Q1 2020 Earnings Call

And for question during the Q and eight session. Please limit yourself to two questions. We will attempt to get to everyone in the queue within the allotted call time.

Please note that all forward looking statements are subject to various assumptions in caveat as new take as noted in the earnings release and shown on this slide now I'd like to turn the call over to Bob.

Thanks Scott.

Good morning, and thank you for joining us today to discuss our first quarter results and 2020 outlook I.

I hope today, we're finding all of you in good health.

These are unprecedented challenging times for all of us.

So the current market conditions. So out has been written and there's not much more I can add but we've seen a dramatic change and a very short period of time.

As we share our results and outlook today I want to be clear that the crisis is in the global economy and our strategic markets.

The crisis is not inside 18.

We see the challenge ahead of us and are taking the actions necessary to keep our employees safe and healthy and to enhance yes enhance a solid foundation to ensure ample liquidity.

Future profitability.

And growth.

My leadership team and I are confident in our ability to do that because of our relentless innovative people.

They are all in.

Do what's necessary to emerge stronger from the actions, we take and the experience we gain from this crisis.

I want to start today with the help heartfelt. Thank you to the people of 18.

The last 10 weeks of tested this across our global organization as never before.

First our operational teams all deemed essential operations based on the product supplied have not missed a beat.

Stressing concern yeah of course total commitment to keeping their people say, it's been our materials falling absolutely impressive.

Our Asian team was the first two experienced the cobot 19 challenge.

On the appropriate methods to continue to work safely have returned to work and they shared their experience with their global team mates for the benefit of us all.

Our digital technology team acted quickly to provide highly reliable highly secure remote access for close to 1000 employees almost 15% of our global workforce.

And less than a week.

Job well done.

Our leaders across the organization are doing extraordinary things in an extraordinary time.

Leadership is not a job greater a tidal it's a role and in these challenging times, our leaders stepped up and continue to step up.

Thank you to our operators and staff, who have adapted to the new reality to keep themselves and their co workers safe to say supply our customers, who count on our central materials I.

Im proud of our people.

Every one of them.

During the right things the right way at the right time in a world of frenetic change and new operating norms.

So to the team and although supporting them. Thank you.

Creating shareholder value in the near term will be directly related to the effectiveness of our leadership and the quality of our team.

Im confident that will deliver and emerge as a stronger company.

So moving to the next slide.

Over the last few weeks as the reality of the situation has evolved weve quickly and decisively adjusted our priorities.

We've taken action to preserve cash and maintain ample liquidity.

Two key elements of that are optimizing our cost structure to match the change demand expectations and supporting our customers through continued strong execution.

While driving for cash efficiency on the short term when the time comes we'll be recovery rent.

Along the way, we'll be leveraging the recently won market share gains to accelerate our growth from the recovery.

It's important for all of us to understand what we're doing to support our customers and optimize our cost structure. After I've done that I'm going to turn it over to Don who'll discuss our liquidity position his perspectives on the business and the full year outlook.

So let's move to what we're doing or have already done to reduce costs.

As of May our board my direct leadership team and I have reduced our base salaries by 20% for at least the next 12 months.

The vast majority of 80 I staff are taking a base our reduction as well.

Using a sliding scale, but the average reduction will be now near 12%.

Over the last three months, we've announced actions to permanently reduce our overhead structure.

More recently, we are actively adjusting staffing levels in our operations based on the specific needs of each business some through temporary or rolling idlings some through indefinite furlough some through lay off.

Our corporate teams are adjusting to focus on trulia central functions, and we're reducing and or deferring our four one k. benefits for participating employees.

Since early March we've identified and have deployed to capture between 110 and $135 million in incremental cost reductions in 2020.

In addition, we're significantly curtailing capital expenditures and reducing inventories.

All hands are focused on preserving cash and maintaining ample liquidity.

Through these actions thoughtfully and quickly deployed.

We're ensuring production capabilities for our customers.

Reserving jobs for our employees.

And maintaining our strong balance sheet.

We will be recovery in growth ready when the opportunity arises.

Turning to slide five.

As we announced earlier this year, we realigned our business segments to further enhance our position as a leader in material science and to create opportunities to accelerate sustainable long term profitable growth.

All in the pursuit of increased shareholder value.

The streamlined high performance materials and components or age PMC segment is made up of our specialty materials business located largely in the Carolinas.

And our advanced forging business located primarily in Milwaukee, Wisconsin, and Irvine, California.

The new age PMC structure brings increased focus on three things material pull through growth opportunities.

Synchronize response to changing customer demand signals.

And acceleration of material flow between the two business units.

The segments business is largely covered under long term agreements ranging from five years to life of engine program, most of which as we've talked to you about it over successive calls have been renewed and expanded within the last 18 months.

The segment is focused on profitably executing recent share gains and margin expansion.

Starting with additional production in late 2020.

And continuing over the next several years.

We are leveraging capacity to expand into new products and customers closely aligned with our existing capabilities.

The newly created advanced alloys, and solutions segment or a ANS combines the prior flat rolled products segment.

