Q4 2021 Allegheny Technologies Inc Earnings Call
Thanks Scott.
Good morning, and thanks for joining us.
Our Q4 performance exceeded expectations.
We're excited to share what 2022 will bring.
No doubt 2021 was a challenging and rewarding year all rolled into one.
The global Pandemics ebbs and flows continued to impact our markets, we accomplished a lot.
Performance accelerated across the year.
We exited 2021 on a high note, earning our highest quarterly revenues and margins of the year in the fourth quarter.
This is largely due to the solid foundation, our team's laid in 2020 and early 2021 .
On an adjusted basis, we earned <unk> 25 per share building on our return to profitability in the third quarter and well ahead of expectations.
For the full year 2021, EBITDA margins were 10, 4% only 30 basis points below our full year 2019.
And that's despite 32% lower revenues.
It's a strong statement of what we've accomplished transforming our business to emerge stronger from the downturn.
The team executed for our customers at the highest level, while maintaining lean cost structures.
It gives us confidence that continued strong financial performance is ahead.
Don will share more details about our financial performance in a few minutes, but I wanted to give you the great news upfronts.
Let's start with the progress we made on our strategic initiatives in the quarter.
First we've been on a glide path to fully fund our defined benefit pension obligations.
It will ultimately eliminate annual cash contributions and expenses are.
Our pace of progress significantly accelerated in 2021.
We ended the year at an 84% funded status up from 75% at year end 2020.
We took further action to reduce planned participation through another third party <unk>.
We're working from every angle to eliminate this financial obligations.
At the end of our pension saga is near.
Next we've been laser focused on generating cash and maintaining a healthy level of total liquidity throughout the pandemic.
In the face of significant uncertainty a year ago, we shared our 2021 goal to achieve positive free cash flow excluding pension contributions.
We achieved that goal in.
In the fourth quarter, we generated over $230 million of free cash flow.
As a result, we ended the year with over $1 billion in cash and liquidity.
Third early this morning, we announced that our board of directors authorized a repurchase of up to $150 million of Hei stock.
With our strong cash and liquidity position and our current stock price. We strongly believe that it's the right time and the right methods to return cash to shareholders.
Well Scott might kick me under the table I'll take this opportunity to advertise our upcoming Investor day on February 17th we.
We will share our long term topline bottomline and cash generation targets as well as more details on our capital allocation strategy.
That you'll all join us at that virtual events.
Alright back to the script.
Our progress on our strategic initiatives.
Lastly, we continue to make progress on the transformation of our specialty rolled products business, what we call SRP.
We updated you on our targets last quarter and we're on track to complete the footprint consolidation and exit standard stainless sheet product sales by mid year 2022.
We've made significant progress toward this goal in two ways.
First product mix enrichment and the fourth quarter, 96% of SRP sales were high value products.
That's a big difference from a few years ago, and the product mix and margin benefits from this effort are expanding.
Dan or stainless inventory continues to dwindle.
We intend to deliver the remaining amount over the next several months.
And to be clear, we're no longer melting are producing new standard stainless sheet products.
Second footprint consolidation.
Since year end, we've sold our facility in Pico Rivera, California one.
When we announced the SRP transformation, just 14 months ago, We said, we would reduce the footprint by five facilities with this sale we've completed three of those five.
We will complete the remainder of the consolidations in the next few months.
In a moment, Dan will share the A&M segment financials, where the SRP business unit accounts for a majority of the revenues.
Spoiler alert.
Improved and poised to get even better.
So in short we have a clear strategy to become an aerospace and defense leader.
In 2021, and especially in the fourth quarter, our progress toward achieving our goals have been substantial.
Now, let's talk about our recent performance by end market as well as where we're headed.
I'll start with our core market jet engines.
Industries long predicted recovery has begun in earnest.
The positive impacts are expanding within a T I R.
Our forging growth began early in 2021.
Materials side, there's been a lag as customers work through excess inventory that rapidly changed in Q4.
<unk> for jet engine materials snapback to support increasing OEM build rates forging customers were low on inventory.
Here's an industry stats that helps put this expanding production ramp into perspective.
The industry's jet engine orders in November 2021 for the highest monthly total since June of 2019.
And that's almost exclusively for narrow body engines. This time around is wide body production rates are still low.
One more step this time ATI focused.
Our 2021 isothermal forging sales nearly doubled year over year.
Driven by our share gains.
What's especially astounding about this accomplishment we.
We achieved this level despite producing leap one be parts only in the last four months of the year and with low wide bodies.
Yes.
That's a clear sign that good news is on the horizon for both the aerospace industry and ATI.
Looking ahead, we expect continued strong forgings and materials growth as our customers increase narrow body production rates in 2022 and 2023.
There is a roadmap for Boeing 737, Max return to service in China.
Global domestic air travel rates continue to improve albeit with a short term negative blip due to the omicron bearings.
Allow me a moment to congratulate the team at our ISO Forgings center of excellence in Wisconsin.
Our fourth ISO press commissioned in 2021 has achieved all necessary customer qualifications.
We'll be putting that tremendous press to good use for our customers going forward.
<unk> worked hard to achieve this milestone we celebrate their efforts and look forward to the results that will lead to a strong return on investment for that new asset.
