Q4 2019 Earnings Call
[music].
Good morning, and welcome to the Allegheny technologies fourth quarter and full year 2019 earnings conference call.
<unk> expense will be in listen only mode should you need assistance. Please signally conference specialist by pressing the star key called by Zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Scott vendor, Vice President Treasurer and Investor.
<unk> relations. Please go ahead.
Thank you Andrew Good morning, and welcome to the Allegheny Technologies fourth quarter and full year 2019 earnings Conference call. This call is being broadcast on our website at 80 I metals Dotcom <unk>.
It depending on the call today, or Bob Wetherbee, President and Chief Executive Officer segment Executive Vice President John Stephens, Inc. In field.
John Newman Senior Vice President Finance, Chief Financial Officer, and Kevin Kramer, Senior Vice President Chief commercial and marketing officer.
Connected to this call via the Internet you should see slides on your screen for those of you who dialed in slides are available on our website.
After our prepared remarks, we'll open the line for question during the Q and eight session. Please limit yourself to two question.
We will attempt to get everyone in the queue within the allotted call time.
Please note that all forward looking statements are subject to various assumptions and caveats as noted in the earnings release and shown on the fly.
Now I would like to turn the call over to Bob.
Thanks, Scott good morning, and thanks for joining us.
Before we get started today I want to welcome our new CFO, Don Newman from his first day quarterly call and the thank our retiring CFO Pat Corsi for a dedicated undistinguished eight career.
Don brings a wealth of multi industry financial experience, including from his most recent role as the CFO stelco and from nearly seven years as CFO headwaters <unk> a leader in the building and construction materials industry.
Throughout his career Don is focused on business growth effective capital allocation and transformation.
We look forward to his contributions to 80, I and you'll hear directly from Don winter in the call.
I'm going to start today by reviewing our focus and 2019 and the significant progress we've made on our strategic imperatives.
And then moved our expectations to maintain this momentum in 2020.
[laughter].
First and foremost we continue to be an industry leader in on time delivery of high quality materials and components.
Our successful aerospace ramp execution has earned us customer commitments that will generate future profitable growth for many years.
This linkage to execution was clear as we extended several aerospace and defense related long term agreements, earning increased market share and most.
We continue to leverage our materials science capabilities and unique process technologies to expand our business with new and existing customers.
We are confident business will continue in 2020 as we finalize the next set of long term contract extensions and capitalize on new opportunities.
Well I won't product achieved its third straight year of profitability.
This was despite the negative impact from section 332 tariff as well as elevated retirement benefit expense related to 2018 pension asset decline.
While we fell short of our 2019 expectations in this segment we were profitable.
We remain focused on improving our cost structure continuously improving our operations and driving profit growth and specialty products.
We took significant steps some 2019 to further strengthen our balance sheet.
First we extended an upsized our asset based lending agreement to ensure ample liquidity through 2024.
Second we reduced gross debt by $150 million from the fourth quarter, which will lower interest expense by roughly $9 million annually.
Starting in 2020 and resulted in a corporate credit rating upgrade.
Finally, we further reduced risk associated with our U.S. defined benefit pension plan.
We're at 95 million dollar and though it's a nation of approximately 1800 retirees in the third quarter and contributed approximately $145 million to our U.S. defined basha benefit pension plans during the year.
Reducing pension liabilities remains a top priority.
We're actively assessing options as part of our capital allocation and liquidity management process, while ensuring that we are well prepared and taking the necessary actions to handle the uncertainties stemming from the 77 Max production suspension.
[noise] 2019 was a year of strategic change and progress at <unk>.
We have a highly skilled and committed leadership team with a mix of 80, I veterans and experienced newcomers I'm highly confident in our progress will continue in 2020.
Let's move on to slide four and a high level overview of our 2019 results.
Starting with the full year 18 generated solid earnings per share and net income growth. This was aided by the sales of non core assets.
Revenues increased year over year on both operating segments, despite challenging market conditions.
Total segment operating profit declined versus the prior year as an increase in H. PMC.
Driven largely by the performance of our specialty materials businesses was offset by a decrease in fr Pete.
As previously discussed this decline was primarily due to higher retirement benefit expenses weaker stain standard stainless market conditions and a bumpy started to the year in our Asian precision rolled strip business known as Paul.
In the fourth quarter, excluding special items Apiay increased earnings per share by 20% versus the prior year.
This growth was driven by operating profit improvements in both segments, including increased sales volume in the HP MC segment.
In the face of commercial aerospace industry uncertainty and despite regulatory challenges in the fourth quarter, we generated year over year growth and earnings per share free cash flow and revenue.
We focused on the things that we could control and we made significant progress on our strategic imperative.
Going forward in 2020, we're better positioned for long term profitable growth and industry, leading execution on multiple aircraft and engine production ramps, including the 737, Max when I retire turns to disguise.