The specialty alloys and components business based in Oregon.

And the aerospace titanium plate product lines, both previously part of the age PMC segment.

Hey, Ines combines all of a T.I.s flat products and creates opportunities to produce materials more cost efficiently.

And more effectively by better leveraging Ada is world class asset base and broad capabilities.

The realignment opens up sheet and strip capacity overtime to produce additional high value advanced Allied products.

Materials, such as titanium Sarcone hafnium niobium and tantalum.

All best and largely for 18 guys strategic markets.

And currently we continue to deemphasize standard value stainless products as new more value added opportunities our capture.

As part of the realignment and as I mentioned earlier, we announced two restructuring actions one in the fourth quarter 2019.

And won recently in the first quarter 2020 that primarily capture back office synergies.

Once fully implemented the combined programs will generate about $14 million of annual benefit.

Together, the new segment structure is designed to deliver.

The optimal combination of growth and profitability.

And the team did a great job, making it happen on January Onest.

So let's talk about what we're seeing in our core markets.

Although today is global macroeconomic backdrop is universally understood to be weak due to the impact from cope with 19.

I think it's going to be helpful to provide a quick update on each of our strategic end markets and those that demand diversified applications and leverage our strength in material science.

Each has a different outlook predicated on their respective drivers.

Well, it's easy to focus today on the negatives in this environment. There are several positive items to note.

Hi, guys defense business is strong diversified and growing.

We produced materials that helped power the new color Navy manufactured parts for military aircraft, both fixed wing and rotorcraft as well as titanium armor for land base vehicles and materials for missile systems.

We saw first quarter year over year growth driven by increased demand for our materials and components produced for enable applications and various missile systems.

We expect continued stability in our defense market sales throughout 2020 and have a strong backlog across 18.

Our precision rolled strip business in China.

On a stall resumed operations in late February and produced year over year revenue and operating profit growth.

In the first quarter quite an accomplishment given the economic changes that have gone on in China and Asia.

Largely due to Oh, Yeah Amendment Tory management actions.

<unk> problem diminished demand for elective surgeries and diagnostic procedures globally.

Nickel market demand is expected to improve from week first quarter levels with the resurgence of elective surgeries.

Return to stability in the global health care system will be important to that recovery.

Moving to aerospace.

I'm not going to repeat what our major airframe an engine customers reported last week.

I will say, we're better connected with them in their supply chain partners than ever.

Well using that connection to quickly adjust our upstream operations to reduce the potential for slow moving inventory and align our growing to match the reality of semantics.

And the first quarter results were generally in line with expectations in January and February we began to see deterioration toward the tail end of March.

As a partial offset to the first quarters involving airspace market weakness we've benefited from increased advanced Fortunately volumes for a large shit ends you know, we who took cash management actions in the second half of 2019.

Looking ahead, we expect our commercial aerospace shipments to continue to declined significantly and steadily throughout 2020.

Stabilizing and 2021.

And we expect to start to see recovery and 2022 getting back closer to 2019 narrow body levels and late 2023.

Early 2024, consistent with other guy.

At the same time, we're focused on executing on recent market share games with new contractual share and pricing levels beginning in January 2021.

These meaningful and I create a business increases stretch across our airport paste portfolio.

And include late 2020 deliveries to support P.T.I.'s, new multi year titanium milk products contract with a major aerospace we <unk>.

[noise] after the energy markets, which combines oil and gas hydrocarbon and chemical processing electrical energy generation and various other southern markets.

Sales increase in the first quarter versus prior year.

Rose was largely due to increased demand for a high value a nickel plate products destined for offshore pipeline projects, requiring highly corrosive resistant materials.

Energy demand is predicted to remain soft due to overall lack of consumer activity.

And looking ahead oil prices are expected to remain low to to ongoing over supply issues depressing exploration and production activities.

On the positive side, we expect a large a few large government backed pipeline projects requiring high value nickel outline materials to be awarded in the second half of 2020.

Majority of revenues falling into 2021.

Additionally, there are several smaller portions of our energy markets that are saying relative demands stability.

Including materials for land base gas turbans civilian nuclear refueling and pollution control for coal fired power plants.

Well that I'll turn the call over to down to share his insights on our business, our first quarter results and our outlook for the balance of the year.

Backed off for a few final thoughts before we open the line for your question Alright. Thanks before he died then too she won results Bob laid out our priorities.

In addition to aligning with their customers and protecting our employees, maintaining a healthy financial position, despite and market headwinds his friends centered in terms of priority.

Fortunately.

We are starting from the strong position with animal liquidity in the strong balance sheet, and we're taking actions to protect and even improve that position.

With that turning to slide six you can see that H.T.I. generated solid first quarter results despite significant global demand disruptions.

First quarter 2020 revenues were in line with prior year, excluding to vested businesses.

I didn't come into earnings per share both increased by significant percentage is your over your.

Largely driven by games in the A.N.S. segment.

This improvement was despite a higher than anticipated book income tax rate up from 5% in 20, 19% to 31% in 2020.

