Q3 2020 Allegheny Technologies Inc Earnings Call
[music].
Good morning, and welcome to the Allegheny Technologies incorporated third quarter 20, Clotting results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you make a star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Scott Miller, Vice President Treasurer, and Investor Relations. Please go ahead Sir.
Thank you good morning, and welcome to the Allegheny Technologies third quarter 2020 earnings call. Today's discussion is being broadcast on our website at H.C.I. metals Dot com.
Participating on the call today are Bob Wetherbee, President and Chief Executive Officer, and Don Newman, Senior Vice President and Chief Financial Officer.
For today's call, we will not display where advanced flights as Bob and Don speak for comments will focus on highlights and key messages. The slides provide additional color and details on our results and outlook, they're available on our website at H.C.I. metals Dot com.
After our prepared remarks, we will open the line for questions.
During the Q and a session. Please limit yourself to two questions. As a reminder, all forward looking statements are subject to various assumptions and caveats as noted in the earnings release and the slide presentation now I will turn the call over to Bob.
Thanks, Scott good morning.
It's an understatement to say that a 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market.
Despite these headwinds relentless AI team continues to rise to the challenge.
Guided by the leadership priorities, we established at the outset of the pandemic.
This morning, I'll share my thoughts on three key topics.
First how we've taken control of what we can control, so accelerating cost savings and strengthening our position.
Second our strong balance sheet puts us in an excellent position to weather storms ahead, as well as to fuel our growth.
And third our view of the markets and our confidence in a stronger future for a T.I. Thanks.
Thanks to strategic share gains at H.T.I.s unique capabilities.
So first where we are today.
We began taking decisive action as soon as our forward looking demand signals Flash Ric Clark.
Our customer connectivity continues to give us the insights to assess market dynamics in the moment.
Okay.
Cost historically viewed as fixed are now turn it on and off in sync with demand, which gives us tremendous control over our costs.
This will be a lasting impact of the actions we've taken during the crisis.
Rudolph are people have been extraordinary.
First and foremost, they're keeping each other safe, while efficiently and consistently delivering critical materials and components to our customers.
The frequent production adjustments, we've made in response to demand shifts and and market forecasts have not an easy for them.
Growing levels and shift schedules have fluctuated as a result.
I sincerely appreciate the entire team's effort and dedication.
And personal economic sacrifice.
They're continued actions demonstrated shared commitment to ati's future success.
The deliberate actions, we have taken and will continue to take are crucial to our ability to emerge stronger company as the economy recovers.
Looking ahead, we're confident demand will eventually recover.
We expect these difficult times to continue for several quarters to come that.
Yes, we do believe we're reaching the bottom with some signs of upcoming stability.
Secondly, let's talk about our balance sheet and the solid position that puts us in.
We've worked diligently to ensure ample liquidity levels and a manageable debt maturities schedule.
Are strong balance sheet gives us confidence to manage through the covid prices and fuel our future growth.
We're fueling growth in three ways first based on customer commitments, we're investing capital to enable strategic share gains a new business awards that will start to see in 2021.
Next organically expanding our presence in adjacent high value markets, where our material science expertise is value.
And finally, when the time in economics, all right, we'll pursue acquisitions to rapidly buildout scale expand capabilities and capture profitable core market opportunities.
As we accomplish our growth goals will intensify our presence in aerospace and defense materials and components.
We will continue leveraging our material science capabilities and advanced process technologies to generate aerospace like margins and adjacent markets along the way.
Looking forward, we're confident that the demand for commercial aerospace products will recover we've.
We see it as growth differed not loss.
No matter what form you believe the coming economic recovery will take us that could be could you look.
That the L shaped when.
When you are at the bottom it's difficult to predict when you will reach the other side.
But we know we will get there.
We're positioning ATI to emerge stronger leaner and more efficient no matter, how the recovery calm.
There are some examples of how I believe we're doing just that.
We're expanding our presence in growth markets like defense.
We have solid positions and adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace like profitability.
Lastly, our efforts to lower costs and streamline our manufacturing footprint, while deploying growth capital will pay dividends for the long term.
Broadly speaking and not surprisingly R Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn.
Defense remains of notable positive exception.
Little more color on our view of what we expect going forward.
Let's start with commercial aerospace.
Both jet engine and airframe continued to decline significantly versus the prior year.
Aggregate year over year sales were down 60% in the third quarter driven by factors, we're all familiar with foreign teams travel restrictions and low 707 Max production.
Aggressive jet engine customer inventory destocking in the near term will better aligned future production levels with demand.
Fourthquarter jet engine product sales room will remain relatively weak as <unk> began to slowly recover.
Specialty materials will likely lag for an additional couple of quarters.
Hei sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 is the impact of announced future wide body production rate reductions work their way through the supply chain.
