ATI Inc.

Good morning. My name is Lauren and I'll be your conference operator today. At this time, I would like to welcome everyone to the ATI Q4 2022 earnings call. All lines have been placed on mute to prevent any background noise. A supplemental slide presentation to accompany the prepared remark can be found on the company's website. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, loaded by the number one on your telephone keypad, If you would like to withdraw your question, please press star and H-2. Thank you. At this time, I would like to turn over the call to Tom Wright, the Vice President, Investor Relations and FPA. And, Tom, you may begin your conference.

Thank you. Good morning and welcome to ATI's fourth 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 fourth quarter and full year highlights and key messages. Before starting our prepared remarks, I want to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlook and can be found on our website at atimaterials.com. 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 morning, and thanks for joining us. We ended the year strong. ATI's quarterly revenue once again topped a billion dollars. That's the second quarter in a row we achieved this milestone. We ended the full year at a run rate of $4 billion in revenue, 37% higher than 2021. We're executing expertly against robust markets. We're meeting our commitments and getting better every day. Today, I've summarized our performance in four key headlines. Headline one, we're achieving what we set out to do. In the fourth quarter, we delivered adjusted EBITDA of $140 million. This was driven by continued strength in our core aerospace and defense markets. Adjusted EPS of 53 cents surpassed the midpoint of our November guidance. The team is laser focused on execution and it shows in our results. On a full year basis, ATI adjusted EBITDA was $549 million, or 14 percent of sales and almost 400 basis point increase over 2021. Adjusted earnings per share was $1.99. We generated $148 million in free cash flow. Don will dive deeper into the financials in a few minutes. Headline two, our deliberate actions and transformation are delivering the results we projected. It comes down to our team, our capabilities, and optimizing our business with discipline. Let me add a little color here, starting with our team. As 2022 began, we were on the front lines of the war for talent, hiring nearly 1,000 new team members during the year. Now, with our workforce largely in place, we're focused on accelerating. Our team is quickly moving up the learning curve, now cross-qualifying from one job to multiple jobs to gain flexibility. Their productivity and proficiency grow every day. To those 1,000 new employees, I say, you made a great decision to join ATI. We look forward to performing together. And to our entire team, thank you for your hard work and focused efforts. You are driving ATI's success. Next up, our capabilities. We're optimizing our existing footprint to increase opportunity. When it comes to titanium and nickel melt, we're focused on two things. First, operational efficiency to increase output, and second, increasing inventory velocity. Some more color on titanium specifically. Russia's invasion of Ukraine has structurally disrupted the global titanium supply chain. An outcome of this tragic situation, is the most significant titanium opportunity in years. Titanium product lead times have grown from eight weeks just a few quarters ago to 60 to 70 weeks today. We're operating with a disciplined, controlled order entry process that leads to optimal use of our capacity. Last quarter, we shared our plans to increase near-term titanium melt capacity for aerospace and defense applications by 25 percent using our existing assets. Now, we're revising this plan upward. Based on overwhelming customer commitments, hearing that the word contracts, we're increasing near-term capacity, not just by 25%, we'll increase by 35%. That's over the 2022 baseline. It requires only nominal CapEx, less than $10 million, which is included in our CapEx guidance. Clearly, demand is growing and the team is responding and we're responding quickly. It's been a busy 90 days. We've restarted a melt shop in Oregon, melting the first ingot a few weeks ago. It was actually out there last week, so my hand's safely on it. Feels great to see the output. We expect production to ramp through the first half of 2023, and we'll start to see benefits from that capacity in the second half of this year. On top of that, a previously announced brownfield investment to further increase long-term titanium melt capacity. is on track to produce first ingots by the end of 2024. Customers are committing to this capacity as well. This brownfield investment is within the scope of previously provided capital estimates. It's crucial to ATI's ability to meet the significant long-term titanium demand. Those of you listening to this call likely aren't the people placing orders for titanium these days, but you probably know some people that are. If you're speaking to anyone about it, my advice is to get those remaining contracts signed up soon. There's very little capacity in 2023 that's unspoken for, and that's increasingly true for 2024 and beyond. Some of our product lines actually have started customer commitments and bookings in early 2025. So it's a tight market. The specialty role products business transformation and footprint consolidation is nearly complete. We're on track to produce first coils at the new Bright O'Neill furnace in Vandegrift, Pennsylvania in the next 90 days. Full qualification and production will come soon after. This Bright O'Neill furnace provides our customers with state-of-the-art sheet finishing capabilities and optimizes our operating footprint to significantly streamline production flow paths. My third