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Good morning, and welcome to the Howmet Aerospace First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and welcome to the Howmet Aerospace first quarter 2025 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 mean 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. And with that, I'd like to turn the call over to John.

Thanks, PT, and good morning, everyone. I'll make my remarks at the outset fairly brief, and then spend more time talking about the outlook after Ken has provided his commentary on the markets and the BU commentary. So first of all, Q1 was a solid start to the year. Revenue was a record and increased 6%, while EBITDA margin was 28.8%. Operating margin was 25.3% and up 500 basis points year-over-year. Free cash flow was a positive $134 million. All segments grew revenue and EBITDA compared to Q4 of 2024. Of the segments, the most notable margin progression was within Fastening Systems and Structures. Free cash flow was deployed with a 25% increase in dividends plus $125 million of share buyback in the first quarter, which was continued in Q2 with a further $100 million in April. We had strong performance on all fronts. My commentary on the outlook will be after Ken. So over to yourself, Ken.

Okay. Thank you, John. Good morning, everybody. Let's move to Slide 5. So end markets continue to be healthy in the first quarter, with revenue up 6% year-over-year. A good start to the year, and we are well positioned for the future with continued investments for growth. Commercial Aerospace was up 9% year-over-year, driven by accelerating demand for engine spares. Commercial Aerospace growth is further supported by record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Defense Aerospace growth continued to be robust in the first quarter, and was up 19% year-over-year. With the global fleet of over 1,100 F-35 fighter jets in service, Defense Aerospace growth was driven by engine spares demand in addition to new builds. As expected, Commercial Transportation was challenging, with revenue down 14% in the first quarter. We continue to outperform the market with Howmet's premium wheels and coatings. Although down year-over-year, Commercial Transportation was up 2% sequentially. Finally, the industrial and other markets were up 10% in the first quarter, driven by oil and gas up 21% and IGT up 12%, while general industrial was flat. Within our markets, the combination of spares for Commercial Aerospace, Defense Aerospace, IGT and oil and gas continues to accelerate, and was up approximately 33% in the first quarter and represented 20% of total revenue. As a compare, total spares revenue in 2019 was 11% of total revenue on a smaller base. 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. In the first quarter, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. Revenue was also a record, up 6% year-over-year. EBITDA outpaced revenue growth and was up 28%. EBITDA margin increased 480 basis points to 28.8%. The incremental flow-through of revenue to EBITDA was excellent at more than 100%. Earnings per share was $0.86, which was up a healthy 51% year-over-year. Now let's cover the balance sheet and cash flow. The balance sheet continues to strengthen. Quarter-end cash balance was a healthy $537 million. Free cash flow was $134 million, which was a record for the first quarter. Free cash flow included the acceleration of capital expenditures with approximately $120 million invested in the quarter, which was up 45% year-over-year. The majority of the CapEx investment was in our Engines business as we continue to invest for growth, which is backed by customer contracts. Net debt to trailing EBITDA continues to improve and remains 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 Fitch’s Q1 ratings upgrade, from BBB to BBB+, which is three notches into investment grade. 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 $167 million of cash to common stock repurchases and quarterly dividends. In the quarter, we repurchased $125 million of common stock at an average price of approximately $124 per share. Q1, was the 16th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low Q1 exit rate of 407 million shares. Additionally, in April of 2025, we repurchased $100 million of common stock at an average price of $126 per share. Remaining authorization from the Board of Directors for share repurchases is approximately $2 billion as of the end of April. Finally, we continue to be confident in free cash flow. We increased the quarterly dividend 25% in the first quarter to $0.10 per share, which was double the Q1 2024 quarterly dividend. Now let’s move to Slide 7 to cover the segment results for the first quarter. The Engine Products [ph] team delivered a record quarter, with revenue, EBITDA and EBITDA margin. Revenue increased 13% year-over-year to $996 million. Commercial Aerospace was up 12% and Defense Aerospace was up 16%, driven by Engine Spares growth. Oil and Gas was up 21% and IGT was up 12%. Demand continues to be strong across all engine markets, with record Engine Spares volume. EBITDA outpaced revenue growth with an increase of 31% year-over-year to $325 million. EBITDA margin increased 450 basis points year-over-year to 32.6%, while absorbing approximately 500 net new employees in the quarter. Now let’s move to Slide 8. The Fastening Systems team also delivered a record quarter for revenue, EBITDA and EBITDA margin. Revenue increased 6% year-over-year to $412 million. Commercial Aerospace was up 13%; Defense Aerospace was up 8%; General Industrial was up 5%; and Commercial Transportation, which represents approximately 13% of Fasteners revenue, was down 20%. Year-over-year, EBITDA outpaced revenue growth with an increase of 38% to $127 million, despite the lower-than-expected recovery of the wide-body aircraft. EBITDA margin increased an excellent 710 basis points year-over-year to 30.8%. The team has continued to expand margins through commercial and operational performance. Now let’s move to Slide 9. Engineered Structures performance continues to improve. Revenue increased 8% year-over-year to $282 million. Commercial Aerospace was flat and Defense Aerospace was up 36%, primarily driven by the F-35 program. Year-over-year, segment EBITDA outpaced revenue growth with an increase of 62% to $60 million, despite the delay in the wide-body recovery. EBITDA margin increased an excellent 720 basis points to 21.3% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability. Finally, let’s move to Slide 10. Forged Wheels revenue was down 13% year-over-year. Although down year-over-year, the Forged Wheels revenue was up approximately 4% sequentially. EBITDA decreased 17% year-over-year. Despite the challenging market, we were pleased with the Forged Wheels team delivering a healthy 27% EBITDA margin as the team flexed cost and reduced head count on a year-over-year basis. Lastly, before turning it back over to John, I wanted to highlight one additional item. Page 17 in the appendix highlights our ESG progress. We continue to leverage our differentiated technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints. Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2024, we met our three-year target of reducing greenhouse gas emissions by achieving a 21.7% reduction versus our 2019 baseline. In April, we issued our annual ESG report highlighting the meaningful progress we made throughout 2024. The full report is available at howmet.com in the Investors section. Now let me turn it back over to John.

