This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day and welcome to the ATI third quarter results conference call. All participants will be in a 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 touch tone phone. 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, VP, Treasurer in Investor Relations. Please go ahead.
spk06: Scott Minder Thank you. Good morning and welcome to ATI's third quarter 2021 earnings call. Today's discussion is being broadcast on our website. Participating in today's call are Bob Weatherby, Board Chair, President and CEO, and Don Newman, Senior Vice President and Chief Financial Officer. Bob and Don will focus on our third quarter highlights and key messages, but may refer to certain slides within their remarks. These slides are available on our website. They provide additional color and details on our results and outlook. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now, I'll turn the call over to Bob. Thanks, Scott.
spk08: Good morning and thanks for joining us today. It feels great to report that we returned to profitability in the third quarter, three months ahead of our expectations. This was no small achievement as we overcame pandemic-induced disruptions, a three-plus-month labor strike, and the challenges inherent in significant business transformation. Our success is due in equal parts to accelerated rates of recovery in our diverse end market. our significant business restructuring and transformation efforts, and the perseverance of the ATI team. Our third quarter adjusted earnings per share were $0.05. EPS improved to $0.35 per share when you factor in the net positive impacts from settling our recent labor strike, including the benefits from our new collective bargaining agreement and the lingering strike-related costs, as well as the gain from the flow-form products divestiture. I'm proud of what our team has accomplished, overcoming the challenges of the past two years. We're winning on the top line through new business and by capturing share gains. We're winning on the bottom line by tightly managing costs and solidifying our financial foundation. We've begun to pivot to growth. We're excited about what we can achieve as the commercial aerospace recovery accelerates and our business operates at high utilization levels. Before I dig into our performance and outlook by end market, I'll provide a progress update on a few of our strategic initiatives. First, we took another step in our ongoing business transformation. We sold our FlowForm business for $55 million, resulting in a gain on sale of nearly $14 million. While this business primarily served the defense market, it had little connection to the broader ATI. There were few material synergies, and its long-term success was linked to specific program volumes rather than our material science. The new owner will be better placed to invest for its future. Second, we built upon our firm financial foundation by taking steps to reduce earnings volatility and cash flow variability and increase financial flexibility. I don't want to steal a lot of Don's highlights here, so I'll limit my comments. We successfully tapped the favorable debt markets to our advantage. We significantly extended our debt maturities by redeeming notes due in 2023. At the same time, we added new notes due in 2029 and 2031. A portion of these proceeds were used to support a voluntary pension contribution. As a result of these third quarter actions, annual interest expense will decrease by about $6 million and pension funding levels improve. Third, as a visible next step in our continuing journey to become one ATI, we promoted Kim Fields to serve as Chief Operating Officer effective January 2022. This officially recognizes the role she's been serving in since December 2020, leading both business segments. Kim's doing a great job aligning the businesses, accelerating execution, and streamlining material flows. As markets recover and asset utilization increases, we're better positioned to expand margins and improve cash generation under her leadership. Lastly, we continue to make progress on strategically transforming our specialty roll products business, taking deliberate actions to create a competitive cost structure. This began last December when we announced our plans to exit low-margin standard stainless sheet products. It includes closing five facilities and concurrently streamlining and upgrading our high-value material flow paths. Those efforts are largely on track. I'll have more on that in a moment. In July, we reached agreement with Specialty Role Products Union-represented employees, ending their three-and-a-half-month strike. Together, we signed a contract that rewards our employees for their important contributions to ATI's overall success. The SRP business is now positioned to be successful in the long term. I'm pleased to say that by the end of September, we've ramped SRP's production rates back to pre-strike levels, with one exception that we're working hard to address. The SRP team did an outstanding job safely getting back on track, accelerating production to meet strong customer demand. You might wonder where we stand on our decision to exit standard stainless sheet products, given the current strong market demand. History reminds us This is a temporary upswing in a highly cyclical business with chronically low margins and high fixed costs. Our commitment to exit hasn't wavered, but our timeline has extended by three to five months due to the strike-related impacts. First, the strike caused us to slow aerospace qualification activities across SRP operations. It also created a significant product backlog destined for strategic customers. As a result, as facilities slated for closure, we'll extend a few select operations into the second quarter of 2022. We would have preferred to stay on our original timeline. We're committed to better position our customers for the accelerating economic recovery and take near-term advantage where current market conditions offer a valuable upside. The savings capture will be slowed by a quarter or two, but let me be clear. The overall favorable economics attached to our transformation over the long run remain in place. Turning to our third quarter performance and outlook by market, we're seeing clear evidence of recovery. Momentum is building as volumes return to pre-pandemic demand levels. Let's start with our largest end market, commercial aerospace. Expansion continues unevenly across our product portfolio. In the jet engine market, forging's demand grew for the fourth quarter in a row. This expansion was driven by demand for narrowbody engines, coupled with our 2021 market share gains. Our Q3 results included initial LEAP 1B volume increases to support the expected 737 