In 2021, Hei will benefit from engined market share gains and new airframe business.
The positive impact from these wins will increase over time as aerospace industry volumes recover.
Our second core market defense remains a source of strength.
Excluding titanium armor Hei's diversified defense sales were up more than 20% year over year led by a naval nuclear and military aerospace growth.
Titanium armor plate sales were down significantly due to timing for both the domestic and international programs.
We're investing resources to accelerate growth in the defense market.
Leveraging our material science capabilities and advanced process technologies to develop and produce materials and components that both power and protect near.
Near term, we expect continued growth in the fourth quarter and into 2021.
Let's let's talk about my thoughts on the three important adjacent and markets.
Third quarter sales were down significantly in the energy and medical markets at top and electronics.
When it comes to energies oil and gas Submarket, we saw lack of and customer demand and a resulting inventories lists reducing exploration and downstream processing activities worldwide.
We expect this mark to remain week in the fourth quarter.
Right spot within energy has the specialty NRG submarket, including solution control nuclear and renewables.
These sales grew a year over year, and we expect a specialty energy market to continue to outperform the larger hydrocarbon based markets in the fourth quarter, mainly driven by large international pollution control projects.
Our medical market is principally comprised of biomedical implants, an MRI materials.
Sales versus prior year or lower to customers in both categories, mainly due to the challenges presented by Covid.
Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers.
<unk> ahead, we believe medical sales will accelerate his patients regain confidence to reenter medical facilities.
Either due to an effective covid vaccine or disease treatment protocols.
Finally, electronic sales move higher per year over year.
This is mainly due to ongoing consumer goods production in support of new product launches and year end holiday sales.
We anticipate modest growth trends to continue in the fourth quarter.
With that I'll turn the call over to down to cover our third quarter financial results in outlook for the balance of the year.
Back to offer a few final thoughts before we open the lines for your questions.
Thanks, Bob.
I'll spend the next few minutes sharing highlights in three key areas. One are better than expected third quarter financial performance, two are strong balance sheet and cash position and trade.
I'll look at our queue, four and 2021 expectation.
From a performance standpoint, the adjusted EPS loss of 38 per share in Q3 is significantly better than our previous guidance of a loss of between $62.72 per share.
R Q3 performance reflects accelerated cost reductions AD and improve next and portions of our business.
First and foremost we are managing decisively.
We are making the most of external demand despite market headwind.
And we're controlling what we can or costs and capital deployment.
Instead of this.
Our third quarter revenue drop by more than 40% versus prior year.
Including a 60% decline in our high value commercial aerospace business.
The revenue job was largely due to market factors that we're not within our control.
On market declines became clear earlier this year, we responded quickly focusing on cost containment.
Benefits of those efforts can be seen in our queue three results.
Despite the 40% drop in revenue, we posted a 25% year over year detrimental margin in Q3.
Some meaningful improvement from the 28% decremental margins capture and Q2.
Clear improvement, resulting from quick action.
Our cost actions are having meaningful impact and they're accelerating.
As Bob described it we have significantly variable is our cost structure cost once considered effects are now variable.
This means we are better prepared to deal with future demand fluctuation.
Also keep in mind that structural cost savings, while accelerate profitability in the recovery expanding margins and increasing our cash conversion.
Looking beyond the income statements are effort to reserve free cash flow are producing results as well.
We expect to be free cash flow positive in 2020.
This is made possible through capital spending discipline, and our ability to convert working capital into cash.
I wanted to take a minute to acknowledge a fantastic efforts of our operating teams.
It took quick actions to protect cash in the near term, while maintaining our ability to grow and be recovering ready.
We ended the quarter with approximately $950 million, a total liquidity, including $572 million of cash in the bank.
That maturity profile also add strength to our financial position.
Our next meaningful that maturity does not occur until 2023 three fiscal years away.
We're focusing on three key levers to drive cash generation.
Cost structures inventory.
Inventory levels and Capex.
Expect to see continued focus on these three areas in 2021, as we adapt our business to fit dynamic and market demand.
At the same time, we will continue to protect our strong balance sheet.
These actions will enable us to manage through the downward cycle and capitalize on opportunities in the coming upcycle.
In terms of outlook looking.
Looking ahead to the fourth quarter, we anticipate increasing demand stabilization and commercial aerospace.
This starts with jet engine Oems working to better align production and demand levels.
Airframe OEM inventory Destocking is expected to persist in the fourth quarter.
Beyond aerospace some industrial markets are seeing modest recovery.
Others, namely oil and gas will likely remain at low levels.
As a result, we expect a fourth quarter adjusted EPS lost in the range of 36 to 44 cents per share similar to our third quarters adjusted EPS.
Have anything to our free cash flow guidance.
Are consistent efforts to generate preserve cash have produced tangible results.
