ATI Inc.

Good morning and welcome to the Allegheny Technologies first quarter 2020 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Scott Mender. Please go ahead.

Thank you, Chad. Good morning, and welcome to the Allegheny Technologies First Quarter 2020 Conference Call. This call is being broadcast on our website at atimetals.com. Participating in the call today are Bob Weatherby, President and Chief Executive Officer, and Don Newman, Senior Vice President and Chief Financial Officer. If you have connected to this call via the Internet, you should see slides on your screen. For those of you who dialed in, slides are available on our website. After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to two questions. We will attempt to get to everyone in the queue within the allotted call time. Please note that all forward-looking statements are subject to various assumptions and caveats, as noted in the earnings relief and shown on this slide. Now, I'd like to turn the call over to Bob.

Thanks Scott. Good morning and thank you for joining us today to discuss our first quarter results and 2020 outlook. I hope today we're finding all of you in good health. These are unprecedented challenging times for all of us. As to the current market conditions, a lot has been written and there's not much more I can add, but we've seen a dramatic change in a very short period of time. As we share our results and outlook today, I want to be clear that the crisis is in the global economy and our strategic markets. The crisis is not inside ATI. We see the challenge ahead of us and are taking the actions necessary to keep our employees safe and healthy and to enhance, yes, enhance a solid foundation to ensure ample liquidity, future profitability, and growth. My leadership team and I are confident in our ability to do that because of our relentless, innovative people. They are all in to do what's necessary to emerge stronger from the actions we take and the experience we gain from this crisis. I want to start today with a heartfelt thank you to the people of ATI. The last 10 weeks have tested us across our global organization as never before. First, our operational teams, all deemed essential operations based on the products supplied, have not missed a beat. Stress and concern? Yep, of course. Total commitment to keeping their people safe and our materials flowing? Absolutely impressive. Our Asian team was the first to experience the COVID-19 challenge, found the appropriate methods to continue to work safely, have returned to work, and they shared their experience with their global teammates for the benefit of us all. Our digital technology team acted quickly to provide highly reliable, highly secure remote access for close to 1,000 employees, almost 15% of our global workforce in less than a week. Job well done. Our leaders across the organization are doing extraordinary things in an extraordinary time. Leadership is not a job grade or a title, it's a role. And in these challenging times, our leaders stepped up and continue to step up. So thank you to our operators and staff who have adapted to the new reality to keep themselves and their coworkers safe as they supply our customers who count on our essential materials. I'm proud of our people, every one of them, doing the right things, the right way, at the right time, in a world of frenetic change and new operating norms. So to the ATI team and all those supporting them, thank you. Creating shareholder value in the near term will be directly related to the effectiveness of our leadership and the quality of our team. I'm confident that we'll deliver and emerge as a stronger company. So moving to the next slide. Over the last few weeks, as the reality of the situation has evolved, we've quickly and decisively adjusted our priorities. We've taken action to preserve cash and maintain ample liquidity. Two key elements of that are optimizing our cost structure to match the change demand expectations and supporting our customers through continued strong execution. While driving for cash efficiency in the short term, When the time comes, we'll be recovery ready. And along the way, we'll be leveraging the recently won market share gains to accelerate our growth and the recovery. It's important for all of us to understand what we're doing to support our customers and optimize our cost structure. After I've done that, I'm going to turn it over to Don, who will discuss our liquidity position, his perspectives on the business, and the full year outlook. So let's move to what we're doing or have already done to reduce costs. As of May, our board, my direct leadership team, and I have reduced our base salaries by 20% for at least the next 12 months. The vast majority of ATI staff are taking a base salary reduction as well. We're using a sliding scale, but the average reduction will be near 12%. Over the last three months, we've announced actions to permanently reduce our overhead structure. More recently, we're actively adjusting staffing levels in our operations based on the specific needs of each business, some through temporary or rolling idlings, some through indefinite furlough, some through layoff. Our corporate teams are adjusting to focus on truly essential functions. and we're reducing and or deferring our 401k benefits for participating employees. Since early March, we've identified and have deployed to capture between $110 and $135 million in incremental cost reductions in 2020. In addition, we're significantly curtailing capital expenditures and reducing inventories. All hands are focused on preserving cash and maintaining ample liquidity. Through these actions, thoughtfully and quickly deployed, we're ensuring production capabilities for our customers, preserving jobs for our employees, and maintaining our strong balance sheet. We will be recovery and growth ready when the opportunity arises. Let's turn to slide five. As we announced earlier this year, we realigned our business segments to further enhance our position as a leader in materials science and to create opportunities to accelerate sustainable long-term profitable growth, all in the pursuit of increased shareholder value. The streamlined high performance materials and components, or HPMC segment, is made up of our specialty materials business, located largely in the Carolinas, and our advanced forging business located primarily in Milwaukee, Wisconsin and Irvine, California. The new HPMC structure brings increased focus on three things, material pull-through growth opportunities, synchronized response to changing customer demand signals, and acceleration