headline today, we're performing in growing markets, especially our aerospace and defense core. Our repositioning to an aerospace and defense leader is well on its way. In the fourth quarter, our overall product mix attributed to aerospace and defense increased to 53% of total sales, up 12 points over the same period last year. In reality, and for clarity, I think we have a good shot to see our A&D product mix go north of 60% by the back half of 2023. The progress we've made is really great and continues, and we're well on our way to the 65% goal we've discussed with you guys earlier. Why is this important? These markets offer premium growth rates and higher margins compared to commoditized products and markets. Those factors provide great opportunity for ATI to generate cash and create shareholder value. It's worth noting that quarter over quarter, Fed engine and airframe sales were flat versus Q3. We attribute this primarily to efforts across the supply chain to control year-end inventory. This was accentuated by planned shutdowns and intentional order recalibrations in the near term to increase the industry's supply chain reliability for the longer term. We expect a strong growth trend to resume in the first quarter. The momentum in our core markets is driving profitable growth across the enterprise. In our HPMC segment, Q4 sales of commercial aerospace products increased by 85% compared to the prior year. Total aerospace and defense sales comprised 83% of HPMC revenue in the fourth quarter. Year over year, total HPMC segment sales climbed by over 40%. EBITDA margins expanded over 400 basis points. This strong operating margin growth reflects higher sales of next-gen jet engine products as well as higher operating levels. In the AANS segment, commercial aero sales grew by 113% versus the prior year. Total A&D sales were over 30% of that segment's Q4 revenue. This mixed improvement, along with the ongoing efficiency benefits of our transformation, drove a 30% increase in full-year total AA&S sales. EBITDA margins improved by over 300 basis points versus 2021, a clear indication to me, and hopefully to you, that our transformation is paying off. Headline number four, the modest headwinds we're experiencing impact only a minor portion of our business, and that portion continues to get smaller. We see some recessionary softness in construction, mining, and general industrial end markets. The good news, due to our transformation, a little more than 15% of our AANS segment is exposed to those headwinds. That's a much smaller portion than in the past. We continue to face near-term softness in our Asian Precision World Strip business. There's a lot of uncertainty there. While we see some positive signals, we're forecasting this business to remain at current levels or even modestly contract until we see a clear upward trend. What I can say for sure, we'll be ready when Asian demand picks up. Okay, now let's go do a quick review of our markets and what we see heading into 2023. These can be found on slide four and the accompanying slides on our website. In commercial aerospace, as I mentioned earlier, we're in the most significant production ramp this industry has seen in several decades. ATI's 2022 jet engine sales doubled from the prior year, an astounding ramp rate. 2022 airframe sales grew 79% versus 2021. Recovery of the airframe market for ATI has lagged at engine throughout 2022. But looking ahead, that's changing. We've been watching for two signals to indicate the commercial aerospace market is at a critical positive inflection point, what some analysts would call growth catalysts. I'm pleased to report we've seen both in recent weeks. On the narrow body side, we've been awaiting increased clarity on future 737 MAX demand. December's mega order from India is a big step toward reducing inventory. Add to that the Chinese Aviation Authority's declaration in January that the MAX is approved to return to service. And then just this week, Boeing announced a fourth 737 MAX assembly line in Everett, Washington. These are growth catalyst number one. The second signal we've been watching for, the resurgence of 787 production on the widebody side. United Airlines' order of 100 Boeing 787s was clearly good news on this front and reinforces exactly what we've been anticipating, even a little earlier than we expected. Positive growth catalyst number two. We expect ATI airframe product shipments to accelerate throughout 2023. In our other core market, defense, growth in global spending continues to create significant opportunities for ATI. In the near term, we're seeing a record level of demand for products like titanium armor going into new military vehicles. In the fourth quarter of 2022, ATI defense sales grew 18% versus Q4 of 2021. The sequential increase was driven largely by accelerated support for the Navy's carrier and submarine fleets, and increased shipments for military rotorcraft applications. We expect 2023 defense sales to be strong in these subsectors, as well as ground vehicle armor and military aircraft. I think most of us saw the news of the allied nations sending tanks to support Ukraine. I think it's just one more reminder of how quickly things have escalated in terms of demand for defense materials. We expect that demand to be sustained for multiple years based on all the signals that we're getting from the federal government. In addition to our core A and B markets, we leverage our expertise to critical adjacent applications with arrow-like characteristics. This includes specialty energy, medical, and electronics. We're seeing growth in these markets too. A little more color about these is on slide four. of the accompanying presentation on our website. I'll now turn the call over to Don to walk through financials and guidance. I'll be back after that to conclude and take us into Q&A.