Thank you to our outstanding team.
Moving to airframes, where market demand remained subdued international travel rates are still well below 2019 levels due to the effects from the global pandemic and ever changing travel restrictions country by country.
On a positive note we showed sequential revenue growth due to a large discrete commercial space order. If you expect to complete in Q1 2022.
We believe the air frame market is at or at least very near the low point.
We expect essentially flat underlying demand in 2022.
For ATI and we have a few modest tailwind that should benefit our 2022 performance.
First accelerating growth from our European airframe OEM that began in 2021.
Second, we'll see new business from a producer of an electric autonomous aircraft Taxane technologies for use with narrow body airplanes.
In the defense market sales in comparison to prior periods were mixed.
This was largely due to the timing of long lead time orders and our naval nuclear market.
On the sale of our <unk> product line in mid 2021.
To help normalize the impact from quarterly timing variations full year of 2021 defense sales across all sectors were up a little more than 1%.
If you remove the impact from the flow form sale revenues improved by nearly 5%.
Our full year growth was largely driven by increased military jet engine products and the naval nuclear materials.
More than offset the temporary project gas and ground vehicle armor.
In 2022, we expect continued growth.
Current budget for the Department of Defense and energy you provide funding for programs of Ati's key customers.
This anticipated expansion will be led by a recovery in vehicle armor as new Abrams tanks are produced in the U K ramps up its Ajax program.
Continued strong funding for hypersonic, where ATI plays an increasingly expansive roll who will provide more long term growth opportunity.
Now, let's talk about Ati's other markets, where we support critical applications that leverage our aerospace and defense capabilities and capacities.
First up is energy or oil and gas markets generally improved and specialty energy markets probably decline.
Oil and gas sales were driven by the final shipment of nickel alloy materials for a large pipeline project off the coast of Brazil.
We also saw increased drilling activity associated with higher oil prices and strong end user demand.
While we anticipate oil and gas sales to be lower in the first quarter largely due to the completion of the discreet fourth quarter pipeline project.
We expect strong underlying market fundamentals to continue.
We anticipate more offshore pipeline projects to be sourced in 2022.
We will remain competitive as nickel alloy markets tighten.
Specialty energy markets declined versus both prior periods for two primary reasons.
First after a robust Q3 results Asian land base gas turbine sales were lower.
Second reduce pollution control demand in India, resulting from pandemic induced project delays.
In 2022, we anticipate pollution control projects to restart in India and underlying land base gas turbine demand to remain strong in Asia, improving from Q4 levels.
Lastly, the electronics and medical markets are smaller for us, but we saw demand growth continue.
Electronics sales grew significantly for our hafnium based materials, coupled with ongoing solid demand within our Asian precision rolled strip business.
Looking ahead, we expect electronics demand remained strong in 2022.
Medical market sales rebounded sharply from prior year hospitals reopen for elective surgeries. They also resumed installation of new and maintenance of existing MRI machines.
Near term outlook for medical markets as being modestly impacted by the current AUM of print Serge reducing hospital capacity for non Covid related care.
That said underlying medical equipment demand remains solid.
Looking forward to 2022, and what ATI can deliver for our shareholders customers and dedicated employees.
Our markets are recovering well.
By concentrating on the things under our control in 2020 in 2021, we've positioned ourselves to win.
We're a leaner company more focused on aerospace and defense was amazing capabilities and a winning team.
I bet, you can sense, my enthusiasm and confidence.
Do you like what you hear today and want to hear more from back on February 17th Virtual Investor day for a more complete picture of our long term plans and goals.
With that I'll turn it over to Don to give you more detail on our Q4 and full year financial results and our 2022 outlook.
Don.
Thanks, Bob I'll Echo Bob sentiments on a strong finish to 2021 are.
Our efforts over the past two years are paying off and we're seizing market momentum as we accelerate into 2022.
You can see it in our earnings.
You can see it in our balance sheet and you'll see it in our 2022 guidance.
It's clear that we are executing.
Before we look ahead, let's talk about what has gotten us to this point starting with our fourth quarter results.
Revenues were $765 million up 6% sequentially and 16% year over year.
Earnings increased even more rapidly thanks to mix enrichment and cost structure improvements.
We generated adjusted EBITDA of $95 million up nearly 20% versus Q3.
About 300% year over year.
This translated into adjusted fourth quarter EPS of <unk> 25.
This included a <unk> <unk> benefit from a favorable tax item related to our Asian precision rolled strip business.
On a reported basis earnings per share was a loss of 23.
Reflecting on debt extinguishment charge and small restructuring adjustment.
I'll provide some additional fourth quarter color, starting with our high performance materials and components segment or H P. M C.
Fourth quarter segment revenues increased by 5% versus the third quarter and by 41% versus the prior year.
These gains illustrate the impact of the ongoing commercial aerospace recovery, which began in early 2021 with <unk> and expanded to include materials in the fourth quarter.
H P. M C. EBITDA was $61 million in Q4, which was significantly better than both prior periods.
Robust year over year incremental margins of 60% were driven by improved product mix and higher volumes spread over a leaner cost structures.
The segment also benefited from two additional items in the fourth quarter.
