDA margin was 23%, and the flow-through of incremental revenue to EBITDA was approximately 25%. While absorbing near-term recruiting, training, and production costs for approximately 500 net headcount additions. Earnings per share was $0.42, which was up 35% year-over-year. The first quarter represented the seventh consecutive quarter of growth in revenue, EBITDA, and earnings per share. Moving to the balance sheet, the ending cash balance was $538 million, after approximately $218 million of capital allocation, a debt reduction of $176 million, common stock repurchases of $25 million, and quarterly dividends of $17 million.
Free cash flow for the quarter was a negative $41 million, driven by higher revenues in the first quarter. Net debt-to- EBITDA remained at a record low of 2.6x. All bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future. Our next bond maturity is in October of 2024, and the $1 billion revolver remains undrawn. Moving to capital allocation, we continue to be balanced in our approach. CapEx were $64 million in the quarter and continue to be less than depreciation. Capital installed prior to COVID-19 puts us in a very strong position to support the continued Commercial Aerospace recovery. Regarding debt, we reduced the 2024 debt tower in the first quarter by approximately $176 million with cash on hand.
These repurchases will lower our annualized interest cost by approximately $9 million. The October 2024 debt tower now stands at approximately $900 million, which is below our revolver. Our continued progress on debt reduction, EBITDA growth, and healthy liquidity has resulted in an upgrade to our outlook from S&P last week, from stable to positive. You can find our remaining debt towers in the appendix. Moving to share repurchases, the first quarter was the eighth consecutive quarter of common stock repurchases. Since the separation in 2020, we have repurchased approximately $928 million of common stock, with an average acquisition price of $31.79 per share. Share buyback authority from the board of the directors stands at $922 million. Lastly, we continue to be confident in free cash flow.
In the first quarter, the quarterly common stock dividend remained at $0.04 per share after it was doubled in the fourth quarter of last year. Let's move to slide seven to cover the segment results for the first quarter. Engine Products continued its strong performance. Revenue was $795 million, an increase of 26% year-over-year, and an increase of 9% sequentially. Year-over-year, Commercial Aerospace was up 31% and Defense Aerospace was up 19%, with both markets driven by higher build rates and spares growth. IGT was up 14% and oil and gas was up 57%. EBITDA increased 23% year-over-year to a record for the segment of $212 million.
EBITDA margin was 26.7% despite the addition of approximately 260 net new employees and the associated near-term recruiting, training, and production costs. Please move to slide eight. Fastening Systems, year-over-year revenue increased 18%. Commercial Aerospace was up 15%, driven by the narrow body recovery. Defense Aerospace was up 38% and commercial transportation was up 19%. Year-over-year segment EBITDA increased 4% as volume increases were partially offset by inflationary costs and the addition of approximately 215 net new employees and the associated near-term recruiting, training, and production costs. Now let's move to slide 9. Engineered Structures year-over-year revenue was up 14%, with Commercial Aerospace up 39%, driven by higher build rates and approximately $20 million of Russian titanium share gain.
Defense Aerospace was down 23% year-over-year, driven by some legacy programs. Segment EBITDA increased 30% year-over-year, while margin improved 190 basis points. Let's move to slide 10. Forged Wheels year-over-year revenue increased 17%. The $42 million increase in revenue year-over-year was driven by 18% increase in volume. Segment EBITDA increased 18% year-over-year in line with the higher volumes. Margin increased 20 basis points as the impact of lower aluminum prices was mostly offset by inflationary cost pass-through and unfavorable foreign currency. Lastly, before turning it back over to John, one item of note.
In the appendix, we've added slide 16 and have updated the improved interest rate expense assumption for 2023 from $227 million to $222 million. This change reflects the 2023 impact of reducing debt by $150 million late in the first quarter. As you may recall, we had already included the impact of reducing debt by approximately $26 million in January before we published our original 2023 guidance. Let me turn it back over to John.