Thanks, Bob. Today, I'll share details on three areas of ATI's performance. One, our 2022 Q4 and full-year results. Two, the 2023 outlook. And three, updates on the 2025 targets shared during our investor conference. Let's start with highlights of our Q4 performance. As Bob noted, Q4 marked our second consecutive quarter with over $1 billion in revenue. Not only are sales up, we're on track with our strategy of shifting product mix to value add. Aerospace and defense sales were 53% of total revenue in Q4. That's up from 51% in Q3 and up 1,200 basis points from Q4 2021. Q4 2022 EBITDA margins were 13.9% compared to 12.4% in Q4 2021. Value-add sales mix, increased production levels, and diligent cost management all contributed to the margin percentage expansion. Fourth quarter EPS was 53 cents, one cent higher than the midpoint of our guidance range. As we dig further into our performance, I'll highlight a few of the key takeaways as we see them. First, as you can clearly see in our numbers, sales are growing in the differentiated markets where we are valued the most. Secondly, we're improving profitability. Our significantly higher adjusted EBITDA reflects the benefits of our business transformation. Full year 2022 adjusted EBITDA was $549 million dollars. an increase of $258 million and 89% from 2021. Compared to full year 2019, EBITDA increased 25% on revenue that is nearly $300 million below 2019 levels. Full year 2022 adjusted EBITDA margins were 14.3%. That's nearly 400 basis points better than 2021 and 360 basis points higher than 2019. These significant improvements reflect the impact of our transformation, structural cost reductions, and continued focus on mix and price improvement. What else contributed to the year-over-year gains? Volume growth, increased metal prices, $34 million in COVID incentives, and $10 million in tariff-free funds. Those COVID incentives, by the way, helped offset operating inefficiencies, as we hired and trained nearly 1,000 new workers. Pass-through revenues due to metal volatility dampen margin percentage performance since they typically generate little or even zero profits. Otherwise, we would have delivered even better margin percentages in 2022. 2022 adjusted EPS was $1.99, up from 13 cents per share in 2021. We recognize that cash generation is key to value creation. In 2022, we generated $148 million of free cash flow compared to our guidance of greater than $90 million. It is also significantly higher than our 2021 free cash flow of $6 million. Third, I want to share progress on two contributors to value creation, Working Capital and CapEx. We ended the year with managed working capital at 30% of revenue. Last quarter, I shared that we were targeting working capital to be in the low 30s by the end of 2022 and expected to hit our 30% target in 2023. The operating teams continue to amaze, outperforming expectations and hitting the 30% working capital target sooner than planned. It benefited 2022 cash generation and liquidity, and positions us for additional future improvements. One more note on working capital. In Q4, customers made advanced payments to lock in their 2023 production slots. This is another signal of strong titanium and nickel demand. This served to pull forward approximately $30 million of 2023 cash flow into Q4. When it comes to CapEx, we continue to maintain strict discipline. Capital expenditures totaled approximately $130 million in 2022. We also accrued $38 million for capital items at year-end. This was due to supply chain equipment delays and resulting timing of payments. The accrued capital items will roll into 2023 CapEx. Even so, we expect to keep 2023 CapEx within the $250 million target we set in our last February's investor conference. More on that in a minute. The fourth key takeaway to highlight, our strong balance sheet, which provides a stable foundation for value creation. We closed out 2022 with more than $1.1 billion of liquidity. That includes $584 million in cash and $538 million available under the ABL facility. The net debt ratio, was 2.2 times at the close of 2022, down from four times at the beginning of the year. Great headway on our goal to de-lever the balance sheet. When it comes to pension, we are now 88% funded on a GAAP basis. Our net pension liability at the end of 2022 was $219 million, down from $396 million at the end of 2021. What accounts for the drop in net liability? increases in discount rates and company contributions offset by negative asset returns. The 20% negative asset returns in 2022 reflect pullback in the broader financial markets. Asset returns and discount rates can change from period to period, but I want to be clear. We remain focused on executing the pension glide path. Our strategy remains the same, and we are advancing. We are near completion of our current stock buyback program. In 2022, we repurchased 5.2 million shares for a cash cost of $140 million at an average price of roughly $26.92 per share. We have $10 million remaining on the current board approved program. Now, let's talk about full year 2023 outlook. You'll see our targets captured on slide nine of the accompanying presentation on our website. Bob painted a clear picture of our markets. Bottom line for 2023, it will be another year of robust, meaningful growth driven by strong and growing markets. The demand is there. While inflation and supply chain challenged us, we successfully offset the impact in 2022 through pricing actions, pass-throughs, and capturing offsetting efficiencies. While inflation seems to be slowing and the supply chain is normalizing, A degree of uncertainty is still expected in 2023. With the team well practiced and taking quick and deliberate action, we believe we can achieve similar success in offsetting negative factors. Post-retirement benefit costs, which include pension and OPEB expense, will increase a net $36 million in 2023. That's within the estimated $30 to $40 million range