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

Welcome, everybody, to the 2024 Global Industrials Conference. It's the largest conference we've ever done. We're at just over 75 companies. 665 of you have come -- or registered to come and join us. Hopefully, you're all here, which would be a pretty meaningful step-up, so nearly 20% step-up year-on-year, which reflects the interest in the sector, which is why it's kind of interesting. If you look at the fund manager survey data published this morning that, actually, in Europe, at least, you've all gone back underweight the sector, having been slightly overweight at the beginning of last month. Globally, things are a little bit more positive, I think, on Andrew's side even more underweight, which is kind of interesting given the stocks keep moving up. Four things I think we're going to hear about today in the next couple of days in terms of themes, the debate between structural and cyclical, the broader CapEx tailwinds from things like energy transition and data centers versus the more cyclical end markets and even cyclicality within those structural themes as companies see expansion in capacity and the movement in the utilization rates. Theme 2, we think the debate between the first half and second half, much of company guidance so far does imply a bit of an acceleration through the year. And yet, we haven't seen much in the way of the fundamentals actually supporting an awful lot of that acceleration so far. The start of the year at least feels fairly muted. Thirdly, regional flavor between U.S. being -- continuing to be robust, Europe continuing to be kind of muted. And expectations around China, the NPC didn't really yield that silver bullet we were looking for. And certainly, the marketing I was in -- doing in Hong Kong about 10 days ago, the local investors there are very, very bearish on the prospects for China through the rest of this year. And lastly, indicators versus the fundamentals, and Ben's done some great work on the PMIs and the short-cycle indicators that we have. BofA's proprietary indicators, over 70% of them are now neutral to bullish versus 43% a year ago. So we're particularly timely this year in terms of those indicators, moving more positively against what does seem to be a fairly muted macro backdrop. I'll leave it there. I'm going to hand over to Andrew to say a few words, and I look forward to catching up with you all over the next couple of days. Don't forget, we have drinks post the close of the time table today upstairs in the Champagne room. Hopefully, we'll see you there. Andrew?

Thanks so much for coming. I think it's -- I've been at this conference, I think, now for almost 2 decades in one version or another. Thanks so much for being here. So I'm the U.S. multi-industrial analyst, and we have robust presence once again at this conference this year. We're very happy to be here. When it comes to the U.S. industrials, I think what we're seeing is that policy is really driving, we think, industrial activity in the U.S. For the first time in many decades, U.S. government actually has an industrial policy, and we think it's heavily influencing where the resources are going. So we do think we are quite bullish about structural changes in the U.S. CapEx going forward, although we do think that the activity will be distorted by the government actions. I would agree with [ Alex ], our impression is that investors, by and large, are waiting for the PMIs to bottom, yet the stocks are going up. I think if you look at our ratings, we are broadly positive. The themes that we are focusing on are grid, electrification and AI. These seem to go together. Reshoring, we think, is the structural theme that is underlying the long-term trend. A lot of our companies are focusing on aerospace, some folks in aerospace to a point where I have to give up coverage and give it to Ron Epstein. But I guess, that's a good thing. And as I said, the big debate in the sector near term is the timing and the shape of short-cycle recovery. So we definitely -- and destock, end of destock, what's happening in the channel. So we'll absolutely be looking for indications of what has transpired in the quarter. And with that, thanks so much for being here. And I will yield the floor, I guess, both for Howmet and Ron. Thanks so much.

I think we'll get started. It's 8:01. So I don't think you need much of an introduction. John Plant, CEO of Howmet. Thank you for taking the time out to be here with us. So my hope here is just a little conversation. Maybe just started off with maybe a big picture question, one of my favorites. I mean, how's business?

Business for Howmet, I think, has been pretty good. There are a lot of noise in the industry. There's a lot of news articles in particular about aircraft manufacturers. But if you can tune out the noise for a moment, which is quite difficult to do, then as it is at the moment, the fundamentals appear to be pretty strong, the backlog is enormous, probably the highest it's ever been. Demand for us as a parts supplier has moved to the right because aircraft have not been produced in the commercial aerospace arena. And that demand that we've seen, we've converted pretty well into, I think, a satisfactory profit and cash stream.