Thanks, Ken. Let's move to page 11. Moving to ESG. We continue to leverage our differentiated technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints. Within our own operations, Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2022, our actions have reduced the intensity of Howmet's greenhouse gas emissions, energy consumption, water use, and hazardous waste. We progressed against our 2024 greenhouse gas emission goal by achieving a 20% reduction in total greenhouse gas emissions through 2022 from the 2019 baseline, approaching already the 2024 goal of a 21.5% reduction. Howmet is also committed to a safe workplace while fostering a diverse, equitable, and inclusive work environment where all our employees can thrive.
Our safety record continues to improve and is seven times better than the industry average. Howmet was named one of the Best Places to Work for LGBT Equality by the Human Rights Campaign Foundation. We also increased our workforce by 1,500 people and invested nearly $200 million in 2022 to support the significant production growth. Regarding governance, the company was recognized by 50/50 Women on Boards for having 40% of our board of directors made up of women. Lastly, 75% of our key suppliers have sustainability programs considered to be leading or active. I'd encourage you to read our sustainability report found at howmet.com in the investors section. Let's move to slide 12 and talk about our updated outlook.
Firstly, demand for aircraft is very high, and aircraft manufacturers' backlogs are in very good order, both for narrow body and wide body aircraft. Spares volume and the business jet market also continues to show strength. Airline load factors continue to be very high and robust in the West, with rapid growth now seen in both short-haul and long-haul flights in Asia. This travel-led demand stimulus is further augmented by the need for modern, fuel-efficient aircraft, given the current cost of jet fuel and the very high cost of SAF substitute fuel. This is further driven by the commitment of airlines to meet carbon emission targets for today, 2030 and 2050, which can only be achieved by using the new fuel-efficient engines and aircraft.
Current new engines fitted to narrow-body jets are all looking at steps to further increase efficiency, which also helps Howmet given our capabilities in complex casting shapes to provide improved air management and hence fuel efficiency. The other divisions of Howmet are also benefiting by the increased use of titanium and sophisticated fastener suites required by composite wings and fuselages, notably, but not exclusively, for wide-body aircraft. The defense market outlook is also healthy, with increased budgets and strong demand for F-35s, drones, rocket motor parts, and howitzer parts. The last part of the F-35 inventory correction regarding bulkheads that resulted from the prior underbuild of the F-35 fighters in 2020 and 2021 should be dissipated over the next two to three quarters. IGT turbine blade demands continue to be steady, and turbine demand from the oil and gas sector is very high.
The year started well in commercial truck. Given the backlog and steady truck ordering in both North America and Europe, it should mean that any demand drop indicated after spring is now pushed out for at least one quarter or so, albeit the normal Q3 seasonality regarding Europe will obviously apply. The required emissions performance targets for trucks in 2024, especially in the U.S., will apply with no ability to have a stimulated pre-build. In reassessing all of the above, plus robust engine demand seen in Q1, the outlook for the year is increased.
We remain cautious about commercial aircraft build in the second half until we see clear evidence of consistent production rate increases, which will be controlled by the efficiency of both the aircraft assembly lines and the supply of parts, which leads to the final production being set by the weakest link in all of this supply chain. We, as you know, saw this effect of this phenomenon in late Q3 of 2022 and also in Q4 when Howmet delivery requirements were curtailed to balance customer inventories. More specifically, in turning to guidance for the second quarter, we now see revenue of $1.61 billion ±$10 million, EBITDA of $362 million ±$3 million, and earnings per share of $0.42 ±$0.01.
For the year, we see revenue of $6.25 billion +$75 million -$50 million, EBITDA of $1.415 billion +$20 million -$15 million. Earnings per share of $1.67 at midpoint, +$0.03 -$0.02. Free cash flow increased by $20 million to $635 million, ±$35 million. Please move to slide 13. In summary, Q1 performance was healthy and a great start to 2023. The outlook, as seen by Howmet, is improving. The balance sheet was improved with debt reductions of $176 million. Net leverage will now continue towards the 2x net debt- to- EBITDA in the balance of 2023, given both the reduction in debt and the improved EBITDA. The balance sheet is strong.