shared in our last earnings call. The expense increase is largely due to changes in actuarial discount rates and negative asset returns in 2022. The additional expense will not impact 2023 contributions to the plan. As a matter of fact, we made our 2023 voluntary contribution of $50 million earlier this week. Plan on another $50 million contribution in 2024 as planned. we have made tremendous progress on the pension in recent years. Since 2013, total plan participants have declined more than 62 percent, and there are now fewer than 900 active participants. We have also worked on net liabilities, executed numerous annuitization transactions, and made voluntary contributions to the plan. We have a clear objective, execute the glide path strategy to eliminate pension impacts. Now, what are EPS expectations for 2023? We expect 2023 adjusted EPS to be in the range of $2 to $2.30 per share. That includes a 24 cent impact from the post-retirement expense increase. Non-recurring items in 2022 and the increased post-retirement expense in 2023 can impair visibility of our underlying EPS growth year over year. Removed from the equation impacts of COVID incentives, tariff refunds, and the incremental post-retirement expense. The result, underlying EPS is increasing roughly 40% year-over-year at the midpoint of our 2023 guidance. That's the bottom line about earnings. Now, how are we thinking about cash generation? We expect full-year 2023 free cash flow to be between $125,000 and $175 million. As I shared, we generated $148 million of free cash in 2022. Now, adjust for the $30 million of cash pulled forward by customers prepaying for production slots. That brings our 2022 free cash flow to roughly $120 million, closer to where we previously guided. Now, think about the impact of 2023. Our 2023 free cash flow would have been $30 million higher than the present guidance. Again, let's remove the noise to understand the underlying growth. 2023 free cash flow at the midpoint of the range is essentially 50% higher than 2022, once you consider the impact of customer prepayments in Q4. We made solid progress improving working capital efficiencies in 2022, hitting our 30% target during a dynamic growth period. In 2023, we expect to make incremental improvement on our 30% working capital level. Overall, we expect managed working capital to be a $100 million use of cash in 2023, give or take. That magnitude is similar to the overall cash impact we saw from managed working capital in 2022. We anticipate 2023 capital expenditures will be in the range of $200 to $240 million including the $38 million carried over from 2022 into 2023. The high end of our range is still below the $250 million CapEx placeholder we shared at our investor conference. We are carefully managing our maintenance capital spend to ensure assets are in ramp-ready condition. Our 2023 CapEx includes capital for the titanium melt brownfield expansion project and 35% production increase from existing assets. I do want to reinforce that this incremental capacity is largely committed under existing contracts. And as a reminder, we target returns of 30% or greater on growth projects. Let's talk about Q1. For the first quarter, we see continued strength in our core markets and continued softness in industrial and consumer demand. Our Asian precision-rolled strip business will likely continue to be impacted by COVID-related challenges. Those conditions could exist for the Asian business into Q2 as well. It is important to remember that the additional post-retirement expense I mentioned earlier will create roughly $0.06 of incremental expense each quarter in 2023 relative to 2022 levels. We expect Q1 EPS to be in the range of $0.45 to $0.51 per share, excluding the incremental post-retirement benefit expense The EPS range is modestly better than Q4 2022. Performance is obviously expected to ramp as the year unfolds, reflecting continued sales growth, added capacity, and recovery in our Asian precision rolled strip business in the second half. Before I go into the extended outlook, let me give you some context related to metal price pass-throughs to customers. Metal prices generally increased in 2022 from 2021 levels. we estimate full-year 2022 pass-through revenues represented $300 to $350 million over 2021 levels. Remember, pass-through revenues typically generate minimal profits and are generally dilutive to overall margin percentages. I thought that might be helpful as we now jump into our 2025 outlook. In our investor conference, we shared that we expected to see revenue grow at a compound annual rate of between 9% and 11% from 2021 to 2025. That would bring our 2025 revenue to $4.25 billion at the top end of the range. Last quarter, I shared that we expected to be at the top end of that CAGR range. We see many positive indicators in our business, including continued strength in our key end markets, pricing opportunities, and added capacity. While we are not going to update our targets, I will share that we foresee potential upside to a 12% CAGR for the 2021 to 2025 period. Note that this growth assumes moderated metal prices, not the elevated levels that we've seen lately. I can save you the math on that additional growth potential. A 12% CAGR from the 2021 levels will result in 2025 revenue of roughly $4.4 billion. Our 2025 margin percentage targets remain at 18 to 20%. The aerospace ramp, with its improved sales mix and higher volumes, should expand margin percentages from current levels. Benefits of our ongoing transformation, as well as growth in defense, energy, and our advanced alloys and ultra performance materials, are expected to be accretive as well. These forces should drive growth well beyond 2025, but we'll save that discussion for another day. Given our growth trajectory coupled with disciplined capital allocation, we see significant opportunity to create value for our shareholders. With that, I will turn the call back over to Bob.

