ATI Inc.

Thank you for standing by, and welcome to the ATI Q3 2022 earnings call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. I'd now like to turn the call over to our host, Tom Wright with ATI. You may proceed.

Good afternoon, and welcome to ATI's third 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 third quarter highlights and key messages. A supplemental presentation is available on our website. It provides 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, Tom. Good afternoon. We adjusted the time of our call to accommodate Boeing's investor day this morning. Thanks for altering your schedule to join us. Let's go straight to the bottom line. Strong Q3 results confirmed another quarter of solid execution. We're delivering on customer commitments as commercial aerospace gains momentum, and geopolitical events trigger significant spending for end-use applications in the defense market. I'll highlight three key things today. First, strong aerospace and defense market momentum is accelerating, and ATI is expanding to keep pace. In the third quarter, half of ATI's revenue came from aerospace and defense. That's the highest level since Q1 of 2020, a very notable milestone. Revenue in these core markets grew 22% sequentially and 87% year over year. That's really a truly astounding rate of change. The team has responded to the market opportunity stir early in the ramp or the recovery, depending on the market you're in. But phenomenal effort, phenomenal result. Overall wide-body demand for ATI's specialty products, like forgings, billets, bar, rod, sheet, and plate, still lags 2019 levels. But our forward order book increasingly shows early signs of the wide-body recovery. Titanium supply is tight. and lead times are extending into the second half of 2023. Russia's invasion of Ukraine continues to change the world in many ways. The conflict has prompted the commercial aerospace industry to redirect buying and commit titanium purchases to Western producers. Defense investment around the world is accelerated. Our competitive position in these markets is strong. whether it's advanced thermal materials enabling hypersonic flight, nuclear propulsion systems on naval ships and submarines, or titanium armor for ground fighting vehicles. ATI's unique capabilities and material science expertise make us a key partner across multiple strategic defense platforms. Candidly, if it flies, if it floats, or if it rolls, as a defense application, ATI's materials are there and they're proven to perform everywhere, every day. Our ability to meet this demand is pivotal to our long-term success. After extensive conversations with customers, government leaders, and market analysts, we've concluded that strong demand for aerospace-grade titanium products will challenge available supplies for a significant time. We've begun to invest in new aerograde titanium melt capacity at existing ATI operations. Near term, say the next 12 to 18 months, we're taking two actions to increase aerograde time melt capacity by 25% over the 2022 baseline. First, we'll reposition our titanium product mix from industrial to aerospace applications. Second, we'll make modest investments to upgrade existing vacuum arc remelt capabilities. We're investing in new capacity for the long term, too. By late 2025, we expect to produce first ingots on new aero-grade titanium electron beam melting capabilities. Combined, these three actions increase total ATI-type melt capacity by up to 60% versus the 2022 baseline. Orders have been placed for major long lead time equipment. Significant renewable and carbon-free power has been committed. And for this new brownfield capacity, we expect to break ground in Q1 2023. Brownfield investments mean we can move faster. It also means modest size investments that fit within our annual capital spend guidance. We'll spend tens of millions of dollars, not hundreds, well within the annual capital spend guidance that we discussed in our 2022 investor day. we all benefit from this new capacity, both ATI business segments, our global aerospace and defense customers, and the overall supply chain. We plan to further quantify the impact of these investments over the next several quarters. We've also invested to ensure we have the team in place to deliver. This year, we've added approximately 1,000 new production employees, bringing us to about 90% of our 2023 needs. Now it's all about the cycles of learning and coaching so they can fully contribute. If that happens, we look forward to increasing levels of productivity and efficiency. My second point today is that ATI is well positioned for continued profitable growth. We call it our five pillars of growth, which you'll see on slide five of the deck we provided. The first pillar is the transformation of our specialty role products business. Our investment in transitioning to a differentiated specialty product portfolio has resulted in far more than just a richer product mix and improved margins. It has fundamentally transformed how our leadership team approaches every aspect of the business. Pillar two is growth driven by the narrow body ranks. As platform build rates accelerate to peak levels over the next four to five years, ATI is well positioned to capture profitable growth. Demand for spare parts for next-gen engines will drive additional sales growth in the coming years. That's as production rates for next-gen planes reach steady-state levels in the back half of this decade. Third, the wide-body market is showing