Q3 2019 Earnings Call
Well I'll turn to page four and similar to our last earnings call I want to highlight recent progress on several strategic imperatives.
First we continue to execute on the broad based production ramp for single and double aisle aircraft engines.
We work closely with our customers leveraging our material science capabilities and unique process technologies to supply the critical co materials and components required to produce the world's most advanced jet engines and other highly technical products.
As a result.
Got a share of the commercial airframe and jet engine sub markets continue to increase with further accretive growth opportunities for our existing cash rocks and powder materials as well as for our advanced boardings on the near term horizon.
With regards to the 737 Mac situation, we continue to enjoy a strong order book and backlog for our advanced materials and components destined for use on the Max and other Boeing programs.
We remain optimistic for a Max returned to service in the near term and subsequent production rate growth in 2020 and 2021.
We're in near constant communication with our customers as we've said before we produced to specific customer orders not to reported OEM build rates.
737, Max is an important program for 18, but it's also important to remember that it's one of many airframe and engine programs.
Including OEM.
That's fair card products segment and towards sustainable profitability, regardless of trade policy year raw material prices.
Our focus on high value for the we continue to make great strides on improving our balance sheet with the conclusion of several events discussed on our second quarter earnings call.
You'll hear from Pat we receive significant cash proceeds from recent business divestitures and asset sales and we concluded our third pension annuitization exercise in Q3.
Coupled with strong operating cash generation, we ended the quarter with over $500 million from cash.
We had and intend to deploy cash over the next several quarters to further meet our strategic growth and balance sheet objectives.
Next to ensure adequate long term liquidity, we extended our asset based lending facility through September 2024, upsizing it by $100 million to reflect our growth since initiated initiating the facility in 2015.
And lastly, we recently announced the expansion at six and a half year extension of our long term agreement with VW ex technologies to supply materials for the manufacturer of naval components.
This contract demonstrates our deep commitment to the global defense industry is a great example of our system of substantial competitive moat.
And illustrates how we're helping to protect sailors soldiers and aircrew around the world.
Congratulations to the H.T.I. specialty alloys on components team for capturing this accretive growth opportunities.
We continue to work diligently to grow our aerospace and defense market shares and expect to meaningfully expand several significant long term contracts in the coming months.
Hi leadership teams committed to achieving our strategic imperatives, and we're making tangible progress in all areas.
We continue to look for ways to go faster and further to generate increased shareholder value from our current business portfolio.
We are being aggressive and taking a broad view as we pursue opportunities to improve performance.
I'll now turn the call over to John Sams to discuss the H. PMC segment results in more detail and I'll return at the end of the call to wrap up and take your questions John .
Thanks, Bob turning to slide five.
States PMC segment posted solid third quarter financial results aligned with our expectations.
Then included year over year operating profit and margin growth as well as revenue growth when adjusted for business divestitures.
We achieved these margin improvements despite ongoing aerospace industry uncertainty.
Customer cash management actions and declines in the segments smaller end markets.
H. PMC revenues grew by 2% versus the prior period, excluding business, excluding divested businesses, primarily due to increased forging volumes in our Irvine, and Poland facilities, which more than offset lower isothermal forging demand.
Caused by the previously mentioned cash management actions the segment returned to year over year operating margin growth in the third quarter with a 130 basis point expansion versus the prior year inline with our previously communicated expectations.
This growth was driven by the additional forging demand noted earlier and was partially offset by weaker product mix, both within our forging operations and our specialty materials portfolio.
Sales and operating profits declined versus the second quarter 2019 as expected.
Primarily due to volume impact from normal customer driven summer production shutdowns.
And planned maintenance outages, primarily in our Miller's Burke, Oregon operations.
Looking ahead, we expect first quarter fourth quarter financial results to improve both year over year and sequentially due to volume growth within our forging and specialty materials product lines, driven by continued aerospace and defense industry growth.
Based on current customer orders, we expect to maintain our jet engine materials and components production above our fourth quarter customer delivery rate as we collectively prepare for increased demand in 2020.
Lastly in building on Bob's earlier comments.
We are actively working to grow our market share and extend our long term agreements with several significant jet engine and airframe customers.
