Q2 2021 Allegheny Technologies Inc Earnings Call
And CEO and Don Newman, Senior Vice President and CFO.
Bob and Don will focus on our second quarter highlights and key messages, but may refer to certain slides within their remarks. These slides are available on our website. They provide additional color and details on our results and outlook. After our prepared remarks, we'll open the line for questions.
As a reminder, all forward looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation now I'll turn the call over to Bob.
Thanks Scott.
Here, we are over a year since the world went into lockdown as a result of the COVID-19 pandemic.
So much has changed from the last 4 quarters and it's easy to focus on the more challenging aspects of this period.
At the same time, it's important to remember that we also changed some things those within our control for the better.
Like many we quickly innovated within our digital technology infrastructure to thrive on remote collaboration.
Technology allowed us to streamline our processes.
And work more efficiently overall.
We'll continue to drive these improvements utilizing new skills and tools to provide more flexibility to our employees and create better connections with our customers.
We will capture the associated structural cost savings.
I am pleased to see millions of people returning to the skies for the summer travel season.
Every day seems to bring another sign of recovery in airframe and jet engine demand.
The current economic reawakening, and everything from travel to consumer goods to energy Israel.
Despite lingering pandemic related uncertainties, I am confident that desire to travel a significant and growing worldwide Ulf.
Ultimately that drives the sustained lengthy backlog for many airlines program.
At ACI, we're ready to produce what our customers need.
With that as a backdrop, we generated second quarter financial results that showcase the improving trends in our end markets.
At the same time, they reflect the negative impact of the recently concluded strike by the United Steelworkers at our specialty rolled products or SRP business.
Excluding the $40 million cost attributed to the strike and a small improvement in our restructuring reserve.
We lost 12 per share in the second quarter.
Despite the earnings loss the aerospace recovery is readily apparent beneath the headline numbers.
Our jet engine product revenues were up over 20% compared to the first quarter 2021.
Our high performance materials, <unk> components segment, or H PMC saw its margins improved by more than 200 basis points sequentially.
And nearly 300 basis points year over year.
Very good news that Dan will cover in more depth in a few minutes.
As we discussed on the first quarter earnings call on April we were incredibly disappointed that the union leadership chose to call a strike at our major SRP operating locations.
Our robust continuity plans allowed us to maintain operations during the strike.
The new 4 year Labor agreement was ratified on July 13th.
Now they represented employees return to their positions within a week of ratification.
Safely and efficiently ramping up operations to their prior production levels.
We're on track and expect to be back to full production capabilities in September.
I've been asked many times by many people inside and outside of ATI. Some form of the question was the strike worth it.
Clearly, we would have preferred to continue negotiating to reach an agreement without a work stoppage.
Our competitive cost structure for this business is imperative.
Left unresolved, we'd be facing rapidly escalating healthcare costs that were on a trajectory to double every 7 years.
Product price in CAD increased fast enough to offset that level of health care inflation.
The SRP business would've fallen behind its competition.
We were compelled to act now to find a solution.
Under this contract annual health care cost inflation will be capped at 3.5%.
The represented employees are responsible to take any necessary actions required to cover annual over to Mt.
The FRP business is now appropriately focused on getting back to full speed, providing our customers with the materials and components they need and want.
On a thank our customers for partnering with us to get through this challenging time.
Also thank you to the very dedicated employees, who ran our facilities during the strike supplying our customers and protecting our business.
To close on my comments related to the SRP business I have 2 pieces of good news to share.
First the transformation initiative to exit standard stainless sheet products is on track and will be completed by year end 2021 as planned.
We're making excellent progress on consolidating our footprint.
Second we recently signed a long term agreement with GSW steel USA to total convert a significant percentage of their Ohio produced carbon steel slabs through our hot rolling and processing facility in Pennsylvania.
This multiyear agreement provides a meaningful opportunity to increase our asset utilization and cash flow.
We're happy to partner with <unk> to bring the exceptional quality engage control of.
Of our World class HR P F to their customers.
We're currently ramping up production.
Congratulations to the operating team for setting a production record for carbon steel toll conversion volume in the month of June even in the midst of the strike at this facility.
So what are we seeing in our key end markets.
For the first time in several quarters. The news is encouraging across most of our portfolio.
To ensure an apples to apples comparison the market data shown on the quarterly earnings presentation and referenced in my comments excludes SRP sales from all periods.
This removes the strike impact from the comparison.
I believe this provides the most realistic view of our underlying performance and the true market demand.
Using that context sales increased sequentially in each of our major end markets with the exception of electronics, which is being compared to record results in Q1.
On a year to year basis, we grew sales in most of our key end markets, most notably energy up 60% and defense up 22%.