We reduced manage working capital by $115 million in the third quarter in the midst of the steep economic decline.
We expect to further reduce inventory in queue for.
Just as a team quickly pivoted cost reductions, we managed our capex spending to better match demand.
To that end.
Where again lowering our capital spending target for the full year.
Our updated Capex forecast range is $125 million to $135 million about 60% of the original 2020 projections.
We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contributions.
We're able to do this because of the successful achievements and working capital Capex and cost structures.
A great accomplishment in the midst of a very challenging environment.
Looking beyond the fourth quarter.
We will stay diligent to preserve or even improve on the gains that we made in 2020.
First we believe that working capital represents an opportunity for further cash flow improvement.
At the end of the third quarter manage working capital was approximately 50% of revenue.
This compares to 30% at the end of 2019.
We understand what it takes to get back to those 2019 levels and we plan to make further improvements in 2021.
That will.
We'll continue to keep a cosigner capital spending.
We will balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels.
Finally, we will stay disciplined on costs.
We will carefully preserve our structural reductions and minimize additions as volumes return to the business.
The way we operate today is fundamentally different than how we used to work.
We will strive to maintain the hard fought gains.
With that I'll turn the call back over to Bob to add some closing comments.
Thanks, and your points were right on a real team effort and a very uncertain time much.
Much appreciate the contributions of everyone.
Our customers or suppliers.
Our comments today focused on what matters, most to our shareholders and to us. These.
These priorities are at the core of how we lead on a daily basis.
First we're managing decisively in times of great market uncertainty.
That includes quickly and effectively adjusting our cost structures and inventories to match demand and we're keeping our people safe.
Secondly, we're preserving cash in maintaining liquidity.
For preserving our ability to deploy cash accretively for our shareholders.
We will be recovery ready.
<unk>, an industry volume growth as well as our strategic share gains and new business Awards.
Finally, we are working with our customers knew and long standing who value our material science capabilities and advanced process technology.
Our goal was to be integral to their success, helping them grow solving even greater challenges together.
In so doing.
Turning in ever increasing share of their business.
We're taking the actions necessary to emerge from this crisis, a stronger leaner and more focused ATI.
Got back to you.
Thanks, Bob that concludes our prepared remarks, operator, we are ready for the first question.
We will now begin the question and answer session to ask a question you May Crestar then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then too at this time little pause momentarily to assemble law roster.
And our first question today comes from Josh Sullivan of the benchmark company.
Hi, good morning.
Good morning.
Highlighted defenses.
Going forward can you just talk about you know how do you take sure there or is it on new program growth.
You know just as we think about defense budget. So I'm looking at the 21 and 22.
No tenderness strength today carryover the out years.
Great question on good morning, Yes, and when you look at what we've been able to do in defense is being very programmed specific <unk>.
Clearly a big part of what we do is supporting what floats. So the nuclear Navy and the propulsion systems. There, we expect that to be a good strong market.
For the years to come as much.
In terms of fuel replenishment is anything so I think that's a fairly solid growth opportunity for us.
The area, we focus on is clearly military propulsion, both helicopter rotary rotorcraft fixed wing, so what I'm very select programs that are growing and we continue to see opportunities there and those programs tend to last forever and obviously consume.
Some portion of aftermarket type things that we enjoy as well.
Brown vehicles were on very specific programs that are starting to gain traction internationally.
Internationally or have implications for international growth on the armor side, So we feel very confident.
These are markets that value or material science capability, and certainly things like.
<unk> in our facilities FASC also contributed to that and lastly, I think take materials high chain look to the future auto work going on in a hypersonic type space applications and either are very light gauge rolling capabilities.
Things like when.
When you think about our alloy mix or Conium hafnium, niobium channel and all those kinds of things, there's a lot of great applications for.
Hi temperature gauge.
Gage growth, which is was really the catalyst for putting our <unk> business together with our specialty rolled products business.
Earlier, this year to give that synergy and to make sure. We're doing everything we could to grow but we see defence continuing to be strong.
Basically because of the programs that were involved.
Got it got it.
And then just just curious if you had thoughts on comments from raytheon's announcements to do some more turbine airflow production. Yeah. I know you guys have a very good relationship with the company just curious on your thoughts on what they might be doing it.
You might be involved there just just what you're thinking I'm sorry that announcement.
We're still adjusting to the new name for Raytheon and so our connection early obviously is with the president within the family lives there and we feel we have some good strong relationships.
To grow in the future.
Really comment on what their plans are but we continue to be very actively engaged with with what they made out of material science basis.
And.
So we're confident that those are they still have a good growth projections.
A profile.
Alright.
And then just one last one on commercial aftermarket for engines that are out of large scale OEM production or even out of production altogether.
Is there any demand pull on the aftermarket side for those engines or how does the order or slow it looks like for those engines that are out of large scale OEM production at this point.
