Q4 2020 Allegheny Technologies Inc Earnings Call
[music].
Good morning, everyone and welcome to the Allegheny Technologies incorporated fourth quarter 2020 of results conference call.
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At this time I'd like to turn the conference call over to Scott <unk>, Vice President Treasurer, and Investor Relations. Sir. Please go ahead.
Thank you good morning, and welcome to the Allegheny technologies fourth quarter and full year 2020 earnings call.
Today's discussion is being broadcast on our website at ATI metal Dot com.
Participating in today's call are Bob Wetherbee, President and Chief Executive Officer, and Don Newman, Senior Vice President and Chief Financial Officer.
Bob and Don will focus on full year and fourth quarter highlight some key messages, but may refer to certain slides within the remarks the.
Slides are available on our website ATI metals, dotcom and provide additional color and detail on our results and outlook. After our prepared remarks, we will open the line for questions. During the Q&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 in the Slide presentation now I'll turn the call over to Bob.
Thanks Scott.
Good morning.
No surprise, we're glad that 2020 is over.
It was a challenging year amplified by significant uncertainty, yes, we made the best of it.
Our team persevered and focused on doing the right things quickly and decisively.
Position ACI to emerge from the crisis stronger company focused on aerospace and defense.
The fourth quarter results reported this morning exceeded expectations as we safely delivered for our customers continued strong cost controls and improved working capital efficiency.
For the year, our free cash flow generation was positive overall.
At $168 million pre pension contributions free cash flow exceeded our full year guidance by 18%.
In today's call my remarks will focus on three major themes.
The leadership priorities that drove our actions and results.
Our transformation to a more profitable aerospace and defense focused company.
And our outlook for our key markets.
So let's start with our leadership priorities.
2020 began with reasonably strong customer demand and without a hint of a looming global pandemic.
Hei posted solid first quarter 2020 financial results.
We enjoyed the benefit of stable jet engine demand bolstered by increased customer volumes that were delayed from the second half of 2019.
While these results will make for a difficult year over year comp in the first quarter of 2021. They did helped to offset the significant headwinds we faced in the subsequent three quarters of 2020.
From the pandemic took hold late in the first quarter, we responded quickly and decisively.
The leadership priorities shown on slide four drove our results and continue to guide our actions today.
First and foremost we focused on keeping our people safe.
<unk> is a core of ATI value.
We quickly enacted policies and procedures around the world to ensure a virus free work environment mitigating the risk of spread.
Our efforts continue to be largely successful.
We remain vigilant to ensure our people go home safely each and every day.
Second we took the necessary actions to preserve cash and maintain liquidity.
We ended the year with more than $950 million of total liquidity, including nearly $650 million of cash on hand.
We extended our debt maturity profile and now have no significant debt maturities before mid 2023.
John will cover some additional achievements in more detail in a few minutes.
Third, we proactively and aggressively optimize our cost structure.
Our close customer relationships enabled us to match capacity with a rapidly declining demand expectations.
We did what was necessary to ensure ATI would not only survived the global recession, but emerge stronger and recovery.
By quickly, reducing our costs, we've minimize decremental margins, eliminating the steep demand drops impact on our bottom line.
We eliminated approximately $170 million of costs in 2020.
We continue to pursue operational improvements.
We expect total cost reductions to grow to at least $270 million over the next few quarters as actions implemented in the second half of 2020 reached their full run rate.
Importantly, we expect about $100 million of these cost savings to become structural continuing to benefit ATI as we returned to growth over time.
It's worth noting that the additional savings we announced in December as part of our strategic transformation are incremental to the savings.
Fourth we are focused on supporting our customers through continued strong execution and operational excellence.
Our customers count on us to deliver the mission critical materials and components to keep their planes flying vehicles moving.
Energy flowing and medical equipment and electronics working flawlessly.
I'm proud of how the team has led through 2020.
Focused on our People's Health, our company's financial health and strengthening our customer partnerships.
The recovery risks, our fifth leadership priority positions ATI to serve our customers and become a more sustainably profitable company over the long term.
We've been rewarded with more of our customers' business as a result.
In 2021, our share of jet engine materials and components on key programs is increasing.
We've also won new business on airframes and are well positioned to win upcoming specialty energy projects.
The bottom line here we've.
We've accomplished a lot in 2020.
Our actions created the necessary foundation for the transformation, we announced in December.
You may recall, we are exiting standard stainless sheet products by year end 2021, as we redeploy our capital to high return opportunities.
These actions are major steps to becoming a more profitable focused aerospace and defense leader.
We're accelerating the creation of significant shareholder value.
And the eight weeks since the announcement, we've hit the ground running and are executing on.
On slide five Youll see two of the leading indicators, we are using to track our progress towards this transformation.
The streamline footprint.
And an improved product mix.
We are of a third metric that will share in the future progress updates the tracks working capital release to largely self fund the project's capital expenditures.
So let me take a moment to review the major actions we're taking.