We continue to gain momentum in our largest key market commercial jet engines.
This is principally driven by the recovery of narrow body platforms, particularly engine programs used on the <unk> hundred 20, and <unk> hundred 21 aircraft families.
As we said on the last few calls the demand recovery began in our forging business where lead times are 6 to 9 months ahead of engine production.
As the market recovery and our recent share gains our forgings revenue exceeded both the prior year and the prior quarter levels.
We expect this positive growth trend to continue and expand as increased production rates on the 737, Max become a larger part of our order book.
We returned to growth in jet engine specialty materials has lagged forgings largely due to pockets of stranded inventory throughout the supply chain.
As expected this inventory is depleting, albeit at an uneven pace according to customer and product form.
In the second quarter sales of our specialty materials like Rene 65, 4 leap engines.
Grew significantly compared to the first quarter.
But were still below prior year.
We anticipate demand from materials to continue to increase for narrow body engines, but lag for wide body engine.
This uneven pool, coupled with any remaining channel inventory will make for a somewhat choppy growth trajectory quarter to quarter for the balance of the year.
Rounding out commercial aerospace the airframe market continues to be soft this.
This is largely due to the much discussed sluggish demand for wide body aircraft due to subdued international travel and stranded supply chain inventory.
We expect this trend to continue throughout 2021, and possibly into early 2022 as the industry awaits a catalyst for increased wide body production rates.
Our newly won European OEM airframe business begins production in the second half of 2021 initially at low levels.
This will partially offset the anticipated destocking pressure at our primary domestic airframe customer.
As I mentioned earlier defense continues to be a growth market for ATI.
Our broad materials portfolio serves customers with a revised range of demanding applications.
Ensuring we can be successful under almost any defense budget or economic backdrop.
Our second quarter growth was driven by naval nuclear applications and rotorcraft products to support increased demand for U S Navy ships and heavy lift helicopters.
We expect our defense business to continue to grow and are seeing titanium armor plate demand return in the second half of 2021 in support of our new U K armored vehicle program.
Turning to the energy markets.
We experienced significant growth largely in our specialty energy portfolio. These.
These increases primarily supported land based gas turbine production in Asia, where energy demand is increasing.
Sales to civilian nuclear customers added to this growth.
Looking ahead, we see continued improvements in energy markets as the world slowly reopens from pandemic, Lockdown and economic growth drives increasing energy needs.
Wrapping up the market's discussion results were mixed and our 2 smaller differentiated markets. We saw the expected return to growth in medical applications as hospitals perform more elective surgeries and diagnostic testing procedures, both our MRI and implant materials sales increased sequentially.
We expect demand to improve modestly over the coming quarters led by MRI.
On the electronics market sales decreased from record levels in the first quarter 2021, but grew year over year.
Sales of Ati's specialty alloy powders increased versus both prior periods.
We expect demand to remain strong for these products for the balance of 2021.
With that I'll turn the call over to Don to cover our second quarter financial results in detail and provide our financial performance outlook for the third quarter and full year.
After he concludes I will offer a few final thoughts before opening the line for your questions.
On.
Thanks, Bob I'd like to cover several areas, including our Q2 financial performance, our balance sheet and our outlook.
On a reported basis ATI loss 39 per share in the second quarter Exco.
Excluding $40 million of costs associated with the strike and a small favorable true up to a restructuring reserves. The company lost 12 per share on the second quarter.
To get a true sense of our performance you have to go beyond the headlines.
As we told you on the last 2 earnings calls the commercial aerospace recovery, particularly in jet engines is gaining momentum and becoming more broad based within our business.
This is readily apparent in our <unk> segment results were jet engines accounted for more than 40% of overall segment revenues.
As Bob shared jet engine revenues increased by more than 20% sequentially for ATI as a whole and for HPLC.
Volumes in our forging business continue to expand building on growth in the prior 2 quarters.
Underlying demand for our specialty materials accelerated meaningfully for the first time since the pandemic began.
In addition to jet engines revenues in each of <unk> key end markets grew versus the first quarter led by specialty energy, including materials for land based gas turbines produced in Asia.
As a result of our profitable jet engine growth and increased asset utilization H PMC EBITDA margins increased by 220 basis points compared to the first quarter and nearly 300 basis points versus the second quarter of 2020.
We anticipate third quarter growth across the <unk> key end markets, most notably jet engine and specialty energy and further utilization benefits from increasing production rates across our network.
We expect robust incremental margins over the coming quarters as profitable jet engine revenues increase and structural cost improvements executed throughout 2020 are maintained.
Turning to E&S Q2 financial results were clearly impacted by the 105 day strike and the SRP business.
It should be noted that while we remove strike related costs from segment earnings segment revenues also declined nearly $140 million versus the first quarter due to plant outages and resulting production declines.