First a roughly $5 million benefit related to the U S government's aviation manufacturing jobs protection program and second about $4 million from a year end customer credits.
In advanced alloys, and solutions or a a N S solid customer demand continued across the segments business units and end markets.
Fourth quarter revenue grew by about 5% against both the prior quarter and prior year.
We generated nearly $50 million of segment EBITDA in Q4.
Up substantially versus prior year.
This included benefits from higher raw material prices.
As predicted and as EBITDA was lower compared to the third quarter.
This was largely due to the impact of a planned shutdown at our vandergrift facility to upgrade a specialty finishing line.
I'll share a couple of data points that demonstrate the benefit of our specialty rolled products transformation.
First with the exit from standard stainless sheet production, we're seeing a significant product mix enrichment.
Bob mentioned that high value products made up 96% of our fourth quarter SRP sales.
Second.
We delivered year over year incremental margins of more than 100%.
How does that happen.
Mix improvements.
Structural cost savings and raw material pricing.
The <unk> team has done a great job, taking decisive actions and executing well we will continue to build on this foundation for years to come.
Before I move to the balance sheet I'll offer a few comments related to our 2021 results and how they position us for growth in 2022.
First revenues increased steadily across the year after considering the SRP strike impacts in Q2 and Q3.
This reflects a growing economic recovery, particularly in commercial aerospace our largest end market.
Our fourth quarter revenue run rate puts us north of $3 billion annually.
Similarly, adjusted EBITDA expanded across the year and ended on a high note at $95 million in the fourth quarter.
Adjusted EBITDA margins also expanded as expected in.
In Q3, we eclipsed our 2019 annual EBITDA margins of 10, 7%.
Q4 brought another step change in those margins.
Q4 margins were 12, 4% 170 basis points higher than 2019.
And keep in mind those margins were delivered at a revenue run rate roughly $1 billion lower than 2019 sales.
Turning to the balance sheet and cash flows we ended 2021 strong.
The team reduced inventory and overall manage working capital across the business.
This along with capital spending discipline pushed us towards our goal of positive free cash flow for the year, excluding pension contributions.
We generated over $230 million of free cash flow in the fourth quarter and ended 2021 with well over $1 billion of cash and available liquidity.
Building on Bob's Investor day sneak peek.
Our improved balance sheet will be the catalyst for growth deleveraging and improving shareholder returns.
Now pension.
We have talked many times about our pension glide path.
This is what we meant we ended 2021 with our net pension obligation of $396 million.
$275 million or 41% drop from where we started 2021.
Plan funded status increased to 84% a 900 basis point increase from the funded status at the beginning of 2021.
How did we accomplish the improvement so quickly.
By executing a solid investment strategy that enhanced strong market returns modest help from market interest rates and $67 million in planned contributions.
Our consistent approach to reducing planned participation is also paying off.
These favorable items more than offset unfavorable changes in actuarial assumptions.
We can see the light at the end of the pension tunnel.
I'll share the 2022 financial benefits from this improvement in a few moments.
As Bob mentioned earlier, we received board authorization to repurchase up to $150 million of our stock.
This will be a great tool for increasing shareholder value as we work to offset potential dilution from our convertible note maturities in July of 2022 and in 2025.
Lastly, as we've rapidly increased EBITDA over the past 12 months, our leverage metrics have improved quickly.
In the fourth quarter alone, we improved our net debt to adjusted EBITDA ratio by 230 basis points from six three to four times.
As our trailing 12 month earnings continue to improve this metric should decline steadily toward our target of two times.
Our confidence is growing in the aerospace and broader market recoveries in part due to our strong market positions and increasing customer demand.
The added clarity as encouraging.
As a result, we believe that we can provide full year 2020 to earnings and free cash flow guidance. In addition to the coming quarters EPS.
Let's start with our outlook for the first quarter of 2022.
We anticipate higher sequential earnings in our <unk> segment from increased volumes, partially offset by lower expected raw material benefits.
This growth will be partially tempered by the impact from the lunar new year holiday on our Asia and precision rolled strip business.
And the H P. M. C segment earnings are likely to be flat to modestly lower when compared to the fourth quarter results that included strong product mix related to the commercial aerospace and commercial space markets.
The customer credit of $4 million booked in Q4 is also not expected to repeat in Q1.
Beyond individuals' segment drivers a few additional items are likely to temper our first quarter results.
First scrap input material costs, especially for nickel are rising to near prime levels.
This is due in large part to the aerospace production ramp and improving overall market demand levels.
As we continue to modernize our melt technologies and increasing majority of our inputs come from scrap sources.
We have seen marginally higher absentee rates early in Q1 due to the Amazon virus.
The good news is that the absentee rates appear headed back to normal and the Q1 financial impact will be modest.
Next corporate costs should increase due to higher base and incentive compensation levels, along with elevated travel and business transformation expenses.
In aggregate, we expect adjusted earnings to be in the range of 18 to 26 cents per diluted share, including an ongoing benefit from the aviation manufacturing jobs program.
The midpoint of that range puts us several cents higher than our Q4 2021 adjusted EPS after taking into account the unique items I mentioned earlier.
Our local leadership teams are doing a great job keeping their people safe and keeping our operations going while following quarantine protocols to mitigate exposures.
