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spk02: Good day and welcome to ATI announces fourth quarter 2021 results conference call. All participants will be in a listen only mode. Should you need assistance, please signal 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. And 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 Mr. Scott Mender, Vice President, Treasurer, and Investor Relations. Please go ahead, sir.
spk05: Thank you. Good morning and welcome to ATI's fourth 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, Executive Vice President and CFO. Bob and Don will focus on our fourth quarter and full year 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.
spk12: Thanks, Scott. Good morning and thanks for joining us. Our Q4 performance exceeded expectations. We're excited to share what 2022 will bring. No doubt 2021 was a challenging and rewarding year, all rolled into one. While the global pandemic's ebbs and flows continued to impact our markets, we accomplished a lot. Performance accelerated across the year. We exited 2021 on a high note. earning our highest quarterly revenues and margins of the year in the fourth quarter. This was largely due to the solid foundation our teams laid in 2020 and early 2021. On an adjusted basis, we earned 25 cents per share, building on our return to profitability in the third quarter and well ahead of expectations. For the full year, 2021 EBITDA margins were 10.4%, only 30 basis points below full year 2019. And that's despite 32% lower revenues. It's a strong statement of what we've accomplished, transforming our business to emerge stronger from the downturn. The team executed for our customers at the highest level while maintaining lean cost structures. This gives us confidence that continued strong financial performance is ahead. Don will share more details about our financial performance in a few minutes, but I wanted to give you the great news up front. Let's start with the progress we made on our strategic initiatives in the quarter. First, we've been on a glide path to fully fund our defined benefit pension obligations. This will ultimately eliminate annual cash contributions and expenses. Our pace of progress significantly accelerated in 2021. We ended the year at an 84% funded status. up from 75% at year-end 2020. We took further action to reduce plan participation through another third-party annuitization. We're working from every angle to eliminate this financial obligation. The end of our pension saga is near. Next, we've been laser focused on generating cash and maintaining a healthy level of total liquidity throughout the pandemic. In the face of significant uncertainty, a year ago, we shared our 2021 goal to achieve positive free cash flow, excluding pension contributions. We achieved that goal. In the fourth quarter, we generated over $230 million of free cash flow. As a result, we ended the year with over $1 billion in cash and liquidity. Third, Earlier this morning, we announced that our board of directors authorized the repurchase of up to $150 million of ATI stock. With our strong cash and liquidity position and our current stock price, we strongly believe that it's the right time and the right method to return cash to shareholders. While Scott might kick me under the table, I'll take this opportunity to advertise our upcoming Investor Day on February 17th where we'll share our long-term top line, bottom line, and cash generation targets, as well as more details on our capital allocation strategy. I hope that you'll all join us at that virtual event. All right, back to the script. Our progress on our strategic initiatives. Lastly, we continue to make progress on the transformation of our specialty world products business, what we call SRPs. We updated you on our targets last quarter, and we're on track to complete the footprint consolidation and exit standard stainless sheet product sales by mid-year 2022. We've made significant progress toward this goal in two ways. First, product mix enrichment. In the fourth quarter, 96% of SRP sales were high value products. That's a big difference from a few years ago, and the product mix and margin benefits from this effort are expanding. Standard stainless inventory continues to dwindle. We intend to deliver the remaining amount over the next several months. And to be clear, we're no longer melting or producing new standard stainless sheet products. Second, footprint consolidation. Since year end, we've sold our facility in Pico Rivera, California. When we announced the SRP transformation just 14 months ago, we said we would reduce the footprint by five facilities. With this sale, we've completed three of those five. We'll complete the remainder of the consolidation in the next few months. In a moment done, we'll share the AA&S segment financials where the SRP business unit accounts for a majority of the revenues. Spoiler alert, they're much improved and poised to get even better. So in short, we have a clear strategy to become an aerospace and defense leader. In 2021, and especially in the fourth quarter, Our progress toward achieving our goals has been substantial. Now let's talk about our recent performance by end market, as well as where we're headed. I'll start with our core market jet engines. The industry's long predicted recovery has begun in earnest. The positive impacts are expanding within ATI. Our forgings growth began early in 2021. On the material side, there'd been a lag as customers work through excess inventory. That rapidly changed in Q4. Demand for jet engine materials snapped back to support increasing OEM build rates. Forging customers were low on inventory. Here's an industry stat that helps put this expanding production ramp into perspective. The industry's jet engine orders in November 2021 were the highest monthly total since June