No. That's a that's a question you asked a couple of other times for us.
I think we're we've always said is it's harder for us to see exactly where the aftermarket is it's an important part of our business probably I think we've said publicly 2025% of what we do is in the aftermarket and so we have that we track it by basically to afford to fit the forging level forging bits.
US and we see the second part specifically coming through but at this stage.
I can still going to be there for awhile.
That growth space for us one man's and start to to go out of.
Production, we're well positioned for that next generation.
Obviously, the the leaps and the the.
The geared turbofan, so that's really where the future is going to be for us.
But I'll figure out a different way to ask the question.
All right well, it's okay. It's early in the morning, we're we're ready.
And our next question will contain sale gibbs's Keybanc capital markets.
Okay. Good morning.
Good morning.
So is.
So as you guys look at your cost reductions in your your new targets for 2020.
John I think you lifted this morning, what what's the implication in terms of how much incremental cost savings, we can get in the fourth quarter relative to the third.
Yes, we have made fantastic progress in terms of the cost initiatives that we triggered early on as soon as we saw the changes going on in the market to give you. Some perspective, Phil if you think about it we captured about $60 million to $65 million of cost reductions in Q3 that was rougher.
Lee twice the size of the capture that we got in queue too. So as you think about you for we feel like we've kind of hit a good pace I would take some martial improvement in queue for relative to Q3, but still in that probably $65 million range for the quarter that set you up for a run.
Right in the 216, probably 275 range.
Four 2021, and so I think that's what I want to think about Ron right and of course, the other key.
Area of the cost reductions is how much of those cost reductions are we going to keep what's structural and for that I would stick with the guideline that we gave you before which is.
We are targeting 40% to 50% of our cost reductions to be structural I would lean toward the 40%.
And that is you do the math will set you up for about $100 million plus of structural cost reductions and of course I don't want to tell you that announced on that those structural cost benefits are gifts that are going to keep giving through the upcycle, they're going to be beneficial to expanding our margin and increasing our cash generation.
And it should create some really substantial enterprise value for our shareholders. So we're really happy with the outcome that we've had so far on on a cost reduction and the quick response that we've had from our team.
Thanks, Don Juan what's what's the cause I. It looks like you did have a pretty healthy pension contribution in the third quarter, which I think we may have anticipated was gonna be four Q waited what do we have lost on on the pension.
Contributions in the fourth quarter.
To come.
Yes, you are.
We had an excess of $60 million of contributions in the court in the third quarter, we're still targeting $130 million for the full year that means you've got about $35 million left in queue for so that sets us up on this glide path.
For for getting our pension plan.
Really fully funded or at least to administer and minimis level over the next number of years and so as you would think about again 2021 is everybody is trying to wrap their head around those expectations. We've said before that 130 for 2020, you looked at 2021% of 2023.
We should be averaging closer to probably $80 million with 2021 kind of $100 million range again really pleased with the glidepath and we're in with our pension we're heading in the right direction and it's still a clear priority for us.
Okay terrific I'll hop back. Thank you I appreciate it you bet.
The next question comes from with Tom Kinda of Talon.
Hey, guys. Good morning, Thank you and good morning.
I just wanted to ask about.
Your visibility on the aerospace side right now.
Have you.
I think there was a discussion about a recovery in the second half of next year.
Yeah, just that you could frame your confidence around that you know what kind of.
For visibility do you have in terms of.
While you're expected maybe jet engine or airframe deliveries are likely to look you have visibility out into.
Into the second half of next year or.
Just kind of dynamic is that situations.
That the tail end there that's the ultimate question of it. Thank you.
The.
Aerospace supply chain and is an understatement, if it's an ecosystem right. It's always evolving at current dynamic environment, but environment, but what we're doing is we're really get the benefit of I'd say about forging businesses kind of our starting point, where you are looking at park specific activity.
Specific programs at our relationships with the.
The big Oems and we know that they were pretty aggressive and adjusting their inventories.
Quickly starting Q4 of last year into the first part of 20.
20, so we think that we're in a pretty good inventory management position. So from as we get into the back half of 2021, we should be able to see that inventory towards bernoff, but it's based on day to day talking to the customer.
Honest with you.
Get a lot of different inputs, we actually listened to some financial analysts to talk about the build right seven talking to the customers and it's really about their tactical activity.
The airframe side right, we all recognize that the airframe.
Supply chain was consuming more than they were needing into 2019 with the situation with the Max.
Also see.
Lower wide body production.
So one of the great measures for us is actually kind of what kind of inventories that we have trapped but doesn't necessarily managed to match up with current order demand.
Dawn said one of the great opportunities for us is.
Right now we're at about.
About 50%.
Capital to sales kind of ratio, we should be much closer to 30% if not better than that over the long term. So that's kind of our own internal indicator of where where is the supply chain.
