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

Good morning, and welcome to the Howmet Aerospace Fourth Quarter and Full Year 2024 Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference to Paul Luther, VP of Investor Relations. Please go ahead.

Thank you, Anthony. Good morning, and welcome to the Howmet Aerospace Fourth Quarter and Full Year 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 means 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.

Thanks, PT, and welcome, everybody, to today's call. Let's move to Slide 4, and I'll begin commentary on our fourth quarter. We closed out 2024 with healthy results, which exceeded the high end of our guide. Revenue is a record as was EBITDA, EBITDA margin and earnings per share. Fourth quarter earnings per share were $0.74, an increase of 40% over the prior year, and that concludes a year at $2.69 and a good year as we put it. For the full year, this represents a 46% increase year-over-year and is 25% higher than our initial guide for 2024. Operating margin for the quarter was 23%. Free cash flow for the year was also a record at $977 million, representing an 88% conversion of net income. Average free cash flow conversion of net income over the last 5 years has been approximately 100%. Of the $977 million of free cash flow generated in the year, all was deployed to share repurchases, debt reduction and dividends. During 2024, Howmet repurchased $500 million of common stock, of which $190 million was completed in Q4. Howmet also reduced debt by $365 million and paid $109 million in dividends. Regarding dividends, we recently announced a 25% increase in the quarterly common stock dividend, which will be paid later this month. The balance sheet continues to strengthen with leverage of net debt-to-EBITDA improving to 1.4x. Ken will now provide additional color regarding end market revenues in the quarter and year before moving to segment results. The one segment I'll highlight is the improvement in profitability of the Structures segment since it showed the largest quarterly increase. This was clearly welcome and helps with our confidence moving into 2025. The commentary regarding outlook will be provided later after Ken's comments.