MAX production ramp. In contrast to forgings, our sequential jet engine specialty materials sales declined somewhat. While it appears that our customers' jet engine material inventories are nearing a low point, it's clear that pockets of inventory exist. We also believe there's widespread customer desire to tightly manage your inventory levels. We predict these inventory stockpiles will be fully depleted soon as OEM production rate increases materialize. We expect customer hesitancy to wane over the next few quarters and order patterns to reflect underlying demand once again. Lastly, on commercial aerospace, our airframe business expanded sequentially for two reasons. First, post-strike recovery efforts in our SRP business, and second, the increasing orders associated with our new European OEM long-term agreement. Year over year, airframe sales declined. We expect this market to continue at low levels in Q4 and into 2022 as international travel rates recover more slowly and 787 deliveries remain on hold. Despite the mixed third-quarter aerospace performance, there's good news on the horizon. As the COVID Delta variant's impact slows and international travel restrictions ease, customers are once again returning to the skies. This market is already displaying strong recovery trends in the form of increased domestic passenger travel, higher global cargo volumes, and accelerated fleet retirement. Moving to the defense market, revenue declined sequentially, largely due to customer shipment timing and the sale of our flow form business. Year-over-year growth was strong. What's driving growth in the near term? Titanium armor for land-based vehicle programs in the U.S. and the U.K., military jet engine sales, and the expansion of new helicopter programs. Longer term, we remain highly confident in ATI defense growth. Our confidence stems from a wide range of new programs and opportunities that can benefit from our advanced materials development and production capabilities. Turning to the energy markets, we saw significant growth sequentially and year-over-year in both business segments. This occurred in oil and gas as well as specialty energy. In our advanced alloys and solutions segment, we produced and shipped most of a large nickel alloy project destined for offshore waters in South America. In our high-performance materials and components segment, strong demand continued for our nickel products used in land-based gas turbine production in Asia. The near-term outlook for our energy markets is solid. Global GDP growth and higher travel rates will increase energy demands clearly. Sustainability trends will drive exploration and production of more environmentally friendly energy generation and transmission technologies. All of these are best served with our unique high-performance materials. Let's wrap up our markets discussion with our critical applications used in medical and electronics. In medical, sales grew sequentially and year over year. Increased demand for biomedical implant materials was driven by low post-pandemic customer inventory levels and increased elective surgery volumes. In Q4, we expect these trends to continue and likely expand to include MRI-related materials. The electronics sales were lower compared to the record-setting levels of the previous quarter and last year, but still very strong. The strong demand for other key end markets required production allocations within our China precision-rolled strip facility, constraining, within the quarter, available capacity for electronics products. We also had a planned Q3 maintenance outage at our Oregon facility. Underlying customer demand for electronics remains strong and should continue. I'll wrap up my opening comments by saying I'm confidently bullish on ATI's future. Our end markets are recovering. We're growing our market share. We've aggressively locked in cost structure improvements. We have significant growth opportunities on the horizon. We've put ourselves in a position to accelerate growth and expand margins. We're executing to win. It's an exciting time for ATI. I'm proud to lead this team as we achieve our goal of becoming a premier supplier of aerospace and defense materials. With that, I'll turn it over to Don to cover our financial results in more detail and provide you with our Q4 financial outlook. Don?
spk07: Thanks, Bob. Bob already gave you my opening line. ATI returned to profitability in the third quarter three months ahead of our expectations. A lot of hard work went into right-sizing the business and putting us on this path for growth. We'll celebrate for a moment, but in reality, we've already shifted our focus to capitalizing on this momentum, further expanding our business and generating shareholder value. Now for the details. Overall, Q3 revenue increased to $726 million. up 18% sequentially and 21% year-over-year. Q3 adjusted EBITDA grew to $80 million, up 49% sequentially and up 381% year-over-year. Q3 performance suggests a revenue run rate approaching $3 billion and an adjusted EBITDA run rate of $320 million. On a reported basis, ATI earned 35 cents per share in the third quarter. We earned 5 cents per share in the quarter after adjusting for a net $43 million of special items. These included gains for post-retirement medical benefits resulting from the new SRP collective bargaining agreement and from full-form products divestiture. Strike-related costs were also excluded. To better understand our results, I'll provide some color around each segment's performance. Starting with A&S, sales grew by 35% sequentially and EBITDA by nearly 60% versus the prior quarter. Within the segment, the SRP team did an outstanding job accelerating post-strike production levels. This was against a backdrop of strong customer demand and elevated pricing opportunities. Their efforts produced tangible results. bringing us back to first quarter 2021 production rates by the end of September, as we had predicted. Our precision rolled strip business in China once again had record sales and earnings due to continued strong demand across a variety of end markets. ANF segment Q3 performance also compared favorably to Q3 2020. Revenue increased $49 million and EBITDA increased $46 million. This impressive earnings growth was powered by increased market demand, higher HRPF toll conversion volumes, streamlined cost structures, and metal price tailwinds. HBMC Q3 sales and earnings were in line with the second quarter and much improved from the third quarter of 2020. Sequential forging's growth from commercial and military jet engine sales was offset by a quarter-over-quarter decline in specialty materials jet engine revenues and the impact of selling our full-form business in Q3. Earnings and margins were consistent sequentially. We offset