Howmet Aerospace Inc. (HWM) Earnings Call Transcript & Summary

Okay. Thank you. Good morning, everyone. Thanks for making it through the process of dialing in virtually to our 42nd annual Aerospace, Defense and Industrial conference. We're very fortunate to have with us today kicking off the management team of Howmet Aerospace, along with PT, who runs Investor Relations, who many of you know. This is meant to be kind of an interview style format. If you have questions, there is a way to shoot them over to me. I'll try to get to them at the end. But I thought maybe it would be best to just get into it, if that's okay with all of you, gentlemen.

Yes, absolutely.

Terrific. Welcome, John. I did want to -- there was a number of questions that didn't get asked on the earnings call that I wanted to tick through just because there were data points that you had provided in the past. And one of the ones that you guys had mentioned pricing confidence this year in 2021. And I was curious if you could speak to how much visibility do you have on your statement that pricing should exceed the 2020 gains in 2021? Maybe if you could speak to the LTAs that you still have outstanding to affirm that or where we are in terms of 2021?

So during last year, we obviously had a view of the revenue last year and have made some estimates for 2021. So clearly, any pricing number that you have is -- tends to be a percentage on the book of business. The negotiation is around the book of business to be renewed. But ultimately, the implementation dollars of that is then dependent upon sales. So if you price for things which then, for some reason, you're not going to sell because there's excess inventory, then obviously, that's going to affect. So there's always a bandwidth around these numbers. But on a, say, like-for-like basis with 2020, that's I think the most relevant and the easiest reference point, then we do see that 2021 should be a little bit better than 2020. And our assumptions are in line with previous statements. And so on that front, we believe in all is well and intact from what I've previously said.

Okay. And just to be clear, on the like-for-like comment, obviously, Q1 of 2020 had a lot more volume.

Yes.

Right. And so just to be clear, this is on the sanitized rebaseline expectations for volume?

Yes. I mean, again, within the bandwidth of the numbers as call it the sanitized and, of course, the next question is what sanity do you apply to aerospace sales these days, especially in the commercial aerospace arena, I'd go one stage further in that the Q3 earnings call, I did comment that we were probably a little bit in advance of where we normally would be for 2021. And I think I gave you a metric of about 60% completion through the process. As you say, I wasn't asked on the call last week, which was fine by me. I know that's -- so we got a lot of questions about it. I'm not quite sure why, but anyway, we did. And there was no question last week. But we are further through the process now. So we're probably closer to that 90% number. But some is being completed in year. So for example, we've just completed one in the last couple of weeks. And so the implementation of that now is what's being done, and it takes you to go through all of the detail, which is involved. So I expect it to follow the same sort of path as previous years is that in terms of absolute dollars, it might -- it won't be like equal dollars per quarter just because of the implementation time frame as we go through the year. So if there's retrospective catch up in, let's say, April, then obviously, that would be in the second quarter. So basically, the most important message is everything is in order. We're a little bit further through the process now than we were back in November. And feel good that it's going to be in the same ZIP code as I've talked on a relative basis to previous years, of course, on a prospective basis. I've never given the exact dollar numbers because that would be inappropriate until we know what the exact revenues will be for the year.

May I ask, I mean, one of the -- the reason The Street obsesses with pricing is because we're in a cyclical downturn. And airline customers are hurting, OEMs are struggling to make sales, airframe OEMs. And so the -- and your predecessors, as I've mentioned before, used to have a floating bar chart that showed that price goes down in the legacy Arconic aerospace business every year. That was sort of just the view. And so the question is, why is that different now?

