Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace first quarter 2021 results. My name is Shelby and I'll be your operator for today. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.
Thank you, Shelby. Good morning and welcome to the Howmet Aerospace first quarter 2021 results conference call. I'm joined by John Plant, Executive Chairman and Co-Chief Executive Officer, Tolga Oal, Co-Chief Executive Officer, and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John, Tolga, 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 addition, we've included some non-GAAP financial measures in our discussion. Reconciliation 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, BT. Good morning and welcome to the call. Similar to last quarter, I will give an overview of Howmet's first quarter performance, then pass to Tolga, who will talk to our markets, and then Ken will provide further financial detail. I'll return to the call to talk to guidance for the second quarter and the full year 2021. Please move to slide four. Let me start with some commentary on the first quarter. Revenue was $1.2 billion and in line with expectations, while EBITDA margin, and earnings per share exceeded expectations. Adjusted EBITDA was $275 million and adjusted EBITDA margin was a healthy 22.7%, similar to the fourth quarter of 2020. Earnings per share, excluding special items, was $0.22, which was ahead of expectations and ahead of Q4 2020. Historically, Q1 has been a significant cash outflow for the company.
However, with improved margins and enhanced working capital control, the outcome was noticeably improved. This will be followed by cash generation in quarters two, three, and four. Lastly, in the first quarter, we focused on de-leveraging, completing the early redemption of the 2021 notes at par for approximately $360 million of cash and reusing cash in hand. The resulting quarter and cash balance was $1.24 billion. On May 3rd, we completed the early redemption of the $476 million of notes due in 2022 for approximately $500 million, inclusive of the accrued interest and fees. Both transactions were completed with cash on-hand. Year to date, we have reduced debt by approximately $840 million, which reduces the 2021 interest expense by $38 million and $47 million on a run rate basis. In 2022, there'll be a carryover interest savings of $10 million.
Let's move to markets and performance on slide five. Q1 revenue was the same as the Q2 to Q4 2020 average and in line with our expectations. On a year-over-year basis, commercial aerospace was down 52%, driven by the lingering effects of customer image rejections and fundamentally lower builds, starting with the Boeing Max. Commercial aerospace continues to represent 40% of the total revenue of the company compared to pre-COVID levels of 60%. The commercial aerospace decline is partially offset by continued strength in our other markets. Defense aerospace was up 12% year-over-year, driven by the Joint Strike Fighter, new builds, and spares. The industrial gas turbine business continues to grow and was up 35% year-over-year, also driven by new builds and spares. The commercial transportation business was up 15% year-over-year, despite customer supply chain constraints.
Although truck demand is very strong, our customers managed through supply chain issues with several commodities which are in short supply, including semiconductors, tires, and glass, to name just a few. We are working closely with our customers to meet demand, which is showing some interruptions. At the bottom of the slide, you can see the progress on price, cost reduction, and cash management. Price increases are up year-over-year and continue to be in line with expectations. Structural cost reductions are also in line with expectations, with a $61 million year-over-year benefit. Segment decremental margins continue to be good at 27%, driven by price, variable cost flexing, and fixed cost management. CapEx was $55 million in the quarter and continues to be less than depreciation and amortization, resulting in a net source of cash.
Adjusted EBITDA margin for the quarter was 22.7% and consistent with Q4 2020 on approximately $30 million of less revenue. Q1 revenue at $1.2 billion was consistent with the Q2 to Q4 2020 average. You can see the benefit of our actions since the start of the pandemic with a 300-basis point EBITDA margin expansion, while revenue was approximately $45 million less than the same period, so good year-on-year performance. Let me turn it over to Tolga to give an overview of the markets.
Thank you, John. Please move to slide seven. Now to year-over-year revenue performance. Q1 revenue was down 26%, driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter. Commercial aerospace was down 52% year-over-year, in line with our projections, as we continue to see customer inventory corrections as expected. Defense aerospace continues to grow and was up 12% in Q1, as we are on a diverse set of programs, with the Joint Strike Fighter being approximately 40% of the total defense business. Commercial transportation, which impacts both the Forged Wheels and Fastening Systems segments, was up 15% year-over-year with a very strong market demand. Finally, the industrial and other markets, which consist of IGT, oil and gas, and general industrial, was up 1%. IGT, which makes up approximately 45% of this market, continues to be strong and was up a healthy 35% year-over-year.
I will now turn it over to Ken to give a more detailed view of the financials.