Thanks, Ken. So, turning to the outlook, let me comment first on tariffs. Clearly, they have increased the uncertainty and reduced confidence in air travel. Regarding Commercial Aerospace, the passenger traffic has continued to grow, albeit more slowly. That's mainly due to Europe and Asia-Pacific, where growth has continued. There's been uncertainty in North America in particular, driven by a combination of political and economic statements. Travel to the U.S. is also reduced, air cargo growth has moderated. Everything is a little less clear, and passenger and freight data, of course, is backwards looking. Nevertheless, our Howmet customers are showing resilience and growth, which is both due to the consistent underbuilding of aircraft in recent years, and hence having very large backlogs. And the fact that airline fleets have become aged and more fuel-efficient aircraft are needed with lower maintenance build. Those combined with the requirement for lower carbon footprints in order to meet emissions targets. Of note is the more optimistic mood around Boeing and the 737 MAX builds. We'll provide improved build rate assumptions later in my commentary. Spares demand has also continued to be strong. And while one quarter doesn't make a year, we did reach the 20% of total revenue milestone in 2025 in the first quarter, a year ahead of schedule. In the first quarter, spares increased by an average of 33% across our segments of Commercial Aero, Defense Aero, IGT and Oil and Gas. Within Defense, demand is steady and increasing, particularly around needed spares. The F-35 spares growth is notable. Moving to Industrial, demand continues to be solid. Addressing IGT turbine growth due to the electricity demand, which emanates from data center buildout, we see the growth assumptions for the next few years remaining intact, with large expected growth for both spares and turbine builds. These turbines cover the full spectrum, from aero derivative turbines, all the way through to the larger size of gas turbine builds. This demand is global. To this end, Howmet is building capacity in each of the major world’s regions, with additional building footprint investments in both Japan and Europe. These capacity expansions are backed by solid customer agreements for many years. IGT matches the Aerospace margins. The expected second half increase in Commercial Truck builds is now less certain, given the North American economic uncertainties and some road freight concerns driven by tariffs. We're watching container shipment bookings very closely. Net tariff costs in total for Howmet are expected to be passed on to customers, with up to a quarter or so of lag, with the impact included in the updated increased guidance. We, of course, avail ourselves of all the trade programs to mitigate the gross tariff impact. Wide inflation assumptions are unclear at this point. The footprint build-out of plants in the U.S. for Aerospace, and now Japan and Europe for IGT, continues. We've been hiring to-date for the U.S. footprint, the net 500 people recruited in the first quarter mainly for our Engine segment. This will accelerate as we move through 2025 and into 2026. Overall, my summary is that this continues to be a good and exciting time for Howmet when we look forward to the next few years, albeit the near-term is rather more uncertain. The specific guidance for Q2 is as follows: revenue of $1.99 billion, plus or minus $10 million; EBITDA of $560 million, plus or minus $5 million; and earnings per share of $0.86, plus or minus $0.01. For the year, the midpoint of revenue guidance is similar to that provided last quarter. The strength in Commercial Aerospace is due to spares on the Boeing 737 build rate assumptions, which are being raised to an average of 25 per month compared to the prior assumption of – 28 per month compared to the prior assumption of 25 per month. The offset is Commercial Truck build assumptions in the second half. We remain hopeful that the final builds achieved are better. Having said that, given the uncertainty around markets, we are widening the range of outcomes for the year compared to that given in February. The year's guidance is revenue of $8.03 billion, which – and also widen the range to plus or minus $150 million. The EBITDA baseline has been increased $120 million to $2.25 billion, plus or minus $25 million. Earnings per share, the baseline has been increased, $0.23 to $3.40, plus or minus $0.04. Free cash flow baseline has been increased $75 million to $1.15 billion, plus or minus $50 million. The good news is that EBITDA, EBITDA margins and free cash flow are expected to be higher for the year. The increased free cash flow guidance includes an increase in our capital expenditure guidance as well as we continue to invest in future growth. This increase is approximately $15 million compared to prior guidance. Naturally, capital deployment continues to be on the same trajectory of uses as normal. At the same time, net leverage is going to further strengthen towards 1.1 times net debt to EBITDA by the end of the year, which is important given the current volatility and our desire for an even stronger balance sheet. This further supports the recent credit agency upgrades. And now, we’ll move to the questions and answers.