So thank you, John. Good morning, everyone. Let's move to Slide 5. So another solid quarter for Howmet. End markets continue to be healthy. We are well positioned for the future and continue to invest for growth. Revenue was up 9% in the fourth quarter and up 12% for the full year. Commercial Aerospace growth remained strong throughout 2024 with revenue up 13% in the fourth quarter and up 20% for the full year driven by all 3 aerospace segments. Defense Aerospace growth accelerated in the fourth quarter and was up 22%. For the full year, defense aerospace was up 15%, driven by fighter programs and fighter engine spares demand. Commercial Transportation was expected to be challenging as revenues were down 12% in the fourth quarter and down 7% for the full year. Although down, we continued to outperform the market with Howmet's premium products. I would also note that despite the challenging market, Howmet's Wheels segment delivered a healthy 27.2% EBITDA margin for both the fourth quarter and the full year. Finally, the Industrial and Other markets were up 11% in the fourth quarter, driven by Oil and Gas, up 22%; General Industrial, up 12%; and IGT, up 5%. For the full year, the Industrial and Other markets were up 9%, driven by Oil and Gas, up 19%; IGT up 7%; and General Industrial, up 5%. Within our markets, we had robust spares growth, the combination of Commercial Aerospace, Defense Aerospace and IGT spares was up approximately 25% for the full year to $1.28 billion. Spares revenue in 2024 represented 17% of total revenue and accelerated in the second half of the year. As a compare, Spares revenue in 2019 was 11% of total revenue. In summary, continued strong performance in Commercial Aerospace, Defense Aerospace and Industrial, partially offset by Commercial Transportation. Now let's move to Slide 6, starting with the P&L. The focus of my comments will be on full year performance. Full year revenue, EBITDA, EBITDA margin and earnings per share were all records. On a year-over-year basis, revenue was up 12% and EBITDA outpaced revenue growth up 27%, while absorbing approximately 700 net new employees. The Engine segment added approximately 1,205 employees while we reduced employees in fasteners, structures, and wheels as we improved labor productivity and are seeing the benefits of our CapEx investments. Full year EBITDA margin increased 310 basis points to 25.8% with a fourth quarter exit rate of 26.8%. For the full year, incremental flow-through of revenue to EBITDA was excellent at approximately 50% year-over-year. Earnings per share was $2.69 per share, which was up a healthy 46% year-over-year. Now let's cover the balance sheet and cash flow. The balance sheet continues to strengthen. Free cash flow for the year was a record $977 million, which exceeded the high end of guidance. Free cash flow conversion of net income was 88% as we continued to deliver on our long-term target of 90%. CapEx investments in the year were a record $321 million, up approximately $100 million year-over-year as we continue to invest for growth. The year-end cash balance was a healthy $565 million. Net debt to trailing EBITDA continues to improve and was at a record low of 1.4x. All long-term debt is unsecured and at fixed rates. Howmet's improved financial leverage and strong cash generation were reflected in S&P's Q4 rating upgrade from BBB- to BBB. As you will also recall in Q3, Moody's upgraded Howmet 2 additional notches in investment grade up to Baa1. Liquidity remains strong with a healthy cash balance and a $1 billion undrawn revolver complemented by the flexibility of a $1 billion commercial paper program. Regarding capital deployment, we deployed approximately $975 million of cash to common stock repurchases, debt paydowns and quarterly dividends. For the year, we repurchased $500 million of common stock at an average price of $87 per share. Q4 was the 15th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low exit rate of 408 million shares. Additionally, in January 2025, we repurchased an additional $50 million of common stock at an average price of approximately $116 per share. Remaining authorization from the Board of Directors for share repurchases is approximately $2.15 billion as of the end of January. For the year, we reduced debt by $365 million. This included a partial pay down in Q4 of $60 million of the U.S. dollar-denominated term loan that's due in November of 2026. The combined debt actions for the year will reduce annualized interest expense drag by approximately $37 million. Finally, we continue to be confident in free cash flow. For the year, we paid $109 million in dividends, which was an increase of 53% year-over-year from $0.17 per share to $0.26 per share. We also recently announced a 25% increase in the quarterly common stock dividend from $0.08 a share to $0.10 per share. Now let's move to Slide 7 to cover the segment results for the fourth quarter. Engines Products delivered another strong quarter. Revenue increased 14% year-over-year to $972 million. Commercial Aerospace was up 13% and Defense Aerospace was up 19%, driven by Engine Spares growth. Oil and Gas was up 31% and IGT was up 5%. Demand continues to be strong across all of our engines markets with record Engine Spares volume. EBITDA outpaced revenue growth was an increase of 30% year-over-year to $302 million. EBITDA margin increased 380 basis points year-over-year to 31.1%, while absorbing approximately 220 net new employees in the quarter. For the full year, revenue was up 14%, to $3.7 billion; EBITDA was up 30%, to $1.15 billion; and EBITDA margin was 30.8%, which was up approximately 360 basis points year-over-year. All were records for the Engines Products segment. Moreover, the Engines Products segment added approximately 1,205 net new employees to support future growth. Now let's move to Slide 8. Fastening Systems had another strong quarter. Revenue increased 11% year-over-year to $401 million. Commercial Aerospace was up 17% including the impact of the widebody recovery and the Boeing strike. General Industrial was up 32%; Defense Aerospace was up 2%; and Commercial Transportation, which represents approximately 14% of Fasteners revenue was down 13%. Year-over-year, EBITDA outpaced revenue growth with an increase of 39% to $111 million. EBITDA margin increased 550 basis points year-over-year to a healthy 27.7%. The Fasteners team has continued to expand margins through commercial and operational improvements. For the full year, revenue was up 17% to $1.6 billion; EBITDA was up 46%, to $406 million; and EBITDA margin was 25.8%, which was up approximately 520 basis points year-over-year. The Fasteners team delivered solid year-over-year revenue and EBITDA growth while reducing headcount by approximately 135 employees. Now let's go to Slide 9. Engineered Structures performance continues to improve. Revenue increased 13% year-over-year to $275 million. Commercial Aerospace was up 9% and defense aerospace was up 51%, primarily driven by the F-35 program. Year-over-year, segment EBITDA outpaced revenue growth was an increase of 55% to $51 million. EBITDA margin increased 500 basis points to 18.5% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability. For the full year, revenue was up 21% to $1.1 billion, EBITDA was up 47% to $166 million, and EBITDA margin was 15.6%. EBITDA margin was up approximately 270 basis points year-over-year and headcount was reduced by approximately 235 employees year-over-year. The team continues to make progress, and we expect continued improvements in 2025. Finally, let's move to Slide 10. Forged Wheels revenue was down 12% year-over-year as the slowdown continues to take hold of the commercial transportation market. EBITDA decreased 8%. However, EBITDA margin continued to be healthy at 27.2% as the team flexed costs and expanded margins through commercial and operational performance. For the full year, revenue was down 8% to $1.1 billion; EBITDA was down 7% to $287 million; EBITDA margin for the full year was a healthy 27.2% in a challenging market and was up approximately 30 basis points year-over-year. Lastly, before turning it back over to John, I wanted to highlight a couple of items that are in the appendix. First, the operational tax rate for 2024 was 20.5%, which represents a 170 basis point improvement year-over-year. Second, pretax return on net assets improved by 800 basis points from 33% in 2023 to 41% in 2024 driven by strong profitability and the optimization of working capital and fixed assets. So with that, let me now turn it back over to John.