Thanks, Don. I completely agree with you on the significant opportunity that's in front of ATI, as well as the fact they were well-positioned to go get it. 2022 was a year of growth and preparation for us. Our strategic efforts put us in a strong position across ATI. The markets? Ready. Orders? In. Capabilities and equipment? Running faster every day with capacity? Increasing. And the team? Already hard at work. Now we're building on our momentum. We're accelerating to meet and exceed our 2025 targets. We're proud of our 2022 results. More specifically, I'm extremely proud of the team that produced them. We're looking forward to even more to come. We are proven to perform. Operator, we're ready for the first question.

Thank you. If you would like to ask a question, then please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. While preparing to ask your question, please ensure that your phone is unmuted locally. We will pause for a moment to allow questions to be registered. Our first question comes from Richard Safran from Seaport Global. Richard, please go ahead.

Bob, Don, Tom, good morning. How are you?

Good morning, Richard.

So, Bob, I wanted to follow up on your opening titanium remarks. Don, this may also be for you as well. I'm trying to get a sense as to how titanium is going to affect your mix and margins as we go going forward. I'm wondering if titanium and alloy sales are going to be accretive to margins. And from what I'm gathering, based on what you said, and correct me if I'm wrong, it looks like the impact is going to be sometime in 24, if not 25. Is that right?

Yeah, this is Don. I'll give you the short answer. Yes, as titanium increases in our mix, we would expect that to be accretive to our margins.

And as far as timing goes, we're actually seeing it unfold now, and it will continue to build momentum through 2024 and 2025. And second here.

On your comments about defense, I wanted to know if you could take a little bit longer view on defense growth, how you're thinking about that, and how you think that's going to reshape the portfolio and impact your mix. And since you're selling materials where you own the IP, I'm just wondering how defense margins might compare with commercial margins.

Yeah, a couple of questions in there. I'll take the last one first. I think over time, defense margins will approach commercial aero margins for the same basic metal units. Commercial aerospace tends to have more differentiation in some of the more exotic titanium grades and nickel grades. But over time, for the common specifications, I think they'll be about the same because that's how we're going to manage our capacity. In terms of the opportunities, you know, we are excited about what's going on in defense. Other than the tragedy in Ukraine that's driving ground vehicle sales, we feel well positioned with, you know, naval carriers, submarine fleets. You know, we're benefiting and we expect to see the benefits of the AUKUS program. And those are huge long-term programs. We're excited about that. We've gotten some awards from the next generation military vehicles, the mobile protected firepower activity that's out there. We see those vehicles coming. Certainly the Abrams tank is a heavy titanium user for lightweight reasons, and that's exciting. And then, you know, all kinds of things, including more space. You know, we put kind of defense kind of crosses over between vehicles. what we see in commercial versus defense, but the commercial space and defense space is really picking up and we see opportunities a little bit longer term, but in our lifetime in hypersonics, right? So you put all those things together, you know, it's a double digit, you know, mid-teens kind of growth for the long term. And again, based on differentiated materials, you know, that really bring value to the end product. So, feel well positioned and bottom line, lots of mission critical platforms for the U.S. and its allies. I hope that, does that help you, Richard?

Of course it does. Thank you, good sir. Appreciate it.

Yep.

Thank you. Our next question is from Phil Gibbs from KeyBank Capital Markets. Phil, please go ahead.

Hey, good morning. Morning, Phil. This titanium debottlenecking, the 35% from 25% you had mentioned a couple months ago, does that involve re-scoping the brownfield? Because I remember the brownfield was 35%. So is this staying at 60% or is this moving to 70%?

It's additive to the total mix. So it does not change what we expect to get out of the brownfield investment. So you're right. Our total capacity is actually, is going up to closer to 70%. You did the math right. So we're excited about it. You know, the long lead time items that are on the books ordered wise, and it's going to be really big. We're happy actually that the demand has been so strong and the customer commitments have really been strong, which is why we raised the short term demand, our capacity number from the 25 to the 35. And, And we were out there last week putting our hands on them, and it's pretty exciting to see the ramp is underway.

And you feel all this added capacity is supported by customer commitments?

We do, and it's moving from the talk about it to the commit to it phase, and a lot of those commitments have been made based on what we're seeing in the market. You know, I think... probably the last 90 days, the reality of the demand in 2023 is coming to the market. And we're seeing lots of interest and our lead times are stretching out to show it. So the simple answer is yes, we feel the customers are committing and have committed in many cases to the capacity.

Do those involve some of these prepayments that you'd mentioned? So it sounded like it was a $30 million investment. tailwind to cash in the fourth quarter. Now, is that $30 million become a $30 million headwind as you ship against those commitments next year? Yeah, I wouldn't call it a headwind. Do you have to give it back?

Well, the way I would look at it, Phil, is number one, the indicator as to how strong the demand is in the market, that customers are willing to make those prepayments in order to reserve their slots. The reality is what's happened is that's cash flow that we would have expected to hit in 2023 that has been accelerated into Q4.

Now, we don't look at that as necessarily creating a divot for us in 2023. You know, clearly when you look at our cash flow guidance for 2023, we didn't take that down by, you know, by respect of $120. or excuse me, $30 million. We set the midpoint at 150. So that's the way to look at it.

And I think that, again, the strongest takeaway that you can make on that, those advanced payments are the demand, which we keep saying demand.

We said it 50 times already in the call, but demand is truly strong.

And our customers, this is not a blip. Our customer's are seeing a sustained need for our materials, and it's going to increase from here.

Thank you. Go, go, go.

Thank you. Our next question is from Seth Seifman from J.P. Morgan. Seth, please go ahead.

Thanks very much, and good morning, everyone. Good morning. I wanted to start off asking about the the profitability in HPMC and how we should think about the drop through in 2023. Some quarters were stronger than others in 22. This last quarter looked a little bit lighter than we expected and kind of moving from the 18% this year to the low to mid 20s out in 2025. how to think about that progression, whether it's kind of back-end weighted or more even across the years.

