Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace First Quarter 2020 Results. My name is Shelby, and I’ll be your operator for today. As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations.

Please proceed..

Thank you, Shelby. Good morning, and welcome to the Howmet Aerospace first quarter 2020 results conference call. I’m joined by John Plant, Executive Chairman and Co-Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John, 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 addition, we’ve included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release and in the appendix in today’s presentation. With that, I’d like to turn the call over to John..

Good morning, and thank you for joining the call. Given the prerelease of earnings, we’ll move swiftly through the slides and then get to your questions. Revenue and profit for the first quarter were in line with the prerelease on April 14. Moreover, earnings per share is at that the favorable end of the expected range. If you move to Slide 4 please.

Then as we discussed on the last call on the 1st of April, we separated Arconic Inc., reported entity into two companies. Howmet Aerospace, which is Remain Co, which is primarily focused on the aerospace sector and contains the four business units within the Engineered Products and Forging segment.

Arconic Corporation, SpinCo, which is primarily focused on rolled and extruded aluminum products, contains the three business units within the Global Rolled Products segment. The targeted guidance for onetime operational and CapEx costs related to the separation were $175 million.

The final costs for the separation will actually be approximately $130 million, excluding tax leakage and debt breakage. Onetime separation costs were funded by divestiture proceeds of approximately $190 million. The highlight slide for the combined company of Arconic Inc., which includes the EP&F segment, the GRP segment and Corporate.

Performance in the quarter was strong despite the impact of COVID-19, which surfaced during the last three weeks of March. Additionally, we were impacted by lower year-over-year 737 [ph] MAX production rate reduction.

Q1 revenues were $3.2 billion, down 9% versus 2019 and down 6% organically, adjusting for the pass-through of lower aluminum prices, currency changes and the divestiture of businesses. Operating income, including special – excluding special items, was up 19%, with a 350 basis points improvement.

Moreover, EP&F improved 300 basis points and GRP improved 310 basis points. We have now had five consecutive quarters of year-over-year margin expansion. Earnings per share, excluding special items, was $0.62, a record and up 44% year-over-year.

Adjusted free cash flow, excluding separation costs, improved $19 million year-over-year, and the cash balance at the end of the quarter was $2.64 billion. We’ve taken several actions to delever and improve our debt maturity profile, which I will discuss later in the presentation.

Lastly, return on net assets was up 410 basis points to a record 14.8% return after tax. Now let me turn it over to Ken for a more detailed view of the financials..

Thank you, John. Good morning, everyone. Let’s move to Slide 6. So for Q1, revenues were $3.2 billion, down 6% organically year-over-year. Market declines were driven by disruptions from COVID-19 and 737 MAX production declines, which impacted both segments.

Revenues for EP&F were down 4% organically, driven by reductions in commercial aerospace of 7% and commercial transportation of 21%. We did have favorability in defense aero, which was up 17% driven by the continued demand for the Joint Strike Fighter.

Also, our industrial and other markets were up 13% driven by increased demand for industrial gas turbines as natural gas prices are at 25-year lows. GRP revenues were down 7% organically driven by all in markets with the exception of industrial, which was up 14% year-on-year as expected. Please move to Slide 7.

On this slide, we’ve provided more visibility to the Howmet Aerospace end markets. The left-hand side of the slide breaks down Q1 revenue by market. So commercial aerospace, is 58% of total revenue. Defense aero is 15%, commercial transportation is also 15%. And industrial, combined with our other end markets are 12%.

We expect defense aerospace to continue to grow year-over-year due to strong demand for the Joint Strike Fighter on both new builds and engine spares. Within the industrial and other markets slices of the pie, the highest growth section is IGT, our industrial gas turbines business.

The IGT market was at a low level last year, and we expect to see growth in 2020 it’s driven by increased demand for both new builds and spares. Regarding spares, we’ve previously communicated that airfoil spares represent approximately $800 million of annual revenue.

