Q1 2022 Allegheny Technologies Inc Earnings Call
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Yeah.
Okay.
Hello, everyone and welcome to the <unk> first quarter 2016 results. My name is Charlie and I will be the coordinator for today's call you'll have the opportunity to ask questions at the end of the presentation. If you would like to do so please press star followed by one on your telephone keypad.
I'll hand over to your host Adam pickup to begin.
Please go ahead.
Thank you good morning, and welcome to Ati's first quarter 2022 earnings call. This is Adam <unk> filling in for Scott Mender, Ati's VP of Investor Relations and Treasurer.
Not with us today due to illness.
Today's discussion is being broadcast on our website.
Participating in today's call are Bob Wetherbee Board Chair, President and CEO , and Don Newman Executive Vice President and CFO .
Bob and Don will focus on our first quarter highlights and key messages a supplemental presentation is available on our website provides additional color and details on our results and outlook. After our prepared remarks, we'll open the line for questions. As a reminder, all forward looking statements are subject to various assumptions.
Yes.
As I noted in the earnings release and in the slide presentation now.
Now I'll turn the call over to Bob.
Thanks, Adam.
Good morning, and thanks for joining us.
We accomplished this quarter builds additional momentum for what we anticipate will be a very strong year for Ats.
Our team is performing well.
Continuing to execute operationally and strategically.
Our market conditions are improving.
Customer demand accelerated in the latter part of the quarter.
These all enhanced our topline growth rate and added to our earnings.
I'll use my time today to tell you about three things that really stand out for me about our performance.
First we delivered overall Q1 EBITDA margins of 15%.
That's an increase of 430 basis points versus full year 2019.
This margin level was achieved despite sales that were nearly 20% lower than 2019 on a run rate basis.
Comparisons to 2020, and 2021 are even more favorable.
We have fundamentally transformed our business over the past two years.
Our results increasingly reflect the value of the actions we've taken.
Second the value of our strategic actions is truly evident in the E&S segment results.
Q1 segment EBITDA margins were over 15%.
No question there were a few beneficial tailwind.
But what's really driving this segment's results structural improvements in our footprint product mix and customer profile.
Continued operational discipline is also increasing the bottom line.
We all know the tailwind inevitably turned to headwinds.
When they do these structural changes will ensure a solidly profitable business through the cycle.
And third our incremental margins were robust while.
While sales grew by 20% year over year adjusted EBITDA doubled.
That is truly impressive.
The Testament to our team's energy and focus to improve ATF.
Look we all started 2022 with an optimism that the world has turned the corner on global volatility.
While we recognize that uncertainty remains the norm for all companies.
Your political issues in Europe , and Covid related Lockdowns in China are the latest additions to the list.
These events create short term raw material price volatility supply chain disruptions and reduced consumer demand transparency.
Yet every cloud has a silver lining for us, it's our ability to nimbly react to ever changing conditions.
And we are operating in an environment, where underlying demand in our core markets continues to improve particularly commercial aerospace.
Amidst the ongoing uncertainty we continue to focus on the things that we can control executing this strategy, we shared at our Investor day.
We're well on our way to becoming an aerospace and defense powerhouse.
We're serving growing markets with our material science expertise and unique process capabilities.
We continue to progress on the final steps in our business transformation plan.
We're no longer producing standard stainless sheet products.
In the quarter, we recognized the benefit from the sale of our stainless related facility and are nearing the midyear closure of the remaining two sites.
We continue to take actions to ensure that we have a purpose built portfolio aligned with our strategy.
To that end, we recently announced the sale of our Sheffield UK facility.
As part of the <unk> segment, and focus is primarily on oil and gas materials.
This facility has struggled to be margin accretive and carries a legacy defined benefit pension liability that will stay with the business post sale.
The U K government is conducting its customary review of the transaction and we expect it to close in the second quarter.
Recent market dynamics created by the Russian invasion of Ukraine have created not only challenges, but also opportunities for ATI.
Raw material flows to global industrial markets, including commercial aerospace are being impacted by economic sanctions on Russia.
Disruptions to material availability have led to higher material prices.
As a case in point extreme price volatility caused the London metal exchange to closed for several days in the quarter.
With disrupted availability and no primary financial market nickel prices rose by more than 30% in March.
We also saw significant increases in the first quarter for other key raw material inputs, including cobalt.
Ferrochrome and molybdenum.
How do we respond to the questions.
We focused on what we can control.
To ensure <unk> ability to meet increasing demand requirements, we took decisive procurement actions to create a near term price protected nickel safety stock.
This will ensure an uninterrupted flow of materials to meet increasing customer demand.
These actions increased our managed working capital balances in Q1.
It's appropriate insurance ultimately benefiting our customers.
We're focused on protecting a continuous flow of ATI products to meet our customers expanding production rates overcoming supply shortages and adding new employees.
We raise prices to offset the additional raw material labor and supply chain costs, we're experiencing.
And product lines with fewer long term customer agreements, we're able to fully offset inflation in the first quarter.