Thanks, Ken, and let's move to Slide 11. I'm going to provide some commentary by each market segment and also then move to specific guidance. But before I do that, maybe it's worthwhile just making sure that everybody understands that we did again outgrow each of our respective markets in 2024, and that's been a theme of recent years, and we expect to do so again in 2025. Let's start with the Commercial Aerospace segment. Air travel and freight transportation have continued to grow, especially in Asia Pacific. Backlogs for Airbus, Boeing and COMAC have never been higher, principally due to the underbuild of aircraft schedules by all of the aircraft manufacturers, but most notably by Boeing, given the strike, which commenced in late quarter 3 and which lasted for almost 2 months and was then followed by a further month of employee retraining with no aircraft build. Hence, backlog increased again. given the continued production of many parts by suppliers, starting with Spirit AeroSystems during this production gap, the runway is wide open for builds to now increase. Airbus came close to their revised 770 aircraft build and show promise going into 2025. COMAC delivered 10 C919 aircraft principally to Chinese airlines, and we can expect higher production volume in 2025. While we have an estimated OEM build volume for each aircraft, perhaps the most interesting build assumption is the Boeing 737 MAX, which we see is about 25 aircraft per month on average for the year, but skewed towards the second half. This assumption enables investors to adjust their models up or down according to their own assumptions. Of course, should Boeing build at rate 38 or indeed rate 42, we will match this. I'll now touch on Spares before moving to Defense. Our total revenue from Spares was $1.28 billion, representing 17% of Howmet revenue. Spares revenue increased approximately 25% in the year and with acceleration in the second half of 2024. We envision Spares to continue to be healthy again in 2025 and growing towards our previously stated projection of 20% of Howmet revenue. Defense was also a source of strength last year, and we see this continuing into 2025 for both legacy aircraft and the F-35. In 2025 or early 2026 latest, we should see the crossover occur where spares volumes for F-35 will exceed the F-35 OE engine for revenues. Then it will continue to grow as the fleet of aircraft expands worldwide. Industrial is expected to be up mid-single digits, led by demand from IGT and Oil and Gas. I provided extensive commentary regarding the future IGT demand during the November earnings call. Since then, the overall picture has become even brighter for electricity demand from data centers due to the incoming U.S. administration's focus, which is less on renewable subsidies and more on fossil fuels. We see demand increasing from running the existing fleet of turbines harder and hence, more spares being required. Moreover, we expect increases in new turbine builds to increase globally in 2025, 2026 and '27 and beyond. The growth requirements for increased megawatts of demand was set out in November, while the change is currently towards natural gas and hence favors Howmet. The expected growth in IGT drives an increase in IGT CapEx investment for 2025 compared to 2024. As in 2024, CapEx investments are linked to customer contracts. As the global leader in IGT turbine blades, we'll continue to focus on additional global capacity demand for Siemens, Mitsubishi Heavy, GE Vernova and Ansaldo. We're optimistic about the next few years of IGT growth and Howmet is well positioned for both future OE build and for spares growth. Moving to Commercial Truck. Demand continues to be muted as expected. We were pleased with our ability to increase Wheels margin despite the severity of the downturn in Q3 and Q4 and printing a very respectable 27.2% EBITDA margin for the quarter. The outlook is unchanged with some return to growth expected in the second half of 2025. In summary, we see demand increasing in 2025 with the profit being back-end loaded, principally due to the Boeing build and likely increase in build moving into 2026 with the increased second half truck builds as well. The overall midpoint of the revenue guide has moved upwards from 7.5% to 8% plus or minus, compared with the November estimate and this extra growth is on top of closing out a very strong fourth quarter of 2024. Moreover, in 2025 first quarter, we expect revenues to be $1.935 billion, plus or minus $10 million; EBITDA of $520 million, plus or minus $5 million; and earnings per share of $0.76, plus or minus $0.01. The guided Q1 incrementals are healthy at over 70%. And for the year, revenue to be $8.03 billion, plus or minus $100 million; EBITDA of $2.3 billion, plus or minus $25 million; and earnings per share of $3.17, plus or minus $0.04. Finally, free cash flow is expected to be above $1 billion at $1.075 billion, plus or minus $50 million. The full year incrementals are healthy at approximately 36% in the guide while we await more clarity on the second half and in particular, the commercial aerospace narrow-body builds. Before moving to capital allocation, a couple of comments on tariffs. We're closely monitoring the situation and the situation as everybody knows, remains fluid, but we expect to be well positioned due to our strong commercial agreements and the mission-critical nature of our products. We'll pass on additional costs through to our customers. We've demonstrated our ability to do so and quickly pass on costs following the steep inflation that we saw in 2022. I'll make a few closing comments on capital allocation for 2025 before moving to Q&A. I invite you to view the 2024-'25 summary slide for commentary. The Howmet balance sheet is strong. We're rated well into investment grade and net leverage closed at 1.4x net debt to EBITDA. 2025 sets up well, but with a back-end load. The dividend payout has been increased to 25% starting -- by 25% starting in Q1. And hence, the dividend payout for the year will repatriate further funds to shareholders. The share buyback program will continue with plenty of availability under the current board authorization. We expect that the total buyback in 2025 will exceed the buyback of 2024. Debt paydown will be muted compared to 2024. This provides the company with both good shareholder return profile and also great optionality. And with that said, let's move to questions. Thank you.