Now let's be clear.
The long term fundamentals driving aerospace demand are still strong.
So enough for me this morning, John Kim and Dan will cover the business and financial results in more details starting with John for the age PMC said, John all years.
Thanks, Bob turning to slide five.
The H.P.M.C. segment increased revenues and profits in 2019 versus the prior year. Despite an environment that was dominated by several key issues.
The large jet engine customers yearend cash management actions, a rapid decline and cobalt prices early in the year.
And industry turbulence around the grounding of the 737 Max.
For the full year profit margins were essentially in line with 2018 levels with year over year margin growth accelerating in the second half of 2019.
Offsetting declines in the first two quarters the year as we dealt with supply chain shortages.
Fourth quarter financial results provided the best year over year improvement in 2019 with sales excluding divestitures, increasing by 10% led by our aerospace and defense markets.
Segment operating profits grew by more than 20% demonstrating the asset utilization benefits due to increased production volumes as well as from our early divestiture of to lower margin businesses. As a result segment operating profit margins increased by 270 basis points year over year.
Looking ahead to Q1 2020, we expect to 737, Max production suspension and lower leap one be engine builds to negatively impact operating profit by 15 to 20 million.
We're confident that we will be able to mitigate a significant portion of this decline in Q1 through a combination of increased jet engine production shipments with other Oems, including those originally delayed in 2019 due to customer cash management actions.
Opportunistic volume growth to fill open capacity and strong cash management and cost discipline.
We will continue to monitor this dynamic industry situation and will provide updates on subsequent 2020 earnings calls as of today based on the input from our customers. We are assuming that the 737 Max production will restart in the second quarter in advance of a mid 2020 returned to service.
We are in near constant contact with Boeing and the engine OEM partners and our coordinating with them to ensure an adequate supply of our critical materials and components in advance of their production.
Turning to slide six.
Looking at H. BMC revenues by market.
Full year 2019 segment sales and excluding divestitures increased 7% versus the prior year. This growth was led by the aerospace and defense markets. Despite jet engine products sales being relatively flat year over year.
2019, commercial airframe product sales grew by more than 20% versus prior year, including double digit percentage growth in the fourth quarter when adjusted for divestitures building on strong prior year growth.
We've been successful and winning emergent business due to our strong operational execution 2019 provided a significant growth opportunity in this area and we expect a return to more normalized volume levels due to lower 737, Max production in 2020, we do not expect the announced 787 rate reductions.
Negatively impact 2020.
Defense market sales saw robust expansion in 2019, increasing by more than 30% year over year on an adjusted basis, including a double digit percentage increase in the fourth quarter. This growth was balanced across all of a T.I.s defense sub markets led by materials and components for naval nuclear.
Military jet engine and space applications.
Jet engine product sales modestly decline principally due to a large customers cash management actions.
Of course in 2019, we also announced signing a multi year contract extension with Rolls Royce for next generation and legacy jet engine materials and multiple long term agreements with GE aviation to supply advanced forgings and materials.
Revenues under the GE contracts alone are expected to exceed two and a half billion over the life of the agreements.
These contracts will enable 80 added deepening relationships with these key customers as well as continue to increase market share in the high growth jet engine market space.
Don will talk about certain strategic investments, we're making to support these organic growth opportunities and commitments under these key contracts.
Sales to our smaller non aerospace and defense markets were mixed.
With medical declining mainly due to an increasingly competitive biomedical implant sector, while our energy market sales increased primarily due to export sales into Asia.
I will now I'll turn the call over to Kim to talk about our performance in the F. RP segment camp.
Okay.
Thanks, John.
Turning to slide seven.
After a challenging start to talk 2019 due to a first quarter that fell below our expectations for both the U.S. and style precision rolled strip joint venture in China.
We generated solid profitability for the second third and fourth quarters, ending the full year 2019 in the black for the third straight year. This positive result was largely due to growth in high value products, along with benefits from additional HRP app carbon conversion volumes.
As Bob mentioned earlier, and we reported today of course in the area RP team worked hard to overcome the combination out the ongoing section to 32 tariff on our eight NT stainless joint venture in carbon conversion volumes, and secondly increase retirement benefit extensive and softer end market conditions or end market conditions for our standard value.
Stainless products and related cost and efficiency.
Thank these issues the FTP stagnant generate solid operating results in the fourth quarter as predicted revenues declined sequentially, mainly due to chime nickel alloy sales in the third quarter just to sell a large oil and gas pipeline project.
Well to the aerospace and defense markets continued to expand into fourth quarter, helping to offset lower market demand for our standard value family product.
Fourth quarter operating profit improved year over year and outpaced our near term expect expectation the segment benefited from ongoing strong high value products sales, a favorable raw materials searchlights timing mismatch driven by nickel prices and a narrow operating lightfair AMC stand with joint venture.
