Q3 2022 ATI Inc Earnings Call
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Thank you for standing by and welcome to the a T. I Q3 2022 earnings call. My name is Sam and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to ask a question. Please press star one on your telephone keypad.
Now like to turn the call over to our host Tom Wright with ATI you May proceed.
Good afternoon, and welcome to <unk> third quarter 2022 earnings call today's discussion is being broadcast on our website.
<unk> in today's call are Bob Wetherbee Board Chair, President and CEO , and Don Newman Executive Vice President and CFO .
Yeah.
Bob and I will focus on our third quarter highlights and key messages a supplemental presentation is available on our website that provides additional color or details on our results and outlook.
After our prepared remarks, we'll open the lines for questions.
As a reminder, all forward looking statements are subject to various assumptions and caveats. These are noted in the earnings release and the slide presentation that I'll turn the call over to Bob.
Thanks, Tom good.
Good afternoon.
We adjusted the time of our call to accommodate Boeing's Investor day. This morning.
Thanks for altering your schedule to join us.
Let's go straight to the bottom line.
Strong Q3 results confirmed another quarter of solid execution.
We're delivering on customer commitments as commercial aerospace gains momentum and geopolitical events trigger significant spending for end use applications in the defense market.
I'll highlight three key things today.
First strong aerospace and defense market momentum is accelerating and ATI is expanding to keep pace.
In the third quarter half of Ati's revenue came from aerospace and defense.
The highest level since Q1 of 2020.
A very notable milestone.
Revenue in these core markets grew 22% sequentially and 87% year over year.
That's really a truly astounding rate of change that the team has responded to the market opportunity still early in the ramp of the recovery depending on the market you're in but phenomenal effort phenomenal Brazil.
Overall widebody demand for Ati's specialty products by forging billet bar rod sheet and plate.
<unk> 2019 levels.
But our forward order book increasingly shows early signs of the wide body recovery.
Titanium supply is tight and lead times are extending into the second half of 2023.
Russia's invasion of Ukraine continues to change the world in many ways.
The conflict has prompted the commercial aerospace industry to redirect buying and commit titanium purchases to western producers.
Defense investment around the world is accelerated.
Our competitive position in these markets is strong.
Whether it's advanced thermal materials, enabling hypersonic flight.
Nuclear propulsion systems on naval ships, and submarines or titanium armor for ground fighting vehicles.
<unk> unique capabilities and material science expertise make us a key partner across multiple strategic defense platforms Candida.
Candidly if it flies.
It floats.
So it rolls as a defense application.
Materials are there and they're proven to perform everywhere every day.
Our ability to meet this demand is pivotal to our long term success.
After extensive conversations with customers government leaders and market analysts.
We've concluded that strong demand for aerospace grade titanium products will challenge available supplies for a significant time.
We began to invest in new Aero grade titanium mill capacity at existing ATI operations.
Near term say the next 12 months to 18 months, we're taking two actions to increase ore grade time melt capacity by 25% over the 2020 to baseline.
First we will reposition our titanium product mix from industrial to aerospace applications.
Second we will make modest investments to upgrade existing vacuum arc re mail capabilities.
We're investing in new capacity for the long term too.
By late 2025, we expect to produce first ingots on new Aero grade titanium electron beam melting capabilities.
Combined these three actions increased total ATI type milk capacity by up to 60% versus the 2020 to baseline.
Orders have been placed for major long lead time equipment.
<unk> renewable and carbon free power has been committed for this new brownfield capacity, we expect to break ground in Q1 2023.
Brownfield investments and we can move faster. It also means modest sized investments that fit within our annual capital spend guidance.
We'll spend tens of millions of dollars not hundreds well within the annual capital spend guidance that we discussed in our 2022 Investor day.
We all benefit from this new capacity, both ATI business segments, our global aerospace and defense customers and the overall supply chain.
We plan to further quantify the impact of these investments over the next several quarters.
We've also invested to ensure we have the team in place to deliver.
This year, we've added approximately 1000, new production employees, bringing us to about 90% of our 2023 need now.
Now, it's all about the cycles of learning and coaching so they can fully contributed.
As that happens, we look forward to increasing levels of productivity and efficiency.
My second point today is at ATI is well positioned for continued profitable growth.
We call it our five pillars of growth, which youll see on slide five of the deck we provided.
The first pillar is the transformation of our specialty rolled products business.
Our investment in transitioning to a differentiated specialty product portfolio.
As a result of its far more than just a richer product mix and improved margins.
It has fundamentally transformed our leadership team approaches every aspect of the business.
Pillar two is growth driven by the narrow body ramp.
As platform build rates accelerate to peak levels over the next four to five years.
<unk> is well positioned to capture profitable growth.
Demand for spare parts for next Gen engines will drive additional sales growth in the coming years.
That's as production rates for Nexgen planes reached steady state levels in the back half of this decade.
Third the wide body market is showing early signs of recovery towards what we expect will be impressive growth.