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much, and good morning and good results. I guess, John, one thing I wanted to touch on, you mentioned in the release where air traffic growth is. And I think the IATA number for March came out today, and it was something like 3% globally. I guess, the question I had is how much does it really matter just in that the structures and fasteners will probably be dictated by build rate and engine. If it’s not for aftermarket, it seems like there’s plenty of demand on the OEM side and new content. And you have to beat the pretty significant decline in traffic to affect your outlook.

I think overall demand or end market demand for travel is important. And it’s important because it does affect, in particular, how we feel about 2026 and 2027. And therefore, for example, the rate at which we would invest in the volume – underlying volume assumptions that are important to us. I think that we’re protected for a significant period of time and maybe many years, it remains to be determined by the fact of the aircraft manufacturers in Commercial Aerospace have a very high backlog. And so even though with the current situation, for example, where China is no longer taking Boeing aircraft, then the question is to you, what does that mean? I mean for the industry where it seems like Airbus probably can’t produce many more, but it strengthens their underlying demand, whereas Boeing maybe not so. At the same time, their backlog is so enormous that their movement to rate 38 and beyond, I think, is still assured. At the same time, could I envisage that certain airlines might begin to cancel aircraft in the, let’s say, coming year? Well, I think it’s possible, but that very much depends upon really what the passenger traffic is. So at this point, I’d say it’s okay, but I think all of us feel a little bit less certain than we did a few months ago given the current, I’ll say, economic policies being carried out in the U.S. in particular. So it’s a long way of saying, I think it’s important for when you look forward into the future of having strong underlying fundamentals for demand that start with confidence in the traveling public, the confidence in freight moving around the world. But at the same time, do we have other areas with strength? Yes, we have strength in defense. We have strength coming from the continued build-out of data centers, which is giving us quite an extraordinary opportunity of demand. And also as noted in the first quarter, at the moment, the demand for spares continues to be very high, and possibly will further increase. But the opposite side of that is should original aircraft engine and production slow or aircraft will slow, then it does affect structures business fastening business. And all of the other componentry beyond turbine airfoils, for example, structural castings where there’s limited aftermarket demand compared to the wearing part. So in the last call, I commented, for example, on the existing fleet, where I’ve been saying for some time that probably the peak for the CFM56 is going to be mid 2027, 2028, well I think it’s at least that and current demand has actually been increasing substantially. And so all of that’s playing well at the moment. And I think the future is fine. But do we – should I get my worry beads out? Yes, I think it’s appropriate, and that’s one of the reasons why I’ve said we’ll further strengthen the balance sheet as we go through this year and have a fortress balance sheet – totally fortress by the end of the year.

