ATI Inc.

and welcome to ATI's second quarter 2023 earnings call. Today's discussion is being broadcast on our website. Participating in today's call to share key points from our second quarter are Bob Weatherby, Board Chair and CEO, and Don Newman, Executive Vice President and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results, An outlook 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, Dave. Let me begin by welcoming you to the ATI team. We're really happy to have you with us, and we're seeing the impact of your presence already. So thanks for being here. We reported another strong quarter with sequential top line growth and margin expansion. We've accomplished a lot, and I'll use my time this morning to focus your attention on the three highlights about the quarter that I think are most important. First, our core aerospace and defense markets are strong. We continue to grow in A and D, both in absolute dollars and as a percentage of our total revenue and income. Why is this so important? Q2 A and B sales increased 5% over the prior quarter and 39% over Q2 of 2022. Specifically in defense markets, sales surpassed $100 million in the second quarter. This is up 7% from the prior quarter and 25% year over year. There's sustained demand in materials for military ground vehicles, rotorcraft, and naval applications. Looking longer term, we're playing a key role in the advancement of hypersonic technologies, an area with significant growth opportunity for our highly differentiated materials. Demand continues to accelerate. Our order backlog is up more than 20% from the beginning of the year, reaching 3.5 billion at the end of June. When you put it all together, strong sequential top line growth in sales, increasing productivity, a very healthy backlog, We're in a very robust part of the cycle with the best still ahead of us. Our percentage of ATI overall revenue attributed to aerospace and defense is now 58%. Just a year ago, that number was 46%. We're making rapid progress toward our AMD sales goal of 65%. Highlight number two, our strategic transformation continues to deliver greater and greater benefits. Our high-performance materials and components segment is hitting its stride. Sales in this segment grew 12 percent quarter-over-quarter and 33 percent year-over-year, driven by ramping commercial aerospace production and robust defense demand. Equally important, HPMC EBITDA margins increased 350 basis points sequentially to 20.5 percent of sales. This increase was driven by improved overall pricing, mix, and volume. All three are enabled by the continued realization of efficiencies in our operations. Our operating teams are doing great work, continuing to improve efficiencies and de-bottle act our critical production flow paths. The team also recognizes that we're not done improving. We still have work to do to improve the velocity of inventory through our system. We're not where we want to be on managed working capital as a percentage of sales and for a variety of reasons that Don will provide color on shortly. But I'm confident we'll see tangible improvement in this metric in the second half of the year. Highlight number three, ATI adjusted earnings per share was 59 cents, landing at the top end of our guidance range. It all starts with doing what we say we will do and delivering on our commitments to our customers and our shareholders. And we did this in the face of challenges, including continued recessionary headwinds in the industrial markets served by our advanced alloys and solutions segment. Our Asian precision rolled strip business is stabilizing, but not yet in recovery. And we're experiencing continuing late deliveries directed by forging billets supplied by third parties. Q2 was a strong, very productive quarter for ATI. It's one more chapter, and there's more of this story to come. I'm excited to talk about how we see this quarter's results leading us into a strong second half of 2023 and beyond. I'll provide more on that in a moment, but first, Don will share his take on these results and our guidance for the second half. I'll be back after that to share my perspective on ATI's future and take us into questions.

