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

Okay. Good morning, everybody. Why don't we get started? I'm Doug Harned, Bernstein Global Aerospace and Defense Analyst. And I am thrilled to have with us, again, John Plant, Chairman and CEO of Howmet. Okay. Yes. Well, but just to start, John, why don't you just give us a little overview about Howmet and how you're looking at market opportunity?

I think all the things I talked about on the recent earnings calls, hold up in the, I think, if anything felt a little bit more confident in the narrow-body production, particularly from Boeing being a little bit better than I previously considered, at the same time, still being fairly cautious about it. The spares business has been running well. And if anything, we achieved our mark probably a year earlier than we've been talking about. And between content growth, the general, I will say, increase in share plus spares and pricing, I mean, everything was working well for us. And really, the only, it's call a blot on the landscape was that the -- my previous assumption around the wheels business for commercial truck was a little bit weaker as I saw it going into the second half of the year, essentially coming off a little bit of uncertainty and taking account of what we saw in the West Coast ports as a result of some of the tariff dialogue that's been going on.

Well, actually, just to get this out of the way, tariffs. So can you give us a little bit of an update on -- it's obviously a moving target here, but how you're now seeing tariffs impacting Howmet?

We gave ranges in terms of what the gross impact might be if the tax also to snap back to previous level after the 90 days. And also then what the net effect was. Of course, it's almost, as soon as you say, this is it, then things change. So whatever I said then and what I'd say today might be a little bit different given that maybe now there is some possibility of rough mark with China, although you read articles yesterday about the COME situation, and you say what's happening here. But because we've given the outer limits of what we saw, I think those still hold. If anything, given the fact that we've probably got another quarter of probably slightly lower input costs, therefore, slightly lower drag as we seek to recover those input costs as a result of the tariffs. The net probably is a little bit lower than I'd said I put -- I'd put it out to a boundary of $15 million for the year, but it's probably trended better than that in the intervening period, based on actions we've taken and also the fact that 145% for China got rolled back to, was it 30%? And Europe's it's bounced around a bit this month. And like what's the latest exemption? It's difficult to -- I find it difficult to be cogently about it each day.

I mean you've spoken before about mitigation strategies. There was that well-publicized force majeure that got out there. I mean...

Yes, I thought you might bring that up.

So how is that? How do you -- maybe you can refresh us on your strategy there for mitigation?

Well, we employ, and have employed and do employ many different strategies, first of all, to address the gross effect for the company. And so whether it's trade agreements, exemptions, what's the code you import things under or indeed just some limited degree, move a little bit of production. But again, that's fairly limited. It doesn't strike me as a sensible thing to have wholesale changes of manufacturing strategy given the climate that we're in. So we do all of that. We were also very clear as we examined each one of our commercial agreements, which I thought and do think are pretty strong. But some of them didn't call out tariff loan, which per se so as an input, let's say, materials costs, if you didn't call it out then I didn't feel as though it was right to be exposed and felt that if we did have the emergency that's -- that was quoted as the reason for them, then it was justification to say this is clearly the force majeure situation. And we were -- you can't do that selectively. You say it is or it isn't, and therefore, we did issue a letter. Obviously, it was leaked. And I guess you and many others enjoyed reading it. And it did have quite a trending population of scrutiny for a while. And I thought it should quiet down. But the way it was necessary, I felt, we have using -- I said there were 2 of our divisions that were a little bit more exposed. And one of them, we used it effectively to get where we need to be to have full new agreements in place that covered us. And so we wouldn't risk that exposure for the company and our shareholders. So the answer is yes, I did. And would I do it again? Absolutely.

Yes. I -- well, obviously, we're going to see how this whole situation progresses, and it seems to change every day. But if we just go over -- just go to the engine products side right now, Boeing -- so Boeing finally appears to be on somewhat of an upward path in terms of production rates on the MAX. I've been waiting for that a long time. And I would think in principle, if we were in what was once a normal environment, you would be, say, delivering into CFM, CE at a rate that will allow them to deliver to Boeing to parallel the production rate and all of those would sort of move together. Right now, we're in a situation where Boeing's got a lot of LEAP-1Bs sitting around. GE is sort of producing at a rate that all in total is a little bit less than they had previously estimated, although they haven't broken that out between engine types. How do you think about your production now as it relates to Boeing given that they're starting to come back?