First we are consolidating our specialty rolled products, finishing operations to create a more competitive flow path focused on increasing production of high value differentiated materials.
This includes closing five plants within the Aaas segment by year end 2021.
In the fourth quarter, we closed two finishing facilities one in western Pennsylvania, and the other in Connecticut.
The three additional closures are expected in the second half of 2021.
Second we're on track to exit 100% of standard value stainless sheet products by year end 2021.
In the fourth quarter sales of these products represented 17% of Ians segment revenues down from 22% and full year 2019.
And finally as a reminder, on the third action, we intend to largely self fund upgrades to our specialty finishing capabilities and vandergrift of Pennsylvania.
This investment of 65% to $85 million spent over three years will be largely self funded through working capital releases triggered by the transformation.
We will make progress on this initiative as we streamline our footprint and we will report our results as part of our next transformation update later in 2021.
Okay.
So let's cut to the chase here.
With these actions were out of way to a leaner more competitive aerospace and defense focus powerhouse.
Poised to substantially increased margins in the E&S segment.
And generate a significantly higher return on capital for ATI.
Success is largely within our control.
Now we have more work to do and we're doing it.
With the demand recovery that we know will come we're confident we'll meet our longer term objectives.
Before Don provides detail about the fourth quarter financial results, Let me share my thoughts about our recent experience in key end markets.
And provide a near to midterm outlook for each.
Let's start with commercial aerospace our largest end market.
As predicted in our last update demand for jet engine forgings increased modestly in the fourth quarter.
Demand for engine related specialty materials, principally ingot and bill it continue to soften as customers destock to align inventories with near term demand expectations.
Looking ahead, we expect jet engine product sales to recover slowly in the first half of 2021 with the pace increasing in the second half of the year.
We expect continued weakness in airframe sales throughout 2021 due to excess supply chain inventories.
This is consistent with the guidance, we provided last quarter, which already accounted for decreasing wide body production rates.
Next up defense sales.
In the fourth quarter, we returned to year over year double digit percentage growth each of Ati's defense market verticals expanded.
Naval nuclear products in support of the U S. Navy's increased long term demand for new ships grew by nearly 50%.
Military aerospace and ground vehicle armor, each grew at a strong double digit rate versus the prior year.
We expect continued defense growth in 2021, albeit at a slower pace due to uneven demand levels of across major platforms supplied by ATI.
Let me give a couple of examples to illustrate what I mean by uneven demand across platforms.
The naval nuclear we expect continued demand growth.
In ground vehicle armor, we expect of temporary contraction due to a one year pause in demand on a customer's major program.
Longer term, we expect ATI as advanced materials to be integral to the success of future government defense initiatives.
Such as hypersonic.
We're also pursuing increased participation in defense applications and other parts of the world.
Shifting to our energy markets.
Sales continued to decline in the fourth quarter compared to prior year, but at a slower pace than in the third quarter.
Our fourth quarter of oil and gas and chemical processing submarket sales dropped by more than 35%.
Sales to our specialty energy markets were more resilient declining only 6% versus the prior year.
Growth continued in our civilian nuclear and pollution control product sales, while demand for electrical energy generation products remained weak.
We expect fourth quarter trends to hold in the coming quarters as demand for oil and gas remains soft, especially energy demand will improve due to ongoing nuclear refueling requirements and strength in Asia from land based gas turbines solar and applications to reduce fossil fuel emissions.
Robust demand for our consumer electronics products was driven by two factors first customer product launches in China and second the increased need for our specialty alloy powders and the support the growth of next generation consumer products globally.
We expect increased demand levels to continue in 2021 with first quarter sales falling sequentially, mainly due to the impact of lunar new year shutdowns of our precision rolled strip operation in China.
Our medical markets continue to decline both for MRI and implant materials, primarily due to the effects of the pandemic.
The where elective surgeries and restricted hospital access to install new equipment have reduced end customer demand and created excess supply chain inventory.
We expect these negative trends to continue until vaccination programs reach critical mass.
With that I'll turn the call over to Don to cover our fourth quarter financial results and our first quarter and full year 2021 financial outlook I'll be back with a few final thoughts before we open the line for your questions.
Thanks, Bob over the next few minutes I will focus on highlights from two key areas first our Q4 financial performance in the second.
Our expectations for 2021.
2020 was a difficult year for all of us for ATI. It started with 737 Max challenges that carried over from 2019.
Of course, those challenges grew exponentially with the global pandemic.
Its impact on our.
Key end markets, including commercial aerospace energy and medical was profiled.
Even with those challenges, we took the strategic and tactical steps necessary to improve our business and position it for a healthy future.
Yeah.
Now, let's discuss Q4 performance.
For the third quarter in the wrong our results exceeded expectations.
And the Q3 earnings call, we noted seeing signs of stabilization in a number of our key end markets.
The commercial aerospace.
At that time, we said, we expected our Q4 performance to be similar to Q3.
In fact, Q4 revenue increased 10% to $658 million versus Q3 levels.