Ati's content on all next Gen wide body platforms will drive significant margin expansion as international travel recovers.
Global freight growth continues.
The defense market drives growth and our fourth pillar.
As I mentioned earlier increased geopolitical volatility has accelerated defense spending across Europe with U S allies around the globe.
The near term opportunities are clear.
The long term opportunities driven by next generation requirements will also drive outsized growth for ATI.
Our materials are ideal for the increased demands of strength.
Light weighting and thermal management at the extreme.
Our fifth and final pillar is driven by differentiated applications like medical specialty energy.
These critical adjacent applications have arrow like characteristics that leverage our expertise.
We also see growth in metallics beyond nickel and titanium such as hafnium and niobium.
Our used in electronics and space and we also see growth in zirconium and specialty energy there are attractive growth opportunities for ATI as advanced alloys.
We succeed where the expectations are great and the barriers are high that's where ati's extraordinary capabilities performed the best and we see tremendous growth potential.
These five pillars define the path to achieving our 2025 goals.
I'm confident we're well on our way.
That doesn't mean, there aren't headwinds impacting our business every day.
Throughout 2022, we've seen macro forces like in place head of supply chain disruptions.
We continue to manage these challenges aggressively.
More recently recession concerns have been in the headlines we believe the recession question is not if.
But rather to what extent will impact ATI.
Which brings me to my third observation for today.
The deliberate repositioning actions, we've taken greatly strengthened Apis resilience in the face of uncertainties.
ATI is well positioned to deal with the challenges we're seeing in the market today.
So it's 2020 and throughout the pandemic, we've taken strategic actions to reshape ATI retrans.
We've transitioned to higher value products and long growth cycle markets. We've consolidated our operating footprint. The result, ATI is a significantly leaner and more nimble and more focused company.
The strength of the company today versus where we were a few years ago is unbelievably improved teams.
Teams aligned we definitely are positioned for the significant growth opportunities that are coming.
No question a portion of our portfolio is impacted by recessionary softness in the industrial market.
Our Asia precision rolled strip business continues to be negatively impacted by ongoing zero co with policies.
What's driving continued market disruptions and is meeting demand recovery in that region.
The impact of these near term headwinds is largely expected to be confined within the Ams segment.
John will share more about these impacts when he shares our Q4 financial outlook.
Before I turn the mic over to down let's shift to a quick overview of our Q3 performance by market and set the context for what we see in the quarters ahead.
As I shared earlier in our largest end market commercial aerospace demand continues to gain momentum.
Jet engine sales grew 26% sequentially and 143% year over year as shipments of forgings and materials accelerate to meet increasing demand.
What drives that growth for us.
Leap powered narrow body airframe deliveries leap engine share gains and service part demand for wide body engines.
Airframe sales increased as well growing by 24% sequentially and 84% year over year with modest, but steady near term widebody demand growth.
We expect acceleration in 2024, and 2025 to drive significant growth in airframe revenue.
Defense sales grew 6% sequentially and 4% year over year, largely driven by increases in military jet engine and rotorcraft sales.
As we look to 2023, we expect strong growth as global defense investment accelerates due to the geopolitical environment I referenced earlier.
It's an understatement to say I appreciate all the ATI team all that they've done to deliver this incredible acceleration and aerospace and defense sales each ATI business has.
Has contributed to that growth.
Beyond our core A&D markets specialty energy sales contracted slightly on a sequential basis grew 16% versus the prior year.
Chemical and hydrocarbon processing sales drove growth as downstream refiners work to bring additional fuel refining capabilities online.
Nuclear energy group, while we saw declining revenue in power generation and renewables.
Over the coming years, we expect global energy security and the push for reduced emissions to continue driving growth for Etfs.
Yeah.
Medical sales grew 20% sequentially and 38% year over year as elective surgeries recovered from pandemic lows.
Looking ahead to 2023 further medical growth as expected as reassuring trends drive new supply opportunities for medical implants, and MRI and materials.
And lastly, electronic sales contracted modestly versus the prior quarter and contracted by 14% versus the prior year.
This was in part due to continued Covid lockdowns in China, but also consumer softening and slowing discretionary demand for electronic devices.
Based on what we see today, the lockdowns could easily extend into mid 2023.
Now I'm going to turn it over to Dan who will walk you through the financials and I'll be back after that to conclude and take us into Q&A Dan.
Thanks, Bob.
Let's jump right into the financial headlines headline one we've returned to our 2019 revenue levels on a run rate basis.
And my number two we.
We delivered another strong quarter in Q3 and expect to cap off 2022 with a solid Q4.
And headlines III.
We are on track to deliver on the 2025 targets we communicated in February .
Our order book and our execution are strong.
Let's dig deeper into these themes starting with revenue in Q3 performance.
Q3 was our first $1 billion quarter since pre COVID-19.
We reached $1 $3 billion in revenue.
That's actually the highest quarterly revenue for hei since the second quarter of 2019.
What makes it especially significant.
