Yahoo Finance Howmet Aerospace Inc. (NYSE:HWM) Q4 2023 Earnings Call Transcript
Howmet Aerospace Inc. (NYSE:HWM) Q4 2023 Earnings Call Transcript February 13, 2024
Howmet Aerospace Inc. beats earnings expectations. Reported EPS is $0.53, expectations were $0.46. HWM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the Howmet Aerospace Fourth Quarter 2023 and Full Year Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the call over to Paul Luther, Vice President of Investor Relations. Please go ahead.
Paul Luther: Thank you MJ. Good morning and welcome to the Howmet Aerospace fourth year and full year 2023 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income, and EPS mean adjusted EBITDA excluding special items, adjusted operating income excluding special items, and adjusted EPS excluding special items.
These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that I'd like to turn the call over to John.
John Plant: Thanks PT and welcome everyone to the 2023 year-end results call. If you move to slide four, please. And I'll start off by saying Howmet's fourth quarter results were indeed very strong. Revenue, EBITDA, EBITDA margin, and earnings per share all met or exceeded the high end of guidance. More importantly, we continue to outgrow each of our respective markets. Specifically, revenue was $1.73 billion, an increase of 14% year-over-year, and with commercial aerospace up 22%. EBITDA was $398 million, which was an increase of 18% year-on-year, while EBITDA margin was in line with Q3 at a solid 23%. Second half EBITDA margin was 30 basis points greater than the full year average, and Q4 earnings per share increased by a significant 39%.
For the full year, revenue was up 17%, driven by commercial aerospace up 24%, and EBITDA was up 18%. Earnings per share continued to improve annually and was a record $1.84 per share, which is an increase of 31% year-over-year. Moving to the balance sheet and free cash flow. Free cash flow was a record and above the high end of guidance at $682 million. And in the fourth quarter, Howmet continued with its balanced capital allocation strategy by buying back another $100 million of common stock and repaying another $100 million of debt as part of its reduction of the 2024 bonds. Moreover, we refinanced the $400 million of the 2024 bonds at a reduced interest rate. The combination of these actions further reduces annualized interest expense by $10 million going into 2024.
This goes towards continued improvement in free cash flow yield and improved earnings per share. Lastly, net leverage improved to a record 2.1 times, which was in line with expectations. Each segment contributed with Engine Products and Forged Wheels delivering record profits. We were pleased with the pickup in faster margins to adjust in excess of 22% EBITDA margin. Ken's going to detail all of this in his commentary. Having completed a strong 2023, the majority of my comments today will focus on the outlook for 2024 and will be covered in the guidance section after covering the historical results. We look forward to a healthy 2024. And now over to Ken.
Ken Giacobbe: Thank you, John. Let's move to slide five for an overview of the markets. All markets continue to be healthy and we are well-positioned for future growth. Revenue was up 14% in the fourth quarter and up 17% for the full year. The commercial aerospace recovery continued throughout 2023 with revenue up 22% in the fourth quarter and up 24% for the full year driven by all three aerospace segments. Commercial aerospace has grown for 11 consecutive quarters and stands at just over 50% of total revenue. Growth continues to be robust, supported by the demand for new, more fuel efficient aircraft with reduced carbon emissions and increased spares demand. Defense aerospace was flat for the fourth quarter. However, defense aerospace was up 10% for the full year driven by legacy fighter programs and spares demand.
Commercial transportation was up 5% year-over-year in the fourth quarter and up 9% for the full year driven by higher volumes. Finally, the industrial and other markets were up 21% in the fourth quarter, driven by oil and gas up 34%, IGT up 24%, and industrial up 9%. For the full year, the industrial and other markets were up 17% year-over-year, driven by oil and gas up 38%, IGT up 16%, and general industrial up 7%. In summary, another strong year across all of our end markets. Now let's move to slide six. Consistent with prior calls, we will start with the P&L and focus on enhanced profitability. For the full year, revenue, EBITDA, EBITDA margin, and earnings per share all met or exceeded the high end of guidance. For the full year, revenue was $6.64 billion, up 17% year-over-year.