To date, we haven't had significant production disruptions related to our staffing levels or our supply chains.
It's a battle, we're fighting and winning everyday and I. Thank our team for their hard work.
For the full year.
I'll start by giving you my thoughts on the outlook for a handful of discrete items.
We expect to achieve additional structural cost savings in 2022 are roughly $15 million to $20 million related to our SRP business transformation. These.
These savings are connected to the remaining footprint consolidation actions expected to be complete by mid 2022.
Similar to prior year, we anticipate paying between 15% and $20 million in cash taxes in 2022.
These relate largely to foreign jurisdictions as we don't expect to be a U S cash taxpayer for the next several years.
As a result of the significant increase in our pension funded status at the close of 2021 retirement benefit expense should decrease by about $5 million from 2021 levels.
Finally, we anticipate interest expense to be about $92 million, a decrease of around $5 million driven by our 2021 debt actions.
On the cash flow side, we anticipate no required pension contributions into our U S defined benefit plans that said as part of our balanced capital allocation strategy, we expect to make roughly $50 million in voluntary contributions as we target increase planned funding status.
Yes.
We expect between 210 and $225 million and capital spending similar to our initial 2020 estimates.
The increase reflects funding growth projects required to meet future production requirements, including 2021 jet engine related share gains.
Lastly, we anticipate manage working capital levels, improving as a percent of sales as part of our ongoing efficiency efforts.
However, due to the expected production ramp to support growing markets, it's likely that manage working capital dollars will increase modestly in 2022.
So where does that position us for the year.
We anticipate a return to full year profitability in 2022 with earnings per diluted share of 85 to $1 five.
Excluding the impact of any stock repurchases.
Let me put a few assumptions and caveats around our 2022 guidance the guidance assumes increasing production rates on narrow body aircraft at both large global OEM producers.
We also assume neither or first quarter or full year outlook include impacts from significant new disruptions related to COVID-19 or geopolitical tensions around the globe.
We're focused on what we can control and proactively deploying mitigation plans around the things that are outside of our control.
Looking at 2022 free cash flow, we anticipate generating at least $60 million.
Our 2022 guidance excludes any voluntary pension contributions.
Like any decision to invest in growth or reduce leverage voluntary pension contributions are a capital allocation decision.
We expect to have the luxury of funding growth and reducing pension obligations in 2022.
While maintaining the flexibility to pivot as needed to achieve our objectives.
I'll conclude by saying that 2021 was a strong year of recovery for ATI.
Our performance showcased our efforts to transform into a premier aerospace and defense supplier.
We ended the year at a high point and as you can see from our guidance, we expect to go up from there.
We're poised for success and confident in our ability to execute.
I invite you to join US for our February 17th virtual Investor day to hear our vision for the future of ATI.
We're on our way to what promises to be an exciting and profitable journey.
Now I'll turn the call back over to Bob.
Thanks, Dan.
We concluded 2021 with strong performance it was a great quarter.
It didn't just happen.
We worked hard to get here with a great team executing fully.
That gives us a running start as we begin 2022 with strong momentum.
Last quarter I told you we're pivoting to growth now we're firmly on that trajectory.
We're seeing strong growth in our largest end market jet engines, along with several of our smaller markets.
Our market shares have increased we've got the tools to help offset inflation through pricing and productivity and we're executing at a high level to fulfill our customers' needs on a timely basis.
Our balance sheet is strong with ample cash and liquidity.
This enables us to fund our strategic growth plans as part of our balanced capital allocation approach.
Our markets are recovering well and we're positioned to win.
Got amazing capabilities, and a winning team and we can't wait to show you what we can achieve.
Operator, we're ready for the fourth.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys and.
And to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
Yes.
And the first question will come from Richard Safran with Seaport Global. Please go ahead.
Thanks.
Bob Dan Scott Good morning, how.
How are you good morning, rich interesting quarter.
The first question I'd like to ask is on the Q4 to Q1 earnings run rate and what that implies or says about 22 now.
Dan I may have missed this with your opening remarks about scrapping, but could you discuss more about the quarterly cadence for 2022, and why you're expecting earnings to be much lower in Q1 versus what we saw in Q4 could you just go over the dynamics there.
Sure. Let me let me first give you some context around the 25 delivery in Q4, and then I'll kind of walk you through how we're thinking about Q1 and then the more fulsome 2022. So.
First 2025 in Q4, a fantastic outcome on all measures and our business and.
And we're very very proud of.
That delivery, but as you look at our 25 in Q4, there are a couple of items that I highlighted and in the earlier discussion.
<unk> are certainly unique to Q4, there kind of normal course of business, but we wouldn't expect to repeat in Q1, and so as you start with a 25 per share in Q4, one item that you'd want to pull out is the tax benefit related to our Asian precision.
Strip business that was about <unk> <unk> that we recorded in Q4, it's kind of a normal course thing that that happens, but more typically done in the fourth quarter as a as we received notification from the taxing authority so that won't repeat in Q1.
There is also the customer credits that I noted and that would represent also coincidentally another three <unk> per share and and that wouldn't be something that we would expect to repeat in Q1. So you take that 25 solid performance in Q4 back off six it gives you a better starting point to think about what Q.
