Q3 2021 Allegheny Technologies Inc Earnings Call
Yeah.
Our third quarter adjusted earnings per share were <unk> <unk>.
<unk> improved to 35 per share when you factor in the net positive impacts from settling our recent labor strike, including the benefits from our new collective bargaining agreement and the lingering strike related costs as well as the gain from the flow form products divestiture.
I am proud of what our team has accomplished overcoming the challenges of the past two years.
We're winning on the top line through new business and by capturing share gains.
We're winning on the bottom line by tightly managing costs and solidifying our financial Foundation.
We have begun to pivot to growth.
We're excited about what we can achieve as the commercial aerospace recovery accelerates our business operates at high utilization levels.
Before I dig into our performance and outlook by end market I'll provide a progress update on a few of our strategic initiatives.
First we took another step in our ongoing business transformation.
We sold our pro farm business for $55 million, resulting in a gain on sale of nearly $14 million.
While this business primarily serve the defense market it had little connection to the broader ATI.
There were a few material synergies and its long term success was linked to specific program volumes rather than our material science.
The new owner will be better placed to invest for its future.
Second we built upon our firm financial foundation by taking steps to reduce earnings volatility and cash flow variability and increase financial flexibility I.
I don't want to steal a lotta downs highlights here, so I'll limit my comments.
We successfully tapped the favorable debt markets to our advantage, we significantly extended our debt maturities by redeeming notes due in 2023.
At the same time, we added new notes due in 2029 and 2031.
A portion of these proceeds were used to support a voluntary pension contribution.
As a result of these third quarter actions annual interest expense will decrease by about $6 million and pension funding levels improve.
Third as a visible next step in our continuing journey to become one ATI we.
We promoted Kim fields to serve as Chief operating officer effective January 2022.
This officially recognizes the role she has been serving in since December 2020, leading both business segments.
Tim is doing a great job aligning the businesses accelerating execution and streamlining material flows.
As markets recover and assay utilization increases, we're better positioned to expand margins and improve cash generation under her leadership.
Lastly, we continue to make progress on strategically transforming our specialty rolled products business, taking deliberate actions to create a competitive cost structure.
This began last December when we announced our plans to exit low margin standard stainless sheet products.
It includes closing five facilities and concurrently streamlining and upgrading our high value material flow paths.
Those efforts are largely on track.
I'll have more on that in a moment.
In July we reached agreement with especially raw products Union represented employees ending their three and a half months strike.
Together, we signed a contract that rewards our employees for their important contributions to <unk> overall success.
The FRP business is now positioned to be successful in the long term.
I'm pleased to say that by the end of September we've ramped srp's production rates back to pre strike levels with one exception that we're working hard to address.
The SRP team did an outstanding job safely getting back on track accelerating production to meet strong customer demand.
You might wonder, where we stand on our decision to exit standard stainless sheet products given the current strong market demand.
History reminds us this is a temporary upswing in a highly cyclical business with chronically low margins and high fixed costs.
Our commitment to exit hasn't wavered, but our timeline has extended by three to five months due to the strike related impacts.
First the strike caused us to slow aerospace qualification activities across SRP operations.
It also created a significant product backlog destined for strategic customers.
As a result of facility slated for closure will extend a few select operations into the second quarter of 2022.
But I would have preferred to stay on our original timeline, we're committed to better position our customers for the accelerating economic recovery and.
And take near term advantage, where current market conditions offer a valuable upside.
The savings capture will be slowed by a quarter or two.
Let me be clear the overall favorable economics attached to our transformation over the long run remain in place.
Turning to our third quarter performance and outlook by market, we're seeing clear evidence of recovery.
Momentum is building as volumes return to pre pandemic demand levels.
Let's start with our largest end market commercial aerospace.
Expansion continues unevenly across our product portfolio.
And the jet engine market forgings demand grew for the fourth quarter in a row.
This expansion was driven by demand for narrow body engines, coupled with our 2021 market share gains.
Our Q3 results included initial leap one the volume increases to support the expected 737, Max production ramp.
In contrast of forgings are sequential jet engine specialty materials sales declined somewhat.
While it appears that our customers jet engine material inventories are nearing a low point, it's clear that pockets of inventory exist.
We also believe there is widespread customer desire to tightly manage year end inventory levels.
We predict these inventory stockpiles will be fully depleted soon as OEM production rate increases materialize.
We expect customer hesitancy to wane over the next few quarters and order patterns to reflect underlying demand once again.
Lastly on commercial aerospace our airframe business expanded sequentially for two reasons.
Post strike recovery efforts, and our SRP business and second the increasing orders associated with our new European OEM long term agreement.
Year over year airframe sales declined.
We expect this market to continue with low levels in Q4 and into 2022 as.
As international travel rates recover more slowly and 787 deliveries remain on hold.
Despite a mixed third quarter aerospace performance there is good news on the horizon.
As the Covid Delta variance impact flows in international travel restrictions ease.