Along with the recent VW ex technologies Naval Nuclear materials Award these potential contract extensions and New business Awards will provide the foundation for ATM is profitable aerospace and defense growth well into the next decade, we look forward to sharing more details on these events in the near future.
Turning to slide six.
The Pie chart and accompanying tables show the H. PMC segment's third quarter sales by market adjusted for business divestitures, which grew by 2% compared to the prior year.
Commercial jet engine revenue declined modestly primarily due to unfavorable product mix within 18, guys next generation specialty materials, largely driven by one customers aggressive cash management actions.
Commercial airframe revenues grew by 5% year over year, despite comparison to a strong growth in the prior year period, we continue to support our primary OEM customer through performance and our privileged to be a key supplier for their emergent demand.
Sales to the defense market continued to healthy growth pace, increasing by nearly 30% year over year building on a smaller gain in the second quarter 2019.
The third quarter growth was broad based across all of a T.I.s defense markets Subsectors and were led by products for military jet engines naval nuclear propulsion and rotorcraft.
Energy market sales grew by nearly 20% primarily due to increased Asian demand, while medical market sales declined due to soft biomedical demand.
In summary, we continue to see aerospace and defense growth despite near term industry uncertainty related to 737 Max returned to service.
We are confident in our ability to deliver future growth and are taking steps to extend and expand our long term agreements in the aerospace and defense markets. Our recently announced extension with VW ex technologies is a Prime example, these multiyear contracts will provide revenue and earnings growth visibility.
Well into next decade, I will now turn call over to Kim to talk about flat rolled products.
Thanks, John .
Turning to slide seven unexpected piece I'd make continue to expand high value product volumes, particularly in titanium plate used for combat vehicle armor and nickel alloy product used primarily for oil and gas application demand for consumer electronics remained solid at our style joint venture in China as a result segment rather.
Earnings for 7% higher versus the prior year and the second quarter 2019.
Shifting to segment operating profit.
Third quarter 2019 resolved improved by 31% versus the second quarter due to several factors first our high value products sales increase benefiting overall segment margins second our solid joint venture continues to improve after sluggish first quarter, despite flowed out and in some Chinese market Oh glow.
While demand for newly launched consumer electronics models produce in age are increasing and we're seeing initial benefits from our recent capacity expansion, particularly from Asian countries outside of China and third while still work in progress we narrowed a quarterly loss associated with our AMC stainless joint venture by nearly $2 million, we continue to.
To work with our partner to achieve cash neutrality in the third in the fourth quarter. Despite the ongoing negative impact from section to 32 import tariffs through continued diligent cost controls.
And lastly, our third quarter carbon conversion volumes grew significantly year over year, helping to drive higher utilization rate and improved cost absorption of the HRP yeah.
We expect to announce shortly the extension of our and all MK carbon conversion agreement soon.
While our third quarter operating results demonstrated significant sequential improvement they didn't decline versus the stronger prior years third quarter. This was primarily due to the increase retirement benefit expenses and the ongoing impact of section to 32 tariffs on the 18 stainless joint venture.
Briefly shifting cash flow yep, RP stagnant reduced inventory levels due to lean initiatives focused on accelerating process throughout plow through the U.S. businesses.
These gains are avnet and 80 idle for all managed working capital improvement, which Pat will cover in detail momentarily.
Looking ahead to the fourth quarter, we anticipate continued profitability in the U.S. operations and for the segment in total, albeit at lower levels in the third quarter.
Revenues are expected to decrease sequentially, despite elevated demand for our titanium products in the U.S. and our precision rolled strip products in China. These higher volumes are offset by normal business seasonality lower nickel sheet production as we expect to complete a large pipeline project early in the fourth quarter and from traditional year on staff.
Understand with customer inventory management actions.
As a result of the lower fourth quarter seasonal volumes, we consolidated our annual facility maintenance program into the fourth quarter to better align with the end market demand forecast. This will likely result in higher planned maintenance expense in the fourth quarter as well.
On the positive side raw material surcharge timing is anticipated to benefit segment operating profit in the fourth quarter due to rising nickel prices.
We expect to further reduce the negative impact from 80 stainless joint venture maintain our solid stall joint venture results. Despite additional downtime related to local holiday and thirdly increase the h. RPF carbon conversion volumes for an L. MK USA.