[Operator Instructions]. Our first question will come from Doug Harned with Bernstein.

Thank you. On Fastening Systems, you came up -- you've got EBITDA margins of 28%, roughly. I mean this is -- has kind of been a big step up. Now you've got, I think, a mix improvement working here with more A350, 787 fasteners. But can you talk about, is there anything unusual that happened in the quarter or are you really on a path here to get materially higher margins going forward, either from mix performance improvement or operating leverage?

I think when I look back at our Fasteners business, the track we're on is really very good, Doug. The focus in the business from all aspects of both operational and productivity improvements has been even better than I had expected and combine that with, I will say, commercial discipline has enabled us to move a long way along the pathway to restoring previous margin highs. And so I'm pleased with that. I don't think that the wide-body mix has changed fundamentally yet for the positive. I mean there's a small positive mix change relative to narrow body that's gone on during 2024. But I do expect that the builds for 2025 to be better than 2024. And so I think there's still some positive mix that's there for us, especially as we look forward to hopefully, a rate 10 and maybe more for the Boeing 787. And also, I think you'll recognize the Airbus future monthly build has been slated to move to 12 aircraft a month by 2027 and that compares to probably last year's about 5 a month. So I think the rate of increase for wide-body is going to pick up over the next 2 to 3 years and that should be a further benefit for the business. Naturally, the rate of increase in margin, I would expect to be, I would say, I'll say less aggressive in the future. But I don't think that we're finished yet.

Our next question will come from Myles Walton with Wolfe Research.

John, just looking at your implied guidance after the first quarter, it implies margins start to step down and certainly incrementals are half of what you're implying for the first quarter. Can you rationalize some of that for us? What's growing? What's the headwind? And -- or is it more conservatism given your lack of visibility beyond the first quarter?

