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spk06: Hello all and welcome to ATI's first quarter 2024 earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Dave Weston, Vice President of Investor Relations. Please go ahead.
spk03: Thank you. Good morning and welcome to ATI's first quarter 2024 earnings call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our first quarter results are Bob Weatherby, Board Chair and CEO, Kim Fields, President and COO, 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 and outlook and can also 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 accompanying presentation. Now I'll turn the call over to Bob. Thanks Dave.
spk04: Good morning everyone. In the first quarter of 2024, our leadership team focused on the things within our control, acting with urgency and a forward-looking perspective. The results reported today reflect those efforts. This morning I'll summarize the three key points I want you to take from our performance. Point number one, Q1 financial results surpassed expectations. We delivered adjusted earnings per share for the quarter of 48 cents, exceeding the top end of our estimated range. Revenue was over one billion dollars for the seventh consecutive quarter. Our advanced alloys and solutions segment led the way, achieving a 14 percent EBITDA margin in Q1. This reflects a double-digit sequential growth in the electronics and medical markets and strong A&D sales and specially grown products. In addition, our Oregon team delivered an accelerated recovery from January's Pacific Northwest storm-related outages. It really was a great performance across the segment. We expected the high-performance materials and components segment to be down in the first quarter, given the late year production outages we discussed in our last video. Equally important, our Forge Products business unit racked up another great quarter. That's two in a row, delivering the highest revenue in their history. All of this sets the stage for strong sequential growth and segment EBITDA margins back above 20 percent in Q2. Our commitment to managing working capital intensity delivered significant first quarter improvements or free cash flow over the prior year first quarter. We fully executed our share repurchase authorization of $150 million, directly sharing the benefits of our strong performance with our shareholders. We did what we said we would do and what we needed to do in Q1. Point number two, demand for ATI aerospace and defense as well as aero-like products remains robust. While the percentage of A&D sales dipped slightly below 60 percent in the quarter due to near-term order patterns and the impact of the Q4 outages, the composite of A&D and aero-like business remained above 75 percent. We're confident sales in the coming quarters will put us back on the trend line to our target of 65 percent A&D sales. ATI's market position is very broad, significantly more diverse than before the pandemic. We're producing for every commercial airframe and every jet engine program. The struggles with the 737 MAX and the resulting impact on near-term LEAP 1B engine deliveries are much publicized. The impact on ATI is not meaningful. Any impact is more than offset by demand to support the geared turbofan accelerated overhauls, elevated engine spares, and increased defense and commercial space activity. And for clarity, the revised lower 737 MAX and LEAP 1B orders are reflected in our 2024 full year guidance. Our focus is firmly on end markets and premium products where our differentiated capabilities and materials are most highly valued. Point number three, we're increasing our 2024 EPS guidance driven by strong demand, improved operational stability, and a healthy pricing environment. We maintain our expectations for both top and bottom line growth in the second half. Our operations are performing at rates that support the second half guidance. Kim will share more color on this in a moment. As we leave the first quarter and look ahead to the strong outlook for Q2 and the rest of 2024, we've reached an ideal intersection of effective strategy, top line growth, and bottom line performance. ATI is proven to perform and well positioned for the future. With that, I'll turn the call over to Kim and return later in the call for a few closing comments.
spk08: Kim? Thanks, Bob. I'm excited about ATI's future and look forward to continue executing our strategy. We've invested a lot in this strategy and I'm confident in our direction. Thank you for your leadership and vision. Looking ahead, let's add a little color on the strength of the markets and why I'm confident in meeting the guidance for the year. First, let's answer the question on everyone's mind. How are the 737 max challenges and resulting build rate reductions affecting ATI? Let me emphasize, this is not impacting our orders in any meaningful way, as you will hear in Don's guidance. What we do see is strong underlying market demand that overcomes any 737 max inventory burn down and leap 1B build rate reduction. We are getting signals that further into the year, we'll see order increases to support 2025 wide body build rates. We are very connected with our customers and they recognize the importance of smoothing the impact to not derail the momentum that's been built. With today's lead time, if you jump on the line, you'll face up to 12 to 18 month wait for material when you get back in line and reorder. In the meantime, there is plenty of demand from others until the 737 max gets back track and returns to a significant growth rate. Last summer, we announced $1.2 billion in sales commitment. These orders are ramping now. Additionally, we're seeing opportunities for emergent demand and expanded share positions as customers eliminate single points of failure and move business from underperforming suppliers to those who perform, like ATI. Today, our customer is more