We see the SaaS a further indication of stabilization in our key end markets and a sign that the worst of the lingering aerospace downturn is behind us.
Our adjusted EBITDA increased 39% to $23 million in Q4 from Q3 levels.
Adjusted EPS was a loss of 33 per share in Q4.
This was better than the optimistic end of our EPS guidance range, which was a loss of between 36.
<unk> 44 per share.
Our improved performance was largely due to stronger cost reduction actions and the higher than expected sales.
Speaking of cost reductions in early 2020, we announced targets to cut costs by between 110 of $135 million for the year.
We increased sales targets multiple times in 2020, as we built momentum.
In the last earnings call we.
We shared a target of $160 million to $170 million of 2020 savings.
The final tally rich.
The reduction is near the high end of our guidance at nearly $170 million in 2020.
That means of run rate of $270 million to $280 million of cost reductions that will benefit full year 2021.
Those cost reductions continue to contribute to favorable decremental margins.
Sort of below 30% for the third consecutive quarter.
We expect approximately $100 million of those reductions to be structural.
Those takeouts should continue to benefit earnings in the up cycle, increasing incremental margins in the future.
Working capital actions initiated in Q2, and Q3 gain momentum in Q4.
Our free cash flow was $168 million for full year 2020.
Well in excess of the top end of our guidance range of $135 million to $150 million.
We're extremely pleased that we closed 2020 with nearly $650 million in cash and more than $950 million of total liquidity.
That's a great outcome.
And one that we can build on in the future.
We ended Q4 with manage working capital at 41% of revenue down 1000 basis points from the end of Q3.
Great progress.
Our goal is to reduce managed working capital for less than 30% of revenue over time.
I can assure you this will remain a key focus in 2021 and beyond.
In addition to our strong cash and liquidity position, we continue to maintain a manageable debt maturity profile.
Our nearest significant debt maturity does not occur until Q3 of 2023.
Another area of success in 2020 was Capex management as we adjusted capital spending to fit the new demand levels.
We started 2020 with a capex forecast of $200 million to $210 million.
Actual of Capex spend in 2020 totaled $137 million, 33% below the initial forecast.
We manage that reduction by carefully analyzing future demand requirements, including recent share gains and adjusting timing on large growth related projects.
We also ensure that our facilities were not over maintained in the current period of low demand.
We understand the importance of being recovery ready and.
And we are prepared to handle our customers' desired pace of recovery.
Now, let's move to pensions despite.
Despite the broader demand challenges, we also made meaningful strides managing our pension glide path.
Our goal is to reduce our net pension obligations each year.
We ended 2020 with our net pension liability of $674 million, that's nearly $60 million lower than the opening 2020 level.
Strong pension asset performance and company contributions in 2020 more than offset in the 80 basis point decrease in discount rates.
This drove the drop in net liability.
The lower net pension level at the end of 2020 of brings multiple earnings and cash flow of benefits in 2021, and the coming years I.
I will detail of that when I share the 2021 outlook.
2020 will be a year of remembered for severe economic challenges and personal hardships for Manny.
As a company we have worked through this crisis to improve the business and prepare for the upcoming recovery.
The teams work on strategic positioning liquidity and cost structures should benefit our shareholders into the future.
With that lets look ahead to 2021.
While we are seeing stabilization there is still uncertainty in terms of end market recovery timing as the Covid vaccines are in the early stages of distribution.
With that uncertainty.
We're going to continue the guidance structure that we started in Q2 2020 well.
We will provide EPS guidance for the upcoming quarter as well as certain elements of our full year cash flows that we believe we can reasonably estimate.
We will also provide insights into what we're seeing as key trends and indicators in our business.
Bob shared his thoughts regarding our key end markets, let me recap of our forward demand views and the pace of recovery within our business.
We expect jet engine product sales to recover slowly in the first half of 2021 with the pace increasing in the second half.
Weakness in airframe materials will continue throughout 2021, consistent with our prior estimates.
Our defense sales will likely grow at a more modest pace compared to 2020 rates.
Recovery in our other significant markets, namely energy and medical is dependent on the global pace of containing the the pandemic.
And finally, our electronics sales should continue to expand.
We expect adjusted earnings to improve in Q1 of 2021 relative to Q4 2020 due to a modest demand pick up in both segments continued cost management.
And lower pension expense.
We expect the Q1 2021, adjusted EPS loss of between 23, and <unk> 30 per share.
Let's talk about free cash flow.
We expect to generate between $20 million and $60 million of free cash flow in 2021 prior to our required U S defined benefit pension contributions.
Although we get there.
Using the same disciplined applied in 2020 by.
By managing our cost.
Being disciplined with capital investments and reducing manage working capital in pursuit of our working capital targets.
Now capex.
We plan to spend between 150 and $170 million on capital investments in 2021.
We adjust our of 2020 capital spending to reflect the new demand levels. In 2021, we will maintain that discipline, but plan to increase spending marginally in anticipation of coming market recovery.