It probably would have been fairly easy for us to be a little bit more optimistic. But at the same time, there's a lot of things going on during 2025. The rate of growth could be materially changed by, let's say, additional narrow-body build as an example. And we've chosen to be fairly conservative in that view for our financial guide. And also, there's always a possibility of some cutbacks given the statements of the CFO at Boeing regarding excess inventory, albeit I don't think that's going to be a problem, but you never know. And therefore, with the lack of visibility that we, and I suspect other suppliers have, we wanted to be a little bit cautious in that regard, and so we don't want to get ahead of ourselves. And so that's the way I think about the narrow-body side. Again, on widebody, it could be better, but let's wait and see to be clear that some of the supply chain challenges that have been quoted publicly, whether it's been seats or fuselages, sections or say, heat exchange, all these sort of things, which have been mentioned, are those now clear. And so we want to be a little bit cautious there as well. And also, as you know, we're building out a couple of new manufacturing plants this year facilitizing them. And so we want to be a little bit cautious in that regard until we've really got our fleet well under the -- firmly placed under the table on those two things. And it's also, as you know, always a little bit uncomfortable having a back-end load to things. And so at this stage, I think we've given best visibility that we have, which is another strong step forward in Q1 and choose to be a little bit more muted in the balance year until we know a bit more about the profile of the year and how it all pans out. And as you know, we also said the second half of the year for Commercial Truck is also expected to improve. But again, it's an expectation, not knowledge. And so again, there's no need for us to get ahead of ourselves until we've got better visibility of all of the things to play out in this year, which is the demand increases from what customers say they may achieve and what markets might do and while we are, as you know, building out a substantial amount of infrastructure to enable us to match the demand as we go into the second half and into 2026.

Just one follow-up. What is the headcount growth you're thinking about to match that expansion of capacity?

I'm guessing about 1,000 net heads for the year at this point. We'll have a higher gross number than that to net down to 1,000, but a little bit less than in 2024, commensurate with us also improving our productivity. But again, it's something which is yet to be determined. But that's directionally how we're thinking about it.

Our next question will come from Robert Stallard with Vertical Research.

John, I just wanted to follow up on your 737 production forecast. I was wondering what sort of purchase orders your various businesses are seeing at the moment, whether you've got any more clarity on how much inventory is in the system at this point?

Clearly, fourth quarter wasn't stellar in terms of requirements of Boeing. And we have seen and have fully taken account of the -- in a couple of product lines, the cutbacks that have occurred due to inventory. And so that's already baked into our first quarter guide. And so there's nothing for us to be concerned about there. The thing that I do worry about is if we are unable to, let's say, smooth some of those is that demand on us could actually accelerate to an even much higher rate in the balance of the year going into 2026. And so it's that potential for some instability in the demand profile that we've taken account of. And -- but the most important thing is that which we see at the moment is pretty baked into our first quarter, which I think is pretty healthy anyway. So nothing to worry about that. Again, as you know, we are -- I'd say just to go a bit further, we're not yet changing over the turbine airfoils for the LEAP-1B. And so we expect that to continue with the existing product as we go through 2025 and looking towards a later implementation compared to the LEAP-1A. So it's just worth mentioning that in the context of the dynamic of the year.

Our next question will come from Scott Deuschle with Deutsche Bank.

John, you referenced Engineered Structures benefiting from product rationalization this quarter. Maybe you can just explain in a bit more detail what that product rationalization point is referring to and if there's opportunity for further benefit from beyond this quarter going forward?

You may remember, Scott, that we did -- closed out a couple of facilities in Europe earlier in 2024 and also sold one of our, I'll say, less profitable Structures business. So that's some of the sort of effect on margin, albeit probably even bigger than that has been the step-up in productivity and performance of the business. And so when I think about it for 2025, I was really pleased with our exit rate and do not think there's anything to worry about in terms of going backwards in that regard. So I think the combination of having thrifted out, say, 3 underperforming operations while still having revenue grow, which is always a great time to do it, improvements in productivity, and also, again, commercial focus has paid dividends for us and for us to be able to step up to -- from a 14% level to an 18% EBITDA margin was really good, and that's why I chose to call out in my opening comments and hope to be as good as that or build on it during 2025.

And just to clarify, can you say what the guidance is assuming on the GTF Advantage certification timing?