Of the $800 million, approximately 50% relates to commercial aerospace engine spares and the other half for defense aero and IGT spares. Going forward, we expect reductions in commercial aero spares, but an increase in defense aero in IGT spares. Hopefully, this slide gives greater transparency into Howmet Aerospace’s end markets.

We have created the same slide for GRP, which is listed a Slide 21 in the appendix. Now, let’s move to Slide 8. Operating profit, excluding special items, increased $75 million or 19% year-over-year, resulted in a record margin of 14.5% despite COVID-19 and 737 MAX impacts.

Margin expansion was 350 basis points, up year-over-year, combined for total Arconic Inc. If we peel that back, EP&F had margin expansion of 300 basis points and GRP had margin expansion of 310 basis points. Corporate expenses, excluding special items, improved 29% year-over-year to $36 million, which is on track with our 2020 annual target.

If we estimate a Q1 split of Arconic Inc.’s corporate expenses into the new Howmet Aerospace and new Arconic Corp. company is approximately $20 million of those corporate expenses go to Howmet and $16 million to Arconic Corp. Moving to EP&F. Our productivity continues to improve.

For the first quarter, EP&F realized $26 million of year-over-year net cost reductions from actions that we took in 2019. The annual target for Howmet Aerospace was $50 million, and therefore, we’re ahead of target for the first quarter.

Additionally, we’ve announced another $100 million of incremental run rate net cost reductions and have taken a $16 million after-tax restructuring charge in the first quarter. Turning to price. We had $5 million of price increases in the first quarter, which was in line with our expectations.

Moving forward, we expect greater price increases in quarters two through four despite the market conditions. GRP also had good net cost reductions in the quarter. GRP extrusions returned to profitability in Q1 and the Tennessee plant improved profitability by approximately $11 million year-over-year.

Lastly, North American scrap utilization approached 60% to a record level. GRP price was approximately flat to the prior year quarter. So let’s move to Slide 9. In Q1, we continued year-over-year segment margin expansion for both segments despite COVID-19 and the 737 impacts. To give you even greater visibility, let’s quickly move to Slide 10.

Since Q1 of 2018, EP&F segment operating profit has increased 520 basis points, and GRP’s segment operating profit has increased 540 basis points. If we converted the EP&F segment operating profit to a pro forma Howmet Aerospace adjusted EBITDA, you get a percent of approximately 23.7%, which is in the top quartile of the peer group.

Now let’s move to Slide 11, where we have adjusted free cash flow and earnings per share. The charts show the consolidated company of Arconic Inc., and we’ve also tried to give you a view of what the estimate would be for Howmet Aerospace. Adjusted free cash flow for the quarter was negative $246 million.

That was in line with our expectations due to our Q1 seasonal capital – seasonal working capital build and an expected incremental $70 million of variable compensation payments tied to 2019 performance. Free cash flow for Q1 was $19 million better than the prior year and is the best performance since our first separation in 2016.

Howmet Aerospace’s free cash flow is approximately 40% of the total at negative $100 million. Earnings per share, excluding special items, was a record of $0.62, up 44% from Q1 of 2019. As expected, earnings per share increased primarily due to operational improvements from segment and corporate productivity.

Approximately 65% of the earnings per share relate to Howmet Aerospace or $0.40 per share. Special items totaled approximately $60 million after tax, and they were primarily driven by separation costs of $50 million and severance costs of $16 million.

Most of the severance costs are tied to the new incremental $100 million cost reduction initiative to realign our cost base as we move into a period of demand uncertainty. With that, let me turn it back over to John..

Thanks, Ken, and let’s move on to Slide 12. The health and safety of our employees is our top priority, and we’ve added the following precautions to prevent the spread of COVID-19. We’ve restricted air travel, and in fact all travel, and are encouraging employees to work from home where appropriate.

We have implemented social distancing standards throughout the manufacturing and office workspaces. And we are ensuring that updated protocols are followed. Lastly, we’re continuing to deep clean and sanitize workspaces, which have potential exposure.