With regard to AMC stand that joint venture really recorded an impairment charge due to the negative effect from the ongoing section to 30, Teekay parents and their impact on the entity's long term financial outlook. We continue to operate the joint venture focused on minimizing the losses as we await the outcome of our second tariff exclusion reclass without.
At least the Midland, Pennsylvania plant will likely cloud impacting hundreds in the U.S. job us steel capacity utilization and national security running counter to the goals established in the 230 to report and the Presidents March eight 2018 proclamation.
Looking ahead to the first quarter, we anticipate significant raw material headwinds compared to the fourth quarter 2019 related to the decline in nickel prices.
Market conditions are improving our standard value stainless products that pricing continues to lag.
We continue to aggressively manage our costs, including the full year 2020 benefits from our fourth quarter restructuring actions to mitigate the impact of these ongoing challenges, we anticipate year over year improvement term stalling Q1, but are keeping a close watch on business activity at China deals at the Corona virus outbreak and our thoughts go.
I'll turn plays in our families in the region dealing with this crisis.
Lastly, we are engaged with us steel workers, showing negotiating new labour pack to replace the current contract which expires at the end of February we're making progress and expect to finalize a mutually beneficial agreement in a timely fashion.
Now turning to slide eight let's take a few minutes to dive deeper into the FOP stagnant full year revenue growth 2019, so year over year sales growth in several key end markets.
Aerospace and defense continue to expand growing by 30% for the year since 2017 sale to these end markets have grown by nearly 70% complementing the strong h. PMC segment growth and showcasing the success of the 180 I approach.
Energy markets revenue grew significantly led by increased demand for marine scrubbers and please ask the authorization materials.
Sales staff, our peace largest end market oil and gas remain solid but declined somewhat compact compared to a strong 2018.
And lastly, our consumer electronics business continue to expand primarily in Asia as we leverage styles. Most recent capacity expansion.
Looking ahead, we have line of sight and expect to capture additional growth opportunities in our key end markets in 2020 to capitalize on our unique production capability.
Shifting to revenue by product, we continue to see the success of our value over volume strategy with meaningful growth in high value products nickel alloys, and titanium materials increased by double digit percentages versus the prior year.
Sales in our standard value stainless products contracted by 9% he had a lower demand in automotive and other consumer facing markets, but also did a purposeful actions on our part.
I'll hand, the call over to Don to talk in more detail about our friends financial performance in 2020 outlook.
Scam, turning to slide nine fourth quarter capped the year of solid progress in cash generation strengthening our balance sheet and unlocking value through the sale of noncore assets.
We ended 2019 with over $490 million of cash on hand.
In part due to strong cash generation from operations in the fourth quarter as well as significant noncore asset sales earlier in the year I'm pleased to report that we achieved our managed working capital stretch goal of 30% of sales at year end.
And we'll continue to work for improvement in this key area.
In 2020.
2019 capital expenditures were $168 million inline with expectations as we continue to balance the needs for additional capability and capacity requirements required to meet future profitability and growth expectations, along with other capital allocation priorities.
In the fourth quarter, we made significant progress toward our long term goal of achieving an investment grade balance sheet by reducing gross debt by $150 million, we successfully launched new $350 million notes at 5.875% and use the proceeds along with.
Cash on hand to early redeem our January 2021, 5.95% notes together. These two actions will save the company $9 million, an annual cash interest expense starting in 2020 in recognition of a T.I.s ongoing balance sheet improvements moodys upgraded each year.
These credit rating in advance of the new debt issuance.
As a result of the early note redemption, we paid a make whole premium of $21 million, which was the bulk of the fourth quarter debt extinguishment charge of $22 million and we accelerated payment of $13 million of interest due to bondholders.
In total we generated nearly $460 million and free cash flow and for 2019, 60% improvement over 2018.
Excluding the interest payments on the early redemption of the 2021 notes, which was initially planned for 2020, we largely achieved our 2019 free cash flow target, which we had increased in October.
Now, let's turn to slide 10, and talk about 2020 expectations.
The 737 matched unrelated leap one be impacts make providing certain financial guidance a bit you bid more challenging of course, we have a better visibility in the near term, but the second half of 2020 is more fluid and less visible.
Despite those challenges will provide some it for some important information that we believe to be helpful and understanding how we see the business performing in 2020, including the key assumptions in a range of earnings per share expectations for the overall business for Q1 and full year 2020.
The 737 matched production suspension will likely impact each 2020 quarter as the previously forecasted ramp will be delayed and elongated deferring, but not diminishing our growth expectations around this important program over time.
We estimate that 737, Max related headwinds, both airframe and engine will reduce a T.I.s first quarter operating profits by $15 million to $20 million.