So let me just step through the overall picture on the changeover on both the GTF and also it's worthwhile mentioning the changeover on the LEAP engine. So GTF certification has not occurred. We still await final approvals from Pratt & Whitney regarding sign-off for tooling to be able to make at high rate. We have done some early production. And so we're optimistic that changeover occurs during the, say, the 2025 year. It's unclear to us yet exactly when the changeover will occur and substantial volumes will do so. But let's assume, at this point, a mid-2025 change, albeit with everybody wanting that change to occur as soon as possible, both the durability improvements in the engine. And for Howmet, additional, I'll say, content and overall mix within the -- in the business. So we see that as a good change, but still struggling to put a pin on exactly which month will change over. In the case of GE, the changeover for the LEAP-1A has finally occurred and so that's good. And if you think about Q4, I mean, we were, during that quarter, uncertain about changeover. In fact, we prepared to change and didn't change and then changed over again. So there's a little bit of disturbance in our fourth quarter engine margin performance due to that changeover, which I think everybody can understand. But the most important thing is that as of now in, say, January into February, we've changed over to the new improved version. And we believe that will be a net good for both GE and for Howmet. So the LEAP-1B, my expectation is that won't change over at all during 2025 and that will be some time more like mid-2026. But again, the timing to be determined and the changeovers need to be approved by both GE, Boeing and also the FAA. So that timing is less clear. So in summary, GTF by hopefully midyear this year, and we look forward to that change. The LEAP-1A has now changed as of January and that preservation in our margin is behind us with all the -- what's required in a major changeover like that. And so all good on that front for increased robustness of those narrow-body engines.

Our next question will come from Ron Epstein with Bank of America.

Can you speak a little more to the opportunity in Industrial Gas Turbine? Because it does seem like over the past several quarters, you've gotten, how do I say, more build up on it, right? So is there any more color you can give around it? And I mean, ultimately, how big could it be for you guys?

First of all, it is tough to get me bulled up on something. I'd like to believe I'm fairly level-headed, Ron, but I do think that the picture for IGT is exceptional and has got even better since our November earnings call, which is, you recall was the day after of the election. And the big picture is data centers are being built out throughout the world. But I'll just stick with the U.S. because it's easy, then you could just extrapolate it, but the data centers require a massive amount of electricity, both for -- both the build-out of them, the functioning of these new chips in the service and also electricity for cooling them down as well. So the demands are extraordinary. And it will be interesting to see how both the electricity is provided and also the grid is able to cope with. And also, I think that certain data center clusters are going to have their own source of electricity because of the security they need for it, which will require gas turbines to be on-site. And so the overall blend or electricity provision between that, which will come from wind, solar, and from natural gas, I think, has changed with the new administration. And I think that everybody is seeing an even brighter prospect for natural gas and industrial gas turbines going forward. And we have been in deep discussions with some of our customers to create the capacity. And in fact, we're actually -- in that CapEx guide I gave, we're actually going to build out additions to 2 of our sites to enable additional plant and equipment to be installed over the back end of '25 to '26 and also to '27. So we're pretty optimistic about it. Of course, it doesn't -- none of these things happen without some disturbance. And we all are familiar with DeepSeek and was that a revolution? And the best way I can explain it is that it was using the benefits of the open language models developed by other hyperscalers. But fundamentally, in terms of the hyperscalers that we think about, which is, say, Microsoft and Meta and Google and Oracle, then I think the requirements for building out the servers and in data centers, it's all intact. And I expect it to be really good for that segment going forward. In the short term, it's going to have to be provided by running the existing turbines harder, which means spares demand. And at the same time, everybody of all of the major gross turbine providers in the world are gearing up to add capacity. And for them to do that, they need the most critical component, which is the turbine blades which leads back to Howmet. And we do have the leading market share of above 50% of that global market. So we're pretty optimistic about it. Consciously, we don't want to get ahead of ourselves. And so I expect that we're going to be constrained in our ability to supply over the next couple of years as we build out this compared to what's there, but are very pleased to be investing in it and what we think is going to be a bright future, both for sales revenue and for margin going forward. And I think on the last call, I did state clearly that our margins in IGT are similar to our aerospace turbines.

Our next question will come from David Strauss with Barclays.

Maybe a question for Ken. Ken, what is assumed in the cash guide for working capital? It looks like maybe somewhere between $100 million and $200 million usage similar to 2024. And then John, in terms of -- it sounds like we should expect to less in the way of kind of gross debt reduction this year, and you talked about a higher buyback. Is it fair to think about that you could look to return pretty close to 100% of free cash flow in terms of buyback and dividend?