diverse than before the pandemic. ATI provides content to all major engine and air frame OEMs. The other large air framer in Toulouse is very busy these days and we've significantly grown our position in certain products upwards of 50% share as they look to diversify their titanium supply chain away from Russian sources. We're seeing very strong demand in engines too. Across the board, higher shop visits are driving up spares demand especially for the hot section materials and parts we produce. This continues to pace closer to 40% overall demand versus the 20% to 25% we've seen historically. We're actively supporting the GTF accelerated overhauls and parts replacement. This multiyear replacement plan is driving GTF forging demand up 25% in the back half versus last year. And we see further growth in this important program in 2025 and beyond. Another strong market is defense. Defense armor plate continues to grow due to Abrams rearmoring packages and foreign military sales. We enjoy a strong supply position on the UK's Ajax vehicle program and we're winning new programs like the US Army's new armored fighting vehicle which has doubled the ATI content versus previous designs. The robust demand we are experiencing across most of our markets creates pricing opportunities as well. We anticipate seeing these wins hit the bottom line in the back half of the year. This potential is built into our updated guidance. Space provides significant opportunities for high growth leveraging our material science capabilities. Commercial launch firms are targeting 100 launches this year which provides a strong start to our new long-term agreements. In fact, every business at ATI participates in this market and our material and parts are being designed into next generations of rockets delivering strength at high temperatures for critical components. It may be a small percentage of our revenue today but it is on track to double this year. The business is going where we want it to go. ATI's products are in every major OEM aircraft and engine program. Bottom line, we have strong customer demand across our markets. Now let's talk operations. I am confident we are operating at the rate needed to meet this demand and our 2024 guidance. Recently, we commissioned a new 12,500 ton bill at press capable of processing both nickel and titanium. This deep bottle necking investment gives us maximum flexibility and is a key enabler to achieving our 2025 targets. Another example, Forge Products is in the process of qualifying products on our fourth isothermal press. A major control system upgrade brought this asset up to best in class and increases our iso-forging capacity by up to 40% over the first half of 2024. These are both great examples of deep bottle necking our nickel and titanium value streams. Last, with the increased industry focus on quality, testing and inspection capacity has been very tight. We have substantially expanded our ultrasonic inspection to support the increased testing requirements and relieve a critical industry supply chain bottleneck. By the second half, our testing capacity will triple. This goes a long way to addressing the urgent need of our customer base. Our team is firing on all cylinders and their hard work really shines through in this quarter's results. We're operating at the rates needed to meet our second half guidance. I'm confident we're taking the steps needed to have increased capabilities and capacity, so we'll reach or exceed our stated 2025 targets. Before I conclude, I want to thank our teams. Every day, they are focused on safely delivering for our customers. As you can see, their efforts are paying off as we achieve solid financial returns for our shareholders. We appreciate all their hard work. With that, I'll turn it over to Don for detail on this quarter's results and the outlook for the second quarter in 2024.
spk11: Thanks, Kim. Let me start by noting that ATI continues to deliver on commitments to our shareholders. First quarter adjusted EPS exceeded the high end of our guidance range in a meaningful way. We also delivered noteworthy improvement to cash performance year over year. We used that liquidity in the first quarter to repurchase $150 million of stock. We are also raising full year earnings and pre-cash flow guidance to reflect expected performance. There are three areas I want to cover today. First, Q1 showed continued improvement in a ramping demand environment. Second, we anticipate a meaningful increase in sales and earnings in Q2. And third, our expected performance in the second half of the year is well aligned to delivering 2025 financial targets. Let's start with color on the first quarter. The ANF segment delivered stronger than expected performance in the first quarter, including revenue growth of 7% over fourth quarter 2023, as well as adjusted EBITDA margins of 14%. Aerospace, medical, and electronics drove the sequential revenue increase. As expected, certain industrial end markets remained soft, continuing a trend started in 2023. Conventional energy sales increased due to a non-recurring product delivery. Beyond this singular event, we continue to expect recovery of industrial demand in the second half of the year. For HPMC, melt outages in late 2023 led to lower first quarter sales and unfavorable mix, as well as lower earnings and margins. But the outages are behind us. Melt rates are where we need them to be to hit our targets. Here, I want to call out the team's efforts to improve cap performance. Q1 has historically been a quarter of seasonal cash burn. Cash used in operating activities this quarter was $99 million. Compare that to the first quarter of 2023, when we used $285 million for operating activities. That's a $186 million dollar -over-year improvement. Working capital management and the absence of pension contributions led to the favorable change. Good progress to date, but we still