We achieved this even after exiting standard stainless sheet.
And it's without our divested Sheffield and <unk> businesses.
We have great momentum.
Revenue increased 42% year over year, and nearly 8% sequentially in the third quarter.
On a year to date basis through September 30.
Our total revenue was up 39%.
From $2 billion in 2021 to $2 8 billion in 2022.
What's more over half 51% of our third quarter revenue is attributable to aerospace and defense.
It's an incredible milestone as we progress toward our target of 65% revenue from A&D.
We are moving in the right direction.
These data points, along with extending lead times reinforce that the business is building momentum.
Let's look deeper into the third quarter performance.
So on the $1 billion of revenue, we generated $141 million of adjusted EBITDA.
On the surface that looks consistent with the prior quarter's reported adjusted EBITDA of $143 million.
However, there is more to the story.
You'll recall that Q2 benefited from $10 million of nonrecurring tariff recoveries and $6 million of Covid relief benefits.
If you exclude those nonrecurring benefits from Q2 EBITDA.
Our adjusted EBITDA improved 11% sequentially in the third quarter.
From $127 million in Q2 to $141 million in Q3.
Third quarter GAAP EPS was <unk> 42.
Adjusted EPS was <unk> 53.
We grew $20 million in Q3 for GAAP purposes related to settling a legal matter associated with the Rowley sponge facility dating back to 2016.
We accrued another $9 million earlier in 2022 related to the same matter.
This settlement puts the lawsuit with U S magnesium behind us.
We have excluded this expense in the calculations to derive adjusted EBITDA and adjusted EPS.
The Q3, adjusted EPS of <unk> 53.
Is consistent with guidance, we provided in our prior earnings call.
It reflects continued underlying strength in our core business and benefits from our business transformation.
Second quarter adjusted EPS was <unk> 54.
Just as I explained upon the adjusted EBITDA keep in mind that Q2 EPS included a benefit of approximately <unk> 11.
From the nonrecurring tariff recoveries and Covid relief benefits.
Margins also remained healthy.
Third quarter adjusted EBITDA margins were 13, 7%.
At our February Investor Conference, we shared 2025 EBITDA margin targets in the range of 18% to 20%.
Although we continue to expand margins to reach the high teens range.
By continuing to improve product mix.
Growing next Gen jet engine sales and by increasing wide body volumes.
That's where we see some of our strongest margins.
We will also continue to manage our costs and capture efficiency gains.
Strong execution within our operations is this confidence there is growth opportunity there as well.
Let me share a recent example of how the team has executed our inflation management strategy.
Year to date through September 30.
Our team has more than offset inflation impacts by relentlessly pursuing pass through opportunities.
Efficiencies and implementing price increases.
It is a daily battle and they are executing day in and day out to capture everything possible.
Now, let's discuss segment results.
High performance materials and components or HP EMC had a great quarter.
H BMC third quarter revenues were over $457 million.
That's up 16% sequentially and 53% year over year.
Volume pricing and mix all contributed to the sales growth.
In terms of mix commercial aerospace sales increased 22% sequentially and 116% year over year.
Jet engine product sales led this increase.
Within this segment, 82% of third quarter 2022 revenue was attributed to aerospace and defense sales.
From 80% sequentially and up from 69% a year ago.
We expect H Bmc's, Andy sales mix to continue to improve as the Aero ramp progresses and defense demand grows.
With that comes the healthier margins of most A&D offerings.
That mix will play a key role in expanding our margins over time.
<unk> adjusted EBITDA was $86 million or 18, 8% of sales.
Strong margin growth reflects two things.
Higher sales of next generation jet engine products.
And higher operating levels.
Third quarter 2022 results did not include Covid relief benefits compared to $6 million of Cobra benefits in the second quarter.
Here's the bottom line for HP EMC.
This segment is in a tremendous growth position.
What's ahead.
The commercial Aero ramp is unfolding.
Defense demand is increasing.
And we continue to enhance our production capabilities and capacity.
We are on the right track to accomplish our long term targets.
Now, let's discuss advanced alloys and solutions or Aam's.
As a reminder, 2021 third quarter was impacted by the labor strike at our specialty rolled products <unk> business.
So it is more meaningful to focus on sequential rather than year over year changes.
Aam's third quarter revenues were $574 million and $11 million increase over prior quarter revenues of $563 million.
Sales to A&D markets were 30% higher than the third quarter over the second quarter led by demand for commercial airframe products.
Sales to industrial markets were down sequentially, partially offset by higher medical sales.
Third quarter segment sales to energy markets were in line with the second quarter.
Sales at our agent precision rolled strip business continued to be negatively impacted by COVID-19 related market interruptions.
Third quarter Aam's, adjusted EBITDA was $76 million or 13, 2% of sales.
Second quarter, adjusted EBITDA was $105 million.
Let's unpack that $29 million decrease between the second and the third quarters.
$10 million was due to nonrecurring section 232 tariff recoveries at the A&P joint venture in the second quarter.