At the highest level, and I'll try to break that down for you. If you look at the aggregate production of parts, and of course, we supply not only the turbine airfoils, but also structural castings, et cetera. If I look in aggregates, then we are producing today as we were last year, well ahead of the industry. So the -- how many engines are produced is not gated by Howmet. There's a choice, of course, on where parts are used either in the aftermarket or OE production. But right now, I know that the comment I made I think is maybe it was November of last year, where I said on the newly upgraded, for example, the 1A we were -- we already put 500 engine sets into inventory and we've continued to build on that. And so...

I'm sorry, that's a 500 engine set so with the new blade. Yes.

Yes. I didn't use that term, but I understand. I never use that word.

Okay. I did and you could take it for whatever.

Yes, I understand what you mean. It seems we make them. But, yes, we've been in a good situation. And if anything, given the production of the total package of engines last quarter, which was closer to $300 million than $400 million. I'll give you the exact numbers should you need it. But clearly, we've been running ahead. And so I think we're in a really good situation. You got to be more specific because, as you know, the 1B has not changed to the new configuration yet, and that's sort of a date yet to be determined. And at the moment, I don't think that there's any shortage of engines available for Boeing production. And so I assume that the comments made by Boeing yesterday, which were obviously really good in terms of their expectation of production for this month and next quarter and potentially after that. It was -- that means there's a great availability of parts, and so everything is good. So that gives me a lot of optimism.

Well, because historically, you deliver a lot of airfoils that are used in OE production. And right now, we're not really -- you don't really need to ramp up on that I'm assuming for Boeing right now. But this -- where is the point that you're looking at where you may have to take production up for those LEAP-1Bs if Boeing stays on a trajectory that they've described?

I think we're going to have to take production up this year is my feeling. So my thought is that the trend of increase in spares that we saw on the 1A last year, which was clearly very positive, and we're going to see some of that this year for the IB, and therefore, that requires more parts. I think the -- notwithstanding the inventory of engines in -- at Boeing, I do think the production rates have to come up. And indeed, one of the really good things is that if you achieve the increase in production of LEAP, let's say, plus 15%, 20%, there's a 60 -- 50, 60, 90 sort of area or more then clearly, the rate of production is going to increase substantially into the 400 or 450 or even more to achieve that annual number. And therefore, that means the vector is one of increased requirements. And so when you look at sort of what's occupying my mind at the moment is, with all of the, let's say, hopeful build increases for narrow-body and maybe wide-body as we go into next year, plus the spare situation, plus all the other things we're doing, for example, IGT and both large turbines plus aeroderivatives and in new small turbines, which are being brought into play, then one of the things which is occupying in my mind is really increasing overall production. And so what do I think about? I think at the moment, I've got to make more. I'm not saying we're not making enough, I'm just saying we need to make more. And if you look at -- we've recently increased capital expenditure in guided numbers for 2025, and that's indicative of what we are looking at more.

Can you talk about both for the LEAP and for the geared turbofan as you've gone to on each of them, new configurations for the -- for HPT blades? Can you comment on your market share, how that's changing going to those new blades and the types of agreements you have, which as you've said before, you've had these long term -- you've set up these long-term agreements on these narrow-body engines.

