Howmet Aerospace Inc. Price & Performance (HWM)

With that, I'd like to turn the call over to John. Thanks, BT, and welcome everybody to today's call. Let's move to Slide four. I'll begin commentary on our fourth quarter. We closed out 2024 with healthy results. Which exceeded the high end of our guide Revenues in record as well as EBITDA EBITDA margin and earnings per share. Fourth quarter earnings per share was $0.74 an increase of 40% over the prior year that concludes the 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 $977,000,000 representing an 88% conversion of net income. Average free cash flow conversion of net income over the last five years has been approximately 100%. Of the $977,000,000 of free cash flow generated in the year, all was deployed to share repurchases debt reduction and dividends. During 2024, Hammett repurchased $500,000,000 of common stock of which $190,000,000 was completed in Q4. Hammett also reduced debt by $365,000,000 and paid $109,000,000 in dividends.

Regarding dividends, we recently announced 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 profit 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 five. So another solid quarter for Halmet Howmet. End markets continued 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 remains strong throughout 2024 with revenue up 13% in the fourth quarter up 20% for the full year driven by all three aerospace segments. Defense aerospace growth accelerated in the fourth quarter was up 22% For the full year, VenterosBase 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 continue to outperform the market with Howmet much premium products I would also note that despite the challenging market, Comet'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, industrial and other markets were up 9% driven by oil and gas up 19%, IGT up 7%, and General and Industrial up 5%. Within our markets, we had robust spares growth The combination of commercial aerospace, defense aerospace, IGT spares was up approximately 25% for the full year to $1,280,000,000 Bears 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 six, starting with P and 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 of 27% while absorbing approximately 700 net new employees. The Engine segment added approximately twelve oh five 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 three ten 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 $977,000,000 which exceeded the high end of guidance. Free cash flow conversion of net income was 88% as we continue to deliver on our long term target of 90%. CapEx investments in the year a record $321,000,000 dollars up approximately $100,000,000 year over year as we continue to invest for growth. The year end cash balance was a healthy $565,000,000 Net debt to trailing EBITDA continues to improve and was at a record low of 1.4 times. All long term debt is unsecured and at fixed rates. Almit's improved financial leverage and strong cash generation were reflected in S and P's Q4 rating upgrade from BBB- to BBB. As you will also recall in Q3, Moody's upgraded Howmet to additional notches in investment grade up to BAA1. Liquidity remains strong with a healthy cash balance and a $1,000,000,000 undrawn revolver complemented by the flexibility of $1,000,000,000 commercial paper program Regarding capital deployment, we deployed approximately $975,000,000 of cash to common stock repurchases debt pay down and quarterly dividends. For the year, we repurchased $500,000,000 of common stock at an average price of $87 per share.

Q4 was the fifteenth consecutive quarter of common stock repurchases.

The average diluted share count improved to a record low exit rate of $4.00 8,000,000 shares.

Additionally, in January 2025, we repurchased an additional $50,000,000 of common stock at an average price of approximately $116 per share.

Remaining authorization from the Board of Directors for share repurchases is approximately $2,150,000,000 as of the January. For the year, we reduced debt by $365,000,000 This included a partial pay down in Q4 of $60,000,000 of the U. S. Dollar denominated term loan that's due in November of twenty twenty six. The combined debt actions for the year will reduce annualized interest expense drag by approximately $37,000,000 Finally, we continue to be confident in free cash flow. For the year, we paid $109,000,000 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 $0.1 per share. Now let's move to Slide seven, to cover the segment results for the fourth quarter. Engine Products delivered another strong quarter Revenue increased 14% year over year $972,000,000 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 with an increase of 30% year over year to $3.00 $2,000,000 EBITDA margin increased three eighty basis points year over year to 31.1% while absorbing approximately two twenty net new employees in the quarter. For the full year, revenue was up 14% to $3,700,000,000 EBITDA was up 30% to 1,150,000,000.00 and EBITDA margin was 30.8% which was up approximately three sixty basis points year over year. All were records for the engines product segment.