As we start to release are trapped materials that will tell you that they started to burn off but the real challenge I think is we're still waiting on the Max return to service.
Yeah, I think once that happens you tell me you guys got it happened Melissa assume it happens.
We start to see visibility came back in January and February I think us and we will get our first true look at what the recovery Scott look like but it's still looking at inventory levels talking to key suppliers and certainly investing with our customers that time.
There's no lack of conversation going on it's a matter of the biggest wildcard for us as.
Max returning to surface at this point.
And just maybe it's a follow up rich.
I'm sorry.
Paul changed Highgrove highlights of their finance Gallovits, Okay [laughter] [laughter].
[laughter].
I was just curious you know the jet engine salesman do that you guys would be able to slide deck do do you think that is a low watermark. If you will I mean, some here do you mean, maybe queue for just a little lower because there's always kind of channel destocking into the calendar year and.
Do you think that March 5th.
<unk> will mark kind of a low point it is a D stopped level. If you will below underlying consumption of the end user.
Where do you think.
We're going to be hanging out at the level like <unk>, maybe even below deck and the first half of next year.
Just look at the shape that kind of weird.
I'm just trying to understand like what is underlying consumption versus yeah.
You guys are actually feeling today, yes, I think.
And my comments with one caveat. So I think if you took a Q3 was still a little bit of a transition quarter queue for Q1, and Q2 that all kind of have that kind of resemble the same pattern. I think we are bouncing off the bottom.
Some of that is what I look at the news that comes across my desk I would say today, it's more up and down where for the last 180 days are to believe it's only been 180 days. So we've been in this pandemic.
Mostly down right negative type stuff so thanks.
Food has shifted quite a bit so I think Q4 to Q1.
Q2, probably flat for for the demand I think a couple of a.
Tidbits, we're working through is that we're going to have some tough comps falling forward right and two one, particularly but I think if you look sequentially I think you'll you'll get a good track record and then not all of our friends in the OEM business or.
R as as effective at managing their forward demand as others right. So there's always one or.
Guidance that we kind of have to wait and see if they tend to do more of their adjustment.
Q1, so we can still get some modest inventory correction for one or two players, but I think for the the core customers that we depend upon in the jet engine space.
Think.
We think we're at the bottom and it should flatten here for the next couple of quarters.
Can work, we're doing on the detrimental margins at all.
Should still be still going to be on our mind. So.
Mhm.
Well, Thanks again I appreciate the the answers Nancy good luck with everything yes. Thank you.
And that's the question will come from Tim that patterns of Bank of America.
Oh Higgins.
Good morning.
Good morning, sorry about that and nobody there. So we're all that detail was.
You could elaborate a little bit more on that Capex, and where it was cats and how long. It can go going forward and then also there is a comment I I caught on that discussion about possible acquisition system wanted a little more detail them that often.
Sure. This is Don let me take a run at that question first from a Capex standpoint, we reacted very very quickly to right size are are capex, where where you are seeing demand going when we entered the year.
We were expecting to spend in excess of $200 million. If you look at our queue three numbers them know what you're going to see is a run rate closer to 120 million. So very positive in terms of where the cuts have happened, it's really been pretty broad based across all of the segments and.
And it's really about prioritizing where we're spending the capex. We're looking at it just like our cost structures were dismantling R capital spending we're looking at what the highest priorities are from a maintenance standpoint, and then when it comes to any growth Capex whatsoever.
Of course interested in growing but we can't spend a dime ahead of when it needs to be spent and we have to be drop dead certain that we're going to get the returns that that we believe we're going to get with these investments. So what you've seen in 2020, you should expect to see in 2021 similar discipline similar flexing based upon what the customer knee.
Needs and what the demand levels are in the in the end market.
The second part of your question would you repeat that.
Yeah sure physicians acquisition, Yeah, that's right. Okay. So the way to think about it is it really comes down to what your priorities which are capital.
And our priorities around capital allocation tender has not changed number one we have to ensure that we have adequate liquidity in the business to keep it healthy and where they're checked that box $950 million of liquidity second priority is we make sure that we've taken care of our people and we make sure that we're maintaining our assets check.
We're doing that third we are on a glide path to the pension we're going to continue to make our pension contributions and see our cells work down that pension commitment to de minimus level over the next several years check we've got that covered at that point, our priorities really are focused on.
Where do we deploy capital to do kind of effectively two things prudently grow and the second is.
Really take care of our of our maturing debt facilities.
So let's focus on the growth, it's organic or inorganic and we do measure the differences.
We understand that that organic growth will get us so far in terms of our business and organic growth may be an enhancer. How do we look at that hearing organic growth and are we open to inorganic growth is what you're asking us.
And the reality is we are.
We have put ourselves very intentionally in a position to have choices.