have many opportunities to unlock when it comes to cash conversion. We are putting that cash to good use. In Q1, we repurchased $150 million of our stock, completing the program our board approved last November. Executing the program early in the year reflects strong liquidity and a stable balance sheet. It also reflects confidence in our improving operating cycle and cash generation profile. We closed the first quarter with more than $950 million of total liquidity, including nearly $400 million of cash on hand. That's after executing the share buyback. Our net leverage ratio was 2.8 times at the end of the quarter and should continue to improve because of cash generation and increasing profits. Looking beyond Q1, we remain committed to delivering maximum value as we 1. Invest for growth, 2. Deliver the balance sheet, and 3. Return capital to our shareholders. With that, let's talk about our Q2 outlook and our updated expectations for 2024. To provide greater clarity into our financial outlook, we have added an estimated range for adjusted EBITDA to complement the guidance we offer for adjusted earnings per share. Demand for ATI products remains strong, particularly in the AMD and AeroLife markets. When combined with the improved operational performance and production capacity that Kim highlighted, the expectations for future performance are compelling. For the second quarter, we estimate adjusted EPS will be in the range of $0.54 to $0.60 per share. We expect adjusted EBITDA in the second quarter to be between $170 and $180 million. Where is that growth coming from? Sales growth in our core end markets, post-outage deep bottleneck production levels, and stable industrial demand. Expecting strength in the second quarter carries over to the full year. We expect full-year adjusted EPS to be in the range of $2.30 to $2.60 per share. At the midpoint of the range, that is a 13-cent increase from the full-year guidance provided last quarter. We also narrowed our guidance range by 10 cents to reflect confidence in our ability to deliver. Adjusted EBITDA for the full year is expected to be in the range of $700 to $750 million. This strong performance and improved outlook carries over to cash flows, where we have increased our full-year free cash flow range by $15 million from previous guidance. The new range is $260 to $340 million. The $300 million midpoint represents an 82% increase from 2023 free cash flow of $165 million. We are not changing our capex range. It remains at $190 to $230 million. I know my audience, most of you have already done the math regarding what this guidance indicates for the second half. The message is that we anticipate strong earnings, margin, and cash generation momentum as we exit 2024 and focus on delivering our 2025 financial targets. With
spk03: that,
spk11: I'll turn the call back over to Bob.
spk04: Thanks, Don. Today's call is my 22nd as ATI CEO. Those of you into material science like we are know that 22 is the atomic number for titanium, so I guess it's fitting. Since being named CEO in August of 2018, it's been a privilege to collaborate with our team to develop ATI strategy and guide our efforts to execute on that strategy to the benefit of shareholders, customers, and employees. Almost from day one, I got great counsel from our directors to build succession plan for whenever the time was right. We've been doing that, building a strong team across the enterprise. That includes investing in Kim Fields. She's learned and led each business unit within ATI, strengthening our operations and championing our growth. Kim equally invested herself in the development experience and the development of our AMD strategy. Our deliberate succession plan has paid off. She's ready to become ATI's next CEO on July 1st. I'm really pleased for her, and she's earned it. I'm excited for ATI, and as executive chairman, I might be stepping away from the day to day, but I'll support Kim in whatever way she needs. As I reflect on the last six years, it's been a great run. Some days have felt a lot more like sprint than a run, but a little more geopolitical and market uncertainty than anyone could have anticipated came along, but we've used every opportunity to our advantage. Yet to be clear, the best days of value creation at ATI are ahead. My confidence in ATI's future is driven first by the strength of the aerospace and defense market demand. This robust growth is expected for the balance of the decade. Second, ATI is positioned in our core markets with a very broad customer and end use application base. And third, our capabilities are extraordinary. Our operational advantage is formidable, and our velocity, speed, and the defined direction is accelerating. It's a great position to begin, for sure. I'm extremely proud to have led the team that has transformed ATI and positioned us so strongly for the future, and we really have a great team. Thanks to them for all we've accomplished together. We are and will continue to be proven to perform. With that, let's open the line for questions.
spk06: Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's turned to speak. We kindly ask that you limit yourself to one question and one follow-up only. Our first question today comes from Michael Leshock of KeyBank. Your line is open. Please go ahead.
spk01: Hey, good morning, and Bob, congrats on number 22.
spk04: Thank you.
spk01: I wanted to start here on the commercial aerospace side. I know the 737 MAX is incorporated in guidance, and it sounds like you have ample room to mitigate some of the near-term challenges across your whole portfolio, but I wanted to ask on how long it would take for subdued MAX build rates to meaningfully impact API. Hypothetically, if Boeing's rates stayed the same for another year, what would the impact look like on 2025 numbers for ATI, and are there ways to mitigate this if 737 issues become a longer-term issue?