Moreover, the engines product segment added approximately twelve oh five net new employees to support future growth Now let's move to Slide eight. Fastening Systems had another strong quarter. Revenue increased 11% year over year to $4.00 $1,000,000 Commercial aerospace was up 17% including the impact of the wide body recovery and the Boeing strike.

General industrial was up 32% defense aerospace was up 2% and commercial transportation, which represents a approximately 14% of VASCAR's revenue, was down 13%. Year over year, EBITDA outpaced revenue growth with an increase of 39% to $111,000,000 EBITDA margin increased five fifty basis points year over year to a healthy 27.7%. The fastest team has continued to expand March the full year, revenue was up 17% to $1,600,000,000 EBITDA was up 46% to $4.00 $6,000,000 and EBITDA margin was 25.8% which was up approximately five twenty 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 nine. Engineered Structures performance continues to improve. Revenue increased 13% year over year to $275,000,000 Commercial Aerospace was up 9% and defense aerospace was up 51% primarily driven by the F-thirty five program. Year over year, segment EBITDA outpaced revenue growth [indiscernible] to maximize profitability. For the full year, revenue was up 21% to $1,100,000,000 EBITDA was up 47% to $166,000,000 and EBITDA margin was 15.6%. EBITDA margin was up approximately two seventy basis points year over year and headcount was reduced by approximately two thirty five 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. 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, pre tax return on Nedax 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 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 three, and which lasted for almost two 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 bills to now increase Airbus came close to their revised seven seventy aircraft build and show promise going into 2025. Permac delivered 10 C919 aircraft in 2024 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 seven thirty seven MAX we see is about 25 aircraft per month on average for the year.

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 $1,280,000,000 representing 17% of Howmet revenue. Spares revenue increased approximately 25% in the year and with acceleration in the second half of twenty twenty four.

We envision spares to continue to be healthy again in 2025 and growing towards our previously stated projection of 20% of HAMAT revenue. Defense was also a source of strength last year. And we see this continuing to 2025 for both legacy aircraft and the F-thirty five. In 2025, [indiscernible] early twenty twenty six latest, we should see the crossover occur where spares volumes for F-thirty five will exceed the F-thirty five OE engine F-four 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 future IGTV demand during the November earnings call. Since then, the overall picture has become even brighter. Electricity demand 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 the 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 2027 and beyond. The gross requirements for increased megawatts of demand was set out in November. While the change is currently towards natural gas, hence favors Hermit 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 vanova, and Anselmo We're optimistic about the next few years of IDT growth and how Howmet is well positioned for both future OE build and for spares growth. [indiscernible] 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. Outlook is unchanged with some return to growth expected in the second half of twenty twenty five. In summary, we see demand increasing in 2025 The profit being back end loaded principally due to the Boeing build unlikely 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 very strong fourth quarter of twenty twenty four So Moreover, we expect in 2025 first quarter, we expect revenues to be $1,935,000,000 plus or minus $10,000,000 EBITDA of $520,000,000 plus or minus five and EPS earnings per share of $0.76 plus or minus $0.1 The guided Q1 incrementals are healthy at over 70%. And for the year, revenue to be €8,030,000,000 plus or minus $100,000,000 EBITDA $2,130,000,000 plus or minus $25,000,000 and earnings per share of $3.17 plus or minus $0.04 Finally, free cash flow is expected to be above $1,000,000,000 at 1,750,000,000.00 plus or minus EUR $50,000,000 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. 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 and A. I invite you to view the twenty twenty four-twenty twenty five summary slide for commentary. The Howmet balance sheet is strong. We're rating well into investment grade and net leverage closed at 1.4x net debt to EBITDA. Twenty twenty five sets it well. But with a back end load. The dividend payout has been increased to 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 pay down 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. Our first question will come from Doug Harned with you may now go ahead.

Good morning. Thank you.

On fastening systems, you came up you've got EBITDA margins of 28% roughly I mean, this is a has kind of been a big step up. [indiscernible] you've got, I think, a mix improvement working here with more A350, seven eighty seven 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 Faster business, the track we are 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 hires.