No adjustments were made for these revenue headwinds.
Despite the short term impacts to 2021 performance, we achieved the needed long term cost structure changes that will help SRP compete more effectively in the specialty materials marketplace.
Sticking with EAA E&S segment, our precision rolled strip business in Asia continues to operate at robust levels with revenues in line with its record setting first quarter well above prior year.
Earnings from this business were below first quarter levels due to unfavorable mix.
Earnings from our <unk> and <unk> business were below the first quarter and prior year, largely due to unfavorable mix and the elevated production costs.
Looking ahead in the <unk> segment, we expect the SRP business to begin to recover in August.
As a result of this drag continuing trial most of July and the inefficiencies associated with the production reroute, we anticipate approximately $25 million of additional third quarter costs.
We expect the Asia precision rolled strip business to produce solid results in what is generally strongest seasonal quarter as device manufacturers prepare for the year end holiday season.
Our <unk> business will likely have marginally lower sequential earnings Julian to its traditional third quarter preventative maintenance outages.
It's worth noting that second quarter corporate costs and closed company expenses were elevated compared to prior year and prior quarter.
Corporate costs were above prior year, largely due to incentive compensation accruals and higher than the prior quarter, mainly due to foreign exchange losses.
Gross company expenses were above first quarter and prior year, primarily due to non repeating benefits in both prior periods.
As we've discussed over the past several quarters, our decisive 2020 cost actions continue to benefit the business.
They serve to limit decremental margins, while year over year revenues declined.
We fully expect them to benefit the bottom line when revenues return to year over year growth.
The <unk> segment's second quarter results offer a preview of what is expected in future quarters.
While HPLC revenues were flat versus prior year earnings grew 30%.
We achieved this earnings growth largely as a result of increasing production rates at many segment facilities, coupled with streamline cost structures. However.
However, we still have room to improve.
Some facilities such as our nickel powder operations on bankers North Carolina continue to operate on limited schedules due to low demand levels.
While others still produce large quantities of lower margin transactional products as commercial aerospace markets recover.
Now, let's move to the balance sheet and liquidity.
As has been the case throughout the pandemic, we've taken actions to improve our debt profile and a prioritized our balance sheet to ensure an ample cushion to weather any storm.
Despite the recent strike we.
We ended the quarter with roughly $830 million of total liquidity, including at least $475 million of cash.
Our second quarter managed working capital levels increased partially from elevated inventories in our SRP business due to strike related inefficiencies.
Accounts receivable and accounts payable balances also contributed to the second quarter's higher working capital levels.
We continue to focus on inventory velocity as we ramp production.
We expect working capital levels as a percentage of sales to improve significantly in the second half of the year.
Looking ahead, we anticipate contributing up to $50 million to our U S defined benefit pension plan in the third quarter to improve our funded status and long term leverage profile.
The deposit is above and beyond minimum contribution requirements, but is consistent with our intent to reduce our pension exposure.
Additionally, we will continue to actively manage our debt maturity profile in the coming quarters.
Before I turn the call back over to Bob I want to provide our third quarter outlook.
And update our full year free cash flow expectations.
As I said earlier.
We expect our jet engine business to continue to improve led by growth in specialty materials, and our ongoing cost structure benefits.
And the A&M segment, we anticipate higher sequential SRP volumes.
We will also see increased maintenance and production cost due to a temporary production outage related to our transformation efforts.
Our <unk> business will be negatively impacted sequentially by its traditional summer maintenance outages, creating lower revenues and higher expenses versus the second quarter.
We expect earnings from our Asia precision rolled strip business to increase sequentially due to higher electronics volumes.
As a result of the new USW Labor agreement, we reduced our contractual funding requirements for post retirement medical benefits.
This will result in a onetime non cash pretax gain of approximately $65 million in our third quarter results.
This benefit and associated $15 million tax charge will be excluded from our adjusted earnings.
In aggregate, we expect third quarter adjusted earnings to be between breakeven and a loss of <unk> <unk> per share excluding strike related costs, and a $65 million post retirement medical accounting gain.
H P&C segment gains will likely be partially offset by ians segment maintenance outages and production expense headwinds.
While we are not able to accurately predict fourth quarter results due to lingering uncertainties on the aerospace production ramp.
We expect adjusted earnings to return to profitability and Q4.
And continue to improve in 2022.
Finally, due to the negative strike related earnings impact, we now anticipate full year free cash flow to be at breakeven to slightly positive levels.
While we work diligently to offset the strikes cash impact continuing to be disciplined on capital spending and aggressively seeking working capital improvements throughout the back half of the year.
I am confident we will meet our goal of generating positive free cash flow in 2021.