EBITDA was $1.5 billion, an outpaced revenue growth by being up 18% year-over-year, while absorbing the addition of approximately 1,850 net new hires. EBITDA margin for the year was strong at 22.7%, with a fourth quarter exit rate of 23%. Adjusting for the year-over-year inflationary costs pass-through, the flow-through of incremental revenue to EBITDA was approximately 31% in the fourth quarter, and approximately 26% for the full year. Earnings per share was a record $1.84, up 31% year-over-year. Additionally, Q4 earnings per share was a record at $0.53 per share versus the prior quarterly record of $0.46 per share. In the quarter, we had two minor benefits impacting earnings per share, $0.01 associated with the Q4 favorable tax rate, and $0.01 related to favorable foreign currency.
The fourth quarter represented the 10th consecutive quarter of growth in revenue, EBITDA, and earnings per share. Now let's cover the balance sheet. The balance sheet's never been stronger. Free cash flow for the year was a record $682 million, which exceeded the high end of guidance. As we have done every year since separation, we continue to drive free cash flow conversion of net income to our long-term target of 90%. The year-end cash balance was a healthy $610 million with strong liquidity. For the full year, we reduced the 2024 debt tower by approximately $875 million. $475 million came from the balance sheet, and $400 million was refinanced at a fixed rate with an approximate coupon of 3.9%. Net debt to EBITDA improved to a record low of 2.1 times.
All long-term debt is unsecured, and at fixed rates, which will provide stability of interest rate expense into the future Howmet's improved financial leverage and strong cash generation were reflected in S&P's December rating upgrade to BBB minus. With this upgrade, we are now rated as investment grade by two of the three rating agencies. Finally, moving to capital allocation. We continue to be balanced in our approach. For the year, approximately $800 million of cash on hand was deployed to debt paydown, common stock repurchases, and quarterly dividends. The previously mentioned debt reduction actions during the year lowers annualized interest expense by approximately $29 million. We also repurchased $250 million of common stock at an average price of $47.76 per share.
This was the 11th consecutive quarter of common stock repurchases. Share buyback authority from the Board of Directors stands at approximately $700 million. The average diluted share count improved to a record low Q4 exit rate of 413 million shares. Finally, we continue to be confident in free cash flow. In the fourth quarter, the quarterly common stock dividend was increased by 25% to $0.05 per share. Now let's move to slide seven to cover the segment results for the fourth quarter. Engine products continued its strong performance. Revenue increased 16% year-over-year to $852 million. Commercial aerospace was up 14%, and defense aerospace was up 18%. Both markets realized higher build rates and spares growth. Oil and gas was up 25%, and IGT was up 24% as demand continues to be strong.
EBITDA increased to 22% year-over-year to a record $233 million. EBITDA margin increased 120 basis points year-over-year to 27.3%, while absorbing approximately 180 net new employees in the fourth quarter and approximately 1,030 net new employees for the full year. For the full year, EBITDA was $887 million, and EBITDA margin was 27.2%. Both were records for the engines products teams, a significant accomplishment. 2023 EBITDA margin was up approximately 450 basis points from 2019 when revenue was at a similar level. Now let's move to slide eight. Fastening Systems revenue increased 26% year-over-year to $360 million. Commercial aerospace was 45% higher, including the impact of the wide-body recover. Commercial transportation was up 13%. General industrial was up 8%, and defense aerospace was down 9%.
Year-over-year, EBITDA increased 38% to $80 million. EBITDA margin increased 180 basis points year-over-year to 22.2%. We are pleased with the continued performance of the fastening systems team with three consecutive quarters of revenue, EBITDA, and EBITDA margin growth. Now let's move to slide nine. Engineered Structures revenue increased 6% year-over-year to $244 million. Commercial aerospace was up 19% driven by build rates and the wide-body recovery. Russian titanium share gain was flat year-over-year at approximately $20 million due to timing of shipments. Defense aerospace was down 35% year-over-year driven by the F35 and legacy fighter programs. EBITDA was $33 million, down slightly from prior year. EBITDA margin decreased 130 basis points year-over-year to 13.5%, partially due to absorbing net new employees.