a weaker product mix driven by increased energy market sales with operational cost improvements. HPMC sales were higher year over year in every major market, led by commercial aerospace. Earnings and margins expanded significantly in Q3 versus the same quarter in 2020. This is a result of our decisive 2020 cost-cutting actions, jet engine share gains, and contractual margin improvements. Let's move to the balance sheet. Late in the third quarter, we issued two debt tranches totaling $675 million. $325 million of the notes are due in 2029 and bear interest at 4.875%. $350 million of the notes are due in 2031 and bear interest at 5.125%. Proceeds from these notes were largely used to redeem $500 million of notes due in 2023, bearing a 7.875% interest rate. The financing brings several benefits, including $6 million in annual cash interest savings, significantly lower interest rates, and a much improved debt maturity schedule. Excess proceeds from the financing were largely used to support a $50 million voluntary pension contribution in the quarter. I will come back to our pension glide path in a moment. After redeeming the 2023 notes in mid-October, we had more than $800 million of liquidity, including approximately $440 million of cash on hand. Third quarter management and capital levels improved sequentially, but remained above our target. This was largely due to SRP strike recovery efforts. Q3 SRP sales were back-end loaded. increasing quarter end accounts receivable. We also ramp production in the quarter, but we're unable to fully eliminate inventory backlogs before quarter end. We expect significant reductions in managed working capital levels well below 40% of revenue across the company in Q4. Returning to pensions, our $50 million voluntary contribution is the latest action and our plan to improve pension funding levels and reduce related expenses and contributions over time. In the third quarter, we completed our fifth pension annuitization effort. This lowers overall participation by nearly 1,000 people and shifts approximately $70 million of assets and liabilities to a third party. We have seen favorable asset returns and planned discount rate movements so far in 2021. If that holds through the end of the year, we may see a meaningful improvement in our pension funded status at the close of 2021. Now, let's take a few minutes to discuss fourth quarter outlook. In HPMC, we expect the jet engine driven recovery to accelerate and broaden across our product portfolio. After several strong quarters, sales to specialty energy markets will likely decline. We anticipate continued commercial aerospace forgings growth. We also expect additional defense sales and to benefit from a large, discrete commercial space project. These changes should result in improved mix sequentially. For AA&S, we anticipate improved financial results in our SA&C business. This is due to defense and medical volumes increasing and expenses decreasing after our seasonal Q3 maintenance outage. In our SRP business, several pieces of equipment will take extended outages in the fourth quarter in support of our strategic transformation. First, we'll idle a finishing line to upgrade its high-value specialty materials capabilities. And second, we'll idle a melt asset to allow finishing operations to process post-strike backlogs. The outages are expected to negatively impact cost absorption and increase cash expense in the fourth quarter. We anticipate a return to normal capacity levels in Q1 2022. Lastly, we anticipate our China precision rolled strip business to experience its normal seasonal slowdown in the fourth quarter due to lower post-holiday electronics demand. Additionally, we expect to recognize a $7 million benefit in the fourth quarter from a retroactive 2021 tax credit in China. In aggregate, we anticipate building on our improved Q3 results on both the top and bottom lines. We expect to report adjusted earnings between $0.07 and $0.13 per share in the fourth quarter, despite the SRP strategic outage costs. Incremental margins will fully reflect our cost structure leverage as sales expand, largely in our HPMC segment. This growth should propel our fourth quarter earnings to 2021's high point and lead to further profit expansion in 2022. This guidance range translates into a year-end EBITDA exit rate that's more than three times greater than year-end 2020. In other words, in four quarters, we've more than tripled our earnings trajectory. As Bob said earlier, it's an exciting time to be at ATI. We are back in the black and see a steady climb out of the 2020 earnings drop. Before I hand the call back to Bob, I want to affirm the free cash flow guidance provided in early 2021. Excluding pension contributions, we expect to be free cash flow positive for the full year 2021. The team has worked hard to put us in a position to be successful, and they are committed. Work remains to close out the year, but I'm confident that we'll hit the mark. We demonstrated significant progress in the third quarter and fully expect to exit the year on a high note. With that, I will turn the call back over to Bob.
spk08: Thanks, Don. I'll close with four important points. Number one, ATI is focused on growth, with the cost structure we need for success. Number two, we're well positioned in key markets to achieve higher than GDP growth over the long term. Number three, transformation of our product mix is largely on track and will deliver significant benefits. And number four, our people, the ATI team, are the core of our competitive advantage. Together, we've accomplished much during an extended period of uncertainty, challenge, and change. I laugh a little when I hear financial experts and market pundits describe what we've collectively weathered as headwinds. That's a tad bit understated. The ATI team has persevered to do what needed to be done, working safely and responding with urgency, always with the long-term interests of the company and our shareholders in mind. Has it been easy? Nope. Have we occasionally had to first convince ourselves it was possible and that we could do it? Yes. But to be clear, we've done what needed to be done. I'm proud of what we've accomplished together. Most importantly, I thank our team for all they've done and the enthusiasm they have for everything that is yet to come. With a clear strategy and consistent, focused execution, we're accelerating our velocity to a very successful future. With that, I'll ask the operator to open the line for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone thumb. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We please ask that you limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will come from Richard Safran with Seaport Research Partners. Please go ahead.