Largely to the release tax asset valuation reserves and late 2019.

On a segment basis agenda city P.S. revenues declined year over your primarily due to demand related slowdowns for our specialty metals late in the quarter as the impact of 737 mass production stoppages and the Kobe 2019 pandemic began to build.

<unk> demand decreased modestly in aggregate with lower hostile conventional forging partially offset by increased eisele thermal forging volumes due to the recovery of delayed unit's caused by a large all we m. 2019 immaturity management action.

H.P.M.C. operating profit to increase despite a revenue decline largely due to favorable product mix generated by increased isothermal for drawings in associated powder material pull through.

Additionally segment expenses were lower as the business moved to reduce costs and the second half of the quarter.

[noise] A.N.F. segment revenues increased year over year across all business units led by specialty rolled products, principally due to higher H.R.P. up conversion volumes and increased high value nickel product sales to energy markets for the completion of oil and gas projects stand.

Stainless products demand group in the first half of the quarter, but tapered off in March response to the shelter and place orders issued around the U.S.

A.N.S. operating profits increase substantially versus a relatively weak prior year period, including your over your growth install despite negative cold at 19 impacts.

Sales of high value advanced L. only materials increased primarily for defense in energy applications, while higher H.R.P. up conversion and standards stainless volumes provided increased cost absorption benefits.

Metal prices were a tailwind in the quarter versus 2019.

Well most of the operations ran adding more normalized rake in January and February demand weakness became more pronounced in March and accelerated in April.

We work collaboratively with their customers to build a realistic view near term demand and have taken significant actions to align our cost structure with our current forecasts recognizing that these are likely to change in this dynamic environment.

An H.P.M.C., we idled two smaller powder plants located in Pennsylvania in March and consolidated orders were possible into our Baker's powder operation.

In the month of April we I don't several of our specialties materials facilities in the Carolinas as well as are forging facilities in Wisconsin, each for one or two two weeks to address reduce demand levels.

On the A.N.N. assign our facilities in Oregon continue to be well utilize serving the defense medical in energy markets.

Inner specialty rolled in standard stainless products businesses, we've taken a number of week long plant outages in April an early main across our network to reduce costs and align inventory levels to better mash demand, particularly for products with relatively short leap times.

Additionally, we've announced the indefinite idling of the N.T. stainless Jeebees Midland, Pennsylvania facility. This summer due to the negative ongoing impact of section 232 tariffs.

We've quickly pivoted to the rapid changes in demand and will continue to adapt as necessary.

<unk>, we're managing our production capacity tightly.

Staying in sync with our current view of demand.

Second where reducing costs to ensure costs structures are efficient underlying to demand.

This is not a new effort.

But the rapid change in demand required a swift and display in response.

We have identified anorexic eating more than $100 million of cost takeouts to improve profitability in the short term.

And we believe we can keep a good amount of those 2020 reductions outer that business and a longer term.

Finally in 2019, we work down inventory levels as part of improving or manage working capital levels.

We're using those capabilities and 2020 to significantly reduce inventory levels generate additional liquidating and ensure that we don't produce inventory ahead of demand.

Well these talk but necessary actions are not completely offset will not completely offset <unk> the loss and demand.

They will help preserve liquidity reduced reduce costs and maintain value for our shareholders.

Let's turn to slide eight for a look at the balance sheet cash flows and current liquidity.

[noise], we've taken numerous actions over the past several years to strengthen her balance sheet. Those efforts are evident today in or cash balances are capital structure, and our access to committed debt capacity as well as our ability to easily accessed credit markets.

Bolstered by or 2019 asset sales, we ended the quarter with nearly $640 million up cash on the balance sheet impart due to our borrowing $300 million under the revolving portion R.A.B.L. facility.

In April we repaid the $300 million and full.

Well. These funds were clearly not required to run the business significant dad market uncertainty existed prior to the Feds March actions to shore up U.S. credit markets.

Reacted because we saw the potential for large scale credit market disruptions and we're thankful that this capital market uncertainty has now diminished.

As part of our normal she's all cash patterns, we used $115 million of cash in our operations and the first quarter.

In line with our expectations.

In contrast, we expect to generate cash from operations in the second quarter, largely driven by reduced inventories and accounts receivable associated with the activity downturn and robust management action.

Capital spending for the first quarter told him $29 million well below the anticipated runrate as we began to <unk> curtail nonessential projects in the second half of the quarter.

Turning to our capital structure H.T.I. has no near term debt maturities.

We use the proceeds from an eight year 350 million dollar and secured debt offering in December 2019, and cash on hand to redeem or 500 million dollar notes that were previously do in early 2021.

And capturing interest rates on the new debt below 6% and a credit rating upgrade.

H.T.I. maintains apple liquidity options in large part to to actions taken at 2019 to expand and stand or F.D.L. facility.

First we have the option to draw $100 million on a new delayed draw term loan by the end of June 2020, if drawn these funds or do concurrently with the A.P.L. in late 2024. Additionally, we have access to a 500 million dollar on drawn revolver.