As announced in December we will also invest modestly to enhance specialty finishing capabilities within our specialty rolled products operations.
I have good news on our expected 2021 pension plan contributions.
As you know contributions to the U S pension plans in 2020 were $130 million.
Due in part to strong 2020 pension asset returns required contributions to the U S. Plans are anticipated to be $87 million in 2021, a reduction of more than $40 million year over year.
2021 pension expense will also decrease dropping $17 million year over year.
Pension expense will be $23 million in 2021 down from $40 million of recurring pension expense in 2020.
In regard to working capital, we expect to continue improving our levels in 2021.
We will pursue our goal of returning working capital levels to 30% of sales as our key end markets recover.
Working capital reductions related to our transformational project will also support the significant improvement.
Overall, we expect working capital to be of modest source of cash in 2021, even after contributing significantly to our cash balances in 2020.
Finally in terms of income taxes, we do not expect to be a cash taxpayer in the U S for years to come.
That said, we do anticipate paying taxes in certain foreign jurisdictions.
We're not able to provide an estimated annual tax rate for 2021 due to uncertainty of the rates and low earnings. However.
We can say that we expect to pay between 10 and $15 million in cash taxes during the year.
We are proud of what our team has achieved in 2020 and look forward to continuing to build on our efforts to make ATI of leaner and more profitable company.
We are well positioned to benefit from the coming aerospace recovery.
This will be even stronger for us thanks to ATI specific share gains and new business wins.
With that I'll turn the call back over to Bob.
Thanks, Don.
Although you havent of some pretty good outcomes and we're proud of it we accomplished a lot in 2020.
Given the store is still great to be starting 2021 with a clear plan.
And were boosted by the first signs of favorable multi market trends, we've seen in over a year.
As John described we ended the year with the strong performance in a challenging market environment.
Our progress in 2020 was of total team effort. The delivered results. We worked diligently to control what we could and responded nimbly to what we couldnt.
Our entire organization remains relentlessly focused on cash generation.
I am proud of how we're living our values guiding us every step of the way.
Today in 2021, we still battle of fair amount of uncertainty for.
There's already a lot less turbulence than we saw last year.
We're gaining velocity.
Aligned and accelerating and a clear direction as we move ahead.
We're well positioned to emerge from this downturn leaner more profitable API, a fierce competitor not waiting for markets to recover as we gained momentum.
GAAP back to you.
Thanks, Bob that concludes our prepared remarks, operator, we're ready for the first question.
Ladies and gentlemen at this time, we'll begin the question and answer session. The.
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At the time, we will pause momentarily to assemble the roster.
And our first question today comes from Richard Safran from Seaport Global. Please go ahead with your question.
Bob John Scott Good morning, how are you good.
Rich welcome back.
Sure.
So to.
Two questions both related to what the recovery looks like.
The first with respect the jet engine products.
I wanted to know if you could talk a bit about how the jet engine products recovered with higher volume now of Bob I think you mentioned forgings in your opening remarks, I think materials lag, but I was curious about how different types of forgings castings and.
What that looks like an N of recovery.
Okay, Great. So let me take the first part on the shape of the recovery from the market aspect.
And then I'll, let Dan talk about the kind of the shape of the recovery from the ATI perspective in light of the transformation that we're going through so that's why it will help get to that answer I think when it comes to the jet engine materials Youre right. Our isothermal forgings are really kind of the the leader of the pack for us in terms of the jet engine.
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Starting to see I guess during the downturn, our jet engine customers were pretty aggressive at adjusting their <unk>.
<unk> chain inventories and the demand pretty quickly.
So we don't see a tremendous amount of inventory in the pipeline, we have a little bit of stranded inventory ourselves that we're working through but you are right. The isothermal forgings will go.
What kind of pace with increases in demand pretty quickly.
Lead times being what they are we're starting to see real demand coming back I think of it.
We'll accelerate through mid year and be stronger in the back half that's coupled with.
Some share gains that we have coming into 2021 as well so I think the debt.
It's the thermal forgings will be our leader of the pack we have some smaller of aerospace forgings that will go along with that.
We're not in the castings business anymore. So we don't have quite as much visibility there, but I would expect that.
I'll follow a similar trend.
When it comes to of Billet bar ingot, we're starting to see what I would call emerging demand.
One of the things that happened in the downturn was that every company I hate to say every man for himself, but every company was doing what they thought they needed to do to manage their cash so not everyone in the supply chain that we supply is as well positioned for an uptick so we'll see the little lumpy there should be some good emergent demand and we think were well positioned.
To respond to that.
And you didn't ask specifically about airframe, but I think.
By mid year, I think the billet and get bar will be moving in the right direction for us will start to see it tracking with engines, but I think the airframe side plate in particular titanium put it could be slow for most of the 2021 before it starts to kind of work its way in and then 2022, we should start to see some.
Some increase there so hopefully that helps on the jet engine side, but.