So how do you -- I mean, I think the -- maybe the elephant in the room is how do you think about the impact that all the news flow we hear on Boeing is going to have on aircraft production rates, to a far lesser extent, aircraft production rates at Boeing? I mean, do you think there's a chance that we could see rates come in well below where we thought they would be this upcoming year?

It always depends on where you thought they're going to come in at, so you know where they're going to be below. I think you'll recognize some of the guidance that we gave that we were fairly cautious on the production assumptions around Boeing and indeed had taken those down from even what we talked about back in November when we gave our first sizing of what 2024 would look like and commercial aerospace is part of that. And then probably hidden away in our Q&A responses was a question about working capital. When I also commented that we probably plan to be a little bit working capital heavy in the event that we were cut back by Boeing because of lack of production. So we'll evaluate once again when we get around to issuing our first quarter results where we think production will land and take it from there. But we were fairly cautious in the way we set up 2024. And also maybe we were pretty cautious 1 year ago when we set up 2023, and yet despite that caution ended up with a significant -- a good outcome for the company.

Got you, got you. Maybe a bigger picture question on -- as a supplier, how much flexibility do you have around this master production schedule, particularly Boeing's, because it seems to be dynamic almost on a daily basis at this point?

Look, there are certain parts of our business that I will say are completely agnostic as to what we produce. So much of the capital equipment does not know whether it's producing a part for Boeing or Airbus or indeed Lockheed or Northrop or any of the aircraft manufacturers, be it defense nor commercial. And of course, neither does our labor. It works on manufacturing of parts. And so all of that is, let's say, fungible and movable. The areas where it gets more difficult when you start thinking about capacity and utilization is that around specific tooling, which, of course, tends to be dedicated to either an airframe manufacturer or an engine. And even to a point where if you take a LEAP engine, you can't take the tooling from a LEAP-1A and apply it to a LEAP-1B because they're different. So it depends what level of specificity you want to get to as to, let's say, how transportable those capacities are inside the company.

Got you, got you. Price has been a differentiator for Howmet. In 2023, I think you guys mentioned you took $105 million in price, the biggest on record. And you said you expected to see a similar level in 2024. What's driving that? Is it sustainable? Are you on track for that?

I must have got carried away with myself and made a bold prediction that it's going to be the same. What we've tried to do is to be -- have a very consistent methodology in approaching price. So early on, I tried to make an assessment of Howmet, what technologies we had, where we fitted into, I'll say, the picture in, say, broader aerospace. And really thought to myself, I did not really see or understood why this should be a price deflationary industry or our part of it should not be. And then we tried to bring a series of reviews and processes to make sure that we treated the top line of the company with the same rigor and analysis as we do all of the other parts of the company. So I always think there's not much point in spending all your time looking at labor productivity or material usage or scrap and yields if you're not paying attention to your top line. And so I've always believed that my first responsibility as CEO is to pay attention to the top line of the company. And I do that, first of all, looking at our growth rates -- our relative growth rate compared to the industry, market shares and then our commercial stance. And I do think that paying attention to price is really important because I'll say one minute inattention on price can take years to correct in a manufacturing environment. And so we highlighted for ourselves the frequency of long-term agreement renewal. And of course, for us, the -- most of our business is done under long-term agreements and then to put in place a process to review them and with some pretty rigorous analysis, so looking at the not only the application of where those parts go, but also the volumes and varieties that they have as they change over time because they do. We know between whether it's, say, an engine program or a fastener program, it's just this -- it's a -- just starting or whether it's mid-life cycle or end of life cycle or about to go into past model. And so I think all of that analysis helps us come to the right view around the approach to pricing. And I think it's pretty independent of whether we're in conditions where there's scarcity of products. So today, maybe there's been relative scarcity because of the demand profile. We've already taken some of the COVID years where there was vastly excess capacity. And therefore, the question was could we possibly even consider raising price during those years? And the answer was yes, yes, we could. And so we had a consistent approach. And there's -- early on, it was written by certain analysts that all we were doing was correcting some sins of the past, which, no matter what I said, didn't appear to have traction in terms of, I'll say, people believing it. But I think now you can see we've had this consistent approach and some confidence that, I think, that 2024 might be as good or in the ZIP code, plus or minus, as 2023. It's only a forecast. Who knows? The forecast is like what the future is. Who knows?