We are excited to accelerate along this path of end market recovery and fully expect our leaner ATI to showcase its capabilities expanding market shares and margins along the way.
With that I'll turn the call back over to Bob for some closing remarks Bob.
Thanks, Don.
Our second quarter financial results showed solid sequential improvement.
Seeing commercial aerospace recovery and our forward order load.
We feel momentum building at ATI, particularly within our <unk> segment.
Improving aerospace market conditions will create an outsized benefit for ATI as we've streamlined our cost structures and have higher shares of critical high growth customer programs.
I am confident that when these volumes return to pre pandemic levels will be an even stronger and more profitable company.
The Ams segment will be well served by growth in defense energy medical and electronics.
Transformation is on track and our specialty rolled products business.
We've made significant and structural changes to rationalize our product portfolio consolidated and upgrade our footprint and align our cost structure for future success.
We're building a leaner more profitable SRP business that our earns its cost of capital has substantial profitable growth opportunities and compete successfully for investment within the company.
I'll close with 3 important points.
ACI has a growth focused company with the cost structure, we need for success.
We are well positioned in key markets to achieve higher than GDP growth over the long term.
And transformation of our product portfolio is on track and will deliver significant benefits.
With a clear strategy and innovative team, we're accelerating our future.
And with that I'll ask the operator to open the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then 1 on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Any time Youre question is minutes Ross.
I would like to withdraw your question. Please.
Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Seth Sigman with Jpmorgan.
Please go ahead.
Okay. Thanks very much.
Good morning.
I was wondering if you could talk a little bit about the <unk>.
Painted impact.
On the latest latest rate actions on 77.
For the for the second half of the year.
Hey, good morning, Seth This is Bob.
I think.
You can look at the 787 news doesn't have a real material impact for us in the back half of the year.
We continue to see the business coming from that particular OEM stabilizing.
At relatively low levels, but nothing significant in the near term obviously, we continue to monitor the longer term.
We still have our expectations are forward looks as you know international travel is probably going to be back by late 'twenty 3 early 'twenty 4.
But we're not seeing any near term impact from.
What's going on with the 787.
Yeah.
Okay, great. Thanks.
Very much and then maybe just 1 follow up if I can.
Good.
In each.
Each PMC business.
I guess the.
Specialty materials there the non.
On forging piece of debt.
Do you guys ever disclose what the breakdown of that is between kind of narrow body exposure.
Wide body exposure.
Yeah.
We don't disclose it because we don't always have the.
Visibility in the airframe side.
When we sell billet bar.
Rod that comes out of our specialty materials business. It obviously goes into their distribution system and it varies.
The OEM will move product around depending on what they need and where they needed. So we don't actually have the clearest visibility to give you.
And answer, but we Havent also historically disclosed it.
Okay, Okay, great I'll leave it there for now, but thanks very much.
The next question comes from Phil Gibbs with Keybanc capital markets. Please go ahead.
Good morning.
Good morning Bill.
On E&S, you said $25 million of additional costs.
5 just means.
That's what you think the impact is going to be not in addition to what you already saw does that is that right.
Yes. This is Don so so the $25 million as our estimate of the incremental cost in Q3 related to the strike event.
Think about Q2, we shared that there was about $40 million of strike related costs. So another 25 in Q3.
Good news is we don't expect any additional costs in Q4. So if you look across the 2 quarters that were affected Q2 Q3 total is 65.40 plus 25.
Suffice it to say, we're very very happy that our represented employees are back to work in and we're re ramping the business and addressing our customers' needs and getting this burden behind us.
And what are you expecting for for inventories over the balance of the year I had I had thought that you were going to.
Chuck through some of those inventories in the second quarter, just as just as you kind of shift out of inventory, but that number surprised me to the upside.
What are you what are you expecting on the inventory side over the balance of the year, Yes, what I would say is we are certainly expecting a healthy working capital release from the second half of the year.
For the SRP business, specifically, we had talked about the expectation on that in Q2, we see a heavy release of inventory during the strike we didn't accomplish as much as we would like to in that release, but the good news is it's deferred is not loss. So we would expect in the second half to see more of.
That release.
Happening in the standard stainless space and and not just standard stainless to be quite clear SRP sales quite a number of other products.
We should also see a ramp in in terms of shipment shipping levels in those products as well.
Okay.
And then on pension and OPEC right. Now you are not liability I think is a little under $1 billion.
You you made mention of making a discretionary contribution in third quarter. You also made mentioned about something on OPE habits getting true up here in the third quarter and.
On interest rates and returns have been a little bit in your favor.
As you look ahead I am assuming nothing changes all too dramatically.
Where could that pre tax liability the 950 ish where could that go.
So first I'm happy to say that we are a lot under our $1 billion.