Approximately $9 million of the decrease was due to the significant declines.
Q2 peaks in commodity prices for multiple metals.
Roughly $7 million relates to planned maintenance outages in the third quarter, primarily at our specialty alloys and components for <unk> business.
Finally, approximately $3 million is due to the negative impacts at our Asian precision rolled strip business.
The transformation of S&P has reduced metal volatility in our business.
Fortunate given the movement in commodity prices in 2022.
Overall, it's a much better business since exiting standard stainless sheet products.
Sales mix is improved.
Value added sales are up.
And we've significantly increased sales under long term agreements.
Margins should continue to expand for SRP and DAA in that segment as the transformation continues.
Now three quick points related to our balance sheet.
First we continue to Delever.
We ended third quarter with a net debt to adjusted EBITDA ratio of two eight times.
This is down 30% from four times leverage at the beginning of 2022.
Second we made a $50 million voluntary deposit into our pension plans. This week, continuing our pension glide path.
Third we reduced manage working capital another 200 basis points in the third quarter to 36, 5% of sales.
We are targeting to be in the low <unk> by the end of the year.
Our team is working hard to get us there.
Let's talk about guidance and outlook.
Looking ahead to the fourth quarter, we see continued strength in our core businesses.
This is led by commercial Aero jet engine and airframe as well as defense and medical.
That said, we expect a few transitory headwinds to negatively impact Q4.
I'll take a minute to describe the business drivers, creating those results.
First we anticipate China will continue its zero Covid policy.
This will negatively impact our Asia precision rolled strip business by approximately four cents in the fourth quarter relative to our prior guidance.
Anticipating that China continues this policy into 2023, there could be impact carryover.
But this won't last forever.
Second we are experiencing lingering effects of the planned annual maintenance outage that occurred in the third quarter at <unk>.
Post outage production has ramped slower than anticipated.
The root causes for the store ramp have largely been resolved and changes in our outage approach should reduce risk of recurrence in the future.
Lastly.
When the Russian invasion began in early March.
<unk> added safety stock for materials, historically source from Russia.
That was a prudent action in the face of uncertainty.
Forward to today.
Our productivity has improved and towards signals are indicating stability in the supply chain.
Fourth quarter is the right time to burn through some of those excess inventories as a result, we're temporarily turning down production rates and SRP, leading to lower cost absorption in the fourth quarter.
S&P will also take advantage of the slower production window and conduct planned annual maintenance.
Technology upgrades in the fourth quarter.
We view each of these items is transitory.
They are not expected to create significant impact to 2023.
What does all that mean to the Q4 adjusted EPS.
We expected to be between 49, and <unk> 55 per share.
That will bring full year adjusted EPS to between $1 96, and $2 <unk> per share.
We anticipate free cash flow to be in the $90 million range for the full year 2022 versus the previous guidance of $110 million.
Primary reason for the reduction is the $29 million litigation settlement, which was not assumed in our previous guidance.
Partially offsetting ultra settlement impact and modestly lower Q4 earnings expectations is lower capital spending.
We previously communicated full year 2022, capex would be in the range of $205 million to $215 million.
We are adjusting 2022 capital spending expectations down to a range of $185 million to $195 million.
The change reflects continued discipline and capital deployment as well as supply chain interruptions delaying delivery of some equipment.
Those delays by the way are not expected to impact growth in any meaningful way.
Before wrapping up prepared remarks, I would like to share some color on 2023 outlook and our 2025 financial targets.
Growth and margin expansion of come quickly in 2022.
I would say even quicker than we are generally expecting.
2023 should be another good year as we progressed toward our 2025 targets.
We continue to see strong demand in our core markets of aerospace and defense as well as other key end markets.
We appointed the business, where we believe we have fantastic growth and margin potential.
When it comes to a possible global recession I wanted to emphasize what Bob said.
We have significantly reduced our exposure to recessionary forces.
We're well positioned.
And we are resilient.
We won't be giving targets for 2023 earnings or cash flow today.
We will stick to our normal cadence and provide 2023 targets with our 2022 year end results.
One item that you may find helpful. Today is how to think about pension expense in 2023.
With declines in pension asset values and discount rate increases in 2022 I know this is on your mind.
I want to be clear that we won't know the actual 2023 pension expense until we close out 2022.
That being said, given where investment markets and discount rates currently sit.
I would expect GAAP net pension expense to increase in 2023 in the range of $30 million to $40 million above 2022 levels.
The increased expense is not expected to change our planned pension contributions in 2023 or 2024.
As you May recall, we are planning annual contributions in the range of $50 million both of those years.
We will maintain or pension glide path.
We have successfully closed the plans to new entrants and reduced pension participants by 60% since 2013.
We are committed to efficiently working down our net pension liability.
Looking past 2023, we are tracking to the previously announced 2025 targets.
We are more confident than ever about our ability to help solve our customers' greatest challenges.
We recognize the value that brings to our customers to API and to our shareholders.