We continue to be a reliable partner to our customers who are critical to national defense, commercial aviation, and the global economy. Let’s move to Slide 13. I’ll now turn to the outlook for which I’ll confine my comments to Howmet Aerospace.

As discussed on the April 14 preliminary earnings call, we have an incomplete picture of the future demand pattern since many of our customers’ production has been significantly impacted. Information flow is currently limited, albeit improving.

Hence, we’re reducing costs, reducing capital expenditure, temporary suspending the common stock dividend and improving our debt maturity profile to preserve cash given the lack of clarity. We find ourselves unable to provide reliable guidance at this time. Turning now to COVID-19.

We felt the impacts from certain customer shutdowns and suspensions and disruptions within certain shifts within our plants during the last three weeks of the quarter. Today, we have only three smaller plants, which are currently closed and they’re in Europe.

To mitigate the impact of COVID-19, we have commenced plans to reduce costs by a further $100 million on a run rate basis. This plan is incremental to the $50 million of carrier reactions we are making from 2019 and the actions we took them. Cost reductions are primarily driven by incremental overhead and some manufacturing reductions.

Moreover, we will reduce our annual capital expenditures by approximately $100 million from the initial target provided at our February 25 Investor Day. The full year capital expenditure estimate of $200 million is driven by lower volumes and us cutting those costs.

Lastly, we have temporarily suspended common stock dividend to preserve cash and provide additional flexibility. Despite the low volumes in 2020, we expect to be free cash flow positive for the year based upon these actions and this free cash flow is after pension after interest and, in fact, all items of cash flow.

To give greater visibility to free cash flow, let’s move to Slide 14 and its key components. We are providing Q1 results and annual estimates on an annual basis consistent with previous guidance, corporate overhead, depreciation and amortization and cash taxes are unchanged.

Pension and OPEB payments have been updated to $210 million based upon final separation calculations. Interest payments have been updated for the new debt issuance and CapEx has been reduced by the $100 million previously mentioned. Common stock dividends have been temporarily suspended.

Working capital will be a net source of cash for the year as AR inventory and accounts payable are reduced. Let’s move to Slide 15 and talk about debt maturities. We’ve taken three actions in April. The first action on April 6, that we redeemed all of our 2020 bonds for $1 billion. Additionally, we redeemed $300 million of the 2021 bonds.

Secondly, on April 24, we completed a bond issuance for $1.2 billion, which is due in 2025. Thirdly, we initiated two tender offers, one for $760 million for the portion of the remaining 2021 bonds, and the second tender offer for approximately $200 million for a portion of the 2022 bonds. These actions will result in the following three benefits.

Firstly, we paid off all of the 2021 bonds. Secondly, we will take pressure off the balance sheet by reducing near-term maturities and turning them out a further five years. Thirdly, we’ll be able to add approximately $119 million of cash to the balance sheet, which will add to our very healthy cash balance that we have currently.

A pro forma cash balance as of April 24 would be approximately $1 billion. The pro forma cash balance would be after the Q1 seasonal working capital build. Moreover, we had reduced the operational cash requirements from $400 million to operate our business to $300 million based upon the updated seasonal working capital needs pertaining to Howmet.

Finally, let’s move to Slide 16. We have prepared a pro forma capital structure slides as of April 24. Pro forma cash would be approximately $1.30 [ph] billion and net debt would be approximately 2.4 times. Additionally, we have an undrawn revolver of some $1.5 billion. And with that let’s move to Q&A..

Thank you. [Operator Instructions] Our first question comes from Gautam Khanna of Cowen..

Hey guys, this is Dan on Gautam. Good morning..

Good morning, Dan..

Hey.

So, we were curious, how does the kind of the combination of COVID and the lower aero OE production rates impact your ability to get the pricing benefits that have been laid out previously in 2020 and 2021?.

Well, I think in terms of the total dollar amount, we should expect something rather lower, given the expectation of lower revenues, but the principle of an increase of an increase we believe to continue to be valid as it was then.