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 exchange relative to narrow body that's gone on during 2024 But I do expect that the bills for 2025 to be better than 2024. So I think there's still some positive mix that's there for us. Especially as we look forward to hopefully [indiscernible] 10 and maybe more for the Boeing seven And also, I think you'll recognize the Airbus future monthly build has been stated to move to 12 aircraft a month by 2027, and that compares to probably last year's about five a month. So I think rate of increase for widebody is going to pick up over the next two to three years and that should be further a further benefit for the business. Naturally, the rate of increase in margin I would expect to be I'll say, less aggressive in the future but I don't think we're finished yet.

Okay, very good. Thank you.

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

You may now go ahead.

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 What's a headwind?

And or is it more conservatism given your lack of visibility beyond first quarter?

It probably would have been fairly easy for us to been a little bit more optimistic. But at the same time, there's lots of things going on during 2025. Rate of growth [indiscernible] could be materially changed by [indiscernible] 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. Therefore, with the lack of visibility that we and I suspect other suppliers have, we want 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 wide body, it could be better. But let's wait and see till we are 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 don't want to be a little bit cautious. There as well? And also, as you know, we're building out couple of new manufacturing plants this year facilitating them And so want to be a little bit cautious in that regard, too. We've really got our feet well under the unfirmly placed under the table on those two things. And it's also, as you know, always a little bit uncomfortable 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. We know a bit more about the profile of the view and how it all 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, we mean there's no need for us to get ahead of ourselves. Until we've got better visibility of all the things to play out in this year, which is demand increases from what customers say they may achieve and what markets might do And while we're, 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 a little bit less than in in 2024. Commensurate with us also improving our productivity. But again, it's something which is yet to be determined That's directionally how we're thinking about it.

Okay. Thanks again. Thank you.

Our next question will come from Robert Stallard with Vertical Research. May now go ahead.

Thanks so much. Good morning. Good morning, John, just wanted to follow-up on your 07:37 production forecast. I was wondering what sort of purchase orders your various businesses are seeing at the Howmet. Whether you've got any more clarity on much inventory is in the system. At this point.

So [indiscernible] our fourth quarter wasn't stellar in terms of [indiscernible] And we have seen have fully taken account [indiscernible] in a couple of product lines, the backs 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. 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 Baltics, we are going into 2026.

And so it's up potential for some instability in the demand profile. We've taken account of And but the most important thing is that which we see at the moment is fully baked into our first quarter. I think is pretty healthy anyway. So nothing to worry about there. Again, as you know, we are I'd say just to go a bit further, we 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. 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. Okay. Thanks so much, John.

Thank you. Hey, John, you referenced Engineered Structures benefiting from product rationalization this quarter. You can just explain in a bit more detail what that product rationalization point is referring to? If there is opportunity for further benefit, from beyond this quarter? Going forward? Thank you. You may remember Scott It closed out a couple of facilities in Europe earlier in 2024. And also sold a I'll say, less profitable structures business. So 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 three underperforming operations while still having revenue grow which is always a great time to do it. Improvement in productivity, and also again commercial focus. Has paid dividends for us and for us to be able to step up to from a 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.

We'll build on it during 20 Thank you. And just to clarify, can you say what the guidance is assuming on the GTA Advantage certification timing?

So let me just step through the overall picture on changeover on 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 our Whitney, regarding the sign off for tooling to be able to make it high rate We have done some early production And so we're optimistic that changeover because during the, say, the twenty twenty five year, it's unclear to us yet exactly when at the changeover will occur and substantial volumes will do so. But let's assume at this point a mid-twenty twenty five change albeit with everybody wanting that change to occur, soon as possible, both of the durability improvements in the engine and for Harmatt, additional I'll say, content and overall mix within the business. So we see that as a good change. But it's still struggling to put a pin in 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. [indiscernible] if you think about Q4, I mean, we were during that quarter, uncertain about changeovers. In fact, we prepared to change and didn't change and then change over again. So a little bit of disturbance in our fourth quarter engine margin performance due to that that changeover, which I think everybody can understand But the most important thing is as of now, in, let's say, January into February, we've changed over to the new improved version.