Continuing share repurchases can be expected as cash is generated, and the current authority is sufficient to continue this program. Annual cash to service legacy pension OPEB liabilities is modest at approximately $56 million. We look forward to updating you again in August, and thank you very much. Let's move to your questions.
We will now begin the question- and- answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please keep yourself to one question only. At this time, we will pause momentarily to assemble our roster. The first question comes from Noah Poponak with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
Noah.
John, you know, if I take the 1Q actual on the revenue and then the 2Q guide, the full- year guide in order to get into that range, 3Q and 4Q, it looks like would need to be closer to $1.5 billion. Recognizing everything you've been saying and the posture you've been taking with conservatism around the end markets, you know, just in general, how do we, how do we get there? I guess last quarter was helpful to describe what you were assuming on the major aircraft production rates in the guide, if you could just update us there.
Yeah. Before I comment specifically on any aircraft build guide, let me just back up and let me talk how we thought about the balance of year. I think this is really important in setting the tone, because managing through an upturn has many more dimensions, especially when you have one major segment, which is, you know, Commercial Aerospace having such significant potential volume increases. As you know, volumes for aircraft build have been taken up, down, delayed with some regularity over the last year, two years. How we've thought about it is that we see essentially Q2 playing out very similar to Q1 and preparing for, as I say, the improvement in build. In doing so, we need to add to our costs.
In Q1, as you saw, from Ken's commentary, we recruited 500 people. We're heading probably to a similar sort of run rate of employee addition in Q2. All expecting that we are receiving and will be receiving the schedules to meet these potential listed second half volumes. Of course, you will know, as everybody else knows, is that Boeing has announced that for their 737, they will take their production rate up to 38 at some time later in the year without specifying exactly when that is. The, you know, the cost of these headcounts are clearly not matched by revenues in the second quarter. We're prepared to support our customers where they may go in volume.
You know, we're confident that those parts are going to be scheduled both by the engine manufacturers and the airframe manufacturers. As I said in my prepared remarks, is that we're also cognizant of what happened in the last four months of last year when cutbacks occurred because people did not achieve or our customers were unable to achieve some of their more ambitious increases that they had thought about. I did say about all marching to the place of the weakest link, and whether that's in the supply base or in the final assembly of aircraft, it doesn't really matter. We set ourselves up and we want to be cautious about the second half, and we'll maintain that stance until we see actual increases in production.
When we see those increases, I think we're gonna have a lot more confidence that we're not gonna get cut back. Hopefully that might produce a, you know, a good outcome, and possibly even better than we currently see. I can say, who knows? You know, we're one of the few, almost the, you know, not quite the one or but say a handful of aerospace suppliers have actually increased guidance. In summary, what I'm saying to you is whether it's commercial aero, whether it's strength in the oil and gas, you know, increased strength in our commercial truck and pushing back some of the potential for any cutbacks there and also the strength in defense.
It's a guide up across, many of those sectors which also have to be taken into account, while still maintaining that, you know, for the year, we need to be suitably cautious because we're only one quarter in. We've got to see how this plays out. Even though, you know, we are optimistic that, everybody achieves their plans. At the same time, you know, I don't want to put ourselves in and give you a sense of robustness which may not occur in the end. Hopefully that gives you—
Okay.
The way we thought about it, Noah.
Yeah.
I've also referenced the only public change in production rate, which is for the 737 later in the year. Essentially, we are not calling out any changes, any other specific numbers, because we don't know of any.
Appreciate the detail on your framework.
Okay. Thank you.
Thanks.
The next question comes from Myles Walton with Wolfe Research. Please go ahead.
Thanks. Good morning. John or Ken or PT. The profile of margins at Fastening Systems, I was hoping you could touch on those. Obviously, the EBITDA margins are a couple hundred basis points below the last year or so. Doesn't really look like mix. I know you're hiring and there's a recruiting training production cost associated with that. Can you just give us some color on the margin trajectory from here? Thanks.