So answering point you make about geared turbofan first. We -- while the GTF advantage is certified, we all know that, but I know also that we are not yet in mass production of the newly improved parts. Yes, we're making them, and I can see that we're going to have to make a lot more of them, particularly as we go through this year. But today, in terms of the grand scheme of like the total engine that's required plus providing parts to the service market then it's not yet at that point. In other words, first off was the LEAP-1A, my view is the story for 2025 will be the release of mass production tools is occurring, but not yet there. Well, yes, we're making so many engine sets a month, but that's yet to come. And then next year, it's going to be another large increase of requirements. On market shares, we don't ever talk about them. So I don't feel as though it's appropriate to do so. But if you look in aggregates of both where we are for the buying blades, relative market share, they've clearly been increasing and I'd be willing to say that and particularly even more so in the hot section of the turbine. And we're seeing all of those theses played out as the technology becomes more exact thing. And indeed, some of the things that we're doing, for example, you use GTF because we're in the midst of getting ready to do mass production, I mean those are really sophisticated products taking some of the technologies that were used in some of the military applications to raise the thermal performance of the parts so you could withstand the actual temperature seen in the engine. So it's long way of saying it's good, happy. We've got to produce more, but I'm shying away from just saying what the market share is.

Well, when you look at producing these new configuration blades that are going to ramp up over time, can you give us a sense of how -- you're still producing the, I guess, I would call them the legacy ones or the traditional plates as well. How long should we see sort of 2 parallel lines running for the LEAP and the geared turbofan?

I think it's going to be longer than everybody expects. In that, I mean, you've got a changeover occurring or has occurred in part on the 1A, but I'm also clear that we'll still be producing legacy parts through this year and next year. And it's also a feature of where an engine comes into an MRO shaft, the question is, do you replace all the turbine blades and therefore, your choice is, you go all the way to the new one? But if the choice by the MRO shop or by the owner of the engine is, I can get away with replacing 25% of the blades or 50%, then you can't mix and match on the same disk. You have to have all of the same. So if you want to economize yourself still got life left in the old blades, therefore, you got to put old blades on to, to do, even though then you have to have an economic equation about how long they'll last for? What's the overall -- when will it come back in for the next shop visit? So it's something which we don't determine. We just say we know we're going to be supplying both all the new. And it's a glide path over time, more and more of the new and less and less of the old. And then we'll do the same thing for the GTF. Today, it's mainly legacy reduction that we're doing. But by -- maybe by the end of the year, we have crossed over to the majority being new. And then it will go around the same sort of path through '26 into '27. And then there's the 1B, which is date uncertain at this point in time, but expected end of this year or end of next year, sometime we don't determine that. It's FAA and the engine maker.

Well, and when you look at this, one of the things that's been significant to us when we look at Howmet is that because the LEAP, your turbofan, because you've had shorter lifetimes for these early blade designs is an aftermarket demand as these come in and need to be replaced, can you comment on when you go to these new designs, should we see -- do you expect to see the life expectancy up comparable to what we've had on CFM56 on V2500s?

I think the question is probably the best answered by the engine manufacturer because they know the exact conditions that those turbine blades are going to face, the effectiveness of the solutions being put in place, the effectiveness of, let's say, particulate or dust collection, I will say, mechanisms on the engine and also, indeed, the robustness of the airflow and consistency. So there's a lot of stuff to be worked through, which we knew we can only provide margins of performance within, we can engineer to whatever you want by way of bandwidth. So first, we accept that. But my thought is, when I look at the narrowbody because I think that's really what you're referring to, then I think the current legacy blades will continue at a very high level and probably haven't peaked for another couple of years. And you may be a very gradual reduction for CFM56. So I think that's currently still growing. Clearly, there's 2 effects going on with the new engine blades. The fundamental, I think, Vector talked about is, whenever you run engines at a higher temperature, higher pressure then the life expectancy of parts is -- always tends to be a little bit less. No different to like a car engine is that if you pressurize it, then you will -- it's not like extending the life of your oil, you're going to a mineral-based oil, then if you're putting in, say, sodium fill valves, you're putting a lot of more pressure in the engine, and higher temperatures then generally speaking the parts wear more. And so I think there's a long-term effect where it's difficult to see at the moment that the current generations will have the same numbers of cycles in the long term. So my thought is the newer engines are going to see higher frequency of shop visits than the predecessor. I'm not saying that they won't be better than they are today because they -- clearly improvements are being made. So I refer to it, there's a long-term trajectory of increase of service parts. And so I think that we will see increases in the number of parts for delivery that will go into engine overhaul every year for the next decade, long-term trend upwards because of what I've talked about. Bear in mind, I said also the CFM hasn't quite peaked yet. And then you've got one other effect, what I call the bubble effect, which is the here and now because the life experience by the current engine blades, which is one of the reasons why we've gone from an improvement in fuel efficiency objective to -- for this generation to more of a robustness solution, is that's producing a very high demand for the next 2, 3, 4 years. Again, we don't determine that. But -- so I think the only thing we are arguing, will argue, but sees that the angle of increase will be, I think, a little bit higher in the short term. We'll continue to grow every year, but the angle of increase will begin to soften. So you can imagine if you have to graph it out, I draw a sharper slope in the near term and continue the slope upwards, but bend it down a bit, the angle would be slightly lower as the new improved blades come in, but still require higher frequency compared to the old, but not the high frequency because of the problems on the current one.