And we believe that will be a net good for Bose GE and for Harmatt. So there was LEAP-1B My expectation is that won't change over at all during 2025 and that will be sometime more like mid twenty twenty six. But again, the timing to be the and the changeovers need to be approved by by both GE, Boeing and also the FAA. So that timing is less clear. 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 level increase robustness of those narrow body engines.

Thank you.

Thank you.

Our next question will come from Ron of America, You may now go ahead.

Hey, good morning, John. Can you speak a little more to [indiscernible] it does seem like over the past several quarters, you've gotten always say, more build up on it.

Right? So is there any more color you can give around it? And ultimately, how big could it be for you guys?

First of all, it is tough to get me bold up on something. I'd like to believe I'm fairly level headed, Ron, but But I do think that the picture for IgG is exceptional. And has got even better since November earnings call, which as you recall was the day after [indiscernible] And the big picture is data center 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 massive amounts of electricity both for both the build out of them, the functioning of these new chips in the service. And also electricity for pooling and down as well. So the demands are extraordinary. And it will be interesting to see how both the 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 of electricity provision between that which will come from wind, solar, from natural gas, I think, has changed.

With the new administration. And I think that everybody is seeing an even brighter prospect for 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 two of our sites to enable additional plant and equipment to be installed over the back end of $25,000,000 to '26 and also we did 2027. 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 I can explain it is that it was using the benefits of the open language models developed by other hype scalers But fundamentally, in terms of the hype speeds that we think about, which is Microsoft and Meta and Google and Oracle, I think requirements for building out these servers and in data centers it's all intact and and I expect it to be really good for that 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 gas turbine providers in the world are gearing up to add capacity And to be able to do that, they need the most critical component, which is the turbine blades which leads back to how Howmet And we do have the leading market share above 50%.

Of that global market. So 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 what's the But very pleased to be investing in it. And And what we think is going to be a bright future both for sales revenue and for margin. [indiscernible] I think on the last call, I did state clearly that our margins in [indiscernible] Similar to our aerospace turbines. Thank you. Our next question will come from David Strauss with Barclays.

You may now go ahead.

Thank you. Good morning. Hey, David. Hey, John. Maybe a question for Ken. Ken, what is assumed in the cash guide for working capital? It looks like maybe somewhere between $100,000,000 and $200,000,000 usage similar to 2024? And then John, in terms of Tumplik We should expect 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? Thanks.

Maybe I'll go first, Ken, and then you clear out the wooden capital assumption. So what we've very clear on David is that if you look at 2022, 2023, 2024, is the our cash flow is essentially being I'll say, repatriated to shareholders either by share buyback dividend I also think of debt reduction and its improvement in future free cash flow is also as part of our Given our net leverage is that where I look at it is that we can increase 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 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 ten year treasury. So again, good work there.

And so that leaves us with share buyback And the commentary I've given so far is 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 the repatriated to shareholders So in terms of Can I ask you on the working capital?

Yes. So David, so in terms of free cash flow, working capital, so again, starting with with 24, that $977 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. [indiscernible] Around $321,000,000 And as you can see in in the reports that we have here, that $100,000,000 increase in CapEx, you can see the year over year primarily in the business which has tremendous return on net assets in the business. So as we move forward into 2025, we try 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 $1,000,000,000 of free cash flow If you look at the working capital specifically to your question, embedded in there is a burn of around $180,000,000 of working capital burn. And the way I would look at it is revenue year over year is up $600,000,000 ish on the guide.

Usually, you have about a 20% working capital burn associated with that revenue increase. So you're looking at a normally you would expect $120,000,000 of working capital burn.

What 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, if that's 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 that working capital number.

Terrific. Thanks very much guys. Okay.

Our next question will come from Kayeoglu with Jefferies. You may now go ahead. Thank you. Good morning, John Kennen, P. T. Maybe can you talk about the step down in engines margins in Q4?