I think the worst of it for us with Q4 and.
Q1, still a little bit of stabilization, we're not seeing the ups and downs that we saw in the order book before.
The non maybe I'll turn it over to you and you can talk a little bit about the transformation.
There's a there's a few different transformation elements that we're talking about.
Overall business, but.
In terms of specifically of the jet engine and.
And and how we're managing our inventory of being recovery ready I think one one points of reinforce is we've done a I think of very good job in managing down our inventory levels, but its always been with the the mindset of being recovery ready. So as the market does turn and the demand signals are sent for in a good position that we can meet those.
So as demand.
But there is a broader effort around transformation that we've been doing in the business.
Are going to benefit us beyond just the jet engine.
The jet engine space that Youre talking about.
I think it's an important thing to think about as you consider what this business looks like.
In the recovery.
And so let me kind of walk you through and give you some perspective.
We've got a number of initiatives that we've got them in place and we've talked about throughout 2020 those.
Of those initiatives include a lot of cost Takeouts that were delivered in 2020 that are going to have a wrap around effect and in 2021, and we've got a transformational project debt that we announced in December that's going to materially change our our specialty rolled products business are fair.
Question to ask Richard if this is kind of what you were pointing toward us.
When you add up all of this transformation what is the new business look like at normalized at a normalized level.
And so.
As you think about debt in 2019, which was call it a normalized.
Period for US, we we generated $440 million of of EBITDA, and we generated about 11% EBITDA margins off of that.
With the cost Takeouts that we have captured through 2020.
As well as the transformational project debt that we spoke to in December between those two efforts are the result is upward of $201 million of run rate EBITDA added to what we delivered in 2019 and so the the.
Effect of that is pretty profound that 11% 2019 EBITDA margin.
And with the pro forma reflection of what we've captured on cost reductions and when we are capturing and highly confident we will capture with the transformation in the SRP business really makes sense.
17, plus percent EBITDA margin at 29 2019 volume levels.
So that's the 600 basis point expansion and in the EBITDA margin. So as Youre talking about transformation as Youre talking about how all of the business is evolving.
For.
For 2021 and beyond that's really how we think about the business and the benefits of these actions of the scary.
Okay. Thanks for that and I guess just quickly as a follow up.
So special for the energy projects that were referenced in your opening remarks could you just discuss a bit about how much.
How much of their work from when do you see those decisions being made.
Yeah. So those those are a lot of those decisions have actually been made in terms of the other two types of things we were talking about I think theres the pollution control activity, which is in the nickel alloy type of materials that are going into into Asia. A lot of those decisions have been made and that will actually happen in 2021.
The orders if they're not in handler.
Here the commitments have been made.
We're also seeing.
Continued strength in the the.
The solar space.
Certainly we're starting to see signs of land based gas turbines kind of coming back.
And then the last piece of that is really proud of you're referring to is the cloud pipes in the lot of those are being let like right now right. So I think there's a pretty good quarter stack up over the next two three years of some fairly major projects, we won't win of mall, but we're going to be competitive on all of them and so I think.
We'll start to see that probably hitting in Q2 from a shipment standpoint.
It's our expectation that help bridge.
It really does thanks for the color guys I appreciate it.
And our next question comes from Gautam Khanna from Cowen. Please go ahead with your question.
Okay.
Hey, guys good morning.
Good morning Gautam.
Just wanted to ask maybe two questions just first on the quarter itself.
The high performance EBIT margin just for.
Moving out the DNA of everything.
Uh huh.
Well the negative five 4% I was wondering if there was the only thing.
It didn't look like mix was materially different sequentially was it just working days or something of that nature of that a lot of down sequentially.
No problem.
Okay. So I'll take the first one of them.
I think what you saw in Q4 in addition to a slightly weaker mix.
A little more transactional business that wasn't in the aerospace the category. So that contributed to a dosing that was going on in Q4.
Actually of some proactive inventory management.
Wrote off some inventory that obviously affected the margins in Q4, but it's not going to be an ongoing concern.
Okay.
And just to be clear.
The follow up the.
Youre quite convinced of it sounds like debt.
Jim Destocking have sort of peaked at this point so on a sequential basis Q1 Q2.
It should get better from what we saw in Q3, and Q4 and obviously the pick up with the rates on the C suite.
And the like.
The second half of the year I, just want to make sure I understood that and secondly is it related airframe titanium despite all of the Boeing 787.
Developments since the third quarter.
Where they haven't been delivering aircrafts.
That does not change what you previously were expecting on airframe tie in 2021.
Okay. So let's see so the first answer to your question and I'll handle the recoveries, yes, we're confident in the jet engine side, partly because of the.
The day to day pulse with those customers I would say theres always going to be adjustments to the schedules.
But I think what we're seeing is more clarity and we were fairly confident that in a lot of the adjustment that came to us and jet engine started in late 2019 related to the.
Issues related to the Max So I think most of those supply chains got adjusted quickly and and I think the wide body issues.