of 2019. And that's almost exclusively for narrowbody engines this time around as Wide-body production rates are still low. One more stat, this time ATI-focused. Our 2021 isothermal forging sales nearly doubled year over year, largely driven by our share gains. What's especially astounding about this accomplishment? We achieved this level despite producing LEAP-1B parts only in the last four months of the year and with low wide-body demand. That's a clear sign that good news is on the horizon for both the aerospace industry and ATI. Looking ahead, we expect continued strong forgings and materials growth as our customers increase narrow-body production rates in 2022 and 2023. There's a roadmap for Boeing 737 MAX to return to service in China. Global domestic air travel rates continue to improve, albeit with a short-term negative blip due to the Omicron variant. Allow me a moment to congratulate the team at our ISO Forging Center of Excellence in Wisconsin. Our fourth ISO press, commissioned in 2021, has achieved all necessary customer qualifications. We'll be putting that tremendous press to good use for our customers going forward. The team worked hard to achieve this milestone. We celebrate their efforts and look forward to the results that will lead to a strong return on investment for that new asset. Thank you to our outstanding team. Moving to airframes, where market demand remains subdued, international travel rates are still well below 2019 levels through the effects from the global pandemic and ever-changing travel restrictions country by country. On a positive note, we showed sequential revenue growth due to a large discrete commercial space order that we expect to complete in Q1 2022. We believe the airframe market is at, or at least very near, the low point. We expect essentially flat underlying demand in 2022. For ATI, we have a few modest tailwinds that should benefit our 2022 performance. First, accelerating growth from the European airframe OEM that began in 2021. And second, we'll see new business from a producer of an electric autonomous aircraft taxing technology for use with narrow body airplanes. In the defense market, sales in comparison to prior periods were mixed. This was largely due to the timing of long lead time orders in our naval nuclear market and the sale of our flow form product line in mid-2021. To help normalize the impact from quarterly timing variations, full year 2021 defense sales across all sectors were up a little more than 1%. If you remove the impact from the flow form sale, revenues improved by nearly 5%. Our full year growth was largely driven by increased military jet engine products, and the naval nuclear materials, which more than offset the temporary project gap in ground vehicle armor. In 2022, we expect continued growth. The current budgets for the Departments of Defense and Energy provide funding for programs of ATI's key customers. This anticipated expansion will be led by a recovery in vehicle armor as new Abrams tanks are produced and the UK ramps up its Ajax program. Continued strong funding for hypersonics where ATI plays an increasingly expansive role, will provide more long-term growth opportunities. Now let's talk about ATI's other markets, where we support critical applications that leverage our aerospace and defense capabilities and capacities. First up is energy, where oil and gas markets generally improve and specialty energy markets broadly decline. Oil and gas sales were driven by the final shipment of nickel alloy materials for a large pipeline project off the coast of Brazil. We also saw increased drilling activity associated with higher oil prices and strong end-user demand. While we anticipate oil and gas sales to be lower in the first quarter, largely due to the completion of the discrete fourth quarter pipeline project, we expect strong underlying market fundamentals to continue. We anticipate more offshore pipeline projects to be sourced in 2022, and ATI will remain competitive as nickel alloy markets tighten. Specialty energy markets declined versus both prior periods for two primary reasons. First, after robust Q3 results, Asian land-based gas turbine sales were lower. Second, reduced pollution control demand in India resulting from pandemic-induced project delays. In 2022, we anticipate pollution control projects to restart in India and underlying land-based gas turbine demand to remain strong in Asia, improving from Q4 levels. Lastly, the electronics and medical markets are smaller for us, but we saw demand growth continue. Electronic sales grew significantly for our hafnium-based materials, coupled with ongoing solid demand within our Asian precision rolled strip business. Looking ahead, we expect electronics demand to remain strong in 2022. Medical market sales rebounded sharply from prior year. Hospitals reopened for elective surgeries. They also resumed installation of new and maintenance of existing MRI machines. The near-term outlook for medical markets is being modestly impacted by the current Omicron surge, reducing hospital capacity for non-COVID related care. That said, underlying medical equipment demand remains solid. Looking forward to 2022 and what ATI can deliver for our shareholders, customers, and dedicated employees. Our markets are recovering well. By concentrating on the things under our control in 2020 and 2021, we've positioned ourselves to win. We're a leaner company, more focused on aerospace and defense, with amazing capabilities and a winning team. I bet you can sense my enthusiasm and confidence. If you like what you hear today and want to hear more, come back on February 17th, our Virtual Investor Day, for a more complete picture of our long-term plans and goals. With that, I'll turn it over to Don to give you more detail on our Q4 and full-year financial results and our 2022 outlook.