However, sequentially, revenue, EBITDA, and EBITDA margin increased for the second consecutive quarter. In Q4, sequential revenue increased 7% and EBITDA increased 10%. Although production efficiencies are not yet back to targeted levels, we are making progress and expect continued recovery in 2024. Now let's move to slide 10. Forged Wheels year-over-year revenue increased 3% to $275 million. The $9 million increase in revenue year-over-year was driven by an 8% increase in volume, partially offset by lower aluminum prices. Sequentially, volumes were down 3% as we're starting to see signs of the commercial transportation market softening. EBITDA was flat year-over-year. EBITDA margin decreased 90 basis points primarily due to the timing of inflationary costs pass-through.
Finally, let's move to slide 11 for more detail on debt actions. In the fourth quarter, we redeemed $500 million of our 2024 bonds. The $500 million redemption at par was funded with approximately $100 million of cash from the balance sheet and approximately $400 million draw from two term loan facilities. Both term loan are prepayable without penalties or premiums and mature in November of 2026. $200 million was drawn from a U.S. dollar-denominated term loan facility and approximately $200 million was drawn from a Japanese yen denominated term loan facility. We entered into interest rate swaps to exchange the floating interest rates of the term loans into fixed interest rates. The weighted average fixed interest rate is approximately 3.9%, which is lower than the 2024 bonds coupon of 5.125% [ph].
The combined impact of these Q4 actions is expected to reduce annualized interest expense by approximately $10 million. Moreover, debt reductions in Q1 through Q3 reduced annualized interest expense by an additional $19 million. We continue to leverage the strength of our balance sheet. Since 2020, we've paid down gross debt by approximately $2.2 billion with cash on hand and lowered our annualized interest cost by more than $130 million. Gross debt now stands at approximately $3.7 billion. All long-term debt continues to be unsecured and at fixed rates and our $1 billion revolver remains undrawn. Lastly, before turning it back to John, let me highlight a couple of additional items. As we continue to focus on improving Howmet's performance and capital allocation, I wanted to highlight our pretax RONA, or return on net assets metric, RONA, which excludes goodwill and special items has improved by approximately 400 basis points on a year-over-year basis from 29% in 2022 to 33% in 2023.
You will find reconciliations in the appendix of the presentation. Lastly, in the appendix on slide 16, we have included 2024 assumptions. Interest expense is expected to improve to approximately $200 million. The guidance includes all debt actions completed to date. The operational tax rate is expected to continue to improve to a range of 21% to 22%. The midpoint of our guidance represents approximately a 600 basis point improvement in the operational tax rate since separation in 2020. We continue to be focused on further improvements in our operational tax rate. Pension and OPEB expense as well as contributions are expected to increase modestly by approximately $15 million year-over-year. Finally, we expect miscellaneous other expenses, which are below the line to be in the range of $5 million of income to $15 million of expense for the year, but are very volatile within quarters.
So with that, let me turn it back to John.
John Plant: Thanks Ken, and let's move to slide 12, please. The commercial aerospace market continues to be strong. Airline load factors are good. International travel continues to strengthen and all this has led to significant orders for new aircraft and higher levels of aircraft backlog at both Airbus and Boeing. Demand for new aircraft is expected to be sustained due to the need for aircraft with substantially improved fuel efficiency and also to the commitments made by airlines of improvement towards carbon neutrality with two stages of 2030 and then 2050. Commercial aerospace spares are also growing not only due to the number of aircraft in service, but also in the case of narrow-body due to the increased service shop visit requirements of the newer fuel efficient engines.