Okay. Thanks very much.

Thank you.

The next question is from David Strauss with Barclays. Please go ahead. Mr. Strauss, your line is open on our end.

Great. Yes, thanks. Thanks very much. John, I wanted to ask you progress on yield on the upgraded 1A blades and how things are going on GTFA and when you expect timing of the OneBlade [ph] upgrade certification? Thanks.

Okay. So we've been moving along our typical learner curves for new – I'll say turbine airfoil production. So everything is going to plan, and we're in very good stead in terms of being ahead of, I'll say, the engine manufacturing requirements. You may recall, I think it was in November of last year when I said we'd already put in 500 engine sets worth of turbine airfoils for the LEAP-1A. As we look at our production of raw castings, my assumption is that we're actually further ahead at this point, albeit we don't have perfect information of then what the subsequent processes are in terms of machining and hold drilling and et cetera, et cetera. But at the moment, our production is going well, but in line with where we expected it to be. So nothing extraordinary at this point. In terms of certification, it feels as though, I mean, we now have, first of all, the 1A certified, the GTF Advantage certified. And the remaining one, to, I'll say, fall into place is the LEAP 1B, which is still to be done. And my current thought is that it's probably heading towards certification by the end of the calendar year. And then with, I'd say, then the final cutover date is yet to be determined as we move in from the end of this year into 2026.

Thanks very much.

Thank you.

The next question is from Doug Harned with Bernstein. Please go ahead.

Good morning. Thank you. In Q4, you had good margins in Fastening Systems and Engineered Structures. This quarter, they're even much better. And you commented that for each of those businesses, you haven't – it's been disappointing to see the ramp on wide-body demand, it's a little slower. Can you talk about what drove the margins up? Are these sustainable? And what additions might you expect once that wide-body ramp occurs?

Yes. So maybe I'll use structures as a poster child for the conversation, Doug. Clearly, the year-on-year improvement is excellent. Obviously, the quarter-on-quarter increase is somewhat less. But nevertheless, I think still notable. And I'm going to say – and it goes towards, I'm sure the question on incremental margins, which is going to be what have been able to achieve. So in structures, for example, I'd say we had a large effort of improved process control. And I'll give you an example of that, as an example, in our aircraft wheels business. For the last, now, I'm going to say, seven months, we've been having irregular detailed views, including myself, with not only the business unit leadership, but also the plant management and even departmental head, so that we could examine the control of temperatures within our forging metals, the dyes. We've looked at, for example, the expensation of oiling, and not just quantity but in terms of coverage, then also the controls within our furnaces and chemical composition and temperature in that edge tanks. It's not for that just by itself, which has actually led to probably an increase in production of, I'll say, 10% to 15%, but the improvement in scrap has been extraordinary. The improvement in productivity has been really, really good. But it's meant to then obviously try to encourage increased process control across other areas. And you could point to, for example, titanium melts as well. So we've been, let's say, doing a lot, and I'm really pleased with the way that the team has done all of that. So when you are achieving those sort of yield improvements and scrap reduction with productivity. Combine that, if you recall, last year, I think the reason the May time frame, we told you that we had exited one business and sold one business in the Structure segment. So I’ve got rid of some, I’ll say, fundamentally underperforming lower-margin entities. So you get a positive mix effect. And you combine that with some price, then you get some really good outcomes. And so I would say it’s been a really great story of say, beginning to fire all cylinders. So you may recall my statement, when we held it for some years with all the downdraft in, say, inventory overhang on F-35 and the wide-body, you say lower build, including cessation of the 787 for a period of time. Now we see stronger demand in the Defense segments, including F-35. I will say, look still afford to increased wide-body. My statement was that we would probably get that to a high teens margin business, and which we managed to exceed this quarter. So I’m convinced that the statement I’ve made in terms of high teens is absolutely solid now. And clearly, we aspire to try to hold where we are. And so that gives you an example. And you could write ditto for aspects of our Fastening Systems and indeed for engines also, really good controls and improving productivity yields have been really outstanding.