With that I will turn the call back over to Bob.
Thanks, Dan.
We're proud of our results this quarter our teams focus on strong execution day in day out.
Our continued performance.
Let me leave you with three takeaways.
Yes.
<unk> growth opportunities are strong.
The next generation aircraft to growing defense investment.
On the metal shifts in global supply chain and sourcing.
Demand for our differentiated materials is growing.
We're expanding aero grade titanium melt capacity to meet demand in both the near and the long term.
That benefits ATI, our customers and the overall supply chain.
It's one part of a robust strategy to capture organic growth.
And were resilient in the face of uncertainty.
The deliberate repositioning actions, we've taken have made a significantly leaner more nimble and more focused.
For the portions of our business that need to navigate the challenges of a softer economy, our new levels of efficiency and performance will serve us well.
We're honored to be partners with our customers. We're excited about the significant opportunities ahead of us.
And our team's ability to execute on our goals.
More than half.
We are proven to protocol.
Operator, we're ready for the first question.
Thank you we will now begin the question and answer session. If you'd like to ask a question. It is star one on your telephone keypad in to remove that question. It does start to.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question is from the line of Seth <unk> with J P. Morgan Seth Your line is now open.
Great. Thanks very much.
Good afternoon guys.
First off on the call.
I guess, just starting off strong drop through in <unk> during.
During the quarter.
Or are those the type of Incrementals that we can get can look for there.
Exiting the year and into 'twenty three.
The short answer is I think that they are pretty representative where we've talked in the past Seth about incremental margins is largely for the overall business and I'll just remind you of what those metrics look like the way to think about our incremental margins.
As the ramp unfolds as such.
Something in the 30% to 35% range.
For a typical quarter is not unusual we do have some quarters, where it can be significantly better.
Especially at a segment level or.
Somewhat less.
For various reasons, but two modeling model I would say something in that 30% to 35% range for the overall business as this ramp continues.
Great. Thanks, and maybe just a follow up while we're in each PMC on the topic of engine there's been some back.
Back and forth this week.
About what rate you.
What rates were seeing from the engine makers and what rates, we're seeing at the.
Aircraft Oems.
What kind of signal.
It sounds fairly strong, but just to clarify the type of demand technical that you're getting on.
On the engine front right now is there any kind of.
Pause or deceleration.
Heading into the year.
And how do you see that kind of playing out into 'twenty three.
Yes sure Seth it's Bob Good question. It's a question we get asked internally on a regular basis.
First of all we're always happy we're not the bottleneck and that continues to be the case I think what youre seeing is theres been this rapid acceleration very fast acceleration and then there's kind of a period in this industry, where it follows a brief period of stabilization before it takes off again.
Whether it is a program specific issue or an engine program specific issue, but it's not unusual the history of the industry would not be a straight line it would be up and stable outcome stable and what we see is.
No one has taken their foot off the gas.
Our side because of the strong spares demand and.
Between spares in the OEM builds wherever that supply chain is constrained.
They're not going to mess up an opportunity. So we have not been seeing any weakness in the order book I think.
Reality is if they take their foot off the gas.
And you have to restart again, and then it really gets kind of a hershey jerky kind of supply chain. So.
Our order book remains robust, we do see things move around a little bit between parts and programs.
Time to time, but we're not seeing any slowdown or haven't been asked to really.
Do anything more than kind of yearly inventory correction and our demand correction, but nothing significant and like we always say, we just felt that the orders we get and that order book is still really healthy.
Great. Thanks, very much guys.
Thank you Mr Sias.
The next question is from the line of Phil Gibbs with Keybanc.
Your line is open.
Hey, Thanks, very much good afternoon.
Hey, Phil.
In terms of the E&S headwinds, you're calling out for the fourth quarter, how much of that is incremental to the.
The third quarter and.
In other words, so as of <unk>.
In addition to the third quarter or is it just this is or is it just relative to what.
You had set out before as your prior guidance.
Yes, let me just kind of breakdown a little bit to help answer that question. So if you look at Q3, two headwinds I would call out would be.
S AMC outage costs the impact of that is about $7 million.
And then in Q3 the headwind around.
<unk>.
The China Covid policy impacts was about another $3 million.
And so and you focus on those components.
And you see what's going to happen in Q4 Q4, we have a couple of other items that we called out one is we're going to be turning down production. Some at the SRP business.
To bring with it some.
Some headwinds around absorption.
And then we expect that we're going to continue to have.
Some headwinds around the.
The COVID-19 situation in China.
Metal that's something else, we called out in Q2, I don't see that as a as a big.
Line in Q and Q4.
But.
I think as you're as you're looking at the overall Q3 to Q4, you're probably saying.
Down about $4 million of <unk>.
EBITDA between those different movements.
Dennis just for that yes for that segment, specifically youre talking about.
<unk> that answer your question.
It does and then on the <unk>.