spk01: Don? Thanks, Bob. I'll echo Bob's sentiments on our strong finish to 2021. Our efforts over the past two years are paying off, and we're seizing market momentum as we accelerate into 2022. You can see it in our earnings, you can see it in our balance sheet, and you'll see it in our 2022 guidance. It's clear that we are executing. Before we look ahead, let's talk about what's gotten us to this point, starting with our fourth quarter results. Revenues were $765 million up 6% sequentially and 16% year-over-year. Earnings increased even more rapidly thanks to mixed enrichment and cost structure improvements. We generated adjusted EBITDA of $95 million, up nearly 20% versus Q3, and up about 300% year-over-year. This translated into adjusted fourth quarter EPS of 25 cents. This included a $0.03 benefit from a favorable tax item related to our Asian precision rolled strip business. On a reported basis, earnings per share was a loss of $0.23, reflecting on debt extinguishment charge and small restructuring adjustments. I'll provide some additional fourth quarter color, starting with our High Performance Materials and Components segment, or HPMC. Fourth quarter segment revenues increased by 5% versus the third quarter and by 41% versus the prior year. These gains illustrate the impact of the ongoing commercial aerospace recovery, which began in early 2021 with forgings and expanded to include materials in the fourth quarter. HPMC EBITDA was $61 million in Q4, which was significantly better than both prior periods. Robust year-over-year incremental margins of 60% were driven by improved product mix and higher volumes spread over our leaner cost structures. The segment also benefited from two additional items in the fourth quarter. First, a roughly $5 million benefit related to the U.S. government's Aviation Manufacturing Jobs Protection Program, and second, about $4 million from a year-end customer credit. In Advanced Alloys and Solutions, or AANS, Solid customer demand continued across the segment's business units and end markets. Fourth quarter revenue grew by about 5% against both the prior quarter and prior year. We generated nearly $50 million of segment EBITDA in Q4, up substantially versus prior year. This included benefits from higher raw material prices. As predicted, AANS EBITDA was lower compared to the third quarter. This was largely due to the impact of a planned shutdown at our Vandergrift facility to upgrade a specialty finishing line. I'll share a couple of data points that demonstrate the benefit of our specialty rolled products transformation. First, with the exit from standard stainless sheet production, we're seeing a significant product mix enrichment. Bob mentioned that high value products made up 96% of our fourth quarter SRP sales. Second, we delivered year-over-year incremental margins of more than 100%. How does that happen? Mixed improvements, structural cost savings, and raw material pricing. The SRP team has done a great job taking decisive actions and executing well. We'll continue to build on this foundation for years to come. Before I move to the balance sheet, I'll offer a few comments related to our 2021 results and how they position us for growth in 2022. First, revenues increased steadily across the year after considering the SRP strike impacts in Q2 and Q3. This reflects a growing economic recovery, particularly in commercial aerospace, our largest end market. Our fourth quarter revenue run rate puts us north of $3 billion annually. Similarly, Adjusted EBITDA expanded across the year and ended on a high note at $95 million in the fourth quarter. Adjusted EBITDA margins also expanded, as expected. In Q3, we eclipsed our 2019 annual EBITDA margins of 10.7%. Q4 brought another step change in those margins. Q4 margins were 12.4%, 170 basis points higher than 2019. And keep in mind, those margins were delivered at a revenue run rate roughly $1 billion lower than 2019 sales. Turning to the balance sheet and cash flows, we ended 2021 strong. The team reduced inventory and overall managed working capital across the business. This, along with capital spending discipline, pushed us to our goal of positive free cash flow for the year, excluding pension contributions. We generated over $230 million of free cash flow in the fourth quarter and ended 2021 with well over $1 billion of cash and available liquidity. Building on Bob's Investor Day sneak peek, our improved balance sheet will be the catalyst for growth, deleveraging, and improving shareholder returns. Now pension. We have talked many times about our pension glide path. This is what we meant. We ended 2021 with a net pension obligation of $396 million, a $275 million or 41% drop from where we started 2021. Plan funded status increased to 84%, a 900 basis point increase from the funded status at the beginning of 2021. How did we accomplish the improvement so quickly? by executing a solid investment strategy that enhanced strong market returns, modest help from market interest rates, and $67 million in plan contributions. Our consistent approach to reducing plan participation is also paying off. These favorable items more than offset unfavorable changes in actuarial assumptions. We can see the light at the end of the pension tunnel. I'll share the 2022 financial benefits from this improvement in a few moments. As Bob mentioned earlier, we received board authorization to repurchase up to $150 million of our stock. This will be a great tool for increasing shareholder value as we work to offset potential dilution from our convertible note maturities in July of 2022 and in 2025. Lastly, As we've rapidly increased EBITDA over the past 12 months, our leverage metrics have improved quickly. In the fourth quarter alone, we improved our net debt to adjust the EBITDA ratio by 230 basis points from 6.3 to four times. As our trailing 12 month earnings continue to improve, this metric should decline steadily toward our target of two times. Our confidence is growing in the aerospace and broader market recoveries. in part due to our strong market positions and increasing customer demand. The added clarity is encouraging. As a result, we believe that we can provide full-year 2022 earnings and free cash flow guidance in addition to the coming quarter's EPS. Let's start with our outlook for the first quarter of 2022. We anticipate higher sequential earnings in our AA&S segment from increased volumes, partially offset by lower expected raw material benefits. This growth will be partially tempered by the impact from the Lunar New Year holiday on our Asian precision rolled strip business. In the HPMC segment, earnings are likely to be flat to modestly lower when compared to the fourth quarter results that included strong product mix related to the commercial aerospace and commercial space markets. The customer credit of $4 million booked in Q4 is also not expected to repeat in Q1. Beyond individual segment drivers, a few additional items are likely to temper our first quarter results. First, scrap input material costs, especially for nickel, are rising to near prime levels. This is due in large part to the aerospace production ramp and improving overall market demand levels. As we continue to modernize our MELT technologies, an increasing majority of our inputs come from scrap sources. We have seen marginally higher absentee rates early in Q1 due to the Omicron virus. The good news is that the absentee rates appear headed back to normal, and the Q1 financial impact will be modest. Next, corporate costs should increase due to higher base and incentive compensation levels, along with elevated travel and business transformation expenses. In aggregate, we expect adjusted earnings to be in the range of 18 to 26 cents per diluted share, including an ongoing benefit from the aviation manufacturing jobs program. The midpoint of that range puts us several cents higher than our Q4 2021 adjusted EPS after taking into account the unique items I mentioned earlier. Our local leadership teams are doing a great job keeping their people safe and