And our LTA oriented businesses prices are rising, but the bottom line impact will lag higher costs by about a quarter.
Current events also provide long term opportunities as.
As customers rethink global supply chains, there is a likely reallocation of demand to western suppliers.
This is most evident in aerospace titanium where customers fear, losing access to close to a third of the industry's capacity for aerospace quality melt.
As customers react to sudden changes in governmental policy and industry certifications. Many are exploring long term agreements to lock in future supply.
We will be disciplined as this process plays out over the coming quarters as we speak it's abundantly clear that we are well positioned to grow this part of our business.
We have the needed qualifications capabilities and near term capacity.
Customers can and are making efficient and economical decisions to be more strategically aligned with ATI.
As we move forward, we will diligently evaluate our opportunities we're balancing the potential need for additional capital expenditures with our long term return on capital expectations.
Exciting times for sure and exciting to be well positioned to take advantage of the opportunities ahead.
With that let's move to a brief discussion of what we saw in our key end markets in the first quarter and what we foresee in the coming quarters.
I'll start with commercial aerospace.
Demand for domestic travel as strong specifically U S. Domestic travel statistics in January and February 2022, where nearly on par with 2019 as.
As industry labor shortages and travel restrictions eased.
International travel rates improved almost 100% year over year in January and February but are still 60% below 2019 levels.
These trends are encouraging there is still significant upside to this market's full potential.
We're also encouraged with increasing demand for narrow body airframes as the 737 Max received clearance tourism commercial flights in China.
This is very helpful to releasing a significant portion of this model's order backlog.
For ATI, our jet engine business continues to gain momentum.
Specialty materials sales growth is accelerating and we continue to see steady progress in forgings, where our recovery began in early 2021.
This growth supports our jet engine customers, increasing narrow body production rates.
Our 2021 share gains magnify the benefits for OTI.
Demand for wide body engine materials and forging is also grew in the quarter.
Narrowly supporting MRO programs for engine overhauls as airlines prepare their fleets for increased international travel.
One big milestone for us for the first time since 2019 more than half of <unk> quarterly jet engine sales were ati's nextgen materials.
That's a really positive sign for API.
We expect these beneficial trends to continue in the coming quarters further propelling our bottom line.
When it comes to wide body airframes sales also improved despite ongoing low wide body aircraft production rates.
We're seeing the benefit of new business wins that began in late 2021 of Airbus.
And for an electric autonomous taxiing vehicle.
As I mentioned earlier, there are substantial new business opportunities in titanium over the next several years.
Significant potential impact will begin in 2023.
Lead times for most titanium products are well into the fourth quarter of 2022.
Next up.
Our defense markets.
<unk> were down versus both prior periods the.
The year over year decline is heavily influenced by the divestiture of our <unk> business in mid 2021.
Rotorcraft sales are affected by a timing issue.
We're seeing the volume for the now completed programs declined faster than the CH 50, <unk> program grew.
Looking ahead, our decades long partnership with Sikorsky to produce U S. Military helicopters continues.
They recently announced ATI is a supplier on the newly proposed defiant X program.
This is a contender to replace the Apache and Black Hawk.
Lastly, as expected titanium armor sales increased in support of U S and British armored vehicle production.
Our defense sales should increase in 2022 with growth in some categories, partially offset by declines in programs at or near their lifecycle and.
Longer term, we expect ongoing growth that is supported by replenishment of vehicles and weapons systems consumed by the conflict in Ukraine.
Increased U S and Allied defense spending and new programs like hypersonic.
Shifting to energy market sales to our oil and gas customers expanded versus both prior year periods.
Despite the completion of a large pipeline project in the fourth quarter and our exit from production of standard stainless sheet products.
Market demand remains elevated as oil prices have steadily risen in 2022.
As a result offshore investments have recovered to pre pandemic levels.
We expect this trend to continue as offshore activity increases, including for nickel cloud pipeline projects in Latin America, the middle East and Asia.
And our specialty energy markets revenues were in line sequentially, but down year over year.
The latter is largely due to the timing of shipments for civilian nuclear applications and pandemic reduced pollution control project work in Asia.
Shipments for land based gas turbines remains strong in the quarter.
Looking ahead, we anticipate specialty energy demand will increase as the transition to greener energy accelerates, we see two drivers one the need for more secure energy supplies in the wake of the Russian invasion of Ukraine, and two increasing momentum to decarbonize.
Additionally, advancements like modern nuclear power reactors hydrogen as a fuel and efficient gas turbines will all likely play a larger role in future energy policies.
We require extraordinary material science expertise and advanced process technologies, the core of Ati's differentiated capabilities.
Finally in our smaller medical and electronics markets first quarter sales performance was mixed.
Sales to medical markets were in line sequentially and increased significantly year over year. This.
This was led by materials for MRI machines as hospitals upgraded equipment to support elevated demand for elective surgeries.
And our electronics markets.
Sales declined versus both prior periods.
Sequential declines were largely due to the lunar new year holiday shutdowns in Asia.
Year over year decreases were more modest than compared to record Q1 sales in 2021.