We're we've had probably three quarters since a lot of that activity started to become known so I think the jet engine side. There is always going to be exceptions, but I think generally the answer to your question is yes, we're confident that we should see improvement in and really throughout the year, but accelerating and.
Q or in the first half and then looking much better in the second half as we get ready the pipeline gets ready for 2022, I guess the jet engine question and I think going back to your other question about tied played.
Yes, we believe 2021 will be the low watermark.
I think we're following and tracking with boeing's announcement of where theyre going on of build and.
And I think we.
We're picking up share in the airframe business globally, so that will help us in the back half of.
2021, but but I think it's going to be.
It'll be for type plate, specifically of what you asked about I think 2021 will be the low watermark for us there.
Thanks, a lot guys.
Our next question comes from Phil Gibbs from Keybanc Capital markets. Please go ahead with your question.
Hey, good morning.
Morning, Phil.
My first question is just on the the free cash flow Bridge I think you had pointed to being $40 million positive at the midpoint excluding pension.
When I think.
Non about cash contributions I've got about $100 million of interest of $160 million of Capex and cash taxes.
And then you've got some offset from net working capital so.
I'm I'm, ranging somewhere between $2 25 of $250 million of of cash needs for you all.
This year.
Should we should we kind of take that as a decent range in terms of what you're trying to communicate and then.
And free cash flow to that in the back into an EBITDA you in terms of what you all views of the potential for the year.
Yes, I think I think your logic is.
What I would say is I wouldn't expect that kind of of cash burn.
So when you think about where we're at from a cash generation standpoint.
We've done a pretty good job pulling the right levers to manage cash through 2020 and ended at a really good really really good spot I do expect net net to be of cash burner in 2021. It may not to the degree that debt that you are thinking but.
One thing that was of great benefit for us in 2020 that will be less of a benefit for us in 2021 is working capital releases.
And why is that well with the decline that we had in the first half of of.
2020, we had pretty significant releases.
And our accounts receivable and then later in the year, we were picking up momentum on our inventory releases as you think about 2021.
As we see 2021 second half, we would expect to see some growth in the business, which would then be a requirement for for putting working capital on the ground, but we still think net net debt working capital is kind of provide a.
Source of cash for us so that may be missing a bit from from your calculation.
That plus and we are pretty disciplined when it comes through managing our levers.
We did in 2020.
We adjusted our Capex pretty significantly and.
To reflect the new demand.
The renew the same things in 2021, and we will adjust our capex and we will adjust our inventory too to really respond to the market signals so that could be again of.
A bit of of positive relative to the burn number of that you were talking about all of that said.
Don I wasn't talking about of burn I was talking about the the slide nine for.
From what I gathered you had free cash flow positive free cash flow of $20 million to $60 million unless I'm looking at that wrong.
We had a positive that's pre <unk> pre pension contribution.
And so so that's right yeah, I think the key takeaway when you think about our cash flow for 2021 is I would expect based upon what we know today to be a cash <unk> our user rather.
But I think it will be a modest use and we're going to exit 2021.
With still a very very healthy level of liquidity.
And it will adjust to the end market signals from the demand standpoint.
Accordingly, whether that means we need to add more working capital in the form of inventories.
Or whether we need to pull levers to reduce in the to reduce capex.
Okay.
And then just in terms of the follow up.
I know clearly there were absorption issues for you all of the second half I think Bob.
Bob You had just mentioned you had written off some written down some inventory.
Any way to calibrate in terms of how much of the under absorption plus some of the ease of inventory write downs impacted your P&L in the in the second half of of.
Of the year, you couldn't have been $20 million of quarter.
Type of thing and when do you expect some of these things to the says.
In terms of the magnitude of impact.
Yes, I think your I think your back of the envelope is not that for hospital.
As you look at it there are some adjustments we took in terms of carrying value of our own inventories and there is the effect of the under absorption answer to think in terms of $10 million to $20 million of quarter is a combination for those two through 2020 debt I think youre not that far along.
Do you think about it for 2021.
Again, it really depends upon the production level and the demand signals would get in the first half of we expect first half to look similar.
Two of the second half of 2020, then you can they can similar similar effects to under absorption.
From an inventory carrying value standpoint, I would I would like to think that any net realizable value of reserves that we had to had the book.
We have already been taken so we shouldnt see significant effect there, but on the absorptions.
But still be of potential for us, especially in the first half to hit the second.
The second half for little bit different.
And that really depends upon the pace of growth right and.
And so it's hard for a little bit harder for us to speak to that.
Thank you I appreciate it.
Yeah.
Our next question comes from Josh Sullivan from the Benchmark Company. Please go ahead with your question.
Hey, good morning, and congratulations on the on the quarter here.
But.
The following up on those cash burn comments for for 2021 is there a scenario in 2022.
Demand is going to potentially be picking up a little stronger where we would continue to see a working capital build in the cash burn what do you think you'll be setup exiting 'twenty, one where 2022 shouldn't you shouldn't see of burn even in the very strong demand environment.