One would look like and and so that <unk> 19.
Compared to our range for Q1 of 18 to 26 cents in the 'twenty two cent midpoint.
It highlights growth between Q1 Q4, rather than Q1 as I noted also in the earlier conversation there are a couple of.
Items to note as you think about Q1.
First of all we are expecting to see volume and price improvements from Q4 to Q1. So so a good guy there we do have some what I would say short term headwinds that we expect in Q1 things like the absentee rate related to the omicron.
The.
Impact to the business short term not expected to be material by any stretch, but still when you compare two quarters together it would be.
Any impact at all.
Also scrap which I mentioned in my my dialogue. So so that's some context about the Q4 to Q1 than what you want to do is remember kind of the bigger picture, which has to do with how to think about the full year results that we guided to clear.
Clearly, we're expecting to see a significant improvement in profitability in 2021, our EPS was <unk> 13.
On an adjusted basis, we're guiding at 85 to $1 five for full year 2022, you talked about the cadence right and you know.
What I would highlight there is we.
We are in a recovery in our end markets and so we would expect growth in our profitability throughout the year and as you look at our guidance and kind of where we started with Q Q Q1 at a midpoint of 22 cents and the midpoint of the full year I think the math works out to be about 90.
Five SaaS you are seeing some growth expected throughout the year and the way to think about it I think rich is relatively steady growth.
As a general assumption is probably a safe way to go so hopefully that's helpful context here.
Hey days of course.
Last question here just quickly.
I like to help you could you expand on your opening remarks and talk broadly about what the end objective here is with your capital structure.
I'm looking for what you expect to accomplish in 'twenty two what levers do you have.
Et cetera. So if you could just maybe talk to that a little bit.
Yeah, I would love to.
As you think about our strategy around capital allocation, what you should begin to see is a balanced approach.
We're in a great position coming into 2022, we've got a very healthy balance sheet.
Almost $700 million of cash well over $1 billion of liquidity, we've put ourselves very purposely in a position where we have choices as to where we're going to allocate our capital and really we do view it as a balanced approach and what do I mean by that well we want to continue to delever.
The balance sheet and our number one on Delevering is attacking that that pension obligation. We made phenomenal progress in that in 2021, and we're going to continue that guide path glide path activity in 2022, So we'll do that delevering.
Another key area for us is investing for growth and so right now our focus is primarily around organic growth with Capex. If you think about our guidance around capex for 2022, we guided at $210 million to $225 million and the way to think about that.
That range of Capex rich is.
60% of that Capex is really going to be pointed towards growth capex growth capex that will allow us to take advantage of the share gains that we've captured and participate in the ramp that's hitting our our business right now and so that's another key use and then youre seeing another key use.
Highlighted.
This quarter with the announcement of our stock repurchase program.
Returning capital to shareholders is an important element to our strategy and and we believe that right now our stock repurchase like we've announced is a very efficient way to deliver that capital back to our customers or excuse me to our investors and and so that's another key element of our strategy.
So as you take a step back and you would if you were describing our capital allocation strategy, what what you'd want to remember is balanced and putting ourselves in a position, where we're not choosing between one or another but really able to execute on all of the opportunities whether it's organic growth.
Levering and return of capital that's what our objectives are around capital allocation.
Thank you.
The next question will come from Seth Sigman with Jpmorgan. Please go ahead.
Hey, thanks, very much and.
Good morning.
I was wondering if you could talk a little bit about where.
Where you are on.
Production rates, especially on the are the two main.
<unk> body programs.
Hey, good morning.
So I think as we go into those kinds of questions. We always give you the starting answer which is we're actually produced orders not necessarily to the build rates.
What I would say is that on the forging side.
Theres not a lot of inventory in the pipeline.
We continue to see the demand going up at the same rate that the production rates are going up so the trend lines kind of intersect.
Probably 12 months ahead nine to 12 months ahead of what the production. So I would say are our increase is tracking to the trend line of what the major narrow body guys are talking about.
There's some question about supply chain disruption in the <unk> path.
For the billets that we supply into <unk>. We're on track, we do get some of our ability on a directed buy from other people.
And that's been a little bit disrupted for various reasons discussed in the press, but I think our forging business is probably the greatest bellwether for telling us where we are on.
On the engine side.
Into sort of the narrow body business, so trend lines are lining up.
Okay, and then do you see I know you've talked about some of the share gains that you have and.
Some of the investment you mentioned for.
Next year is going toward realizing those are there.
Are there shorter term share gain opportunities that that might be out there.
As the ramp proceeds, particularly on the on the narrow body side.
Yeah, I think the opportunities for us will come through performance with what we've historically called emergent demand.
Thank the pressure of the supply chain is going to be a relatively unprecedented ramp because the demand is sitting there and.
The Oems are increasing their builds to capture it as fast as they can.
And obviously most of the supply chains are adjusted themselves through the pandemic. So it's going to be exciting for the entire supply chain. You know as we go forward for US we feel well positioned in terms of having said right from the start of the pandemic, we were going to remain recovery ready, we delayed a couple of investments.
During the pandemic, we talk this morning about the fourth ISO PRASM that heat treating facility coming online in Wisconsin, We feel really good about that that'll give us a really preferential position I think for a merchant demand will be ready when other people stumble and so I think that gives us an opportunity for more of the merchant demand most of the major contract.