Yes, yes. That makes sense. When we think about the spares opportunity in the airfoils business, given GTF and LEAP, time-on-wing and more just CFM56s lying around because Boeing can't deliver airplanes, it would seem like it's a very robust opportunity for your airfoils business.

Yes. There's no doubt that our spares business has been growing. And clearly, from the times of COVID, where we took a major hit because when aircraft aren't flying, there's not a lot of demand for spares, but then you have to really separate out the different strands within the company. So that which would pay -- pertain to defense continue to be strong and has continued to grow and has probably seen a 50% increase in demand between 2019 and now, depends on IDT segment. We just lump them together. So for -- opacity reasons has that. So we'll not try to be too open about it. And then in the commercial aerospace market, we took a long time to claw back from the COVID years. And last year, we, say, reached the same level as 2019, which is like the reference point that we've used, albeit the exit rate was at a higher level. And therefore, it does all go well for the future. Of course, rather than recapping the past, the most important thing is what does the future hold. And there are 2 or 3 themes going on, which I think is important to understand. The first one is what's the trajectory of, let's call it, the historical past, so CFM56, as you say. As we know, those shop visits have not yet peaked. They will peak and -- possibly in '25 or probably more likely in '26, I feel, that that's going to see a peak and then a consistent demand, but diminishing over the next 10, 15 years of CFM56. Meanwhile, of course, the demand for spares for the GTF program and the LEAP program is beginning to increase. And then you've got to separate out within that. So what's the normal level of demand and what might that look like? And then what's the higher level of demand that will be produced? Because those engines are working at elevated temperatures, elevated pressures and therefore, inherently, when you put that amount of stress inside any engine of any form, whether it's a car engine or an aircraft engine, the answer is the parts don't last as long. And it's all in the quest to achieve a higher level of fuel efficiency or lower carbon footprint as you atomize the jet fuel. And so inevitably, the engineered duty cycle of these parts is going to be less. So whatever numbers of cycles you want to use for the benchmark for a CFM56 now is that, inherently, my belief is that the shop visits will be more frequent on today's more modern engines. So you have a structural change in the aftermarket, which will go on for the next 10, 20, 30 years. Who knows how long? But that's only one part of it because, then, separate to all of that is the fact that these engines are still fairly early in their life cycle. And there are robustness issues, which again have been talked about and reported in the press, whereby compared to the secular growth of spares because of the nature of the performance and duty cycle of those engines, there is, say, these robustness issues, and that's been referred to as time on wing. And then for time on wing is that we know that they are lower and exceptionally lower compared to the predecessor engines. And within that analysis, they are very much lower in countries where, I'll say, the aircraft being operated where there's high pollution, I mean, the particulates in the air, and they've been causing particular difficulties, whether it's been the dust and particulates blocking the holes in the combustor and, therefore, making the engines run hotter, and therefore, the turbine blades receiving those -- I'll say those elevated temperatures way above the engineered level of temperature performance, which, of course, causes degradation. And then effectively, the particulates do get through, they are [ shop ] blasting the coatings on those turbine blades. So you've got the double effect of elevated temperature combined with a very corrosive environment, which is again causing the required replacement of those much earlier. So there are engineering programs, which were originally may be more aimed at further developments of fuel efficiency, which are now probably more aimed at robustness. And you're familiar with those coming through. So I deem the time on wing more like a 2-, 3-, 4-year bubble of replacement, and -- which I'll say comes and goes. But the backlash fundamentally is as you work through that elevated short-term, I'll say, demand increase, you've got the longer-term increase just because with more and more engines that go into the fleets is that with the reduced times between MRO shop visits, that's going to increase. So I do see a, I'll say, reinforcing benefit that we will see in terms of demand for spares and therefore are thinking good thoughts for us in that department. Now the question is, how much is a good thought? Well, we haven't categorized it yet. It's tied up in -- I said you start off with when the CFM56 peak, how hard the existing fleet of aircraft run? And what does that give us compared to, I'll say, the time on wing issue and then the more structural thing? And then trying to project out, so when do we think the peak visits for LEAP or GTF will occur, and trying to pick up those years. And while I've had discussions with some of the engine manufacturers in terms of their own planning and having to build out capacity for the MRO shops that they want to use to serve the industry, I mean, that's something which we -- I have not talked about yet in terms of what years do we think that will peak, but years into the future. So we just see for many years that demand growing.