In the near term, we see lower sequential revenues as the Covid driven Chinese Lockdowns continue.
That said, we expect strong underlying market demand for electronic devices and chips that lead the market recovery later in the year.
From my perspective, Thats, where we stand.
In the past I spoke of pivoting to growth now.
Now the markets have pivoted and were fully accelerating the path forward is clear.
Our largest and most profitable end markets are strong and accelerating fueled by underlying market demand and our team's ability to execute for our customers.
We have significant growth opportunities ahead, driven by four things.
First the commercial jet engine demand expansion.
Second airframe demand growth acceleration in 2023 aligned with international travel growth.
Third potential reallocation of aerospace titanium market shares and.
And fourth defense market growth as global spending increases.
We've made tremendous progress thus far.
The ATI team is committed to improving every aspect of our operations and it shows.
Concurrently we have put ourselves in a great position to win I am confident in our team and our future.
Now I'll turn it over to Dan to give you some additional detail on our Q1 financial results and forward outlook.
Don.
Thanks, Bob for a great overview here my headlines for the quarter.
Q1 revenue was up 20% year over year and 9% sequentially.
Bottom line is growing and our margins are expanding.
This reflects the strong underlying demand in our end markets and benefits from our transformation.
As a result.
We are raising our full year EPS guidance by nearly 60%.
I'll explain how these results positioning ATI for a great 2022 and.
And our creating momentum for 2023.
Let's start with our first quarter performance.
Sales of $834 million were up 20% year over year and 9% sequentially.
Earnings growth was even more impressive.
We earned adjusted.
EBITDA of $125 million up 100% versus prior year.
That's 32% growth over Q4 2021.
This translated to an adjusted first quarter EPS of <unk> 40.
These adjusted results exclude a few things.
Our $25 million noncash charge related to the pending sale of the Sheffield UK operation.
A $7 million gain on sale of our Pico Rivera facility.
And an $8 million net increase to our reserves.
Primarily due to a proposed settlement made under pending litigation matter.
On a reported basis, we earned 23 per share.
Before I cover the segment details I wanted to provide some color on ATI specific tailwind.
Bob noted that we recognize some federal employment related subsidies in the first quarter.
If you recall, we recognize the same subsidies in smaller amounts in the second half of 2021.
First we received a benefit under the aviation manufacturing jobs protection program or AMG P. J.
To maintain employment levels as the aerospace industry recovers.
Second we recognize employee retention subsidies for maintaining appropriate recovery ready employment levels during the pandemic.
In aggregate these benefits totaled $29 million in Q1.
These are meant to offset prior year expenses and current costs and efficiencies relating to sustaining employment levels.
In reality these benefits allowed us to retain the employees needed to be ramp ready for our customers.
We expect a roughly $6 million <unk> benefit in Q2.
As a company, we generated robust year over year incremental margins of 50% in the first quarter.
Our business transformation is reducing costs and eliminating less profitable businesses and product lines.
We're also capturing benefits of employment subsidies tailwind from higher raw material prices and strong demand.
We have consistently maintained incremental margins above 30%.
Since the recovery began in mid 2021.
Our employees have worked hard to get us into this position.
Now, let's dive into segment performance, starting with high performance materials <unk> components or HPLC.
First quarter segment revenues were $342 million.
Up 40% year over year, and nearly 10% sequentially.
The segment continues to benefit from the expanding commercial aerospace recovery.
We see that particularly in jet engines, where sales increased almost 90% versus prior year as a result of increasing material sales and steady forgings growth.
Defense sales were lower while medical sales increased versus the prior year.
Segment, EBITDA was $68 million.
Resulting in a nearly 20% margin.
This included $22 million of employment subsidies, partially offset by labor and other costs related to ramp readiness.
Results also reflected higher material input costs from increased commodity prices and temporary global scrap shortages.
Segment, EBITDA grew 12% sequentially compared to Q4 2021 that also included AMG P benefits as well as a large customer credit.
Excluding those benefits from Q1 2022 margins increased year over year.
When the subsidies are removed from both periods, we saw sequential declines for two reasons.
First we experienced temporary margin compression when raw material cost drive higher surcharges in revenue.
While EBITDA dollars remained constant.
Second.
A high percentage of HP EMC revenues are generated under long term agreements.
Many have price recovery mechanisms that tend to lag actual input costs by approximately one quarter.
This causes a drag on margins when prices increase rapidly.
But we will unwind when prices fall benefiting margins.
In advanced alloys, <unk> solutions are aaas, the benefits from our ongoing transformation are clear in our results.
Revenues increased by 9% versus both prior periods due to broad based expansion in several core markets.
Growth was led by aerospace and defense sales, which increased by 47% year over year.
By 29% sequentially.
These gains were largely an airframe applications, which benefited from new business that began in mid 2021.
Sales to market focused on standard stainless products declined as we entered production in those materials.
Segment EBITDA of $75 million grew by over 50% year over year and sequentially.
This included $7 million of employment subsidies and benefits from higher raw material prices.
Margins increased by over 500 basis points versus both prior periods.