I think part of the thing regarding pricing is the attitude or behavior towards it. And as I think you know that's -- my background involves a lot of, say, automotive exposure. And that clearly is a business where price is more expected to be deflationary each year. And in the, I'd say, 14 years since I led an automotive parts company, one of the things we were very focused on was managing that deflation, but also introducing new products and technologies and pushing the technology boundaries such that we really were, I'd say, further along the technology spectrum than try to be better than our competitors. And so we were really trying to reset baseline prices with new products all along the way. And so when I joined the -- what was then, I say more of conglomerate, but it's now a company with aerospace focus. I think one of the things you always do or should do before you look at -- after your cost situation is to examine the revenue line because there's always going to be much more revenue or say, leverage from revenue were both volume and pricing, than you'll ever have through costs. And so I believe that's the first order of business. I'm trying to examine aerospace involved with rather more focus than it had been historically as part of, let's say, Alcoa and Arconic, when there was so much going on between mining, bauxite and Alumina and rolling aluminum. And so to some degree, maybe the aerospace business was not subject to a great focus. And therefore, the opportunities I've had of examining each product, its relative competitive position. The technical characteristics of our parts -- that focus led me to conclude that, in some cases, we have truly unique capabilities and providing just a great value, extreme value to our customers and allowing for performance characteristics, let's say, of engines, in particular, which probably nobody else in the world was able to for some applications, not all. And it very much depends again, even inside the turbine, which part of the turbine you are and the performance requirements of those blades. And so I think that has led me to believe that for some parts, we shouldn't be in a price deflationary situation. It's one where we're trying to gain the right value for Howmet for those particular parts. And it's all part of that balance of trying to get the right value for the provision that we make and the performance that we allow. And also when you think about it, if we can come up with parts that can withstand at volume and scale, some of the temperature and pressure performances, which allow for the vastly reduced emissions on engines, then there's a value to that, whether it's in the carbon footprint that comes out or even in our own ESG ratings for this sort of thing. So we believe to some degree, we're also on the side of this, what I call the side of the angels in providing that level of capability, which is producing a cleaner environment for all of us.

As a follow-up to that, John, I guess one of the -- despite all that, I guess, is what I would say...

Despite all that. You don't have another go. You want to come up to me again, I know.

No, it sounds harsh. And I don't mean to be dismissive of it in any way because what you guys do is extremely technologically sophisticated in all markets. I guess where I have concerns is, again, your predecessors themselves, despite that portfolio, and you mentioned it's an attitude but assumed it was a price down market. Your principal competitor, which is no longer that visible to us, Precision Castparts, when it was public, talked about it being a deflationary market. And their whole gig was to cut price and hopefully gain more market share as a result of it. You have companies that have lower profitability expectations in the market, ATI, relative to your EBITDA margins at Howmet. So I look at the industry structure, right? And I see competitors that are a little bit more desperate, an attitude that's lingered for a number of years prior to your tenure here. And it just begs the question, why are customers -- are they willing to do -- like you guys have -- you didn't do this last quarter, but 2 quarters ago, you guys gave an example of pricing at all segments went up, Engineered Products, Fastening Systems, Engine Products. It was across the board. I'm just curious, is that, in fact, true? Does that opportunity exist at all areas of the portfolio? Is it just 1 or 2 products within each of the portfolios that has a sole source position or sophistication that allows it, and therefore, it's not a broad-based comment on pricing in the portfolio. Just how do we frame it? Because industry structure does not necessarily support better pricing, at least, it hasn't.

Yes. First of all, I do recognize that, first of all, today's conditions, where there is excess capacity produces a degree of pressure. And therefore, maybe the conversation, balance -- it's always different, I think, each year, but certainly, compared to when nobody was able to produce enough which is recent, let's say, 18 months ago, and we were probably unique in having capacities in certain product lines, which label -- enable that additional capacity to be provided to the market. And we had invested accordingly. For example, we put in $250 million into our engine business. And we came to fruition just at the time of the downturn, so that was exclusive in terms of timing. Clearly, not all of our products are equal. That's not realistic, not possible. And so we run the whole gamut from certain products that we reduce price on through to those that we're able to improve pricing. So it really is, let's say, a more nuanced approach. I read that word last year in a sell-side report, and it now becomes a bit more sophisticated or a bit more nuanced. And I always thought it was that, but it's nice that it's written. And there's very different strokes in every company. So at times, we think the opportunity is to, let's say, improve our profitability through fundamental productivity in certain operations. And we may reach for a longer, long-term agreement to enable us to have the security of addressing those manufacturing issues that we may have or have had. And in other areas where that is not the case where the technological differentiation is fundamentally different. So in the state of Howmet, there are clearly different product lines with different performance characteristics and competitive positions. I think the only thing that you said, which I probably disagree with is that while Precision Castparts may have said those things that you say they've said. I don't really know. But I've really not seen that degree of passiveness nor compliance. I've always thought of them from the anecdotal evidence that I'm aware of is that they're probably rather more aggressive than that. And so that's a comment you've made, which I find puzzling in all of that dialogue.