Well segment financial results remain on even quarter to quarter. In 2019, we are solidly profitable for the third year in a route with significantly improved the foundation of our business increased pack for long term partnerships that will drive key asset utilization levels over time.
While the impact of section to 32 tariffs on our business can't be ignored we are focusing on improving items that we can control like advocating for logic based change to trade action and on January generating cash from existing assets to help fund 18 strategic balance sheet improvement actions.
Turning to slide eight.
Yep RP segment continued to see strong year over year growth and a key end markets driven by fundamental demand increases in market share growth opportunity if customer demand expansion is driving growth in our high value nickel alloy and titanium products.
Aerospace and defense sales were up 25% in the third quarter and have increased 40% year to date. This growth is balanced across several key submarket, primarily titanium armor plating for land vehicles and for commercial jet engine products.
Sales staff Rps largest end market oil and gas increased significantly versus a strong prior year that also included nickel alloy production for an offshore pipeline project and consumer electronics market sales continue to expand in China as our customers produced new product.
Looking at revenue by product high value products sales increased by 13% versus a strong prior year quarter led by sales of our titanium and nickel alloys materials, we anticipate ongoing strength in titanium materialistic active fourth quarter slowdown of nickel alloy sales due to the completion of a large pipeline project in the fourth.
Quarter 2019.
Sales of our standard sale stainless products decreased by 12% in aggregate as our commodity driven end markets broadly consumer durables and automotive experienced sluggish demand for the third straight quarter contributing to modestly lower asset utilization rates in some of our melting and finishing operations.
Overall, the team continues to make progress on a strategic imperative generating sustainable profitability. Despite a challenging global trade environment, very raw material cost input and related customer demand fluctuations.
I'll hand, the call over to Pat to Corsi to talk in more detail about our third quarter financial performance and provide an update our outlook for the fourth quarter.
Thanks, Kim turning to slide nine let me start by talking about an important proactive step to prove our balance sheet and long term liquidity in September we finalized the five year extension to our asset based lending or ABL agreement, which now extends through September 2024, we upsized the total.
Capacity of the revolving credit portion by 100 million with a new ceiling of 500 million. This provides us with committed liquidity through our 2023 debt obligations and gives us access to a low cost borrowing option.
Turning to near term liquidity, we ended the third quarter with 511 million of cash on hand, and approximately 460 million of borrowing capacity available under our expanded a deal.
Managed working capital continues to be an area of significant progress as a percentage of sales it improved by 280 basis points year over year, ending the quarter at 33.6%. We expect continued improvements in the fourth quarter and expect to meet our year end 2019 objective to be at or below our target of 30%.
For manage working capital as a percentage of sales.
Third quarter capital expenditures were 47 million inline with expectations and total 98 million year to date, we remain on pace to meet our previously communicated 2019 capital expenditures target.
Moving to the pension we contributed approximately 65 million to our U.S. defined benefit pension plan in the quarter as part of our full year 2019 expense expected total contribution of $145 million. We also successfully completed our third pension annuitization action in the third quarter.
Further reducing plan participation by over 1800 people. This brings total pension participant reduction to more than 50% over the past six years.
We also finalized the sales of our titanium investment castings business.
And the second tranche of our oil and gas rates in the third quarter generating approximately 185 million in cash, bringing our total 2019 business divestitures and asset sales proceeds to approximately 250 million.
As a result of these asset sales adjustments for divested businesses and our updated full year financial outlook. We are increasing full year 2019 free cash flow guidance by $55 million to approximately 475 million, excluding our U.S. pension plan contributions are.
Cash position provides us with the opportunity to further our strategic capital deployment priorities over the next several quarters.
Turning to slide 10, I will now provide you with an update of our expectations for the fourth quarter financial results.
First focusing on the beach PMC segment, we expect revenues to increase by mid single digit percentage versus the prior year, primarily driven by increased production levels. As a reminder, fourth quarter 2018 revenue should be reduced by 48 million and third quarter 2019 revenue should be lower by 8 million.
To account for divested businesses.
Fourth quarter 2019, operating profit margin should improve by approximately 200 and based 10 basis points.
Year over year to about 16%.