Titanium melt side did you say your debottlenecking to have 25% incremental capacity just to serve aerospace specifically and then by 2025 youll have up to 60%.
Yes, that's right. So I think debottlenecking is probably a simple approach to it.
We're focused on the growth in aerospace and defense applications and it is both aerospace and defense. We are staying very strong defense pull in the arm space.
Obviously some of the rotorcraft those kinds of things you will see increased demand. So first thing we would have to say you know what we're going to have to back away from the <unk>.
Industrial applications, which we did at our mid year.
We've been able to start moving that capacity to aerospace orders, which are rapidly filling up.
And then we have quite.
Quite a few.
We call them.
Our furnaces that vacuum arc re mail furnaces, where we have a portfolio of different ages different technologies, so really pulling some investments forward with pulling some upgrades forward, but we really have an opportunity to do that in the near term. So.
By through the course of 2023, we will start to see that ramp up but into 2024 25, we will see about a 25% increase in capacity over that 2022 baseline just from those kinds of projects.
<unk>.
And then when the new EV furnace comes on it will start firing up in mid 2025 should get some pretty simple qualifications given that it's a brownfield operation.
Then that takes us from this first wave of 25% all the way up to 60% over the 2022 baseline so.
It can do anything, but I think the order book for aerospace and defense and titanium is going to be.
Really strong through that period of time, so we feel pretty good about the return on those investments.
Does that help clarify Phil.
It does but how does how does any of this taking into account restarting capacity I mean, I think you had some higher cost capacity on the west coast is that.
Is that business turned down permanently or are you.
Restarting some of those furnaces and Repurposing.
Yes, there is.
Portfolio furnaces, there could be a couple on the west coast refinery, but the facility itself would not.
Yeah, we would not require at all it's probably just some one or two furnaces to be used to kind of get us through this bridge, while we upgrade the rest of the technology.
While we actually get our raw material flow in the right spots. So more of a trends of scenario kind of stuck out in the west coast.
And then just lastly.
Was this litigation charge.
This morning from.
Sorry, So you said where was that coming from the litigation charge that wasn't in your previous free cash flow guidance, where does it come from.
While this dates back to the Rowley sponge facility in a dispute that arose and 2016 when that facility was idled.
So there was a dispute with a supplier and it was settled.
Troy Shuttle this last quarter from a.
At least from an income statement standpoint, we booked the whole charge.
So the cases grows by the way, we're going to cut the check for that in Q4, so the cash flow onto the business in Q4.
Okay, but there is no there is no other recurring liability associated with that it's done now.
There is not it's all behind us.
Thank you.
Thank you Mr Gibbs.
The next question is from the line of code Tom corner with Cowen.
Tom Your line is now open.
Hey, guys good afternoon.
Hey got it together.
I had a couple of questions on the titanium melter capacity you may have said this but.
I apologize if I'm asking again, but what is the total capital cost of <unk>.
Those upgrades and capacity.
You have contracts kind of supporting the incremental volume have you picked up.
More.
This business because of the <unk>.
Dynamic if you could update us there.
Yes, so I'll take the second question first and let Dan talk about the investments.
So I would say that all of the Aero and defense.
Customers in the world have been looking for alternative supply.
That was kind of a panic mode and.
I'd say March April may.
And then.
People started to get a feel of who could do what are moving away from <unk>.
Highly vertical integrated Russian stores too.
From fragmented solutions that are going to have to be put together from a supply chain. So once those those opportunities.
Came clear things settled into a normal flow in.
Yes, we are seeing opportunities both on the defense and the commercial aerospace side related to this.
So that's what we're responding to somewhat.
And in terms of what we're doing with our mill capacity.
I'd say that the other thing we were seeing was that.
The commercial aerospace recovery was coming pretty darn fast.
We knew it was going to take us a little time to do some of these brownfield investments so.
Long winded answer, but the bottom line was yes, we're seeing share gain opportunities based on.
The disruption in the global titanium supply chain and a lot of.
Fabricated products certainly into.
Jet engines as.
As well as.
She can play into airframe.
Airframes.
Alright.
This is Don I'll take the.
The first part of the question of interests with Capex as I remember gautam.
So the way to think about the capital spending Youre right. We havent shared specific dollar amounts, but as to the capital for this specific investment.
What I can do is I can tell you number one that this is part and parcel to the capital spending profile that we shared with the market in our February Investor Day, and just as a reminder, what we said back then was the company intends to spend about $200 million of capital in 2022.
Going to spend a bit more than $200 million in 2023, and then 2024 after youre going to see our capex start to to reduce and until it hits above our annualized.
Depreciation expense level, which is in that 140 850 kind of range. So the answer is.
It's already considered in our spend another important element is to remember that these are not monolithic investments that are being made in Maine, and we talked about metals assets.
These are these are assets as barb calls them in the tens of millions they are not in the hundreds of millions and then another important consideration is this is a spend that's going to happen over several years and it is consistent with what we've shared in the past, which is our prioritization of melt.
As well as powder.