of material flow between the two business units. The segment's business is largely covered under long-term agreements ranging from five years to life of engine program, most of which, as we've talked to you about it over successive calls, have been renewed and expanded within the last 18 months. The segment is focused on profitably executing recent share gains and margin expansion, starting with additional production in late 2020 and continuing over the next several years. We're leveraging capacity to expand into new products and customers closely aligned with our existing capabilities. The newly created Advanced Alloys and Solutions Segment, or AANS, combines the prior flat roll product segment with the specialty alloys and components business based in Oregon and the aerospace titanium plate product line, both previously part of the HPMC segment. AANS combines all of ATI's flat products and creates opportunities to produce materials more cost-efficiently and more effectively by better leveraging ATI's world-class asset base and broad capabilities. The realignment opens up sheet and strip capacity over time to produce additional high-value advanced alloy products, materials such as titanium, zirconium, hafnium, niobium, and tantalum. all best and largely for ATI's strategic markets. Concurrently, we continue to de-emphasize standard value stainless products as new, more value-added opportunities are captured. As part of the realignment, and as I mentioned earlier, we announced two restructuring actions, one in the fourth quarter 2019 and one recently in the first quarter 2020, to primarily capture back office synergies. Once fully implemented, the combined programs will generate about $14 million of annual benefit. Together, the new segment structure is designed to deliver the optimal combination of growth and profitability and the team did a great job making it happen on January 1st. So let's talk about what we're seeing in our core markets. Although today's global macroeconomic backdrop is universally understood to be weak due to the impact from COVID-19, I think it's going to be helpful to provide a quick update on each of our strategic end markets and those that demand diversified applications and leverage our strength in material science. Each has a different outlook predicated on their respective drivers. While it's easy to focus today on the negatives in this environment, There are several positive items to note. ATI's defense business is strong, diversified, and growing. We produce materials that help power the nuclear navy, manufacture parts for military aircraft, both fixed-wing and rotorcraft, as well as titanium armor for land-based vehicles and materials for missile systems. We saw first quarter year-over-year growth, driven by increased demand for our materials and components, produced for naval applications and various missile systems. We expect continued stability in our defense market sales throughout 2020 and have a strong backlog across ATI. Our precision rule strip business in China, known as STAL, resumed operations in late February and produced year-over-year revenue and operating profit growth in the first quarter. Quite an accomplishment given the economic changes that have gone on in China and Asia. Looking ahead, we expect consumer electronics demand to be relatively soft in the second quarter, but ramp up in the second half of the year as customers across Asia begin producing devices and advanced televisions for the year-end holiday sales. In the medical market, first quarter decreases were more significant. largely due to OEM inventory management actions. These stem from diminished demand for elective surgeries and diagnostic procedures globally. Medical market demand is expected to improve from week first quarter levels with the resurgence of elective surgeries. A return to stability in the global healthcare system will be important to that recovery. Moving to aerospace. I'm not going to repeat what our major airframe and engine customers reported last week. I will say we're better connected with them and their supply chain partners than ever. We're using that connection to quickly adjust our upstream operations to reduce the potential for slow-moving inventory and align our crewing to match the reality of demand. In the first quarter, results were generally in line with expectations in January and February. We began to see deterioration toward the tail end of March, and as a partial offset to the first quarter's evolving aerospace market weakness, we benefited from increased advanced forging volumes for a large jet engine OEM who took cash management actions in the second half of 2019. Looking ahead, we expect our commercial aerospace shipments to continue to decline significantly and steadily throughout 2020. stabilizing in 2021, then we expect to start to see recovery in 2022, getting back closer to 2019 narrow body levels in late 2023, early 2024, consistent with other guidance. At the same time, we're focused on executing on recent market share gains with new contractual share and pricing levels beginning in January 2021. These meaningful and accretive business increases stretch across our aerospace portfolio and include late 2020 deliveries to support ATI's new multi-year titanium mill products contract with a major aerospace OEM customer. As to the energy market, which combines oil and gas, hydrocarbon and chemical processing, electrical energy generation, and various other sub-markets, Sales increased in the first quarter versus prior year. Growth was largely due to increased demand for high-value nickel plate products destined for offshore pipeline projects requiring highly corrosive resistant materials. Energy demand is predicted to remain soft due to overall lack of consumer activity, and looking ahead, oil prices are expected to remain low due to ongoing oversupply issues suppressing exploration and production activities. On the positive side, we expect a few large government-backed pipeline projects requiring high-value nickel alloy materials to be awarded in the second half of 2020, with the majority of revenues falling into 2021. Additionally, there are several smaller portions of our energy markets that are seeing relative demand stability, including materials for land-based gas turbines, civilian nuclear refueling, and pollution control for coal-fired power plants. With that, I'll turn the call over to Don to share his insights on our business, our first quarter results, and our outlook for the balance of the year. I'll be back to offer a few final thoughts before we open the line for your questions.