So maybe a natural question, if you can answer, is that secular shift from the prior generation to the new generation. When you think about the time between shop visits or -- because investors are always thinking, how can I model this?

Yes, it's difficult.

How should one think about that?

Just stick a pin in it and have a go. That's what we have to do. Well, you know it's good. The question is, how good?

Yes, yes. Interesting.

Yes. One day when I'm a bit smarter, I'll try to do it myself and tell you. Or maybe I've already done it myself. I just won't tell you.

Yes, yes. That's fine. I mean, that's -- I guess, that's what everybody is going to be wondering.

Yes. And again, it's all wrapped up in how effective are the fixes, can you do retrofits of the existing engines with the new. You have to have max sets of parts across the engine or even across a turbine, not necessarily that you'll replace every single blade on a shop visit. And therefore, do you -- is there a demand for, say, the historical parts, which are going longer? There are so many factors to be considered. It's not easy to necessarily fix it just yet.

Yes. It seems like a lot of variables. On the Q4 call, you mentioned about expanding capacity in airfoils with committed share from an engine OEM customer. Is there anything else you can say about that? Any other color you can put around that?

Not really, except that we think it's really good. I think that any time you have the opportunity of raising your organic growth rate is really the best type of growth at all, it's far clearer and, I think, likely produce better returns than considering M&A risk. And therefore, I've been quite happy that we would kick up our capital requirements. I mean, I do recognize that there will be considerations from, let's put in more fast money words, well, let's sell on the news because the free cash flow might be diminished for a period, although I haven't really laid it all out exactly what we think we're going to do. And then I'll come back in at a time when that capacity comes on stream. I think that's false gold. You might be trying to chase that new cycle for us because of all the things we just talked about on the spare side. But at the same time, I do think that when you can deploy capital with making more of the same, it doesn't get better than that. More of the same, it's something. And so you haven't got to go down new learner curves. You really can crank the handle on the manufacturing side. That's the best type of capital. So you know what it is. You're going to make more -- you -- it enables you to continue your -- to achieve the goal of being and growing above market rates. It's enabled you to take share. And by the way, the returns in our engine business are truly good. You can see the margin returns. It's more difficult to get at what's the return on capital. But it's superior to the company average, which, when we look at it, we've stripped goodwill out because we did nothing with it and say, "We know we're earning in the 30s as a company." And clearly, with engine being one of our better performing margin, part of it is even better than that. So where else do you get the opportunity to deploy capital with that sort of returns?

Can you -- maybe as a follow-on to that. Can you speak a little bit to the competitive environment in airfoils? What's happened there? I mean, you're kind of had -- we had -- it seemed like we had one world pre-COVID, and the world has changed post-COVID, the competitive environment.