spk08: Well, hi. I think I'll take this one, Bob. Just to give you a little bit of color, as we mentioned, there's been minimal impact on us, and primarily because it's more than offset by demand across all our other programs. Even if it was, as you said, further out and multiple quarters forward, as we're looking at a couple things are true. One is wide-body demand is starting to ramp, which has much higher titanium content than the 737 MAX, which is more of an aluminum plane. The engines programs across the board, we're seeing really strong demand on all of those programs. Engine spares and MRO visits are up, which some OEMs are predicting increases in that as well. We're a key part of the GTF overhauls, and parts replacement, and that's going to be elevated for several years as we work with them to help lower their AOGs. Lastly, you can't forget the LEAP 1A has just as much jet engine content and titanium as the 1B, and that is continuing to grow, and we anticipate that. As we said in the near-term, minimal impact, and we anticipate that for many quarters out that we're going to be in good shape.
spk01: Got it. That's really helpful. Then on industrial demand, just wanted to get your take on what gives you confidence in a second half recovery and what are the moving pieces that you're seeing on the industrial side.
spk11: Thanks. This is Don. I'll take that question. Really, we've talked for a while now about our expectations that industrial is going to recover, largely in the second half of the year. What we're looking at is signals within the individual end markets that make up our industrial. What I would say is this last quarter, we saw some positives in oil and gas. Some of those are recurring, some are not, but we are seeing some indications from a book order volume standpoint that there's positive trends. What it does is it gives us great confidence that our expectation for Q2 is still strong. In addition to that, we've seen recoveries in Asia demand with our Asian precision rolled business and stability in industrials overall.
spk01: Great. Thank you.
spk06: Our next question comes from Richard of Seaport. Please go ahead.
spk12: Good morning. Bob, congrats to you. Thanks, Rich. I have one for you, Don. Any time, Bob. Kim, could you expand a little bit more on this wide body demand you were mentioning in your opening remarks? Is that coming from both Boeing and Airbus? Is it possible, could you discuss the 787 orders that you're getting right now? Is it supporting higher rates than what we're seeing right now, given your lead times?
spk08: Thanks, Rich. Appreciate the question. There's been some, obviously, the 350, they've come out and stated higher rates as they're going forward. I've got to take everyone back. The material lead times for these programs are 12 to 15 months out. We are starting to see and talk with our customers. We're very aligned with them. We're starting to see that demand increase. We're talking to them about how do we ensure that the material flow is going to be available as they start to ramp up. As you said, the 787 has continued to ramp. We've started having those conversations on that side and we anticipate seeing those orders being placed to get into the lead time for the second half of this year as we gear up for shipments into 2025.
spk12: Thank you for that. Don, just quickly, could you go over, discuss a bit about how you're thinking about capital deployment now, given that you used up the $150 million in the first quarter? At one point, Tom, I think you were talking about M&A also. If you could include a bit of a discussion about that in your answer, thanks.
spk11: Sure, happy to do that. We've talked many times about our balance capital deployment strategy. We're focused on three elements, growing the business, delaboring, and returning capital to shareholders. Those three priorities and the balance around them is not expected to change. You're pointing out that we did fully consume the authorization that we had for share repurchases in Q1 with the $150 million. Are we expecting to do additional share repurchases this year would be a fair conclusion of the question that you're asking. The short answer to that is, we have clearly prioritized returning capital to shareholders. Since early 2022, we've repurchased almost $400 million of our shares. We are in a very fortunate position where we expect to have healthy cash generation. Just have to look at the targets that we've shared. That coupled with our strong balance sheet and liquidity, Rich, we're in a great position to continue to make choices. What does that mean for maybe an additional share repurchase program this year? The short answer on that is, I don't want to get ahead of my board, but I would point out that our board has been extraordinarily supportive of this balance capital deployment strategy and prioritizing return of capital to shareholders. I would not expect that the $150 million program we just completed will be the last program. Quite the contrary. In terms of M&A. Our bias on growing the business and investment has really been toward organic investment. We've got a long list of great projects that provide robust returns. We don't see that changing. It doesn't mean that we're not interested in M&A, but I can tell you the hurdles that we have internally. Hurdles in terms of very close adjacencies, overlap to our current business, return profiles, those kinds of things. They're very robust. If we were to do any sort of acquisition, it would certainly be challenged to hit our internal targets. It isn't something that we're putting great emphasis on or priority. We have a great business to run that's growing with CapEx and is going to provide the returns and the targets that we've shared with the market. We're happy with where we're at, but it is, I will tell you, it's nice to have choices. It goes back to your original question, capital deployment. Our starting objective with our strategy and focused on cash generation rich was to put us in the position where we could make healthy choices for our shareholders. That's something that I think you're starting to see.
spk04: Thanks a lot.