So there is the short answer is if there is strong demand I would expect that we will be adding working capital in 2022.
Really depends on the pace of the recovery.
It also depends upon.
We've talked a lot in 2020 about our focus on improving our working capital efficiency and we did a phenomenal job of that in Q4.
I mentioned in the prepared remarks.
Remarks that we reduced our percentage of working capital from 50% at the end of Q3 down to 40%.
And in Q4 of our internal goal is we want to get back to the 30% level and lower.
The pace for our two being able to achieve that goal is going to be an offset to what we need to add to our working capital because of an uptick and so if we're really fortunate we can do a good job offsetting the requirement for investing in working capital with becoming more efficient.
With working capital, but generally I think you should think of 2022.
As of year of investing for.
<unk> of working capital to fund the growth that we're seeing in 2022, which is obviously that's a good thing right, we don't mind investing for growth.
Right.
Thanks for that and then just switching over to the strength in the.
All of the onshore in China can you just provided some color on the strength in those markets sequentially.
We had apple delivered the largest number of iphones.
Some of the Smiths ever debt.
Strength for stall of more broad based and consumer electronics or is that really the focus for you guys.
Great question, So I'll start off with congratulating the team that runs our precision rolled strip business in China. The fourth quarter was the record performance for them and the based on the investments we've made there probably year and a half of the two years ago. So they were well positioned and they took advantage of it now in terms of the broad base.
You know I think you start with the consumer electronics at the core.
We're starting to see the initial opportunities in solar that we've been kind of waiting for to be candid for.
A year or two but we think there's growth there.
There are things in our precision rolled strip businesses, there that go into medical applications.
You can see some things you know hypodermic needles, various other things that the prs of precision rolled strip growth into and in automotive, it's still an automotive play for us in Asia. There are some we're making stainless specialty stainless that is the thickness of the human hair. So there's a lot of applications and more sophisticated automotive applications that are.
Are there so I think it is broader than just consumer electronics.
And so we feel good about the other than the lunar new year, which we can't do much about in Q1 seasonally we expect that trend to continue based on the strength of the underlying markets.
Thank you.
Okay.
Our next question comes from Timna Tanners from Bank of America. Please go ahead with your question.
Yeah, Hey, good morning.
Morning Timna.
Mike I just wanted to ask two things one is if we could kind.
Kind of continue the discussion about cash uses but talk a little bit instead of working capital maybe about capex needs going forward because I caught onto your comments about about pushing out some projects and just wondering what that looks like when you catch up and how you're thinking about that and then all of a high level question.
Sure I'll take I'll take a run in answering that.
You think about 2020, we went into 2020 with the intent that we were going to invest somewhere between 200 $210 million in Capex and then of course, when the pandemic hit we hit the brakes we.
We did it in a very thoughtful way, but we really peel back on that investment took it down to the mid 100 <unk> ultimately for 2020. If you look at 2021, our guidance of $1 50 to 170, the increase year over year as a modest increase the with the idea that we do.
Expect to see some end market recovery that is going to create some demand pull for investment in certain assets.
Support of specific customers.
This does not of a.
Build it and they will come kind of approach that's not how we how we view our capex.
Thank you.
If the 2021 plays out like we expect it will be we're going to be a net $1 50 to $1 70 range. Then I think if youre thinking past that okay. What's the right way to think about capital investment.
<unk> 2021.
The the 20 $200 million to $210 million of investment level that we were thinking of for 2019, which was part of a normalized coming off of a normalized 2019 getting ready for <unk>.
Organic growth that we saw in the business I can see where that number could could come back to life in 2022, Capex as we're preparing them for that delayed growth that we that debt.
That was put on pause.
With the pandemic.
And of course that I wouldn't expect that thats going to be an ongoing run rate for capex.
That's one way to think about 2021 of them in 2022, okay.
Okay, Great that's exactly what I was looking for thanks for that and then I guess I know I'm asking you to kind of speculate here, a little bit, but and some of these things are still evolving but in light of the by the administration kind of announced interest in shifting away from fossil fuels and kind of it seems a bit aggressively toward.
I'll kind of LNG can you remind us of the ATI suite of products and opportunities and you know.
Where you might get hit because you used to supply some of those other areas, but also the opportunities I know you've been.
Nuclear <unk> and maybe other green energy focus.
That's a good question. So I think when you start with the you started with nuclear and we're still big in the nuclear space. So I think that's an upside opportunity for us out of our core again operations I think we're starting to see.
Opportunities in solar, which although they tend to have a stainless space. They tend to be on the specialty end and really light gauge tight tolerance types of things kind of following the same issues with the.
Consumer electronics from a product standpoint, then you add into that emission control systems.
I think the flue gas the sulfur nation as the way we used to call it but it's really about what's going on with <unk>.
<unk> globally, it's not really of U S issue, it's more of a global issue and then I think the the other thing you'll see more of is the resurgence of land based gas turbines and other.