We are once again returning to the skies. This market is already displaying strong recovery trends in the form of increased domestic passenger travel.
Higher global cargo volumes and accelerated fleet retirements.
Moving to the defense market revenue declined sequentially, largely due to customer shipment timing in the sale of our <unk> business.
Year over year growth was strong.
What's driving growth in the near term titanium armor for land based vehicle programs in the U S and the U K.
Military jet engine sales and the expansion of new helicopter programs.
Longer term, we remain highly confident in ATI defense growth.
Our confidence stems from a wide range of new programs and opportunities that can benefit from our advanced materials development and production capabilities.
Turning to the energy markets, we saw significant growth sequentially and year over year in both business segments.
This occurred in oil and gas as well as specialty energy.
In our advanced alloys and solutions segment, we produced and shipped most of our large nickel alloy project destined for offshore waters in South America.
Our high performance materials <unk> components segment strong demand continued for our nickel products used in land based gas turbine production in Asia.
The near term outlook for our energy markets as solid.
Global GDP growth and higher travel rates will increase energy demand clearly.
Sustainability trends will drive exploration and production of more environmentally friendly energy generation and transmission technologies all.
All of these are best served with our unique high performance materials.
Lets wrap up our markets discussion with our critical applications used in medical and electronics.
And medical sales grew sequentially and year over year increase.
Increased demand for biomedical implant materials was driven by lower post pandemic customer inventory levels and increased elective surgery volume.
In Q4, we expect these trends to continue and likely expand to include MRI related materials.
Electronic sales were lower compared to the record setting levels of the previous quarter and last year, but still very strong.
The strong demand for other key end markets required production allocations within our China precision rolled strip facility constraining.
Constraining within the quarter available capacity for electronics products.
We also had a planned Q3 maintenance outage at our Oregon facility.
Underlying customer demand for electronics remains strong and should continue.
I'll wrap up my opening comments by saying I am confidently bullish on Ati's future.
Our end markets are recovering.
We're growing our market share.
We are aggressively locked in cost structure improvements.
We have significant growth opportunities on the horizon.
We've put ourselves in a position to accelerate growth and expand margins.
We're executing to win.
It's an exciting time for ATI and proud to lead this team as we achieve our goal of becoming a premier supplier of aerospace and defense materials.
With that I'll turn it over to Don to cover our financial results in more detail and provide you with our Q4 financial outlook down.
Thanks, Bob.
Bob already gave you my opening line.
<unk> returned to profitability in the third quarter three months ahead of our expectations.
A lot of hard work went into right sizing the business and putting us on this path for growth.
We'll celebrate for a moment, but in reality, we've already shifted our focus to capitalizing on this momentum.
Further expanding our business and generating shareholder value.
Now for the details overall Q3 revenue increased to $726 million.
Up 18% sequentially and 21% year over year.
Q3, adjusted EBITDA grew to $80 million.
Up 49% sequentially and up 381% year over year.
Q3 performance suggests a revenue run rate approaching $3 billion and an adjusted EBITDA run rate of $320 million.
On a reported basis ATI earned 35 per share in the third quarter, we earned <unk> <unk> per share in the quarter. After adjusting for a net $43 million of special items. These included gains for post retirement medical benefits, resulting from the new SRP collective bargaining agreement.
And Trump full form products divestiture strike related costs were also excluded.
To better understand our results I'll provide some color around each segment's performance.
Starting with Ams sales grew by 35% sequentially and EBITDA by nearly 60% versus the prior quarter.
Within this segment the SRP team did an outstanding job accelerating post strike production levels.
This was against a backdrop of strong customer demand and elevated pricing opportunities.
Their efforts produced tangible results, bringing us back to first quarter 2021 production rates by the end of September as we had predicted.
Our precision rolled strip business in China. Once again had record sales and earnings due to continued strong demand across a variety of end markets.
Aam's segment Q3 performance also compared favorably to Q3 2020.
Revenue increased $49 million and EBITDA increased $46 million.
This impressive earnings growth was powered by increased market demand.
Higher HRP F toll conversion volumes.
Streamline cost structures and metal price tailwind.
H BMC Q3 sales and earnings were in line with the second quarter and much improved from the third quarter of 2020.
Sequential forgings growth from commercial and military jet engine sales was offset by a quarter over quarter decline in specialty materials jet engine revenues and the impact of selling our fall forum business in Q3.
Earnings and margins were consistent sequentially.
We offset a weaker product mix driven by increased energy market sales with operational cost improvements.
<unk> sales were higher year over year in every major market.
Led by commercial aerospace.
Earnings and margins expanded significantly in Q3 versus the same quarter in 2020.
This is a result of our decisive 2020 cost cutting actions jet engine share gains and contractual margin improvements.
Let's move to the balance sheet.
Late in the third quarter, we issued two debt tranches totaling $675 million.
$325 million of the notes are due in 2029 and bear interest at four 875%.
$350 million of the notes are due in 2031 and bear interest at 512, 5%.