Thank you, Tolga, and good morning, everyone. Now let's move to slide eight for the segment results. As expected, Engine Products year-over-year revenue was down 32% in the first quarter. Commercial aerospace was down 55%, driven by customer inventory corrections and reduced demand for spares. Commercial aerospace was partially offset by a year-over-year increase of 18% in defense aerospace and a 35% increase in IGT. IGT continues to be strong, we will continue to make investments in this business as demand has been increasing for cleaner energy. Decremental margins for engines were 26% for the quarter, as segment operating profit margin was approximately 19%. In the appendix of the presentation, we have provided a schedule which shows each segment's decremental margins for Q3 2020 through Q1 2021. Now let's move to Fastening Systems on slide nine.
Also as expected, Fastening Systems year-over-year revenue was down 29% in the first quarter. Commercial aerospace was down 42%. Like the engine segment, we continue to experience inventory corrections in the commercial aerospace market. The industrial and commercial transportation markets were down 2% year-over-year, but up 19% sequentially. Decremental margins for Fastening Systems were 45% for the first quarter as furloughed workers returned to work. Please move to slide 10 to review Engineered Structures. For Engineered Structures, year-over-year revenue was down 36% in the first quarter. Commercial aerospace was down 57%, driven by customer inventory corrections and production declines for the 787 and 737 MAX. Commercial aerospace was partially offset by a 10% year-over-year increase in defense aerospace. Decremental margins for Engineered Structures were 18% for the quarter, compared to 24% in Q4. Lastly, please move to slide 11 for Forged Wheels.
Forged Wheels revenue increased 19% year-over-year despite customer supply chain constraints. Forged Wheels revenue grew faster than the overall market, in part due to Howmet's new innovative 39-pound wheel. Segment operating profit margin was another record at almost 31%, as year-over-year incremental margins were 56%. The improved margin was driven by continued cost management and maximizing production in low-cost countries. Please move to slide 12. We continue to focus on improving our capital structure and liquidity. First, we completed two early redemptions of our bonds. The first transaction was on January 15th. We used cash on-hand to complete the early redemption at par of the 2021 bonds due in April 2021. By paying down the bonds three months early at no additional cost, we saved $5 million of interest. The second transaction was earlier this week on May 3rd.
We used cash on-hand to complete the early redemption of the bonds that are due in February 2022. The bonds were redeemed at a cost of approximately $500 million. As a result, the interest costs have been reduced by approximately $47 million year-over-year. Moreover, as John has mentioned, in 2022, we'll get an incremental $10 million of carryover interest savings. Gross debt stands at $4.2 billion. All debt is unsecured. The next maturity is in 2024. Finally, our $1 billion revolver remains undrawn. Before I turn it back to John to discuss the 2021 guidance, I would point out that there's a slide in the appendix that covers special items in the quarter. Special items for the quarter were a charge for approximately $60 million after tax. The charge was primarily related to three items. First, we had fire costs at two of our plants of $7 million.
Second, we had an impairment of assets associated with an agreement to sell a small manufacturing business in France of $4 million. Third, we had a pension settlement charge in the U.S. of $3 million. Finally, we continue to work on reducing legacy liabilities and improving asset returns for the pension plan. I would highlight two significant items. First, we announced a planned administration change of certain prescription drug benefits that is expected to reduce costs and reduce our OPEB liability by approximately 20% or $39 million. Second, we are benefiting from pension asset investment returns of over 13% that we realized in 2020. The combination of the asset returns and the liability reduction have decreased annual pension and OPEB expense by 37% or $13 million annually. Now let me turn it back over to John.
Thanks, Ken. Let me move to slide 13 for the Q2 and annual guidance. First, the good news is that we're another quarter along towards the recovery of the commercial aerospace market. This will go a long way in helping profitability and complementing the growth and solidity of the defense aerospace, IGT, and commercial transportation markets. There are a series of leading indicators that are showing very well for us. Numbers of flight inquiries, bookings of flights, hotels, and car rentals. We also note the increase in U.S.A. TSA numbers, flight takeoffs, particularly in the U.S. and China. Europe remains somewhat muted given the effect of the pandemic and slow implementation of COVID vaccines. All of this should begin to help airlines with aircraft production, particularly of narrow body aircraft. We note that the demand for wide body aircraft probably may not reappear until mid-2022 or even into 2023.
We see at the end of the second quarter as to be an inflection point to the beginnings of production increases for Howmet in the second half of the year, with the exact precise timing yet to be determined. We are planning to bring back from furlough or recruit several hundred workers during the next two quarters to train and retrain to be ready for this demand, just in the same effective way that we did in the third quarter of 2020 for the commercial wheels business. My expectation is that these costs, plus costs of recommencing mothball plants and equipment, will hold EBITDA margins at around the 22% levels until further stabilization is reached. We know that there is an effect on the commercial transportation market of parts shortages, particularly semiconductors, which is reducing shifts and production work in the second quarter.
