ATI Inc.

Good morning and welcome to the Allegheny Technologies Incorporated third quarter 2020 results 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 Minder, Vice President, Treasurer, and Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to the Allegheny Technologies' third quarter 2020 earnings call. Today's discussion 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. For today's call, we will not display or advance slides as Bob and Don speak Their comments will focus on highlights and key messages. The slides provide additional color and details on our results and outlook. They are available on our website at atimetals.com. After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to two questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats, as noted in the earnings release and in the slide presentation. Now, I will turn the call over to Bob. Thanks, Scott.

Good morning. It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market. Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic. This morning, I'll share my thoughts on three key topics. First, how we've taken control of what we can control, thus accelerating cost savings and strengthening our position. Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth. And third, our view of the markets and our confidence in a stronger future for ATI thanks to strategic share gains and ATI's unique capabilities. So first, where we are today. We began taking decisive action as soon as our forward-looking demand signals flashed red. Our customer connectivity continues to give us the insight to assess market dynamics in the moment. From this, we gained conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations. We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond. As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance. We accelerated benefits from our cost savings initiatives through aggressive implementation. This included capacity up. Cold, dark, and quiet facility idlings reduced our fixed costs. Minimized variable costs. Swift execution on our restructuring programs eliminated costs to align with demand declines. reduced overhead. We've intensely reviewed every administrative and non-production-related expense, continuing only what was critical. Overall, we've significantly variabilized our cost structure. Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs. This will be a lasting impact of the actions we've taken during the crisis. Through it all, our people have been extraordinary. First and foremost, they're keeping each other safe while efficiently and consistently delivering critical materials and components to our customers. The frequent production adjustments we've made in response to demand shifts and end market forecasts have not been easy for them. Growing levels and shift schedules have fluctuated as a result. I sincerely appreciate the entire team's effort and dedication and personal economic sacrifice. Their continued actions demonstrate a shared commitment to ATI's future success. The deliberate actions we've taken and will continue to take are crucial to our ability to emerge a stronger company as the economy recovers. Looking ahead, we're confident demand will eventually recover. We expect these difficult times to continue for several quarters to come. Yet we do believe we're reaching the bottom with some signs of upcoming stability. Secondly, let's talk about our balance sheet and the solid position it puts us in. We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule. Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth. We're fueling growth in three ways. First, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021. Next, by organically expanding our presence in adjacent high-value markets where our material science expertise is valued. And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities, and capture profitable core market opportunities. As we accomplish our growth goals, we'll intensify our presence in aerospace and defense materials and components. We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace-like margins in adjacent markets along the way. Looking forward, We're confident that the demand for commercial aerospace products will recover. We see it as growth deferred, not lost. No matter what form you believe the coming economic recovery will take, it could be a V, could be a U, could be L-shaped, when you're at the bottom, it's difficult to predict when you'll reach the other side. But we know we'll get there. We're positioning ATI to emerge stronger, leaner, and more efficient no matter how the recovery comes. Here are some examples of how I believe we're doing just that. We're expanding our presence in growth markets like defense. We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability. Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term. Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn. Defense remains a notable positive exception. A little more color on our view of what we expect going forward. Let's start with commercial aerospace. Both jet engine and airframe continued to decline significantly versus the prior year. Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with, quarantines, travel restrictions, and low 737 MAX production. Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand. Forest borders at engine product sales will remain relatively weak as forgings begin to slowly recover. Specialty materials will likely lag for an additional couple of quarters. ATI sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain. In 2021, ATI will benefit from engine market share gains and new airframe business. The positive impact from these wins will increase over time as aerospace industry volumes recover. Our second core market, defense, remains a source of strength. Excluding titanium armor, ATI's diversified defense sales were at more than 20% year-over-year, led by naval nuclear and military aerospace growth. Titanium armor plate sales were down significantly due to timing for both a domestic and an international program. We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect. Near term, we expect continued growth in the fourth quarter and into 2021. Next, let's talk about my thoughts on three important adjacent end markets. Third quarter sales were down significantly in the energy and medical markets and up in electronics. When it comes to energy's oil and gas sub-market, we saw a lack of end customer demand and a resulting inventory glut reducing exploration and downstream processing activities worldwide. We expect this market to remain weak in the fourth quarter. The bright spot within energy is the specialty energy submarket, including pollution control, nuclear, and renewables. These sales grew year over year, and we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects. Our medical market is principally comprised of biomedical implants and MRI material. Sales versus prior year were lower to customers in both categories, mainly due to the challenges presented by COVID. Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers. Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter medical facilities, either due to an effective COVID vaccine or disease treatment protocols. Finally, electronic sales move higher year over year. This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales. We anticipate modest growth trends to continue in the fourth quarter. With that, I'll turn the call over to Don to cover our third quarter financial results and 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.