Proceeds from these notes were largely used to redeem $500 million of notes due in 2023.
Bearing a seven 875% interest rate.
The financing brings several benefits, including $6 million in annual cash interest savings.
<unk> lower interest rates and a much improved debt maturity schedule.
Excess proceeds from the financing were largely used to support a $50 million voluntary pension contribution in the quarter.
I will come back to our pension glide path in a moment.
After redeeming the 2023 notes in mid October we had more than $800 million of liquidity, including approximately $440 million of cash on hand.
Third quarter managed working capital levels improved sequentially, but remained above our target.
This was largely due to SRP strike recovery efforts Q.
Q3, SRP sales were backend loaded increase in quarter end accounts receivable.
We also ramp production in the quarter.
Were unable to fully eliminate inventory backlogs before quarter end.
We expect significant reductions and manage working capital levels, well below 40% of revenue across the company in Q4.
Returning to pensions.
Our $50 million voluntary contribution is the latest action and our plan to improve pension funding levels and reduce related expenses and contributions over time.
In the third quarter, we completed our fifth pension annuity innovation effort.
This lowers overall participation by nearly 1000 people and shifts approximately $70 million of assets and liabilities to a third party.
We have seen favorable asset returns and planned discount rate movement, so far in 2021.
If that holds through the end of the year, we may see a meaningful improvement in our pension funded status at the close of 2021.
Now, let's take a few minutes to discuss fourth quarter outlook.
In <unk>, we expect the jet engine, driven recovery to accelerate and broaden across our product portfolio.
After several strong quarters sales to specialty energy markets will likely decline.
We anticipate continued commercial aerospace forgings growth.
We also expect additional defense sales and to benefit from a large discrete commercial space project. These changes should result in improved mix sequentially for Aaas, we anticipate improved financial results and our ethane and <unk> business.
This is due to defense and medical volumes, increasing and expenses decreasing after our seasonal Q3 maintenance outage.
And our SRP business several pieces of equipment will take extended outages in the fourth quarter in support of our strategic transformation.
First while Idaho, a finishing line to upgrade its high value specialty materials capabilities and second while idle amounts asset to allow finishing operations to process post strike backlogs.
Footages are expected to negatively impact cost absorption and increased cash expense in the fourth quarter.
We anticipate a return to normal capacity levels in Q1 2022.
Lastly, we anticipate our China precision rolled strip business to experience its normal seasonal slowdown in the fourth quarter due to lower post holiday electronics demand.
Additionally, we expect to recognize a $7 million benefit in the fourth quarter from a retroactive 2021 tax credit in China.
In aggregate, we anticipate building out our improved Q3 results on both the top and bottom line.
We expect to report adjusted earnings between seven.
And <unk> 13 per share in the fourth quarter. Despite the SRP strategic outage costs incremental margins will fully reflect our cost structure leverage as sales expand larger.
Largely in our H PMC segment.
This growth should propel our fourth quarter earnings to 2021 high point and lead to further profit expansion in 2022.
This guidance range translates into a year end EBITDA exit rate, that's more than three times greater than year end 2020.
In other words in four quarters, we've more than tripled our earnings trajectory.
As Bob said earlier, it's an exciting time to be at ATI.
We are back in the black and see a steady climb out of the 2020 earnings trough.
Before I hand, the call back to Bob.
Want to affirm the free cash flow guidance provided in early 2021.
Excluding pension contributions we expect to be free cash flow positive for the full year 2021.
The team has worked hard to put us in a position to be successful and they are committed.
Work remains to close out the year, but I am confident that we'll hit the mark.
We demonstrated significant progress in the third quarter and fully expect to exit the year on a high note.
With that I will turn the call back over to Bob.
Thanks, Don.
I'll close with four important points.
Number one ACI is focused on growth with the cost structure, we need for success.
Number two we are well positioned in key markets to achieve higher than GDP growth over the long term.
Number three.
Transformation of our product mix is largely on track and will deliver significant benefits.
Number four our people the ATI team are the core of our competitive advantage.
Together, we've accomplished much during an extended period of uncertainty challenge and change.
I laugh, a little when I hear financial experts and market pundits describe what we've collectively weathered as headwinds.
That's a tad bit understated.
The ATI team has persevered to do what needed to be done working safely and responding with urgency.
As with the long term interest of the company and our shareholders in mind.
Has it been easy nope.
That we occasionally had to first convince ourselves that was possible and that we could do it.
Yes, but to be clear, we've done what needed to be done.
I'm proud of what we've accomplished together.
Most importantly, I. Thank our team for all they've done and the enthusiasm they have for everything that is yet to come.
With a clear strategy and consistent focused execution, we're accelerating our velocity to our very successful future.
With that I'll ask the operator to open the line for questions.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will come from Richard Safran with Seaport Research partners. Please go ahead.
Bob John Scott Good morning, how are you.
Good morning Rich.
So two questions first.
The second one is a bit more strategic in nature, but first I just wanted to ask for a bit of a clarification at HP. It was interesting sales driven by energy aerospace with slot defense down.