keeping our operations going while following quarantine protocols to mitigate exposures. To date, we haven't had significant production disruptions related to our staffing levels or our supply chains. It's a battle we're fighting and winning every day. And I thank our team for their hard work. For the full year, I'll start by giving you my thoughts on the outlook for a handful of discrete items. We expect to achieve additional structural cost savings in 2022 of roughly $15 to $20 million related to our SRP business transformation. These savings are connected to the remaining footprint consolidation actions expected to be complete by mid-2022. Similar to prior year, we anticipate paying between 15 and $20 million in cash taxes in 2022. These relate largely to foreign jurisdictions as we don't expect to be a US cash taxpayer for the next several years. As a result of the significant increase in our pension funded status at the close of 2021, retirement benefit expense should decrease by about $5 million from 2021 levels. Finally, anticipate interest expense to be about $92 million, a decrease of around $5 million driven by our 2021 debt actions. On the cash flow side, we anticipate no required pension contributions into our U.S. defined benefit plans. That said, as part of our balanced capital allocation strategy, we expect to make roughly $50 million in voluntary contributions as we target increased plan funding status. We expect between $210 and $225 million in capital spending, similar to our initial 2020 estimates. The increase reflects funding growth projects required to meet future production requirements, including 2021 jet engine related share gains. Lastly, We anticipate managed working capital levels improving as a percent of sales as part of our ongoing efficiency efforts. However, due to the expected production ramp to support growing markets, it's likely that managed working capital dollars will increase modestly in 2022. So where does that position us for the year? We anticipate a return to full year profitability in 2022 with earnings per diluted share of $0.85 to $1.05, excluding the impact of any stock repurchases. Let me put a few assumptions and caveats around our 2022 guidance. The guidance assumes increasing production rates on narrow body aircraft at both large global OEM producers. We also assume neither our first quarter or full year outlook include impacts from significant new disruptions related to COVID, or geopolitical tensions around the globe. We're focused on what we can control and proactively deploying mitigation plans around the things that are outside of our control. Looking at 2022 free cash flow, we anticipate generating at least $60 million. Our 2022 guidance excludes any voluntary pension contributions. Like any decision to invest in growth or reduce leverage, Voluntary pension contributions are a capital allocation decision. We expect to have the luxury of funding growth and reducing pension obligations in 2022 while maintaining the flexibility to pivot as needed to achieve our objectives. I'll conclude by saying that 2021 was a strong year of recovery for ATI. Our performance showcased our efforts to transform into a premier aerospace and defense supplier. We ended the year at a high point, and as you can see from our guidance, we expect to go up from there. We're poised for success and confident in our ability to execute. I invite you to join us for our February 17th Virtual Investor Day to hear our vision for the future of ATI. We're on our way to what promises to be an exciting and profitable journey. Now I'll turn the call back over to Bob. Thanks, Don.
spk12: We concluded 2021 with strong performance. It was a great quarter. It didn't just happen. We worked hard to get here with a great team executing fully. That gives us a running start as we begin 2022 with strong momentum. Last quarter, I told you we're pivoting to growth. Now we're firmly on that trajectory. We're seeing strong growth in our largest end market, jet engines, along with several of our smaller markets. Our market shares have increased. We've got the tools to help offset inflation through pricing and productivity, and we're executing at a high level to fulfill our customers' needs on a timely basis. Our balance sheet is strong with ample cash and liquidity. This enables us to fund our strategic growth plans as part of a balanced capital allocation approach. Our markets are recovering well, and we're positioned to win. We've got amazing capabilities and a winning team. And we can't wait to show you what we can achieve. Operator, we're ready for the first question.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Richard Safran with Seaport Global. Please go ahead.
spk11: Thanks. Bob, Don, Scott, good morning. How are you? Good morning, Rich. Interesting quarter. The first question I'd like to ask is on the Q4 to Q1 earnings run rate and what that implies or says about 22. Now, Don, I may have missed this with your opening remarks about scrap and but could you discuss more about the quarterly cadence for 2022 and why you're expecting earnings to be much lower in Q1 versus what we saw in Q4? Could you just go over the dynamics there?
spk01: Sure. Let me first give you some context around the 25 cent delivery in Q4, and then I'll kind of walk you through how we're thinking about Q1 and then the more fulsome 2022. So first, 25 cents in Q4, fantastic outcome on all measures in our business. And we're very, very proud of that delivery. But as you look at our 25 cents in Q4, there are a couple items that I highlighted in the earlier discussion that are certainly unique to Q4. They're kind of normal course in a business, but we wouldn't expect to repeat in Q1. And so as you start with a 25 cents per share in Q4, one item that you'd want to pull out is the tax benefit related to our Asian precision rolled strip business. That was about three cents that we recorded in Q4. It's kind of a normal course thing that happens, but more typically done in the fourth quarter as we receive notification from the taxing authority. So that won't repeat in Q1. There's also the customer credit that I noted. And that would represent also, coincidentally, another $0.03 per share. And that wouldn't be something that we would expect to repeat in Q1. So you take that $0.25 solid performance in Q4, back off $0.06. It gives you a better starting point to think about what Q1 would look like. And so that $0.19 compared to our range for Q1 of 18 to 26 cents and a 22 cent midpoint, it highlights growth between Q1, Q4 rather, and Q1. As I noted also in the earlier conversation, there are a couple of items to note as you think about Q1. First of all, we are expecting to see volume and price improvements from Q4 to Q1, so a good guy there. We do have some, what I would say, short-term headwinds that we expect in Q1, things like the absentee rate related to the Omicron impact to the business. Short-term, not expected to be material by any stretch, but still, when you compare two quarters together, it would be an impact. Also scrap, which I mentioned in my dialogue. So that's some context about the Q4 to Q1. Then what you want to do is remember kind of the bigger picture, which has to do with how to think about the full year results that we guided to. Clearly, we're expecting to see a significant improvement in profitability. In 2021, our EPS was 13 cents on an adjusted basis. We're guiding at 85 cents to $1.05 for full year 2022. You talked about the cadence, right? And what I would highlight there is, we are in a recovery in our end markets. And so we would expect growth in our profitability throughout the year. And as you look at our guidance and kind of where we started with Q1 at a midpoint of 22 cents and the midpoint of the full year, I think the math works out to be about 95 cents, you are seeing some growth expected throughout the year. And the way to think about it, I think, Rich, is relatively steady growth. as a general assumption, is probably a safe way to go. So hopefully that's helpful context to you.