Maybe I'll facility provides flexible access to low cost committed capital with minimal covenants and we maintain a supportive an active relationship with the members of our A.B.O. Bank group.

We're living in a dynamic world impacted by a variety of demand demand demand factors.

Will continue to be prudent with their cash and ensure that we have ample liquidity should the current market downturn accelerate linger longer than expected or a protracted deterioration in credit markets materialized.

We will expect the bass, but prepare for the worst.

Now, let's turn to slide nine and talk about you too in 2020 expectations.

Began 2020 with competence in our ability to predict full year earnings in free cash flows under a few t. assumptions.

And just a few months with the rapid deterioration in global economic activity and uncertainty surrounding the depth of the decline and the subsequent pace of the recovery of key and markets. Each of those key assumptions has been significantly altered.

As a result, or what's wrong or 2020 full your G.P.S. guidance.

However, we feel that it's important to update you on what we know today and what we believe we can accurately predict.

In terms of aerospace and overall demand I won't repeat the the trends that Bob shared earlier.

Two or can markets.

The other t. assumptions initially provided around or 2020 guidance were nickel prices between $6 and $6.50 per pound.

No significant impact to cope with 19.

Or from a covert 19.

2020 year today nickel prices have traded roughly between $5 in $5.50 per pound.

Well this gap provided that had when two or 2020 financial assumptions impact on level of uncertainty generated is relatively small compared to the well discussed challenges presented by <unk> 19.

We're taking quick into saying <unk> decisive actions to reduce negative impact from these major economic changes.

Incremental cost savings efforts outlined in this call are expected to save the company roughly $115 million to $135 million in 2020.

This is in addition to the restructuring actions, we announced for our during our fourth quarter 2019 results.

Band.

With the segment realignment announced in March.

Will continue to monitor or markets and work with our customers to ensure that are plans are adequate for the demand that they expect.

The new demand expectations provided another opportunity to reassess and Reprioritize capital allocation.

We we began 2020 with a 200 million to 210 million dollar capital investment budget, largely driven by growth projects and maintenance of our world class assets.

Well it was clear that are customers are where we do is production levels and 2020.

Expected return to grow up on the 737 maps and 80 320 programs over the next several years, coupled with our recent share games and new business requires us to continue to invest some capital for future growth.

However, our teams have closely scrutinized project plans and require timing for new assets eliminated spending on non essential projects and reduced maintenance calf, x., where possible where that can be possible without significantly jeopardizing reliability.

As a result, we now expect to span between 130 and $150 million on capital projects in 2020.

Waiting to a roughly 30% reduction versus prior guidance.

Despite and Mark and uncertainty many of the variables that driver free cash for largely with their control.

Such as capital spending an inventory levels.

Previously, we estimated free cash flow, which excludes U.S. pension plan contributions to be between 135 and $165 million for full you're 2020.

Today, using the capital expenditure range provided assuming lower net income in a favorable release of manage working capital, we anticipate generating free cash flow of between 110 $140 million and 2020.

You offering teams around H.T. I have done a great job in a short amount of time to understand the challenge attacked the castle drivers and maintain a positive outlook for the year.

[noise] before I move on it's worth noting that H.T.I.'s 2020, U.S. pension plan contribution is expected to be $130 million. That's in line with prior expectations.

Will likely to permit your contributions until your end as part of the revised government pension regulations.

Turning the second quarter, we believe that we have sufficient near term visibility based on our customer provided orders to give them more detailed estimate of our expected quarterly earnings per share.

The second quarter will be the first full quarter impacted by covert 19.

Based on our experience in April and our forecast for for the balance of May and June we expect a significant sequential revenue and earnings decline.

Well, we will make progress on limiting our detrimental margins in the quarter.

Cost cutting actions will be will not be at full run rate.

We expect to continue to reduce detrimental margins in the second half a 2020 based upon or implementation of implementation timeline around our cost savings actions.

Given our current view demand and revised cost assumptions, we expect and earnings loss of between seven and 17 cents per share in the second quarter using a tax rate similar to the first quarters.

Importantly, we intend to be free cash flow positive in the quarter.

I <unk> no during the call back over to Bob to add some clothes income.

Thanks done.

I'm sure it's clear to everyone on the call that you and your team have been just a little bit busy Ah, but highly focused over the last couple of weeks and just to be clear. It's it's much appreciated.

Well, we didn't choose the current economic environment. We're operating in we haven't experienced leadership team that understands what needs to be done and the speed that is required.

We'll keep these leadership priorities as our North star as we navigate these challenging times.

First and foremost as I said earlier, our success begins and ends with the A.T.I. team.

Our priorities to keep every team members safe and we have collectively done a great job in that regard so far with no significant production disruptions from covert 19 infections.

We remain on alert and ensure that our employees have the tools they need to work safely during this public health crisis.

For as long as required.

Leveraging the foundation provided by our team we take pride in our role as supplier of choice for our customers.

Drive to earn the first call when a customer as a corrosion or a high temperature challenged.