spk06: Our next question comes from David Strauss of Barclays. Please go ahead.
spk05: Thanks. Good morning. Bob Wendoff for my congratulations as well and best wishes going forward. Thanks, David. Appreciate it. Of course. I guess the first question for you, Don, the EPS guidance increase, obviously some of that is the lower share count, but beyond that, what actually changed since we didn't have an EBITDA expectation before this or guidance before this? I guess what got better in terms of end markets or maybe break it out by business ANS, HPM? What has improved versus when you gave initial guidance?
spk11: Yeah, starts with our Q1 performance being better than expected. That was helpful in getting comfortable with raising the guidance. Really, it's starting with two pretty key items. One is continued strength of demand in our core end markets, aerospace and aerolike. That strength is reinforcing growth, especially in the second half of the year in our business and growth that we expect is going to carry to 2025 and beyond. Seeing that continued strength of demand was helpful. Another thing that I would point to that has increased our expectations of the business are tied to our -bottle-necking activity. Of course, that's related to production. As we saw successes in the first quarter around our -bottle-necking efforts and seeing improved flow around products that are melted and then seeing those progress through our production cycles, through finishing and getting out the door. Very positive trends that we see there. That's what I would point to. We've got some additional -bottle-necking focus or efforts in the second half that will continue to add incremental even to the business. Those are the primary drivers.
spk05: Okay, great. You've talked about a second half of the year recovery in your industrial end markets and you mainly point to oil and gas. If that doesn't materialize, how much risk is there to your guidance? Are we at the low end of the EPS range? If industrial just holds where we are today, does that put us at the low end or are we outside the range? Thanks.
spk11: Yeah, the magnitude of that were to happen, it wouldn't have a significant effect on the guidance or us performing as guidance that we shared today. It would be marginal, I would say, to the guidance of 725. I would still expect with stable industrial, stable being defined as where we were in Q1, I would expect pretty high confidence in our ability to deliver on the guidance that's on the table today.
spk05: Thanks very much.
spk06: The next question comes from Scott Dueschel of Deutsche Bank. Your line is open.
spk02: Hey, good morning. Good morning. Hey, Kim, reading between the lines on the prepared remarks, it sounded like ATI maybe recently expanded its role with Pratt and its work scope on the GTF. I guess, did I read that right and is there any additional context you can add?
spk08: Thanks, Scott. Yes, you did. You did read that right. I'd say ATI is part of the solution there. We've got a great relationship that's only grown through the pandemic and it started with us partnering with them on the angle scan testing protocols and practice and helping them work through both what was necessary and then how to streamline that so that it didn't create more bottlenecks in the supply chain from an industry standpoint. And second, as I mentioned, we are partnering with them and we are part of the solution with helping them address the GTF issue and the accelerated overhauls that they're driving. I think he was mentioned during the earnings call, material flow is really going to be the key and we're partnering with them to accelerate that flow through parts. I talked a little bit about our investment in ultrasonic inspection and testing and again, that's in conjunction with helping to help support them really to accelerate bringing those AOGs back down. You did ask, but as we look at our guidance, that is something that we did anticipate some of that incremental work in there in terms of scope. But as we look forward, I'd say my bias and you're probably hearing Don's bias as well is to the upside of the range because clearly if we're able to move quicker and as we work with them, they'll want to do that as well and get those planes back up in the air and back in service.
spk02: Okay, can you say what specific parts you're selling into them now? Is it powder metal or more forged products? Just trying to understand more specifically. Yeah,
spk08: no, so they're powdered metal. I think they've shared this, probably that they through their joint venture provide that material to our forged products group. So we're making the forged parts and just as an overview, we are typically participating with all of our engine OEMs in the hot section of those parts. So the HPT and HPC disks and so forth. So again, as you look at overhauls both from the powdered metal situation they've got, but also just from the expanded overhauls that if they're bringing these planes in that they may want to do some additional work so that they don't have to come back in again as soon. Both of those opportunities are hitting us.
spk02: Okay, great. And Kim, are you able to say if ATI was one of the new sources of supply for titanium that Collins Aerospace recently signed on?
spk08: Well, what I can say is RTX is a long-time customer. We are partnering. We've grown our business over this time. I don't usually get into specifics about specific contracts and customers, but this example on the GTF we just talked about is a great example of where we are continuing to grow our business with them. And as I said, we've got a great partnership with them.
spk02: Great, thank you.
spk06: The next question comes from Chris Olin of North Coast Research. Please go ahead. Your line is open.
spk09: Hey, good morning. I wanted to ask a little bit more about the titanium market share and maybe focus on the Airbus supply chain sourcing strategy. So it looks like the Canadian government officially exempted the Russian titanium imports from that sanctions list. And that decision confused me, but I guess what I was really confused by was the customer behavior because it looks like some of the suppliers in Europe and Canada under the Airbus umbrella really either did not have any intention of breaking away from Russian supply or adhering to what Airbus had officially saying. So you know, I guess what I'm curious about is kind of your views on what's been going on lately with the contract movement or lack thereof. And does the fewer breaking off of contracts from Airbus hurt the Northwest titanium capacity expansion strategy? And I guess finally, Bob, as one of your last acts of CEO, I'm wondering if you're going to throw away your Brian Adams records as a protest of these exemptions from Canada.
spk04: Thanks. Well, let me deal with the last question first. I don't have any more records, but I'm going to hang on to the digital thing for sure. You know, I love the Canadians, their friends, right? So I would say, let me start with kind of the broader picture and kind of work down the color around that. Right. So I think your question was, you know, how do you see Russian supply and the risk to those of us who invest? I think our operations in the Pacific Northwest are going to come online. Customers have committed across the board, gives us a great capability to marry up with our other titanium melting. And so I think we don't see any risk with that. It certainly gives us a lot of flexibility, both in terms of the input materials, as well as the alloys and the end views. So it's a very broad capability and we look forward to that. I think if you look at the overall supply chain, you know, what's going on perhaps in Canada, you know, I don't think the Russian material in the supply chain has been totally consumed yet. You know, it's still working its way through. It's not to zero. It's probably going to take into 2025 to do that. I think we have to recognize it's important to the national interest of the U.S., the Canadians, the Europeans to build airplanes. And that's what they're going to do. They're going to have to build airplanes. And so that's going to be their first priority. And that's what you see in some of the exemption activities is, but it's going to be spotty kind of stuff. I think the majority of the supply chain are being filled by the incumbents. We certainly are saying that. I think all of our competitors around the world are saying the same thing, but think back to the experiences and learnings over the last two years of the supply chain and what's going on. Right. Number one is this commitment to eliminate single points of failure. So where people relied on sole sources, perhaps out of Russia, probably not going back to that. Number two is requalification issues. Right. Think about the effort over the last two years to requalify. And here we are heading into the start of a wide body demand increase. So who's going to take real risk on their ramp to switch supply when they've gone to great pains over the last two years to put it in place. So I think that's, I can't speak directly for Airbus and their strategy, but I would say that's the apparent strategy that they're on because they're acting like they've moved and they're sticking to it. But the titanium industry needs to perform and meet the need. Let's not give need to go back to another source. That's our daily mantra. And I think the OEMs are wanting to be, they want a level competitive playing field, but boys, it got to be reliable. As Kim said earlier, every CEO on calls in the last few weeks has talked about the importance of material flow. So I don't think they take the situation lightly, but I do think there'll be situations where the industry that doesn't have the right capability or the right capacity at the right time where you'll see material flowing. But I would put it at low to no risk for the balance of the decade that the major OEMs would go back to Russian supply in a big way. I can't predict politics, but you can certainly predict economics. And I think they're committed to doing what's right for their customers to build the planes and reliable flow of high quality material that's been qualified over and over again in the US and Europe is going to be their priority. So let's see, did I answer all the questions that Chris had? I think I did. Brian Adams is still in my Rolodex and the City of Northwest is going strong. And we'll go from there.
spk09: Yeah. Okay. Thanks a lot. I appreciate it. Go listen to Summer 69 on your retirement.
spk04: All right. Thank you.
spk06: Our next question comes from Seth Safeman of JP Morgan. Please go ahead. Your line is open.
spk10: Thanks very much and good morning, everyone. And let me add my congratulations, Bob, and congratulations to Kim as well. I wanted to ask, maybe starting off and starting off about the HBMC profitability, you talk about some lower shipments of high value aerospace parts and we attribute some of that to outages. Were there more timing issues in the quarter rather than outages? And then how do you expect this to bounce back? And does that lead to a margin back above 20% in the second quarter for HBMC?
spk11: Sure. Let me cover that. So first of all, the primary driver for the lower revenues in Q1 were really tied to the melt outage impacts from that Q4 set of events and the impact that it had on our inventory positions for Q1. So as we have those outages behind us, we're expecting, of course, to be back up to the production levels and we are seeing that, not just expecting it, we're seeing it. And then take another step upward in terms of our deep bottlenecking activity. Add to all that, if you're talking about HBMC, some of the things that Kim had talked about around forgings. And when you talk about forgings, you have to remember they've had two running quarters in a row where they've set all-time records on their revenue. In addition to that, we've started the fourth isothermal press and we have added sonic testing. And that sonic testing was a bottleneck in the business. So as you look forward to Q2 in the second half of the year, for HBMC, you're seeing a lift in volumes, you're seeing, and that's deep bottlenecking as well as production efficiency. Don't forget the new assets that are coming online. We've talked about the Albany, Oregon facility that we restarted in 2023, that that would be ramping up and really hitting income statement run rates in the second half of the year. That's a good guy. And then just the general overall, the efficiencies that we're going after in HBMC. And then just one more thing, if you'll bear with me, is you think about the volume increase, where is it happening? Well, it's happening in aerospace and defense and aerolite. Those are our richest margin product offerings. And so that's going to be beneficial to margins. So volume increases, greater efficiencies, great mix-up impacts, and faster flow. Those all set the stage for answering your question, what the heck's going to happen with HBMC margins? The good news is they're going up. We expect by, certainly in Q2, we're going to see HBMC margins back about the 20% level. And as the year progresses, we would expect that those margins in the Q3 and Q4 kind of timeframe would be in the 23% range, which is right in line with the targets that we have for 2025, which as you know, are low 20s to mid 20s for HBMC. Now, if we're going to talk about margins, I want to also just give you a sense as to how we're thinking about margins in the broader business. And so if you think about ATI consolidated, so our experience this last quarter was .5% EBITDA margin. And I would expect that with each passing quarter, our consolidated EBITDA margins would be increasing. And for the overall business, our 2025 targets are EBITDA margins in the 18 to 20% range. Where we exit 2024 is an important point in terms of ability to close the gap and hit that 18 to 20% margin target. So how should you think about our expected margin exit rate for Q4 of this year? I would expect the consolidated EBITDA margins to be in the range of 16.5 to 17%. And of course, we're targeting 17% in our business. So delivering 17% as the Q4 exit EBITDA margins really sets us up well to hit our 2025 range of 18 to 20%. So hopefully that's helpful.
spk10: Yes, that was great. And yeah, although it was such a robust answer, I'll leave it at one for this morning. Thanks very much,
spk01: Don. Great.
spk06: Thank you. Our next question today comes from Tim Lattanas of Wolf Research. Your line is open.
spk07: Yeah, hey, good morning. Can you hear me okay?
spk04: Yes, we got you loud and clear, Tim.
spk07: Okay, great. Bob, congrats on a great run. And it seems like it's been like, I don't know, yesterday that you just started, but it's great to see all your progress. I wanted to just ask about CAPEX and capital allocation. So on CAPEX, I know you've done a really good job of de-bottlenecking and having bite-sized kind of growth, but just want to know, is that, how much more runway do you have of de-bottlenecking? How much more can you continue to kind of do these bite-sized increases in growth that way? What ending are we in there? And then second question, just a little bit more on the buybacks. Is this, you know, a good cadence to expect going forward? Is there an opportunistic element to your buyback where, you know, you look at the share price or do you just look at a steady amount over time? Thanks again.
spk11: Sure, let me take that. In terms of CAPEX and de-bottlenecking, first I want to reinforce the growth that we're seeing in the business and the really strong trajectory that we're sharing a part of today is all built on the CAPEX guidance that we've shared with the market up to this point. Our plan is we expect to average $200 million of CAPEX each year between now and through 2027, plus or minus. So in terms of de-bottlenecking and what are the opportunities, I would say we're nowhere near really fully exhausting the opportunities and improving the production efficiencies and flows in our business. And I think that it's fair to say that those opportunities exist throughout the business. And it starts with melt. And so unlocking the melt capacity, like we have been working on and we saw significant steps forward in Q1, you know, that is the first step in really unlocking the bottlenecks in this business. So it's very, very exciting. You know, talking about it's effectively free capacity and, you know, whatever de-bottlenecking investments that we're making in support of, you know, of increasing this flow is subsumed in our CAPEX guidance that I just mentioned. So it's not incremental to it. And then could you repeat your question around SHERP BIVACS?
spk07: Oh, sure. Yeah, it was more about, you know, what's the cadence that we might want to expect or does your board think about it in terms of a steady state or opportunistic?