Thanks, Bob. Following those same headlines, I'll add some more color on our results and financial trajectory. First up, we are increasing A&D content. This is directly in line with our strategy to expand our aerospace and defense leadership. Reaching a near-term high, 58% of ATI's Q2 revenue is driven by A&D. This is up 1,200 basis points year over year and up 200 basis points sequentially. With strengthening demand, A&D offers some of our highest margins and projected sustained growth. Our goal for A&D content is 65% or higher of our total business. A&D should continue to drive growth for ATI, and we project it will be greater than 60% of total sales by year-end. Within A&D, sequential jet engine sales increased 10%, and defense sales rose by 7%. Strong trends we expect to continue. Turning to headline number two, margin performance. ATI's overall adjusted EBITDA margin increased to 14.3%. That's an increase of 150 basis points sequentially, driven by our HPMC segment. Overall adjusted EBITDA increased by 13% from last quarter and 5% year over year. Let's take a closer look at HPMC's Q2 results. 2023 Q2 sales increased $56 million, or 12%, compared to the first quarter of 2023. Remember, AMD content makes up 83% of total Q2 HPMC sales. It's a key driver in the 33% year-over-year increase in HPMC revenues. Another positive in our HPMC performance was a reduction of our lingering cost inefficiencies from 2022 and Q1 2023. As expected, that roughly $5 million headwind incurred in Q1 declined this quarter. The improved mix inefficiencies are clearly visible in HPMC's adjusted EBITDA margins, which improved 350 basis points sequentially to 20.5%. Our 2025 targeted EBITDA margins for HPMC are in the low to mid 20% range. This puts us in line with those 2025 targets. Strength in HPMC offset flatness in our AANS segment, where we saw sequential sales decline. That was primarily due to softness in general industrial end markets and lingering economic impacts associated with our Asian precision rolled strip business. We're doing a lot of things well, and it shows in our results. One area that we know there's opportunity for improvement is managed working capital. It's an area of critical focus for ATI and our leadership team. At the end of the second quarter, managed working capital was $1.6 billion, or 39% of sales. This balance drops by 120 basis points when adjusted for a $50 million strategic raw material purchase we made in Q2. That purchase was funded with a draw on our ABL revolver. We expect that strategic inventory largely to be consumed and the ABL draw to be repaid by the end of the year. What else is driving higher working capital? I would point to three things. First, we've put inventory into position for the continuing A&D ramp. As Bob noted, our backlog has grown more than 20% year to date including 9% growth in Q2. Second, our production rates are improving, which can create inventory spikes as we work to solve downstream bottlenecks and constraints. And third, we have inventory associated with expanding titanium melt capacity ahead of ramping sales. The good news is all of these drivers lead to higher sales, earnings, and cash generation. We focus on inventory for a purpose. Ramping ahead of new revenue is the best purpose I can think of for near-term inventory increases. We are focused on hitting our 30% managed working capital target by year end, and we're confident we will deliver. We have equally sharp focus on efficient and strategic capital deployment. Our CapEx for the first half of 2023 was $103 million. which includes $38 million of carryover related to capital expenditures accrued at the end of 2022. Overall, we remain on track in 2023 with our disciplined capital investment plan. We're holding our previous annual CapEx guidance of $200 to $240 million. It's important to emphasize this guidance includes expenditures associated with our recently announced titanium melt expansion in Richland, Washington. We're managing the challenges of working capital in concert with prudent and focused capital expenditures. Therefore, we are holding our annual range of free cash flow at $125 to $175 million. Expanding on cash management, we generated $68 million of cash from operations in Q2. We ended the quarter with a total liquidity of approximately $770 million. This reflects $267 million in cash and $500 million available under our ABL facility. We remain committed to our balanced capital deployment strategy, which includes returning capital to shareholders. In last quarter's call, we announced the next tranche of share repurchases with a $75 million buyback program. While we did not repurchase shares in Q2, we expect to complete the $75 million program by the end of the year. And our third area to highlight, it was a strong quarter for earnings per share. At 59 cents per share, adjusted EPS was at the high end of our guidance range and 3 cents above the midpoint of the range we provided. The higher performance reflects favorable price and mix tied to A&D growth. This was partially offset by slower industrial demand and moderately lower raw material metal prices. This positive performance builds on our results from the first quarter. This was our fourth consecutive quarter in which revenue exceeded $1 billion. Our revenue of $1.05 billion represents a 9% increase year over year and reinforces the sustained strength and demand. We are confident in our position as a premier aerospace and defense supplier. Now, let's look forward to Q3 and full year guidance. For the third quarter, we expect adjusted EPS to be in the range of 51 cents to 57 cents. The midpoint of the range, 54 cents, is below Q2, driven by planned facility outages in the third quarter. It also reflects our expectation that sales in our Asian precision rolled strip business will continue to be pressured due to China's economic conditions. We are also assuming the slowdown in industrial demand will continue in Q3. We are raising our full year EPS guidance to range of $2.15 to $2.35 per share. You can use the full year and Q3 EPS guidance to get a sense of how we're thinking about Q4 performance. Assuming Q3 and full-year EPS are at the midpoint of their respective ranges, then Q4 EPS would be in the range of 63 cents per share. That would be a strong finish to a great year and would provide nice momentum as we move into 2024. What would drive an EPS increase in Q4? Continued robust A&D demand. contributions from the restart of the 34th Avenue facility in Albany, Oregon, and continued operational improvements. With that, I will turn the call back over to Bob.