<unk> were less going into the last ramp pre pandemic. So I think the supply base feels pretty comfortable that they have the contractual positions in place, but theyre going to do whatever it takes to hit their targets. So that's our opportunity to perform.
Great. Thanks, and then if I could follow up just with one last quick one within the guidance Don how are you treating the convert that comes due later this year.
So in terms of the shares outstanding when you say how are we treating it yeah, yeah exactly.
Yes. So first of course, we do assume it will convert them, but when you think about the share count.
At this point in the year, what I would assume is basic shares outstanding of about 127 million shares and then.
We're still including even though we have the share repurchase program in place in our guidance, we're still assuming that all of the fully diluted shares are outstanding and and Thats, a 152 million roughly of of shares. So that's how I would think about it as you're modeling year. If there are shares.
Our win there are shares brought in under the share repurchase program. Obviously, we'll share that with you guys. Each quarter. So you understand what to adjust when it comes to your EPS calculations.
Got it thank you very much.
The next question will come from David Strauss with Barclays. Please go ahead.
Hi, Good morning, this is Josh corn on for David.
Regarding the guidance for next year, what are you assuming for oil and gas in 2022, given the much higher oil prices.
Yes. Good morning. This is Bob in terms of oil and gas I think we still see.
Good demand in oil and gas we talked about it in.
The commentary, there's two elements for us in oil and gas, there's because flow lines and umbilical.
But it's a smaller part of our business today than it used to be and then we have the opportunity for some of our clad.
Pipe products that go into more of the the challenging oil and gas reserves I wouldn't say, it's going to be a huge uptick and part of that is that I think the nickel products in the United States will be relatively tight.
Just on the uptick in demand in aerospace and defense and we also see an uptick in India with what we call flue gas <unk> projects that go into coal fired power plants to make better emissions much lower that was slower in 'twenty 'twenty. One so we should see an uptick there, but thats more than specialty energy.
So I would say modest continued growth.
So it's going to be a tight market.
Based on the nickel demand thats going on in the market.
Okay. Thank you and then is there anything else left to spend within Capex on the.
Transition to the higher value add product.
Yes. This is Don so yes in our 2022 Capex it includes.
Additional spending to largely finish the transformation for SRP and and that's being executed on plan everything is unfolding as expected or maybe even a bit a bit better. So yes. That's included there.
Okay. Thank you.
The next question will come from Phil Gibbs with Keybanc capital markets. Please go ahead.
Hey, good morning.
Hey, Phil.
I know, we don't talk too much about it over the years, but.
Things might be changing a bit given some of the new business awards that you've had and gained over the last couple of years.
How should we think about pricing.
They're all just pricing in terms of that that kicking in in 2022 and hitting the bottom line is that is that a bigger than normal driver.
Year.
I think you have to break it down by between the two segments, Phil Good morning by the way and good morning.
I think on a high performance.
We will see continuing.
Continued mix enrichment there.
Better product form next generation alloys next generation platforms. So we will get product.
Product mix and the pricing that goes with that Youll start to see you'll still continue to see that growth.
Think on the Aam's side.
You know probably there you'll see as we get into the higher value products, we're still gonna get mix enrichment the thing about that segment.
Third of it is transactional so we've really got some good upside in a tight market there and almost all of our lta's have significant material inflation pass through and we're certainly doing that and then some in terms of the material pass throughs. So I would say you know still.
Sometimes it's hard to differentiate price from product mix because of the the different alloys and programs, we're participating in but we still feel like there's good pricing opportunities due to the tightness in the market throughout 2022.
It helps a lot that we're no longer in the stainless sheet business and I think the metrics will become clearer now in 2022 that where we're almost out of that business for sure.
Okay. So it does sound like there is theres some theres some.
Benefit in the guide from pricing and mix this year as there should be.
Hello, Matt.
That's right with the nickel price strength that we've had.
Who knows where it's going to go for the balance of the year, but so far so good there.
Yes.
And then.
Obviously geopolitical risks are always apparent and global market like like aerospace.
And we've seen the Russian.
Roderick swirl before.
Is this is this time any different than in years past where.
You've got the potential to see emergent demand or fill the gap.
And then I think you do those do those conversations on the other side take kind of a bit of.
Cooling process, maybe just some of those other periods just because Boeing.
At the current time has enough inventory in the 70 eights omnichannel.
Yes. Good question I'll take that one Dan if it's all right with you. The the you referenced kind of the Russian situation, then I would just start by saying we monitor it closely.
It's hard to speculate as to what any solution.
But.
<unk> quickly certainly what we learned in the downturn of the pandemic has moved quickly.
You actually had both positives and risks kind of as you walk through your question and I would say that youre right with that probably the risk. We manage most closely is what I'd call the nickel supply for non rotating.
Hearts and products made in our advanced that wasn't solutions segment.
Didn't affect really a RH PMC segment because of how we source that material.
It's mostly on the nickel side, but you know in a in a segment. We always have the backdrop of scrap units and a few other things we can be working on but that's the that's the risk side, we think.
We will watch that very closely and have some alternatives and you're right. I think there are some upsides in terms of opportunities are probably on the titanium space and <unk>.