Looking into 2020, we anticipate strong engine jet engine customer demand, particularly in the first half of the year.
Shifting to the front were product segment, where we expect continued profitability in the fourth quarter, despite challenging us industrial markets.
We anticipate revenue declined by a mid single digit percentage compared to Q3 2018, mainly due to lower nickel alloy products sales as we complete a large pipeline project in the fourth quarter 2019, along with normal customer inventory management actions at year end.
In line with the revenue decline. Therefore piece segment operating profit is expected to be decreased by nine to 13 million versus the third quarter 2019, due to the reduction in profitable high value products volumes and the negative cost impacts from lower standard stainless sheet demand.
This includes the effect of production outages to facilitate required maintenance projects in the fourth quarter. These unfavorable impacts will more than offsets the potential raw material benefits and the anticipated improvement in the a in Ts stainless joint venture results.
Finally, I want to draw your attention to a couple of items.
That will likely impact our fourth quarter results first we expect the benefit of 25 to 35 million due to the release of a portion of our deferred tax valuation allowances.
Second depending on average raw material cost in the quarter, primarily related to nickel, we may incur LIFO expense in excess of our remaining and RV inventory reserve with a significant volatility in these materials the potential magnitude the impact of this is difficult to accurately predict.
We do believe that the negative impact could be in the range of zero to $5 million for the quarter with that I'll now hand, the call back over to Bob.
In closing Ats generated solid third quarter financial results that were in line with our near term expectations.
We continue to execute at a high level on our portion of the aerospace production ramp and have consistently helps our customers mitigate their supply chain challenges and maintain their production schedules.
We intend to sustain our strong performance in some cases expand our market shares while our customers increased production rates to satisfy their substantial backlog.
Today across the world, our relentless and innovative people are really leveraging our material science expertise and they're leveraging our advanced process technologies to really solve problems that our customers bring to US. We've earned the first call from our customers to respond and grow these are exciting times rate tie.
We did what we said we were going to do in Q3 and with the team. We have an 80 I am confident there we're going to do that again in Q4 inline with our expectations and I do look forward to updating you on our continued progress on future calls so with that Nicole let's open the call to questions.
Thank you.
I'll begin the question and answer session.
The interest of equal access to all participants please limit yourself to one question and one follow up to.
You asked a question you May press Star then fun on your Touchtone phone.
If you are using his speakerphone, please pick up your handset for Prosigna [noise].
First question comes from Richard Safran with Buckingham Research Group. Please go ahead.
Thanks.
Good morning, everyone. How are you.
Good morning, Richard.
Okay.
So right off the bat I'm going to tell you I know you're not issuing a 2020 guide here, but Pat you on John both made comments about 2020. So I just wanted to know if you'd be willing to comment generally about 2020 trends maybe how you see some of your end markets trending what the big drivers would be and you know if crop of course, if possible how you see your top.
Okay. Richard This is Bob Weve been we noted your question here as a lot in this one but well start with the markets and then well, let Pat and John junk and as they see fit but from an aerospace and defense standpoint, both naval ground missiles aerospace.
Continued strong into 2020, we our order book and our customer contact center are very positive we recognize the the Max issue brings a little uncertainty, but overall fundamental demand is good.
Oil and gas should be good for us in the flat roll sector, we do see.
Q4, moving into Q1 for the pipeline business, but strengths in the middle part of the year should be there, though the backlog with those projects is good.
And on the industrial side, you would actually diminished our participation in some of them more standard stainless type products, but I think the industrial markets will be relatively flat I'm, certainly a little bit of a yearend inventory adjustment here in Q4 rebound a little bit in Q1, but for the most part flat but.
Even there we have the opportunity you know to move from more of the volume based products to more of the higher value products I think from a market perspective, we're well positioned for a stronger 2020, Pat you want to add any color. The only thing I'd add Bob is just to comment on free cash flow. We do expect continued free cash flow into.
2020, strong creep free cash flow lean initiatives throughout those businesses are continuing to drive improvements in inventory levels. So we expect continued improvement there next year and then with the profitability of strong profitability. We do expect strong free cash flow. So we will provide guidance on the January call.