But it's also choices that are going to be executed based upon the discipline you've seen over these last few quarters and and as we look at M&A. It's also important to understand our priorities there.
Our priority is aerospace and defense growth, that's our core that's where we make our highest margins that's where we have experienced the healthiest growth and choices, we deploy capital to growth, whether it's internal or external it has the priority toward.
Preference toward aerospace and defense and will be opportunistic we.
We see opportunities really often.
And we're pretty discerning in pre careful as we make those decisions, but we do see it as a possibility I think thats write down I think it's about expanding into.
Geoscience capabilities that can go into components.
We understand our material science capabilities, but almost everything we sell something else happens to us before it gets on the end use so we see some really unique appetites coming in defense for high temperature structures.
Powder metallurgy plays into that game.
Sure There are times, Tim now you might accuse us of being in the lumberyard business in some aspects of our business and we think going up the value chain to be near to the end state is actually where there's a opportunity for further differentiation leveraging our advanced processes and certainly our material science, though.
That helps with the color you were looking for.
Okay. Thanks for that yeah, just trying to understand like if you're you know you're.
Can I finish some of that isothermal forge trash capex sure where that stands relative to thinking about M&A and how those priorities would be going for it but I I can follow up offline and I I would think Jim now I can actually answer that question for you. The answer is yes in due time, but it's really going to be dependent upon.
What is the demand in the market is and when when when we would need those assets to be in place to meet the demand for that our customers put in front of us, we're not going to rush to spend the money.
There is still good investments at the right time.
That makes sense and my other question was just to put you on the spot if he can't obviously election day in a couple of days and I was just wondering if you could comment at all if you have any insights as to the impact one way or another specifically on trade for example, if it's not too late to revive.
Get some of that.
Slabbery rolling opportunities. It then they're growing now or you know with regard to defense spending in any types there.
Yeah, I think I'll.
Start with the defense spending I think in the near term narrative medium term I think the defense spending we will continue.
The opportunities for the programs that were on specifically feel relatively strong for a long period of time not necessarily driven by.
Politics, but.
Global threats in defense needs. So we spend a lot of time, we have a dedicated team in D. C who was spending a lot of time with the.
The Pentagon at various folks and so I think on defense we feel.
Relatively strong in terms of.
Assets that we might have idle, they're always idled such that they could be returned to service, but we continue to deemphasize our position in stainless and.
I think we are interested in using.
Using the HR Pf that we have in Pennsylvania for cash generation.
Think there's still a lot of opportunities, we still get inquiries about using that capability as we all remember it was built for a capability and it came with a.
Ah capacity and we still get inquiries to do that the markets have been up and down over the last 180 to 200 days. So so hard to tell where that might go but.
Yeah, I think our focus is clearly an aerospace and defense.
Where we want to go we also have.
Adjacent markets and electronics.
Electronics medical.
Space.
And they tend to have the places we're going to invest actually are in the aerospace like profitability ranges.
There are good opportunities there in those markets and.
We've been known to sell assets from time to time. So if somebody comes along and says Hey, we would really like to take a risk and that lower value space.
We are open to that.
Okay. Thanks, guys best of luck.
Thank you.
The next question comes from David Strauss and Sparkly.
[noise]. Thanks morning, Good morning, David.
Ah apologies, it's any of these have been asked.
I joined linked from another call.
Free free cash flows, we think about 21 and the moving pieces there between I heard the comments on Capex, but no capex working capital.
Cash taxes, and I guess, <unk>, including or excluding pension contribution would you.
Checked it to two grumbling 21 versus 20.
Hi, David this is done.
Haven't given guidance yet for 2021, but let me give you some color of course in 2020 were expecting that generate somewhere between 135 and $150 million a free casual and a pre challenging environment. How do we get there. There's three levers that we're managing it's about our cost structure is a sputter capex and it's about are working capital the way to think about.
2021 is you're going to see number one the same discipline around the same levers as we look at our cost structure is we're going to work very hard to continue to capture cost savings and maintain the gains that we've already captured in 2020 I've already talked about the structural savings be in the range of $100 million even in the recovery.
So I feel very positive about that when.
When it comes to our Capex the same discipline that you see in 2024, we took our capex spanned really shaped it to the new demand took it from 200 million down to run right and after Q3 at about 120 million.
Back to see that very very same discipline applied as we look at what the market demand as in 2021, and then the last lever in which which I think really key to understand how we're reviewing 2021 and this will likely be reflected when we give her guidance for free cash flow is how we're thinking about our.
Manage working capital levels.
Bob already touched on this but I want to drive home how important this is.
Are we ended Q3 with a manage working capital as a percent of revenue at about 50% and you know David that we ended 2019 at metrics metric was management and capital at 30% of revenue that 20% Delta, we see as a massive opportunity.