This is a long-term trend over the next decade and one which we look forward to. Defense budgets and hence the defense market continues to be strong in fighter aircraft, farmers, drones and helicopters. Tank turbines and Howmet systems are also strong. Specifically, we expect increased F35 engine spare requirements due to the shop visit requirements as the fleet continues to expand globally. Other markets of oil and gas and gas turbines continue to be healthy. We do see natural gas turbines to be the natural accompanying technology to the renewal segment of wind and solar. The market where we're cautious is that of commercial transportation, where we see potential for up to a 10% reduction in revenue as we move through 2024. We do envisage commercial transportation to resume growth in 2025 and into 2026.
This is supported by the view that any potential reduction is mild due in part to the continued secular growth of our improved penetration of aluminum wheels compared to steel wheels for the needs of fuel efficiency or increased payloads. Also as truck engines move to alternate means of propulsion other than fossil fuels, the adoption of aluminum wheels should gradually move towards 100%. Moving now from general market commentary to specific numbers. We expect Q1 revenue to be up 9% year-over-year and EBITDA up approximately 11%. For Q1 of 2024, we expect revenues of $1.74 billion, plus or minus $10 million, EBITDA of $400 million, plus or minus $5 million and earnings per share of $0.51 plus or minus $0.1. This is similar to Q4 after excluding the one-off benefits of the tax rate and below the line items, which contributed about $0.02.
Regarding the full year 2024, we see revenue at $7.1 billion plus or minus $100 million; EBITDA of $1.635 billion plus or minus $35 million; and earnings per share of $2.15 plus or minus $0.05. Free cash flow, we see a $735 million plus or minus $35 million and CapEx of $290 million plus or minus $15 million. I'd like to comment further on the capital expenditures, seen as these are expected to be above depreciation for the first time in many years. Essentially, this is due to investment opportunities materializing the Engine Products business. We see this as a very good sign to be able to deploy capital with high returns and rapid future growth. In fact, let me expand. In fact, 2023, which was another year of above market growth in each of our segments, in fact, above 5% above market served.
This engine investment is viewed as excellent and speaks to the continued market growth in the business with 27%-plus EBITDA margins and a 33%-plus return of capital. And this continued growth is seen as the investments come on stream in approximately 18 months' time. Underpinning all of this is an agreement with one of our engine manufacturer customers for increased business and increased market shares. This does not change our long-term commitment to deliver average free cash flow conversion of 90% of net income. And as you can see from our guide, free cash flow after all cost is approximately 45% of EBITDA which is best-in-class. We based our guidance on Boeing 737 MAX production of 34 aircraft per month and six 787 aircraft per month. Our Airbus assumptions are in line with their plans.
As an example, Airbus A320s are at 56 aircraft per month. We are prepared and can be prepared should volumes increase above current customer assumptions. In the case of the A320 we're anticipating the build rate increasing in 2025 to approximately 60 to 65 aircraft a month and that will require us to do some prebuilds or parts in 2024, and that explains the average we've given. Please now move to slide 13. 2023 was another good year for Howmet. Sales increased by 17% and were above each of our segments end markets. EBITDA was up 18% and EBITDA margin increased to 23% in the second half of the year. Earnings per share was up 31%. Cash flow exceeded guidance and was in line with our long-term view of converting 9% of net income into cash flow.
The balance sheet was strengthened with significant debt paydown repurchases with cash on hand and record low net leverage of 2.1 times. The outlook for next year or for 2024 has already been outlined in the numbers given. But let me give you some qualitative terms to look at 2024 as it demonstrates the following features. We have further revenue growth, which we expect will be proven to be again in excess of our end markets served. Free cash flow continues to improve with the higher EBITDA margins and we expect further reduced debt and interest expense burden. And we take into 2024 a reduced share count. And you can expect further shareholder friendly actions of increased share buybacks and further dividend growth. And now I'll close my prepared remarks.
I now hand over and get ready for questions. Thank you.
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