Yeah. Fastening Systems margin is not where I'd like it to be. At the same time, we also need to recognize exactly where we are in terms of the production mix, which is still very much metallic focused of narrow bodies for the main. We've seen really no demand change for essentially no de-demand change for our wide body business currently except for something on the Airbus A350. We do expect that mix will change and improve in the balance of the year. In preparing ourselves, if you look at the net recruitment, I think we called out like 250, 260 net people in Engine, which of course is 2.5x larger than our faster business.
Say we were at 215, 220 people in Fastening. We recruited disproportionately in Fastening as preparing for that improvement. Essentially, when I think about the year and margin rate, is that I don't see much change. A little bit of change positively maybe in Q2, but essentially, having absorbed the costs of raising production and stabilizing the workforce, plus the increase in volume, plus the improvement in mix. I do think that we will see some margin rate improvement in the second half of the year. Basically don't expect much in Q2. We're positioning ourselves optimistically for improvement in the back end of the year, Myles.
Should the incremental margins of that segment in 2024, 2025 more approximate the whole company at that point?
Approximate the whole company. Well, I'm hopeful that they're gonna go up, you know, then you can say, well, everybody hopes for that sort of thing, generally our hopes for Howmet tend to come to reality. I've no comment specifically about saying, does it match this segment or that segment on average? All I know is that, I'll be somewhat disappointed if we're not earning a margin rate in 2024 above our current Q1 level, and indeed don't expect it to be like that.
Okay. Thank you.
Thank you.
The next question comes from Robert Spingarn with Melius Research. Please go ahead.
Hi. Good morning.
Hi, Rob.
John, you had this, very strong sequential growth in Industrial. Some peers have suggested that that's just a matter of a lot of, inventory that was available to ship in this first quarter. How does that trend, as we go through the year?
If I pick apart our, you know, if you aggregate, let's call it our wider industrial business, we saw really strong demand in terms of oil and gas sector, which is really for derivative turbines. That was quite extraordinary at 50%+ . We don't see anything but that being positive for the next, you know, say few quarters. You know, we haven't really thought about 2024 at this point, but oil and gas has been quite strong. That's backed up by the industrial gas turbine business at 14%. Those are the two. Beyond that, the wider industrial business was really low single digits, so nothing exceptional there at all.
For the two specific sectors which make a difference to us, which is oil and gas and IGT, we don't think we pulled anything forward or there's any concerns whatsoever.
Just to tie the loop on this, should we expect sequential growth in Industrial throughout the year?
Well, I did say Q2 we see is very similar to Q1. I don't think you should be expecting anything given what has been a really, really great first quarter, even though maybe I shouldn't say it myself, but it was good. I think you should think about Q2 being pretty similar and us taking on cost prepare for the second half. We're gonna wait and see how our customers' volumes pan out. We think we've tried to give you a balanced view of the way forward. I don't think you should expect any sequential growth, you know, over and above what's been quite exceptional growth already.
Okay. Thanks so much, John.
Thank you.
The next question comes from Kristine Liwag with Morgan Stanley. Please go ahead.
Hey, hey, John. Following up on your salient point on marching to the weakest link. I mean, having to invest ahead of time, with volumes being uncertain, you know, seems counterproductive for the supply chain. First, where do you see the weakest link industry? What do you think is keeping Boeing from actually getting to 38 sooner? Also, what do you think for the 737 MAX? What do you think the OEMs could do better to make it easier for the supply chain to meet these volume increases?
Well, really, I don't have any comments regarding any specific knowledge about Boeing's production and its moves up or down, except that, you know, I'm very supportive, and I know that we can support them, whether it's directly for airframe parts or through parts supplied by the engine manufacturer. I don't have any specific information if there are supply challenges in any specific suppliers. Obviously we've all read about the tail plane, tail section issues and its fastening to the fuselage.
Obviously, you know, my guess, and it's a guess, is that there's a finite amount of parts that they can get, and how many of those parts are directed to the original equipment build for the 737 and how much are for retrofit of the aircraft, which are out with airlines or even the inventory they've got. You know, we don't know and we don't control any of that. You know, we're just hopeful that our customers keep to their statements and their plans. As I said, I think they absolutely will schedule the parts on us.