Yeah, I think the easiest way to think about it is we've talked about incremental margins going forward north of 30%, I think is what I've shared. We still expect that that is intact. We did note that with the additional $36 million of post-retirement expense in 2023. That's going to create some earnings headwinds. It'll also be a bit dilutive to the overall margins for the business. This is not HPMC specific, but for the overall margins. The good news is we're going to more than make up for that roughly 80 to 90 basis point headwind due to the post-retirement. Now, when you think about HPMC, there's strong growth that we're seeing in that business. The mix is changing as we get more and more of the next gen products that are being sold. So, you know, I think you should expect to see continued expansion, you know, into the kind of range that we talked about in our investor conference, which I believe we said, you know, expect for HPMC margins in the 20, kind of low to mid 20s. And we still see ourselves on track to accomplish that in that time frame. Okay. Okay. Excellent.

And then on the titanium, we think about the incremental titanium growth coming in 2023 on the airframe side. I guess, you know, should we think about most of that coming in A and S? And then you talked a little bit about the growth catalysts for 787. And, you know, we are at a place now where you think Boeing, you know, should be moving toward a higher rate. But in a more, I guess, is that the main driver of the increased demand that you're seeing? Or is it much more broad based? And to the extent it's more broad based, can you touch on the other drivers?

Yeah, a couple questions in there, Seth.

I think the question, the first one was around near-term titanium impact. You know, so we're going to be ramping up here in the first half, and it takes a little while to go from melt to final product in the back half. So, you know, from a top-line perspective, you know, we'd expect $50, $60 million of top-line revenue from this additional melt in 2023 is probably a good estimate that Don would let me get out there for you. And then in the second half, yeah, clearly in the second half, you asked about AANS and HPMC. I think it could probably be 50-50 between the two. You know, it's titanium 6-4 for the most part, so it can go a lot of different ways. So if you're modeling it, I'd feel comfortable 50-50 between the two segments. I think that was the first set of questions. The second part was around 7-8-7. and is that the principal issue? I would say we're not done with the titanium share reapportionment from the prior sources. You know, people still have material flowing, you know, from Russia, and they're working hard to get their supply chain reshored or reaffirmed up for what they want. You remember the VSMPO guys are a very integrated business. And the alternative is not so integrated. So there's still a lot of work to be done, I think, in that supply chain. So we're seeing part of that still continuing. I can't speak for our customers, but we actually exited our joint venture with the Russians and we did what was right for our customers. It just took us a little while to exit from that. So it's not unusual that they would do that. The wide bodies in general, you know, we've repositioned our mix that We're more and more agnostic as to which OEM we're supplying, and certainly the wide-body phenomenon in the short term has been in the U.S. in terms of its shortfall, but Europe's been good. Airbus has been good on the wide-body, and we're benefiting from our relationship with them there. So I think the catalyst that I would say is, yep, H7 demand, wide-body in general. realignment of supply chains. And then I think we're on the verge of starting to see some of that early 777 stuff. I know it's a ways before it enters into service, but I think that catalyst is coming very, very quickly, probably in the 2024 timeframe, given the long lead times that we see. So we're pretty excited across the board on wide body in general. And, you know, our long-term guidance, when we did our 2025 guides, about 100 narrow bodies, 20 wide bodies by 2025, you know, those estimates are looking a little more conservative than we thought. So we're pretty excited about all the catalysts coming together.

Great.

Thank you very much.

Thank you. Our next question comes from Gautam Khan from Taiwan. Gautam, please go ahead.

Hi. Good morning, guys.

Morning, Gautam.

I wanted to ask you about lead times right now. How far out are you guys quoting on your various aerospace products, so airframe, jet engine, and how has that changed over the last six months?

Yeah, so the last six months. Good question, Gautam. Good morning. So one thing that has kind of gone on for us during the COVID pandemic was a shift from distributors as a key part. They're still important. Distributors are a key part. But the team's done an excellent job of aligning more closely with OEM demand. So we are getting, you know, a few more direct signals as a percentage of our mix in aerospace and defense. So that's been positive. I would say today, depending on the part and the flow path, customers are willing to commit orders and some products into Q1 of 2025, believe it or not. So we do have a fairly controlled order entry program against those commitments. They have that kind of visibility and they want to make sure they get their pipeline. Now, I would say more of the meal products type things, plate, You could probably still get some titanium in Q4 of 2023, but those slots are going fast, so I would wait around. And then the general more specialized alloy mill products that come out of our North Carolina melting probably into 2024, early 2024, if not Q2 of 2024. So where were we six months ago? I know where we were eight quarters ago, eight quarters ago, you could place an order in the quarter and get it right. So that was eight, six to eight weeks. And that was obviously in 2020, 2021. And, um, those days are gone. So yeah, it's really, I would say the average lead time is 50, 60, 70 weeks, depending on the product.