The next question is from Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning. John, I was wondering if you could give us an update on where you currently are on the 737? Obviously, noting you’ve increased your full year production rate guide. And also where you are on the wide-bodies? Obviously, you did make those comments about the ramp there being a bit slower than expected. Thank you.

So maybe I’ll start with the wide-body first. As you know from public commentary, the 787 increase in ramp rate was delayed about three months, I think until the – I think it’s the second half. And so while we think the demand for that aircraft is extraordinary and the backlog is very high. So we have confidence that the full demand for that aircraft is there. It has caused a little bit of, I’ll say, perturbation in the first half of this year. On the A350, again, probably well-publicized commentary is that it’s been difficult to getting some of the future componentry from Spirit AeroSystems. And so on that one, our rate assumption, which was 6, is probably more like a 5.5 now, and our rate assumption on the 787, which was going to 7 earlier has now pushed back a little bit. So that’s the picture on wide-body. But having said that, with absolute confidence the demand is there, which will carry us through into 2026 and 2027. On narrow-body, well, we’ve noted and feel more confident in the pickup in build that’s been going on in Boeing. And so there, we’ve moved from a 25 rate assumption to a 28 rate assumption as an average for the year. And so that implies that we will see a higher rate of production in the second half. What we’ve been experiencing in the quarter, because if you look at commercial aerospace sequentially between Q4 and Q1, while the year-on-year plus 9% is really good, the sequential is a much more modest increase than that. And that’s basically because of, I’ll say, inventory takeout that Boeing has been doing so. The – I think is the increased rate of production. We haven’t seen that come through in the first quarter. In fact, if anything, a little bit of reduction in certain component risk, particularly at the second tier level in terms of machining shops, which take our components and then go and machine them. So as that inventory through the chain has been, I will say, go down, we have noted that reduction, albeit, we are see – we feel as though we’re going to see and are seeing already some pickup in that rate as we move forward in the latter part of Q2 into Q3 as the rate – we have further improvements occurs in Boeing. On Airbus, A320, same assumptions before in the mid-50s, hopefully improvement as we go through the year. So I think that pretty much covers it.

Perfect. Thanks, John. Thank you.

Thank you.

The next question is from Myles Walton with Wolfe Research. Please go ahead.

Thanks. Good morning. John, the Fastening margins, Doug started to ask on that, but you sort of used the structure as a case study. If we could focus on fasteners, did you get much benefit in the quarter from the PCC fire tightness that’s likely been created? And have you closed on any share gain contracts under LTA or just general improvement that you saw in that business? Thanks.

In the quarter, there was nothing of any note. I mean, we did do a few parts where one of our customers had an absolute need to have something in the quarter. So we did that, but it's not measurable in terms of any meaningful revenue number. We have been booking orders, and I'll say at the moment, we are probably in that between $20 million to $30 million, probably, let's say, mid-20s in terms of orders booked at the moment, but we're still hundreds of parts yet to quote. And so we are hoping that number moves up as we go through the year. And then again, hopeful that by the time we get into midyear and beyond is that will start to produce a meaningful quantity to cover the possession of those SBS [ph] related issues.

Would that target potentially be over $100 million by the end of the year if those quotes...

No, I don't think so. I think that's too much. Signal – I think the whole of our output was somewhere between $150 million and $200 million of revenue. Just sure PCC are going to reallocate some of that production to the other sites. And then obviously, we'll get hopefully a slice of what remains, which can't be done. And it's pretty difficult to take all of that production and move it in-house because nobody sits there with that capacity. But how it all falls out, I think we'll be well short of the $100 million and maybe I'd – just total guess would be half of that, but I don't really know.