early signs of recovery towards what we expect will be impressive growth. ATI's content on all next-gen wide-body platforms will drive significant margin expansion as international travel recovers. and global freight growth continues. The defense market drives growth in our fourth pillar. As I mentioned earlier, increased geopolitical volatility has accelerated defense spending across Europe and with US allies around the globe. The near-term opportunities are clear. The long-term opportunities, driven by next-generation requirements, will also drive outsized growth for ATI. Our materials are ideal for the increased demands of strength, light weighting, and thermal management at the extremes. Our fifth and final pillar is driven by differentiated applications like medical and specialty energy. These critical adjacent applications have aero-like characteristics that leverage our expertise. We also see growth in metallics beyond nickel and titanium, such as hafnium and niobium. These are used in electronics and space, and we also see growth in zirconium and specialty energy. There are attractive growth opportunities for ATI's advanced LOs. We succeed where the expectations are great and the barriers are high. That's where ATI's extraordinary capabilities perform the best, and we see tremendous growth potential. Together, these five pillars define the path to achieving our 2025 goals. I'm confident we're well on our way. That doesn't mean there aren't headwinds impacting our business every day. Throughout 2022, we've seen macro forces like inflation and supply chain disruptions. We continue to manage these challenges aggressively. More recently, recession concerns have been in the headlines. We believe the recession question is not if, but rather to what extent will it impact ATI. Which brings me to my third observation for today. The deliberate repositioning actions we've taken greatly strengthen API's resilience in the face of uncertainties. API is well positioned to deal with the challenges we're seeing in the market today. Since 2020 and throughout the pandemic, we've taken strategic action to reshape API. We've transitioned to higher value products and long growth cycle markets. We've consolidated our operating footprint. The result? ATI is a significantly leaner, more nimble, and more focused company. And the strength of the company today versus where we were a few years ago is unbelievably improved. You know, the team's aligned. We definitely are positioned for the significant growth opportunities that are coming our way. No question, a portion of our portfolio is impacted by recessionary softness in the industrial markets. Our Asia Precision Roll Strip business continues to be negatively impacted by ongoing zero COVID policies. That's driving continued market disruptions and is muting demand recovery in that region. The impact of these near-term headwinds is largely expected to be confined within the AANS segments. Don will share more about these impacts when he shares our Q4 financial outlook. Before I turn the mic over to Don, let's shift to a quick overview of our Q3 performance by market and set the context for what we see in the quarters ahead. As I shared earlier, in our largest in-market commercial aerospace, demand continues to gain momentum. Jet engine sales grew 26% sequentially and 143% year-over-year as shipments of forgings and materials accelerate to meet increasing demand. What drives that growth for us? LEAP-powered narrowbody airframe deliveries, LEAP engine share gains, and service part demand for widebody engines. Airframe sales increased as well, growing by 24% sequentially and 84% year-over-year, with modest but steady near-term widebody demand growth. We expect acceleration in 2024 and 2025 to drive significant growth in airframe revenues. Defense sales grew 6% sequentially and 4% year over year, largely driven by increases in military jet engine and rotorcraft sales. As we look to 2023, we expect strong growth as global defense investment accelerates through the geopolitical environment I referenced earlier. It's an understatement to say I appreciate all the ATI team and all that they've done to deliver this incredible acceleration in aerospace and defense sales. Each ATI business has contributed to that growth. Beyond our core A&D markets, specialty energy sales contracted slightly on a sequential basis but grew 16% versus the prior year. Chemical and hydrocarbon processing sales drove growth as downstream refiners worked to bring additional fuel refining capabilities online. Nuclear energy grew. While we saw declining revenue in power generation, and renewables. Over the coming years, we expect global energy security needs and the push for reduced emissions to continue driving growth for ATIs. Medical sales grew 20% sequentially and 38% year-over-year as elective surgeries recovered from pandemic lows. Looking ahead to 2023, further medical growth is expected as reshoring trends drive new supply opportunities for medical implant and MRI materials. And lastly, electronic sales contracted modestly versus the prior quarter and contracted by 14% versus the prior year. This was in part due to continued COVID lockdowns in China, but also consumer softening and slowing discretionary demand for electronic devices. Yeah, based on what we see today, the lockdowns could easily extend into mid-2023. Now I'm going to turn it over to Don, and he'll walk you through the financials, and I'll be back after that to conclude and take us into Q&A. Don?