Our capabilities and capacity.
We expect that we're going to get returns north of 30%.
And then the last thing that I would mention in this regard as you know it is this investment is part and parcel to the extraordinarily strong demand signals that we're getting in aerospace and defense, specifically pointed to our titanium and in it.
Which is something we plan to do as we believe that there will be underlying demand and we were we are.
Our confidence in the investment.
What's unfolded since that decision is only reinforced that this is a great investment.
Just to follow up on that.
Bob.
It sounded like from your remarks that there was kind of a friendly as soon as the war broke out.
And then maybe less urgency among the Oems to actually.
Close deals on sign up long term for for for titanium.
Volumes with you guys and with others I don't think it's just API. So is it more just opportunities still or is there have you guys actually.
Sign some contracts, where you've kind of guaranteed a higher volume next year the year after.
Or is that still just theres a standstill right now.
I'm trying to figure out how much they need and how much they are willing to pay and that's <unk>.
<unk> done an urgency.
No fair question I would say that it went from friends friendly to deliberate.
Conclusion right.
So we have I can think of two fairly large commitments that customers made to us that will impact 2023 deliveries, which is why we are moving ahead to expand our melt capacity.
Its first 25% will go a long way to supporting some of those opportunities we will always have room for some of the transat.
Transactional types of businesses are kind of pop up from time to time in the distribution community, but the Oems are committing and we feel good about some of the positions that we've been able to gain both in aerospace and defense. So.
Hopefully that helps with the clarity.
And one more if I may just there was a question earlier, which I wanted to get you to expand upon which is on.
On the jet engine channel you heard how much earlier in the week talk about.
Lower shipments into year end relative to what they were hoping for previously.
Heard that there's you know.
Bottlenecks in the jet engine supply chain it looks like it's on the leap program, but I cant quantify that but I'm just curious.
Why why won't these issues backup to ATI at some point like what gives you confidence how far out can you see in terms of your orders scheduling.
If we could just elaborate on that thanks.
Yes, but we're not seeing it.
It's true.
Before we get on these calls.
Quick debrief with all of our business unit presidents.
Our CFO <unk> <unk> to make sure we're not missing any last minute.
Breaking news, but I think part of it is.
We are in many cases like the forgings, where you have a pretty strong vertical integration into our specialty materials business.
That helps quite a bit.
We have pretty good visibility on our forgings, we've done a lot or doing more on.
A couple of lean leaning into lean with better connections to our jet engine forging customers.
There are cases candidly, where we are dependent on another supplier spill it to forge and we do know that they do tend to run late so some of our competitors.
They actually be more dependent on other people spell it than we are but I think the principal reason is that for fairly large percentage of what we do we have the vertical integration opportunity between specialty materials and forging is within.
The <unk> segment.
That was originally the purpose behind acquiring a formerly known as flattish forgings.
So in some kind of at times to be honest when other suppliers fail then they become opportunities for us so.
I think that team is working well together to make sure they have the right stuff in the right place so.
Help a little bit on the clarity side.
Yes. Thank you.
Okay.
Thank you for your question.
Our next question comes from the line of Josh Sullivan with the benchmark co.
Josh Your line is now open.
Okay.
Hey, good afternoon.
Okay, just following up on that.
Just kind of following up on that.
You talked about aerospace aftermarket, helping is the OEM sales go through this kind of uncertain time period, but if you do the math on.
<unk> really unique specific parts that are maybe just unique to one engine and you see what the Oems are announcing they're delivering.
The aftermarket piece that would be outside of that within your expectations or is it is.
Is it more than you would expect or is there another X factor there.
Yeah.
Good question so we.
We see spares demand exceeding historical spares ratios right. So.
A good example of that is probably on the wide body side, where if you look at the parts, we're supplying for wide body engines.
Alright.
I'd say, 50%, 60% higher than the ratio would normally relate to so we're seeing outsized short term demand based on the use of the wide body engine.
Wide body flights and when we talk to our customers about it thats. The same thing I see service visits spares for branches are up so yes, we've seen an outsized.
Demand for spares really across the board, but for US. It's most pronounced on the wide body side as they come in for service after pretty heavy years, so not a lot of new plans, but certainly a lot of spare so how long will that continue.
For a while we said we would expect it to eventually go back to all things revert to the mean as they say but.
Probably we're talking about year or two or three before that happens.
No.
Three out there in the schedule.
Right right.
And then curious if youre able to see the Boeing delivery assumptions over released today.
Reiterating 2025 outlook and I know youre, not giving 'twenty guidance.
Looking at Boeing's delivery assumptions.
Any notable.
Francis with what you guys are looking at a delivery not enter into the next year or so.
I think it actually confirm them, so what I, what I heard them say it was.
You know by 2025 2026, they could be.
Hitting 50, a month on the narrow body.
2014 wide bodies.
That's pretty good for RFS, that's better than our assumptions to be honest with you when we look at the combined narrow body.