Then, you know, should they build at that rate, they'll have the parts, but if they fail to build at those rates, then of course there is the potential to be cut back as they rebalance their inventories for parts they've had which they didn't use. So it's very, it's a very difficult question for us to answer. So I think the takeaway really is we're ready, we're committed to support our customers. At the same time, we're not willing to get ahead of ourselves. We are willing to do the recruitment necessary, but I hope that we don't end up with what we did last year in, like, in the fourth quarter, where we shed some employees, because we were a little bit too far ahead of where our customers were.
That's how we think about it. I can't call out anything specific of, you know, there is this issue. If that was fixed, that would solve the problem. I guess it's all wrapped up in the statement later in the year. I guess you can ask Boeing specifically, you know, which month that is.
Great. Thanks, John. If I could follow up on Myles's question earlier. You know, if you exclude inflationary pass-through costs, incremental margins were 25% for the whole business. You know, at some point, you know, as the supply chain issue alleviates for Boeing and Airbus, we could get these higher volumes materialize.
At that point, you know, you might have CapEx and labor already in place. When we kind of look out to 2024, 2025, where could incremental margins be for the Aero businesses? Is this something that could be in the 30s% or 40s%?
Well, when we talked about this, a year or so ago, we did say we probably see a couple of years at 35% incrementals ±5%. You've seen all of that play out in terms of being in the low 30s to the high 30s. It's very much been dependent upon the change of volume by quarter. When we're prepared, and, you know, I'll say it's a reasonable growth, we convert really well. When it's been excessive growth, you know, we've struggled 'cause we had to ingest more, more labor and it's, you know, untrained the, for the, you know, and going through all of that, there's costs and real costs and scrap, et cetera. That's how it's played out the last couple of years.
In the first quarter of this year, here we are again, you know, we're preparing for volume and taking people on and all of that's good because we know at some point it's gonna happen because the demand is so strong. You know, adjusting for the, you know, the metal and the non-metal inflation flow through, it's at 25%. If you reverse engineer from our guide for the year, you'll see that it's around about 29%. If you got a 29% for the year and you start off at 25%, that then implies just by the math, is that the second half we anticipate to be over 30%. Again, you can reverse engineer that from the, from the numbers already given without me calling a specific percentage out.
Should that continue, and then obviously it depends on the growth rate going into 2024 as to what the incrementals will be, but it should be in a good zone. At the moment, I'm voting for the higher volume and because ultimately having those higher volumes with our leverage of applying our margin rate to the higher volumes, you know, clearly overcomes the working capital drag and the capital expenditure drag. It all ends up in free cash flow, Kristine.
Great. Thank you, John.
Thank you.
The next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.
Thank you. Good morning, John and Ken and PT. Thank you.
Hi, Sheila.
Hi. On just the 2023 EBITDA margin, you guys had a nice boost at the midpoint, 10 basis points, but down 10 basis points on the high end. Maybe if you could just update us on your working assumptions for the margin mix and the $70 million-$100 million of incremental inflation that you had previously called out, any progress there and changes given commodity prices have come in a little bit? Thank you.
I mean, we've seen some commodities come in, but also quite a few have moved out against. For example, if you take hafnium and rhenium, those have become very expensive in the last few months. In fact, we've been laying in some security stocks of certain of those metals to make sure that we have adequate coverage so that we're able to support our customers in their quest for the increased volumes. At the same time, while I think generally, you know, we see it as a big positive that inflation is beginning to come down, it's still pretty high. You know, let's call it 6%, 7% in that zone.
Those non-metal inflation is where the big action is today in trying to, you know, look at that, control it, at the same time, you know, recover it. For me, the major story on margin rate is, you know, volume and then, you know, do we see those flow throughs that we anticipate? Obviously it'd be great if, you know, if everybody built what they say they're gonna build then, and with this increased spares demand both for domestic and international, and to cure some of these time on wing issues, then that spares demand is also, you know, quite robust for us at the moment. Hoping the revenue turns out to be that or better.