Wow. Okay. And do you guys have any long-term contracts coming up for renewal? over the next year and i'm just curious like how pricing it sounds like this is a good environment for pricing uh to move higher even on ltas as they come for exp you know renewals is that is that meaningful in any way uh yeah we don't have any opportunity yeah i don't believe we have any major ones in 2023 um you know they are kind of layered in so you know 2024 2025

probably 2025 will be the first major transition year to other contracts. Most of the big OEMs are out. You know, we have quite a few that go to 2030, 2035, those kinds of numbers. And most of those have, you know, inflationary or pricing pass-throughs. I would say, you know, for people who don't have contractual commitments or don't have long-term relationships, you know, spot pricing is up significantly in the market. And, um, you know, it's the market price. So we're taking advantage of the opportunity. So I think there are pricing opportunities, uh, both on the raw material pass through as well as just fundamental demand.

Yep. Okay. And last one, just on the VSMPO opportunity, where has Boeing moved a little more urgently? Have you heard from other OEMs besides Airbus? Um, who want to go ahead and lock up supply with you guys.

Yeah, I was in Seattle earlier this week enjoying a great celebration of the final 747 being delivered. It was a great moment in history and proud to have been part of that. I do think all the OEMs are moving with urgency. I think the wide-body recovery across the board is driving that. I think it's a complex issue. It's not as simple as just redirecting. Oh yeah, we'll buy this stuff over here and everything's going to be fine. You know, it's a complex supply chain, complex and very important specifications. But I do think over the last six months, I think they have started, there's a lot of urgency everywhere I go. Anytime I get a phone call from a customer, you know, There's a reason for it, but we're in a great position to be able to take advantage of it. And I've been talking to more customers along with our chief operating officer, Kim Fields. We talk a lot about the customers on a regular basis, and it's really trying to get clarity of demand, and they're working on it with urgency.

Got it. Thank you very much.

Thanks, Gautam.

Thank you. Our next question is from David Strauss from Barclays. David, please go ahead.

Thanks. Good morning, everyone. Good morning, David. John, is there any capital deployment assumed in your guidance for 2023?

So, David, when you say capital deployment, could you be more specific?

Yeah, I guess returning cash to, you know, debt pay down or share buyback, anything assumed in the guidance you gave.

Yeah, so what I would say is there's a couple elements that I would highlight. One, of course, when we think about capital deployment, we kind of have three legs to that stool. One is investing for growth. That's, for us, primarily focused on the CapEx, and we've talked about our CapEx guide at 200%

240 in 2023.

And then the second leg on that stool is about de-levering. And so to us, there's two things that come to mind. One is the pension. And first and foremost, we're making voluntary contributions to the pension plan. This year, we have a $50 million contribution. We actually made that contribution earlier this week. So that is out of the way for 2023. We have another $50 million contribution that we have planned for 2024. And then in terms of other debt actions, we really don't have any imminent debt maturities that we're going to have to deal with. So there's no repayments that are required when it comes to bank debt or anything of that sort. And nothing is planned. I don't plan to take out any of our ABL term loans or anything like that. And then the third leg, of course, is return to capital shareholders. That's extraordinarily important to us. In 2020, or excuse me, 2022, we repurchased about $140 million of shares. We've got $10 million left on that $150 million program. So we'll finish that share repurchase program up in early 2022. And then, of course, we're expecting that we're going to generate a healthy amount of cash flow as the arrow ramp unfolds. And our expectation is that we're going to put that money to work and returning capital to shareholders continues to be a very, very important thing to us. And so it'll continue to be a feature. So at this point, the board has not approved additional share repurchases beyond the remainder of the existing program. But I wouldn't read anything into that fact because of timing.

of an approval would be after we finish up the existing program. I hope that helps.

Yeah, sure. And then a question on longer-term free cash flow conversion. So it looks like in 2023 you're targeting somewhere around 50% free cash flow conversion on net income, close to you know, probably 25% or so, 20% on EBITDA. You know, I think before you talked about 90% free cash flow conversions to target, you know, out in 2025, where it looks like, you know, you're targeting somewhere around 800 million or so, 750, 800 million EBITDA. You know, what, you know, maybe the building blocks for free cash flow out there?

Yeah. So I'm happy to touch on that. Your math is right, by the way. If you do You take the EPS guidance and you back into cash and cash conversion. We're in that 50% range right now. We've made a significant improvement, by the way, in that metric over the last couple of years. But our stake in the ground is 2025 cash conversion of greater than 90%. And what's going to happen is, of course, everything on cash generation starts with profitability. Our profitability has increased and is expected to increase significantly. That's going to play a key part. We're unlocking the efficiency in our managed working capital. So a huge step in that already in 2022 when we hit our target at 30%, we're going to continue to make progress and improve on that working capital efficiency. Another important part of it is going to be CapEx, capital spending. And so this year, our capital spending range has a midpoint of about 220. And what I shared previously still holds. As you look at between now and 2025, what I expect is our capex spend is going to edge down. And by the time we get to 2025, I would expect our capital spending to be close to our depreciation rate. And our depreciation rate at that point will be somewhere between probably 150 and 170 million. So that's helpful as well. And so all those are some of the building blocks to improving this cash conversion metric.