spk11: It is, of course. So last question here, just quickly. I'd like to know if you could expand on your opening remarks and talk broadly about what the end objective here is with your capital structure. I'm looking for what you expect to accomplish in 22, what levers you have, et cetera. So if you could just maybe talk to that a little bit.
spk01: Yeah, I would love to. You know, as you think about our strategy around capital allocation, what you should begin to see is a balanced approach. We're in a great position coming into 2022. We've got a very healthy balance sheet, you know, almost $700 million of cash, well over a billion dollars of liquidity. We put ourselves very purposely in a position where we have choices as to where we're going to allocate our capital. And really, we do view it as a balanced approach. And what do I mean by that? Well, we want to continue to delever the balance sheet. And our number one in delevering is attacking that pension obligation. We made phenomenal progress in that in 2021. And we're going to continue that glide path activity in 2022. So we'll do that delevering. Another key area for us is investing for growth. And so Right now, our focus is primarily around organic growth with CapEx. If you think about our guidance around CapEx for 2022, we got it at $210 to $225 million. And the way to think about that range of CapEx, Rich, is about 60% of that CapEx is really going to be pointed toward growth CapEx. Growth CapEx that will allow us to take advantage of the share gains that we've captured and and participate in the ramp that's hitting our business right now. And so that's another key use. And then you're seeing another key use that's highlighted this quarter with the announcement of our stock repurchase program. Returning capital to shareholders is an important element to our strategy. And we believe that right now, stock repurchase, like we've announced, is a very efficient way to deliver that capital back to our customers. excuse me, to our investors. And so that's another key element of our strategy. So as you take a step back and if you're describing our capital allocation strategy, what you'd want to remember is balanced and putting ourselves in a position where we're not choosing between one or another, but really able to execute on all of the opportunities, whether it's organic growth, de-levering, and return of capital. That's what our objectives are around capital allocation.
spk00: Thank you.
spk02: The next question will come from Seth Seifman with JP Morgan. Please go ahead.
spk08: Thanks very much and good morning. I was wondering if you could talk a little bit about where you are on the production rates, especially on the two main narrow body programs?
spk12: Hey, good morning. You know, so I think as we go into those kinds of questions, we always give you the starting answer, which is we actually produce to orders, not necessarily to the build rates. But what I would say is that on the forging side, there's not a lot of inventory in the pipeline. We continue to see the demand going up at the same rate that the production rates are going up. So the trend lines kind of intersect probably 12 months ahead, 9 to 12 months ahead of what the production is. So I would say our increase is tracking to the trend line of what the major narrow body guys are talking about. I think there's some questions about supply chain disruption in the forgings path and You know, for the billet that we supply into forgings, you know, we're on track. We do get some of our billet on a directed buy from other people. And that's been a little bit disrupted for various reasons discussed in the press. But I think our forgings business is probably the greatest bellwether for telling us where we are on the engine side into, you know, to the narrow body business. So trend lines are lining up.
spk08: Okay. And then do you see – I know you've talked about some of the share gains that you have and, you know, some of the investment you mentioned next year is going toward realizing those. Are there shorter-term share gain opportunities that might be out there as, you know, as the ramp proceeds, particularly on the narrowbody side?
spk12: Yeah, I think the opportunities – for us will come through performance with what we've historically called emergent demand. I think the pressure of the supply chain is going to be a relatively unprecedented ramp because the demand is sitting there and the OEMs are increasing their bills to capture it as fast as they can. And obviously, most of the supply chains have adjusted themselves through the pandemic. So it's going to be exciting for the entire supply chain as we go forward. For us, we feel well-positioned in terms of having said right from the start of the pandemic, we were going to remain recovery ready. We delayed a couple of investments during the pandemic. We talked this morning about the fourth ISO press and that heat treating facility coming online in Wisconsin. We feel really good about that. That'll give us a really preferential position, I think, for emergent demand. We'll be ready when other people stumble. And so I think that gives us an opportunity for more of the emergent demand. Most of the major contracts, were let going into the last ramp pre-pandemic. So I think the supply base feels pretty comfortable that they have the contractual positions in place, but they're going to do whatever it takes to hit their ramp targets. So that's our opportunity to perform.