City, and we're going after aggressively today, and it's really going to unfold in 2021, as we released captured inventory that we have and it really apply some pretty solid methodologies to make sure that we're not creating any new stranded inventories and and that should be.
A significant source of cash generation for us.
Oh, great. That's helpful. So so you think the biggest lever to get back down towards the 30% range is on need inventories side more so than anything so it'll be done in terms of receivables and tables.
Yes receivables.
We're doing a good job around that we're not seeing any issues no delays. The receivables are working Windsor way down in the normal course payables the way to think about payables no step change in the deep Gpo's. We have picked up a couple of days in our favor around payable phenomenon not expecting a step change there.
The real opportunity here and what we're focused on.
Really inventory.
<unk> no.
Our mind, it's a it's a really big opportunity.
Okay.
And then I'm thinking about the trajectory on on narrow them with you were talking about you know in the second half of the year next year things, maybe starting to get a bit better.
Between here and a nurse should we expect a year I mean, you've done a great job on for mental margins.
Four or should we expected.
The level of detrimental margins would continue to to shrink from here you can kind of you know.
25%, Decrementals, which is I think what what are you doing the quarter is that is that the right way to think about.
No what what those will look like over the next couple of course.
Yeah I'm glad you asked a question you're right. We made some really good progress around our decremental margins last quarter to 28% with work that down to 25. So how should we think about decremental margins going forward really I think as you are modeling. It you want to think about our decrementals in the 25% to 30% range remember the fact.
That we've.
Remember the fact that.
As we look at what's created those really favorable detrimental margins, it's really about our cost initiatives. There's two baskets to that one basket is is what I call.
<unk> related or variable Isaac our cost structures, which is going to enable us to continue to flap says the end markets are moving up and down.
So we're in good shape there the other key thing and it will continue to benefit are detrimental margins as you go through 2021, and even the upcycle are those structural changes I know I've mentioned it several times, but it is quite important as you guys are are thinking about 2021 and beyond.
As we keep that $100 million of incremental savings structural that's that's a gift that keeps getting and it's going to contribute if not just too beneficial decremental margins and incremental margins, but also our cash flow.
Okay, I guess than than following up on that I mean, Bob what.
I mean with this kind of business in the past we've done used a 40, 50% tons Decrementals I mean, what what is you know how is the approach been different this time to allow you to.
To be able to hold yellowed much much lower levels in terms of the Decrementals receipt.
Yeah.
We've been very aggressive David on making sure.
We're running the right facilities.
And we actually check this morning, we have six facilities that are actually on an indefinite idol today.
Where are higher cost facilities and so the challenge there is we use the term cold dark and quiet candidly that you have to take those for these offline and eliminate the cost for the maximum now for those facilities come back online.
Flea they'd have to be justified justified to reinvest that working capital unjustified at the capacity and in the meantime may.
Making structural changes in those facilities.
Viable when they did come back so I think what's different this time is primarily driven by the magnitude and probably the duration of the economic situation, we were able to take more structural change that we ever have before and so that's been a huge contributor to that on to do on it.
Add some more color to today's question.
I think I think.
Certainly we're facing unprecedented times and one of our key mottos internally is don't waste a good crisis and so really the the dramatic changes in the end markets driven by Covid have open up new opportunities for us to make fundamental changes that may be in the past for a more difficult.
Difficult thing to do so for us and for our teammates and the operations Everything's on the table and so that opens up new opportunities that maybe others hadn't seen in the past.
It's not it's.
Not bad it's actually a really good outcome of.
Really tough situation with crisis.
Think that crisis gets us to recovery ready.
We recognize that being recovery ready is important for our customers.
The generic term or a blank check actually it's really driven by what specific actions would we take in the supply chain and what's the lead time to take those and candidly on a weekly basis, we're looking at our customers forward Logan candidly. The reports you put out on some of the other analysts as you look out we've tried to gather where.
We need to be and when do we need to be there, but we've we've taken a more.
Conservative view I think of what the math is going to be in the near term b position on a cost basis.
<unk> that.
Okay. Thanks, very much for the call I appreciate it.
Thanks, David.
Our next question.
<unk> comes from <unk>.
<unk>.
Thank you good morning.
Question about next year 2021 regarding your jet engine and airframe business are you expecting any contribution from price increase also to your top line because maybe some new contract starting the new calendar here Oh, it's mainly off the volume story has to be looked at as it would be too.
Next year volume stabilizing and gradually recovering yes.
I would say good morning, Protas three three components to that some of the contract renewals. We had did have you know.
We call it margin enhancement and it came from one of two sources it could be unit price, but also could be product mix. So we continue to drive as we get more share and the jet engine space.
Even in some of our airframe spaces, we've been able to get a better product mix that plays more favorable utility there.
Alloys.
