Yahoo Finance Howmet Aerospace Inc. (NYSE:HWM) Q1 2024 Earnings Call Transcript
Howmet Aerospace Inc. (NYSE:HWM) Q1 2024 Earnings Call Transcript May 2, 2024
Howmet Aerospace Inc. beats earnings expectations. Reported EPS is $0.57, expectations were $0.518. 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: Good morning and welcome to the Howmet Aerospace First Quarter 2024 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] Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.
Paul Luther: Thank you, Gary. Good morning, and welcome to the Howmet Aerospace first quarter 2024 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income and EPS mean adjusted EBITDA, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items.
These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John.
John Plant: Thanks, PT, and good morning everybody. Q1 2024 was an outstanding quarter for Howmet. Revenue, profit, margin, and earnings per share were records and all improved versus guidance last year and sequentially. More specifically, Q1 performance and year-over-year improvements were as follows. Revenue was $1.824 billion, up 14%. EBITDA was $437 million, up 21%, with a healthy incremental of 35%. EBITDA margin was up 150 basis points to 24%. Operating income was up 27% with a margin rate of above 20. Earnings per share were $0.57, an increase of 36% year-over-year and 8% sequentially. We'll recall that in Q4, the earnings per share benefited by an unusually low tax rate of 20.7% and also currency favorability and hence the sequential improvement was indeed excellent.
Free cash flow was $95 million and marks the first quarter with an inflow to be followed by further inflows in Q2, Q3 and Q4. We were particularly pleased with the positive cash flow since for many years we've seen Q1 outflows, which had to be overcome in later quarters. A total of $150 million of cash was used to repurchase shares just over 2.2 million shares at an average price of approximately $67. Dividends of $0.05 per share were paid, and you'll recall that these had been increased by 25% in Q4 of 2023. Finally, net debt to EBITDA was a record low of 2x. I'll now turn the call over to Ken to cover the financials in more detail before returning to talk to the overall outlook for 2024.
Ken Giacobbe: Thank you, John, and good morning, everyone. Let's move to Slide 5 for an overview of the markets. All markets continued to be healthy in the first quarter. On a year-over-year basis, performance was as follows. Total revenue was up 14%, driven by very strong growth in the commercial aerospace market, which was up 23%. Commercial aerospace has now grown for 12 consecutive quarters and represents approximately 50% of total revenue. Growth continues to be robust supported by demand for new more fuel-efficient aircraft with reduced carbon emissions and increased spares demand for engines. Moving to our other markets. First, defense aerospace was also strong, up 12%, driven by fighter programs and engine spares demand.
Next is commercial transportation, which has been resilient in a challenging market. Revenue was up slightly as we continue to offset weakness in the market by taking share from steel wheels with Howmet's lighter and more fuel-efficient aluminum wheels. Finally, the industrial and other markets were up 7%, driven by oil and gas up 15%, general industrial up 10%, and IGT, which was flat. In summary, another strong quarter across all of our end markets. Now let's move to Slide 6. First, moving to the P&L. Q1 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. Revenue was up 14% and EBITDA outpaced revenue growth by being up 21%, while absorbing the addition of approximately 430 net new employees in the quarter.
Incremental flow-through of revenue to EBITDA was a healthy 35%. EBITDA margin was a record at 24% and earnings per share was also a record at $0.57 which was an increase of 36% year-over-year. Now let’s move to the balance sheet and cover the balance sheet and cash flow. The balance sheet and liquidity have never been stronger. Cash at the end of the quarter was $534 million, and free cash flow was a record for Q1 at $95 million. Net debt to EBITDA improved to a record low of two times. All long-term debt is unsecured and at fixed rates, which provides stability of interest rate expense into the future. Howmet’s improved financial leverage and strong cash generation were reflected in Moody’s Q1 ratings upgrade to investment grade. With this upgrade, we are now rated as investment grade with all 3 rating agencies.
Additionally, with the recent upgrades, we have established a $1 billion commercial paper program, which further strengthens our liquidity. Finally, we continue to have access to our $1 billion undrawn revolver. Total liquidity now stands at approximately $2.5 billion. Finally, let’s move to capital deployment. We deployed approximately 700 – excuse me, $170 million of cash in the quarter to shareholders, of which $150 million was used to repurchase common stock. This was the 12th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low Q1 exit rate of 411 million shares. Finally, we continue to be confident in our free cash flow. In the first quarter, we deployed approximately $20 million for the quarterly common stock dividend of $0.05 per share.
Now let’s move to Slide 7 to cover the segment results for the first quarter. Engine Products continued its strong performance. Revenue increased 11% in the quarter to $885 million. Commercial aerospace was up 14%. And defense aerospace was up 13%. Both markets realized higher build rates and spares growth. Oil and gas was up 15% and IGT was flat. Demand continues to be strong across all of our engines markets. EBITDA increased 17% year-over-year to a record $249 million. EBITDA margin increased 140 basis points year-over-year to a record 28.1%, while absorbing approximately 435 net new employees in the quarter. Once again, the engines team delivered another strong quarter. Now let’s move to Slide 8. Fastening Systems also had a strong quarter.
Revenue increased 25% year-over-year to $389 million. Commercial aerospace was up 44%, including the impact of the widebody recovery. Commercial Transportation was up 5%; general industrial was up 14% and defense aerospace was down 11%. Year-over-year EBITDA outpaced revenue growth with an increase of 59% to $92 million. EBITDA margin increased 510 basis points year-over-year to 23.7%, which reflects the improved commercial and operational performance, complemented by the widebody recovery. Now, let’s move to Slide 9. Engineered Structures performance continued to improve. Revenue increased 27% year-over-year to $262 million. Commercial aerospace was up 26%, driven by build rates and the widebody recovery. Defense aerospace was up 27% year-over-year, primarily driven by the F-35 program.