We ended last year 2020, with $674 million of net pension obligation and.
And <unk> obligation of a couple of hundred million dollars, both as you're pointing out we're going to see that <unk> obligations.
Dropped by about $65 million in Q3.
So that's a nice a nice decrease net.
We're continuing to stay focused on the glide path, especially around the pension.
We have said over the last several calls that we are committed to working down that pension obligation and getting it to a fully funded status in.
We're keeping that focus we think that we can achieve that over the next handful of years and make the pension irrelevant from a leverage standpoint, and thats consistent with our focus on Delevering.
We also believe that we have some of the books closed today, we'd probably see a benefit around discount rates, which are an important element of calculating the net pension and <unk> obligations and show.
You look at our 10-K, and we'll give you some sensitivities Phil but for every 50 basis points of increase in discount rate. We would expect about $140.150 million decrease in net pension obligation so that debt.
<unk>.
Balances are definitely working.
Down from from where we saw them in the last couple of years.
Thanks, So much yeah you bet.
The next question comes from Gautam Khanna with Cowen and company. Please go ahead.
Yeah. Good morning, everyone. This is Dan on for Gautam.
Thanks for the questions.
So could you quickly explain.
What explains the year over year decline on Nextgen jet engines in the quarter.
Largely mix I think is how you want to think about it.
I think that.
Whether it is from it.
Okay got it.
Great and then.
4.
The strike related sales.
Delays are those going to be caught up or like are they deferred sales or were they lost entirely.
I think what you would see is it's a mix of <unk>.
Certainly with transactional.
Sales of course, there is it's more likely that those those missed sales, we're not going to make up but there is we believe the opportunity to make up a healthy amount of the sales that were missed in Q2 and and we will make every effort obviously in the business to do just that so.
Our guidance does reflect our expectation that we'll be picking up some of those some of those missed.
Net sales in Q3, and then our cash flow guidance also expect that for the balance of the year.
On a little color to that for Darrin I think.
About the comments, we made about accelerating our exit of standard stainless sheet products.
Clearly a lot of those went through the distribution channel and we're not going to make those up it's actually accelerated the curve of our exit shifted in the second quarter and then at the same time on our specialty products.
On that business.
We saw distribution or some of our our customers actually complete their their inventories. So there'll be there should be good demand to kind of get those stocks back in place as we start to see the ramp coming in other places. So I think don's comments we're.
We're not going to see the replacement of the transactional standard stainless stuff, but clearly the specialty we feel good about having those orders for the future.
So so do you think what can be made up will be made up in Q3.
I think what can be made up will be made up in the second half of the year.
Got it okay, great. Thank you.
The next question comes from Josh Sullivan with the benchmark company.
Go ahead.
Hey, good morning.
Good morning, John Good morning.
Can you just talk a little bit about the long term cost guidance you guys achieved through the downturn and then maybe what you think you can keep long term versus some of these new inflationary pressures on labor materials I'm, just as we ramp back up.
The quarter clearly shows the benefit of volumes here, but I'm curious if you're able to hold on to that just given some of these inflationary pressures that are coming true.
Yeah sure. This is Don I'm going to I'll address that so I think in terms of 2 baskets, 1 basket as what we were able to achieve in 2020.
And.
Our.
Cost to take out capture in 2020 was about $170 million the run rate on that was about $270 million to $275 million.
And the way to think about that from a structural standpoint is we believe that all of that 270 run rate about $100 million of structural so that's a gift that keeps giving when it comes to our financial performance in the future. The second basket do you want to think about is the cost savings associated with our transformation of the SRP business.
And thats, an incremental $50 million and as you can imagine as we've talked about that transformational effort, where we're consolidated inc. Footprints, we're improving flow paths on our products for reducing.
We're reducing transportation cost.
And just.
Brings it with it.
A lot of benefits from a cost standpoint, not just cost of course.
There's also mix and other benefits, we'll get from that transformation, but.
And just like that $100 million structural benefit in the first basket that $50 million benefit from the transformation should also stick with us as a structural good guy and so will benefit off into the future from that effort.
1 other thing by the way that I would add when you talk about how to think about the cost structure is going forward with that transformation project 1 of the benefits that we're going to get beyond cost reductions and efficiencies, we're significantly reducing the volatility in that business related to.
Metal prices, we expect that.
For example, with nickel prices roughly 2 thirds of our current volatility around net coal is going to be eliminated as we exit standard stainless sheet and as part of that transformation of SRP.
Hopefully that gives you an idea of.
The new profile.
Yes, no. Thank you. Thank you for all that.
And then just secondly.
Crane utilization for us on other volumes are on the upswing and give us given the leverage you guys can get on the commercial side.
Is there anything you can give us on.