And you spoke about Bob higher forgings, offsetting offset by specialty materials, but correct me if I'm wrong, but materials are more of a long lead item and aerospace production is increasing.
Why wouldn't materials be declining.
Hey, good just from your remarks that it is.
Correctly due to Destocking and the other thing is I think you said the issues would be resolved soon so do I interpret that to mean, you probably have a <unk> impact, but not likely 2022.
Alright, rich I'll take that question.
A couple of things Youre right. The forgings business a great example of that was the leap one b I'll give you a little factoid there so in Q3.
We shipped more leap one before James that in all of 2020.
Right.
So when you think about that what you're seeing is the accordion effect of the supply chain. So first thing we had to do is get the forgings to the customer now we're pulling through kind of some trapped inventory that was there the billet that we supply our other supply and then as that gets depleted here at the balance of the year at the end of the.
Year, which I think is a fair assumption that it'll be gone towards the end of the year. So by the time, we get to 2022, we should see a better synchronization of forgings and that longer lead time bill that item.
There's still some pockets out there are customer specific alloy specific depending on batches and pull rates, but we're definitely seeing it in the engine side, where the demand and the order book.
We're booking if you wanted to order today you'd be early Q2, probably for some of the longer just for forgings and some of the bill. It. So we're starting to see that demand build we're obviously adjusting our crewing and capacity to accommodate it so.
I think I answered your question, which is is the accordion effect of pulling inventory out and yes, we expect that supply chain that were part of the kind of be back to.
Kind of.
Quarter demand levels and in sync with demand as we can.
Enter into 2022.
Okay. Thanks for that.
Second one Tom.
I wanted to know if you'd be willing to expand on some of your cash flow remarks, not just 'twenty two what.
Maybe if you would.
Take a long term view here.
Could you discuss the major moving pieces that contribute to your cash flow.
Not just the improvements in net income I'm, sorry, but for example, you mentioned.
You made a brief mention about cash pension.
Working capital trends also DNA capex et cetera.
I'm using uses examples but I'm looking for trends in the big pieces that really kind of drive your long term cash flow outlook and you know if you could just tell us how you're thinking about it.
Happy to do that of course, you said not to include our earnings but of course I have to right. So the first major movement.
That's going to really drive the cash flow generation is going to be profitability, we've talked in the past rich about.
Trajectory around our ability to generate increased profitability as our end markets recover so that is a key and we've walked you through the math walked everybody through the map before this is a business that 2019 volumes or mix that should generate in excess of $600 million.
EBITDA that's important when you think about the other key drivers around really cash flow.
First thing that comes to mind after earnings is managed working capital.
We are.
I, obviously focused on achieving our sub 30% target what does that mean well that means is that that we're going to work down our managed working capital levels to be below 30% of revenue we've been there before it should take us probably a couple of years.
<unk>.
To get there from where we're at right now.
We ended this last quarter north of 40%, we should and Q4.
Probably certainly well below 40%, maybe mid thirties, and then as we think about achieving that 30% target over the next couple of years, one way to think about it rich is you take our exit rate out of Q4. This year and then you think achieving sub 30% two years from now and draw line.
Right that'll be Directionally, how we think about continuing to work down our working capital investment. So that's important another key driver courses capex the way to think about Capex I'm going to give you a little bit of kind of a bifurcated view of Capex. One is to check carve off what is our maintenance capex.
Next view, how should you guys think about maintenance capex. It is a moving number it's not a steady number from quarter to quarter, but one thing that you would probably want to do in your models is think in terms of hei has about $70 million to $80 million a year.
News as a placeholder, but $70 million to $80 million year maintenance Capex. Okay. Then you've got total capex. Once you add the growth capex to it what's the way to think about growth Capex, well I think 2009 2000 Twenty's early guidance.
Covid guidance that we gave on total Capex is an interesting data point.
If you remember we said that in 2020 before Covid hit we're going to spend about $200 million to $210 million on Capex and and so obviously a lot of that was growth Capex. We only ended up spending in the range of $150 million something like that so we had an amount of our capital that we did.
So as you think about coming out of the trough and getting into the recovery. We will finish the projects that we had started and.
Before Covid hit.
But then as you look past that as you think about okay. How should we think about what ATI might spend on an all in from Capex.
I think number one the maintenance Capex target will give you a good sense of where to start number two remember that whatever we're spending on growth capex in support of <unk> and demands that we're seeing in the market from our customers and so it'll be a sensible number.
But certainly will be.
North of.
Of that maintenance target.
So those are kind of the major targets that we think about it when we when we are the major levers rather we think about when we think about.
Free cash flow generation is that helpful.
Oh, yeah. Thank you.
The next question will be from David Strauss with Barclays. Please go ahead.
Okay.
Thanks, Good morning, guys.
Good morning, David.
These are you know that's a big Q4 adjusted EPS guidance.
Just take the midpoint at 10 cents.