And of course, what we think is, the any LTA renewals really need to look at the three to five year period and not a specific one or three year timeframe and the necessary capacities need to be put in place for when the full run rates are reachieved.

So for example, in the case of Airbus, we expect that a couple of years and now that they quickly back up at 60 build rate per month or more. And the 737 MAX will be also going very well as the as the planes on the ground are cleared from what we’ve read from Boeing..

Got it. Okay. Thanks.

And then just real quick, have you began to see destocking pressures at all from the aero OE production cuts? And do you guys have like a good idea of inventory already in the channel or is that something that lacks visibility for you?.

It’s still tough to have total visibility, given the fact that we’ve only recently had a return to work for those airplane makers. And they are, as you know, have been reassessing their own production plans and now that resetting their own inventories.

My basic thought is that when we exited 2019, in fact, our arrears were at a higher level than we’d entered the year. And so given the arrears were so high, it would indicate that it wasn’t an even sort of vast amount of inventory in the pipeline. But I guess it will be part specific and aircraft specific. So it’s hard to give a very precise answer.

But as a basic theme, if your arrears were even higher despite the massive increase in production that we did achieve and the part of the results we achieved last year, and we certainly didn’t have a big burn down of inventory and arrears in the first quarter. So I don’t know it’s going to be a massive impact.

At the same time, we don’t have visibility into exactly what our customers are carrying..

Your next question comes from Robert Spingarn of Credit Suisse..

Good morning, John, If I could ask a technical question about the life cycle of your – of an engine, and your participation. When in an aircraft’s life cycle, will you see your greatest aftermarket events? I’m assuming this is tied to shop visits.

And what do events represent as a percentage of the original dollar content? So, if you have x on the original airplane and you get the shop visit one, what does that represent in terms of x as a percentage?.

I think the best example I can give you is for the CFM engine, which has recently been replaced, as you know, by the engine ranges. And our view is that the peak demand for aftermarket is yet to come. And so that’s assumed that peak demand per our estimate is around 2025.

And so that would be, let’s say approximately seven years after the engine replaced. So, while we have spares demand during across the life of any engine, its peak is normally after the installed base is at its highest, and therefore, I’d say approximately a seven-year lag, and therefore, we have that CFM spares, I say, yet to peak.

So that gives you a general direction for it. But it’s also influenced by the duty cycle of those airfoils on the engine.

And I think you’re probably aware that to achieve the fuel efficiencies that are required for the newer engines in the thrust for lower emissions and a lower carbon footprint, those engines are running at higher pressures and temperatures. And so we do our very best to work with the engine manufacturer to achieve similar life cycle of the blades.

But certainly, the impact of those pressure and temperatures is higher. So early on in an engine life, we probably have a slightly reduced duty cycle. But then it evens out over time. So that gives you the best answer I can give you to it. I wasn’t able to answer your final point about what exactly what percentage is that – I’d have to go and get that..

Well, we can do that off-line, but I was trying to think about it on an individual aircraft basis as opposed to the fleet as we look at what happens here. But maybe I could try one other thing related.

When I go back to your Investor Day slides, which I wouldn’t imagine you have close by, but there’s a slide, Slide 29, that talks about your legacy engine platforms and your next-generation platforms. And you’re on all the new stuff. You’re on most of the old stuff.

When we think about those two populations of airplanes and your $400 million in airfoil aftermarket, if I got that number right, how does that $400 million divide between the two groups?.

That’s going to be mainly CFM at this point in time, but there will be the offset on the – as an example, I mean I’ve just given you one engine range. Obviously, there will be the larger engines as well. And therefore, you have to build the, let’s say, the 777 fleet into those numbers or the A330s in there.

So there’s a lot of things you’ve put in there.

But basically, if you – the way I think about it is that of the – if you just took the narrow-body engines, come back to the vast majority of the aftermarket, would pertain to the previous sort of rather the current engine, albeit we will see those – that spares demand grow over time for the current engines as well for the LEAP-1A and 1B..