On the various segments, where utilization has been where we are now so something with the number of shifts you guys have or just any way to frame utilization conversation.
Yes, it's 3 minutes or less Josh.
Let's see it anyway, you want a day.
So I think.
We'll start with our <unk> business, our specialty materials business.
I'd say were probably you know.
From an equipment utilization probably.
At the bottom of the trough clearly we've started to see the uptick so it probably is.
2 thirds, where we wanted to be but we have a couple of projects coming that we slowed down it will be coming online in the next year or 2 but I'd say probably it.
We're probably.
In the 65% utilization rate, but obviously, we've adjusted our crewing to to be cost effective. So that's really the lever for us to ramp up on our forged products I would say, it's a little bit higher than that probably.
We also have.
Just on what we have online today in capacity, it's probably in the 75% utilization, but youre going to see.
We've got some ISO on heat treat capacity coming on we opened a new facility in Wisconsin for machining and inspection. So there should be some upside there that sort of the base. The denominator is going to change a little bit on forgings, but feeling pretty good in terms of looking forward.
And our <unk> business.
On the electronics space the nuclear space.
We are probably that 85%, 90% range, we've got some upgrades on some expansions coming there for organic growth but.
It's a very stable business, obviously, we have what.
What Don talked about with the summer maintenance outages, that's kind of a.
Our refinery there that we have in <unk>. So it kind of consumed itself a little bit. So you have to have annual maintenance, but it's been a good stable business for us throughout so it should return, but I would say probably 85% is a safe number for us AMC and.
And then.
Obviously, we're going through the transformation of our STP business.
So we are resetting the denominator. If you said to me Hey, where are you going to be on your downstream I'd say.
We're going to be it price, 70% of where we want to be by the fourth quarter. They got lots of upside clearly are.
<unk> talked a lot about today is on the 30% range, but.
We see line of sight to go to 50, and then through 2022 could even get up to 70%. So we're pretty excited about what could come there and then lastly, I would say in our Asia Pacific precision rolled strip business, which is predominantly electronics driven.
Driven we're probably closer to the 90%.
95%, but there's always mix rationalization opportunities to really keep enhancing the mix. There. So hopefully that helps is that does that kind of in 3 minutes or less what youre open to here.
Yeah no absolutely. Thank you. Thank you for setting the bar there for us that's on.
On the quota and thanks for the questions Alright.
The next question comes from me.
Neutral with Bahrenburg capital markets. Please go ahead.
Thanks, and good morning, everyone.
With regard to the restructuring actions that you announced last year for the E&S segment.
Can you help me understand the year over year bridge.
For Q3, because I'm thinking on a year on year basis, you should see a large decline in revenue right just because you.
Shutdowns.
What was that 4 to 500 million on our sales or are there other offsets.
Hi, Matt.
Yes, you are absolutely right, we announced the exit from standard stainless sheet, which on an annual basis in 2019 was about $450 million of revenue.
On what you would expect to see I think in the second half of the year as we continue on that glide path to exit that standard stainless sheet business.
We still have some inventory that we want to release out of the out of our inventory balances related to those standard on commodity products.
And we're working with our customers to to help meet their needs as part of our glide path out of that space. So I think from a standard stainless standpoint that is what you would expect to see offsetting that you would expect to see a ramp in terms of sales in the second half related to SRP.
Pacifically.
As we start making up for some of the loss sales that were experienced in the Q2 strike impact and then some of that strike impact of course carries over into Q3. So that's why we talk really about the second half of the year.
The other impact that would be a beneficial impact to us.
On marginally beneficial impact to us in terms of the E&S and specifically SRP revenue is related to the increase in metal prices Nicole as an example has increased.
2 of almost $9 a pound since since the beginning of the year and I think we entered the year at about $707.15, and so that actually creates a benefit to us in terms of sales that will impact second half, presumably if metal prices remain at these levels.
Got it okay.
So as this plays out over the next day.
So on months it can.
Can you describe in the context of your end market sales mix, which you provide every quarter.
Which are the end markets that youre moving away from.
Commodity business 1 stop.
Yes. Good morning, <unk>. This is Bob I think there is 1.
1 channel and free markets that I think we would be talking about so.
We've talked about standard stainless a large percentage of the.
Stainless goes through what I would call standard distribution channels.
Sure.
They tend to be standard with standard gauges standard grade. So that's the number 1 issue for us that we're moving away from where those markets go you would see it in some of the oil and gas products certainly automotive applications.
And in General industrial you might see some in the building and construction space you'd see some in the foodservice space that tend to be in those standard grades. So.
I think what you'll see for us in the future as the focus on clearly aerospace and defense is the core of what we do and then we leverage.