Bob is that a good way to kind of you know is that a good place to build off of as we as we think about next year given given all the moving pieces here with the exit from stainless and metal prices and you know kind of how how should we think about.
Building off of that as we model out next year.
This is Dan I'm going to take a run at the question and Bob can can mop up if it's needed but.
Yes, I think to think about our exit out of 2021 from an earnings standpoint that.
That 7% to 13.
Guidance is helpful and interesting data point, but you want to consider a couple of things first of all.
We did note that we've got planned strategic outage in Q4, and our SRP business, it's part and parcel to the transformation of that business to a specialty products business.
And so we're going to have some out of pocket costs associated with that in Q4, probably the right way to think about those auto pockets.
And under absorption impacts I'm guessing, it's something in the $10 million range, just as a placeholder and and then we also noted that we've got a $7 million. Good guy on the tax line. So if youre looking at Etfs and projecting out EPS at $7 million good guy on the <unk>.
<unk> you wouldn't want to extrapolate to all quarters in 2022, because it is a it's a kind of a once in a year.
Item that we pick up in Q4.
But as you think about our trajectory what I would encourage you to think about and consider as you think about our future earnings.
Our Q3 run rate.
Almost $3 billion of revenue.
<unk> $320 million of adjusted EBITDA and it is a dramatic turnaround in this business, but it's not by accident.
It's not by accident, because a meaningful portion of this is because of the changes we're making in the transformation. It's also the cost takeouts that we executed throughout 2020 and efficiencies that we're continuing to capture and in addition to that of course, we are expecting recovery in our key end markets Aerospace of course is the.
<unk> is the star in that.
And those end markets from a profitability standpoint for us.
So hopefully that helps you.
Yes, it does.
And I guess trying to put a finer and finer point on the on the cash flow question.
Youre projecting dawn.
$600 million EBITDA.
What do you.
And at what rate can you convert EBITDA into cash as at 30, <unk>, including including pension amusing, 30% conversion at a 40% conversion what do you think about us.
The rate conversion rate of EBITDA into free cash.
For that for that I kind of prefer to instead of giving you just a blunt percentage where I'd like to do is just again give you a little bit of data point right. So if you're starting with EBITDA.
You want to remember that there's cash interest that you'd want to consider on that are our interest expense runs in the range of about $100 million right. Now annually. So you want to consider that we are tax shielded so taxes shouldn't have a big impact on what youre projecting and then the other important part of it is working capital right.
So as.
As you're as you're modeling it you want to consider our target we wholly and completely believe we can get back to where we are our revamp that doesn't sound very good ROIC. When you when you say it like that we were at 30% before.
And so we've got some work to do to structure to do that structurally and consistently but we believe we can get there and then the big question that youre going to want a striking assumption on is how much growth capex is in a given period are you already know our maintenance capex because I just shared that.
So if you're thinking about 2022 for example, what you can what I would do is I go back to the data point that that we gave you at the beginning of 2020 before COVID-19.
Raised the Ted and that was $200 million of of <unk>.
Total capex. So I think it's all of those data points you probably can take a view in terms of how to think about conversion.
Okay, and sorry last one.
Next year, including whatever you do from a pension perspective.
Would you expect free cash flow to be positive, so including pension not excluding pension.
That is certainly our target.
Yes.
Positive free cash flow is always our target rate.
We understand the.
Value creation that comes with with a positive cash generation.
So one thing another data point that might be helpful to you by the way is and you had asked and I missed it how to think about pension contributions. So we're on this pension glide path and and I can't tell you. How excited we are to see the potential to be out of the pension business and we expect that.
We contributed $67 million to our pension plan and 2021, our minimum required is more like 10 or 12.
What you should expect as Youre thinking about free cash flow generation and conversion is over probably.
Continue to make contributions.
$50 million to $70 million range for the next.
Two or three years, but it's all going to be driven by this ultimate objective.
Of driving our net pension obligations to a de minimis level and making them irrelevant.
You guys and to ourselves and we're on that glide path. So.
Very very positive.
Thank you and the next question will come from Phil Gibbs from Keybanc capital markets. Please go ahead, hey, good.
Hey, Phil.
So the way that we're Sn.
Essentially looking at the fourth quarter with all the moving pieces here and I think you hit.
On with David I don't want to get expectations too far out of our out of balances that EBITDA plus or minus should be reasonably similar to <unk> because you got H P. M C moving up.
And do you have.
Just moving down largely on the outage.
Is that the is that the way to think about it.
I think that's good math.
And then on your free cash flow being modestly positive breakeven or modestly positive for the year. Excluding pension contributions is that pension contribution number 67 million this year.
First part of your question Phil It broke up can you repeat the first can you.
Yeah, I was saying in your free cash flow guide for the year of breakeven to modestly positive yes, Sir.
Excluding pension contributions is the pension contribution number $67 million.
We're not yeah, we're not anticipating making any additional pension contributions in 2021, but that's the right number to be used at 67, Okay. That's right. Yeah, you got it Phil.