Okay. Yes. I mean, they did use to say it. But one other thing maybe related to this is prior to your tenure, John, as CEO, the company was something of a mess, right? I mean, they have issues. And I'm not talking about just how Arconic as a stand-alone, I mean, even as part of Alcoa, there was first Rixson there was a number of issues that came up. Was -- is part of this pricing -- this couple of year pricing reset, is it enabled by an artifact of poor contract structures early on that are being reset to kind of market terms now, if you will, and therefore, may not be an enduring opportunity once those initial contracts are marked to market?

Yes. It's really difficult to say whether there's some of that effect or not. I don't know if I can agree with you because I see the opportunity in future years as well. Again, to very different degrees because, again, all years are not equal. I think 2022 won't be as good as 2021. And when you think about price, it really is wrapped up with so many other things in terms of quality, delivery, robustness of relationships and really being recognized as a company that really commits to something and then delivers. And part of the -- it's a part of my own personal philosophy is, if ever I say something, this is what we're going to do, whether it's internal to the company or whether it's an external commitment to a customer, then I think that people can rely upon it. And certainly, I've always thought that in our external relationships that reliability is so important. And so where we have, I say, compensated for other people's lack of being able to supply or providing quality at impeccable levels. I mean it's part of the driving of performance, and I'll come back to performance in a second. But so for example, in one of our businesses, when they were very proud, I remember early in 2019 and saying of their quality performance. I did give them some different reference points. And so I did explain that, again, without trying to always refer to the past, but predecessor company had operated at below 3 parts per million across the board, across every customer, across every product line, which is a true Six Sigma level of quality performance and we haven't talked publicly really about quality, but we really have tried to focus on delivery of impeccable, not just deliver the quantities. But also at the quality level that's something of a different order of magnitude. And I know from my last quarter, if you -- one of our businesses has now made a -- call it multiple fold. If I give you the number, it will be -- give you exactly where we were, but it actually achieved a level of 10 parts per million in an aerospace business, which is pretty respectable. In fact, if not world-class, not quite as good as where I think it should be or could be. But it's focusing on all of that performance, not just performance in terms of our own let's say, bottom line of the company, but really performance for all of our customers and provision of that value and security and reliability. So more than just the technical prowess. And so we really have been trying across multiple fronts. So I don't really talk about the past, but certainly, where people have said Arconic before or Alcoa was, let's say, challenged, you said a mess. I try not to use emotive words like that, but I understand why you say it. And so we really have tried to focus the dialogue on what's really important to us. And part of not just in the hard metrics of performance, quality, delivery what the profitability is, but also try to improve the culture of the company to focus on those fewer things, which are really important. And I think in trying to achieve that, then you're really trying to harness the hearts and minds of not just the top executive team, but all of the team leaders throughout every stage of our manufacturing and production process. And so no way do I believe for a second that it's all done. It's part of a journey. And -- but I do think we've made large strides, and I see people becoming increasingly confident and -- in their own decision-making, their freedom to take decisions within frameworks that are provided and provide swiftness and clarity to that which we hold important, and rather than have a laundry list of everything is important, we only actually have a few things which we do hold as important. So as Ken will probably attest to, I remember early on, putting down 5 things that we're going to work on. And then more importantly was a list of 30 to 40 items. This is what we're not going to do. So I think world class companies define themselves more by what they're not going to do than anything else because it's that cacophony of noise which leads people to say, well, I've achieved this, this, and this. But really, it hasn't contributed much to the well-being and, let's say, excellence or profitability of the company. So that whole trying to move the culture in a fairly rapidly fashion has been very important to us in trying to achieve the performances that we have achieved. And obviously, we were making good progress through '19 into '20. And then obviously, things hit us. And we've really, I'll say, battled back all the way through 2020 to try to exit last year with something which, in the end, I think, was -- it probably surprised me to the extent we actually achieved the same profitability as the previous year quarter despite -- and you know what the despite is, given the pandemic event. So there's a lot been going on. A lot more than I talked to in the last couple of minutes, maybe you shouldn't be such a smooth questioner and draw me out on the things that I don't normally talk about.