I mean, calling out a 0.1% or 0.2% on the margin rate is difficult. You're talking fractions, like $1 million or $2 million here or there. You know, I'd say it doesn't really matter, Sheila.
Okay. Thank you very much.
Thank you.
The next question comes from Seth Seifman with JPMorgan. Please go ahead.
Hey, thanks. Thanks very much. Good morning, everyone.
Thanks Seth.
I think during the prepared remarks, I think you, Ken mentioned the $20 million of share gain from Russia on titanium in Engineered Structures. I think that's the wraparound on the share gain that you made last year. Can you talk a little bit about the state of opportunity there and, you know, maybe specifically with some of the more, you know, refined forgings, where Howmet might be in the running to do that and there aren't many others, and whether the OEMs have moved forward there with a lot of alternative sources or not yet?
You're absolutely correct, Seth. The $20 million was the increase in our fourth quarter of 2022 volume. The way to think about 2023 is you take that $20 million, multiply it by four, and then add on to that about a 25% ± growth for 2023. Currently, I think you just take our 2023 number and you probably add another 25%-30% on for 2024. That's the way I'm thinking about it. You know, we've taken a lot of very positive steps with order intake, notably from Airbus, but also from Embraer and also more recently, our first orders with Boeing. That's both for mill product and some forgings.
We continue to work actively on quotations, particularly with Boeing, who are, you know, getting, I'd say, more engaged given the fact that, you know, they've known they've had a very large inventory of titanium, given the restricted build of the 787 and other wide bodies. We see them preparing for ordering and release and gradually increasing those requirements during the back end of this year and into 2024. It's all playing out as expected and see the titanium opportunity as very positive. It's only blemished at the moment by reverts.
It'd be very tough to get a hold of, and it's expensive. You know, so we've laid in for additional sponge requirements and are seeking really to ramp up our production in in our titanium furnaces during the balance of 2023. That's important to us.
Great. Thank you very much.
Thank you.
The next question comes from Robert Stallard with Vertical Research. Please go ahead.
Thanks so much. Good morning.
Rob.
John, I'd like to ask you about lead times. If Boeing does move ahead with this move to 38 per month on the 737, wouldn't you have to start producing these parts considerably in advance? More importantly for you, I suppose, wouldn't you have to start ordering the metal sooner as well, almost like now, if you're gonna hit that by the end of the year?
Yes. Yeah. You're right. We are, you know, recognizing that, you know, we are increasing rate and some of that, you know, is occurring now. It's only balanced by the, you know, the amount of inventory that we have. As you know, we carried, let's call it $100+ million of inventory from 2022 into 2023. Because of, you know, the volume that we saw, we chose not to reduce inventories in the first quarter. You know, we wanted to keep everything healthy. We've tried to input materials such that we can respond to both the production requirements as scheduled, and also what we think is going to be some spot buy purchases, which will be required in the balance of the year.
We're ready and poised to be able to respond, I think in, hopefully in a good and efficient manner. As I said before, you know, we don't know that exactly, you know, what all of the issues are in terms of the that govern the final production rates. You know, we're prepared.
Okay. Sorry, just to follow up on that. How much lead time would you need from an OEM customer to, say, theoretically move your production or deliveries, from where you are at the moment, low 30s to 38?
It very much depends upon the parts. Where we're accessing base metal, it'll be, let's say more in that, let's say six to nine months. If it's where alloyed metal, you're now talking out really 15-20 months of laying in order requirements to anticipate. We're already having to anticipate what 2024 might look like for our material ordering and laying those requirements on our supply base. And it's all, you know, again, predicated on, you know, how many are built this year. You know, do we build in excess or anything's pushed, and what the growth rate will be next year. As I said in my prepared remarks, managing an upturn has far more and many dimensions than managing a downturn.