I also expect, by the way, that when we're out in the 2025 timeframe, I still expect to be a limited cash taxpayer, which is going to be helpful at least in that period when it comes to to cash conversion.

Okay. Thanks very much, Tom.

You bet.

Thank you. Our final question is for Team Natanas from Wolf Research. Timna, please go ahead.

Yeah, good morning, everyone. The first question I have is just really... Good morning. We talked a lot about airspace and defense, so I just thought we should probe some of the other end markets. I know they're de-emphasized. But on the positive side, you sound more constructive on specialty energy. So just wondering for a little more color on that and if you've quantified any of the IRA benefit and timing. And then on the more cautious side, you know your industrial headwinds contrast with what we're hearing from others. So I'd love to get a little more color on that and why you're confident

in the h2 timing for china demand recovering why not earlier why h2 that would be really helpful all right there's a lot in that one uh do you want to take the first one down on the china issue you want me to do sure no i'm happy to do as far as the the china headwinds you know the the restrictions of course uh have fallen off significantly you know the downside is there's more covid and uh and so what we're seeing In our business and in a more broad circumstance, we're seeing those actual COVID cases that are creating the headwinds in China. And we have seen that, we saw that in the kind of latter Q4. I think we've seen a bit of a step down in early Q1. And we'd like to see that headwind go away. We're just, you know, based upon the current pace of things, our expectations is that it's going to be with us in the first half. Now, it could be that the COVID cases recover much quicker than we're planning. And, you know, our business is ready to roll. I can tell you that. But, you know, in an abundance of caution for how we view the business and the trajectory, our sense is it's going to take us the first half.

That's right. I think the thing is we want to see it before we forecast it. That's the bottom line. Let's see it materialize because there's been a lot of ups and downs in that market over the last couple of years. I think your other question, Tim, was around oil and gas and energy in particular. I think we see strength, specialty, specialty energy. Yeah, we definitely see the oil and gas side with the subsea, the offshore and the subsea systems, nickel clad, various things, specialty alloy things. for the deep water or subsea systems. That's growing and continues to come back strong. You know, we continue to see in the specialty side lots of activity in, you know, next generation technologies, civilian nuclear is actually coming back. So we feel pretty optimistic about those applications. And I would say, you know, we've had a long history with flue gas desulfurization of coal plants in Asia. And although that market kind of goes up and down a little bit with the nickel price in terms of how they want to purchase. But bottom line is we feel pretty good about those markets with continued growth. I would say high single digits, low double digit kind of growth through 2023. And you asked about Inflation Reduction Act impact and timing. To be candid, We haven't factored that in. That would be an upside if it came. I'm not sure it will come to the markets we're serving. A lot of the opportunities we see for special energy actually are outside the United States. So probably not such a big impact for us.

Okay, thanks. And if I could sneak one more in. You mentioned a couple times in the outlook slides the ongoing or benefits from reshoring trends in material sourcing. I just wondered if you can explain a little more what that means And along those same lines, I know in the past you've talked about molly prices, molybdenums exploded. Does that even matter anymore for you? Thanks again.

All right. Let's see. There's a couple in there, Tim. You're getting like six today.

That's pretty good. On molybdenum, we always care about molybdenum. But I think, you know, with the material pass-through, you know, we work hard to pass it through and not take that risk. I think the team's done a good job of that, but it's always an issue in terms of how fast and what kind of pattern it goes up. So that's kind of number one. I think your second question was around reshoring. So the first and obvious one is in commercial aerospace. Second and less obvious one is in the medical space. Over the last few years, we had seen material purchases that were more common purchases. I wouldn't say commodity, but we're more standard moving to places like Russia, China, various other sources. I think that particular supply chain is interested in reshoring. We're also seeing some activity in the electronic space. Obviously, there's a huge activity. If you've been to Phoenix lately, you'll see a lot of building of chip manufacturing, and we actually provide some specific materials that go into the precursors that go into chip manufacturing. That's been positive for us. And, you know, I think it's the surety of supply chain, the surety of the quality. So between electronics and medical, I think those are probably two other good examples. And then, you know, we do a lot of work that has historically brought materials out of China. And I think the growing sensitivity to near-term supply chains of input materials. You know, everything we make is alloyed in one shape, form, or another, and those alloying ingredients come from all over the world. So we've been able to really focus on how do you near-shore or re-shore some of those kind of things. So hopefully that's a couple of good examples to give you some color on where else that's going on.

Okay, thank you. Thank you. That is now the end of the Q&A session, and I will now hand back over to Tom Wright for closing remarks.

Thank you for joining us today. A replay of this call will be available on our website. This concludes the ATI fourth quarter earnings call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.