Andover dimensions of products that we make so I'd say there are some that that there's going to be driven by that but the majority of it would be.
Increasing in volume.
Got it and.
To be inventory, you'll see all products that your customers carry.
On the on the jetting decide on a frame site is that <unk> around three to six months typically are are give or take our higher yeah.
Yeah, I don't know exactly how much inventories vague carry per se, but I would say from a lead time perspective.
Historically, we've seen the lead time from shipping of forging per se too Dang bolted on a plant can be six months.
Oh, that's a nice average and on an uptick it tends to get a little tighter can be as short as four months, maybe in the best cases so.
If that's what you're asking how long from build.
And yet or delivery of an engine two apart supplied by us of forging that can be four to six months when you get into other products like Bill has been played it can extend closer to 12.
To 15 months, depending on the product.
The difficult the challenge of the supply chain.
Got it and if I could just ask one quick follow up on but.
When you lost the last question about detrimental margin and apologies for my didn't understand it connected but I think you're saying that you can keep the detrimental close to 25% because of that the stretching will cost sitting right like that's the.
That's a target I guess, it's closer to 25%.
Centered correctly.
Yeah, partially what what I was saying was as you think about our decrementals margins going forward consider them in the 25% to 30% range and.
And that would be consistent as you go through 2021 and think about.
How the change in revenue it affect the bottom line, where I raised the comment about structural changes.
Is really around how to think once we're in the recovery how to think about the benefits of the cost actions that we've taken.
Overall have delivered a significant amount of cost reductions in themselves in the range of 260 to 275 of annualized savings.
Key to me is what happens beyond the downcycle how.
How much of that can you Keith.
And there gets the structural changes and those are those gifts that keep giving.
And that's in the magnitude of about $100 million, plus and and so that's what I was referring to as I said you know as you think about decremental margins afternoon in the future, especially past 2021 once.
Deep into the recovery.
It's important to know that those decrementals and are incremental margins going forward are going to be pretty robust.
I understood to appreciate that thanks, guys.
And our next question will come from Matthew feels with Bank of America [laughter].
Hey, guys.
I just wanted to ask about liquidity uhm.
No you've obviously done a fantastic job of kind of managing the working capital, but I noticed that the ABL availability dropped this quarter, presumably because you're you're bothering you based shrunk in accordance with that.
How do you think about the trade off between kind of squeezing out cash flow and kind of managing that ABL available.
I'm really glad you asked that question. So when you think about what's going on with availability right. Usually there is there is a tradeoff between the release working capital get it into your cash, but hey, you're losing some of your availability on your ABL. We of course are very aware of those mechanics.
So here's what we're doing we actually have a very healthy set of initiatives that we're targeting and we're capturing that are looking at our existing collateral baskets. There are some of those collateral baskets that have historically not been included in our borrowing base thing.
<unk> like international receivables, there's some inventory categories that may exist with third parties. What we're doing is we're working with their banking group to get those baskets of collateral included in our ABL borrowing base going forward, what's the benefit of that of course.
Is that even though you're converting some of your base borrowing borrowing base into cash you replenishing the collateral and it's really kind of free collateral. If you think about it that way, Matt and so it can be very very beneficial to us our goal is.
Right shape right now with $950 million liquidity, we're going to continue to drive increasing our cash balances. It's the right thing to do and we're going to look to maintain their overall liquidity even in a challenging environment by continuing to add baskets that have been underutilized in the past. So we're doing the right things to put us.
And keep us in a healthy physician.
Oh, that's great. That's very helpful. And obviously you know you built up you know what kind of a war chest of liquidity for a downturn, but you know now that we're another 90 days into this.
How do you feel about your your maturity window. Obviously your first maturity of size isn't until 2023 do you think that that's still plenty of time or or do you think about wanting a longer runway or are you comfortable with that the downturn won't be as deep as you initially feared any thoughts on that kind of.
Sure do you schedule.
You know the policy.
Yes, we are in great shape or on our debt maturities and the reality is with the kind of cash and liquidity that we have right now.
Ultimately our choice or excuse me our objectives were to give ourselves some choices around things like you're just describing how do you manage these debt maturities I think we've got a lot of runway around.
Around our debt maturities were in great shape.
Terms of.
When we maybe refinance the bonds that are going to be maturing of 2023 I'll call that a game time decision.
There's a lot of a lot of dynamics that go into manager capital structure in front of your business the growth opportunities that that Timna brought up so right now we're in fantastic spot to be able to make those choices and the markets have been healthy and supportive as well, which is also of course helpful.
And this concludes our question and answer session I would like to turn the conference back over just gotten into for any closing remarks.
Thanks, Laura Thank you to all the participants and listeners for joining us today that concludes our third quarter of 2020 conference call.
The conference is now included thank you for attending today's presentation you may now disconnect.