Still a shift from coal.
Cool in the oil to the various things that I think when you look at our product mix in the energy space.
You know, it's kind of it's gonna be the bigger chunk for us in the future, it's kind of probably be 60% to 70% of what we do versus historically the oil and gas we spent the AR and the old ATI the not the old tool of the ATI, but the prior product mix had a lot of oil and gas you know of consumer or I'm, sorry of chemical processing hydrocarbon.
Processing.
Youll see of play of less there they tend to be more standard stainless pipe.
Infrastructure types of things.
Thank you know the we're going to be where corrosion strength of high temperature unique issues are and I think for the especially energy sector corrosion is gonna be Oh.
A big material science issue that people are going to have to work through some of it.
We're well positioned in some parts of the world, It's a matter of which parts of the World go first and then I think you know of electric vehicles battery storage.
Hydrogen as a fuel hydrogen is producing hydrogen there's opportunities there for more specialty materials.
I think a nickel and.
Titanium will play probably more on the nickel side and most of these applications. So that does that help with the answer you were looking for 10 of them okay.
It does I, just don't know how much of what you'd be losing that used to be hydrocarbons. So cash is you know.
Versus what you'd be gaining with regard to the green energy. It is the mix that's higher value add or is it an offset or just from a rough numbers. What you think about incremental oh, okay. Yeah. So two parts of that so our decision to exit the standard stainless sheet is is obviously lower margin stuff.
And the stuff, we're moving into is definitely on the higher margin nickel alloy type products that are harder to make a different.
Different dimensions and specifications. So we think it's a positive from a product mix standpoint, and it's it's a positive from a fit with our material science technology.
And it's part of the fundamentals of why exiting stainless was the right thing for us to do.
So yeah, I'd sort of it's a positive margin shift for us.
Okay, great. Thank you.
Our next question comes from Paratonic Massaro from Bahrenburg. Please go ahead with your question.
Thanks, and good morning, guys.
I was hoping if you could just elaborate a little bit about your isothermal forging business a little bit. So first of all just to confirm the is that 13, 14% of your total sales and then how much of that is the direct sales to Oems versus selling.
Powder on feedstock to those customers so that they can for everyone's just somebody.
There's a lot of questions from their parents as they don't have to ask.
Little amount so of art.
The third kind of.
At the end so yeah isothermal forging is obviously, what we do in our forged products business, primarily in kind of Hey, Wisconsin.
Don't know if we've actually ever said what percentage of our business is isothermal.
You asked the secondary question went true Hey are you selling you know ingot billet bar you know if the other forgers.
I would say today depends.
Depends on the grade it depends on the alloy I mean, our long term goal was to make sure that our forging operation was the 100% supplied by our own feedstock.
Some customers provide the feedstock of forging so over time I would say.
Good day.
40% is what we consume and 60% would be sold the other people the port but it is somewhat of a directed buy situation.
And then back to your first question you know when you look at our forgings business in general.
It's in the Acm's each segment, obviously, but.
You know, it's it's about 30% of our HPLC business as the actual forging business.
And that would include the forging itself plus the value out of the raw material that we pull through but.
That's 2020, and obviously that's depressed from the current environment and as we look forward the team's done a great job of positioning the business for share increases and.
Kind of focusing on jet engine and you know still has the non jet engine business, but it's less important so.
Let's go back and did that kind of cover the ground you were looking for an answer in.
Yes, very much true I appreciate all the details here and then maybe as a follow up.
Well the free cash flow guidance.
Just a quick one is that also the free cash flow guidance. After the any dividends paid to non controlling interest, which I'm guessing primarily the JV in China I think it seems like you've paid $7 million in 2020, but a bigger amount of about $15 million dividend Inc.
I am sorry, some of it in 2020 and 15 in 2019 debt.
After that.
Yeah that would be excluding because of the dividends that are paid to the minority owner and are actually in the finance section so they're not a part.
They are not part of the free cash flow definition of our calculation and in the numbers that you that you mentioned or are kind of in that range area. How you expect them to be kind of in the $7 million range.
And our next question comes from Matthew Fields from Bank of America. Please go ahead with your question.
Oh, Hey, everybody.
I just wanted to sort of touch on liquidity and sort of use of the cash and I just.
Find it interesting that you ended the year basically with the exactly the same amount of the $956 million of liquidity, but you ended 2019, just a weird pork there.
Hmm.
But we are acquiring for the hard work, it's hard work to get to that one of the number yeah, maybe maybe not that's of coincidence.
You know you kind of the heading into the pandemic.
But you know you wanted to sort of boost liquidity.
And you didn't the wanted to get your hands around kind of how deep the hole was going to be and for how long the whole was going to be before you kind of made any other moves.
You know I just wanted to.
You see kind of.
The man picking up in the second half of 'twenty, one when do you feel like youre going to be at the point, where you can kind of deploy some of the potential excess liquidity on the on maybe debt reduction.
All of them.