Okay. Thanks, So a topic I asked about last quarter I'm, assuming Boeing is right on Mac certification, you know et cetera, I belief in the leap you've been shifting at a 50 to a when do you start shipping at 57 again, if we assume Boeing is right about the the ramp and also and that Sean I could you get more.
Specific about the weaker alloy oh, the weaker aerospace specialty alloy product mix was that anything too with the Max was that some dilutive aftermarket work you know that kind of thing.
Good day, Richard This is Bob again, we'll [laughter] interest through the call here. So you know we were actually producing the customer orders that we get not necessarily to a specific build rates. So we always have to come back and remind on that.
I think what we do expect through the course of the next few quarters as Boeing has said they want to get back to 57, Yeah. We expect that we're ready to do that when they're ready to go we won't be the bottleneck to get to 57.
Probably a few inventory adjustments, both up and down as people kind of work through the inventory over the last 12 months that may or may not have been though and then certainly a gradual ramp up to that you know a well that Boeing take the lead in terms of when they're actually producing but.
We're ready when they're ready so John and all that you got a question to.
Yes.
I do but [laughter] hi, rich.
And.
I would see.
Relatively near term impact of those things.
So that's all it is we see that diminishing someone.
Ward and improving and into next year.
Thank you.
Our next question comes from Josh Sullivan of Seaport Global Please go Uh huh.
Hi, good morning.
Morning, Josh just on the contracts you mentioned you have coming up for renewal here can you give us any timeframe when we might see those publicly and then if you could just maybe comment on what percentage of your overall EBIT those contracts cover right now.
Alright, good morning, Josh I'll take a stab at the first part of that question, so kind of break the contracts into a three pieces, obviously, we're happy with.
The other two buckets that you are probably most interested in our the jet engine side and we actually expect to wrap up the next round of LTE as you know by the end of the year and should be able to make an announcement close to the ended the year in terms of the jet engine side.
On the airframe side now that I think there's some well known that activity with another major European based airframe manufacturer, who is going through a consolidated bid program and we expect though is probably in Q1.
In announcement, so I like the VW XC was great a jet engine or contracts are coming to conclusion here.
Oh, you on any color to a.
Second part of Josh question.
Number was eight contracts we've been working one we just announced with.
Technologies.
I think five of those we anticipate being completed by year end.
Early Q1, and maybe later year, we'll update you as those go along.
As far as your question about what percent of our EBITDA These contracts represent.
Our EBITDA.
Well I think the other parts on the go to that it was really setting us up as you said in your remarks, the foundation well into the middle part of the next decade, so to a pretty a transformational for us and sets the stage.
I appreciate the color.
Then just on the 787 production cut in late 2020, when might we see that impact you guys and then secondly does that have any impacts next year.
On that customer, which implemented some cash management and outlook.
Cash management I look this year.
Yeah. Good question Josh.
Boeing and expect continued to.
Able to supply that.
In terms of your second part of the question, we don't see a much of it and pass through the course of 2020 and don't really see much of an impact on a.
The supplier or the customer you referenced in your question.
Great appreciate it thank you.
Our next question comes from Phil Gibbs Keybanc capital markets. Please go ahead.
Hey, good morning.
Hey, good morning, Phil.
A question about just the guidance for high performance models for the fourth quarter pad I know that there's some.
Just some just some things here with the divestitures and I just want to make sure that we've got the right.
Expectations in terms of the way that you want to communicate them for both.
Sales and margins.
Okay.
On the revenue side, we said mid single digits, Okay. So I'm, a little bit maybe little slightly lower than our original expectations, but a very strong for the order and consistent with our with our previous guidance here.
The 16% relative to the 14 three that you just it so that's what you're communicating so 170 basis points sequentially.
Sequentially, that's correct, okay, so year over year 210.
Okay, just wanted to clarify that and then.
No I think theres a lot of interesting things that you're doing on the balance sheet.
You talked about strategic capital deployment priorities you.
You did a third pension annuitization, but just want to frame kind I would like you to frame up in terms of what what we should expect here moving forward with the cash building in them.
Obviously with the.
With the pension being a priority. So just a so just just would like some further thoughts around that thanks.
So the priorities remain the same we're going to take a look at our overall debt levels. So we would we are obviously considering reducing those levels in the near term with some of this cash on the balance sheet.