You know, whether it's labor, materials, production facilities, capital, you know, et cetera, et cetera. It, it's quite fascinating and, you know, I'd say it's, it's really, I'll say in one sense, a really high-class problem to have. You know, here we are debating what's the angle of the growth rate, and, you know, we worry excessively about some of the minutiae, but at the same time, you know, we've got to keep our mind focused on the main goal, which is these are really good conditions to be in where, you know, we're looking at the growth rates that we're talking about, and we know that we're gonna grow again in 2024, and we know we're gonna grow again in 2025. In, in my book, all of that's pretty good, Rob.
Yeah. Thanks so much, John.
Thank you.
The next question comes from David Strauss with Barclays. Please go ahead.
Thanks for taking the question.
David.
Hey, John. Two things. If you can update us on the status of the UAW in Whitehall, what's going on there? Any color you wanna give around the recent change in leadership at Fasteners. Thanks.
Okay. In Whitehall, we continue to be in negotiations with the UAW and have extended the agreement with, you know, with no work interruption. That's just going on, as normal. In fact, you know, we've been discussing that again in the last few days. I'd say normal sort of negotiations around that topic. Just remind me, David, your second one. I got focused on the negotiation one.
Yeah, thanks. The change in leadership that you announced at Fasteners.
Change in leadership. Yeah. We actually changed out the leadership of the Faster Group at the fourth quarter of 2022, and have been managing through, let's say a temporary solution there with an acting, let's say, president of fasteners. You know, it's also given me the opportunity of even being, let's say more intimate with that business. You know, and now appointed what we think is gonna be a great leader for that business. You know, the person has started. They were engaged with us the week before starting our quarterly business operating reviews. That was, I think that was a good learning and, you know, information exchange.
You know, I'm optimistic that with the changes that we've made and the increased focus and performance orientation of the business, that the things that I see are possible, become not just possible but probable. You heard me talk already in response to a question, I think it's from Myles, about the Fastener margin rate, which, you know, I'm optimistic for the second half of this year, especially if we carry on recruiting in the second quarter and taking those costs on and getting ready. The improvement in volume, and then the improvements in mix with wide body coming more to the fore.
In particular, you know, we are beginning to see stirrings of life in the, I'll call it the sub tiers of the 787 suppliers around the world, which will require, you know, the fasteners from us to be able to produce their parts, which they then ship to Boeing. It's a long supply chain, and we do see that wide body mix beginning to improve in the second half and then, you know, improve again in 2024, both for the requirements of Airbus for the A350 anticipated increases and further increases in 787, because it's quite dramatic, the change which you get from those wide body aircraft and the degree of composites they contain.
Do you anticipate having to make additional hires in the second half, John, to hit the stated production rates that are out there? Or will that all be in place with the additional hires that you talked about in the second quarter?
If it is as we think, we should be at rate in the first half, inevitably there's always some attrition, there's obviously replacement. The case for hiring in the second half will be, I'll say, basically predicated on two factors. Is one, what is the actual rate of production required in the second half? Secondly, particularly when we get to the fourth quarter, we will have to be anticipating, to some degree the rate of growth into 2024, which as I said, we expect 2024 to be another very positive year for, particularly on the Commercial Aerospace side. You know, it's difficult to be precise until I know more about the final requirements for the second half, and then what's the angle of increase for 2024.
Thank you.
Okay. Thank you.
The next question comes from Gautam Khanna with Cowen. Please go ahead.
Hey, guys. Good morning.
Hey, Gautam.
I promise I'll keep it to one this time.
I know.
Hey, I wanted to ask—
We gave you a bit of grief of your one three-part question last time, I think it was. All is good.
That's right. I deserved it. Hey, just wanted to get your pricing expectations over the next couple years, and if you could specify price opportunities, I should say, and then if you could specify where, at which segments the pricing opportunity is greatest. Thank you.
Okay. I think when I talked in February, I indicated to you that we were about 80%-85% done in terms of moving through the long-term agreements for 2023. Now, we're up at the 95%-98%. Essentially, 2023 is complete and everything is in line with what I've previously said in terms of a similar order of magnitude, in terms of further pricing, you know, that we talked about for 2022. That, as you know, is over and above any recoveries for either metals or non-metals inflation. That's quite separate. This is just pricing. You know, we don't normally talk about 2024 at this point. You know, we've been studying that recently.