EBITDA was up $7 million year-over-year and EBITDA margin decreased slightly to 14.1%. Sequentially, revenue, EBITDA and EBITDA margin increased for the third consecutive quarter. The team is making progress, and we expect continued improvements throughout 2024. Finally, let’s move to Slide 10. Forged Wheels revenue was essentially flat year-over-year in a challenging market. Although revenue was essentially flat, EBITDA increased 4%, driven by volume and productivity. EBITDA margin was a healthy 28.5%. With that, now let me turn it back over to John.
John Plant: Thanks, Ken. And let’s move to Slide 11 to show our progress on 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. Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2023, we continue to progress against our 2024 greenhouse gas emissions goal by achieving a 20% reduction in total greenhouse gas emissions from 2023 compared to 2019, which is our baseline year. We are tracking well to our 2024 goals of a 21.5% reduction. I would like to draw your attention to the issuance of our annual ESG report in April, which details the good progress we’ve made.
Additionally, in the report, we reflect 2027 goals for Howmet, which shows the continued progress on our baseline year of 2019, with a full 33% reduction in greenhouse gas emissions. Now let's turn to Slide 12 and start to talk about the outlook for the business. Firstly, I'll address commercial aerospace, which represents our largest revenue market. Demand for air travel continues to be very strong. And if anything, will be constrained during the summer season by the availability of new aircraft, especially narrow-body aircraft. Asia-Pacific travel, which has been lagging the U.S. and Europe has been increasing rapidly. And is now back to approximately 90% of pre-pandemic levels. International Asia-Pacific travel was up approximately 50% in the recent months and speaks well to future aircraft demand especially wide-body aircraft.
Freight requirements also continue to be robust. The one item that needs to be set out is the fact of the FAA restrictions on the Boeing 737 MAX production of 38 per month in the light of continuing quality problems at Boeing. These facts are extensively reported in the press and have resulted in lower production, well below the prior levels of approximately 30 aircraft per month, which in itself was well below the 2023 targets of 38 aircraft per month. Clearly, the prospect of going up to rate 42 and rate 47 per month is now unlikely in 2024. This has caused Howmet to completely replan our year. And we've concluded that a further reduction in build to approximately 20 aircraft per month average for the year is a more secure assumption than that previously reported of 34 aircraft per month.
As we replan our year, we've taken account of this revenue adjustment, while replanning other areas of our business, for example, Spares, Defense and Wheels revenues. And we net all of this replanning out to an overall increase of approximately $200 million of revenue for 2024. This guide reflects continuing strong Airbus production in line with our overall planned percentage increase of aircraft of approximately 9%. We now envisage, as an example, Wheels revenue being higher than previously expected in Q1 and Q2, whilst continuing to expect a reduction in the second half of the year. In the second half, we expect this to be offset by higher wide-body build especially in preparing to move into 2025, complemented by robustness in Spares, Defense and IGT sales.
However, we do expect Boeing to trim back production part schedules for the 737 MAX to lower levels than previously envisioned. In terms of specific numbers in Q2, we expect revenue to be $1.835 billion, plus or minus $10 million, EBITDA $440 million, plus or minus $5 million, earnings per share of $0.58, plus or minus $0.01. For the year, we see revenues around $7.3 billion, plus or minus $75 million. EBITDA of $1.75 billion, plus or minus $30 million, earnings per share of $2.35, plus or minus $0.04 and free cash flow of $800 million, plus or minus $50 million. Clearly, the diversity of Howmet product revenues and solidity of performance can be seen in these numbers. We're pleased with the resulting increased outlook and our free cash flow in particular.
Therefore, we expect to increase our dividend payout in the second half of the year, starting with the payment in August pending Board approval. Specifically, the expected dividend increase is $0.02 per share to a total of $0.07 per share, which is a 40% increase. This notably maintains the 2023 dividend yield. The balanced capital allocation plan continues. Capital expenditures elevated over 2022 and 2023 levels and is now a little ahead of depreciation. The main thrust continues to be the expansion in our engines business to achieve the market share increases that I already talked about on the last call. The majority of the other uses of free cash flow in terms of capital allocation will be share buyback in 2024, while still preserving the ability to pay down the stuff of the 2024 bond of $200 million should we decide to do so.
I'm also sure that we will focus on refinancing the 2025 bonds later in the year or the latest in early 2025. I thought it useful to provide more of an extensive roadmap to our capital allocation thoughts during this call. In terms of net leverage, we're also envisaging getting closer to our minimum leverage target of towards 1.5x net debt-to-EBITDA by year-end from the 2x that we currently have at the end of Q1. In summary, moving to the summary slide. We have a strong start to the year. We have incremental EBITDA margins of 35% and an operating margin now over 20%. We have the ability to withstand the reduced narrow-body build notably from Boeing. We have a complete replanning of our year. We've increased the guide by $200 million of revenue at midpoint and the margin rate from 23% to 24%.
And we've increased cash flow just under $100 million. We also noted that we expect to raise the dividend by 40% in the second half of the year. And that we have a clear plan for the balance of 2024 in terms of capital allocation plans. Thank you. And we’ll now move to Q&A.
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