I don't know if it has something to do with COVID. I think it's more to do with the technology change, which has been going on in engines. The degree of technological change, which you've seen to try to make these engines perform, these, I'll say, improve fuel efficiencies and the complexity that's there. So when you -- maybe when you look at a turbine blade, you think, well, that's pretty straightforward and simple. It's just a lump of metal, isn't it? Whereas my view is it really truly is a thing of beauty. And the majority of what makes it very special is some things you can't see. It's the shaping and quantum of the airflow passages with inside it, where now it's not just a matter of air flowing through it, we actually accelerate the air flow at certain points and decelerate it as it goes through those turbine blades. And that enables us to achieve temperature performance, which I think are unique. And it's also now moving to the arena where we're also explaining the benefits of shaping the exit paths of air flow, so you can hold those molecules on the face of the blade. And to do that, you can't really use existing drilling techniques, which are just -- a drill is a round hole. There are far better ways of shaping airflow than just round holes. And trying to put those exit orifices on shapes that you could never possibly get a machine in to drill. And so that's the technology development, which is going on. And I think that we're at the forefront of that, enables us to achieve things that otherwise couldn't be done. And I think, as you know, we are unique, for example, in providing the turbine blades to the F-35 engine, which operates safe at 1,000 degrees higher than nominal temperature, above the normal commercial, even though it's less than trying to say today's commercial air engines are actually operating much higher than their design specification because of the issues we just talked about.

Got it, got it. Yes. For those of you who haven't seen it, we got to tour the Whitehall facility where you -- where Howmet does a lot of the airfoil stuff, and it's pretty awesome.

Once a decade, Ron, we allow people in there.

That's a pretty remarkable tour.

And the other thing is, as we try to show you, that's what we were, let's say, what production looked like a decade ago. This is what it looks like now when we put this additional capacity, and we're taking it to yet another level beyond that which you saw in September.

You wait 10 more years to see that one, right?

It might be a good session for you. How's that?

All right, all right. That's fair enough. Fasteners margins recovered during the course of 2023. But it seems like the fasteners business still isn't to where it was, call it, pre-pandemic. When do you expect it to get there?

I've never said, first of all, it will get there wherever that is because I rarely make clear and unequivocal projections about the future, because it assumes a level of press yields I just don't have. Or maybe some other way of saying, I just don't feel like putting my head in that noose, if you were to remind me 2 years on. By the way, you didn't quite achieve that. So what I do think is -- we at Howmet had, let's say, suffered and is suffering, I guess, for ourselves. We had the mix effect initially during the COVID years, where we had cessation of almost totally wide-body build. In fact, when 787 was closed down for production as it was, even though it's normally one a month with the inventory that we got, we weren't producing. And therefore, when we supply metallic fasteners, they have a different value proposition to a metallic base fastener for a narrow body because composites produce a requirement for a lot more sophisticated products, which we're able to provide for the airframe manufacturers to provide the, I'll say, electrical passthrough, the fuselage. And so that bad mix, combined then with -- I didn't feel as though we were doing -- hitting our stride in terms of neither manufacturing efficiency nor being on top of things necessarily as much as we could commercially, and that also included pricing. So we recognize that certain things are market based, which we can do nothing about. I'm going to sort of, call it, in the mix bucket. And then there are things we can address, which are the manufacturing operations and also our stance, right, to recovery of inflation or whether it's pure pricing, et cetera. So we've made leadership change, as you know. And I feel as though that's been a very positive thing for us, as we see additional cutting-edge brought to the development and pushing on those 2 elements of what is in our control. And then we also, as anybody needs in life, you need to get a little bit lucky. And of course, now, we're seeing the reemergence of wide-body build. So 787 has come back from nothing to, let's call it, rate 5 at the end of last year for the 787. And maybe if Boeing are right, maybe it will get to 10 in 2 or 3 years' time. And the A350, which again had recovered to about rate 5 is probably heading to rate 6, and they're thinking good thoughts about rate 9 in the next couple of years. So it does seem as though there will be recovery of the wide-body market, the use of composites, the additional value those produce. And therefore, with a relatively outsized growth compared to narrow-body, depending on how many narrow bodies are actually produced, I think that's a positive mix effect for us. So I think we get the market tailwind, plus our own, I'll say, fixing ourselves. So even though, I'll say, 20% EBITDA margins aren't shabby, I didn't think they were appropriate and therefore we needed to do better. And I think those 3 things together have begun to see the production of better margin profile for us. And we've seen margins climb probably 300 basis points during the course of, I'll say, the end of 2022 through '23. And I'm hoping -- hopefully, good things happen this year. I guess, we'll see when we...