spk10: Bob, Don, Scott, good morning. How are you? Good morning, Rich. So, I have two questions. The second one is a bit more strategic in nature, but first I just wanted to ask for a bit of a clarification at HP. It was interesting, sales driven by energy, aerospace with slack defense down. You noted and you spoke about, Bob, higher forgings offset by special materials. Now, correct me if I'm wrong, but materials are more of a long lead item. And if aerospace production is increasing, why would materials be declining? I take it just from your remarks that it's strictly due to destocking. And the other thing is, I think you said the issues would be resolved soon. So do I interpret that to mean you probably have a 4Q impact, but not likely 2022?
spk08: All right, Rich, I'll take that question. A couple of things. You're right. The forgings business, a great example of that was the LEAP 1B. I'll give you a little factoid there. So in Q3, we shipped more LEAP 1B forgings than in all of 2020, right? So when you think about that, what you're seeing is the accordion effect of the supply chain. So first thing we had to do is get the forgings to the customer. Now we're pulling through kind of some trapped inventory that was there, the billet, you know, that we supply or others supply. And then as that gets depleted here at the balance of the year, at the end of the year, which I think is a fair assumption that it'll be gone, you know, towards the end of the year. So by the time we get to 2022, we should see a better synchronization of of forgings and that longer lead time billet item. There's still some pockets out there, customer specific, alloy specific, depending on batches and pull rates, but we're definitely seeing it in the engine side where the demand and the order book, we're booking, if you wanted to order today, you'd be early Q2 probably for some of the longer, just for forgings and some of the billets. We're starting to see that demand build. We're obviously adjusting our crewing and capacity to accommodate it. I think I answered your question, which is it's the accordion effect of pulling inventory out. And, yes, we expect that supply chain that we're part of to kind of be back to kind of quarter demand levels and in sync with demand, you know, as we enter into 2022.
spk10: Okay. Thanks for that. Second one. Don, I want to know if you'd be willing to expand on some of your cash flow remarks, and not just 2022. but maybe if you would take a long-term view here. Could you discuss the major moving pieces that contribute to your cash flow? Not just, you know, like improvements in net income, you know, et cetera, but for example, you mentioned, you made a brief mention about cash pension, working capital trends, also DNA, CapEx, et cetera. And I'm using these as examples, but I'm looking for trends in the big pieces that really kind of drive your long-term cash flow outlook. And if you could just tell us how you're thinking about it.
spk07: I'm happy to do that. Of course, you said not to include earnings, but of course I have to, right? So the first major movement lever that's going to really drive the cash flow generation is going to be profitability. We've talked in the past, Rich, about the trajectory around our ability to generate increased profitability as our end markets recover. So that is a key. And, you know, we've walked it through the map, walked everybody through the map before. This is a business that 2019 volumes a mix that should generate in excess of $600 million of EBITDA. That's important. Then you think about the other key drivers around really cash flow. First thing that comes to mind after earnings is managed working capital. We are... myopically focused on achieving our sub-30% target. What does that mean? What that means is that we're going to work down our managed working capital levels to be below 30% of revenue. We've been there before. It should take us probably a couple years to get there from where we're at right now. We ended this last quarter north of 40%. We should end Q4, probably, certainly well below 40%, maybe mid-30s. And then as we think about achieving that 30% target over the next couple years, one way to think about it, Rich, is, you know, you take our exit rate out of Q4 this year, and then you think achieving sub-30% two years from now and draw a line, right? That'll be directionally how we think about continuing to work down our working capital investments. So that's important. Another key driver, of course, is CapEx. The way to think about CapEx, I'm going to give you a little bit of a bifurcated view of CapEx. One is to carve off, what is our maintenance CapEx view? How should you guys think about maintenance CapEx? It is a moving number. It's not a steady number from quarter to quarter. But one thing that you'd probably want to do in your models is think in terms of ATI has about $70 to $80 million a year. Now, use it as a placeholder, but $70 to $80 million a year in maintenance CapEx. Okay? Then you've got total CapEx once you add the growth CapEx to it. What's a way to think about growth CapEx? Well, I think 2020's early guidance, the pre-COVID guidance that we gave on total CapEx, is an interesting data point. Now, if you remember, we said that in 2020, before COVID hit, we were going to spend about $200 to $210 million on CapEx. And so obviously a lot of that was growth capex. We only ended up spending in the range of $150 million, something like that. So we had an amount of our capital that we deferred. So as you think about coming out of the trough and getting into the recovery, we will finish the projects that we had started before COVID hit. But then as you look past that, as you think about, okay, how should we think about what's ATI might spend on an all-in from CapEx. I think, number one, the maintenance CapEx target will give you a good sense of where to start. Number two, remember that whatever we're spending on growth CapEx is in support of LTAs and demand that we're seeing in the market from our customers. It'll be a sensible number, but certainly will be north of that maintenance target. So those are kind of the major targets that we think about when we – or the major levers, rather, that we think about when we think about pre-cash flow generation. Is that helpful?