spk08: Great. Thanks. And then if I could follow up just with one last quick one. Within the guidance, Don, how are you treating the convert that comes to you later this year?
spk01: So in terms of the shares outstanding, when you say how are we treating it? Yeah, exactly. Yeah. So, you know, first, of course, we do assume it will convert. But when you think about the share count, you know, at this point in the year, what I would assume is basic shares outstanding, about 127 million shares. And then, you know, we're still including, even though we have the share repurchase program in place, In our guidance, we're still assuming that all of the fully diluted shares are outstanding, and that's 152 million roughly of shares. So that's how I would think about it as you're modeling the year. If there are shares or when there are shares brought in under the share repurchase program, obviously we'll share that with you guys each quarter so you understand what to adjust when it comes to your EPS calculations.
spk02: Got it. Thank you very much. The next question will come from David Strout with Barclays. Please go ahead.
spk03: Hi, good morning. This is Josh Korn on for David. So regarding the guidance for next year, what are you assuming for oil and gas in 2022, given the much higher oil prices?
spk12: Yeah, good morning. This is Bob. In terms of oil and gas, I think we still see good demand in oil and gas. We talked about it in the commentary. There's two elements for us in oil and gas. There's what we call flow lines and umbilicals, but it's a smaller part of our business today than it used to be. And then we have the opportunity for some of the clad pipe products that go into more of the challenging oil and gas reserves. I wouldn't say it's going to be a huge uptick. And part of that is that I think the nickel products in the United States will be relatively tight based on the uptick in demand in aerospace and defense. And we also see an uptick in India with what we call flue gas desulfurization projects that go into coal-fired power plants to make their emissions much lower. That was slower in 2021, so we should see an uptick there. But that's more on the specialty energy side. So I would say modest continued growth. But it's going to be a tight market based on the nickel demand that's going on in the market.
spk03: Okay, thank you. And then is there anything else left to spend within CapEx on the transition to the higher value-add product?
spk01: Yeah, this is Don. So, yes, in our 2022 CapEx, it includes additional spending to largely finish the transformation for SRP. And that's being executed on plan. Everything is unfolding as expected or maybe even a bit better. So yes, that's included there. Okay, thank you.
spk02: The next question will come from Phil Gibbs with KeyBank Capital Markets. Please go ahead.
spk06: Hey, good morning.
spk01: Hey, Phil.
spk06: I know we don't talk too much about it over the years, but things might be changing a bit given some of the new business awards that you've had and gained over the last couple of years. How should we think about pricing overall, just pricing in terms of that kicking in 2022 and hitting the bottom line? Is that a bigger than normal driver this year?
spk12: I think you have to break it down by between the two segments, Phil. Good morning, by the way. And, you know, I think on high performance, you know, we will see, you know, continued mix enrichment there, you know, better product form, next generation alloys, next generation platforms. So we'll get product mix and the pricing that goes with that. You'll start to, you'll still continue to see that growth. I think on the AANS side, You know, probably there you'll see as we get into the higher value products, we're still going to get mixed enrichment. The thing about that segment, probably about a third of it is transactional, so we've really got some good upside in the tight market there. And almost all of our LTAs have, you know, significant material inflation pass-through, and we're certainly doing that, and then some in terms of the material pass-through. I would say, you know, still sometimes it's hard to differentiate price from product mix because of the different alloys and programs we're participating in. But we still feel like there's good pricing opportunities due to the tightness in the market throughout 2022. It helps a lot that we're no longer in the stainless sheet business. And I think the metrics will become clearer now in 2022 that we're almost out of that business for sure. Okay.
spk06: So it does sound like there's some benefit in the guide from pricing and mix this year, as there should be on the plan. Yeah, a little bit. You know, I think that's right.
spk12: With the nickel price strength that we've had, you know, who knows where it's going to go for the balance of the year. But so far, so good there.
spk06: And then, obviously, geopolitical risks are always apparent in global market like aerospace. And we've seen the Russian rhetoric swirl before. Is this time any different than years past where you've got the potential to see emergent demand or fill the gap? And then I think do those conversations on the other side take kind of a bit of a cooling process maybe to some of those other periods just because Boeing you know, at the current time has enough inventory in the 787 channel? Yeah, good question.
spk12: I'll take that one, Don, if it's all right with you. You referenced kind of the Russian situation, and I would just start by saying we monitor it closely. It's hard to speculate as to what any solution would be, but to act quickly, certainly what we learned in the downturn of the pandemic is, you know, move quickly. You actually had both positives and risks kind of as you walked through your question, and I would say that you're right with that. You know, probably the risk we manage most closely is what I'd call the nickel supply for non-rotating parts and products made in our advanced elements and solutions segment. It wouldn't affect really our HPMC segment because of how we source that material. It's mostly on the nickel side, but, you know, in the A and S segment, we always have you know, the backdrop of scrap units and a few other things we can be working on. But that's the risk side, we think. You know, we'll watch that very closely and have some alternatives. And you're right, I think there's some upsides in terms of opportunities, probably on the titanium space and some of those other ones if something like that were to happen. So it's a balanced approach. You know, we stay close to it, we assess it, and we control what we can and adapt. And I think The organization's proven they can do that over the last two years. But it's something we're watching very closely.