Very well. Yes, absolutely.

Show our results. We have not committed that we will achieve whatever number you've got for 2019 as a reference point.

Got it. All right. Fair enough.

Yes. I don't think -- I don't see 13 or 14 787s in our future by 2025. Yes. I don't think Boeing are talking to that.

Yes. And I think they could do it, even if they were...

That's a different matter. I have no comments on that.

Yes. Turning to the structurals business. Are there any updates you can offer with regard to the Lockheed Martin dispute on titanium river?

Well, it's not particularly widely publicized, but it is in the public domain because the judge overseeing the case, which was the one that we went through at the end of last year, issued a notice last Friday. And that notice said something to the effect that the parties involved, that's Lockheed and Howmet, have now agreed through mediation and the mediator, which is also a judge, had informed the main judge, who issued the notice last Friday, that the matter is now settled. And we're in the process of papering it and signing the final agreements, which are due by March 29. And because of that settlement is that the court hearing, which was scheduled for July is now canceled. So assuming we both stick to the heads of agreement that we have agreed and that's done, and that's what was doing in the public domain. What isn't is any details around it, but the fact of settlement is...

Can you say, are you happy with the settlement?

Well, I assume that, say, in any negotiation, there's always a degree of happiness for both parties, and there's also a degree of unhappiness for both parties. And providing those of an equal measure on both sides, then everybody is okay. How's that?

Got you. Fair enough, fair enough. That's how it works.

Yes. I mean, in life, nobody ever gets what they all -- they totally want, do they?

Yes. No, not usually. Occasionally.

Okay. Must be -- life must have been better in BofA than it is in Howmet then.

No. I'm not saying that about BofA. But anyway -- so it seems like in recent quarters, you've maybe deemphasized the VSMPO opportunity or maybe I'm interpreting that wrong. Can you speak to that a bit? Is it...

Well, I -- the answer is that in the shortest form, my answer would be yes. But I don't think that's a satisfactory response because I think I need to amplify so as to make sure it's put into context. First of all, that as a strand of revenue for the company to produce more titanium, I did feel as though it's getting overemphasized because I do see other things growing actually at a faster rate than that and, therefore, it wasn't appropriate. And also I kept reemphasizing that I'm fundamentally unwilling to add capacity to that -- to produce that stranded revenue as it results from the issues around, let's say, sanctions on VSMPO because of the time that it would take to put capacity in the ground to when it would actually produce, these are very long run items for titanium production and whilst we would consider minor bottleneck breaking capacity that could earn a good return in the very short term, I'm fundamentally unwilling to put in large capital assets, which are then subject to fundamental geopolitical uncertainty. And the best way I can categorize that would be, I mean, who knows, by November of this year, we might be friends with Russia again. I don't know that. But you read enough in the press that certain parts of the political spectrum in the U.S. appears to be more favorable towards Russia than others historically. And therefore, what impact would that have? And because I don't see know, I don't see why I should risk shareholder money to put capacity in for that. And so that, to me, is like a fundamental unwillingness to invest. And then again, it doesn't stop the questions about how much should we take. But when I look at the -- all the options we have in terms of deployment of capital, and I think $1 of fixed capital and $1 of working capital are exactly the same in terms of taking business on at the margin. And I know you can say, "Well, working capital can come in if volume drops," but we're not planning on that. We're planning on continuing to drive the company above market rate levels. And so with the very long, I will say, supply chain and then the time to produce from start to finish, let's say, for a titanium plate, it is extremely working capital intensive. And I felt that we've got better options inside the company to deploy capital than that. And so there are -- I don't want to chase something which I don't feel I should. I want to chase something sufficient to, let's say, keep filling up a little bit of our capacity steadily at the right pricing level, not chasing it and certainly not putting in high levels of new fixed capital to put fixed capital and then a huge amount of working capital on something, which I don't think can never be as good as, let's say, investing, for example, in our engine business. Because margins, even at the incremental level, are not as good. And so I think it's really important. And one of my roles is to be clearly, clearly focused on how we allocate capital in the company, and not all mouths are equal in terms of how you're willing to feed them. And so titanium is not at the top of my list. It doesn't mean that I'm not willing to take on business. It's just how much where and who with. And I would like to put ourselves in the position of choice on like which customer am I willing to consider, not just sell it to anybody. And so I want to sell it to people who, I think, are going to win themselves.