Okay, very good. Thanks, John.

Thank you.

The next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

Hey good morning, everyone. So John, maybe taking a hindsight view. I mean the earnings power of Howmet today is just so much stronger in the previous forms of this company with Arconic, Alcoa aerospace over the years. Your market share wins and the engine upgrades, focus on the higher-value tech items and operating efficiencies are clearly paying off. And look, I know you don't give a long-term outlook, but to the extent that you could, how should we think about incremental margins for the company once we do get to the 50-plus per rate per month for the 737 MAX and 10-plus per month for the 787? I mean, how high could margins really go?

I don't know if I could answer that question given where we are, and it's been moving. I think the majority of the benefits of having Howmet as a pure-play company has been increasingly the luxury of some of the conversations that we're able to have because of that focus and time and knocking problems over one by one. And so the example I gave, which was just focused on aircraft wheels. I – obviously, it's a segment of a single plant, and therefore, it's meant to convey what we're doing more generally. But having that – the sort of conversations and the luxury to have the time to have those sort of conversations is really good. But where you go in the future, it's always a function of what's the angle of demand because margin rate assumptions are affected, not only by the, I'll say, internal, let's say, efficiencies that you do, but also is fundamentally different when you're growing at like a 2% versus a 12%. And so at the moment, it's really difficult to know how to answer that question when we've seen such violent rate swing assumptions for both wide-body and narrow-body over the last few years. And here we are again now grappling with a set of circumstances that we had not really envisaged in terms of how we manage through the current tariff situation. So it's so difficult to be able to respond and appear any for – to be in any form of, let's say, clear thinking at this point in time. And as you know, when we went through inflation in the, let's say, 2022 time frame as that picked up, are you just getting a dollar for a dollar that impacts and flattens your margin. And if we're successful, I think we are, and it's been interesting. We haven't had a question on tariff so far. But if we get a dollar for a dollar again that's a damp in our margin. So I don't know how to answer the question that would be anything meaningful for you, Kristine.

Thanks, John. And maybe pivoting to cash. Despite this uncertain environment, and you had COVID, you had inflation, you have tariff risks, but at the same time, free cash flow is still positive for the enterprise, you're able to support your CapEx increase with cash generated and you've got extra. And the balance sheet is under levered. There's a point in time, as the economic environment stabilizes for demand for aerospace, could we see a period where you could return 100% of excess free cash flow to shareholders? And even if you should do that, the delevering aspect is still pretty meaningful. So how do we think about priorities of capital, especially as we emerge from this period of uncertainty?

I think we've had a pretty good record in returning the cash flow to our owners. And I may have the year wrong, and I'll let Ken have a look. But I think, for example, in 2023, we actually returned more than 100% of the available free cash flows to shareholders. You could say – I also treat repayment of debt as effectively returning money to shareholders. So our conversion, if you look at the five years – if I looked at this recently, if you look at the five-year average, we're exactly at 100% conversion of net income into free cash flow, albeit it's been, let's say, closer to 90% the last year, a couple of years if we've picked up the CapEx in particular. So when I look at our cash flows at the moment, clearly, we're able to afford to invest. And I think that takes away for our customers, any uncertainty about the supply base for us, in particular, can we invest to meet the future demand. So when you look at the investment we made back in 2020, that was $0.25 billion in our engine products. We are investing more than that currently in our, I'll say, aerospace, turbine airfoil increase in production. And that ignores the IGT aspect. So we're able to fund that. This year, in terms of the contours of say, capital deployment, clearly, we've already mentioned that we've increased the dividend. I think the buyback of shares will actually be at a higher number than it was in 2024. And at the same time, I expect that our balance sheet will be further strengthened by the end of the year because we've got, I think, improved EBITDA that in the guide. And we need to look at any further tranches of debt, which we want to pay down because what I – when recognize that at 1.1 times net debt to EBITDA, we're a little bit underlevered. At the same time, I think given all of the uncertainties, it's appropriate for us to have that as a year-end view currently. And obviously, if some of the immediate great clouds pass over and then we're looking to further deploy. But it's going to be a good return for shareholders this year with increased share buyback over last year, increased dividend. And so it's all going to be good.