We continue to work to offset the deferred 737, Max and leap one be related production and to control our costs. During this industry wide event.
Reflecting the 737, Max impacts known raw material related headwinds and quantifiable production and cost offsets, we expect to generate between 12 cents and 16 cents of earnings per share in the first quarter of 2020.
Assuming a 23% to 25% book tax rate.
This compares to 12 cents in the first quarter of 2019, which utilize the 4.7% effective tax rate for comparison on a like tax basis first quarter 2019 earnings were nine cents per share.
Using the tax adjusted 2019 figure, we expect first quarter 2020 earnings per share to increase by at least 30% year over year.
For the full year 2020.
Assuming a second quarter 737, Max production restart leap one be engine production aligned with guidance given during GE earnings call last week stable nickel prices and minimal global impact from the current Corona virus epidemic, we expect to earn between 70.
Five cents and 90 cents per share utilizing a 23% to 25% book tax rate.
This range reflects the dynamics related to the 737 Mac situation and its impact on the supply chain.
This 2020 got range compares to 96 cents per share in 2019 on a like tax basis.
2020 free cash flow is expected to remain positive and following the range of $135 million to $165 million, excluding expected us pension trust contributions.
To achieve these results, we anticipate aerospace and defense growth outside of the 737, Max including ongoing emergent demand fulfillment throughout the year.
As we've talked about several times on this call. We finally, we fully intend to maintain our cost and working capital discipline and we'll benefit from proactive efforts to improve earnings in 2019, including our fourth quarter restructuring action.
Slide 11 provides a few detailed 2020 financial modeling assumptions to ensure clarity on key line items.
We expect our full year 2020 defined benefit pension contributions to be about $130 million.
We anticipate total retirement benefit expense to be approximately $60 million down nearly $30 million versus prior year.
Our 2019 actions to lower debt levels will reduce annual cash interest expense in 2020.
We expect 2020 net interest expense to be between 86 and $90 million down from $99 million and 29 team.
Aligned with our recent guidance, we anticipate a normalized reported or book tax rate of between 23 and 25%.
We expect to cash tax rate to be between five and 7% due to ongoing benefits from our net operating loss carry forwards.
20, Twentys diluted share count is expected to be relatively consistent with 20 nineteens diluted share count.
As a reminder, H.T.I.s diluted share count includes shares associated with our convertible debt due in 2022.
When calculating our earnings per share using the diluted share count you must add back approximately $2.4 million of quarterly interest expense So earnings assumed in the numerator.
We intend to invest approximately $200 million to $210 million back into the business through capital spending.
This includes approximately $100 million per added billet and isothermal forging.
Pasadena and capabilities in support of the long term Aero engine supply contracts announced in 2019 as well as other share gains earned in contractual agreements.
We've committed to have these strict to having these strategic strategic assets assets, rather fully operational and 2021 and 2022.
Apart from these strategic investments capital spending to support ongoing operations is expected to be below current depreciation and amortization levels.
We are committed to enhancing cash flows and improving capital allocation in part through continued improvements and manage working capital, including inventory levels with that I'll now turn the call back over to Bob.
Thanks, Don plus a good stuff in your update today, we won't be lost on the audience that weve changed our approach to guidance and.
In uncertain and turbulent times I think we all know clarity is a darn good things I appreciate.
The detail and the concrete assumptions.
You went through today.
So 2019 is is now history.
The year filled with significant challenges and strategic actions.
Jeff with solid financial results in the fourth quarter.
We focused on controlling the things we can control.
Same lining and unlocking value from our asset portfolio.
Moving the health of our balance sheet perfect timing for that given the uncertainty that we see here in the first quarter.
Generating cash from operations and concluding contract renewals and expansions in growing markets that will generate considerable profitable growth for the long term.
As I said, although the aerospace industry experiencing significant turbulence the long term market fundamentals are still intact.
Heading into 2020, we're taking action to counter the negative headwinds from the 737 Max production suspension.
John Kim and Don talked about them.
To date, we've initiated a cost savings program.
Adjusted our near term operating capital spend.
Secured our balance sheet and are working diligently across the organization to capture emergent demand to offset the anticipated order deferrals.
We're creating a robust future with our customers built on continued strong execution.
We are proud of what we accomplished in 2019, but we recognize there's more to be done to generate value for our shareholders and we're confident we have the team to be successful and 20 point.
With that Scott, let's open the call for questions.
We will now begin the question and answer session.
ASCII question You Me Press Star then one on your Touchtone phone.
If you are using new speakerphone, please pick up the handset before pressing the keys.
We withdraw your question. Please press Star then too.
Once again, please limit yourselves to two questions.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Phil Gibbs of Keybanc capital markets. Please go ahead.
Hey, good morning.
Good morning, Phil.
Great work on the balance sheet.
Thanks, There was a team effort and.