Yes. That makes a ton of sense. You mentioned that F-35 is 35% to 40% of defense revenues. And I think you mentioned recently that you see that end market defense growing mid-single digit. Do you worry about the -- it seems like, at least in the last budget request, F-35 numbers got cut back. There's been some of the issues with the Tech Refresh 3. That said, however, now F-35 is a full rate production. It got awarded that. And you are -- what impact could that have on the defense business? And then, I guess, the flip of this is there is things like the XA100 and XA101 and NGAD and F/A-XX, I think, that you alluded to before. Can that offset any of the softness you might see on F-35?

First of all, the current, I'll say, budget constraints appears that it will cut back, if it's carried through, if it is carried through, which is not by any means certain by the time it's finally finished coming out of, I'll say, Congress and SA agreement. Then production might be cut back on all requirements for the U.S. Air Force. But when you look at the demand for the F-35 globally and all of the, I'll say, order intake, which seems to have been accelerating, and maybe it's been accelerating because of the invasion of Ukraine, is that it's been surprising to the upside just how many air forces have been ordering the F-35. And if I roll the clock back 4 years, I was thinking that F-35 would peak at around 2025 and then decline. And now because of those foreign country orders, I just see the rates of production requirement at Lockheed continuing through the end of the decade. And so it's fundamentally changed my assumptions around fundamental F-35 demand. Within that, you get the normal, what I call, anecdotal noise. And as a businessman, I try to tune out anecdotal noise, which is -- so today, they can't deliver those aircraft to the Department of Defense because the software isn't ready for those upgrades. And so maybe if it's just a matter of flashing a bit of software as and when it's ready, they can deliver them fairly quickly if they've been produced properly in the first place. So the question then becomes, does Lockheed continue to build at rates? And have they got a space to store them? Because obviously, those have to be stored within a protected area. And provided they've got the parking space, then life is good. And my thought is that Lockheed will need to continue to produce at rate because to take rate down and collapse it and then expect that it is going to come back up fairly quickly is foolish. Just look at the 737 as an object lesson on how difficult it is to move rates up and down quickly with the loss of skills you get. So I think collapsing F-35 production because of a bit of software being late would be really high to folly not that I run Lockheed or anything like that, so that's not my decision. But I think it's better that we see a stable environment for production. They reflash the software when it is ready, and off we carry on for the next decade. Meanwhile, in our case, the size of the fleet continues to grow. It's almost 1,000 -- or it is 1,000 aircraft now deployed mainly in the U.S. but around the world. And as they fly those things, not that the certainly flying many combat missions, but they still have to get flow and people trained in them is that they require spares. And the duty cycle of any military aircraft is very different to a commercial airliner just because of what's expected of them in terms of, I'll say, climbing vertically or, I don't know, doing loop-the-loops or, let's say, combat training is very different and the stress is there. So the shop visits are much more frequent, and that comes to spares demand. And so I really do believe that we'll see spares demand next year or the year after equivalent to the level of production. And so it's coming up very rapidly, which is good. At the moment, for example, this year, it is helping offset that last bit of the bleed down of the bulk head inventory, which is at Lockheed, which they over-scheduled in years gone by compared to actual production. And so we've been bleeding that inventory off between us to come more into line probably by the second half late or hopefully no later the end of 2024.

Great. Cool. Well, I think with that, we're out of time, John. Thank you very much, as always.

Thank you, thank you.

Super informative.