We were able to overcome the impact of higher cost in the quarter through improved product mix and base pricing along with volume related benefits.
The specialty rolled products team is doing a fantastic job at quickly changing the business mindset from a producer of commodity products to a true high value specialty materials provider the numbers tell the story.
Let's turn to the balance sheet.
Cash and available liquidity totaled nearly $700 million at the end of the first quarter.
Per our normal seasonal patterns cash from operations declined versus year end 2021 levels as we work to build inventories in support of the ongoing market recovery.
In addition, as Bob shared Russia's invasion of Ukraine has negatively impacted the price and availability of many industrial commodities.
We took proactive steps to procure additional raw materials required in order to ensure on time customer deliveries throughout 2022.
Managed working capital as a percentage of sales increased versus year end 2021.
This was the result of increased volume demand, particularly late in the quarter as well as higher raw material costs.
As a partial offset gross inventory turns improved by nearly 10% in the first quarter as the work of our dedicated inventory flow teams gained traction.
We intend to closely manage inventory as the year progresses continually assessing the need to maintain additional strategic quantities.
At our Investor Day in February we laid out our capital deployment plans in detail.
Summarize will focus on one funding organic and inorganic growth as opportunities arise.
<unk>.
Do think debt and pension obligations.
And three Opportunistically returning capital to shareholders.
In support of these objectives, we spent $26 million on capital expenditures in Q1.
We expect this pace to accelerate as we plan to hit our 2022 capex range of $210 million to $225 million.
We also acted on a recent board authorization to repurchase up to $150 million of Hei stock.
In the first quarter, we bought back approximately three 5 million shares at an average price of $25 57.
That 6% below monday's closing price.
These repurchases will go a long way toward offsetting the expected dilution when our convertible notes mature on July one of this year.
We expect to issue five 8 million shares at that time since settlement in shares as required above the $14 45 conversion price.
We're excited to be in a position to return cash to shareholders, while still funding our business priorities.
To date, we've spent about $90 million and $60 million remains on our $150 million authorization.
We will continue to provide quarterly updates on our progress.
Now, let's spend a few minutes pulling it all together.
What are these results mean for our second quarter and full year 2022 outlook.
We expect underlying market conditions in our core aerospace business.
And our strong execution to drive increased sales and earnings across 2022.
Demand expansion in other key markets should also support our growth.
In the second quarter tailwind from governmental subsidies and raw material benefits will likely be significantly smaller in Q1.
Covid related logistical challenges in China mainland net production output at our Asian precision rolled strip business.
Finally, we expect a noncash charge of about $110 million related to the expected Sheffield sale.
Which will be excluded from adjusted earnings.
On the positive side of the Ledger, we anticipate a $9 million benefit from our portion of the section 232 tariff recovery made by our E and F joint venture.
We anticipate second quarter earnings in the range of 32 to <unk> 40 per share.
Despite the strong market conditions net unfavorable sequential headwinds will likely cause second quarter earnings and margins to contract somewhat compared to first quarter.
Year over year earnings and margins are expected to continue to expand.
Looking a little further out the picture becomes a behavior.
There is raw material volatility the impact from ongoing geopolitical events supply chain disruptions and COVID-19 resurgence in China. However.
However, the team is managing challenges and driving results.
Given Q1 performance Q2 outlook and anticipated growth in the second half of the year, we are increasing our full year guidance.
Our revised full year 2022, EPS guidance is a range of $1 42.
The $1 60 per share.
This represents a midpoint increase of 55 per share versus the prior guidance range.
Nearly 60% higher.
We are confident in underlying market fundamentals support growth and we have sufficient levers to meet this increased EPS outlook.
Due to the uncertainty of raw material pricing and the potential need for higher strategic inventory levels, we're keeping our full year free cash flow guidance in place.
We'll reevaluate as events unfold across the second quarter and provide an update on our next earnings call.
With that I'll turn the call back over to Bob.
Thanks, John .
I am sure today's audience can sense, just how excited and encouraged we and our leadership team our by our start to 2022.
We've got a strong setup heading into the second quarter.
Our growing end markets and solid execution and the team's proactive and creative efforts to address challenges as they arise are driving results.
And beyond the second quarter, we have great long term opportunities to profitably expand our business.
As excited as we are about our first quarter performance.
We also want to keep our long term goals for ATI and the forefront we.
Outlined them at our Investor day in February .
Great forward impactful and worth recapping.
We intend to grow faster than the market, 9% to 11% annually through 2025.
With that growth, we expect ATI has EBITDA margins to increase steadily to 18% to 20% over that same time period.
When we hit our profitable growth milestones, we anticipate converting 90% of our net income to cash to further propel growth and returns to shareholders.
With our first quarter results and strong second quarter guidance, we're on the path to hit these targets.
Havent had a chance to go through our Investor day materials.
Chris you to look take a look listen what's driving us to a better company than ever before.
The video replay and slides are available on our website.
Operator, we're ready for the first question.
Maybe talk to your question. Please press star followed by one on your telephone keypad now maybe like to draw your question.
Please press star followed by two okay.