Those capabilities into what we call specialty energy, which we talked about today being land based gas turbines you talked about certainly the medical space that we see good growth and certainly on electronics, so the backing away as oil and gas oil and gas automotive.
Kind of a general industrial stuff as well as more OEM business.
I always have distributors in the mix because they provide an important service to our customers, but will be less reliant on the distribution channels in the future.
Got it thanks, a lot for that and maybe a last 1 just going back to the free cash flow guidance.
$40 million cut.
I'm wondering if you could provide you some more color as to what are the moving parts.
Like how much is EBITDA versus the.
Strike related costs.
Working capital, perhaps yes.
Yes, so youre right when you look at the the free cash flow guidance for free.
For 2021, what you see in new guidance is breakeven to a slight positive on free cash flow.
The headline in terms of the biggest part of that bridge to the revised guidance is really about the strike impact. If you think about the $40 million of costs in Q2, and the $25 million that we're expecting in Q3, that's largely cash related right. So it's a $65 million headwind that would not.
Have been included in our original guidance now of course, we're working offset that how are we doing it through our working capital release, managing our capex with a lot of discipline and then we've got some other cash initiatives that we are working right now that are all pointing us toward let's get to our free cash flow from <unk>.
2021 in the black and.
I feel very very confident that we're going to be able to pull the right levers and an accomplished the goal that we set out.
With this new guidance.
Okay sounds good thanks, guys.
Yeah.
Please go ahead, Mr fields with Bank of America with your question.
Thanks very much.
Just wanted to add.
Go back from a free cash flow guidance.
Again.
Breakeven to slightly positive.
For.
Pension contribution and I, just you know theres been a lot of sort of movement on that pension.
Last quarter, you said it was going to be below 87 on.
The required basis now the required pension contribution was 17, but youre going to make a voluntary.
Pension contribution of 50 can you just give us what the actual sort of cash into the pension this year all in.
Yes.
So first I'm glad you asked the question because.
It is an important area.
You are right when we talked about the contribution to the pension plan as we entered 2021, what we said is we we were going to deposit $87 million, which was then the minimum.
Then the federal laws around pension contribution requirements changed and last quarter, what we told the market is.
With the change in the Lord presented the opportunity to be more flexible when it came to contributions to the pension plans and by that time, we had to positive $17 million into the plans in 2021, and we kind of hit pause. We said you know what gives us the balance of the year.
<unk> to look at our liquidity and our balance sheet and we'll make the decision on whether or not we're going to make further contributions show the flexibility with the new laws. We were taking advantage of now when you look at our liquidity position on our balance sheet and we're in great shape. We ended this strike.
We have a good a good trend in terms of end market recoveries, we feel good about making discretionary contributions to the pension plan. So with that what we have said this quarter is hey.
In Q3, we expect another $50 million to be deposited that will make total deposits into the plan $67 million.
In 2021.
From a definition standpoint around free cash flow, you're 100% right as we define free cash flow and talk about free cash flow. It excludes contributions to the pension plan.
And we do that for a number of reasons, including providing comparability of our cash flow to part 2 peers, who don't have defined benefit plan.
So hopefully that clarifies for you how to think about our pension contributions.
No that's very helpful and then.
I don't know if it's too early but the $50 million.
And then Jerry contribution this year.
Take care of our required contribution to the pension for next year in 'twenty 2.
You know it.
It likely would but that's not the way, we really think about it we love the flexibility as I said, but the reality is we're on a glide path. We want to continue to work down our pension plan and so what's really going to drive our future contributions to the plan would be.
It would be.
Our desire to be to drive those plants to fully funded status in the next number of years.
Okay. Thank you and then.
Follow up on me.
Your your.
Your borrowing base on your ABL with a little bit limited last quarter. It looks like it's further limited this quarter.
As you are kind of trying to squeeze on cash from managed working capital should we should we expect that revolver to be limited by the borrowing base, while you're while you're trying to kind of squeeze out manage working capital for organic. Thank you can work that borrowing base back up and gain liquidity that way.
Meantime, I think the punch line is you should think of that liquidity from the Undrawn ABL at around where we were about $350 million at the end of this last quarter think of it being at that level, probably through 2022, and there'll be pluses or minuses right as we manage our overall book.
Quiddity and also work to reduce our managed working capital balances.
Which will have some effect on the borrowing base, but think in terms of 350 ish to say $400 million.
Available capacity under the ABL for the next year or so.
The next question comes from Richard Safran with Seaport Global.
Please go ahead.
Thanks, Good morning, everybody how are you.
Good morning, good morning rich.
I just have 1 question this morning.
I hope, it's not a bit too early to start asking you guys about capital deployment and just how the thinking is going about debt.
Specifically, if things continue to improve.