Timing worked in our favor.
Decision, making once those good appreciate that.
Pat ran to the finish line to.
Finished up for us and and on a good balance sheet to start the year with.
Thanks will welcome Don and congratulations bad wherever you are listening to this is well known yet yes, we wouldn't let us go solo.
I wouldn't think so.
In terms of the lead build rate assumptions for for 2020, I know, there's ups and downs with the leap one a on the downs with the one be but how are you thinking about that collectively in terms of the the impact.
Yes, I think the good news is we moved our call back a couple of days, so we could actually let.
Those closer to the on market go first with Boeing spirit.
For sure and as you as you do the triangulation on those things.
So there was pretty strong alignment between them and that's really the base assumption for US what is what is Boeing saying was spirit, saying, what RGB, saying those are the leaders.
We wanted to be aligned with the GE lead production outlook that they provided last weekend. So thats the base assumption for US I think they were pretty clear on their call what theyre headed for.
And clearly.
You know, we believe that Theres top end to our guidance is achievable with a few tailwinds, but the opportunity here for US as stated in same as we've said many times and we don't really produce to a build rate we produced through our orders.
Very active six weeks since mid December when Boeing announced suspension.
We've had near constant contact with the customers across the supply chain.
Look to do what's best for their business recognizing fully that engine producers are not going to zero.
Still producing we have a little bit of this disconnect between airframe builds and builds consistent.
For us but.
So far the orders order pattern is.
Very clear for US is obviously that the growth being delayed and we're seeing the orders differ but not.
Not loss.
Bob when you look at the airframe side of things I think it's a little bit tough from from our standpoint to understand really the dynamics because I know when you go in and.
You are just these long term agreements with Boeing or Airbus, respectively, There's often min Max agreements and make whole agreements. If they go below in men's and things of that nature, which doesn't necessarily exist with the engine guys.
So how do we think about data I mean, obviously Max is not producing a until whenever they do.
But there are there are there agreements in place in terms of parachutes, which protect in cases like this to some degree. So just wanted to your thoughts on that.
Yes, I think.
Markwest.
When you look at the airframe side.
We look at our order book and the lead times, the orders and the thereof, Bill significantly through the major part as you're probably into the third quarter and obviously.
They are committed our customers are committed to.
Keep their commitments within that lead time once that once they've committed.
There are mid Max's I think what's going on in the industry is.
People, who are executing in the market are being rewarded with emerging demand and we certainly see the benefit of that in some of our contract renewals most of our contract renewals were seeing share gains they don't all click and that exactly the same time.
So there are changes there that we're dealing with and certainly.
Some of the changes in the supply chain around how information is passed is still improving and we're staying well connected to the end users as as more digital technologies to get involved.
Supply chain process.
Said, Kevin Kramer with US here this morning, and he's back from the ROE busy signing up contracts in the fourth quarter, Kevin do you want to add to build.
Sure Bob Thanks, and feel good morning.
Offset and good morning, as Bob said, you know some of the contract Minton Max's are.
Clearly confidential and yet on the upside as we stated our fourth quarter results, we did benefit certainly with with Boeing on some emerging opportunities.
It's our expectation to continue that in 2020, though clearly the base purchase volumes will be different versus 2019 with regard Airbus as we've shared on previous calls we continue to be engaged with the contract con bid negotiations and to loose a we stay very can.
An active with Airbus that decision, we're still estimating will be at the end of the first quarter and again, we remain hopeful that there will be.
Inappropriate share that we will learn across all the products on.
The flat rolled side in the specialty materials side.
Yeah, Kevin just as a sub sub questions about and I'll hop off does your.
Does your Capex for this year.
Call It guide to or anticipate that that that appropriate share with Airbus that you're talking about.
Yes.
Thank you.
The next question comes from Gallstone Cano of Cowen and company. Please go ahead.
Hi, guys.
Congrats to a path as well and Don Thank you.
Further detail I was wondering.
If you could talk about a it so you have the Q1 guidance you have the annual guidance.
It appears by definition that things accelerate through the year and snows just curious what are your.
Leap expectations Q2, Q3, Q4, I mean, do we expect the ramp.
From the Q1 rates and.
And related Lee.
Are you actually taking production down <unk> or that you are building inventory you kind of in Q1, so you're going to have better absorption.
Reflected in the numbers.
So that we you know, but your shipments maybe pick up in Q2 and beyond just living in frame sort of what's going on.
Okay, Let me start them and then I'll hand off to a I'll hand, it off the Dom and John to make whatever comments they want to add so I think.
At a high level or the one point I'd like to start with is that there's more to our aerospace and defense business than the 77, Max So we have a wide variety of customers want every program. So I think one of the things you're going to see that we committed to in the fourth quarter was the particular customer that had a.
Little bit of a cash management issue in 2019.