You know, it's while it's a little bit early, is that my guess it's a similar order of magnitude, you know, heading in that direction for 2024, Gautam.
Okay. Any segment that stands out with the greatest pricing opportunity over the next couple of years?
Yeah. Price is positive for us in all four segments. Inevitably for Engine, it has to be greater because it's the largest segment. But it also carries with it some of the more exceptional technologies where we're now pushing the boundaries once again of what's possible to enable really the mission of, let's say, further, you know, let's say lower fuel usage and improved carbon footprint.
I see that, those, you know, impacts not only for the fact that you've got the fuel efficient aircraft, but the engine developments which are being made by our customers, those are really, you know, going to assist on that whole achievement of lower greenhouse gas emissions for the, for the air, you know, the aerospace and airlines in particular. I think it's all good news, and the Howmet technologies are intimate to, helping to achieve that in the, in the stage of the turbine, particularly after the combustor.
Thank you, guys.
Thank you.
The next question comes from Matt Akers with Wells Fargo. Please go ahead.
Yeah. Hey, guys. Good morning. Thanks for the question.
Hi.
John, I was wondering if you could talk about, kind of your latest thoughts on this Asheville facility that Pratt is ramping up. I think that's supposed to ramp up production a little bit this year. Have they given you any indication of kind of what the volumes are there and, maybe, you know, what kind of timeframe you think that could, you know, is there any risk to kind of your airfoil volume?
Well, I don't think anything in terms of the narrative have changed from all the words that I've expended on this topic over the last two, three years. You know, starting with Pratt & Whitney deciding to sell their airfoil castings business, which is in Poland, in 2016. Then deciding in 2017 that they would re-enter, but with using new core technologies from a company they bought. They've been obviously continue to develop that. You know, I mean, take both GE and I think Pratt. We've coexisted with them for many, many years, with them having their own development and production capabilities.
In terms of when you get to, I would say, real production of high volume of very complex parts, I'd say Howmet is in a really good zone. I'm not gonna use the word league of its own, but I mean, in terms of the achievement of the complexity with the yield rates, that's really important to the whole economics of the casting business. The information I have is that of the $650 million that's still being applied to machining, coating, hole drilling and casting, the only information I've got is that I read or heard from an earnings call that they were on the machining side, that they were now 63% completed in terms of that investment.
As you know, the machining investments are very expensive for machining of turbine parts. They're expecting first pass off some qualification for those machine parts in May of this year. I guess it's, you know, proceeding to plan. At the same time, I've also noted with you the extension of our long-term agreements with Pratt. I've also shared with you conceptually, without giving you detail, of the further technology improvements we're making, both for the Block 4 Joint Strike Fighter for the 28 improvements in the requirements for efficiency and thrust in that program, and also on the GTF Advantage engine. There's a lot going on, and we're intimate with those developments with our customer.
Great. Thank you.
Thank you.
The next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.
Hey, good morning.
Hi, Phil.
Hey. You pointed to strength in spares, demand in Engine Products in both Commercial Aero and Defense. Can you give us an idea about where that business is relative to pre-pandemic levels and whether or not you'd expect that to continue?
We're seeing a nice improvement in our spares business. If you go back to the reference point that we gave you of 2019, we were about $800 million. At the time it was roughly half of it was Defense and I ndustrial. Now it's probably closer to $475 million, maybe $500 million. That's continued to grow. Commercial Aerospace dropped quite dramatically to well below $100 million. This year we see that Commercial Aero segment, which used to be $400 million, probably back to at least 75% of its pre-COVID-19 pandemic levels. That part of the or that half of the spares is not yet back to where it was, but growing rapidly with, you know, 30% and 40% compounding.
I expect that 75%, depending, we won't say the way it will turn out to be, but 75%, could be 80% of the 2019 level by the end of the year of that, what was $400 million then.
Thanks, John.
Thank you.
This concludes our question and answer session and the Howmet Aerospace first quarter 2023 earnings conference call. Thank you for attending today's presentation. You may now disconnect. Thank you.