As noted earlier today, the timing for cash generation has been a focus for us, and instead of the normal large Q1 outflow, which then has to be subsequently overcome, the first quarter was essentially break even, and all subsequent quarters are expected to be cash generative. Specifically, the guidance for Q2 sales at $1.2 billion ±$30 million. EBITDA of $265 million ±$5 million. EBITDA margin of 22.1% ±10 basis points, and earnings per share of $0.20 ±$0.01. For the year, sales at $5.1 billion plus $100 million, minus $50 million. The EBITDA baseline increases by $50 million to $1.15 billion, with a range of +$50 million to -$25 million. EBITDA margin baseline is now increased to 22.5%, +60 basis points and -20 basis points in terms of a range.
The earnings per share baseline increases to $0.95, a significant increase over prior guidance, and with a range of +$0.07 to -$0.04. The cash flow baseline increased to $425 million plus or minus $30 million. Moving to the right-hand side of the slide, we note that the second half revenue is expected to be up 12% for the total company, driven by the increases in commercial aerospace, defense, and IGT. Price increases to be greater than 2020. Cost reduction carryover, approximately $100 million, and pension and OPEB contributions of $160 million. We continue to evaluate the impacts of the American Rescue Plan Act upon pension contributions and will determine those later in the year. CapEx is expected to be in the range of $200 million-$220 million, compared to depreciation and amortization of $270 million.
An adjusted free cash flow conversion is about 100% of net income. We plan to reinstate the quarterly dividend of $0.02 per share of common stock in the third quarter of 2021, pending the final board approval. Please move to slide 14. To summarize, Q1 was a healthy start to the year, and liquidity of the company continues to be strong. The guidance provided is raised from that given in early February and reflects our first quarter profitability strength, the redemption of bonds for cash, the institution of the dividend, all of which provide value to shareholders. More broadly, the focus is now turning to the beginning of the revenue recovery in the second half. Commencing with commercial aerospace and the run rate of both revenues and margins as we exit 2021 and move into 2022, where we see the prospect of further leading indicator improvements.
Thank you. Now we'll take your questions.
Thank you. We will now begin the question and answer session. As a reminder, press star 1 to be placed in the Q&A queue. Press pound if you would like to be removed from the queue. We request that you limit yourself to one question. Our first question comes from Seth Seifman of JPMorgan.
Thanks very much, and good morning.
Morning, Seth.
Morning. Just looking at the different segments and where Aero came down, I guess if you think about where you are relative to the bottom, it sounds like obviously there's increases coming for the second half. For fasteners, do you feel like you have visibility with regard to what the level of de-stocking is and that what we've seen in Q1 is kind of close to the bottom, I guess similarly for structures as well?
The way I think about it is in terms of sequence of the transition, with the end of the second quarter being the transition from basically the current holding pattern and really as a result of the reduced demand and then the correction of the inventory at our customers. Already we know that commercial transportation is going well, subject to those interruptions because of supply shortages. The big turn comes in commercial aerospace, we believe at the end of the second quarter. I think that's going to be led by the engines business in terms of the first uptick in demand and supported by structures, with fasteners probably still being a little bit behind that by another quarter or so.
My picture for the year is that commercial aerospace, I think year-on-year, we're going to see that segment up 15%-20% in the third quarter compared to second. Second quarter will be a reduced decrement compared to what we've seen, the 52% currently. As that increase that we see, the turn occurs, it will be led by Engine, supported by Structures with Fasteners following maybe fourth quarter or even at the end of the year, just as those inventories are absorbed. With what we think will be a fairly significant snapback in the first part of 2022. That gives the sequence that I expect both for the commercial aerospace market and how it affects each of our segments through the next three quarters.
Great. Thanks. That's very helpful. Just as a quick follow-up, can you talk about your level of visibility on the 737 MAX versus when we were on the call three months ago?
We think that it's going to continue in line with Boeing's build rate, which is currently at seven, rising to 14 in the late summer. Then into the, I think, 22 per month range as we start 2022, then up to 30 a month. It seems set well at the moment. We still, as I said on the previous call, have been supplying effectively below the seven rate per month in aggregate. Obviously different levels according to the different product lines. We are expecting to see being in line with ship set values to equal production and then the lift of production as we go forward. That's all built into what we think will be that 20% increase in commercial aero commencing in the third quarter. Also supported by the increase in production in narrow body for the Airbus A320 as well.