And then in your filings recently, you've been providing backlog for the business.
What should we be thinking about in terms of the backlog at the end of this quarter versus last quarter.
I think what you would expect.
For our SRP business.
I mentioned that we built our managed working capital for SRP, we were still working through the strike related backlog you would expect that we will be through that backlog by the end of this year.
And that I would say.
Backlogs generally in the same range at the end of Q4 as we saw at the end of Q3, just generally what would you add to that but yes, I think that's right I think so the way we.
We're looking at it as kind of where our lead times going and what's going on in the industry. So.
What we see for our specialty materials business is that lead times.
Through the pandemic, we're less than 90 days now theyre moving out to closer to Q2. So 120 150 180 days. So we're getting to the point, where we're starting to see the orders actually.
Aligned with this demand ramp so from a backlog perspective, I think that the lead times are the best indication that H PMC.
Is really seeing the the increase in the in the order book.
Okay.
And then last one just from a housekeeping perspective on on debt reduction.
The the refinancing didn't fully.
Gel and <unk> in terms of the actual balance sheet, so how much debt.
Including.
Accrued interest in and and other things should we expect to be coming out of Q4 as those bonds are retired.
So the headline numbers on that would be we had $500 million of par outstanding at the end of Q3 that we took out.
We also paid about a $70 million premium to to execute that redemption.
Both of those events, obviously happened in mid October and then from an interest standpoint, theres about $6 million of interests that we ended up paying related to that redemption.
And thank you. The next question will come from Seth Sidesman with J P. Morgan. Please go ahead.
Great.
Thanks, very much and good morning, good morning.
Yes.
Just wanted to ask first about H.
H P M C.
The forging ramp that.
That's ahead.
Obviously, we've heard a lot of different places about.
Some of the challenges in ramping.
Historically been a challenge.
Aerospace for gangs I guess.
How prepared do you feel for what they are in Q4, and you know what kind of work do you have to do for 2022.
Yes, so I think we're in good shape and our forging business for Q4.
We actually supply a lot of the billet that goes into our forging. So we feel we're in pretty good shape. There we do have.
Isothermal forging and heat treating capacity that we slowed down during the pandemic, that's coming and getting qualified here. So we feel really good going into 2022 2020 with the capacity that we're going to have in place.
And the things we're working hardest on at the moment.
Getting our workforce in our Labor force back we have a.
Our pool of prior employees or people that got laid off as we went in and so we're in the process of calling them back.
In Q4.
Our head count issues, probably we're going to end up increasing our head count as we go into next year, but.
56% from where we are today, mostly on the direct labor side, and that's where we're spending most of our time and it's the hiring and then followed by the.
The requisite training to get them in the right spot, but we recognize the importance of getting our staffing in place.
I would say our HR team is fully engaged in making sure we get people back and our team has done a great job to avoid.
A lot of the Covid related disruptions, but we obviously keep our eye on that too. So I think the number one issue for us is making sure. Our crewing is in place as we go into 2022.
Okay, great Great and then.
Don I think you mentioned that if the year ended today.
The pension liability would will have shrunk from from yearend Ah can you can you can you tell us what that what that would be if the year ended today with today's discount rates and return to the contributions that you made.
It's a it's a fair question, but I'm actually not going to fully answered it.
Largely because there's a lot of science a lot of work that has to be done around that but what I can say is that we love the direction that the key movers are going and just.
Just for some context.
When you look at the discount rate and the volatility around discount rates for every 50 basis point move and discount rates. It has a $115 million impact on the liability and so if if we were to see just a 50 basis point move and discount rates in our favor.
And we would see a $150 million good guy hit our balance sheet right.
And I don't want to share with you how much are they move so far this year, because then that kind of.
I think takes us into that level of detail I'm not prepared to talk about.
But they are indicators of good guys and.
And we're certainly.
Managing with the expectation that we'll continue to have very good returns on our investments I think our advisers and our team have done a good job on that and then there's not a whole lot. We can do about discount rates, but we can at least cross our fingers and hope they hold.
Or maybe even grow even more in our direction.
Okay, great. Thank you very much you bet.
And the next question will come from Gotham Kona from Cowen. Please go ahead.
Hey, Thanks, guys.
Hey, guys good results.
Good morning.
Yeah, So couple of questions.
First just what are you guys seen with respect to titanium demand in 2022, given like all the noise around the 787.
Inventory overhang.
Boeing and then the.
737 ramp.
How that plays out I'm. Just curious are you do you guys have pretty good visibility.
From from the Boeing supply chain on what your titanium shipments will be next year are they going to be up or down.
Year over year relative to 'twenty one.
Yeah. Good question, and we probably have more visibility than we'd like at times as to what's going on with titanium so I'm going to limit. The titanium question too airframe, specifically and then if you wanted to follow up.
Go further but.
So I would say that our 2021.
It was pretty much the low point, but 2022 will probably be flat to that.
On the titanium I'll call. It the mill products side that goes into the airframe from the the.