Of course.

But so what you’re saying is there’s a lot of NG and a lot of CO in that group?.

Yes, absolutely..

Okay. Thank you very much..

And the reason why we partitioned today, the spares, to give you a little bit more detail rather than everybody assumed that the $800 million will pertain to the commercial aerospace business. We also want to draw your attention to, obviously, supply spares to defense and industrial as well..

Right, of course. But obviously, I’m focusing on the piece, that’s likely to move the most, just during this period of time..

Yes..

Yes. Thank you very much..

Thank you..

Your next question is from Seth Seifman of JPMorgan..

Thanks very much and good morning..

Good morning, Seth..

I’m just curious with regard to the different product areas that you guys talked about on Investor Day, the engines, fastening systems, et cetera. I know we don’t have guidance for the year at this point.

But when we think about the relative impact of what’s happening across aerospace and transportation, and we think about how those might stack up in terms of the relative impact on sales and profits in those product segments, is there any color you can offer just on the relative impact there? And do you plan to report out on this basis going forward?.

Okay. I think the – first of all, the planned report out is that we’ve been thinking it’s more likely that we give the segment information than anything else, albeit we’ve always given growth rates by end markets. And I understand why maybe the absolute percentages for end markets is also highly relevant.

So, we’ll assess that and see whether we put that out there. The way I think about it at the moment is, let’s say, approximately 58%, just under 50% of our business pertains to commercial aerospace. And I’d say a very coarse level of analysis, so I think it’s just – we’re just worth – it’s only a quarter’s analysis at this stage.

If you take the changes currently anticipated by Airbus, for example, narrow-body, the A320, more like about a 35% reduction and wide-bodies at about a 40%. And I’d say Boeing wide-body probably about the same, but it’s a bit more cloudy because of the specific build quantities around the 737.

So it’s really difficult to give a generalized picture for the 737 at the moment. I mean, in fact, it’s not recertified. But I’d take a broad sweep through it and say, down 35%, give or take, as a guesstimate at this point in time.

Albeit we do need a little bit more time to be able to give a more accurate and be clear with a clearly thought through picture. On commercial transportation, I’m going to be rather more pessimistic and say about 15% of our end markets. We could see given the fact that if you take April, there was virtually no truck production.

And therefore, I could see us being down close to 50% in that business ultimately. Given the current dramatic change in the order intake for Class A trucks, as an example, both in Europe and in the U.S. On defense, that 15%, you see double digits. I mean maybe it will be as big as the 17%, but that’s on 15% growth.

And then industrial, I’m going to say trucks, 10%, would be up, would be a guesstimate at this point for those sales or so. So when you – and that’s the way I sort of test as we try to reforecast each quarter and trying to reforecast the year as we go through this. I test that against the course modeling that I just gave to you.

And it triangulates reasonably well at this point, albeit we do need another quarter to go by, I think, in terms of getting enough information to have confidence in providing guidance, because I mean giving guidance, it’s pretty serious. We try to get it to be something, which we believe is going to be done rather than just say, it’s not a wish..

Thanks very much..

Your next question is from Josh Sullivan of The Benchmark..

Good morning..

Good morning, Josh..

Just a question on free cash. You’re going to be positive here for the year in 2020 with working capital as a source of cash.

But if we look at 2021 and what the OEMs have communicated on production rates, just as they stand now, would you be cash flow positive in 2021 or would working capital go the other way?.

The way I believe that we should operate, that we should be exactly the same as what I went through in the 2008 and 2009 financial crisis, albeit in a different industry. I mean it should be much slimmer margin than aerospace that was in all over the company.

Back then, we were cash flow positive when the capital is coming in and cash flow positive when capital is going out. And so that’s where I start, because I think that’s really important. And my expectation at this point, bear in mind, I’d say, we haven’t given guidance, so there haven’t been a newer number.