Great. Thanks very much.
Thank you.
Your next question is from Robert Spingarn of Credit Suisse.
Hi, good morning. John, just following up on Seth's question there on the MAX, maybe just to ask it slightly differently. With Boeing or other suppliers talking about 160 aircraft being produced in 2021, can you tell us where you are relative to that number, given inventories already in the supply chain and so on? In other words, how much production do you need to do to match to their 160?
Yeah. I think we are closer to the 120 level, let's say 25% below that number for the year is how we see it with that inflection point coming, a significant inflection point coming as we start Q3, for which if we didn't have confidence, we would not be going through the recruitment and bringing back the people in our second quarter, starting the second quarter and seeing significant employment increases during the next two quarters.
Okay. Just on that, I guess on the other question that Seth asked, and you talked about the second half improvement earlier, led by engines. When will you actually know? How far in advance of the shop visits are they scheduled, and are parts ordered, and what are the lead times for structures and fasteners as well? In other words, when will you know what your second half looks like?
Okay. We have already begun to receive order intake now from our customers, particularly on the engine side, with letters and commitments and I'll say schedule releases and EDI transmission. What we're seeing is all the things which have been stated appear to be materializing as we speak. Even in the last week, we received letters from, let's say, Safran or CFM and meetings with GE Aviation, et cetera. It's gone from what we think may happen to, I would say, a lot more confidence. The question is one now of just the final degree to be determined. There's other stuff which has to fill in, but an increasing level of confidence compared to three months ago.
Is it different for fasteners? It's much more book and burn, so the lead times are shorter and you won't yet have a firm view on that?
Yeah. We operate with some of our customers on min-max systems. The averages take some time to re-average. At the moment, as we were re-averaging down on those min-max systems, it takes time for it to feed through and it'll then snap back. It gained more significance to the upside. With that, I'd say maybe a two-quarter delay for that segment is what I see as the most likely scenario. That's why I said I think that fasteners will be a quarter or two behind what we're seeing elsewhere.
Right. Well, thank you, John.
Thank you.
Your next question is from David Strauss of Barclays.
Good morning.
Hey, David.
Hey, John. John, can you touch on what an inflationary environment might mean for your business, thinking about it from a pricing and raw material standpoint? As you net all of it, do you think an inflationary environment potentially going forward would be a net positive for the business?
For the next few years, I don't see it as significant either way, because material inflation will essentially be passed through to our customers by the escalator agreements that we have. Therefore, we're talking more about what will be the impacts of labor inflation. For labor inflation for some significant parts of our businesses, those are already set for the next, I'll say, two to four years, depending upon the various labor agreements that we have in place. Obviously some of the workforce, it's an annual event, and then it's up for us to gain the productivity that we seek to gain each year to offset that labor inflation. In an inflationary environment, I don't expect that to be a problem for us.
Indeed, with our customer agreements that we have, then also some of that we see as being taken care of within the bandwidth of the LTA negotiations that we've been undergoing.
Okay. As a follow-up on the capital deployment front, I know you've taken out a fair amount of debt, reinstituting the dividend, but still looks like the way you're tracking, your cash balance will be well over $1 billion at year-end without doing anything else. Now that you don't have much, it looks like, to do on the debt side of things, how are you thinking about share repurchase from here?
We described the potential for capital allocation strategies in some detail in the last call. In fact, I think I called it the smorgasbord of opportunity to do various things. What we considered as the first order of battle was to deal with the next couple of maturities of our bonds. We did that easily from cash on hand, that obviously produces a lower interest burden for the company, a lower gross debt, therefore it's also seen some improvement from the rating agencies. That's been, I think, a good step for us. Now the next thing we have to address at some point, but not I don't think just now, is the October 2024 at some point. That's three and a half years away in terms of bonds. I'd say that part of the balance sheet is dealt with.
We felt confident in the cash flows of the business to reinstate the dividend, that's an expression of our confidence and again, part of our plan to return money to shareholders. The other two aspects that we have to consider is what about share repurchase and also, to what degree, if anything, do we participate in any M&A activity which may materialize over the next, let's say, year or so as the commercial aerospace market solidifies into, let's say, skylines and a confidence level that we all can believe in? Clearly, that's beginning to happen given what I said about the inflection point that we see coming.
I guess you're in that position, David, that you said, is that if all things work out as planned, is that we'll have a very significant cash balance at the end of the year and have the ability to make other decisions in capital deployment in the future. I think all is well in terms of, let's say, the whole capital allocation strategy that we set down for ourselves in the recent months.