No, that's good. I want to make sure I heard this correctly. Did you say that 2022 pricing should be similar to '21? Or did you say lower?

No. I said not -- it would be below.

Got it.

So I said that '21 would step up above '20 and '22 would step down because just the natural ebb and flow of the renewal volume or value. And so '22, my current thought is it's going to be healthy, it could be positive, but not as good as '21.

Okay.

And it's all -- and then, of course, you have to calibrate that with volumes. None of us are really sure what volumes are going to be yet for '21, never mind '22.

Got it. Is just the timing of when contracts come up for renewal, is your point?

Yes. Exactly.

It doesn't allow for that. One -- 2 quick tactical questions on fasteners. I noticed one of your competitors, LISI, announced in January, they extended their Boeing agreement. Have you guys done the same on fasteners?

Yes, we have. And I'm trying to remember now whether that -- I thought we concluded that in the early parts of 2020 for -- it was a very long duration, longer than normal. And I'm going to say, I'm positive that we did that in the first quarter of 2020.

Okay. Got it.

I can't remember every single one of the -- every contract.

No, that's fine. I just figured they are a big one. The other one, Boeing's titanium contract with their existing mill products suppliers expires in '22. Are you guys via RTI pursuing that because I don't think historically, they've had a big position with Boeing on titanium mill products?

We have really been a fairly small player at Boeing from the titanium aspect. We have had and are in dialogue with trying to improve that. And it's been part of, in fact, my commentary to them particularly at times in the last few years, as we've sort of had, I've never been really quite sure of, let's say, geopolitical tensions. And where especially if support -- external support to Boeing is ever needed, then I have thoughts it -- since they get the majority of their supply from Russia, then why should that be the case? Let's look at buying America. And as you've recently seen, it's not just been talked from the previous administration, but also the -- President Biden has also commented about buying America. And I don't mean buy America for our customers to be at a disadvantage, but literally buy because it's like everything else, we've been improving the performance of our titanium business as well. And I believe we can hold ourselves up. That and when you think about it, especially if tensions would arise, then some of those -- if you're buying the majority of your input materials from a third country, which we would have tension with, that's not a good condition to be in. So I think it's an opportunity for us to take an additional part of that business and provide Boeing with all of the again, quality, delivery and economics that are required. So that's what I'll say is on the table, has been a subject of a dialogue for some months now. And let's say, hopefully, it will result in, say, a good outcome.

Okay. No, that's helpful. John, also off the earnings call, you made a comment that I didn't know if it was significant or not about RTX, Raytheon. And on the Q3 call, I think you'd mentioned that you have many years left under an agreement with them already. Because, as you know, they're trying to build an airfoil facility to do more work in-house. But -- and then on the Q4 earnings call, I think you mentioned that there was an extension to it. But I didn't know if that was included in your Q3 remarks. So have you guys -- since they've announced at RTX a desire to build this airfoils plant, what has the dialogue been between Howmet and Raytheon on supplying airfoils to them?