So that's not going to be right away. That's going to be a while?

Yes. But I mean, I'm just trying to get -- this is how I see it. It's the best way I can describe it. So I think myself, shares are going to increase every year that I can see at the moment. You look at the build-out of MRO shops, it's being built as they know they've got to come in for more services over the next decade or 2. And it's just the angle of increase with a call. Maybe it's unfair to call it a bubble at the moment, which is that you know certain countries, because of the blocking of holes, let's say, in combustors with particulates has produced engine temperatures way higher than was envisaged, therefore, that has to be replaced at far more frequent intervals than ever considered. And now we're engineering to a higher cylinder performance, even though they say things are being done to prevent some of those blockages, but either which way those new things are going to be, have higher content in them, greater performance.

Can you -- I know when you deliver a blade, say to GE, you don't know if it's going to go into aftermarket or OE. But can you give us a rough sense now of how large your aftermarket is on engine products?

Yes. We've -- as a percent of Howmet would say, we've got on this March from 2019, we're about 11% of our total revenues. We've achieved, I think, 17% by the end of last year. I said doing 25%, 26%, going to go to 20% and heck we got there in Q1.

That's an engine part?

No, that's total Howmet. If I then, of course, apply that percentage to engine products and you've got a much higher percentage because, I mean, very approximately, if engine is probably -- I use loosely 50% of the revenue, and therefore, if it's 20% of the company, it's 40% of engine, that's about right. And I can always rely upon Ken, who's in the audience do correct me, necessary. But then that breaks out because I'm just giving you the totals for commercial aero, defense aero, IGT, oil and gas the whole lump there. But if you look at the situation, which we described in '19, which was $400 million for commercial, $400 million for the defense and industrial markets, then if you just think about 11%, 20%, that's essentially revenues growing as well. So it's double. Yes. And it's pretty much still the same mix today, not quite 50% commercial aero, maybe just under the 50%, maybe 48%, but very loosely, it's 50-50. And then it comes down to actually there's fewer military jets on the same time. They have a higher duty cycles because performance required and therefore, shop visits are more frequent until you go into all of that.

You've been able to bring margins up over time, which we would assume is both a combination of pricing and operating leverage. Can you comment at all on what's been driving your margin improvement, and where you expect to go in engine products?

If -- we did a recent West Coast, we participated with someone to do like a West Coast to move to one of our plants like a rings plant, an engine plant. And I didn't actually attend that one. So -- but I did enjoy the summary of it, which was not only a great plant, let's say, so clean, so good. But those like top-level descriptors. But the thing, which I felt, was really good was that we're producing more parts now in 2025 than we did in 2019, but with approximately half the people. And so the whole thrust that we've had by way of improving our processes, improving process control, and therefore, improving yields, the theme of automation, it has played out for us very well. And put with that the additional volumes, you've got volume leverage, you've got productivity and you've got some price as well, then that's a good cocktail to have. And so if I could use that as a poster child for every one of our operations, that'd be great. I'm not saying they're all that good, but they will -- I hope they all will be.

it did seem that the Whitehall facility, when I was there, you've got automation, the reduced dispersion of output and improves your yields. So my assumption is that this is playing out at many of your facilities. Is that correct?