But we expect to be cash flow positive in 2020 when we’ll see an inflow, and we’ll be cash positive in 2020 when we’ll see an outflow. So at this point in time, that’s what I believe to be the case. And I wouldn’t be saying it if I didn’t really believe it..

Got it, thank you..

[Operator Instructions] Your next question is from David Strauss of Barclays..

Good morning. Apologies if I missed this. Was late joining in the call.

But John, have you offered any color, any range of what you would think would be the right level for decremental margins as we go down here over the next couple of quarters?.

We haven’t given decremental margins. When I talked to – I talked to you quite a bit when we’re doing that virtual – by virtue of the debt raise. Of course, we consider that 80% of our cost structure is variable. Now it doesn’t all flex instantaneously as I’m sure you’re well aware.

There are things which move instantaneously, which is, for example, if you don’t make the part, you don’t buy the material. So you can expect material costs, by and large, to flex according to usage.

And then we go through, as I said, the more extreme would be some of the staff costs, particularly in Europe, where any adjustments would need to be made after consultation with the European Works Councils and those sort of things.

And so when we think about that, that it takes a longer time to flex it in accordance with the future demand outlook that we believe we’ll see. And so that’s what we’re trying to do.

So there’s a guide in terms of what’s truly fixed versus variable, and the variables is in accordance with time, because the basic philosophy being there’s very little that should be considered to be permanent or fixed. It’s all to do with the passage of time..

Okay. And a quick follow-up, your comment on working capital being a net source this year. What – did that happen in Q4? Or did it happen before that? I mean, I think you typically use working capital through at least the first half of the year..

Typically, we’ve been a working capital user. One of the things we’ve tried very hard last year for Arconic Inc. was to – rather than as we – all of the cash flow for the company in previous years had really been achieved in the fourth quarter. We advanced that significantly last year. So, we were generative in the third and fourth quarters.

And we were clearly driving on that to really only have our first quarter being a quarter of cash outflow. And it’s a bit too early to say whether that will be achieved given the uncertainty that we have and we’re dealing with at the moment. But that’s basically directionally where we believe to be.

Now, what I expect to happen is for working capital, I think receivables and payables flex, I think, for the most part. The latest code of the day is that we have in the activity levels, the most difficult one will be inventory management.

And my expectation is there, that in the earlier part of the remaining three quarters of the year, we will have a degradation of days of inventory. Part of it is just to do with the – able to respond and flex on input materials in real-time when you would have uncertain, I’d say, customer schedules.

I mean plants have been – some are already closed with receiving docks closed. And therefore, if you can’t deliver product, it’s not surprising, your inventory will increase a bit. But then there’s also the effect of an irreducible amount of inventory between machine stations and extrusion stations in the forging presses in the business.

And so my expectation is that we will see both for Q2 and for the year, but to a lesser extent as we go through the year as we work this down. So, days will – I expect by the end of the year, days will be better than they are in Q2, but not as good as previously just because of the scale of, I’ll say, demand contraction that is there potentially.

And albeit we’ll be grappling with it and driving inventory down in absolute dollars as we go through the year. So it’s just – again, it’s one of time. And so while we’ll seem to be a little bit more inefficient in the second quarter, improving efficiency there afterwards.

But in terms of inventory dollars, I struggle to believe that given the scale of diminution of – on the commercial aerospace business that we’ll be as efficient as we were in these terms as 2019..

Great. Thanks for all the details..

Thank you..

Your next question is from Carter Copeland of Melius Research..

Hey, thanks a lot for the time.

Sorry, I was off for a second, John, if you addressed this, but I just wondered if you could speak to just given your military exposure and some of the capital that’s been flowing in even on the commercial side in terms of payments from your customers and that impact on the working capital situation, if you’re seeing any changes there? It seems like money is increasingly flowing.

If it wasn’t, just any color there would be helpful. Thanks..