spk06: And then last question is just for Don. In terms of your expectations for 2022, how are you thinking about the corporate effective tax rate? I know you gave the cash piece, but the corporate effective tax rate within that EPS number and then also what the raw material plus or minus was after a pretty strong year this year.
spk01: The way to think about the corporate tax rate is it's going to be extremely low. I think I shared that we expect cash taxes to be in the $15 to $20 million range, and we're fully reserved on the federal side for U.S. purposes. So I really expect an extremely low effective tax rate for the overall organization. So I think there's, you know, just before we leave the theme of guidance and how to think about some of the activities that are going on in the market geopolitically might be helpful too to just touch base a little bit on inflation and how we're managing inflation and the questions around price. You know, I think one thing that our team has done an extremely good job at is as the supply chain volatility has hit the world, Our team has done a terrific job managing all those dynamics. And one way that we've been successful in doing that is being very proactive around offsetting inflation through price. Also through efficiencies, where we believe we have a core competency in improving our efficiencies from period to period. But I think it's an important thing for us to highlight. The organization is very focused on monitoring what's happening with input costs and quickly reacting to those dynamics, making sure that we're getting the right price adjustments to offset. So thanks for letting me add that.
spk06: Thanks, Don. Speak in a bit. Appreciate it.
spk02: The next question will come from Gutom Khanna with Cowan. Please go ahead.
spk10: Hey, good morning, guys. Good morning.
spk12: Good morning.
spk10: I had two questions. First, you know, you heard Raytheon and Boeing point out that forgings and castings will be a or is a pinch point in the supply chain. And I wondered, you know, Halmet just commented that it's not them. I was wondering, are you guys seeing, you know, constraints to your output in the forgings and casting space? Or do you think Those comments of some of the prime contractors relate to other competitors or perhaps they're just speculating on what might happen. And then I have a follow up.
spk12: Yeah, good. All right. Good question, Gautam. I would say castings is a separate issue and we're not in that product line anymore. So we don't see too much of that activity, luckily. On the forging side, I would say our perspective, I'd start off with a real clear definitive statement. It's not us either. And part of the advantage of the ATI supply chain is we're vertically integrated back to billet. Depending on the product, depending on the application, you know, 70% of what we do comes from our own operations. So we're close coupled and we certainly see the advantage from a supply chain signal and response. But the other 30% is billet that's on a directed buy that comes to us. And yeah, I would say, you know, one of our competitors is pretty open about a press that they're working to supply. So we're seeing a little disruption from that. And then I think anytime, you know, somebody is restarting, you know, billet or powder billet capacity, you can run into bumps, right? So we are seeing some of those kinds of challenges in the supply chain, not totally unexpected, but things that we're working hard with our customers to overcome.
spk10: Okay, and then just to follow up on that, you know, the Special Metals Corp has got that strike, you know, on five months now. Like you mentioned, the writing press at Carpenters, you know, out of commission for a little bit. Does this confer or are you seeing emergent demands right now for nickel billet or how might that actually change share or does it?
spk12: Yeah, good question. So simple answer to your question is yes, we're seeing emergent opportunities due to the supply chain disruptions of others. I think there are opportunities as we have been through this ourselves, but we're obviously in a great position, trusted supplier, have the relationships. Part of our strategy shift as part of our transformation is to move more to long-term agreements. So I think as we see this disruption, especially with our transformation of the sheet business, the specialty roll products business with our new capabilities, coupling melt to hot rolling to finishing and the wider widths and tighter gauges, there's a lot of pull for that demand. So we feel like there's emergent demand that we'll be able to you know, sustain longer term in our specialty role products business and the AANS segment. So, yep, we're seeing it and we're trying to take advantage of it.
spk10: Last one, if I might, Bob, you know, you've previewed, you've told us to tune into the investor day, but in the past, you guys have, you've mentioned, you know, 600 million plus of EBITDA as being achievable and Anything changed on that view?
spk12: I'll go first and say no, but then I'll ask Don to add color.
spk01: I would add no. All joking aside, we're on track. And you can see that in our, hopefully you can see that in our 2021 performance. And you're right, I have talked a number of times about how to think about the long-term profitability of our business relative to where we were at in 2019. And what I would say is we are absolutely on track with the color that I've shared with you guys in the past. When it comes to February 17th, we're going to share more information, trying to help you understand a few things about how do we think about top line growth over the extended period of time? How do we think about margins over the extended period of time? And then really importantly, we also want to talk a bit about cash generation over the extended period of time. And, you know, metrics like cash conversion yields and those kinds of things, because they're an important part of understanding the value opportunity and potential in our business. So we're going to spend some time with the attendees on all those topics and more.
spk10: Thanks. Looking forward to it, guys.
spk02: All right. Thanks, Adam. The next question will come from Josh Sullivan with the Benchmark Company. Please go ahead. Good morning.
spk04: Good morning, Josh.
spk09: So I understand that the absentee rate due to Omicron and Q1, but what about the incremental labor needs throughout the year and then to hit the higher production levels? You know, how heavy a lift is that on headcount? You know, do you see any tight areas there, you know, especially as you're talking about capturing this emergent demand? I'm just curious about what you're seeing in those specialized labor markets you guys access.