And appreciate their trust one awarding us with multi your supply agreements at increased market shares.

Each of those customers can be sure that we all serve them with a high degree of operational Exelons advanced process technologies.

Expect from A.P.I.

We will be recovery ready when the time code.

In addition to support for people on customers, we acknowledge their current economic environment and are taking action to align our costs structure with the reality a future demand in the markets we serve.

Incremental costs doubts described on this call totaling approximately $125 million of 2020 savings set the midpoint of our range.

Upon our earlier restructuring actions.

These efforts are necessary to ensure that we emerge from this period a stronger A.T.I. that's our commitment.

Lean.

<unk> unprepared for growth.

Finally, we will remain vigilant about preserving and when possible improving our balance sheet.

We'll do this and will continue to generate free cash flows.

Our actions in recent years provide us with nearly $900 million of cash and available liquidity. It will be prudent stewards of these assets and work to maintain the strength that refill.

In closing I believe we have the right strategy.

In our priorities are clear.

Overtime R.N. markets will recover.

Remain focused on creating longterm shareholder value through the combination of materials science.

Advanced process technologies.

And are relentless innovative people.

Scott back view.

<unk>.

Lose are prepared remarks.

Operator, we're ready for the first question.

Thank you.

Begin the question and answer session to ask the question you may plus or.

<unk>.

If you're using speech.

Pick up your hands that'd be cool.

[noise] withdraw your question.

Star.

Crumble paused momentarily blow roster.

Yeah.

And the first question today will come from got some auto Talon. Please go ahead.

Yeah.

Yeah.

Thanks for the question.

So we're curious.

He said Oh your age.

Bite, 40% <unk> T.I. able to remain profitable.

Mhm.

Yeah.

Good morning are you talking about specifically the aerospace market.

Already chalk, yeah, sorry, sorry, I'm I'm, referring to yeah.

Airbus Yeah.

Right. So I think it's if you look at the markets will give ya tag team here in terms of our response so from an aerospace perspective, Yeah. I think you have to look at the mix of our products. So the jet engine business you know I don't know if we're going to see yeah, 40%.

Overtime little bit long, but probably good based on the balance we have Ah with the military as well as commercial Erol's air frame error engine guys.

On the airframe side, our business actually relatively stable. There you know we've expanded our share positions growing you know so we're supplying almost every major aerostructure guy, but it's been a relatively strict stable business or.

No no products business.

But I think you have to look across the breadth of of A.T.I.C. The stability of defense medical in electronics, Yeah, and certainly energy is going to go up and down but you know I think we've right sized our business and optimizing our costs structure to to to manage that demand. So.

Expectation you know is to be profitable over the long term.

Going at any color to know I would I would emphasize and we do have diversification and and markets. We've got we've got great relationships with their customers are saved up with them and I I you know I think the cost factions that we're announcing in this in this color are pretty reflective of the folk.

That we have to maintain profitability those 115 hundred and 35 million, let's call. It the midpoint to keep it simple hundred and 25 million, that's $125 million of incremental cost takeouts.

That were accomplished within a pretty short period of time about 45 days.

And show we have a team that understands the business, we understand how to leverage our costs structures to meet demand you'll see the same commentary around inventory levels and working capital release, So I think as as we see changes and in pockets of our business I think that weren't a good position to move quicker.

To react to it.

Yeah, I think I'd add one more piece to that aerospace market in particular I think Dan.

Two two and Q3 would probably fit into what people would describe as but the tree phase, where we're reacting quickly to the new reality of demand.

Then you know 2021, probably looks like a a trough in the aerospace business such that you know we want to be profitable in that trough.

We certainly expect to be cash positive you know during that period of time.

Yeah before the initial Ah recovery in aerospace starts to emerge and 2022.

Right. So I think we've got a window of time here in Q2 and cute to read it will be going through his Don said not fully at runrate into two but by the end of the year, we should either.

Yeah, I guess, one more thing I'll ask [laughter] paper Rolling So as you as we look at her business were also quite fortunate that even though you know you read the headlines around and markets insurance landmark is for certain customers seeing their businesses drop we're in a beneficial spot.

Because our team has been has put us in a position where we get the call.

And what that means is that we have been quite fortunate in in increasing share with customers. So when you look at you know a headline number around you know around filled rates dropping a certain percentage should present it doesn't necessarily mean that we're going to experience the same decline.

Mine for that customer base, because we may well it picked up incremental share or will be turning on incremental share in a future period, that's going to offset part of that decline. So it. It's I think our diversify footprint is putting us in a pretty good spot.

Thanks, guys I I really appreciate that detail.

That's that's really helpful.

And then just quit follow up you have any idea on on you know the level up Arrow D. stocking expected 2020, and how long that may last.

<unk>.

Yeah, I think you know so first and foremost from our perspective, you know we produce too specific customer orders.

We do expect you know some ups and downs back and forth as people adjust so we don't really have a clear view of what's in that inventory pipeline, but I think the majority of that information has been communicated to us and I think.

You know, we'll see some of that in 20.