<unk> body sector, when we got into Investor day, when we laid out the 2020 fives.
Our underlying assumptions were more around the 100 narrow bodies on closer 20 wide bodies at that time.
So everything we see says were probably conservative on our 2025 estimates I don't Ive mentioned, Don nervous when I say that kind of stuff publicly but.
I think there was some good news on how they see the I'll call them. The grounded fleet, the 87 and the $3 seven as how they see those being put into service and how they see the production ramp coming in actually fits what we see in the 2020 for 2025 timeframe. So we should start to see.
And we are seeing some of that demand.
Our lead times for titanium or out too.
Easily the third quarter of 2023, so we are seeing.
Some uptick on the titanium side that we haven't seen in a long time, so bottom line.
I would say.
Our estimates are more conservative than what we saw today from.
The Investor day presentations, but positive trends for sure.
Got it got it.
And then just one last one on the lingering effects of the annual maintenance should we expect these events to have a longer recovery cycle in the future and we've seen this from some others in the industry knows labor hurdle, how are you going to address that going forward.
Yeah. This is Don I'll take the question. The short answer is no. We wouldn't expect that we would see elongated.
<unk> I think we've done a pretty good job of maintaining our assets.
One situation are highlighted in this call was related to our CMC business unit and a delayed ramp in a specific outage that they took we understand the root causes we resolve the root causes and so we wouldn't expect that to be a repeat typically very very good as a team.
<unk> in terms of executing outage planned outages.
Okay. Thank you for the time.
Thank you Mr. Sullivan.
Our last question today comes from the line of Timna Tanners with Wolfe research.
Your line is now open.
Yeah, Hey, Ron Thanks for the time I know that Bob pose the question. It's not a question of if we're heading into a downturn, but how much it affects ATI and I guess I just wanted to see a high level, we can try to take a stab at that because in the past even when aerospace's Fang sometimes you can get thrown off by the non aerospace recession.
And with risky stuff. So if we think high level about how much of your business could be more subject to the slowdown what do you. What do you suggest we look at for that is it just anything not Andy or anything not medical and just put a lower margin on that business and that's the grass skirts or another approach suggest yes.
Yes.
We'll try this approach in and John will jump in if he wants to add any color. So we actually do look at that pretty regularly breaking it down by markets within the segment.
I would say today because of the product mixes of market shares the big moves we've made on our footprint.
We would say that at this particular time, the recession is probably going to impact aam's segments.
Okay.
CMC segment, we might see slow to moderate growth, but we're not going to see a downturn I don't think they are going to take the foot off the gas on aerospace and defense for <unk>.
Magnitude of in Aaas recession would probably impact plus or minus 15% of our revenue base, which is a significantly different place than we were pre COVID-19.
What I was saying, we expect our E&S business to go down 15% in a recession. What we believe is 15% of that end market plus or minus would be subject to recessionary downturn. So you can kind of take that what are we about half a billion dollars.
Yes.
I got about 15% of that or so on a quarterly basis would be recession exposed and then you can kind of make an estimate of how much those kinds of markets with a decline in a recession now we're seeing some of that Dan pointed it out in China. Today. So we're already have some of that factored in.
The COVID-19 issues or the zero Covid policy in China, but if you talk to US like you did maybe five years ago.
When we had other products in our mix that we no longer produce.
We would've been more exposed and then the last part of why we think we are less exposed as we've changed our customer base. We don't have what I would call. It a full line commodity style distributors in our mix anymore. They tend to as you know well adjust their demand based on the anticipation of market shifts.
We have a lot more Oems, who really only changed their demand profile based on actual demand shift. So I think we're in a better position than we've ever been but.
Nearly 85% of Ats revenue is probably is resilient to a recession as we've ever been.
Timna.
No that was helpful. Just to clarify then you think 85% of E&S or 85% of ATI know Jorge.
85% of NFS for sure and 100% or as close to a 100% as we can get an H P. M C.
Maybe just two things I would add to that Timna. If you don't mind. So one thing is the benefit of the transformation, we've talked about quite a lot is reducing our metal exposure the metal volatility exposure and as you know very well when you're getting into recessionary periods of time that.
The moves in metal prices can can be pretty dramatic.
So not just the percentage that Bob is talking about that's important to understand but also we've dimensional knee changed how metal price movements affect our business and as well as pricing and so you know the short answer is we really have dampened the effect of inflation on our <unk>.
Business.
With this transformation and.
And so we think that we can perform really well with great resilience, even if there's a global recession, especially.
Especially given the strong underlying demand for our core businesses like our core markets like aerospace and defense.
Okay. Thanks for that color that's helpful context, and I'll leave it there. Thanks again.
Alright, thank you.
Okay.
Thank you for your question.
We have no further questions waiting at this time, so I'd like to hand, the call back over to Tom Ryan with ATI.
Okay.
Thanks again for joining us today.
This concludes our Q3 2022 earnings call.
Thank you for your participation you may now disconnect your lines.
Okay.
Yes.