All right. Thanks very much, John.
Thank you.
As a reminder, we do ask that you limit yourself to one question. To ask a question, press star one. Your next question is from Carter Copeland of Melius Research.
One question. David's in trouble. I guess I got to stick to one, right, John?
Well, you'd never do anyway, Carter. It's one of these aspiration things, but you go for the multiple five-part question.
That's fine. I'll do one one-parter. Obviously the shift in focus is moving to going back up in production and then bringing people back from furlough training and the like. One of the things that we used to talk about before this all went down was yield, whether that's first pass yields or roll throughput yields in some of those key spots in your facilities. When you look at yields in production facilities today versus where those were when we were talking about shortages and engine OEM factories two years ago or so, how does that stand today, and how does that play into your confidence and conviction around going up without hiccups?
Okay. When I look at the last couple of years in our aerospace business, I think one of the untold stories is the improvement in our delivery performance and our quality levels, whether it's been reducing arrears, whether it's been parts per million defects or even internal scrap in our manufacturing plants. Yields have clearly and definitely improved, both for our defense aerospace and commercial aerospace segments. It's all good. I really want to protect our reputation and ability with our customers and really seek to do that by bringing labor back and training it. I think the things we did last year in the third quarter for our Wheels business have paid off handsomely in terms of our ability to increase production with excellent quality and deliver these very significant incremental margins that we've seen in that Wheels business.
Rather than, I think, stumble through this, we're trying to be ahead of it, being planful on labor and recognizing that there is a training time or retraining for people to be able to deliver at the yields that we currently have and hopefully continue to improve them. That's why I want to plan carefully through the next couple of quarters because we are talking a very significant increase in labor. Obviously, we'll be tailoring it to and then trimming it exactly as we see to go through it. I really want to be ahead of this thing and not chasing it and having yields issues and arrears bill, and all the consequences that that puts upon the business.
If it costs us, let's say, a couple of 200 or 300 basis points or whatever margin for a quarter or so, I think that's money really well spent because it's going to be what's the margin as we exit this year and how do we perform into 2022. Really trying to be planful about the next phase of our business and not just react to it after the event and then you seem to be scrambling. That's all part of the value we bring, I think, to the industry and to our customers.
Great. Thank you, John.
Thank you.
Your next question is from Gautam Khanna of Cowen.
Hey, guys.
Hey, Gautam.
Forgive a two-question ask, first I was curious about lead time discussions with customers. Are you having those? I imagine it's chicken or egg. If the lead times are short, they don't have the urgency to place orders. Then we have, as the order books pick up, the lead times extend and there's a queuing effect. Do you think that plays out over the next year and a half where we see kind of a bullwhip effect? I know you just talked about the second half being above the first half, could we see kind of outsized growth as we move in, or do you think it will be just feathered in gradually in terms of the recovery? Then I have a follow-up.
The way I see it at the moment is everybody's aware there's plenty of metal in the system, and that gives people, I'll say, the ability to drop in a little bit later than would've been normal. If you looked at the demand levels of 2019, where lead times were, let's say, to get metal for some of our products was over 12 months. We need to recognize the situation we're all in with carrying some trapped inventory, and we still have trapped inventory, which we plan to liquidate during the balance of 2021.
It's really interesting because when we look at our inventory levels as we move through the year, one of recent discussions in our quarterly review has been to what degree do we hold onto some of those in the latter part of the year, just so, again, we're in a really strong position as we enter 2022 with what we think will be a fairly strong year for us in terms of demand. Where we find ourselves at the moment is our customers know that there's metal in the system and know there's trapped inventory, and so we're more on that three to six months of lead times, and people have been holding off, and we've been seeing that fill in very significantly in the last few weeks. Obviously, it's like everything's going to depend.
I do see if we look at six months from now, those lead times are going to be significantly increased. Therefore, orders are going to have to be placed. Otherwise, with some of the production increases on narrow bodies in particular that Airbus and Boeing are looking at for 2022, and certainly later in 2022, they won't occur unless orders are placed. The availability of that inventory and the current excess of metal, which has been in the system for the last year, just won't be there.
That is helpful. Then I just wanted to ask, last quarter, we talked about how the Boeing schedule was a little bit more in flux than the Airbus production schedule. We heard Spirit yesterday talk about 9-10 A350s coming out of the plan this year and next. I was curious, how stable is it now on the Airbus side? Did you see much in the way of changes over the past three months?
No.
Okay.