21, but it should be pretty much resolved by then yeah, I would say, even though most of our major customers don't send us there have been Tory details. We we are really close contact with those with those customers and and there's a real open dialog around what their demand is and part of that conversation.

That happens in some cases multiple times a week is Ah you know it is their underlying demand and you know what they might have been there pipeline that isn't impacting yet. So so we do have some visibility ah, but those close relationships, especially with a large customers is is.

Very very helpful and addressing what you're talking about.

Yeah, I think Dan you started the conversation or the question around or changes in the aerospace Ah side of our business I would tell you that we didn't wait until March to work on our inventories there were some big announcements late in the fourth quarter December in particular, and we adjusted our melts schedule almost.

Immediately.

And and going down the path to.

Take Mount schedules out and adjust our inventory immediately and so it's not in a a land rush so to speak here in the last few weeks, it's actually been something that was planned in relatively orderly and in concert with both our major airframe and engine customers. So I think we were a little bit ahead in a little bit of.

Pro activity in terms about inventory is kind of flow out.

One thing that I would add on that is you know you look at at what's happening from from a debt demands standpoint, you know of course, we have we as long term contracts, especially any H.P.M.C. side of the business and and with key customers and those many of those contracts have minimum.

And so we're able to cushion the blow a bit on the downside in terms of in terms of their demand dropping you know doesn't <unk> to us by any stretch imagination from from declines in demand, we don't mean to imply that but it certainly gives us a a bit of in a safety net or floor. If you will.

Thanks, guys.

[noise]. Thank you Oh, that's a question will feel Gibbs we're keeping.

Please go ahead.

Just really curious about.

These cost reductions that you're outlining hundred 25 million at the midpoint, presumably much that did not hit and Q1, so should we view it as.

125 over the balance of the year meet in the last three quarters. So you know in other words your your true annualized cost reductions are between 150 209.

So fellas says Donald ticket and good morning, well, what I would say is you're right. You know the the incremental 125 is not and two one results so $0 and Q1 the way to think about that hundred and 25 is where there were.

Feeling really good about the ability and we've already started by the way to call and capture these savings. These are not pine. This guy cost reductions and so we expect that we will see steady ramping throughout the second quarter, we should be able to hit a run rate on those savings early.

Three and and so have the largely the runrate benefit in two three and Q4 and and and again feels really good above the ability to to capture those savings.

<unk> is that Kerry.

Carries over that call it 150 million plus one right here.

Carries over to 2021, how much.

Is is structural and that's your let's just say, let's just let's just pay the picture that revenues.

For simplicity stay in a range between call it to Q. 20 into 221.

What any of those costs come back or or or a majority of these structural at peace volume levels.

That's a great question. So here I'll give you give me a a couple different answer elements to an answer here. So first you know when you think about 125 I would say, we're really pleased with the outcome of that initial initial lap or but as you can imagine it happen.

Really quick the hundred and 25, we we were really disappointed when we identified it it's very orderly. It's not you know, it's it's not high level bullet points on a white board. These are detail cost takeouts with supporting plans.

But you know the reality is we need to do some more work around a couple things. One is the structural changes that would allow us to keep these costs out of our our costs structure is going for and then I think there's real opportunity here I think a place holder.

For you right now is probably think in terms of you know, we'd we'd like to keep up to half of that hundred and 25 out of the cost structures in the long terms I mean structural changes it's out that say that we might not be able to do more than that but we really as a team need to spend some time I'm doing that and as you as you look at the ones.

25, you know as you move over to 2020 or 2021, rather there's no magic in in crossing that date line and show there will be you know.

Oh elements of cost reductions like we have five bonuses as a as a modest element of the 125. Those bonuses you know won't be paid in 2020, but then it gets to 2021 and a bonus targets would presumably be reset which means there's a real potential that bonuses would go back to north.

<unk> level.

On the other hand, we have a a list of things that are not in the 125 at work continuing to work.

And so you know I think this is going it's going to great direction. It's a great outcome for an initial effort over about a 45 day period and there is more work to come.

I think that's that's right that I I think.

You know at this point till 45 days into it you know everything is is on the table for us.

I have a couple of my leaders would say that the only difference between fixed and variable cost it's time.

And so we know where we are on the first 45 days and we continue to do that but you know we can emphasize or let me emphasize that our primary focus is to minimize the detrimental margins that that we're facing by reducing our costs.

We can see one last week.

Sure.

Well last one of my good on the just the just beside a pension and then also not working capital.

I just wanted to read you correctly that.

130 million a pension contributions you anticipate making this year, despite the ability legally to to move those out and then.

Secondarily.

What what's the networking capital goal for for the bounds.

Over the years, it's something like 200 million 300 million just trying to square those those two things I've got some so in terms of the pension to the federal the February leave religious allows you instead of making the payments on December 31st you can make it on January 1st Okay. So there's not like it's not a huge relief I mean is.

Intro, your because you're not to pay snake or you made your payments. So that's that's great, but it's not a solution to you know long-term equity or even short term liquidity really.