To ask a question. Please ensure your army hit locally.
Our first question comes from Seth Saltzman of J P. Morgan Seth Your line is now open.
Thanks, very much and good morning, everyone.
Hey, Thanks, Good morning, Sam make sure good morning.
I just wanted to make sure I understand.
Dynamic of.
Kind of pass throughs in HPLC.
And.
What kind of growth.
The margin.
If we took out the.
Yes.
The subsidy.
It hadn't really expected the margin to remain at the Q4 level.
But the but the step down was significant and so just just understanding the pass throughs, there, especially on some of the mill products. It sounds like and how to think about the trajectory of the HPLC margin.
Here given the.
The different drivers.
Sure. So this is Don let me take a take a run at that first of all in terms of the pass throughs. The way that you want to think about our <unk>. We have long term agreements that allows for the pass through of a good portion of metal price movements. We also have CPI types of.
Of adjustments that we are able to get through those same those same agreements. In addition to that so those are the LTA is under the non ATI LTA transactions, our transactional sales, we're able to typically get good recovery in terms of our.
Underlying cost increases through price increases now one thing to keep in mind. When you do think about the pass through mechanisms under the LTA is is there does tend to be a bit of a time lag where theres about a one quarter lag between when the inflation is seen in our cost structures and.
Wendy.
The adjustment mechanisms within the LTA allow for the recovery and the and the prices so as youre thinking about the incremental margins in quarter to quarter.
Quarter to quarter margins Thats, one way that youre going to want to to think about it.
The other thing to keep in mind as you as you kind of consider that the employment incentives that we raised this quarter is.
The headline number is $29 million of credits that are incentives rather that were recorded in the quarter 22, I believe was related to <unk>, but that's not the whole story the whole story as those credits are really about helping to make.
Businesses ramp already and.
And how is that happening while companies like us are adding new employees. All the time this quarter, we added about 500 500 employees.
As you can imagine when we hire those employees. There is training required multiple months ahead of those employees being able to to be a key part of our meeting ongoing demand. So there's real costs involved.
That that you need to consider as you think about those credits. So you don't want to just strip out the $29 million or $22 million of credits as you think about Q1, because there are offsetting expenses to think about as well for Q1 to give you some sense SaaS and.
In terms of what those offsetting expenses are as Youre doing your math.
Think in terms of probably $8 million to $10 million of.
Inefficiencies tied to those new heads or other.
<unk> related inefficiencies within our cost structures.
So I would add that now how do you think about the margins going forward the way to think about the margins going forward in terms of your overall business or.
Done a really good job I think in terms of our incremental margin performance and what we shared is think in terms of 30% to 40% incremental margins as the business continues to progress through the ramp.
It's going to be the same story with HPLC specifically.
In the broader sense, so I would expect that as the year continues we will continue to see expanding margins.
Top line growth and growing bottom line and of course all of that I think is reflected in the guidance that we gave for the full year. So a lot of good news a little bit of noise in the current quarter, but the noise I think as you consider the things I shared the noise.
Once you adjust for that I think it is clear that this underlying performance.
Drilling performance of the business is quite strong.
Perfect. Our next question comes from Richard Safran of Seaport Research Partners. Your line is now open.
Bob Don Adam Good morning, Scott Hope you get better.
So.
I wanted to follow up on your titanium comments.
Following so two things on its call. It has a lot of inventory and its suspended imports from Russia, clearly theres a lot of share to be gained here.
It is also true I think that Boeing isn't unique here derisking from Russian titanium.
This impacts Airbus and the engine manufacturers. So I thought you might expand a bit on your opening remarks and talk about share gains what your incremental capacity is the timing of those gains when we might see it and if you are already in those discussions with customers right now.
And to pick up share thanks.
Alright. This is a great hey, good morning, Richard Great way to get four questions in one here. So I'll try to work in reverse order. So I would say that our major Oems are very.
Energetic and focused on making sure they have their titanium supplies in line for the long term.
We do see a lot of activity and I expect the second quarter to be a really busy time working with the customers to try to sort that out and.
Second piece of your question I think from an industry perspective I think.
Titanium Aero quality milk will be the primary stress point that people are going to work through so I think youll see people in the industry today looking at some of the I would call. It a bottleneck management 101 techniques, where you look at the product mix that you have are you optimizing through the bottleneck.
For us I think it'll be in the industry, it's going to be the milk side.
<unk>.
About 30% of the world's titanium aero quality milk, that's kind of at risk here. So I think.
What youre going to see through the course of 2022 is positioning for 2023 and beyond our lead times are out into the fourth quarter today.
That's really our order book is really driven by current demand no real share shifts.
And as we look to 2023.
I'll do the usual incremental small projects to debottleneck some of our downstream and worried about the milk, but I think what youll see.
As an opportunity for reallocation of shares 2023 and beyond it's too early to speculate as to what that is.
But from our standpoint, if you go back to Investor Day, we were clear that we feel we have the capacity to support the build rate projections through 2026.
Was financially we built in about 100 narrow bodies and 20 wide bodies per months.