As they know following through and we're actually seeing growth at that account and we're seeing a Q1 materialize as we expected. So there is actually growth in our business in aerospace and defense beyond the Max I think that's an important thing to understand particularly evident in Q1.
I think in terms of the balance for the year you know I think the guidance that are most of the others in the supply chain have given have been full year guidance. We do I don't know if Pat left us the legacy trademark to use the word lumpy, but I do believe they'll be ups and downs through the course.
So the year and so our guidance is really for the full year.
To predict what's going to happen in every 90 day period, given the critical decision that Boeing needs to make on when they're going to restart we're confident in the full year, we do expect things to move around during the quarter to quarter or be a little more variable, but a full year should be.
Where we want to be the last question, then I'll turn it over to Don to add some more color is your question, but are we taking production down and the answer is were smoothing. It out there there may be a short term inventory rise here in Q1, but you know our target is to be at the 30% working capital.
As a percentage of sales them. When we believe we have the the team and the systems to do that were not pre producing any significant amount. So we're staying connected with the order pattern.
Excuse me we're also.
Not anticipating.
No any ah layoffs or massive production reductions you know we are committed through the aerospace ramp we've learned from the aerospace ramp to be ready to go and Boeing and GE said go we're ready to go we're not going to be the bottleneck in the supply chain and our track record of execution is earned a lot of these opportunities.
So I guess, that's kind of the covers most of the points Dawn color you know what I would add is we're very disciplined when it comes to managing our inventory levels, but we're also in a daily contact with their customers and and we want to be disciplined and what we carry and produce but at the same time.
We also want to be able to pull a trigger and make sure that they have what they need in order to execute the ramp so it'll be a balance, but we have the the right tools and right people in place to manage that quite well.
Okay. Thank you and as a follow up you mentioned that 2020 guidance doesn't.
Reflect any downtick in these 787 production rate.
When do you anticipate you'd feel that and.
Yes, and where would you feel that I presume and titanium shipments but.
Can you give us some quantification on what your interest you know what do you estimate your eight seven or revenue per shipset to be today and.
So we can maybe frame that out as we move into.
Yeah, I think third question I think on the 77, a seven we expect.
You know through what we see for forward lead times to kind of smooth out the impact we're not actually saying it in 2020.
And we'll have to reevaluate 2021.
You know at this point in time when it comes to revenue per Shipset. It's a very unique time in the industry, where the engine production candidly is disconnected from the airframe production and so using those kind of metrics in the short term.
Can lead people to wrong conclusions. So we are in the process of thinking those through you know.
There's there's data that was relevant to our positions chair positions in 2016 2017 2018.
Good news is that the team has worked very hard no share positions are changing so they're a little bit out of sync a in total and by program. So we're not really going back to those in the near term.
Kevin anything you want to add yeah, just one additional comment we're clearly tracking the build rate updates that going to have provided from 14 to 12 on the 787, which we do have on our plan, reflecting that in the fourth quarter I in 2020 wind will have to reassess if theres any further decline and to build.
Right, which Boeing has indicated there could be.
We haven't seen it yet and I can only be emergent demand opportunities. So covered you know any potential short term issue there.
Thanks, guys.
The next question comes from Matthew Korn of Goldman Sachs. Please go ahead.
Hey, good morning, everyone. Good here from me Don.
On that.
Following up on the Max you spoken of demand delayed not destroyed and what kind of cost savings initiatives or even taking in the merger in the mid term near term.
And then at what point, there's 2021 become a concern where the ability of you and others in the chain to fairly quickly ramp up again, you know becomes impaired it does that happen its clarity still lacking is at mid year is it sooner than later.
All right several several questions in there Matt I'll see if like in a will cover them and then the last John to jump in so in terms of being prepared to ramp you know when the industry needs us to ramp.
And we've done that a couple times are I think we're well prepared for that with our people and capacity and capability.
In fact, the investments, we're making here the strategic investments, we're making actually position us well for 20 122 and really the growth in 23. So on the on the cost side I think you know, we're managing we manage our overtime relatively tightly we take advantage of attrition when it comes but we're always engaged in the continuous.
This improvement of our processes I think Kevin talked about what's going on in the flat rolled side, John you want to add some color too you know how you see it in the age PMC side.
Yeah, sure Bob Hi, Matt the.
As Bob said, so we have.
A strong focused on cost reduction in cost containment.
So when we're in an environment like this oh, one we stay the course with the things we already are doing which we view is more sustainable cost reductions not not temporary per se and we balance that against as Don said earlier, our ability to flex when emerging opportunities.
Present themselves.
And especially as we get towards the back half of the year, where we expect to see more activity as we bridge into 2021, which based on the on you know earnings calls over the last week or so indicate you know higher production rates on the one be so we're balancing that through primarily focused on.