Yes. I really do believe that what we showed, maybe 2 years ago, by way of the visit, we only probably do it once a decade, showed a level of sophistication with automation, which I believe is breathtaking because the one thing you note is the lack of people. But it's not per se and knock on the use of humans in the process, or it's not just for the economics of wages, but essentially, it's for the absolute need for the control and tolerances and quality to achieve the throughputs and yields, particularly as we've gone to increased air passages through turbine blades, which gives you far thinner wall sections and the control of those both in high-volume production, but also, I will say, all moving to the most sophisticated level of alloy you could use. And so it takes a lot for them to do that with manual processes, it's -- and I just don't think it's possible to have it economically viable. And so that's part of what we do. And just now, we've just -- in that same site, we've just built a new plant, the roof is on, some equipment has arrived. We have recruited. We're on our way to recruiting a few hundred people this year. And, I mean, today, it's just as I say, just bits of pieces of equipment. So if you visit were to do 1 there today, then you'd say you see a few, let's say, transfer presses. You'd see some early core production, but nothing where all the processes are joined up yet. And all we're producing is scrap. We don't just train on it, we chop it up and then make sure nobody can see what it is because we try to protect the IP. And that really won't come on stream to back end of this year into next year. And as the requirements have gone up, we're actually having to make further increases in investment in that facility and that will be at a level above in terms of, again, automation that we envisage to do. So we are determined to take it to a level above what you saw a couple of years ago. So the theme goes throughout the company. And if I look at one of our fastener plants as an example, we -- if we've got, let's say, 10 processes to produce something, then with use of latest equipment capabilities or making sure we use all the capabilities of existing equipment, if we can delay 4 or 5 process steps and still produce the part to the highest quality, that's what we're doing.

Talking about fasteners...

By the way, I did get it quite carried away on the -- I think in response to your question on the last earnings call, well, I think I was getting to the point where I was boring you about what we're doing on aircraft wheel control. And I thought, I think Doug's had enough of this already.

Okay. So we'll switch topics. So -- but fasteners what you just touched on. So we've been expecting this wide-body ramp to occur on the 787 and the A350. It's been a little behind schedule in terms of production at Boeing and Airbus. But once that happened, our expectation was, this is going to really help margins in your fastener business, but margins, you just reported, you're up 400 basis points and this hasn't -- this effect hasn't kicked in yet. Can you talk about what is taking your margins up there, and how we should look at this over the next couple of years?

Well, we could have got a little bit carried away with ourselves last quarter. That's possible. I hope not. It did turn out, I think, as good as we could have imagined. That's probably code for saying maybe better than we thought. But that's good because we always try to achieve at least our own expectations, if not yours. And so I do think that's the, I say the majority of that has been achieved without the benefit of fundamental mix emanating from the widebody and composite aircraft. That's yet to play. It's an unusual situation because we -- most of our plants are multiproduct, multipurpose and customer agnostic, and it makes for much more even production. But in the case of the fasteners for the composite aircraft, they are concentrated in a couple of plants, and therefore, they're still what I think underloaded. And therefore, theoretically, should volumes ever increase, and the order book is so high for wide-body demand is so he thinks it's got to increase at some point. So there will be the 787 goes to 7 a month from the last several years at 1, 2 to 5. Now, I think it's moving on to 5, or it's the A350 at probably 5.5 months this year or something. I'm expecting the problems of -- to get more production will be solved. And, therefore, it will play out into higher production maybe 2026, 2027. And, therefore, again, it should be positive for us, particularly because we say we're slightly unbalanced at the moment between, I'll call it metallic and fasteners to go to a metallic type of aircraft to composites. And therefore, I keep thinking good things. We've never happened yet, but it's going to happen.

Well, one other thing here on fasteners. Can you give us any kind of an update on this SPS fire and the impact that it may have on you?