So if you think about where we are in the wide body production today, we have plenty of upside.
As we've said before we don't produce to build rates, we produced a firm orders.
And when we do that we don't really invest capital without firm customer commitments. So at this point I think we're probably about 90 days away from giving you a good answer on share shifts, but I think I would just leave you with the thought that.
There's a lot of activity.
And.
We expect to be in a good position to gain from that going forward, but too premature to really make any commitments.
Yes.
Perfect as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad. Please limit yourself to two questions to allow everyone to ask their questions answered.
Our next question is Phil Gibbs from Keybanc capital. Your line is now open.
Thanks very much.
Don on the side of high performance materials and composites in the first quarter. If we were to assume that you.
You effectively had.
Proper.
Proper timing of raw materials and pricing you noted the one quarter lag and I think in your adjusted results. Excluding subsidies. It was some something like 13, 5% margin.
Now if those things were aligned.
What would that what would that margin would have looked like is it is it a drag of 300 bps or 200 bps of what type of what type of number should we be thinking that youre going to recover.
Well so.
It's hard for US hard for me to give you a solid number on that on that lag effect. What I would say is if you just start with the margins for the quarter and adjust for.
Directionally for.
Credits to kind of pull.
Pull out those credits and the offset of offsetting expenses related to it you'd be approaching about 16% EBITDA margins.
Generally, yes, I could see where that one quarter lag.
Could push you up into probably the upper teens.
At the present time, but.
Just.
Swag estimate of top of my head.
That makes sense.
And then on the side of.
Not working capital clearly a big a big increase there.
I guess within that how much how much of that was posed volumetric versus versus inflation related because obviously everything everything that you consume has gone up materially in the last.
Three to six months.
And then what's what's the path as we should think about.
Beyond potential not working capital release or stabilization moving ahead.
Sure. So the first answer is if you look at what happened with managed working capital in the quarter rest of the inventory was up about $140 million about two thirds of that increase was tied to commodity price increases. The remainder is I would say volume related it has to do with us.
Ensuring that we've got adequate materials in place for the ramp to satisfy our customers' needs. It's also addressing some of the underlying risks that came up with Russia's invasion of Ukraine. We took some proactive steps to make sure that we had inventory for.
For things for example, like nickel that were on the ground and.
And if there was a disruption of supply, which there hasnt been at this present time, but if there was a disruption that we're in a good position to continue to produce for our for our customers and I think as you look further out what you should expect is number one we absolutely have not lost sight of our target of getting our map.
Working capital back down into that 30% range.
We certainly expect that we will we'll be there by the end of the year, all other things being equal and I think also.
Mentioned in the prepared remarks, some of the headway that our teams are making around managing our inventory in a more efficient way and we saw a 10% improvement in inventory turns management I think thats early indicator that what we're focused on as a team is working.
Okay.
Our next question comes from Gautam Khanna of Cowen. Your line is now open.
Hey, Thank you.
I'm curious if.
If you could talk about on the titanium share opportunity are you guys engaged with.
Not just the air framers, but.
The engine manufacturers like specifically, safran, which talked about sourcing about haps effects.
Titanium needs from.
<unk> I just wonder if you guys used to be a big supplier. There I don't know if you still are.
If those conversations are happening now.
Yeah, Good morning, Adam.
In terms of titanium, we break our business down into the industrial side, which we're actually taking a break in the short term with our joint venture and kind of moving away from that in the short term, but then you get into the standard quality for structures and then rotating quality for engines and I would just be really key.
Clear that everyone, who is in the rotating quality titanium industry is looking at alternatives. So I think the answer to your question is yes.
We've heard from them right and we continue to hear from everyone. I think some of the engine manufacturers are more titanium intense than others based on the parts, they manufacture and where they fit in the supply chain.
I think they are all acting reasonably and proactively looking to make sure that this is not the issue that slows down the supply chain, so I give them credit for that.
Turning to get real estimates in terms of.
How much of a potential Russian supply is going to be displaced and for how long. It was probably the biggest issue I think in the at the current time. There is a lot of focus on 2023, making sure. They are positioned for 2023 and into early 2024, and then there's kind of some longer term opportunities that come in.
After that so that kind of bifurcated near term long term, but the.
The long winded answer to your simple question is yes, we've heard from them.
Okay, and I would presume that.
You guys like you said looking for long term volume commitments.
And attractive pricing.
Do you think the customers are.
Willing to.
Go down that path.
Better commitments for you guys or are.
They are threatening to self certify I'm.
I'm just curious like.
What's the urgency on their end.
To move forward.
Yes.
Yes. Good question just to be really fair to them I think they are acting with urgency.
And I think they are acting deliberately.
Intentionally to make sure that they have the supply commitments in place.
I think they are understanding.
The world is changing place as it relates to an inflation around energy transportation and certainly the raw material component. So in my conversations.
It does get to my level.
We do hear a lot about.
Uh huh.
How they are thinking differently about their procurement clearly they would not want to miss an airplane delivery.
For a dollar a pound here or there. So the bottom line is we're in a good position.
To solve the challenge there now facing it wasn't a problem of our making and it wasn't a problem, they're making but because of the capabilities and the range of products that we supply.
We're in the mix because we have to be part of their solution. So I think.
The answer is they are acting with urgency.
And what we can bring to them and.
Over the last two years, we've become very good at quickly assessing potential issues.
Dynamically reacting and that's kind of one of the outcomes of leadership in the Covid environment is you just have to adapt and I think thats, what theyre doing is hard politically.
In some areas of the world to do those kinds of things, but I think there they are trying to do the right things.
Okay.
And our next question comes from Josh Sullivan of the Benchmark Company. Your line is now open.
Hey, good morning.
Good morning, Josh on the wide bodies on the wide body MRO activity.
What type of product flow or are you seeing or expecting through the year and are you able to see any difference between demand for heavier versus lighter maintenance.
Just anything to point to either uptick existing fleet usage bring you back aircraft from long term storage just trying to get some more color on what youre seeing in that wide body demand in the aftermarket.
Yeah, we normally.
Well, we don't really see aftermarket.
Demand separated from OEM original equipment type demand, but because of the unique nature of the wide body business. We are actually seeing more specifics MRO activity. So I think theres. Some engine programs that are going through icon upgrades or upgrade packages. So we're seeing some of that we're seeing the shop.
Is it accelerating.
Older product lines, plus freighters seem a lot of activity there and I think we're starting to see getting ready to refresh for the uptick on the international routes. So I would say at the moment, our MRO business is anywhere from 50% to 75%.
<unk> kind of above the normal rate percentage, if you look at our business and you say hey, what percent MRO.
It's probably a quarter or so.
We're probably as a percentage seeing much higher MRO business to the tune of 50 60, 70% depending on the part.
Part depending on the program depending on the supplier, but it's been strong coming into 'twenty started in 2021 has been strong through 2022 and every indication is it's going to be strong through 2023.
Got it and then just wanted to know aerospace titanium gets the headlines on potential Russian supply chain de risking, but just given the special capabilities at the <unk> facilities are there any emerging Russian related opportunities there.
Okay.
Yes, we think so.
One of the products that we have to figure out for ourselves would be what people call Pac rolled sheets in the titanium space, it's not a place that we.
Historically played but there is a tremendous pull in customer commitment to pull us into that.
<unk> is a huge enabler.
To be able to move forward there so I think youll see that.
It's also from our perspective in terms of capabilities that we didn't have it.
Seems like <unk> was a long time ago, but it really wasn't from an aerospace contracting perspective, so we're able to.
Leverage things like gauge control on profile control, which is key to manufacturing.
Aerospace machining space. So I think we are seeing some of those.
<unk>.
We're going to take full advantage of it the other thing we're doing as part of our.
Nation away from stainless is a beautiful new Brian and Neil furnaces as part of our transformation I'll give us.
At our properties for Formability, you think about superplastic, forming part so you think about it.
Dimensional control of going into a press.
The combination of <unk>, plus this new Brian and Neil is going to be exciting news to the industry versus the competitive benchmarks. So I think the answer to your question is yes, we're getting a lot of coal and we're pretty excited to finally.
If youre talking about the startup and ramp of this stuff versus just the building of it.
Our next question comes from David Strauss of Barclays. David Your line is now live.
Okay.
Hi, Good morning, this is actually Josh corn on for David.
So you had mentioned the 90% free cash flow conversion target at the Investor day back in February . So could you just talk about why free cash flow conversion is only around 90%. If capex is going to be near DNA level no pension contribution.
And working capital contributing to cash.
Yes. This is done so that was a target for everyone else's benefit that was a target that we talked about in our investor call as we discuss 2025 and our trajectory towards 2025.
What I would say is that Josh we understand all the levers that are available to us it all starts with with profitability.
Then obviously managing your capital deployment, including managed working capital we are in the right glide path to pension and what I would say in direct answer to your question, 90% is a great start and it doesn't mean, that's our endpoint.
We're planning on attacking that objective and doing everything we can to push right past, it and do better than 90%.
Perfect. Our next question comes from <unk> Misra of Thornburg Powersoft. Your line is now open.
Thanks, Hey, good morning, Thanks for taking my question.
I was hoping you could just discuss the major moving parts in your guidance versus three months ago. So.
187 delays with probably a drag, but maybe you saw incremental strength that.
Narrow body demand. So just if you could recap what has changed in your outlook versus three months ago.
Yes again this is done so.
So let me kind of give you the high level in terms of.
The reason for the increase.
And if it's all right I mean, there's there's interesting information I guess around the move to Q2, but I think what's more interesting is what's driving our full year guidance that we provided up 60%. So long short we are seeing increased demand across all of our key end markets.
Point, that's just the period end point and so with the strong demand in our aerospace both Gen engine as well as airframe going beyond that we are seeing growth in the defense end markets as well as medical and other key end markets.
That is a key driver in the increase in our expectations around earnings.
And that's those are our tailwind that we saw.
Certainly late in 2021, but certainly they picked up pace in the first quarter and there.
Theres a number of reasons for that I think underlying demand demand recovery of the.
All of them.
Air travel.
Certainly the market opportunities that are being created through the disruptions that have happened through through Russia et cetera. All of those are positive in terms of increasing demand in our business at all of that so thats. The topline rate that's all that we put in place.
The right mechanisms to manage our cost structures, starting in 2020 and through 2021, those structural cost changes that we made are continuing to benefit our bottom line. Our organization learned a lot through the downturn in terms of managing cost and and so those are bent.
Fits that we expect will continue to deliver.
Add to all of that the transformation around our specialty rolled products business is.
Is being executed extremely well.
And in combination with the other initiatives you have around improving our mix all of those contribute to a significant uptick in terms of our expectations for the full year.
Perfect. Our final question today comes from Timna Tanners of Wolfe Research Timna. Your line is now open.
Okay.
Okay. Thanks very much.
Just wanted to understand and sorry, if I missed it the new comment on slides, Evan that says evaluating need for additional strategic material.
And I'm still a little perplexed with the comment that you'll have a modest use of management, but obviously a big move. So maybe you can also help us understand what's embedded in your guidance.
<unk> prices.
Yes, as you know Timna, we haven't changed our guidance in terms of free cash flow for the full year, we adjusted up our EPS guidance by about 60%, but it's along the shortage. They take a step back and you look at what's happening with their managed working capital in Q1, and then how should you think about.
That for the balance of the year, let me give you some data points in.
Q1, we saw our inventory balances increased about $140 million I think I mentioned earlier two thirds of that increase is due to commodity price commodity prices.
And increasing in Q1.
Secondly.
With a number of dynamics first dynamic would be the ramp the ramp at least in our business is picking up pace and so we made the decision that we would ensure that we have the right inventory in place to meet the ramp demand that our customers are signaling to us. So we put some additional inventory in place for that add to that.
The disruptions in raw material supply chains around things like nickel that are tied to what's happening in Russia.
And in that regard we made some proactive decisions very early on in Q1 to make sure that we had nickel supply tied up so that if there was a disruption of nickel coming out of Russia, or some ripple effect of it.
We're still in a position, where we can make the products and meet our customers demand.
So with all that we continue to look at the ramp the pace of the ramp as well as the supply chain whats happening geopolitically and making decisions as to whether we need to continue to maintain safety stock or whether we would look to release some of that safety stock.
And unlock that cash and bring it back into.
Back into our cash balances, so trying to be very thoughtful and strategic and Thats, what youre seeing in terms of our current working capital balances and why we decided that at this point, we kind of hit the pause in terms of giving updated cash flow guidance and like Q2 play out a little bit.
At this time, we currently have no further questions. So I'll hand back to Adam Peck for any closing remarks.
Thank you Bob any last thoughts before we conclude the call yeah. Thanks, Adam I, certainly do number one best wishes to API as Scott and then there is a little under the weather today, which is really unusual for Scott So.
Impact on the prep for today it was significant and I. Appreciate it is probably one of our best salespeople in the industry. So that helps a lot to be backend action soon for those of you who missed on probably later this afternoon. Because these are meant.
To hold down the other one is Adam thanks for jumping in I'm sure managing Don and I through a call process. Like this is as close to a career building experiences. We can offer today. So thanks for doing that.
Scott on the bench, so a great opportunity for me to go off script for a minute you probably a little nervous but a couple of final thoughts.
Number one is a shout out to our 400 employees are so our forging operation in eastern Poland.
50, 60 miles from the Ukrainian border and we appreciate all they in their community are doing to support the influx of Ukrainian refugees.
We're proud of what they are doing support them from afar, but.
In the Big scheme of things, we're talking about today, that's a bigger issue. We appreciate what they're doing.
But as far as the balance of ATI and all those things that are going on and we are moving quickly to being that aerospace and defense leader that we've talked about in Investor Day, Q1 should Denver demonstrate the progress we're making I'd leave you with the thought that we have the team to win they are totally committed to doing the right things the right way to help our customers.
<unk> things.
Things that normally it's extreme conditions and extreme conditions, usually are performance based this is clearly a market base that we're adding to that list.
And number two it will come down to execution, and we recognize that and we're fully invested in that.
And lastly.
Creating meaningful value for our shareholders is top of mind as we take all these actions. So those are the thoughts coming out of the quarter going into the balance of the year Don talked about what the potential is.
Order lead times are pushing into the fourth quarter. So we see the demand supporting that.
No.
Say, we are thriving and.
And we do thrive when expectations are great and the barriers are high I think on the titanium side.
Barriers to entry continue to be high so it's a matter of managing the global changes as they come in really getting a bead on that over the next 60 days that's why we.
The best in our value the most and we get to test our value proposition.
Here in the near term, but I'm proud of the team they are unlocking our potential and I am proud to say they proven to me that we are a proven to perform.
Thanks, Bob and thanks to everyone for joining US today. This concludes our Q1 2022 earnings call.
Okay.
Yes.
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Yes.