The big B perspective, one of the benefits we have that offset some of that is a growing share position with a European OEM with our new long term agreement there. So we should actually see our shipments.
Be flat to up in 2022 for titanium mill products, but I think the industry.
We will see flat through 2022, and it's really going to take as you suggested.
The 787 is going to have to come back to have some level of confidence and certainly the 737 needs to get to 31, although from a titanium standpoint, it's really the 787 decision that I think we're all waiting for now we've taken a lot of our in process inventory down, but there's a lot still in the pipeline.
Oh, Yeah, absolutely that's very helpful and then to expand that on the engine side titanium and maybe also just on industrial.
Do you guys have a view on 'twenty two with respect to both of those.
I think on the on the the.
On the engine side, we see going up and we see it going up for a couple of reasons. One is obviously the planes that are flying are are the next generation engines.
For sure.
Obviously, that's a big nickel part for us.
In the industrial titanium area, we actually see very strong global demand there.
Which has been positive we don't talk much about that.
Most of the questions. We get are aerospace related, but I would say industrial titanium will be up and.
Thank you know on the engines, we should see similar kind of growth rates that we're seeing in the forgings and anvil with business not not stellar in titanium because of the airframe problem, but other than that it should be.
Sure.
And last one before I turn it over just you know.
Obviously, the special metals Corp, as a strike I don't know if theres any are you seeing any.
Share gains not kind of unrelated to the GE contract that you signed that obviously conferred more share but.
Because of competitor.
Challenges due to whatever whether it be strikes or supply chain or what have you already seen kind of an improvement in emergent.
Demand in any of the end markets and if so if you could just kind of.
How long might that last.
There.
There.
Alright, you know I always.
Make sure my attorneys attorneys are happy when I speak on a call like this but I'll answer. Your question. The answer is yes, we are seeing opportunities emerging from other competitors supply disruptions.
And I would say.
It's hard to quantify how long any of these labor disruptions or these supply disruptions will last but we are seeing it and it's good business for us and then about half of what we get in emergent gets converted.
To L. T A's right. So the first calls you get our transactional calls and then the next opportunities.
Certainly.
Converting those to <unk>, which is our goal. So I think it's a combination of nickel and titanium opportunities across the board but.
Is it going to move the needle significantly for the company, it's probably going to be in our.
Our specialty rolled products business is where we're seeing a lot of opportunities.
But in specialty materials, but it's been positive for us. We're just glad we resolved our issues and have moved on.
And thank you. The next question will be from Josh Sullivan with the benchmark company. Please go ahead.
Hey, good morning.
Good morning, Josh.
Yes.
Follow up on the titanium team.
Your raw titanium supply agreements have you seen any impact from the magnesium shortages or just.
Noted, our current inventories and demand for 'twenty, two so huge pull on it right now anyway.
I think the simple answer to the question on Mag is nope, we haven't seen any major issues, yet we watch it because it's an indicative issue of all other kind of supply chain issues that are out there.
Not yet right.
And then on the commercial stage project. The discrete one that you mentioned is this is an existing customer that switching material or is this a new customer.
Let's see that's a good question.
So long term customer that's been in the space business, they're supplying obviously the commercial space activity I would say.
It's kind of a bulk buy right, they're kind of buying ahead and I think that's prudent the.
The capacity they want we'll probably get sucked up by the increasing commercial aerospace recovery.
It's an exaggerated by for them. It's a multiyear buy is probably what I would say and so we're.
Glad to have and it leverages, our material science and advanced process technology is pretty well. So I think that answered here because it's close enough Josh to answering your questions.
Yeah, Yeah. Thank you thanks for your time.
The next question will be from Tara This Rob.
Aaron Berg. Please go ahead.
Hey, good morning, John and Scott.
Just I guess a question on 77, given the issues. They had in Q3 do you think Europe shipments for that program. We're in line, but site per month production or.
You were running lower than that during Q3.
Yeah. Good question I think they were still a ways away from being in line with five I think of.
We're probably lower than that I mean, the the situation I think on titanium.
With Covid and various other things kind of got out of whack you know I think it's probably I don't know if it's the worst with the industry's ever seen but it's pretty significant in terms of working that through so I think what the difference between double digit 787% and five was the biggest gap we were running into I think it's.
<unk> and <unk>.
You know the Destocking, what we thought would probably be by third quarter, it's probably going to extend it through the balance of the year and it's really the Destocking issue. Yes, I think there is a desire by that particular OEM to smoothed out the solution. So people can do it as economically as possible and we're seeing that.
But it's.
To a degree but.
I think the answer to your question is no we hadn't gotten justify we were still kind of work on the Destocking issue and so its just an extended extension of the titanium recovery from mid year to probably the end of the year to catch up.
Got it got it and then how.
How should we think about Europe specialties electronics sales in the next two quarters.
You exit some commodity business.
Should it be down let's.
Say about $100 million sequentially in Q4 because of these idle.