Yes. We -- you looked at the situation, considered the revenue going through that plant, how much might be moved to existing PCC facilities. And it's difficult to get an exact number, but say, if there was $150 million, possibly $200 million rather, let's use $150 million coming out of plant, I think half gets redeployed to other PCC plant is my guess, particularly into California. And then there's a balance, and we have quoted a lot of parts. We have now booked some healthy orders. I'm trying to remember the number I gave you on the last call. So I'll -- I don't quite remember, but I'm thinking like $25 million, yes $25 million to $30 million was that sort of area with the prospect of it going up further because we've still got hundreds of part numbers to quote. We've seen, as you always get this, you have some people move faster than others, probably according to their need and availability and what images they're carrying. So for example, Boeing were fast out the gate on this one. And we put a huge team behind and we've been in a supportive situation to do that in 1 or 2 special applications to ensure that production continuity could occur, for example, on the 737. So that -- we're doing that, working with them very well. And it's less of an Airbus type of play from that plant, but the some. And then the rest is into both distribution and to the engine makers and we have lots more to bid. We've got 3 customers already where we have production orders for as soon as we can make them, not this month, but hopefully, towards the back end of the year into next year, we'll be making some more of these parts. And as I said, as inventories dwindle, more and more orders. What the total is eventually, I don't know, hopefully, north of 30, it can't be more than 70, so it pick somewhere between 40 or 50, who knows.

But if we go back to another area, which is when you not too long ago said that now you're becoming an AI company as well...

No, I didn't say we get an AI, I just said that AI is giving us this extraordinary opportunity. And I think if you throw AI into any earnings call, it's worth $10. That's a joke, just in case.

I'm not really wanting to put that.

But it was electricity demand for us. If you do ChatGPT search, 10x electricity to Google search, so please use any form of those, what you have graphical capacity or something? I can't keep up with all the names. But there's lots of them use that and then more electricity, more data centers, you're increasing anyway and therefore, more electricity, and therefore, AI is good.

So you talked about -- I guess, you've gotten an agreement in Japan now on IGT related to this. And I know you talked about discussions with some of the other big players, Renova. Can you give us an update on how you expect that IGT trajectory to go? I believe IGT is about 10% of revenues.

A little bit less than that, but you're in the ballpark, $500 million, $600 million, that sort of area of revenue last year. I'm hopeful it will be more this year. But again, it's one where we're building capacity like crazy to also to be able to meet what our customers want. we are bottleneck breaking. We are addressing yields -- and there's also, particularly with some of the newer turbines, there's again the same trajectory of changeover in more solid blades to cord rates, which is, again, value that we see in both quantity increases and sophistication increase, therefore, content. And yes, in fact, we, in the, let's say, IGT network. And let's say, we've got really 3 plants aimed at that. They're supported by some other, let's say, core operations then we're building a new one in Japan. So it's not just dedicated to the Mitsubishi Heavy, it also suppliers into other customers. So we do supply all customers. And we're also expanding in Europe, and we've put capacity by way of additional machine tools into -- being put into our plant in the U.S., but we're not expanding footprint there. And so there's a lot of good things happening. And also, we made that small technology acquisition last year, which is also giving us a level of capability on tooling to produce these very large blades, which have extreme, I will say -- I'll say, extremes of where you're relieving the tension in the parts because of the length with the level of, I'll say, thermal energy we're putting into it during the casting process, and therefore, we're actually using tools with servo motors to adjust as we mold cores and so it's a bit of a PR thing saying what a great technology.

Okay. Moving to engineered structures. This is another one where you took margins up a lot. And can you comment on -- you had 18.4% margins? I know you've changed leadership there a little while back. I mean, a lot has been going on. I mean, what should we think of that business terms of margins going forward?