We've seen no changes on Airbus. It's been solid all the way through. Meeting what they've said, reinforcing what they've said, issuing of both skyline and then production schedules. No changes from Airbus at all. In fact, in the more recent past, we have not seen changes from Boeing either, which in the last year or so tend to be towards the downside. Again, none of that's been occurring.
Terrific. Thank you, guys.
Thank you.
Your next question is from Robert Stallard of Vertical Research.
Thanks so much. Good morning.
Hey, Robert.
John, you've been saying some pretty positive things about what we could be seeing in 2022 and beyond, but I was wondering, as we feed this volume through the system, what your thoughts might be on incremental margins, as volumes recover. Can we, say, for example, take your experience in wheels, and apply that to aerospace?
Obviously, the Forged Wheels will have a different profile to our Engine Products, to our Engineered Structures, so it's got to be segment by segment. Essentially, I am on record as having said that we expect fairly strong incrementals as we go forward, because in the way that we managed through this crisis, you can see that compared to our normal decrementals of, let's call it 40%, we've been getting those into the 20s and have been quite pleased with both the way we've managed our structural cost takeouts and the variable costs. It's our job not to allow those more fixed costs to creep back into the system. Also indeed try to be sticky on those variable costs as we go back up the production volume curve. We are expecting healthy incremental margins.
Part of it is also getting that labor in place at the right time and trained and ready, as I tried to describe on a couple of questions ago, so we don't stumble our way through this. It's planfully set out, accepting it, as I said, if it costs us two or 300 basis points of margin, not basis, 20 or 30 basis points of margin. I think I just calmed it to like just over 22% for our second quarter just to take out of, I'd rather bring the labor in and then look forward to those healthy incrementals going forward.
That's helpful. Just a quick follow-up. That margin impact from extra labor, that's baked into your 2021 guidance?
Yes, it is.
Yeah. That's great. Thank you very much.
Thank you.
Your next question is from Noah Poponak of Goldman Sachs.
Hi, good morning, everyone.
Noah.
John, having 2Q revenue be down year-over-year a little bit, despite that lapping a largely pandemic impacted quarter, the low end of the 2Q guide being down a little sequentially. That's pretty surprising given your mix. I kind of expect that in aerospace original equipment, as that's longer cycle, but aerospace aftermarket, defense, truck, industrial would think would all be up year-over-year and sequentially. Is there just more destocking in aerospace original equipment or a longer time for you to link up to Boeing and Airbus than maybe I had appreciated? If you could help me understand that and maybe just get specific on how much inventory destock left and anywhere where you're not yet linked up to Boeing and Airbus would be really helpful?
Q2 2020, our customers were not rapid to change some of the production requirements, and that became more of a feature in the third quarter, as you know from last year. When we look at Q2 this year, because some of the schedules had not been reduced that significantly, although they were reduced and you see plants were closed down, it's a very, I'll call, turbulent quarter to comp against. The way I look at it is more, let's say, on a sequential basis where I'm thinking that, well, commercial aero was down 52%, it's going to be down a lot less than that in terms of build comparisons. The only other muting effect I'm thinking about at the moment is we are careful in terms of the commercial truck build plans of our customers, just because of those parts shortages.
We are seeing shifts go down and customers take weeks out in the second quarter, and that's part of what we're guiding to as well, including that in our numbers as best as we can estimate it at this point in time. At the same time, I'm going to say to you now the flip side of that is that order intake for us, pretty much globally, has been very healthy. You've seen Class eight truck and trailer orders at levels now which essentially secure the backlog for the balance of 2021 and most of the way through 2022 at the moment. Whereas before we were thinking we had a fairly good trajectory, but it wasn't filled in totally, now we just see that demand so strong.
For example, if you wanted to buy a new trailer to go with your truck at the moment, if you ordered it today, you wouldn't be thinking about taking delivery for 12 months. You're looking out into the second quarter of 2022 now. That's how long lead times are in the commercial transportation industry. That's really very healthy for us and really puts a very solid platform under 2022, never mind the balance of this year. I just want to give you the full picture around that. If we're cautious on, I'll call, supply-based interruptions of the truck build in the very short term, given the strength of the economy, what we see by way of transportation and shipping of things, it's producing a very solid picture for backlog for the next, let's say, 18 months.
That's really helpful. Could you just put a little more detail around where, if anywhere, you're not yet linked up to Boeing and Airbus, or where in the business there's more inventory destock yet to occur?