$500 million of capacity or some of that was already captured in your Q3 results.
Yeah, I think it's.
I would say I don't see it going down.
I think the issue that we're dealing with as.
We're going to end up with some margin compression because of that.
The work, we're doing with the outages to get prepared or finish off our transformation, which is actually ongoing now.
But I think in general you know.
We'll probably see 10% growth in the topline.
And why Don was signaling the outages issue is that probably have this 10 million dollar issue that we're dealing with for the maintenance issue that fair dos.
Net and then the outer edge of course was related to SRP right it'll be a headwind realm.
Relative to our otherwise performance the overall business.
Business.
I see okay. Thank you and then maybe last one just in terms of 737 Max ramp up is your exposure to that platform.
Similar to your exposure to treat 20, neo or Max is it.
A bigger are much bigger than that.
Let's see.
So I think it depends on a couple of things that we do we like every airplane ever built.
<unk> today period.
We're on every program, we love them all.
I would say when you look at the <unk> hundred 20 series, there's clearly engine preferences that people have in.
Some of them don't always pick the leap, but were you know they might go with the geared turbofan. So I think thats the biggest differential between them is.
100% leap on one program and probably 60% leap plus geared turbofan on Dod.
The $3 20, so, but it's a you know we're getting to the point, where we're happy when every airport any airplane gets built anywhere in the world.
Our materials, there, but maybe a slight advantage to leap powered and airplanes versus.
Geared turbofan powered airplanes, but we love them, we love them all.
Got it got it that's very useful thanks, guys.
The next question will be from Matthew fields from Bank of America Merrill Lynch. Please go ahead.
Hey, everyone.
I don't want to beat the working capital a horse to death here, but.
Your your receivables kind of jumped up a lot.
Great quarter.
You know kind of.
Initial deposits on the leap engines, that's going to reverse when you get the cash in the door or is that something else could you just talk about kind of why that accounts receivable was so dramatically higher in the third quarter sure.
Of course, we either the growth in the in the revenue, but I also.
So I mentioned that for SRP SRP of course was coming out of the strike and then are there and the recovery in Q3.
And so they were ramping throughout Q3, a lot of their sales were back end loaded in the quarter and because of that that drove the AR balance up at quarter end that will of course be collected in and.
You know in Q4, and so we should see that that release.
Okay, and that's part of the working capital flipped in the fourth quarter that will get you to that is yes, absolutely yeah. That's a good segue.
That's a great interpretation and we will see a similar good guy who in their release of inventory for SRP, similar mechanic or direction not similar magnitude.
Okay, Great. That's helpful. And then you know kind of next up.
Chopped a lot of wood on the balance sheet getting rid of that near term maturity.
What can you talk a little bit about the next kind of couple of steps of the deleveraging plan. You mentioned, you know $50 million to $70 million of pension contributions for the next few years.
After that is it kind of paying down the 22 converts at maturity or or hopefully with equity from hopefully from the credit side.
And then there's other parties on the call, but what are the kind of next steps in your mind towards kind of deleveraging the balance sheet sure step one first and foremost maximize our earnings and the drop through to cash conversion rate. So, but when you get past that what are we going to do with the cash, but we think in terms of.
We know we're going to delever in the normal course, because of the ramp that's already happening our profitability right from a net debt ratio standpoint, we took our net debt.
To EBITDA ratio down 130 basis points and just the last quarter that is going to continue to drive down that metric. So we have that benefit and when you talk about the maturity profile.
Youre right, our treasury team did a phenomenal job with this refinancing pushing maturities out and really solidifying a pretty strong maturity schedule. The nearest term maturities. We have two of our prime two maturities that are in the more near term our convertible debt right. So the likelihood of both of those.
Converting is very very high.
The nearest term on that is about $84 million and that gets us and 2022 again, we expect it will convert if for some reason it didn't convert we're in a healthy financial position to deal with it but believe me I am expecting is going to convert.
And beyond that other actions to take.
What we would love to do is not just rely on the net debt raise.
The ratio, it's great to have to just work it down because were more profitable, but we've got $1 6 billion of debt, we want to pay it off.
So we will over time attack these maturities with the with cash and pay those down at the appropriate times.
Of course, you also need to make sure that youre not blunting your growth opportunities by over allocating to reduce to reduce your nephew or your debt positions. So it will be balanced in that.
Then as far as other Delevering the pension I mean, we've already said we're on a glide path I shared as you had mentioned what we're gonna do around contributions we think that we're on a very natural plan to see that delevering happen without any extraordinary efforts on our part.
Maybe another just.
A question answering a question you didn't necessarily ask yet, but as we think about our leverage levels I would like to see our balance sheet.
Levered at below two times net debt and we are definitely on that glide path to work down there over you know.
Not too far distant future just with whats happening in our business in the normal course.
Thank you, Sir ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to Scott Minder for any closing remarks.
Thanks to everyone, who has joined US today. We appreciate your continued interest in ATI. This concludes our third quarter 2021 earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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