If I look at that business, first of all, well, if I look at the allocation of my time, it was 1 where I probably paid more attention, look, over the last few years, first of all to engine and to fasteners and wheels and maybe didn't pay as much attention. Well, maybe it's like most things I do, I think so where do you have the most impact, focus where you can be really, really good. And also in that business, it was more one of triage because we had the COVID down draft, 40% volume disappeared. Then you had a wide-body titanium, which is inside that business, that's more of a wide-body play than a narrow-body play. And then add to that the fact that, I'd say, our customer for big structural parts. So I think bulkheads for F-35s as an example. And Lockheed had underbuilt over several years during, let's say, COVID and beyond and hadn't really achieved the, I'd say, 150 rate that was talked about. And so there's a large inventory of those parts to burn off as well. So a lot of things which were going on, but we're still being done and improved. Everything we did was just holding where we were, let's say, a 14% margin business, which in a structures context, isn't bad. In fact, sometimes that business is better than some other coal companies. Our dog, if you want to call it that, some sort of BCG analysis was still pretty good. But I always felt that with a bit more love, care and attention, it could do a lot better. And that's why I wildly went out and said, I think this could be a high-teens business. I don't often do that because I don't -- I'm not sure that's really a margin predicting just like feeling, and I felt this could be a high teens margin business. And we did move up, and we've done a lot of really good things. So yes, we've done some change of leadership. Yes, we've spent more time and attention. Yes, for example, on that long-winded answer I gave you about aircraft wheels, which is also inside that business. I was telling you about process control improvements just because using that as a poster child for a lot of things we were doing there. And I could give you yields in melt shops on titanium production and all the rest, if you want to, what weight we use in terms of the electrode production, things which would bore you, I'm sure.

No, we can do that. I'm happy to do that.

Okay. Any time you want to do it, we would spend the rest of our time today if you want to. But there's a lot of things that have been happening and I think the team has been doing great. And so we did the 18%. So it was getting towards high teens. And then we went crazy and broke the 20% number. And then we did a few other things like got rid of a couple of bad businesses, sold one, closed one, all within that, and yet you didn't really notice it because revenue continued to climb, which is the best time. Let's deal with those things while revenue is going up and -- but still be very laser-focused on what you're really good at. And increasingly, we are again spending time looking at what are we really good at in that business because we'd like to stay ideally with a 2 handle on the number rather than my underachieving high teens, but it's only a quarter. It's...

Good quarter.

But a good quarter, and I don't like going backwards.

Okay.

That's part of my DNA.

Okay. Okay. That's good. So in terms of going forward, free cash flow this year to guide to $1.15 billion. When you look at that, what factors are out there that could take that higher or lower when you look at the variables involved?

It's going to come down to final cash tax bill, guessing at that. The first capital that is high and then our ability to thrift production to be more working capital efficient. So those are the main things. There could be a tiny bit issue in terms of -- we're always looking for opportunities to relieve our gross liability on pension. So we always like fine, can we do something there? But essentially, it's the main things which are going to be, I'll say, the big drivers are between those 3, work capital, fixed capital and obviously, profitability as well, but I'm taking that forgiven because we've told you what that number is guided as 2.1 something. Again, we got quite carried away.

Can you give us a sense in this, just sort of the CapEx outlook because there is -- I know you're thinking about a lot of potential investment needs here as you ramp up in different areas.

The best deployment of capital for us is organic growth. If you look at the return profile of the company, it's really good and superior to buying our shares back. I just mean to say you shouldn't buy your shares back. I'm just saying that it's a return on capital of that marginal dollar then I prefer to put fixed capital. At the same time, I also think you have to respect the things like conversion ratios. So I don't think -- even though I think could we spend more, yes. But I do think it's -- a high-quality company should be converting their net income. I mean, I use 90% as the long-term metric for us. We had some years above 100%, probably in that just after COVID. We've had several years now like 88%, 89%, but we've blended out somewhere in 90% to 100%, probably 100%. And so I just think so, maybe we'll end up around that 90%, but with the first capital, if I put another $10 million or $20 million or $30 million fixed capital, that might be a really good thing. But I also don't want to go too far because I do think, again, good companies convert net income into a high conversion ratio. It's part of what you should do.

Well, I think we've got to wrap up here. But John, I want to thank you for joining us today. This has been great. We'll have that yield discussion another time.

Okay. Thank you.