Basically, we are still having inventory taken out in the second quarter. We think, and it's a best judgment, that basically that just essentially stops at the end of the second quarter. We begin to see our structures business in the second half where we're planning for increased production. We're seeing it clearly. I've already mentioned the engine-based business. The only business which is going to lag for, again, a couple of quarters behind that is going to be our fastener business, where I think we're going to be close on, have balanced all inventories out maybe by the end of the third quarter. It could stray into Q4, but that's how we see it at the moment.
Different flavors for those different segments according to basically lead times and trying to get ahead of it, because I think one thing our customers don't want to have is some of the supply constraints, particularly around engine parts, which are really long lead time items, ultimately. They're on the same constraints as we saw a couple of years ago.
Okay. Thanks so much.
Thank you.
Your next question is from Paretosh Misra of Berenberg.
Thank you. Good morning. I'm guessing structures have the highest wide body exposure and probably engines have the highest narrow body exposure. Is that correct? If there any way you could further quantify it as to what's the wide body versus narrow body split in engine versus structures?
You're right in terms of basically our structures and our Fastening Systems business because of the composite content of wide-body aircraft. If you're thinking Airbus A350 as an example, or Boeing 787s, and with those composite structures, more titanium, whole different suite of fasteners, you can see that impact in the way we've laid out our revenue expectations. We're, as we said, I'll say it's an improving situation, still not behind the engine business. If you look at the traditional split, you're going to have to go back to 2019 because it's been moving around, and I'm struggling to keep all of these numbers in my head, but it's like a 60/40 narrow. Maybe 55/45 narrow to wide-body split. That has shifted the same as Boeing and Airbus has shifted over the last 12 months. Give you a picture on that.
I think traditionally Boeing would have been 60, Airbus 40. It's flipped the other way, then it'll rebalance again in 2021 to some degree as the MAX gets back up and going. For engines, I actually don't keep the numbers in my head in terms of what the exact split is. Certainly, in terms of what we see over the next 12, 18 months is that the narrow body engines, so think LEAP-1A, LEAP-1Bs, then obviously some of the aftermarket service business coming back, particularly for the CFM engines, will obviously begin to fill in at the back end of the year into 2022. I think that's the best I can do at this point. I can't exactly remember the split between wide and narrow for engine. Maybe we haven't given it.
This is great, John. I really appreciate all the details. Maybe as a follow-up, with regard to the industrial and other end market, and sorry if I missed this, but have you given out what sort of full-year growth rate is baked in your revenue guidance for the year?
For the growth rate for industrial markets, we haven't called that out. Just to maybe just give you a picture on that, the way we see us going through IGT, part of that business is strong and getting stronger, in fact. At the moment, we could sell everything we could make. Again, we're working on raising production for that. That's, I'll say, fairly exciting. Oil and gas has been really very muted for the last year and the first half of this year. Our thought process is that as maybe the fourth quarter or certainly by the first quarter of next year, we think the oil and gas begins to show an improvement for us. We see Texas crude now at $66 plus or minus, and natural gas has moved up.
Rig count has moved up significantly for the Gulf. All that's talking well to us in terms of the demand pattern as we work through inventories in oil and gas. General industrial is also strengthening as we see through the balance of 2021 again in the second half. Basically, snapshot is IGT strong, oil and gas, another quarter or two of weakness followed by some strength. General industrial progressively getting better as well.
Great. Thank you very much.
Thank you.
Your next question is from Philip Gibbs of KeyBanc Capital Markets.
Hey, good morning. It's Mike on for Phil. I wanted to get an update on price increases here. You're getting good traction there, and you expect to be greater than what you saw in 2020. Do you have visibility into when you expect the lion's share of those price increases to be seen in the year? Should we expect fairly steady benefits quarter-over-quarter?
I think we're going to see a fairly steady pattern throughout the year. Most of our agreements have now been, in fact, I think all of our agreements have been renewed in terms of LTA for 2021. We don't expect much by way of spot business unless something occurs in the back end of the year where, say, demand is mismatched to previous schedule. That's the picture there. I guess we'll be giving enhanced detail on that in our 10-Q, which we plan to issue later today. Basically everything's in order on that side compared to previous statements.
Okay, great. Thank you.
Thank you.
Your next question is from George Shapiro of Shapiro Research.
Yeah, John, it looks like sequentially commercial aero was maybe down about 2%, if you could validate that. If you could also break out what you think the mix is now between OE and aftermarket, and then the improvement you're looking for in the second half, is that primarily OE or aftermarket? Thanks.