The reason that we would make the contribution and 2020 instead of 2021, So December 31st versus January 1st.

Because we get a benefit in terms of the accounting and and the calculation liabilities and contributions for going forward and so that there. There is some mechanical reason that there isn't mechanical reason why we would choose to do it a day earlier.

In terms of are working capital, what I would say about working capital and if you don't mind, so I'd like to tie it to our the equation goal. So right now we ended the the the quarter with about $900 million of liquidity, we expect that with X.

Ah pension contributions are going to be cash flow positive.

That means if you add 130 of cash flow or a pension contributions. It. It brings you to kind of a cash flow neutral. If you will our goal is you know we want we want and the your and a position when we have at least the the look putting level. If we do now which if if if you go back and look in history.

<unk>, we're actually at one of the high points of liquidity I think in the company and show maintaining that but yet continuing to go after the their reductions and especially in the Tories absolutely a priority for us.

And so we're going to continue to go after that AD liquidity, but you know our our first goal is let's drop below a rat, even though there's a lot of dynamics in the markets and then let's add what we can.

So that.

The next question will come from Josh Sullivan with a bunch more company.

Yeah.

Oh good morning.

Morning.

If we just think about you know the downturn in 2015 and 16, just compared to the operations today. The structural changes that you've done you know is there any way to either no qualitatively or quantitatively you know think about how E.T.I. is positioned to manage this cycle verse. It was in the previous cycle.

Yeah. Good morning, just thanks for that Yeah, I think when we look back whether it's 15 16 or even the finance crisis of away into one nine.

No. We're fundamentally differently structured business then we were back in those times you know the 15 16 was clearly related to work stoppage followed by a massive restructuring of our several products business at that time.

We've also from a structural standpoint seems significant growth in our H.P.M.C.'s segments editions of the for James that came with the Laddish acquisition. So just prior to 2015 2016 were certainly seeing the growth in powder in the next generation applications and I think you know that's been.

Parts. So structurally were different in terms of what that leads to is the product mix and it go we've had a steady cadence over the last 18 months of long-term agreements that have increased our business content as well as the margin enhancements that come with that in the H.P.M.C. segment.

I think we've made a significant shift in our product mix and the advanced salaries and solutions segment with a focus on you know value over volume.

And you know I think the changes we made to close our pension to new entrants you know kind of takes care of that we get some increased flexibility with our workforce to respond you know quickly to changes in our business.

Yeah, and the bottom line I think is were different company than we were back then more resilient going into the crisis, then as as Don mentioned, you know or liquidity is in a p. position.

Right.

Thanks, Thanks for that.

And that just with regard to the you know the continued strong outlook for for the defense business. You know the F. 35. The the summary businesses lives are complex supply chains are you seeing any logistic challenges just just given that complexity. You know do you think there'll be any delay there as it is it's still pretty strong pull through.

So my team will be happy to hear the answer is Ah nope, we're not seeing any real supply chain issues candidly early on in the covert 19, there was little bit of a challenge with just ballistics testing with the government, but that's pretty much behind us.

And we don't see any real disruptions and we see actually would never call. It business as usual because that's a growing part of our business for us, but yeah, it's been very stable and and the growth is set to continue based on the backlog that we have.

Yeah.

<unk>.

<unk> you just provide any color you know what you're seeing the on the ground in China with the stall operations. Yeah. I know you said you expect an increase in the second half the year with consumer electronics, but is there any way to characterize you know how stalls markets are reopening just currently on the ground.

Yeah Oh.

Yeah, so he's looking at China, obviously, the the lunar new year, everybody knows what was happening and so we saw no significant decrease in in demand in February which was planned and as we reported we had Q1 growth. This year over last year I I would talk about too you know specific.

Markets, you know consumer electronics took a dom down and.

Too I think we're expecting that to look like a v. shaped recovery and the electronic space when we get into the second half I think it automotive, which you know we don't have thought course strategic market for us, but it's important for precision all strip.

Markets down about 25% compared to 2019 and candidly, we expect that to be flat for the balance of the year unless there's some other kind of government intervention.

And the other thing that we're seeing in but are small businesses going beyond China and growth in the broader Asia and people getting ready for the next generation of Ah electronics, whether it's the 83 inch flat screens or various other things that price points on those would come down to the point where demand is up.

So we expect you know growth in the.

Asian region first all outside of China, you know in the second half of the year as a people get ready for the the year round holiday season.

Yeah they.

But I question will come from pair Taj that's wrong with Baron but let's go ahead.

Hi, Thanks, Good morning, Yeah. Thanks for taking my question so <unk> on these.

Titanium contract.

Usually that you mentioned it can you quite similar color on <unk>, we're supposed to expectations, what sort of ramp up should we expect yeah and the second half and then it 2021.

I realize you have drawn your guidance, but what's that already included in your previous Guy just like 2020.

[noise] well actually take the guidance questioned on and I'll come back on the contract.

Okay. So I'm a I'm the contract you know, we're not really going.