They were down about one hundred and one hundred and fifty bps Q over Q. A surprise given the continued volume growth there. And how do we think about margin levels in 2025 and 2026 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 what I called noise And I wouldn't be too much into that at all.

It doesn't 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 synergy for that business, it really I think it's very inconsequential. The thing I said earlier in the call which maybe is amplifying a little bit about, As you know, we went through the changeover in terms of preparing for the new LEAP-1A stage one turbine blade, which has been noted Probably what's not been noted is the change of dates in terms of implementation and to 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 And so we don't see any of those changeover costs reoccurring in 2025 For the LEAP range of engines, because I would have said LEAP 1B will be a 26 item. And certainly not in the might be the first half of twenty twenty six. That's a TBD. And then of course, there will be the changeover coming for the GTF which we see as positive possibly even one more positive for the LEAP engines just because it's needed so much and the technology changes is considerable.

And so we look forward to that. And again, with it being data uncertain, So I think the most important thing is it [indiscernible] 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 it categorize it. I think the second party question was about margin. If I could guess at it, 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 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 reversible. Again, it's always a a view and a forecast. But year on year, is that I think structures will probably be the biggest percentage improvement in the year. But heck, I'd like all of them to be continuing to move forward. And we'll see how it goes.

Okay. Thank you. Thank you. 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 wanted to perform how do you think about its place in the portfolio? [indiscernible] said and been waiting to go on record that I did see Structures business moving to the high teens in terms of your margin performance, And 1 quarter doesn't make a year, but if you take say what would I guess that, 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 its depreciation rate because of its overall place in the portfolio. In terms of margin performance, etcetera. 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 [indiscernible] inventory overhang that was at Lockheed in terms of bulkheads is I think behind us and you can see some of the effect of that.

I also see that titanium demand is [indiscernible] in 2025. And 2026, it's always unknowns because we are the beneficiaries of some geopolitical tensions that have a Russia knows where all of that goes. At the moment, I think it's it's certainly higher teens margin business. And there's no reason why we need stop there. And so whether we can move it into the that remains to be seen. But ultimately, I still stand behind the stage. 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 to really capacitize there just because of the growth, the defensive mode around the business and the technology and the technologies which are yet to come. And so I'm very positive about all of that. Structures so far so good and I'm pleased with its performance. And but nothing in terms of place in the portfolio. It's a good contributor. It's creating value. And so all good is not concerned. Excellent.

Thanks very much.

Okay. Our final question will come from Ken Herbert with RBC Capital Markets. You may now go ahead.

Yes. Hey, John. Thanks squeezing this in. You had really strong spares growth in 2025. What's or in 2024, what's the underlying assumption for spares growth in 2025, if you can provide that? And I guess specifically, 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? What you're seeing? Thank you. Okay.

So let me deal with the CSM56 comment first is that my view has been is that the statements, which was probably viewed about three or four years ago, the 2025 would be the year of peak demand for CFM56 I say in my view that's been pushed out to more like 2027.

And 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 think 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 late than that, That's what I stand at the moment. Is there any degradation from that would be very marginal and will take many years into the next decade. So I don't see massive change there. If you think about it, when we started out 2024, the assumption around lead production was much higher than it turned out. And those new engines are not in the market. And therefore, And therefore, that 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 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-one A blades. So I think the important things to remember is we don't control when our blades leave us and are passed 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 need for bone will be fulfilled and And let's say those LEAP-1BMs will be produced for them. And all of the balance goes to spares. On the other hand, spares are prioritized first and OE engines less. Then that does have an impact. And so we've provided some caution around that fact [indiscernible] Spouse is to be prioritized and at the expense of OE Bill, 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 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 I think every one of those engines is going to be necessary to allow Airbus 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 [indiscernible] 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 at the Gulf and whilst maintaining and fulfilling the spares demand which is going to be very healthy going into '25.

Great. Thank you.

Thank you. [indiscernible] [indiscernible] [indiscernible]