Okay. Benefits in the second half essentially is OE. There will be some modest improvement, I think, in commercial aero, but fairly modest. To give you the picture, if you go back 2019 as a reference point, $800 million of spares, which essentially is engine plus a bit on top of that in our fastener or structure business. It was $400 million of defense and industrial that grew, let's call it 20% over the last year or so. Healthy growth there. For the most part, the spares or parts we sell through to the MRO shops through our customers just dropped off a cliff in the second half of last year. Basically, we see limited demand. There's still a demand like commercial business jet and some very modest levels of spares business.
Our picture through that is first half of this year is pretty much the same as the back half of last year. Compared to $100 million a quarter, think more like $20 million a quarter. It can be below that, it can be just above it, just depends on the quarter. This is bouncing around with small numbers. In the second half of this year, I think we're expecting a modest lift, but not planning for anything significant in that spares business in the second half at this point. As I say, a little bit higher than that, let's call it compared to the $20 million a quarter, thinking more like that $25 million-$30 million a quarter. It doesn't move the needle for us at this point in time. I think it will in 2022.
All the guidance I've given you is essentially a balance of the commercial aerospace part of our business is coming off the OE demand.
Okay. Thank you very much.
Thank you.
Your final question is from Noah Poponak of Goldman Sachs.
Noah, you're back.
I'm back.
I was waiting to get more than one question in.
I totally never violate the stick to one question rule. I came back. Just kidding. John, the last time commercial aerospace was in a similar point in its cycle, sort of looking at the early part of the recovery, the Fasteners market was just volatile. It turned out that it was because of a lot of use of distributors and just kind of maybe a long path from the part OEM to the airplane OEM. It ended up just taking a long time to recover and was just kind of messy. Hearing you talk about the inventory de-stock maybe lasting a little longer there, maybe you could just help us get comfortable that the issues that drove that last time around aren't in the system again. I guess, how worried are you about that in that business?
I don't know if I can give you any more comfort, I guess. I wasn't particularly around when the last cycle really occurred. I don't know. We've done a lot of efforts in our business to try to grow it, not just in OE demand, but also through distribution. At the moment, I think it's good and clear that we've called it out at being probably a couple of quarters behind where we think some of the other parts of our commercial aerospace business are beginning to respond. I think that's a fairly thought through and quality view of the market at this point. I recognize that we do have extended chain. For example, if you just take the North American business, I'll just confine my comments to that. Yes, we'll supply directly to Boeing, that's part of the demand.
We'll also supply into, if we come into Spirit, and therefore there's another step in the supply chain. What we're clear on is that we've been supplying at below rate for some time. We're not trying to be optimistic in saying we're going to see that recovery in Q3 or Q4. We've been saying it's a couple quarters behind. I do think that it will begin to recover, although maybe it's the bullwhip comment that Gautam used, or just snap back. I think we're going to see significant demand increases for our fastener business in 2022. That's the best I can guide you at this point in time.
Okay
without the perfect visibility that I guess we'd all like, but we don't have.
Yeah. Okay. That's helpful. Just one more while I'm on here. The cost you've referred to sort of prepare to have growth come back, hiring, et cetera, is there any range of an absolute dollar number you could put on that just so we could then compare that to the cost out number you've had?
Well, of course, the cost out number is essentially more of a structural cost takeout rather than the variable cost side.
Yep.
The employment that I'm talking about bringing into the business is essentially in our variable cost structure. You need to understand it's a completely different part of bucketing in the P&L.
Right.
I just consider the direct labor we flex in accordance with the production requirements. To give you a picture for second quarter, we're thinking of, let's say around 400 people, could be 500 people to bring into the business during April, May and June to prepare ourselves for what we've talked about. Recognizing that many of those hours won't be necessarily that productive as we go through. You can begin to work out, if you just apply an average direct labor cost per employee for that sort of numbers and average them through a quarter, you can see the sort of costs that we're talking about, this being there.
I believe that's essential for us to be able to then achieve the yields, the incremental margins that we've talked about, which is really what this business is all about and the way we should think about it.
I should just think of it as your structural cost out number you've spoken to, then obviously variable cost tethered to revenue, but that you're going to have some variable costs lead the revenue recovery as you anticipate it.
Exactly.
Okay
Works will be taken on. We're preparing, as I go through waxing and I'll say prep for slurry tanks and then de-mothballing our casting machines and lines so that all of that occurs, so we can take the production on as we go into Q3 and Q4.
Okay. Thanks for taking my questions.
Okay. Thank you very much. I think that concludes today, but if I leave the operator to conclude it for us.
We have no further questions in queue. Ladies and gentlemen, thank you all for your participation. This concludes today's conference call. You may now disconnect.