spk10: Oh, yeah. Thank you.
spk02: And the next question will be from David Strauss with Barclays. Please go ahead.
spk00: Thanks. Good morning, guys. Good morning, David. This, you know, the Q4 adjusted EPS guidance, you know, let's just take the midpoint at 10 cents. Bob, is that a good way to kind of, you know, is that a good place to build off of as we think about next year, given all the moving pieces here with the exit from stainless and metal prices? And, you know, kind of how should we think about, you know, building off of that, you know, as we model out next year?
spk07: You know, this is Don. I'm going to take a run at the question, and Bob can mop up if it's needed. But, you know, yes, I think to think about our exit out of 2021 from an earnings standpoint, that, you know, that 7 to 13 cents of guidance is a helpful and interesting data point. But you want to consider a couple things. First of all, you know, we did note that we've got a planned strategic outage in Q4 in our SRP business. It's part and parcel to the transformation of that business to a specialty products business. And so we're going to have some out-of-pocket costs associated with that in Q4. Probably the right way to think about those out-of-pockets and under-absorption impacts, I'm guessing it's something in the $10 million range, just as a placeholder. And then we also noted that we've got a $7 million good guy on the tax line So if you're looking at EPS and projecting out EPS, that $7 million good guy on the tax line, you wouldn't want to extrapolate to all quarters in 2022 because it's a kind of once-in-a-year item that we pick up in Q4. But as you think about our trajectory, what I would encourage you to think about and consider as you think about our future earnings, our Q3 run rate, almost $3 billion of revenue and $320 million of adjusted EBITDA. It is a dramatic turnaround in this business, but it's not by accident. It's not by accident because a meaningful portion of this is because of the changes we're making in the transformation. It's also the cost takeouts that we executed throughout 2020 and efficiencies that we're continuing to capture. And in addition to that, Of course, we are expecting recovery in our key end markets. Aerospace, of course, is the star in those end markets from a profitability standpoint for us. So hopefully that helps you.
spk00: Yeah, it does. And I guess trying to put a finer point on the cash flow question, you're projecting, Don, this $600 million EBITDA gap. At what rate can you convert EBITDA into cash, including pension? Is it a 30% conversion? Is it a 40% conversion? What do you think about as the right conversion rate of EBITDA into free cash?
spk07: For that, I'd prefer to, instead of giving you just a blunt percentage, what I'd like to do is just, again, give you a little bit of data point. If you're starting with EBITDA... You want to remember that there's cash interest that you'd want to consider on that. Our interest expense runs in the range of about $100 million right now annually. So you want to consider that. We are tax-shielded, so taxes shouldn't have a big impact on what you're projecting. And then the other important part of it is working capital, right? So as you're modeling it, you want to consider our target. We wholly and completely believe we can get back to where we've already been. That doesn't sound very heroic when you say it like that. We were at 30% before. And so we've got some work to do that structurally and consistently, but we believe we can get there. And then the big question that you're going to want to strike an assumption on is how much growth capex is in a given period. You already know our maintenance capex because I just shared that. So if you're thinking about 2022, for example, what you can – What I would do is I'd go back to the data point that we gave you at the beginning of 2020 before COVID raised its head, and that was $200 million of total capex. So I think, you know, with all those data points, you probably can take a view in terms of how to think about conversion.
spk00: Okay, and sorry, last one. Next year, including whatever you do from a pension perspective, Would you expect free cash flow to be positive, so including pension, not excluding pension?
spk07: Well, that is certainly our target. Positive free cash flow is always our target, right? We understand the value creation that comes with positive cash generation. So one thing, another data point that might be helpful to you, by the way, is, and you had asked and I missed it, how to think about pension contributions. So we're on this pension glide path, and I can't tell you how excited we are to see the potential to be out of the pension business. And we expect that, you know, we contributed $67 million to our pension plan in 2021. Our minimum required is more like 10 or 12. What you should expect as you're thinking about free cash flow generation and conversion is that we're probably you know, continue to make contributions in the 50 to 70 million range for the next two or three years. But it's all going to be driven by this ultimate objective of driving our net pension obligations to a de minimis level and making them irrelevant to you guys and to ourselves. And we're on that glide path. So, you know, very, very positive.
spk02: Thank you. And the next question will come from Phil Gibbs from KeyBank Capital Markets. Please go ahead.
spk04: Hey, good morning. Hey, Phil. So the way that we're essentially looking at the fourth quarter with all the moving pieces here, and I think you hit on with David, and I don't want to get expectations too far out of balance, is that EBITDA plus or minus should be reasonably similar to 3Q because you got HPMC moving up and you have ANS moving down largely on the outage. Is that the way to think about it?
spk07: I think that's good, Matt.
spk04: And then on your free cash flow being modestly positive, break even a modestly positive for the year excluding pension contributions, is that pension contribution number 67 million this year?
spk07: The first part of your question, Phil, broke up. Can you repeat the first?
spk04: Yeah, I was saying in your free cash flow guide for the year of breakeven to modestly positive.
spk07: Yes, sir.
spk04: Excluding pension contributions. Is the pension contribution number 67 million? Is that the number?