Okay. No, we’ve seen no change in our receipts from customers at all. So everybody’s paid and been paying to terms. We always have a – at the end of any month, there’s always a tiny delinquency in terms of being exactly on time. We terms of being exactly on time. We’ve never achieved 100% 30 days or 45 days, whatever the number is, in terms of receipts.

But we’re up at a very high level of collection percentage, and we’ve looked at that very carefully – and all receipts very carefully and there’s no change..

Okay, okay. Great. And then with respect to the areas of the business where you’ve got a substantial portion of the sales volume that may go through distribution, and I’m thinking about fasteners here.

How do you get comfortable that you’ve got the risk appropriately sized there given the sort of ongoing uncertainty around rates and what not? How are you thinking about those portions of the business relative to the aggregate whole? Thanks..

We’ve looked both at the OE bill and projected rates and that which goes through distribution where, of course, it’s always – we have less visibility. Of course, our distribution sales are not really very high, neither in the context of fasteners nor in sort of in the context of total Howmet.

And therefore, while we are, I think, appropriately cautious, currently, I think we believe we’ve got a handle on where that is. Albeit if we were surprised to the upside, that would be great. If we were surprised on the downside, I don’t think it’s going to be that significant to us overall..

Okay. Thanks, John..

Thank you..

Your final question is a follow-up question from Josh Sullivan of The Benchmark..

Yes. It’s just a follow-up on….

You’ve come back and squeezed one more in….

That was kind, just a follow-up on the defense side of the business.

Can you talk about the F-35 exposure? How much of that is OEM versus aftermarket at this point as that program matures? And then are defense customers talking about taking advantage of any of the available commercial capacity to maybe build inventories, either as buffer stock or spares inventory?.

So, F-35 was – and I’m supposed to be giving you the answer I could get before I sort of give you more granular commentary. It’s essentially all OE at this point in time, very little spares.

That’s not to say the spares aren’t required because they are, because the duty cycle of that engine, given it’s the military duty cycle, is far less than the average commercial engine. But then as you’ve, I think, seen from our previous decks, I mean that engine is operating to 1,000 degrees higher temperature.

And that is in particular when the aircraft has less air flow through it as it hovers in the air and has those capabilities for certain versions of that jet.

So, even with its reduced duty cycle compared to a commercial, given it’s still fairly new in the market, the spares parts of the business has been, I’ll say, fairly limited, albeit it’s still there.

When I think about F-35, we were – the critical turbine blades in it were all critical, yes, but the ones which are the most exacting to manufacture, which are the ones which have, I’m going to say, the extraordinary levels of coring to achieve the multi sort of level of chambers that they have within them too and then how the air comes out of the trailing edge, then the more difficult ones were really tough for us to make.

And so we were under pressure all the way through 2019 to produce more blades and I recognize that it is possible, we were – I don’t think we were the limiting factor on the engine, but we were close to it and sought to increase that capacity with additional dies and improved yields as we went through the year.

We believe that the combination of that plus the additional capacity that we brought online and pertain to our Whitehall engine facility has been helpful to that situation, and we’ve seen signs of improvement.

But we’re also clear at the moment, we could sell everything that we could make, given the, I’ll say, unfulfilled with the basic demand that we have. So, we’re trying to build to a higher rate, a rate build for 2020, which is higher than the rate build in 2019. And then we’re trying to prepare for additional rate increases also in 2021 and 2022.

So, the – I mean the alleviation of capacity from, let’s say, the commercial side has been helpful to it. But that wasn’t the singular issue in terms of us meeting the rate increases relative to tooling as well. So right now, the way I think about it is that we found them a way of improving rates.

We do know that there is a large spares demand that’s there for us to fulfill as well on top of the increase in builds that’s there.

And so I look at it as a very positive thing for us in going through into 2021 and 2022 and beyond, because then, we have additional rate increases to provide for plus the fact that the spares packages that are required to be fulfilled is going to be, also, a good thing in the future for Howmet..

Got it. Thank you..

Thank you very much. And I think that was the last question. So if we could close the call, please..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect..