ATI Inc.

Hello everyone and welcome to ATI's third quarter 2024 earnings call. My name's Lydia and I'll be your operator today. After the prepared remarks, there'll be an opportunity for you to ask questions. If you'd like to ask a question today, 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, Investor Relations, to begin. Please go ahead.

Thank you. Good morning and welcome to ATI's third 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 third quarter results are Kim Fields, President 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 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 Kim.

Thanks, Dave. Good morning, everyone. Let me start by saying our team is motivated by our mission to support our customers. Consistently providing the highest quality product even as we navigate market and supply chain turbulence. As you saw in our earnings release, the third quarter represents mixed results for ATI. While there are positive highlights and accomplishments achieved, the team and I are disappointed by the shortfall to our financial guidance. Our performance was not what we strive for. We can and we will do better. On today's call, I'll walk through the challenges we encountered this quarter and how we are responding to them. For the third quarter, our adjusted EBITDA was approximately $186 million, up from our Q2 EBITDA of approximately $183 million. However, it was below our guided range of $189 to $199 million. Adjusted earnings per share was 60 cents. below our guided range of 63 to 69 cents per share. We've adjusted our expectations for the coming quarter and the full year 2024 to account for ongoing headwinds related to supply chain uncertainties and one remaining operational challenge. We anticipate sequential growth for the fourth quarter, and we are continuing to pursue opportunities to exceed the guidance ranges that Don will walk you through today. We will be transparent in what these changes in business conditions could look like through the end of the year and what has been incorporated into our guidance. While our total growth fell short of expectations, the quarter did include several bright spots showing momentum in key focus areas. Segment adjusted EBITDA margins met or exceeded our expectations. In HPMC, we saw over 200 basis points of sequential improvement in segment EBITDA margin Moving closer to the mid-20s range that we see as achievable in the near term for this core A&D segment. In AANS, our segment EBITDA margin was approximately 15%, consistent with our expectations as our mix of A&D work continues to build in this segment. Our consolidated EBITDA margins increased by 100 basis points as we continue to improve price and mix and take operating costs out of our business. Our A&D mix remains greater than 60% and our backlog remains stable as we continue to book new business across both segments. These achievements underscore that the underlying fundamentals of our strategy are working to expand margin and drive value creation for the future. So why did this quarter's results fall short of our guidance? Let's set the foundation. Our ranges for guidance are intended to cover our high and low-end expectations based on customer demand and operational performance. They contemplate variables like supply chain performance and operating efficiency, as well as non-operating items. This quarter, the impact of market volatility and operational performance issues exceeded what we had anticipated. Most notably, much of this volatility materialized late in the quarter, limiting our options to offset the risks that were realized. These risks were evenly split between customer demand changes and operational challenges. Let's touch on customer demand first. We've all witnessed the demand bumpiness of the commercial aerospace ramp. While backlogs and demand for commercial aircraft remain quite high, both aircraft OEMs are ramping more slowly than the industry expected. These delays worsened when Boeing's work stoppage began on September 13th. While some customers in Boeing maintained their orders and shipments, others in the supply chain reacted quickly, managing orders around their production schedules and year-end inventory targets. Even ahead of the work stoppage, they began pushing out planned deliveries into 2025, canceling orders, or not placing transactional orders. Looking closely at our results, we believe these rapidly emerging adjustments in demand for commercial airframe materials serve as one of the key drivers for our quarter shortfall. This impact extended to the transactional business as well, which historically has been a significant contributor on top of our LTA contracts, enhancing growth over the last three years. Comparatively, our jet engine customers have worked to maintain supply chain momentum and limit disruption. While new engine deliveries are delayed from build rate reductions, continued MRO activity drove ongoing demand for our products. However, MRO demand can be less predictable. Demand variations for specific parts on specific platforms cause operational disruptions as customers reordered priorities and pushed out excess parts not immediately needed to complete an engine overhaul. While less pronounced than with airframe, engine shipments were impacted over the last three weeks of September, reflecting accelerating supply chain dynamics. This rapidly pivoting customer demand led to increased changeovers and smaller lot sizes in our operations, and ultimately decreased what was actually available for us to ship. Beyond underlying demand, customer program changes can create bottlenecks in our operations. That's what we experienced as we significantly increased production levels for our key engine program. These requirement changes caused bottlenecks in our testing and inspection areas and impacted our shipment rates. We are working with the customer to implement improvements for testing outcomes and to decrease testing time. These efforts, along with our investments to triple testing capacity, will support the rapid increase in part production and reduce bottlenecks. We expect output to increase as our testing capacity expands. What is clear? Underlying demand for new planes remains strong. These fundamentals support long-term growth for the commercial aero market and for ATI. The current turbulence will likely continue until the growing work stoppage is resolved and the supply chain realigns to consistent demand signals. Over the next two quarters, we anticipate modest growth as the supply chain readies for the next build rate increase, which we believe will come in the back half of 2025. The other half of our MIS is related to operational challenges during the quarter. Since the pandemic, our sales have grown approximately 45%. To achieve this significant growth, we've pushed production to record highs. These record production levels leave little room for missteps. With that said, operations are most efficient with level, stable product flow. Disruptions create bottlenecks and inefficiencies. When unexpected outages occur, surging capacity and emerging bottlenecks can be difficult to overcome. especially when they occur in the last few weeks of the quarter as they did in Q3. One example that highlights this. As we push performance levels, a long-standing design flaw was discovered in our HPMC nickel melt shop. Last quarter, that part flaw allowed molten metal to escape and damage the equipment, causing an operational outage. Our team took action immediately to restore operations, and once they identified the issue, they re-engineered the part effectively eliminating this risk going forward. Today, the operation is achieving the melt targets needed to deliver our Q4 anticipated growth. But as we were executing our recovery plan in Q3, transitory bottlenecks began to emerge due to the surging material. This, as well as transportation delays related to Hurricane Helene, restricted our ability to fully offset the impacts to the quarter. Each issue on its own was not significant. but aggregated, they were difficult to overcome. In the AA&S segment, we experienced an outage of our vacuum anneal furnace in Oregon due to a failure caused by a new water pump we recently installed. This asset serves as the final step in a proprietary operation that primarily serves the space industry. While restoration is underway, the team is working to rapidly qualify other assets in parallel to protect our customers and mitigate sales impacts. This will continue as a headwind into the fourth quarter. Let me emphasize, progress has been made. Our quarterly sales exceeded $1 billion for the ninth consecutive quarter, and our expanding margins demonstrate that our strategy is on the right path. This continuing improvement throughout 2024 showcases momentum in key areas, increasing milk capacity, reducing finishing bottlenecks and improving mix and pricing. We continue to invest in reliability and deep bottlenecking of our production footprint. Our entire team is focused on the most vital priorities as we operate our business safely, efficiently, and reliably. The productivity and leveling work we're doing is building momentum. Already this quarter, we see encouraging progress. That gives me confidence that our performance will continue to improve and that our strategy is directly aligned with the growth we believe is ahead for ATI. What hasn't changed? The future for ATI is strong. The market fundamentals are clear. Aircraft production and maintenance will increase. The need to protect U.S. and allied troops continues. Critical customers in specialty energy, electronics, medical depend on our materials for the differentiated performance they need. We didn't expect this ramp to be a straight line. We are confident the current market turbulence and our operational challenges will resolve. Aero and defense growth will re-energize in 2025. The end users of our products need us more than ever, and we are focused on delivering for them every single day. With that, I will turn it over to Don for his comments.