spk07: Yeah, we're not anticipating making any additional pension contributions in 2021.
spk04: But that's the right number to be using, 67? Okay.
spk07: That's right. Yep, you got it, Phil.
spk04: And then in your filings recently, you've been providing backlog for the business. What should we be thinking about in terms of the backlog at the end of this quarter versus the last quarter?
spk07: I think what you would expect for our SRP business, I mentioned that we built our managed working capital for SRP. We were still working through the strike-related backlog. You would expect that we will be through that backlog by the end of this year. Beyond that, I would say backlog's generally in the same range at the end of Q4 as we saw at the end of Q3, just generally. What would you add to that, Bob?
spk08: Yeah, I think that's right. I think, Phil, the way we're looking at it is kind of where are our lead times going and what's going on in the industry. So what we see for our specialty materials business, is that lead times through the pandemic were less than 90 days. Now they're moving out to closer to Q2, so 120, 150, 180 days. So we're getting to the point where we're starting to see the orders actually aligned with this demand ramp. So from that backlog perspective, I think that the lead times are the best indication that HPMC is really seeing the increase in the order book.
spk04: Okay. And then last one, just from a housekeeping perspective, on debt reduction, the refinancing didn't fully gel in 3Q in terms of the actual balance sheet. So how much debt, including accrued interest and other things, should we expect to be coming out of Q4 as those bonds are retired? Thank you.
spk07: So the headline numbers on that would be we had $500 million of PAR outstanding at the end of Q3 that we took out. We also paid about a $70 million premium to execute that redemption. Both of those events obviously happened in mid-October. And then from an interest standpoint, there's about $6 million of interest that we ended up paying related to that redemption.
spk02: And thank you. The next question will come from Seth Seifman with JP Morgan. Please go ahead.
spk03: Great. Thanks very much, and good morning. Good morning, Seth. I just wanted to ask first about, you know, HPMC and the, you know, the forging ramp that's ahead. Obviously, we've heard in a lot of different places about, you know, some of the challenges in ramping. Um, it's historically been a challenge, uh, in, in aerospace forging. I guess, um, you know, how, how prepared do you feel for what they're in Q4 and, uh, you know, what kind of work do you have to do for 2022? Yeah.
spk08: So I think we're, uh, in good shape in our forging business for Q4. Uh, you know, uh, we actually supply a lot of the billet that goes into our forging. So we feel we're in pretty good shape there. We do have, you know, isothermal forging and heat treating capacity that we slowed down during the pandemic that's coming and getting qualified here. So we feel really good going into 2022, 2023 with the capacity that we're going to have in place. And the things we're working hardest on at the moment are getting our workforce and our labor force back. And we have a a pool of prior employees or people that got laid off as we went in. We're in the process of calling them back in the Q4. Our headcount issues, probably we're going to end up increasing our headcount as we go into next year by five, six percent from where we are today, mostly on the direct labor side. That's where we're spending most of our time. It's the hiring and then followed by the requisite training to get them in the right spot. You know, we recognize the importance of getting our staffing in place. I would say our HR team is fully engaged in making sure we get people back and, you know, our team's done a great job to avoid a lot of the COVID related disruptions, but we obviously keep our eye on that too. So I think the number one issue for us is making sure our crewing's in place as we go into 2022.
spk03: Okay, great, great. And then Don, I think you mentioned that if the year ended today, the pension liability will have shrunk from year end. Can you tell us what that would be if the year ended today with today's discount rates and returns and the contributions that you've made?
spk07: You know, it's a fair question, but I'm actually not going to fully answer it, largely because there's a lot of science, a lot of work that has to be done around that. But what I can say is that we love the direction that the key movers are going. And just for some context, when you look at the discount rate and the volatility around discount rates, for every 50 basis point move in discount rates, it has $150 million impact on the liability. And so if we were to see just a 50 basis point move in discount rates in our favor, then we would see $150 million good guy hit our balance sheet. And I don't want to share with you how much have they moved so far this year, because then that kind of, I think, takes us into a level of detail I'm not prepared to talk about. But they're indicators of good guys, and we're certainly managing with the expectation that we'll continue to have very good returns on our investments. I think our advisors and our team have done a good job on that. And then there's not a whole lot we can do about discount rates. but we can at least cross our fingers and hope they hold or maybe even go even more in our direction.
spk03: Okay, great. Thank you very much. You bet.
spk02: And the next question will come from Gotham Kona from Cowan. Please go ahead.
spk11: Hey, thanks, guys. Hey, Gotham. Some good results.
spk08: Yeah, thanks.
spk11: Good morning. Yeah, hey, so a couple questions. First, what are you guys seeing with respect to titanium demand in 2022, given all the noise around the 787 inventory overhang at Boeing and then the 737 ramp and how that plays out? I'm just curious, do you guys have pretty good visibility from the Boeing supply chain on what your titanium shipments will be next year? Are they going to be up or down year over year relative to 2021?
