Q2 2022 Allegheny Technologies Inc Earnings Call
We strive for perfection every day and every site.
We owe it to our customers and they appreciate our efforts.
Across ATI, our actions are translating into strong financial results and significant long term opportunities.
Three things stood out for me in our Q2 results.
First revenue growth is accelerating.
Our second quarter sales of $960 million were up 15% sequentially.
Equally supported by both business segments.
This marked the highest quarterly sales since Q4 2019.
It's worth noting with the previous period was before we exited standard stainless sheet and divested both our <unk> business and our Sheffield operation.
While higher base and surcharge pricing provided a tailwind expanding customer demand is the real driver.
Second our margins continue to improve.
Momentum is building in these early phases of the aerospace recovery.
Q2, adjusted EBITDA margins were near 15% in the second quarter.
This marks an improvement of more than 600 basis points year over year.
Sequentially margins were in line, despite the second quarter results, having significantly fewer government related benefits.
Actions taken during the pandemic to transform our cost structures and business portfolio are paying off.
We expect this performance to continue.
And third we're seeing an increase in free cash flow as our forward order book continues to strengthen and input costs improve for the balance of the year.
We had a modest use of cash in the second quarter.
This was in line with our normal seasonal trends in our performance was better than we anticipated.
Without stealing all down spender, we're increasing our full year cash flow target to reflect these improvements you.
You'll still find working capital for the ongoing production ramp in capital projects for organic growth.
As we do we're making progress toward our long term goal of converting 90% of net income to cash by year end 2025.
Let's take a step back from our short term results.
I have three big picture observations to put Ati's performance in context.
First the strong demand for air travel has returned to the vast majority of global markets and should grow consistently for the next several years.
My recent travels for the Farnborough Air show clearly makes this point.
Completely full international flights both ways.
Each row was jammed with people from around the world.
Claim model centered in desert at the start of the pandemic have returned to service.
At the show itself, both airframe Oems announced customer orders for narrow and wide bodies.
While the narrow body supply chains recently experienced a few bumps not unexpectedly.
Production rates on narrow bodies are still projected to ramp to record setting levels.
Wide body engine spare parts demand is spiking as airlines address the recovering strength in international travel.
And how does all that relevant to our shareholders and our team.
These trends benefit ATI, even more than they did in 2019 for two reasons.
One our shares have grown.
And to the industry is moving almost exclusively to fuel efficient next generation jet engines, where we have significantly more content.
Now more than ever you can't fly without ATI.
My second Big picture observation.
<unk> invasion of Ukraine is changing the world in many ways some of our big other small, but most are going to be sticky for some time to come.
Let's be clear the Russian aggression is having a tragic impact on millions of People's lives.
We're seeing significant migration primarily to other parts of Europe .
We continue to stand in support of the people of Ukraine.
We thank our employees, particularly those in Poland, who have directly helped impacted Ukrainians.
On the business side of this issue the situation in Ukraine has focused the industry shifting aerospace titanium purchases to western sources.
Customer discussions on the subject are pervasive active and wisely.
We're disciplined in our response.
We're balancing the need to help our customers and repositioning their supply chain with our commitment to benefit our shareholders at the same time balancing short term and long term interests of both.
We announced a significant titanium share gain in July with GKN Aerospace. It's a great example of how we're finding the best ways to allocate our increasingly tight capacity to the greatest strategic benefit.
Yeah.
The impact of Russian aggression in Ukraine goes well beyond aerospace share shifts.
Three examples that are meaningful for API.
First countries and connected to geopolitical hotspots are increasing their national defense investments.
In the near term this means increased demand as combat weapons systems are replenished.
We're also seeing increasing demand for all types of military vehicles, some near term and some extending into the medium term.
And the longer term new capabilities like hypersonic are a priority for development.
These require extreme materials science expertise, which is ATI sweet spot.
Second impact of note.
Security of National Energy supply has become critical.
Countries are assessing vulnerabilities created by procuring energy from potential adversaries.
Renewables, such as nuclear hydrogen in solar or the long term environmentally friendly solution for most at.
At the same time increased fossil fuel usage source differently will be required until the new sources can be built at scale.
ACI serves both.
And third looking beyond aerospace and defense customers and other key ATI markets are working to eliminate Russian made input materials.
This was clearly visible in the medical markets, where sourcing titanium and other inputs are shifting to western based suppliers.
Again, ATI is well positioned to service the supply chain shifts.
My final observation is 100% of our own making.
Now fully out of standard stainless sheet products.
Expect this will be the last time I mentioned this product line in my earnings call remarks, as we sold our last coil in the second quarter and closed our facility in Illinois.
Fourth and our transformation our specialty rolled products.
Expansion of our Vandergrift, Pennsylvania operation is on track it will be the best finishing facility or specialty materials.
We're winding down those operations left at our Ohio facility and.
In the first weeks of July we've idled, all but one operation one last operation actually at that facility.
The team is doing great work.
With the standard stainless exit in the second quarter's divestiture of Sheffield our portfolio transformation is largely complete.
A leaner more focused company, we're investing our energies growing our strategic quarter.
We've embraced the name you know SaaS API as.
As our official name and we've adapted Dallas as our new headquarter cities.
We're expanding the vision of what we can achieve.
We haven't just transform physically we've also evolved our culture.
Our specialty rolled products team continues to increase the percentage of business under long term agreements with Oems building and mitigation for raw material fluctuations.
Our specialty alloy and components team continues to explore innovative and valuable uses for the exotic alloys and materials we produce.
The same can be said within our high performance materials and components segment, where our forged products and specialty materials businesses are working together more closely than ever before it's about delivery lead time and quality.
We have the winning combination in this market.
Let's shift to a quick overview of our Q2 performance by market and what we see for the quarters ahead.
First in our largest end market the commercial aerospace resurgence is well underway.
Jet engine related sales increased year over year by over 90% and nearly 30% sequentially.
What drives these significant increases in demand.
Narrow body production rates leap engine share gains and service part demand for wide body engines.
In the up cycle early phases, perhaps but the trend lines are upward and solid.
Rounding out commercial aerospace airframe sales increased for the second consecutive quarter as we realized volumes from our previously discussed share gains and new business wins.
With relatively low wide body aircraft build rates and significant wide body channel inventory.
Aircraft OEM sales are expected to remain subdued into 2023 before accelerating in 2024.
Last week's announcement on the resumption of 787 deliveries as an important positive catalyst for ATI and the industry.
Final weighted good news and clarity we can work with.
Growth outside of production rate increases as possible with a likely additional share shift from Russia and suppliers.
Our air France category also includes space applications, which we expect to grow.
Next up let's talk about defense.
Sales improved sequentially, largely due to higher naval nuclear volumes.
When compared to prior year sales were down due to shipment and program timing for naval nuclear and rotorcraft customers.
Looking ahead expect defense sales to advanced driven by ongoing geopolitical events.
And our broad based new business development efforts.
Moving beyond our core A&D markets energy demand growth accelerated in the second quarter, increasing nearly 70% versus prior year.
And 25% compared to the prior quarter.
High oil prices and global energy supply chain disruptions pushed customers to fund the exploration and expansion projects, including downstream processing.
Specialty energy markets grew across technologies as well.
Pollution control systems natural gas turbines and renewables.
The ongoing push for energy security and reduce carbon emissions will continue to drive demand for etfs materials and components over the coming quarters.
Lastly, we saw year over year demand growth in medical and electronics.
Sequential revenue comparisons were mixed with medical sales up almost 10%.
Product sales down 4%.
The medical markets elective surgery volumes continue to increase post pandemic.
This drives customer demand for implant and MRI materials.
We expect this trend to continue augmented by ongoing customer shifts away from Russian materials.
In electronics demand for consumer devices has slowed somewhat as a result of customer supply chain issues and reduce discretionary spending.
Additionally, our Asian precision rolled strip sales were lower as a result of Covid related lockdowns in Q2.
Demand for Ati's hafnium and magnetic alloys continues to expand in part to support <unk> micro chip production.
Yeah.
I'll wrap up by saying we are laser focused on what makes ATI grades.
Material science, and our advanced process technologies, coupled with strong operational execution that produces incredible product quality and reliability.
We put ourselves in a strong position and we're executing to deliver on strong demand.
Now, let's hear from them.
I'll be back after that to conclude and take us into Q&A Dan.
Thanks, Tom let's start with the bottom line upfront.
Our revenue growth is accelerating and is strong in both business segments.
Each segment grew the top line sequentially by at least 14%.
Year over year growth was even more substantial.
That's compared to a prior year period impacted by the pandemic and a labor strike.
Adjusted EBITDA margins were nearly 15% in the second quarter.
Our adjusted earnings of <unk> 54 per share is above our guidance range driven by strong volumes and benefits of our accelerating business transformation.
As a result, we're increasing full year earnings guidance for the second time. This year this time by nearly 40%.
With increasing confidence in our forward visibility, we're improving our free cash flow guidance as well.
Now, let's dive a little deeper into the second quarter's results.
Q2 sales were just below the $1 billion mark at $960 million.
We fully expect to cross the $1 billion threshold in the coming quarters getting back to 2019 levels on a run rate basis.
That's after exiting standard stainless sheet products and divesting of full form and Sheffield.
That's a stunning recovery in a short amount of time.
Our earnings and margin improvement were equally impressive.
In Q2, we generated adjusted EBITDA of $143 million.
For the second quarter in a row adjusted EBITDA margins roughly 15%.
This compares to full year 2019 margins of 10, 7%.
We're proud of this achievement.
Testament to our team's hard work during the pandemic.
We ensured we emerged ramp ready.
It also reflects their hard work streamlining cost structures, improving product mix and fully offsetting the negative impact from inflation through midyear 2022.
In our February Investor Day, we gave long term EBITDA margin guidance of 18% to 20% by the end of 2025.
Our 2022 year to date results clearly show that we are building momentum.
Our Q2 adjusted EPS came in at an impressive 54.
Up <unk> 14 from the first quarter.
This is despite significantly lower federal employment credits and grants in the second quarter.
On a GAAP basis, we posted an EPS loss of 31.
The second quarter, adjusted EPS excludes noncash charges related to the sale of our Sheffield operations.
You will recall that we sold Sheffield because it was not well aligned with our strategic focus and generated negative EBITDA in 2021.
For Us this divestiture is a case of addition by subtraction.
Now, let's take a deeper dive into segment results.
I'll start with high performance materials, <unk> components or HPLC.
The aerospace recovery is accelerating.
Driving increased demand for our specialty materials and forgings.
In the second quarter revenues were almost $400 million.
80% of those sales came from the aerospace and defense markets.
An important milestone in that journey to reaching our long term financial goals.
Revenues increased 16% sequentially and 32% year over year, largely driven by sales to the jet engine market.
<unk> adjusted EBITDA in Q2 was $60 million, representing a 62% increase over prior year.
Earnings decreased by about $8 million sequentially as a result of lower government employment benefits.
Recall that our first quarter included $23 million of benefits from the aviation manufacturing jobs Protection Act and other employment programs.
Q2 results included only $6 million of similar benefits.
The significant difference in value more than accounted for the sequential earnings decline.
Offsetting the strong segment operating performance.
What are these results showcase.
Revenue growth potential.
Mix improvement towards next generation materials and benefits from our cost cutting efforts.
We expect this progress to continue during the commercial aerospace ramp.
Let's shift to advanced alloys and solutions or Atms.
Our transformation again significantly and positively impacted our financial results Q.
Q2 revenues were $563 million, an increase of 14% versus Q1.
Year over year, we're up nearly 80%.
Now keep in mind prior year revenues were impacted by the multi month labor strike.
Strike, which concluded in July 2021 impacted our specialty rolled products or SRP business.
Sequential and year over year gains were across most major end markets led by aerospace and energy.
And from an earnings standpoint, <unk> continues to post strong results.
Second quarter, adjusted EBITDA was $105 million.
That bears repeating.
Aam's EBITDA was more than $100 million.
In a single quarter.
That's an increase of nearly $30 million sequentially and almost $70 million year over year on 2021 results that were adjusted for the labor strike impact.
Q2 margins were an impressive 18, 6%.
That's an increase of 330 basis points sequentially, and 720 basis points versus prior year.
Q2, 2022 results included about $10 million of section 232 recoveries on tariffs paid in prior periods.
As Bob announced we're completely out of the standard stainless sheet business, but.
But the impact of our transformation reaches far beyond simply eliminating low value products.
The SRP business has improved its customer mix and grown the percentage of business under long term agreements.
As a result, we have significantly increased our ability to recover higher input costs and have materially reduced our exposure to metal volatility.
Most importantly.
We're being more fairly compensated for the value that we're delivering.
The transformation is working as planned.
We expect to eliminate the additional costs in the second half of 2022 as the final stainless related facility is idled.
And we anticipate further product mix improvements as we've reduced lead times and increased capabilities at our vandergrift facility.
Now, let's talk about the balance sheet.
We continue to take actions to reduce leverage and strengthen our financial foundation.
Late in Q2, the remaining $84 million of our convertible notes converted into roughly five 7 million shares.
To help offset that shareholder dilution, we've repurchased roughly $3 5 million shares in 2022.
More color on that in a moment.
As a result of rapidly improving EBITDA and debt reduction our net debt to adjusted EBITDA ratio dropped to three three times.
Looking ahead expected strong second half financial results and cash generation should help further reduce our leverage metrics.
We're quickly moving closer to our goal of maintaining a two times net debt ratio across the business cycle.
At the end of Q2 total available liquidity was $730 million, including $274 million of cash on hand.
Looking ahead, we expect to increase our cash balance as the year progresses.
Managed working capital as a percentage of sales improved sequentially by nearly 300 basis points.
At quarter end it stood at 38, 5%.
This figure remains elevated largely due to one strategic raw materials that were purchased at the onset of the Russian invasion to rising commodity prices and three <unk>.
Funding inventory for growth ramp.
This metric should continue to improve in the second half of 2022.
We expect to end the year much closer to our longer term target of 30% of sales.
Capital expenditures were $29 million in Q2 and $55 million year to date.
We expect this pace to accelerate due to organic growth related projects in the back half of the year.
However, we will likely spend below our initial 2022 guidance range of $210 million to $225 million, our new 2022 target for capital spending is $205 million to $215 million, which reflects our continued discipline around capital deployment.
I want to reiterate our capital allocation priorities and highlight where we stand today.
First we'll fund growth.
But it's important to stay disciplined and we will.
Second we want to reduce debt and fund our pension obligations.
That is $84 million lower as a result of the convertible note maturity.
In terms of the pension we intend to make a $50 million voluntary contribution to our defined benefit plans in the second half of the year.
This contribution coupled with increased discount rates could meaningfully move us closer to our pension funding goals at the end of 2022.
Our third priority is to proactively return capital to shareholders.
Year to date, we purchased three 5 million shares under our share buyback program at a total cost of $90 million.
$60 million remains on our current board authorization.
We'll be thoughtful executing that mandate balancing our cash needs with stock price and shareholder interests.
The good news is we're in a position to tackle multiple priorities simultaneously.
Now, let's talk about guidance.
We continue to outpace our earnings expectations due to strong customer demand healthy product mix and our ability to offset inflation.
After a strong Q1 results, we increased our Q2 and full year expectations.
We're back in that enviable position today.
Thanks to our strong Q2, we are increasing our expectations for Q3 earnings.
We expect Q3 EPS to fall within a range of 50 to 58.
At the midpoint. This is in line with our Q2 adjusted results.
Our revised forecast takes into consideration the expected negative impacts from business seasonality scheduled outages and lower commodity costs.
And we don't anticipate additional federal employment incentives or section 232 tariff recoveries in Q3.
We're also substantially raising our full year adjusted EPS guidance as a result of our year to date and Q3 performance.
Our new 2022 guidance range for adjusted earnings is $2 to $2 14 per share.
This is an increase of almost 40% at the midpoint versus prior guidance.
For reference this compares to adjusted EPS of $1 18 in 2019.
Excluding benefits from the sale of our oil and gas rates in that period.
Our business is performing.
And we're keeping our foot on the accelerator.
Lastly, we're updating our free cash flow guidance as we see our improved earnings convert to cash.
For full year 2022, we expect to generate at least $110 million of free cash flow, excluding any voluntary pension contributions.
This represents an increase in free cash flow guidance of more than 80%.
We're working hard to increase cash conversion rates toward our goal of converting at least 90% of net income to free cash by the end of 2025. This is a step in the right direction.
In closing, we're pleased with the momentum building in the business and strong underlying demand in our key end markets.
Our investments in wrap readiness and business transformation have fundamentally changed the trajectory of the business for the better.
We have the right strategy and are confident in our team's ability to successfully execute for the benefit of our customers and our shareholders.
With that I'll turn the call back over to Bob.
Thanks, Tom.
As I listen to your commentary. This morning, I think we'd agree is fair to describe our Q2 results as robust not a word we use a lot, but certainly appropriate for this time.
They reflect our decisive actions taken to position us for this moment this moment with a strong market recovery.
Our outlook demonstrates that we expect these positive trends to gain momentum.
We expect higher sales earnings and cash flows.
Our end markets are improving particularly commercial aerospace.
Demand for new aircraft and the materials needed to keep them flying are expected to benefit our business for years to come.
The defense and energy markets are also contributing to our positive performance.
And outlook.
Our success is not only a function of great markets, but also our team's heavy lifting.
I used the word team purposefully.
It's been a total team effort.
I'm proud of their achievements and I know, they're proud of what they've done as well.
So that always fun easy or simple schedule.
But I am proud of haven't gotten what they needed to get done.
We've had a lot going on at ATI.
We put ourselves in a position to be successful and it's paying off.
Our cost structures are lean our footprint is streamlined and we have the workforce largely in place to accelerate along with our customers' production plans.
Our assets and capabilities are unmatched, we've transformed our physical structure, our culture and our performance. Our incredible people are leveraging these tools to unlock new opportunities to create long term shareholder value like never before.
And we recognize we have more work to do.
We're challenging ourselves setting high expectations.
And we do what we say we will we raise those expectations higher.
We are truly proven to perform and our customers recognize and reward us for it.
Operator, we're ready for the first question.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now when preparing to ask your question. Please ensure you are on mute locally if you change your mind. Please press star followed by team.
Our first question is from Richard Safran of Seaport Research Partners. Your line is now open. Please go ahead.
Bob Dan Scott Good morning, how are you.
Good morning.
Yes.
Good morning, listen I'd like to get an industry perspective from you and then I have a follow up.
So given the constraints what do you think is the ability to supply chain to support to narrow body rate ramp and where do you see the major issues. We heard Boeing mentioned 38, a month, we know Airbus is looking for higher rate.
How steep of a narrow body rate ramp as possible in your view.
Yes, rich this is Bob good morning, and thanks for the question.
So the question I've been getting pretty regularly for the last six months.
Well the good news in all of this though rich as a judge not the bottleneck. So that's a good good thing we don't intend to be the bottleneck, but to your question I think on.
The ramp speed.
Look at the history.
How I'm going to talk about narrow bodies, but.
Narrow bodies and kind of go up about a build rate of five per OEM every six months until they get stable maybe six to eight months gives us stability and then make the next ramp the next five in the next five so I think you know.
We only produce to orders, we don't produce to build rates, but we factored into our long term planning with kind of a <unk>.
<unk> per every six months to eight months until they achieve stability I think they recognize that a stable supply chain thats coming along at their pace.
Critical.
The second part of your question was around.
Where are the problems today.
I won't speak to the castings issue I think a lot of people have talked about that.
Probably closest to it but.
I think it's somewhat broader than that and it's little things So <unk>.
See some specialty alloys, forging billet supply issues pop up.
And become a problem on some of the specialty stuff Youll see.
Fire here or a fire there in our melt shop, you'll see deferred maintenance, causing a press to breakdown I think we're going to see those kinds of issues.
Coming up but I think castings is probably the biggest issue and then making sure that that the forgings demand as is keeping up.
We're keeping up with what the industry is forecasting and we havent really confidence in the customer dialogue.
There have been some recent announcements lately, but we're not seeing anybody take their foot off the accelerator handoffs to travel.
Yeah, I'd say 2022, and the 'twenty two 'twenty three is going to be a good ramp for the industry and we're going to get to these record levels in due time, so hopefully that helps answer your question.
Yes of course, it does so next up.
Maybe for Don because I'd like to ask you about the remarks, he just made and I'm not trying to put you on the spot but.
In light of GKN, what can you tell us about further share gains and what this means to that.
Long term forecast you gave back in February .
Your remarks now just you mentioned like EBITA margin. So here, we are six months later and it looks to me like advanced alloy EBITA margins ex the $2 32 are pretty much in line with your 2025 guide for mid to high teens. So.
I'm kind of wondering if share gains to make your February guide a bit.
A bit obsolete I'm, just trying to get a sense of at least how you're thinking about it now.
Yeah.
Yes, I appreciate that perspective, and and I agree with you. The business is performing really really well to get to the core of what you're asking we are seeing broad based demand across many of our key end markets.
And.
In February at our Investor Conference, we shared a 2025 guidance and with that at that point, we had what we believe were very healthy and somewhat aggressive growth rates for the top line and for margin expansion.
After the conference obviously, some events happened in the world, including the Russian invasion of Ukraine.
<unk> a number of dynamics.
In the market and has created some opportunity for us. So the core question I think that you are asking is done.
It's a new world as it exists today or your number is low.
And what I would say is the <unk> related share gains for example that that have come up since our investor day are 100% incremental to the information that we shared in our Investor day in our 2025 targets.
So I see upside there I would reinforce rich that the opportunities were seeing are beyond aerospace. It includes other key end markets.
And medical and energy and I would say that the.
<unk>.
Tailwind that we're seeing.
We're also not just related to the geopolitical stuff that we saw happen with the Russian invasion, although it's certainly impactful. So good news for US is our strategy and our capabilities put us in a fantastic position.
And I think we'll see performance certainly at the high end.
Of the targets that we laid out in our February conference.
And it's our goal to certainly beat those those targets as time unfolds. We think we have a great opportunity to do that and then we're also excited this broad base.
Demand. These tailwind that we're seeing look to us to be sustainable for our business and so thats good for for all of us.
Yeah.
Thanks very much.
Okay.
Our next question is from Phil Gibbs of Keybanc. Your line is now open. Please go ahead.
Hey, good morning.
Good morning, Phil.
Last quarter, you gave a lot of good texture on your jet engine business and it was it was very heavy.
In terms of MRO.
I think this quarter.
While we don't have your opinion, yet it looks like Oh, you would've had to have picked up just given the strength in the base of baseline or numbers in the first quarter for MRO. So maybe explain the texture of the jet engine.
So the second quarter.
Yes, sure Phil I think.
You're right on on both themes right. So as you might imagine over the last one.
The new builds get delivered and then transitioning into probably some of the <unk>.
And we think thats going to be for the next couple of years a sustained trend.
Based on the engine side. So we've got more clarity on that over the last 90 days now on the.
Yes.
OE demand I'll tell you if I showed you some of the charge the percentages are staggering, but again, we're starting from a low base right. So when you look at the percent increases on that all our major programs were well positioned with the next generation alloys, we are well positioned.
Programs and because we were shipping a lot of those products 12 to 15 months in advance.
As long as we get our supply chain stays in sync, which is a day to day challenge to make sure we're in sync.
We're going to see the OE demand increase pretty well, but I think the spares will stay pretty hot here for.
The short to medium term, so hopefully that helps.
Yes, so it sounds sounds like to me that if anything.
The spares the spare side has really been what's surprising to you all in the last maybe three to six months in terms of its strength.
Now, let's say the last three to four months. It's been it started strong we got a lot of indications in the middle of the first quarter.
Since we don't produce anything but orders the orders have come in maybe if you want to buy incremental forging from US today, we're definitely into Q2 of 2023 bookings.
And so.
I think on the spare side, our team is being very conscious of it because it's.
We have some good products in the widebody sector on the engine side and.
So we want to be supportive of those customers because they are.
They have got an engine in for repair overhaul they want to make it work so.
What we're seeing now is more of a sustained trend than just an initial blip.
Okay, well, that's encouraging and then one more follow up just on the third quarter guidance.
Yes.
Mid mid point, Don is 54, <unk> <unk> 54 sides clearly the tariffs moving away labor credits moving away, but you do have the sustained recovery in aerospace so.
Fair to say that in that sequential stability, you've got to pick up in HPLC.
Thats equally offset by a decline in ASP.
I don't know if I would look for a decline in E&S I think we're like I said, we're seeing broad based demand.
Clearly the E&S segment is performing very very well as is hmp's CMC. So I think youre going to see good guys on both sides, especially as things unfold for the balance of the year.
Yes.
Thank you.
But.
Our next question is from Seth <unk> of Jpmorgan. Your line is now open. Please go ahead.
Okay. Thanks very much.
Good morning.
So.
Just wanted to ask about one of the key themes, we heard across the aerospace and defense sector.
This quarter has been about sourcing labor and supply chain, but particularly about sourcing labor and given the <unk>.
Ramp up in activity.
That you guys have in front of you at both <unk> and <unk>.
Aerospace and increasingly it seems in energy as well.
How you're positioned for that.
And what kind of risks remain.
Around kind of having that.
The labor pool to make sure that you can deliver on the growth you expect over the next.
234 quarters.
Yes.
Good morning.
Yes, I think when you look at the hiring starts with recruiting Bryan This is a recruiting market.
So we have deployed differently in this ramp than we've ever done before to make sure. We have a really qualified broad aggressive recruiting team.
Four or five major hubs that we operate so North Carolina, Pennsylvania, Wisconsin them in Oregon, and most of our focus candidly is in Wisconsin, North Carolina, and the team's done a great job. So it's.
It's been challenging, but we're ahead at or ahead of pace.
Every given week.
Onboarding. So it's a weekly scorecard that we look at in Q1, I think we talked about adding about 1000 positions.
Phil that ramp we've probably got about 20% to 25% more to go balance of the year. So we feel we're at pace.
Confident we're recruiting aggressively.
Good a couple of things during the pandemic that are helping us at this point that's different than some others in the supply chain. Our strategy is to keep each of our operations open. So it was a matter of moving people around and maybe we had more technical more skilled people doing less skilled jobs during the pandemic, but they are.
We're able to get back to their their jobs and as we add people.
We're getting really good employees onboard and trained quickly without a degradation in productivity I think that's really been a key is hiring and recruiting is one thing, but how quickly can you get them up to speed. So I think our strategy there.
There has been good in the aviation jobs protection was helpful.
Loud us to do some things aggressively we probably wouldn't have done otherwise.
We've tried to keep as much of the technical talent as we could but to say the least we're pulling every lever, but we feel like.
So far we are.
Keeping on pace with what we need to do through the balance of the year.
Great Great that's very helpful.
And then.
Maybe just to follow up a little bit on Richard's question earlier.
Level of earnings in <unk>, you mentioned emphasized it yourself on a 100 million Bucks.
In the second quarter.
There was a one timer in there, but based on the EPS guidance for the rest of the year. It doesn't seem like that is coming down materially in the near term and just in order to make sure that all of our expectations remain in check and don't get out ahead of ourselves.
Run rating at something close to a 100 here for a good part of 2022 are there things in that that are that we should think about as maybe not sustainable going forward because as we as we head to $23 24 to 25, you would think that theres going to be there's going to be growth in the business.
And that would lead to potential upside off this level.
But just to kind of level set.
Is there anything in this year, that's really not sustainable other than the tariff.
Reimbursement.
Yes.
So a couple of things to keep in mind first the underlying businesses both segments are performing really well.
As you think about transitioning from the first half of the year into the second half of the year. How should you think about it as you go into Q3 in both of the segments. What you would expect to see is some outages in Q3, that's kind of seasonal for US. There is also a broader seasonal broader seasonal pullback.
Into Q3 and that has to do with for example, Europe take.
Taking there.
<unk> vacations.
In Western Europe , and the U S as well.
A heavy vacation period, which can impact production that's normal.
I think another thing to keep in mind you pointed out.
232 recoveries, obviously, you would pull that out that was roughly $10 million good guy for us in Q2 that won't be repeating in the future and then we.
Had a modest amount.
On the <unk> side in terms of these employment program benefits $6 million I wouldn't expect that to repeat.
So that's one set of things that I would note another thing to keep in mind is.
Is that how is our business affected by metal prices now we've seen a lot of volatility in the first half of the year around commodity prices like nickel.
And although we have significantly reduced the volatility in our business related to metal price movements like nickel.
We still are impacted by it and so we've been seeing recently, where nickel prices have moderated some and so you would expect that that would create some <unk>.
Sequential headwind for <unk> in Nash.
As those metal prices come down and it affects surcharges and things of that chart pricing may may soften a bit as a result of those commodity prices coming down.
So not not a lot of a specific quantifiable things in that second group, but those are those are things that you would want to consider good news is we do have this underlying tailwind and multiple end markets Arrow is an easy thing for everybody on the phone to do.
2.2, and understand and we expect that as 2022 unfolds, we will continue to see Paul on the business from that standpoint and finished the year quite strong as you can see by the map in our in our guidance for the full year does that help you a bit.
Yeah, absolutely that's very helpful. Thanks, Thanks very much.
Our next question is from Gautam Khanna of Cowen. Your line is now open. Please go ahead.
Yes, good morning, guys.
Good morning.
How many.
Good morning, I had a quick.
Follow up on.
Titanium share opportunity I was curious if.
The EU sanctions, which were I guess taken off of <unk>.
Specifically does that reduce the urgency of Airbus or safran.
To move away from that source of titanium or are you seeing any.
I'm just curious.
Does that do anything to the pace of negotiations.
And are those two prospective customers you do expect to gain share.
With over the next couple of years based on the Russia situation.
Yes, good morning Gautam.
<unk>.
The issue about urgency as your first question, we haven't really seen any change in the level of urgency with antibody.
The aerospace supply chain.
There's been a tremendous amount of work to set up additional qualifications.
There is certainly multi market that Tom referred to in terms of the markets that are looking for titanium shifts that certainly multi tier I think a lot of the commentary focuses on the Oems, but there's a tremendous amount of procurement or directed buying where people are really concerned about that supply. So.
I never believed that.
They were totally go away from Russian supply, but I do think they are committed to managing our overall risk levels and thats kind of what they've said publicly.
And it's very much a diversification play to make sure. They can deal with any eventual circumstance. So I think most of US who are in this position will qualify and we will win some share.
<unk> will also be emergent demand like there always is in this uptake uptick so.
I do think the industry is repositioning itself not 100%, but significantly and we do expect to win share across multiple different places not only airframe, but we're seeing it in defense clearly.
Terms of armor systems Rotorcraft engines, all those kinds of things medical and then even in the industrial and energy space.
We backed away from our unity joint venture on industrial titanium to free up some units in.
Those island last a very long so theres a lot going on but I do believe.
They are going to shift and I do believe there is long term benefit they will gain from that across the tiers.
That's helpful and I was wondering if have you guys seen any emergent demand.
On the precision forgings side because of.
Potential bottlenecks in some of your competitors.
Does that show up in the quarter or is that showing up in the bookings rate.
Yes, I would say the answer to your question is yes, I mean, we obviously talked to our customers on a regular basis I mean, they are looking at various options. There are some places that were qualified that they haven't fully taken advantage of yet.
But Q2 was.
I have to go back and say you know the Russian situation developed in late February early March So I think with the order lead times its trial late 2023.
Late 2022 into 2023 opportunity for us.
We're still growing into our share position in Europe that we announced.
A while back that haven't.
Haven't fully been exercised but on.
On the opportunity side I would say, yes, there is some upside.
But it's going to be 2023 and to your question Timna bookings.
Thanks, a lot guys.
Okay.
Our next question is from David Strauss of Barclays. Your line is now open. Please go ahead.
Okay.
Hi, Thanks.
Don just a follow up on <unk>.
<unk> SaaS question your EBITA was $143 million I think in the quarter.
You you kind of have the recurring number is when you strip out the one timers.
Kind of the the.
Big benefit that you've had from from higher nickel prices.
So I mean, the easy math of course is to grab the two big chunks that I talked about so if you start at 143, and you strip out it was $9 million to $10 million or $2 32 recoveries and and then we had about $6 million of federal.
Employment grants.
Types of benefits that gets you to a number kind of in the 130 range.
As far as as far as metal tailwind in Q2.
I would say they are modest.
We're trying to get trying to wrap your head around what is what is kind of a.
Our recurring Q2 number I would say in that.
Certainly 125 to $1 30, plus range as you think about Q2, and then as you look into the second half of the year Q3 are laid out here. We've got some seasonality it's normal for our business, but we have this underlying demand that's really creating some positive.
<unk> in the business and we have a continued transformation of the of the SRP business and that that's really that transformation is pretty profound.
Impacting the top line and it's impacting the bottom line of the E S.
<unk> results.
Yes.
Improving mix, it's improving.
Margins, we expect that that's going to continue to add benefit as well and I shared in our pre in the pre pre prepared comments that we expect some some good guys in the second half around <unk>.
Costs related to that transformation, because we have another facility that is going to be shut down.
And.
And we've got some other mixed benefits from the transformation, we're expecting so.
That's the best probably the best color I can give you in terms of how to think about how to think about Q2, and then how to think about the go forward for the second half.
Okay and on.
Your your free cash flow guide can you walk us through the <unk>.
Moving pieces on working capital how you get there I mean, obviously, you've had a pretty big inventory and receivable build here in the first half of the year.
Yes, I'm happy to do that so there's a couple there's a couple of key data points.
Think about as you're thinking about our managed working capital which is there.
Really important influence when it comes to our free cash flow guidance. So on the one hand keep in mind, our target around managed working capital Hasnt changed we were at 30% of sales in 2019, our target is to get back to 30% of sales and then improve upon that so.
As you look at where we ended Q2, we're at 38, 5% I believe at the end of the quarter of about 300 basis point improvement in that position. That's great. As you think about going forward by the time, we get to the end of 2022, we expect to be a lot closer to our 30% target, where we're going to be in the neighborhood.
We're not going to quite get there, but what it's clearly indicates is a significant reduction in managed working capital levels from where we are today to where we're going to be at the end of the year. So how is that going to happen well first you want to think about why we're at where we are from a working capital standpoint.
For one thing we did add some strategic inventory and that was tied to what was happening with the Russian invasion of Ukraine. When that was transpiring, we made a strategic decision to add safety stock strategic inventory in the business. The good news on that is that <unk>.
Our inventory in the short term de risked us and we expect that by the end of this fiscal year, we'll burn through that inventory so that will be a good guy for us than one of the reasons why inventory has been elevated in the short term is because higher commodity prices commodity prices around things like nickel I think of have.
Certainly moderated. Some then we have all of the structural efforts that are going into what.
What we need to do in order to get to the 30% target.
Kim fields, our C O and her team are doing some great work around that the transformation that we've talked about is an important part of it we consolidated our footprint and reduce the number of manufacturing facilities in inner SRP business. For example think about what that does to the floor.
<unk> of inventory and the need or lack of need after the fact for inventory in certain positions. So.
What you should expect is in the second half of the year as all of this is transpiring you should see a significant release of managed working capital and a generation of cash tied to our to our managed working capital.
The last thing I would say is don't forget you know in our business. We've very typically generate the majority of our free cash flow in the business in the second half of the year and then it's usually largely in the fourth quarter that pattern.
It will be in place in 2022 as well.
So does that help you.
Yes, thanks very much.
You bet.
Our next question is from power comes from Michelle Applebaum Bank. Your line is now open. Please go ahead.
Utilization rates are you seeing and if you could give us any sense of how these conversion service sales are trending.
Hey, good morning fair to us. So this is Bob I would say, we're very pleased with the conversion business at <unk>, it's actually settling into being kind of a normal part of the process.
And we're probably in <unk>.
60% plus or minus range depends on the week depends on the month, but.
It's turned out to be a positive in a positive earnings and cash generator for us. So so far so good.
And that's great to hear and then maybe as a follow up are you expecting any major changes in Q2 versus Q2 in any of the <unk>.
Corporate items, so corporate cost depreciation on any of those things.
So short answer is no we're not expecting any significant changes in those cost categories.
Alright, thanks, guys.
Our next question is from Josh Sullivan of Benchmark Company. Your line is now open. Please go ahead.
Hey, good morning.
Good morning, Josh.
The incremental defense opportunities in ground vehicles, what could that look like versus previous cycles, and then a couple of years ago, you've made enough for grow your Washington presence, where some titanium programs you've had exposure to.
Wondering what this ground vehicle cycle, it could be more meaningful than historically.
The simple answer is yes, we expect this cycle to be more meaningful I think but.
But we see as an industry trend that plays to our strength is actually.
Light weighting of military vehicles for a different potential conflict and was contemplated in the past so very strong for titanium armor.
We've talked in the past about some of the programs we're on.
Abrams Ajax and recently.
There has been the announcement of the.
The NPS opportunity that.
That we see and we also saw the.
Our mobile protected firepower with MTF stands for I guess make sure. The acronyms that are clear that's a big opportunity in the titanium armor space in titanium places. The other thing that's developed over the last six months as the opportunities related to August and certainly naval nuclear programs that broadens.
Both submarines and carriers bigger than what we probably anticipated six months ago.
Not necessarily on the titanium side, but you asked about ground vehicles.
And we do see.
For fairly significant upside to that compared to where we've been basically.
Due to the geopolitical response that.
A lot of the NATO countries are investing themselves.
Yes.
Got it.
And then what are your thoughts on strategic M&A at this point.
Job done some portfolio shifting here.
What do you see what do you see as far as the need or even an opportunity to.
Maybe grow into some new markets at this point.
This is John what I would say is we don't want to get too specific in terms of the.
The types of capabilities that we'd be looking for but what I would say is.
And this is going to be consistent with what we talked dinner.
Our February Investor Conference about when it came to M&A, we are prioritizing A&D and we are prioritizing.
Really unique capabilities that will increase our competitive advantages.
So with that that means it is focused on differentiated businesses.
Businesses that will move the needle from an economic standpoint and margin standpoint for us.
And so we're being very discerning in terms of what we're interested in and why.
And so.
Are we are we considering opportunities.
Yes, but assume that it will be extremely disciplined and.
And.
You won't be surprised if we were to pick something up it will have an A&D focus generally.
Thank you for that Doug.
Thank you.
We have no further questions I'll hand back to the team for that closing will not.
Okay.
Thanks again for all to all for joining US today. This concludes our Q2 2022 earnings call.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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