Great. Thanks, John.

Thank you.

The next question is from Ron Epstein with Bank of America. Please go ahead.

So let me ask the tariff question that nobody asked. How are you thinking about that, John? And you guys were, I think, really the first to come out with the force majeure concept on tariffs. And I mean how pass-through-able, is it? And how are you broadly thinking about it?

Yes. I thought for second, even despite my prompting, that no one would ask the question. So I was going to have to find a way of talking to it so that it could be out there. I mean first of all, let's say, the wider picture in tariffs has been very fast moving and changing, both in terms of the percentages and also exemptions either by product or by country. So it's been tough to keep up with all of the changes there. But at the same time, we do understand the thrust of the administration to, I'll say, try to reassure our production. We know where it's appropriate. Having said that, our duty is to, first of all, minimize the impact, and we do that with a series of trade programs, and I'm sure you're familiar with all of the names, let's say, whether it is the USMCA, whether it's due to drawback, using a bonded warehouse is free trade zones. And then you've got some other exemptions, which you can talk to, I could quote like [indiscernible] two and three exemptions and inward processing relief and so on. There's a lot of programs that you look at and to see just what can you minimize the impact for the company and also for our customers. The third point is, clearly, we want to protect Howmet. When we examine contracts, while we have a very solid, for example, material escalators in place. In certain cases, tariff is not called out in the contract language. And so we wanted to protect for that. So there is no ambiguity. And also then, we, as you know, issued letters of force majeure, which we had to issue to all of our customers so that we would have consistent messaging. You can't say to one and not the other, et cetera. So it's a stance in the company. So today, let's now move to impact. At the gross level, and assuming, after all the mitigation actions that we've taken, and assuming that after the 90-day period, there is a bounce-back to the previous levels, which hopefully will be the case. But we envisage the gross impacts for the company in a worst case position to be at about $80 million. And that's if the 90-day period, it goes and pass and comes and goes and there's a bounce-back there. The next point would be, so what is the net impact after all the mitigation and then pass through? We see that as less than $15 million in 2025. And the majority of that $15 million, but not all of it, but the majority of it is the way called the drag impact. That is when you incur costs, we'll be having to fund certain importers because they haven't got the working capital to pay the duties. Until we have all of that, and we see it as a drag in, we'll be paying out, but then invoicing either supplements to existing invoices or surcharges. And obviously, that affects you in the quarter. That's why we see – you'll see in Q2, we assumed a lower margin rate than we had in Q1, essentially because of tariff drag and then it just goes on for a period of time, but hopefully, by – we get into the second half of the year and into the fourth quarter, then it will be just normal course of business in terms of invoicing recovery, but we'll still have that drag in 2025. So that's how we see it today, but because it could be still fast moving. To give you a little bit more granularity, the majority – I'll say there's just two real impacts for us. One is the imports from Europe, and the second one are the imports from China, not surprisingly, given the percentage of tariffs for China at the moment. Two of our business units out of the four are primarily affected. And in one, we've already secured individual customer agreements covering more than 90% of revenue to cover the tariffs. So that's one. And then the second one, then about 50% is covered through distribution where it's contract to contract. And therefore, is a small net overhang, which is yet to be locked out with a larger customer. So that's all within the net $15 million that I told you about. So hopefully that gives you a pretty comprehensive walk through from what – how we see it, what the gross impact might be, what the net impact is and what our assumptions are.

Got you. Got you. And that's helpful. And if I can just one quick follow-on. How exposed to rare earth and maybe rare minerals? I mean is that a question mark for you guys? Or do you have that covered?