spk12: Right. So it's very regional. And the issue we're dealing with with the absenteeism has been, you know, really short term. I appreciate you asking about it because it's been a daily fight, you know, to make sure that who's going to come in and what kind of crewing you have. And it's an opportunity for me to say, hey, man, I really respect the challenge our first line supervisors are going through, but they're up to the challenge and they're working through it. And we are seeing very much a commitment to operating safely, but also it's regional, right? So, If you think about our company, we think about the Carolinas, we think about Wisconsin, we think about Pennsylvania, and we think about Oregon, right? So Omicron kind of started in the east and went west, and we're starting to see that impact decline. Now, you asked the question about labor. Our investments over the last few years have brought a tremendous amount of automation into our operation. Probably as a guide over the course of 2022, we'll hire between 400 and 450 operating people against a base of 6,000 to 6,500, give or take, depending on how you count. So, you know, 15% kind of increase. And again, it's the short-term impact of Omicron was in reliable training progress. So we're kind of working through that now. But as it recedes, we should be back on track. But again, it's not a huge issue. I'd also say aerospace and defense jobs are great jobs, especially where we are in the cycle and people that we're hiring see that. It's not quite like retail or distribution or warehousing. You know, these are jobs that people really covet. So I think we're recruiting from a good base and obviously, you know, we're committed to remaining globally competitive. So there's always that constructive tension and certainly, Any issues that we deal with, we should be able to offset with pricing as we think about the inflationary trends there. Does that help, Josh?
spk09: Yeah, that's all great stuff. And then just on the fourth isothermal forge that you guys have coming online, how should we think about the utilization filling up there versus what was built on the organic demand, what was originally designed, versus this emergent demand that you're thinking about I'm just curious how you're thinking that's going to come together.
spk12: Yeah, so it's a great complex combination of the isothermal press and then some heat treating capacity that came with it. Every good operating leader always wants to use the new stuff fully. And they want to use it fully because it's more automated, more consistent, higher productivity. Not that we had a quality issue, but the more consistency to it, more reliable. So what you'll see is on the new asset, it should be fully utilized. And then what normally happens is the oldest press tends to be either we invest in maintenance to make sure it's recovery ready for the peak that's coming, or we optimize our product mix across those kind of assets to make sure that each one is running the most optimal product mix. So I expect the utilization of that particular unit to be pretty good, pretty fast. That's why they were committed to getting all the necessary customer qualifications done during this period of reduced demand, we'll just call it. So we feel pretty good, but I would say it'd be highly utilized and then our less efficient press will probably get less utilization.
spk09: And then just one last one, just on the timing of the naval nuclear material, how should we think of that cycle through 22 and 23?
spk07: The naval nuclear cycle through 2022, I think you'll see continued growth.
spk12: There's certainly some positive pull. You know, the Australians are thinking, you know, they're doing their thing with the British and the Americans on more submarines. I think that will benefit us. And we're starting to see the pull for that. So I think you'll see a continued increase through 2022 into 2023. The cycle is pretty long here. And the commitments should be multiple years past that. But I'd say when Don was kind of talking about the growth through the year, the aerospace increase is one of those. The defense side with naval nuclear leading the way is the second one that should be a real positive upward lift.
spk02: The next question will come from Perry Taj Misra with Barenburg Capital Markets. Please go ahead.
spk00: Hey, good morning, guys. Thanks for taking my question. So metal prices have been quite strong. Is that a risk in the second half of this year or next year, that that could be a revenue headwind, even though I realize that you pass those through to your customers?
spk12: I think it's hard to predict nickel prices, Pertosh. You know, we don't. I would say one of the things we're doing that we're focused on is in improving our inventory intensity or reducing the use of inventory as a percentage of our sales. You know, we had over 700 basis point reduction in the intensity. Probably the biggest single up or down risk we face today, and that is work in process inventory. So our goal is to have as little, you know, as we need for WIP. That will help us. I think the transformation that we're doing will help accelerate that because we got less footprints and less you know, travel between locations and will help us accelerate the reduction. But it is possible. I would say we're doing everything we can do to mitigate it going forward. And getting out of the stainless business, sheet business actually takes away the greatest single risk we've had historically in that area. So I think we feel like we're moving in the right direction.
spk00: Fair enough, fair enough. And then how should we think about the incremental margins in 2022, given some headcount increase through the year and some other moving parts?
spk01: Sure. This is Don. I'll take that question. First, we had a fantastic experience around our incremental margins in the second half of 2021. And as you think about the incremental margins going forward, You're pointing out potential headwinds to it. There's also potential tailwinds that can come up from time to time. I think what you really want to do is you want to stick with the guidance that we've given in the past, which is incremental margins through this up cycle in the 30% to 40% range. We're going to have some quarters, like this quarter, where they were extremely strong, and we'll have other quarters that might be a little bit short of that goal, but long-term I would really stick with that 30% to 40% incremental.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Mr. Scott Minder for any closing remarks. Please go ahead.
spk05: Thanks. As Bob and Don mentioned, we plan to hold a virtual investor day on February 17th where we'll expand on our business strategy and provide long-term financial targets. More information on how to attend the event can be found on our website at atimetals.com. Thanks again for joining us today. This concludes our fourth quarter 2021 earnings call.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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