Maybe I'll go first, Ken, and then you clear out the working capital assumption. What we're very clear on, David, is that if you look at '22, '23, '24, is that our cash flow has essentially been, I'll say, repatriated to shareholders either by share buyback, dividend or I also think of debt reduction and its improvement in future free cash flow, is also as part of that. Given our net leverage is that -- the way I look at it is that we've increased the dividend, but that's not going to fundamentally change the contours of our cash flow and its usage. But this year, in 2025, I just don't see us doing anything like what we've done in the last couple of years in terms of putting our debt stacks into a really great order and also putting out an average interest cost of our long-term debt in a really good condition below the average of the 10-year treasury. So again, good work there. And so that leaves us with share buyback. And the commentary I've given so far is that it will be above 2025. I've not put a pin in the exact number. And -- but you can assume that if you look at the combination of all of that is that the benefits of our cash flow will be largely, if not wholly, repatriated to shareholders because everything else is in such great shape. Ken, over to you on the working capital?

Yes. So David, so in terms of free cash flow, working capital. So again, starting with '24 that $977 million of free cash flow was a record, as we talked about, that 88% conversion. Very pleased with the performance of the team on that, especially considering embedded in that was record CapEx investment, right, around $321 million. And as you can see in the reports that we have here, that $100 million increase in CapEx, you can see the year-over-year, primarily in the Engines business, which has tremendous return on net assets in the business. So as we move forward into 2025, we tried to give you the assumptions on Slide 15 in the deck in terms of some of the building blocks of free cash flow, but north of $1 billion of free cash flow in 2025. If you look at the working capital, specifically to your question, embedded in there is a burn of around $180 million of working capital burn. And the way I would look at it is revenue year-over-year is up $600 million-ish on the guide. Usually, you have about 20% working capital burn associated with that revenue increase. So you're looking at a -- normally, you would expect $120 million of working capital burn. But we're going to build more inventory, right, as we look at commercial aerospace, specifically in narrow-body, if our assumption is maybe conservative on narrow-body, is that higher and say, Boeing can go to 38, 42. We will be ready for that. And that's why we're going to put some incremental inventory in that working capital number.

Our next question will go from Sheila Kahyaoglu with Jefferies.

Thank you. Maybe can you talk about the step down in Engines margins in Q4. They were down about 150 bps Q-over-Q, a surprise given the continued volume growth there? And how do we think about margin levels in '25 and '26 for engines given new capacity coming online and the narrow-body engine kits you talked about? And maybe a follow-up to Myles' question. What segment decelerates the most from Q1 levels?

Okay. So first of all, in my view, Sheila, the small margin change in engine in the fourth quarter is what I call noise, and I wouldn't read too much into that at all. It doesn't bother me. Of course, I would not have liked it to occur. But at the same time, in terms of the long-term thematic for that business, it really -- I think is fairly inconsequential. The thing I said earlier in the call, which maybe I should amplify on a little bit about. As you know, we went through the changeover in terms of preparing for the new LEAP-1A Stage 1 turbine blade, which has been noted. Probably what's not been noted is that the change of dates in terms of implementation and the final FAA certification and then readiness. So we incurred some costs during the fourth quarter in that whole changeover. And the most important thing is that changeover is behind us. The new blade is, as far as we can see, is performing well. And so we don't see any of those changeover costs reoccurring in 2025 for the LEAP range of engines because I already said LEAP-1B will be a '26 item and certainly not in the, in my view, the first half of '26. That's a TBD. And then, of course, there will be the changeover coming for the GTF, which we see as positive and possibly even more positive for the LEAP engines just because it's needed so much and the technology change is considerable. And so we look forward to that. And again, with it being data uncertain. So I think the most important thing is Q4 was -- I mean, this is the normal, I call quarterly noise. I don't think anybody can be that good in terms of what's a fractional change for a percentage point while undergoing such significant change. So that's how I'd categorize it. I think the second part of your question was about margin. If I had to guess at it in terms of total change year-on-year from an average of 24 to an average of 25, I'm pretty positive about our Structures business and the changes we've been making to that business during 2024. And I see that a lot of those things came right in the fourth quarter, and we hope that there's nothing that's going to occur that will put us into reverse at all. Again, it's always a view and a forecast. But year-on-year, is that I think Structures will probably be the biggest percent of improvement for the year. But heck, I'd like all of them to be -- continuing to move forward, and we'll see how it goes.

Our next question will come from Seth Seifman with JPMorgan.

I guess, maybe following up on that last question with Structures. Impressive margin performance. You've kind of exited some areas. So not a place where you've been looking to add incremental capital. Once you've kind of got it performing the way you want it to perform, how do you think about its place in the portfolio?