spk08: Yeah, good question. And we probably have more visibility than we'd like at times as to what's going on with titanium. So I'm going to limit the titanium question to airframes specifically. And then if you want to follow up, we'll go further. So I would say that 2021 is pretty much the low point, but 2022 will probably be flat to that. on the titanium, I'll call it the mill product side that goes into airframe from the big B perspective. One of the benefits we have that offset some of that is a growing share position with the European OEM with our new long-term agreement there. So we should actually see our shipments be flat up in 2022 for titanium mill products, but I think the industry you know, we'll see, you know, flat through 2022. And it's really going to take, as you suggested, you know, the 787 is going to have to come back to have some level of confidence. And certainly the 737 needs to get to 31. Although from a titanium standpoint, it's really the 787 decision that I think we're all waiting for. Now, we've taken a lot of, you know, our in-process inventory down, but there's a lot still in the pipeline. Does that help? Okay.
spk11: Absolutely. It's very helpful. And then to expand that on the engine side, titanium, and maybe also just on industrial tie, do you guys have a view on 22 with respect to both of those?
spk08: I think on the engine side, we see it going up. And we see it going up for a couple of reasons. One is obviously the planes that are flying are the next generation engines for sure. Obviously, that's a big nickel part for us. In the industrial titanium area, we actually see very strong global demand there, which has been positive. We don't talk much about that. Most of the questions we get are aerospace related, but I would say industrial titanium will be up, and I think on the engines, we should see similar kind of growth rates as we're seeing in the forgings and billet business. Not stellar in titanium because of the airframe problem, but other than that, it should be good.
spk11: And the last one, before I turn it over, just, you know, there's obviously Special Metals Corp. as a strike. I don't know if there's any – are you seeing any share gains not – kind of unrelated to the GE contract that you signed that obviously conferred more share, but just because of competitor – challenges due to whatever, you know, whether it be strikes or supply chain or what have you? Are you seeing kind of an improvement in emergent demand in any of the end markets? And if so, if you could just kind of how long might that last? What's your expectation there?
spk08: All right. You know, I always have to make sure my attorneys are happy when I speak on a call like this, but I'll answer your question. The answer is yes. We are seeing opportunities emerging from other competitors' supply disruptions. And I would say it's hard to quantify how long any of these labor disruptions or these supply disruptions will last, but we are seeing it, and it's good business for us. And then about half of what we get in emergent gets converted to LTAs. So the first calls you get are transactional. calls and then the next opportunities are certainly, you know, converting those to LTAs, which is our goal. So I think it's a combination of nickel and titanium, you know, opportunities across the board. But is it going to move the needle significantly for the company? It's probably going to be in our specialty raw products business is where we're seeing a lot of opportunities, a little bit in specialty materials. It's been positive for us. We're just glad we resolved our issues and have moved on.
spk02: And thank you. The next question will be from Josh Sullivan with the Benchmark Company. Please go ahead.
spk09: Say good morning. Good morning, Josh. Just to follow up on the titanium theme, your raw titanium supply agreements, have you seen any impact from the magnesium shortages? Or as you just noted, are current inventories in demand for 22 just not a huge pull on it right now anyways?
spk08: Yeah, I think the simple answer to the question on mag is nope. We haven't seen any major issues yet. We watch it because it's an indicative issue of all other kind of supply chain issues that are out there, but not yet.
spk09: And then on the commercial space project, the discrete one that you mentioned, is this an existing customer that's switching material, or is this a new customer?
spk08: Let's see. That's a good question. It's a long-term customer that's been in the space business. They're supplying, obviously, the commercial space activity. I would say it's kind of a bulk buy, right? They're kind of buying ahead, and I think that's prudent. because the capacity they want will probably get sucked up by the increasing commercial aerospace recovery. So it's an exaggerated buy for a multi-year buy is probably what I would say. And so we're glad to have it. It leverages our material science and advanced process technologies pretty well. So I think that answered your question. Was that close enough, Josh, to answer your question?
spk09: Yes. Yeah. Thank you. Thanks for your time.
spk02: The next question will be from Paritosh Misra from Barenburg. Please go ahead.
spk05: Hey, good morning, Bob, Don, and Scott. Just, I guess, a question on 787, given the issues they had in Q3. Do you think your shipments for that program were in line with five-per-month production, or you were running lower than that during Q3?
spk08: Good question. I think they were... still a ways away from being in line with five. I think, you know, we're probably lower than that. I mean, the situation, I think, on titanium, you know, with COVID and various other things kind of got out of whack. You know, I think it's probably, I don't know if it's the worst the industry's ever seen, but it's pretty significant in terms of working that through. So I think, you know, what the difference between, you know, double digit 787 and five was the biggest gap we were running into. I think it's probably going to extend the destocking. What we thought would probably be by third quarter is probably going to extend it through the balance of the year, and it's really the destocking issue. I think there's a desire by that particular OEM to smooth out the solution so people can do it as economically as possible, and we're seeing that to a degree. I think the answer to your question is no, we hadn't gotten just to five. We were still kind of working the destocking issue. So it's just an extension of the titanium recovery from mid-year to probably the end of the year to catch up.