Maintaining our working capital disciplines, we know that as the supply chain drops in rate theres going to be an inventory build earlier than we have to burn off a while we're doing a week we can't.
Affect our ability to react quickly.
When opportunities present themselves.
So we're working our way through there and then we also have to prepare for the change in.
In shares associated with contracts that we earned.
And negotiated in 19 that will begin to affect us in 2021.
So John this is Don I'll I think I would add is while we announced a restructuring with a modest.
Reserve that we booked at the end of Q4. This is a I think another key example, this is a culture of continuous improvement we continue to look at our cost structures and identify where we have opportunities to improve efficiencies and ER and that particular example.
The four and a half million dollar cost to execute has a a run rate savings of about $8 million. A year. This is one of of and quite a number of initiatives that are underway in the organization in the normal course, not just because those 737 Max issue, we see opportunity to become better every day and.
And we're going to continue to go after those efficiencies as well.
I appreciate all that color, let me switch gears just a bid a question for Kim then any effect so for that you're seeing install from the quota virus outbreak anything around worker absenteeism moving along the supply chain any color you can give there at all it sounds like you're fairly confident that that's been a resilient business so far.
Yeah, I mean, I think you know the government's put in some some guidelines he tried to regain the movement of folks and then they have AF businesses to cut back on production.
And the new years.
So that has had a small and passed on some of our production, but from a customer and order standpoint, it's been strong and again, we're seeing strong first quarter versus kind of year over year style, we anticipate as they get this under control and businesses start back around I think February February the time.
So they're going to be coming back on attack that we'll see kind of a resumption of the demand at the top four.
And again this is Kevin again the historical.
A basis for the stall business around new lunar new year and within the first quarter. It is they slower time of year for us in fact, our slowest quarter.
So as Ken said, we are following the guidelines were most certainly caring about our employees. It's about 550 people and then we also have offices, a T.I., Shanghai and Beijing as well and so we are following the mandate.
The government and again, we expect to come up on the 10th.
Pending any other change and though we should get back on plan through the balance of the year.
Alright, Thanks folks good luck to thank you I spent.
The next question comes from David Strauss of Barclays. Please go ahead.
Hi, guys, especially couples on for David wanted to just circle back on pension the and it's still kind of weighing on your on your free cash flow and so what im wondering are like when we could start to see substantially lower contributions you guys have talked about kind of potential annuity transactions and I know.
You did some kind of pension reform. This year on there's also highlighted that kind of 500 million cash balance. So just any any color you can provide there would be great.
Sure. This is Don as you pointed out we didn't a meaningful annuitization related to 1800 or the the participants 95 million dollar investment through through that exercise also contributed about $145 million and not in 2019 and will contribute a at least 130 million.
And 2020.
You know, where we're continuing to look at strategic opportunities to work down that obligation and you know first and foremost are going to make sure that we have ample liquidity in the business to to manage through those 737 situation. In 2020 of course, we have a lot of liquidity on our balance sheet, we have a rock solid balance sheet, which.
She has a which is quite fortunate and through 2020, we will look at other opportunities to to make headway with a with that pension.
Okay, great. Thanks, I'll keep it to one.
The next question comes from Josh Sullivan of the Benchmark Company. Please go ahead.
Good morning.
The other kind of pad and then more than.
He said on the new consistency and others.
So I mean, you know them.
Right.
Good morning warm.
Well, you and then other hi, Ben.
Well great assumption.
Okay. So [noise].
Josh you're a little bit a hard to here. So we heard you ask I think about the Oh.
When does the contract kick in.
And Jonathan will kind of cover that topic for us and then as a tied to any specific build rate assumptions and you know I think as we've said before you know we're producing two specific customer orders.
So we're prepared to grow or with the Maxim the leap specifically and so you know the capability that were investing in will position us well for 21 and 22. So I'm just not tied to any specific build rate assumptions, but we do believe you know that the share increases.
This will be meaningful and starting to Oh, certainly in early 2021, and so will actually start to see some of the manufacturing benefit of that in the fourth quarter as we as we move materials into the supply chain you know as as the the industry goes today, you know, we still see kind of six months from the time.
I'm you know a we ship so the time it gets onto a engine or a plane for basically the specialty materials and forging sense certainly the longer term issues for mill products is still in the 12 month range. So that is a factor for us as we think about you know when the share increases.
Occur and when the build rates occur and and we certainly leverage that so John you want to talk more about the contract and what you see coming.
Yeah, Bob Hi, Josh the I think Bob said it correctly, a these contracts kick in and 2021 beginning of 2021.
And.
They're not tied to specific build rates as he said, they're more share based.
Contracts and Ah So as we look ahead into 2021.
Based on the guidance, we've been given so far we anticipate an increase.