You need to generate cash.
Much longer for example, do you expect to focus on debt reduction after that how are you thinking about the balance between dividends and buybacks.
A while back if I'm not mistaken you were leaning towards dividends, but it's been a while since I think you were asked about this so I thought maybe.
You did give us a.
A bit of an update on what current thinking is.
Okay, I'm going to take a run on answering that question rich and.
First when it comes to capital allocation, where you want to start obviously is how much capital you have available to you.
More on a really enviable position when you think about our incremental margins and the ability of the business to generate strong cash flows in the ramp.
On a great spot and and with the cost Takeouts that we've put in place that will increase profitability and cash flow as well. So we're going to have an ample amount of capital available to allocate Dan from a prioritization standpoint, the way I would describe it as a.
Balanced approach we are prioritizing.
Deleveraging that includes bank debt, but it also includes the pension plan and we're fortunate in that our debt maturity profile gives us some flexibility we don't have any near term maturity, but I expect that we would delever.
First through growing our EBITDA, which should ramp quite nicely in the recovery.
And then also being the position to choose to deploy capital to our cash to pay down debt.
Then it's the pension right that would be the next element of how to think about delevering while were already on this glide path on even if you look at the contributions in 2021 at $67 million Theyre really modest and so as I pointed out on Phil's question and we entered the year with.
$674 million pension obligation.
And.
We'll continue to make.
A healthy contributions to work that down and we will and I would expect that that will be fully funded in the normal course without having to do anything extraordinary over the next handful of years.
It's not all about Delevering, it's important because it derisked the business and strengthens our balance sheet, but we also want to invest for growth than we've done that across this this.
This down cycle and we'll continue to do it through Capex. If you think about our Capex program. Our Capex program is set to accomplish 2 things 1 is to continue to maintain our assets and keep those assets healthy and we do that and we've done it throughout this down cycle.
As to growth and so as you look at growth opportunities Theyre, typically organic or inorganic no surprise, there and we have a lot of organic opportunities that we can deploy capital that capital to at very healthy returns and so we will continue to prioritize that growth.
Because we think that in combination with the balance Delevering strategy is what's in the best interest of our shareholders.
Then when it comes to when it comes to the specific examples that you gave her on equity would we be interested in dividend or share buybacks I would say at debt at this point.
We would say no not yet, but it is certainly on our radar and we are open to doing either 1.
Given the right circumstances, and so I would say more to come on on those 2 options as far as preference of dividend versus share buybacks.
Of course, it depends a lot on where the share price is.
And so it's a bit early in the game for us to make that call.
So does that does that help you rich.
That actually helps me quite a bit that was that was terrific color. Thanks.
And we have time for 1 last question or that will be Chris Olin with tearful research. Please go ahead.
Hey, good morning, everyone. Thanks for good morning, Chris.
Chris.
I wanted to touch a little bit on the titanium market.
And specifically thinking about the titanium scrap channel as it relates to your melting feedstock I guess, if you would look at the ramp on aircraft production net seems to be planned over the next 18 months and then you'll consider supply or that revert coming back from aerospace it looks like it's going to be awfully.
As we get closer to 2022, so I guess my question to you would be.
Do you feel comfortable with your ability to capture your future scrap require maintenance and I guess second to that can you remind me.
How are you guys are protected in terms of like contracts or or whatnot should scrap pricing servers like we've seen in some of the other metallics.
Yes, Chris this is Bob in terms of.
I think your first question was how.
How do we see the scrap market is.
The titanium demand starts to increase.
I think because of the wide body situation.
It's going to be a while before it gets back to higher than 2019 levels youre going to see that gradual ramp obviously.
There's a lot more narrow bodies.
And wide body. So that's the first issue I think it is going to be a slower ramp on the titanium demand for structural stuff.
So I think that will help us.
For a period of time and we'll work through that.
Clearly the narrow bodies are strong.
But we get a little bit of a delay on the wide body mix. So that that comes back I think.
We're confident that we have access to sufficient scrap I think it's going to be.
More on.
A gradual increase on that side versus that big Spike right. So we're seeing good growth in the engine space, 20% growth Q on Q4, the <unk> engine components in general So I think youre going to see us be slower.
And I think that was the first question.
That you have.
I think.
We don't really see a huge challenge with the scrap side I think it's.
On something we obviously are into every day in terms of how we're protected if theres a big spike.
I think a lot of our scrap is a closed loop system and so.
The customer that we're dealing with or the customers that are in the contracts that tends to be on.
A non issue for us on the scrap price spikes from probably the best way to look at.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Scott Mendel.
Any closing remarks.
Thank you to all who have joined US today. We appreciate your continuing continued interest in ACI and this concludes our second quarter 2021 conference call.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].