spk05: Got it. Got it. And then how should we think about your specialty role product sales in the next two quarters as you exit some commodity business? Should it be down, say, about $100 million sequentially in Q4 because you idled, what, $400 million or $500 million of capacity, or some of that was already captured in your Q3 results?
spk08: Yeah, I think it's, I would say, I don't see it going down. I think the issue that we're dealing with is we're going to end up with some margin compression because of the the work we're doing with the outages to get prepared or finish off our transformation, which is actually ongoing now. But I think, in general, we'll probably see 10% growth in the top line. And why Don was signaling the outages issue is that we'll probably have this $10 million issue that we're dealing with for the maintenance issue. Is that fair, Don?
spk07: Yeah, right. And then the outage, of course, was related to SRP. But it'll be a headwind relative to our otherwise performance for the overall business.
spk05: I see. Okay, thanks. And then maybe a last one. Just in terms of 737 Max ramp up, is your exposure to that platform similar to your exposure to 320 Neo or Max is bigger or much bigger than that?
spk08: Let's see. Good. So I think it depends on a couple of things. We like every airplane ever built that flies today, period. So we're on every program. We love them all. I would say when you look at the A320 series, there's clearly engine preferences that people have, and some of them don't always pick the LEAP, but they might go with the gear turbofan. So I think that's the biggest differential between them. is 100% LEAP on one program and probably 60% LEAP plus geared turbofan on the 320. But we're getting to the point where we're happy when any airplane gets built anywhere in the world. So our material is there. But maybe a slight advantage to LEAP powered airplanes versus geared turbofan powered. airplanes. But we love them. We love them all.
spk05: Got it. Got it. That's very useful. Thanks, guys.
spk02: The next question will be from Matthew Fields from Bank of America. Merrill Lynch, please go ahead.
spk01: Hey, everyone. I don't want to beat the working capital horse to death here, but your receivables kind of jumped up a lot this particular quarter. Is that, you know, kind of initial deposits on the LEAP engines that's going to reverse when you get cash in the door. Is that something else? Can you just talk about kind of why that accounts receivable was so dramatically higher in the third quarter?
spk07: Sure. Of course, we had the growth in the revenue. But I also mentioned that for SRP. SRP, of course, was coming out of the strike and the recovery in Q3. And so they were ramping throughout Q3. a lot of their sales were back-end loaded in the quarter. And because of that, that drove the AR balance up at quarter end. That will, of course, be collected in Q4, and so we should see that release.
spk01: Okay. And that's part of the working capital flip in the fourth quarter that will get you to your cash flow guidance.
spk07: That's a great interpretation. And we'll see a similar good guy in the release of inventory for SRP. similar in mechanic or direction, not similar in magnitude.
spk01: Okay, great. That's helpful. And then, you know, kind of next up, you chopped a lot of wood on the balance sheet, getting rid of that near-term maturity. Can you talk a little bit about the next kind of couple steps of the deleveraging plan? You mentioned, you know, 50 to 70 million pension contributions for the next few years. After that, you know, is it kind of paying down the 22 converts at maturity or hopefully with equity from Hopefully from the credit side, I know there's other parties on the call, but what are the kind of next steps in your mind towards kind of deleveraging the balance sheet?
spk07: Sure. Well, step one, first and foremost, maximize our earnings and the drop through the cash conversion, right? So when you get past that, what are we going to do with the cash? Well, we think in terms of we know we're going to delever. in the normal course because of the ramp that's already happening in our profitability, right? From a net debt ratio standpoint, we took our net debt to EBITDA ratio down 130 basis points in just the last quarter. That is going to continue to drive down that metric. So we have that benefit. Then when you talk about the maturity profile, you know, you're right. Our Treasury team did a phenomenal job with this refinancing, pushing maturities out and really solidifying a pretty strong maturity schedule. The nearest term maturities we have, two maturities that are in the more near term are convertible debt, right? So the likelihood of both of those converting is very, very high. The nearest term on that is about $84 million and that hits us in 2022. Again, we expect it will convert. If for some reason it didn't convert, we're in a healthy financial position to deal with it. But believe me, I'm expecting it's going to convert. And, you know, beyond that, other actions to take. What we would love to do is not just rely on the net debt ratio. It's great to just, you know, work it down because we're more profitable. But we've got $1.6 billion of debt. We want to pay it off. So we'll, over time, attack these maturities with cash and pay those down at the appropriate times. Of course, you also need to make sure that you're not blunting your growth opportunities by over-allocating to reduce your debt positions. So we'll be balanced in that. Then as far as other de-levering, the pension. I mean, we've already said we're on a glide path. I shared, as you had mentioned, what we're going to do around contributions. We think that we're on a very natural plan to see that delevering happen without any extraordinary efforts on our part. You know, maybe another, just a question, answering a question you didn't necessarily ask yet, but, you know, as we think about our leverage levels, I'd like to see our balance sheet, you know, levered at below two times net debt. And we are definitely on that glide path to work down there over, you know, not too far distant future, just with what's happening in our business in the normal course.
spk02: Thank you, sir. And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scott Minder for any closing remarks.
spk06: Thanks to everyone who's joined us today. We appreciate your continued interest in ATI. This concludes our third quarter 2021 earnings call.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer