Howmet Aerospace(HWM) - 2020 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenues improved by 9% compared to the third quarter but were down 29% year-over-year due to reductions in commercial aerospace [9][26] - Fourth quarter EBITDA margin was 22.8%, consistent with the fourth quarter of 2019, despite a 29% revenue decline [31][52] - Free cash flow for the fourth quarter was positive at $268 million, marking the third consecutive quarter of positive free cash flow since separation [11][13] - Full-year free cash flow as a percentage of net income was 115%, significantly above the guidance of approximately 90% [13][54] Business Line Data and Key Metrics Changes - Engine products revenue was down 33% year-over-year, with commercial aerospace down 58% but partially offset by a 30% increase in defense aerospace [38] - Fastening Systems revenue decreased by 30% year-over-year, with commercial aerospace down 38% [39] - Engineered Structures revenue was down 30% year-over-year, with commercial aerospace down 52% [40] - Forged Wheels revenue decreased by 6% year-over-year but increased by 18% sequentially, with operating profit margin reaching a record high of 30% [41] Market Data and Key Metrics Changes - Commercial aerospace revenue was down 51% year-over-year, while defense aerospace grew by 14% [36][26] - Commercial transportation was down 31% for the year but showed a strong recovery trend in the third and fourth quarters [36] - Industrial and other markets were flat year-over-year but up 12% sequentially, with industrial gas turbines (IGT) up 38% year-over-year [35] Company Strategy and Development Direction - The company is focused on permanent cost reductions and price increases, with structural cost reductions exceeding expectations [10][28] - The outlook for 2021 includes expectations for improved clarity in commercial aerospace as vaccine rollouts progress [56][58] - The company plans to maintain strict capital expenditure control and effective inventory management [17][18] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the commercial aerospace market due to ongoing inventory corrections and the impact of the pandemic [70][78] - The company anticipates a gradual recovery in commercial aerospace, with expectations for increased aircraft builds in 2022 and beyond [58][61] - Management highlighted the importance of solidifying commercial aerospace build rates before making aggressive share repurchases [118][120] Other Important Information - Special items for the quarter included a benefit of approximately $14 million after tax, primarily due to insurance proceeds [43] - The company reduced its U.K. gross pension liability by $320 million and net debt by approximately $370 million since separation [47][54] Q&A Session Summary Question: Can you provide more assumptions on Q1 and 2021 guidance? - Management indicated that Q1 revenue is expected to be in line with the average of the last three quarters, with caution around commercial aerospace due to ongoing uncertainties [68][70] Question: How much of a headwind will variable cost flexing and furloughs be in 2021? - Management acknowledged potential drag from bringing back furloughed employees but emphasized the importance of maintaining quality and delivery promises [87][88] Question: What is the status of the forged wheels transition to low-cost sourcing? - Management confirmed that the transition is ongoing, with additional benefits expected in the first half of 2021 [90][92] Question: How much inventory remains in the chain related to your products? - Management estimated that destocking will likely be completed by the end of Q2, with expectations for increased build rates in the second half of the year [100][102] Question: Can you walk us through the free cash flow expectations for 2021? - Management highlighted improvements in pension contributions and expected working capital to be a modest source of cash in 2021 [109][114]