Some of those other ones if something like that were to happen. So it's a balanced.
We stay close to it when we assess it and we control what we can and adapt and I think the organization has proven they can do that over the last two years, but it's something we're watching very closely.
And then last question is for Don.
Are your your expectations for 2022.
How are you thinking about the corporate effective tax rate I know you gave the cash piece, but the corporate effective tax rate within that EPS number and then also what the.
The raw material plus or minus was after a pretty strong year this year.
The corporate the way to think about the corporate tax rate is it's going to be.
Extremely low like I think I shared that we expect cash taxes to be in the 15 to.
$20 million range, and we're fully reserved on the federal side for U S purposes, So I really expect.
Extremely low effective tax rate for the overall organization.
So I think there is.
Before we leave the the theme of guidance on how to think about some of the activities are going on in the market geopolitically might be helpful to to to just touch base, a little better on an inflation and how we're managing inflation in.
And the question is around around price now I.
I think one thing that our team has done an extremely good job at is as the supply chain volatility has hit the world. Our team has done a terrific job managing all of those dynamics and one way that that we've been successful in doing that is being very proactive around offsetting.
Inflation through price also through efficiencies.
We believe we have a core competency and improving our efficiencies from period to period, but I think it's a it's an important thing for us to highlight the organization is very focused on monitoring what's happening with input costs and quickly reacting to those to those dynamics, making sure.
They were getting the right price adjustments to offset.
So thanks for let me add that.
Thanks, Tom speaking about I appreciate it.
The next question will come from <unk> Khanna with Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, good morning.
I had two questions first.
You heard Raytheon and Boeing.
Didn't out that forgings and castings will be or is.
And the pinch point in the supply chain and I wondered.
How much just commented that it has not been I was wondering are you guys.
<unk> seen you know.
Constraints to your output and the forgings and castings space or do you think.
Those comments of some of the prime contractors relate to us.
Other competitors or perhaps theyre, just speculating on what might happen.
And then I have a good alright, good question Gautam.
I would say.
<unk> is a separate issue and we're not in that product line anymore. So we don't see too much of that activities locally on the.
Forging side I would say our perspective I'd start off with a real clear definitive statement, it's not us either.
And.
Part of the advantage of the ATI supply chain as we are vertically integrated back to bill it.
Depending on the product depending on the application.
70% of what we do comes from our own operations. So we're close coupled and we certainly see the advantage from a supply chain signal response.
But the other 30% is bill if that's on a directed buy that comes to us and I would say no.
One of our competitors is pretty open about our press if they're working to supply. So we are seeing little disruption from that and then I think anytime somebody is restarting.
No other powder billet capacity you can run into box right. So we are seeing some of those kinds of challenges in the supply chain not totally unexpected, but things that we're working hard with our customers to overcome.
Okay, and then just to follow up on that.
You know the special Metals Corp has got that right now one five months now.
Like you mentioned already impressed with Carpenter.
Out of commission for a little bit does this confer are you seen emerging demands right now for nickel billet or.
How might that actually changed share or.
Yes.
Yeah. Good question. So simple answer to your question is yes, we are seeing emergent opportunities.
Due to the supply chain disruptions of others.
I think there are opportunities.
As we have been through this ourselves, but we're obviously in a great position trusted supplier have the relationships.
Part of our strategy shift as part of our transformation is to move more to a long term agreements. So I think as we as we see this disruption, especially with our transformation of the sheet business specialty rolled products business with our new capabilities coupling.
Milk to hot rolling to finishing.
And the wider widths and tighter gauges theres a lot of pull for that demand. So we feel like theres emergent demand that we'll be able to.
Sustained longer term in our specialty rolled products business on the A&M segment. So yes.
We're seeing it and we're trying to take advantage of it.
Okay.
Last one if I might Bob.
You've previewed you've told us to tune into the Investor day, but in.
In the past you guys have.
You've mentioned.
$600 million plus of EBITDA as being achievable.
Anything changed on that view.
Yeah.
I'll go first and say no, but then I'll add back I ask Dan to add color I would add no.
All joking aside we are on track and and you can see that in our hopefully you can see that in our 2021 performance.
And you're right I have talked a number of times about how to think about the long term profitability of our business relative to where we were at in 2019 and what I would say is we are absolutely on track with the color that I've shared with you guys in the past.
When it comes to February 2017, we're going to share more information trying to help you understand a few things about how do we think about topline growth over the extended period of time, how do we think about margins over the extended period of time and then really importantly, we also wanted to talk a bit about cash generation over the extended period of.
Time.
<unk> metrics.
Metrics like cash cash conversion yields and those kinds of things because they are important part of understanding the value opportunity and potential in our business. So we're going to we're going to spend some time with with the attendees on on all those topics and more.
Thanks, looking forward to it guys alright.
Alright, Thanks Scott.
The next question will come from Josh Sullivan with the benchmark. Please go ahead.
Hey, good morning.
Good morning, Josh.
So I understand that the S&P re do the omicron in Q1, but what about the incremental labor needs throughout the year and then to hit the higher production levels.
They are lifted.
On head count do you see any tight areas, there, especially if you're talking about capturing this emergent demand.