I said and been willing to go on record that I did see the Structures business moving to the high teens in terms of the margin performance. And one quarter doesn't make a year, but if you say what would I guess at, I'd say that we will probably be able to repeat that in 2025. And so inevitably, when you begin to do many of the right things in the business, it does earn its way to have some additional capital deployed towards it, whereas we've been really, I'll say, starving that business or certainly not reinvesting at its depreciation rate because of its overall, I'll say, place in the portfolio in terms of margin performance, et cetera. So I think you earn your right to grow even though that business as you've seen, is growing. I think the good news is, is that the inventory overhang that was at Lockheed in terms of bulk heads is, I think, behind us and you can see some of the effect of that. I also see that titanium demand continues to be healthy in 2025. And 2026, it's always unknown because we are the beneficiaries of some geopolitical tensions there versus Russia and who knows where all of that goes. But at the moment, I think it's certainly a higher teens margin business. And there's no reason why we need to stop there. And so whether we can move it into the 20s, that remains to be seen. But ultimately, I still stand behind the statement. I don't see that as a business which can intrinsically have the rate of margins that we have in our engine business, and that's why we've been really pleased to really capacitize there just because of the growth, the defensive moat around the business and the technology -- and the technologies which are yet to come. And so I'm very positive about all of that. But Structures, so far, so good, and I'm pleased with its performance. But nothing in terms of its place in the portfolio. It's a good contributor. It's creating value. And so all good as far as I'm concerned.

Our final question will come from Ken Herbert with RBC Capital Markets.

Thanks for squeezing this in. You had really strong Spares growth in '24. What's the underlying assumption for Spares growth in '25, if you can provide that? And I guess, specifically, in the last few calls, you've talked up in particular, demand around the CFM56 and Spares activity there. Can you comment within spares on the aerospace outlook, in particular and what you're seeing?

Okay. So let me deal with the CFM56 comment first is that -- my view has been is that the statements, which was probably viewed about 3 or 4 years ago, that 2025 would be the year of peak demand for CFM56. I said in my view, that's been pushed out to more like 2027. And I think it all comes back to the existing fleet is being worked harder. You can see that the demand into the MRO shops for, I say, those legacy engines is still increasing and facilities are being created and more deeper overhauls are being performed, and so I really do think that my statement holds. And then if '27 is the peak, and it might be later than that, that's what I stand at the moment. Is there any degradation from that would be very marginal and it will take either many years into the next decade. So I don't see a massive change there. And if you think about it, when we started out 2024, the assumption around LEAP production was much higher than it turned out. And those new engines are not in the market and therefore, in itself creates more demand for CFM56s because airlines are still using those planes as much as they possibly can and trying to accelerate, I'll say, their transition through any MRO repairs. So that deals with CFM56. In terms of demand for LEAP range of engines, I think the spares demand continues to grow. And if anything, the demand for LEAP-1B is -- I think we're going to see that accelerate in 2025 and building on a very strong demand for LEAP-1A blades. And so I think the important thing to remember is we don't control when our blades leave us and a path to CFM, let's call it. We don't control how many of those are built into new engines and how many goes to spares. And so that will be an interesting dynamic as we go through 2025. But my expectation is that the needs for Boeing will be fulfilled. And let's say those LEAP-1B engines will be produced for them and all of the balance goes to spares. On the other hand, the spares are prioritized first and OE engines less, then that does have an impact. And so we've provided some caution around that fact. And so that if spares is to be prioritized at the expense of OE build, then we would not be selling our structural castings and also all of the other parts in the low-pressure turbine that's built out by Safran. And so when you think about it, overall, what does that say? Spares are going to increase again in 2025. And so I think we're going to see a very healthy increase in spares. And I'm hoping that we're going to see both a healthy increase in spares and a healthy increase in OE engine build and the numbers for LEAP production will actually be higher than is currently being called out. But that again is to be determined. But I think every one of those engines are going to be necessary to allow Airbus and Boeing to enable them to achieve the builds that they want to achieve with Airbus rising above the mid-50s and also Boeing reaching their stated exit rate of -- is it 38 or is it 42, that's again to be determined. But it's very clear to me that every part of what we produce is going to be necessary to build out those engines to enable the aircraft to be built and whilst obviously maintaining and refilling the spares demand, which is going to be very healthy going into '25.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.