ATI Inc.

Welcome to the ATI Q2 2022 earnings call. My name is Ruby and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press start followed by one on your telephone keypad. I will now hand over to the team to begin the presentation.

Thank you. Good morning and welcome to ATI's second quarter 2022 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 second quarter highlights and key messages. A supplemental presentation is available on our website. It provides additional color and details on our results and outlooks. After our prepared marks, 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 relief and in the slide presentation. Now, I'll turn the call over to Bob.

Thanks, Scott. Good morning, and thanks for joining us. After many quarters of saying we're preparing for the ramp, the time has come, and I can say with confidence today that we are ramping. Our core markets, namely aerospace, defense, and energy, are accelerating. That's largely due to end customer demand, technology shifts, and geopolitical events. Across our asset base, production is increasing to match this demand. This is what we plan for. We're ready, and it feels great. Admittedly, we're in the early phases of this ramp, but we're confident we're positioned and moving forward. I'm not going to say it's easy. We're operating in challenging circumstances. Labor markets are tight. Input costs are rising, with inflation a global issue. Supply chains are fragile after two years of pandemic reshuffling. Just like during the pandemic, we're laser focused on what matters most. I'm proud of how our team is responding. We worked hard to be on track or ahead to fill open positions. We're offsetting inflation with cost reduction initiatives and dynamic pricing. Our operations are producing and delivering high-quality parts and materials in a timely manner. While we aren't perfect, we strive for perfection every day at every site. We owe it to our customers, and they appreciate our efforts. Across ATI, our actions are translating into strong financial results and significant long-term opportunities. Three things stood out for me in our Q2 results. First, revenue growth is accelerating. Our second quarter sales of $960 million were up 15% sequentially, equally supported by both business segments. This marked the highest quarterly sales since Q4 2019. It's worth noting that the previous period was before we exited standard stainless sheet and divested both our flow form business and our Sheffield operation. While higher base and surcharge pricing provided a tailwind, expanding customer demand is the real driver. Second, our margins continue to improve. Momentum is building in these early phases of the aerospace recovery. Q2 adjusted EBITDA margins were near 15% in the second quarter. This marks an improvement of more than 600 basis points year over year. Sequentially, margins were in line despite the second quarter results having significantly fewer government-related benefits. Actions taken during the pandemic to transform our cost structures and business portfolio are paying off. We expect this performance to continue. And third, we're seeing an increase in free cash flow as our forward order book continues to strengthen and input costs improve for the balance of the year. We had a modest use of cash in the second quarter. This was in line with our normal seasonal trends, and our performance was better than we anticipated. Without stealing all of Don's thunder, we're increasing our full-year cash flow target to reflect these improvements. We'll still fund working capital for the ongoing production ramp and capital projects for organic growth. As we do, we're making progress toward our long-term goal of converting 90% of net income to cash by year-end 2025. Let's take a step back from our short-term results. I have three big picture observations to put ATI's performance in context. First, the strong demand for air travel has returned to the vast majority of global markets and should grow consistently for the next several years. My recent travels to the Farnborough Airshow clearly makes this point. Completely full, international flights both ways. Each row was jammed with people from around the world. Plane models sent to the desert at the start of the pandemic have returned to service. At the show itself, both airframe OEMs announced customer orders for narrow and wide bodies. While the narrow body supply chain has recently experienced a few bumps, not unexpectedly, production rates on narrow bodies are still projected to ramp to record-setting levels. Wide-body engine spare parts demand is spiking as airlines address the recovering strength in international travel. And how is all that relevant to our shareholders and our team? These trends benefit ATI even more than they did in 2019 for two reasons. One, our shares have grown. And two, the industry is moving almost exclusively to fuel efficient next generation jet engines where we have significantly more content. Now, more than ever, you can't fly without ATI. My second big picture observation, Russia's invasion of Ukraine is changing the world in many ways. Some are big, others small. but most are going to be sticky for some time to come. Let's be clear. The Russian aggression is having a tragic impact on millions of people's lives. It's forcing significant migration, primarily to other parts of Europe. We continue to stand in support of the people of Ukraine. We thank our employees, particularly those in Poland, who have directly helped impacted Ukrainians. On the business side of this issue, the situation in Ukraine has focused the industry on shifting aerospace titanium purchases to Western sources. Customer discussions on the subject are pervasive, active, and lively. We're disciplined in our response. We're balancing the need to help our customers and repositioning their supply chain with our commitment to benefit our shareholders at the same time. balancing short-term and long-term interests of both. We announced a significant titanium share gain in July with GKN Aerospace. It's a great example of how we're finding the best ways to allocate our increasingly tight capacity to the greatest strategic benefit. The impact of Russia's aggression in Ukraine goes well beyond aerospace share shifts. I have three examples that are meaningful for ATI. First, countries in and connected to geopolitical hotspots are increasing their national defense investments. In the near term, this means increased demand as combat weapons systems are replenished. We're also seeing increasing demand for all types of military vehicles, some near term and some extending into the medium term. In the longer term, new capabilities like hypersonics are a priority for development. These require extreme materials science expertise, which is ATI's sweet spot. Second, impact of note, security of national energy supply has become critical. Countries are assessing vulnerabilities created by procuring energy from potential adversaries. Renewables such as nuclear, hydrogen, and solar are the long-term environmentally friendly solution for most. At the same time, increased fossil fuel usage sourced differently will be required until the new sources can be built at scale. ATI serves both. And third, looking beyond aerospace and defense, customers in other key ATI markets are working to eliminate Russian-made input materials. This is clearly visible in the medical markets where sourcing of titanium and other inputs are shifting to Western-based suppliers. Again, ATI is well-positioned to service these supply chain shifts. My final observation is 100% of our own making. We are now fully out of standard stainless sheet products. I expect this will be the last time I mention this product line in my earnings call remarks. as we sold our last coil in the second quarter and closed our facility in Illinois, the fourth in our transformation of specially rolled products. Expansion of our Vandergrift, Pennsylvania operation is on track. It will be the best finishing facility for specialty materials. We're winding down those operations left at our Ohio facility In the first weeks of July, we've idled all but one operation, one last operation actually at that facility.