I'm just curious about what youre seeing in those specialized labor markets you guys are because.
Right. So it's very regional and the issue we're dealing with with the absenteeism has been really short term I. Appreciate you asking about it because it's been a the daily fight to make sure that who is going to come in and what kind of crew and you have an <unk>.
The opportunity for me to say, Hey Man I really respect that challenge. Our first line supervisors are going through but they're up to the challenge and they're working through it and we are seeing very much a commitment to operating safely but also its regional right. So do you think about our company and we think about the Carolina as we think about Wisconsin will think about Pennsylvania.
When we think about Oregon, So omicron kind of started in the east and West and we're starting to see that that impact decline now you asked a question about labor.
Our investments over the last few years have brought a tremendous amount of automation into our operation probably.
Probably.
As a guide over the course of 2022, we'll hire between 400 450 operating people against a base of 6000 to 6500 give or take depending on how you count so.
15% kind of increase and again it's.
The short term impact of Omicron was reliable training progress. So we're kind of working through that now, but as it recedes, we should be back on track.
But again, it's not a huge issue I'd also say aerospace and defense jobs are great jobs, especially where we are in the cycle and the people that we're hiring see that it's not quite like retailer distribution warehousing. These are jobs that people really covet. So I think we're recruiting from a good base and obviously.
You know we're committed to remaining globally competitive so theres always that constructive tension and certainly any issues that we deal with we should be able to offset with pricing as we think about the inflationary trends there.
I hope that does help Josh.
Yeah on the program itself.
And then just on the the fourth isothermal forge that you guys have coming online how should we think about the utilization filling up there.
Versus what was built on the organic demand when it was originally designed versus this emergent demand that youre thinking about.
So I'm just curious how you're how you're thinking that's going to come together.
Yes.
It's a great complex the combination of the Isothermal press and then some heat treating capacity that came with it.
Every good operating leader always wants to use the new stuffs college, when they want to use it fully because it's more automated more consistent higher productivity.
Not that we had a quality issue, but the more consistent so you to it more reliable so what youll see is on the new asset it should be fully utilized and then what what normally happens is the oldest press tends to be either we invest in maintenance to make sure its recovery ready for the peak that's coming.
Or we optimize our product mix across those kind of assets to make sure that each one is running the most optimal product mix. So I expect the utilization of that particular unit to be pretty good pretty fast that's why they were committed to getting all the necessary customer qualifications done.
During this period of.
Reduced demand will just call. It. So so we feel pretty good but I would say would be highly utilized and then our less efficient, perhaps we'll probably get less utilization.
And then just one last one just on the timing of the naval nuclear material, how should we think of that cycled through 'twenty two 'twenty three.
The naval nuclear sales through 2020 to 22, I think you'll see continued growth there certainly are some positive coal.
Now the Australians are thinking you know they are doing their thing with the British in the Americas more submarines. So I think that will benefit us and we're starting to see that.
For that so I think you'll see a continued increase.
Through 2022 into 2023, the cycle is pretty long here and the commitments should be multiple multiple years past that but I'd say when Dan was kind of talking about the growth through the year. The aerospace increase is one of those the defense aside what's naval nuclear leaving the way. It was the second one that should be a real positive.
<unk> upward lift.
The next question will come from <unk> Misra with bare Newberg capital markets. Please go ahead.
Hey, good morning, guys. Thanks for taking my question, so metal prices have been quite strong.
Is that a risk in the second half of this year or next year that that could be a revenue headwind, even though I realize that you pass those through to your customers.
I think it's hard to predict nickel prices per ton you know, we don't I would say I would say one of the things. We're doing that is we're focused on is in proving our inventory intensity of reducing the use of inventory as a percentage of our sales we had over 700 basis point reduction in the intent.
<unk>, probably the biggest single up or down risk, we face today and that is work in process inventory. So our goal is to have.
As little as we need sort of with that will help us I think that the transformation that we're doing will help accelerate that because we got less footprints unless you know travel between locations and will help us accelerate the reduction but it is possible I would say we're doing everything we can do them.
Mitigated going forward and getting out of the stainless business sheet business actually takes away. The greatest single risk. We've had historically in that area. So I think we feel like we're moving in the right direction there.
Fair enough fair enough and then how should we think about the incremental margin.
In 2022, given the.
Some head count increase through the year another some of the moving parts.
Sure. This is Don I'll take that question.
First.
But we had a fantastic experience around our incremental margins in the.
Second half of 2021.
And as you think about the incremental margins going forward your point or your pointing out potential headwinds to it there is also potential tailwind.
That can come up from time to time I think what you really want to do is you want to stick with the.
The guidance that we've given in the past, which is incremental margins through this up cycle in the 30% to 40% range, we're going to have some quarters like this quarter, where they were extremely strong and we will have other quarters might be a little bit short of that goal, but long term I would really stick with that 30 to 40.
Percent incremental.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Scott <unk> for any closing remarks. Please go ahead.
Thanks, Bob and Don mentioned, we plan to hold a virtual Investor day on February 17, where we will expand on our business strategy and provide long term financial targets.
More information on how to attend the event can be found on our website ACI metals dot com. Thanks again for joining us today and this concludes our fourth quarter 2021 earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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