And I talked too much about it today other than I would say yeah, you probably not too surprising that are are aerostructures customers. You know have their place full at the moment.

Adjusting their contracts it isn't it is multi year and it is titanium they'll products and we'll have more information as we go forward, but we're excited about it because we should see production in late queue for 2020.

To increase our participation going into 2021, yeah, what I would say in terms of guidance is we are getting orders. So you would see the benefit of some of the production and cost absorption in 2020 because of it but in terms of a delivery of those I would I would expect no money.

Serial deliveries in 2020.

Expect that to hit 2021.

God and then about two or how to production <unk> I believe you said that you shut down too small plants and Pennsylvania. So can you just maybe talk about how many plants are operating or what's the total capacity utilization it right now.

See <unk> world with got a lot so I would say.

The only two that are down or just done the powder business.

Of 'em ones related more to the aerospace demand actually both of them are related to you know space to man and we were able to consolidate that production you know in other facilities. So I would say.

On a broader utilization those are the only two plants. So we really have down what we're doing to manage our capacity is what we call temporary or rolling idols, where you might yes tank up melt shop.

A week, we took our carolina facilities down for a week or two depending on what 10 operations. They were Don talked about what we're doing up in our forging business. So but you'll see if you know if you know if you said hey, what are we running I would say most of our major facilities are probably down in one week a month.

In some shape or form so.

Probably in about a 75 per cent utilization now the reason we're doing it is to get our inventories in line and making sure. We can make the right stuff at the right time for our customers and.

And then make sure we understand what the long term.

<unk> going to be long term being defined as 2021 at this stage and then adjusting our Crewing you know to match through the balance yeah, Yeah, and just for some perspective for those plants over I know they they would represent probably something in the range of 25% to 30% of of that production capacity. So.

So temporary idling and not a huge percentage of our footprint.

It is it certainly helps to optimize the the production processing and and the plants.

[noise] Oh next question will come from Matthew feels good Bank of America. Please go ahead [noise].

Hi, everyone I want to ask a a couple of balance you question.

I know you said to 60 availability and revolve around March 31st and then understand you repaid the 300 and April but.

<unk> was 500 in total.

With 300 dollar and I'm I'm not sure how you get choose to use availability, including some of your accordion option.

<unk>.

As a way to think about it is so there there are kind of three elements to the facility. If you I mean, if I could just described those 200 500 million dollar revolver. That's the headline and we have a modest amount of of letters of credit federal outstanding against it something in the range about 50 million dollar.

And you've got a a a term loan element that is outstanding that's 100 million and then the final keys is the delay draw hundreds that I talked about it my script.

Lifetime got we can draw by the end of June when you look at the at the availability.

You know and it doesn't move from period to period, depending upon the underlying collateral bayes and show it depends upon a accounts receivable and the inventory and and whether or not they she happen in that period qualify for draw rates and and so that's where you know some of the dynamic around.

Around to available capacity can change from from a 500 million dollar headline too you know different dollar.

Generally the way to think about it is.

500 million dollar revolver to 100 million dollar term loans and and we we're we've got a pretty much near full availability. What we've drawn the term loan first term loan and will we may well draw the second trouble.

So it's 160 available on the revolver and then 100 million potential if you draw the second.

At it the way that drugs and that and that one that that was during this guy was after we had drawn to 300, but you're right right right now you got some that men x.

The 200 million accordion feature you have like a real over that is absolutely true and show good point, that's another opportunity for us to to potentially increase liquidity, whereas you can imagine that you one of the things we look at his room and training our balances right now we have more collateral than we have capacity under the <unk>.

<unk> and so you know one thing we evaluate is how do we optimizer collateral nice at relative to the health facility and national and that that we look at as a potential elaborate hole if it makes sense, but good good catch.

I think and then and then sort of related to that.

You have you know that hundred million dollar delayed dropped term loan.

DQSA low rate I think of Blackboard plus 125.

Yeah, you're 27 notes or trading at 80 cents on the dollar I understand that first and foremost preserving liquidity is the key but why not.

Issue some of that delayed draw or or issue. You know you boost the revolver, a little bit and buy back no to the discount capture some captured some debt discount and reduce sort of overall, but burton.

Up your your home, 100% right. So first priority for US is we want to make sure that we have ample liquidity, especially during this to this time of of disruption and and get better line of sight to to what this down cycle looks like to make sure that we've.

<unk>.

Opera amount of equality in the business then you're right <unk>. We would end up doing was we you know if we had access kept capital available based upon our our assessment, we wouldn't start hunting for once the proper place to deploy that capital again, an x. return and you're right, there's probably an interest arbitrage.

Easy for us it with some of her outstanding debt, so you're you're dead on right.

[noise]. Thank you ladies and gentleman was concludes our question and answer session.

<unk> back over the ball, but it'd be free remarks.

Thank you and thanks for joining us on the call today stay healthy.

And thank you for your continued interest in A.T.I.

If you Bob Thank you all participants and listeners joining us today that concludes their first quarter 2020 conference call.

Thanks for attending today's presentation.

Caroline's.

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