Certainly and engine builds in 21 over 20 on the one be as we said earlier, we have we're we participate in multiple engine and frame programs.
So all of those together I mean.
Part of the capital investment the strategic capital, we identified as necessary.
Even though the build estimates might be a little lower on the one be and 21 than originally thought.
But we still need a that additional capacity so we're preparing for that.
And as Bob said, when we anticipate seeing the impact of those in fourth quarter.
Great. Thanks, appreciate that and it just one for Tim on the 232 issues. During the prepared remarks, you know you mentioned the potential to address the bid but assets. You are what are the gating factors. There. When you know do you think you would have to make a decision on those assets and then what is the current.
Last look like at that facility.
Well, we are yeah, we had our second exclusionary class down and so we're waiting and waiting on our apply we've had quite a bit of interaction providing information and stuff like that we hope to hear any answer but you know as as we stated in some of our Pollo cases, you know we're prepared to idle that killed.
And yeah, we've been paying parents now for our 23, Mike I'm looking at something close to $40 million and so they are getting close to the timeline. We're gonna have to make a decision and then if this is going to occur Seth may take a different corp [noise].
I think that's there again I mean, I think our situation warrants and exclusion you know national defense and the end of the security of the business that we run its into that category as well as a domestic availability you know if you can make money buying domestic it's that kind of last and that's kinda we pursued.
Adoption, we obviously believe the long term health of the business.
It is our primary concern and we believe you know candidly. The tariffs are an unintended consequence, there are pretty big blunt instrument, but I think take to Kims point, we still see strong pull from our customers to do this but there's a limit you asked you know I, we still losing money and the joint venture.
Sure and the answer is yes, and how much longer are we willing to go you know candidly I think we deserve a decision from the government.
And the process as well defined I think the the processes within the Commerce Department are geared to give an answer and we're we're ready and we think we deserve one so we're making our case a more clear to those that control that process and.
But patience is limited you know we're to the point, where the business strategy that we're on needs us to move forward, but candidly, we're not going to make it easy for the government, they're gonna have to decide and we believe that time isn't there.
Okay. Thank you.
The next question comes from Matthew Fields of Bank of America Merrill Lynch. Please go ahead.
Hey, guys just wanted some clarity on free cash flow you said 135 to 165 million that's before pension contribution right. So that trend that after that it would be five to 35 million.
Hi, yes.
You're right. The 135 to 165 is acts.
Provisions and pension contributions would be 130.
Okay, and then are there any other asset sales Univision and 2020, I know you sort out a lot in 19 or we are we done for a while or is that going to be a part of the 2020 cashless story.
We don't have any that are in that plan you know to be clear in candid you know we evaluate you know our portfolio on a regular basis looking at you know the different options are clearly, we just talked about what might happen with our Midland a joint venture we could certainly as he that eventuality I think.
The other.
Locations and processes, we're always looking at those core absence of our company is really EPA economic value add type thing so cost to capital is key to us we understand that.
That factors into it but we're focused on maximizing the value of our portfolio you hear us talk about share gains topline growth mix enrichment.
Cost a reduction cost synergies looking for opportunities across the organization to accelerate new product or new product growth. So I think theres still lot of of room for that but the quick answer to your question is no.
But there's a lot more color in context that goes with that.
One thing I would add this is Don one thing I'd add on as you think about our free cash flow as I noted the capex range at 200 to two tan.
That includes 100 million dollar investment in Iraq, and capital that's tied to a two contract extensions meaningful share increases.
Very very meaningful growth opportunities in the business. So as you think about year over year free cash flow generation, you just want to keep that that investment in mind as it about as it will produce some nice benefits past 20 twond.
Understood. Thanks, very much further clarity.
And we have you follow up from Phil Gibbs of Keybanc capital markets. Please go ahead.
Hey, good morning, just curious in terms of what the the nickel impact is in Q1 versus the fourth quarter, obviously, a pretty substantial reset I'm not a lot of that is gonna be sustained given its kind of a mark down against higher inventory levels [noise], what's the magnitude of that that impact in Q1 sequentially.
<unk>.
Hi, Good question do we actually factored that into our guidance I'm, we hadn't really broken it out separately for for this fall but.
You know, we can check with Scott and follow up but we do see it's declining I think nickel prices today are in the 575 range.
Probably down from you know the sixes in the December timeframe, so probably a 50 cents decline about 10%, but we did factor that into two our guidance.
Thank you and then Dan on the on the pension 28 million dollar year over year swing is that all going to be below the operating income line.
And not in that line item, yes. It is yes, so no change in service cost about okay.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bob Wetherbee for any closing remarks.
I'll be quick with limited closing remark. So thanks for joining us on the call today and thanks for your continued interest in <unk>.
Thank you Bob. Thank you all of this system lift there is joining us today that concludes our fourth quarter and full year 2019 conference call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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