Yes, there's three that we are, I'll say, worried about. And I pick the first one, which would be, yttrium, then there's gadolinium and excuse me – there's another one, struggling to remember the name of it. But in the case of two, the – our supplier has approximately 10 years of inventory. So we feel pretty good on that, and the one – and I can't which of those named it was now, maybe it's the gadolinium then. That's a short maybe less than a year, but there is – it's like everything, there is a possibility of, I'll say, working around that. So I think I might misread these words, but I think that we're okay. And certainly, in the cases, they start with yttrium like a very long decade of inventory. So, I think, that's held in – held in Europe actually. So we're in good shape there.

Got it. Thank you very much.

Thank you.

The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Good morning, John and Ken. John, I'm going to have you double down on tariffs since you asked.

Oh no.

I know.

I want to go back. I thought of the third word, the third rare earth, I could tell you it's erbium, if that means anything to you. It affects in a titanium shell, but anyway, sorry, carry on.

It means absolutely nothing, but thank you. So with the Q1 margins of 28.8%, really strong leverage across the segments, whether it was fasteners or your poster child. Just curious, relative to the full year guidance, when we think about first half top line growth of 6%, second half is up 10%, but the margins are implied to step down 100 bps. So from 28.5% [ph] to 27.5% [ph], but the net tariff impact is only about 15 bps of that. So how do you think about what else is built into the contingency? And how sustainable are Q1 levels across segments?

Yes. So I think there's a few things going on. There's the, I'll say, dampening effect of tariff and I don't have to hand the same bps. You've obviously calculated it quicker than I did. But I look at the flattening effect of a dollar for a dollar, then I look at – the thing we haven't talked about is – our assumption is that there will be actually a step down of production in our Commercial Truck business. While we've been holding onto margin as much as we have, but it's been good. There are still – there are points you get to where it's increasingly painful. And so a little bit more caution because of that Commercial Truck business. And of course, we have yet to see the Commercial Aircraft production step up. You see inventory effect all over. And so I point to several things that – a little bit of concern. So, I feel as though it's an appropriate guide, with more concern in the one segment, which is Commercial Truck and its volumes and what that could do to us. Meanwhile, of course, as you know, we are we're recruiting significantly for the new facilities and building those out. So we put in 500 people in the first quarter. If you asked me to call it again today, I'm thinking an additional 1,000 by the end of the year. And of course, those have to go through not just the recruitment, but the training process. So there's a bit of that. So I think it's where we think it's appropriate at this point in time, Sheila, like would we try to do better, of course. But with all the uncertainty, all the things I mentioned, it's – I think still staying north of that 28% is really good in the balance of the year with all the things that we're trying to do and the run rate that we try to achieve as you go into 2026.

Thank you.

Thank you.

The next question is from Scott Deuschle with Deutsche Bank. Please go ahead.

Hey, good morning. John, within that 33% [ph] spares growth figure, can you segment that at all by end market, perhaps just to highlight what end markets were accretive to that 30% – 30% growth rate, and which were dilutive. And then secondly, I think Engine products may have been experiencing some destocking headwinds for cold section engine parts in the LEAP engine. Is that correct? And if so, is that now behind you? Thank you.

Yes. So dealing with the Engine segment question first. Yes, we have had some of that destocking effects, in particular for the LPT part of the production where, if anything, those LPT parts, which are produced in France were, I think, probably a little bit over produced last year, given the output of LEAP in the first quarter, which was, I think, 314 OE engines, then that was probably less than we had originally thought. And so the LPT overhang still exists and doing with that is the structural casting. So, I don't think that's over yet. But it depends upon the rate of increase in production. And so if you reverse engineer the math, which was to get to a – I think the guidance on LEAP was roughly around 16 70 [ph] engines for the year, then clearly, production is going to go well north of 400 engines. So if – should that occur, then I think as we get into Q3 and Q4, we should be beyond that destocking effect that we've seen, which is because of, let's say, lesser production last year and a modest startup this year. But should we see 450 engines per quarter, then that would be good for us. The first part of your question was regarding spares. Basically, Commercial Aero and Defense were in the over 40% increase, while the IGT in Oil and Gas were more like a 15% increase. So – and that's just to do with available capacities at this point and trying to turn up there because there is demand for additional parts for the IGT business in particular. So if you assume 40% for Commercial and Defense and mid-teens for the IGT Oil and Gas that's in our spares business.

Thank you, John.

Thank you.