spk11: I would say a combination. You know, what we try to do with our board is really look at things on annual basis based upon our plan liquidity and cash generation. We make a recommendation to the board in terms of a level of CAPEX de-levering and SHERP BIVACS, that balanced deployment strategy I've talked about. And so it's typical to talk to the board about that earlier in the year. And that's what we did this year. Actually, we accelerated a little bit and did it at the end last year. And that worked out extremely well. We repurchased shares early enough in Q1 before the run up in our SOC. That probably saved us $15 to $20 million because of that being proactive on that, Timna. In terms of being opportunistic, the short answer there is yes, we would expect to be opportunistic and to have a cadence. Opportunistic, this is a great example. So we expanded the 2024 program of $150 million that was originally planned to be executed late in the year. We pulled that forward for a number of reasons, a number of really good reasons. Now we're seeing this very healthy cash generation profile for the rest of the year. We would go back to our board and have conversations around the topic with them of should we allocate more capital for additional share repurchases this year. But it is important to remember as we think about capital deployment and cash generation, the idea of having a balanced deployment strategy is not a one-off, one-year or two-year kind of strategy. So investing for growth, investing for D-levels, and returning capital to our shareholders is something that is a continuation in our business.
spk07: Okay, thanks again. Best of luck.
spk11: Thank you.
spk06: And our next question comes from Gwatsom Khanna of TD Cowan. Please go ahead, your line is open.
spk13: Hey, thanks. Good morning, guys. And congrats, Bob and Kim.
spk04: Yeah, thanks, Adam. It's been a quick six years, that's for doubt and sure, but I'm confident it's ready to go.
spk13: Yeah, it's been quick and I was just thinking, I finally stopped calling you rich and now you're leaving.
spk04: Well, as long as you don't call it Kim, Bob, I think.
spk13: Exactly, who knows what will happen. But hey, I wanted to just revisit what you said in your prepared remarks on 737 and de-stocking. And I was wondering if you could, maybe I missed it, but explicitly has there, this has had no impact on lead times, nickel billets, on your titanium airframe shipments, etc. Is that true? Like there's just, it's entirely, you have seen a change in schedule, but it's been entirely offset by the other programs. Is that a fair characterization?
spk04: Yeah, so you raised the question on two different alloy series and they have slightly different answers. So I'll take the titanium side and I'll let Kim add the color on the nickel side because I think it's important to differentiate the two. When it comes to titanium, the 737 max, as much as we love it, it really is much more of an aluminum intensive vehicle, as they say. And so I would say the uptick in the wide body space is more than offsetting the downside on the 737. So I would say what we see at the moment is stability in the order pattern from the guys in Seattle. So yeah, a little bit down on the 37, starting to see the up on the wide body. So the message on titanium, I think, in the air structures in the United States is stable with an upward bias. And so we haven't seen it go down. We've just seen it stabilized, but we are definitely seeing it interest in the second half, which is also an indication of the build rates of 2025, given the lead times of 12 to 15 months. So we are seeing that activity. It helps when A350s are going to go to 12 from 10. That'll be exciting. And we are looking forward to the day when they deliver 10 787s a month. And so we're starting to see that activity. So that's kind of the titanium story. Kim, you want to fill in Gautam's question on the technical side?
spk08: Sure. Yeah, because that kind of leads us to the engine side and the LEAP1B. And as I mentioned, there has been some modifications. And we're staying aligned with our customers. But as we look at it, it's more of a modifying of the growth, but we're still seeing growth. And so instead of maybe 20% to 25% growth, it's closer to like 10% to 15% growth that we're continuing to see from the LEAP program overall. And that includes that LEAP1A and the 1C for that matter. As we look out over these different programs, as I mentioned, there are a couple things happening. The widebody is bringing the Rolls-Royce demand forward. And so they're looking at some of their large engines and how do they support that. So there's a lot of activity there. And then the GTF overhauls, obviously, they want to get through that overhaul and replacement as fast as possible. And so that's ramping very quickly. And any capacity that we have that can go to helping them move through that program quicker is going to be used. So yeah, we don't have a lot of concern as we look at this. It's more flight modification of that 1B ramp rate and everything else seems to be very robust and growing.
spk13: And just as a follow-up, Kim, what are the Nickel-Billet lead times at this point? I think last quarter we were thinking over 60 weeks. Is that fairly consistent?
spk08: Yeah, we do have some. There's some products that are over 70 weeks. I do think Don mentioned some work that we're doing on productivity and deep bottlenecking. And so I'd say it's about 12 to 15 months still, but we are working and we are seeing some capacity increases that are allowing us to pull some of those orders in and frankly using those to react to emergent demands that our customers are having that they need to get a little bit further up in line to help them out. We're still in that same range. We do have some investments coming on that will help help at lead time, but it's still kind of in that 12 to 15 months.
spk13: Thanks a lot, guys. Thanks, Adam.
spk06: Thank you. We have no further questions, so I'll turn the call back over to Dave Weston for any closing comments.
spk03: Yes, thanks everyone for your time today. Please reach out to our Investor Relations team today with any follow-up questions. And with that, thank you very much again and have a great day.
spk06: This concludes today's call. Thank you for joining. You may now disconnect your line.
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