Q4 2022 Allegheny Technologies Inc Earnings Call

Yeah.

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Okay.

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Good morning.

My name is Lauren and I'll be your operator today at this time I would like to welcome everyone to the Hei Chief will 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

Moving to slide presentation to accompany the prepared remarks can be found on the company's website.

After the Speakers' remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply crushed stockpile by the number one on your telephone keypad.

If you would like to withdraw your question. Please press star <unk>. Thank you.

At this time I would like to highlight the call to Tom Wright, Vice President Investor Relations and FBA and Tom You May begin your conference.

Thank you good morning, and welcome to <unk> fourth quarter 2022 earnings call. Today's discussion is being broadcast on our website participating in today's call are Bob Wetherbee Board Chair, President and CEO , and Don Newman Executive Vice President and CFO .

Rob and Dan will focus on our fourth quarter and full year highlights and key messages before starting our prepared remarks I want to draw your attention to the supplemental presentation that accompanies this call those slides provide additional color and details on our results and outlook and can be found on our website at ATI materials Dot com.

After our prepared remarks, we'll open the line for questions. As a reminder, all forward looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation now I will turn the call over to Bob.

Thanks, Tom.

Good morning, and thanks for joining US we ended the year strong.

Ati's quarterly revenue once again topped $1 billion.

As the second quarter in a row, we achieved this milestone.

We ended the full year at a run rate of $4 billion in revenue, 37% higher than 2021.

We're executing expertly against robust markets, we're meeting our commitments and getting better every day.

Today I've summarized our performance in four key headlines.

Headline one.

We're achieving what we set out to do.

In the fourth quarter, we delivered adjusted EBITDA of $140 million.

This was driven by continued strength in our core aerospace and defense markets.

Adjusted EPS of <unk> 53.

Surpassed the midpoint of our November guidance.

The team is laser focused on execution and it shows in our results.

On a full year basis, ATI, adjusted EBITDA was $549 million or 14% of sales and.

And almost 400 basis point increase over 2021.

Adjusted earnings per share was $1 99.

We generated $148 million and free cash flow.

Don will dive deeper into the financials in a few minutes.

Headline too.

Our deliberate actions and transformation are delivering the results we projected.

It comes down to our team our capabilities and optimizing our business with discipline.

Let me add a little color here, starting with our team.

As 2022 began we were on the front lines of the war for talent hiring nearly 1000, new team members during the year.

Now with our workforce largely in place we're focused on accelerating.

Our team is quickly moving up the learning curve now cross qualifying from one job to multiple jobs to gain flexibility.

Their productivity and proficiency grow every day.

To those 1000, new employees I say, you made a great decision to join ATI.

We look forward to performing together.

And to our entire team. Thank you for your hard work and focused efforts you are driving <unk> success.

Next up our capabilities where.

We're optimizing our existing footprint to increase opportunity.

When it comes to titanium and nickel metal we're focused on two things first operational efficiency to increase output and second increasing inventory velocity.

Some more color on titanium specifically.

Russians invasion of Ukraine has structurally disrupted the global titanium supply chain and outcome of this tragic situation.

This is the most significant titanium opportunity in years.

Titanium product lead times have grown from eight weeks, just a few quarters ago to 60 to 70 weeks today.

We're operating with a disciplined controlled order entry process that leads to optimal use of our capacity.

Last quarter, we shared our plans to increase near term titanium melt capacity for aerospace and defense applications by 25% using our existing assets.

Now we're revising this plant upward based on overwhelming customer commitments here and that the word contracts, we're increasing near term capacity not just by 25% will increase by 35% that's over the 2020 to baseline.

It requires only nominal capex less than $10 million, which is included in our Capex guidance.

Clearly demand is growing and the team is responding and we're responding quickly.

It's been a busy 90 days, we've restarted our melt shop in Oregon melting the first and get a few weeks ago I was actually out there last week. So my hand safely on it feels great to see the output we expect production to ramp through the first half of 2023 and.

And we will start to see benefits from that capacity in the second half of this year.

On top of that our previously announced brownfield investment to further increase long term titanium melt capacity is on track to produce first thing gets by the end of 2024.

Customers are committing to this capacity as well.

This brownfield investment is within the scope of previously provided capital estimates, it's crucial to ATI is the ability to meet the significant long term titanium demand.

Those of you listening to this call likely aren't the people, placing orders for titanium. These days, but you probably know some people that are in.

If you are speaking to anyone about it.

This is to get those remaining contracts signed up soon.

There is very little capacity in 2023, that's on spoken for and that's increasingly true for 2024 and beyond some of our product lines actually have started customer commitments and bookings in early 2025, so it's a tight market.

The specialty rolled products business transformation and footprint consolidation is nearly complete.

We're on track to produce first coils at the new Bryan Neil furnace in Vandergrift, Pennsylvania in the next 90 days.

Qualification and production will come soon after this.

This is Bryan Neil furnace provides our customers with state of the art sheet, finishing capabilities and Optimizes, our operating footprint to significantly streamline production flow paths.

My third headline today.

We're performing and growing markets, especially our aerospace and Defense Corps.

Our repositioning to an aerospace and defense leader is well on its way.

In the fourth quarter, our overall product mix attributed to aerospace and defense increased to 53% of total sales up 12 points over the same period last year.

In reality and for clarity.

Have a good shot to CRA ANV product, Mexico, north of 60% by the back half of 2023. The progress. We've made is really great and continues and we're well on our way to the 65% goal. We've discussed with you guys earlier.

Why is this important these markets offer premium growth rates and higher margins compared to commoditize products and markets.

Those factors provide great opportunity for ATI to generate cash and create shareholder value.

It's worth noting that at quarter over quarter jet engine and airframe sales were flat versus Q3.

We attribute this primarily to efforts across the supply chain to control year end inventory.

This was accentuated by plant shutdowns and intentional order recalibration in the near term to increase the industry's supply chain reliability for the longer term.

We expect a strong growth trend to resume in the first quarter.

The momentum in our core markets is driving profitable growth across the enterprise.

In our <unk> segment Q4 sales of commercial aerospace products increased by 85% compared to the prior year.

Total aerospace and defense sales comprised 83% of <unk> revenue in the fourth quarter.

Year over year total H BMC segment sales climbed by over 40%.

EBITDA margins expanded over 400 basis points.

This strong operating margin growth reflects higher sales of Nextgen jet engine products as well as higher operating levels.

In the E&S segment commercial Aero sales grew by 113% versus the prior year.

Total A&D sales were over 30% of that segment's Q4 revenue.

This mix improvement along with the ongoing efficiency benefits of our transformation drove a 30% increase in full year total aam's sales.

EBITDA margins improved by over 300 basis points versus 2021.

Clear indication to me and hopefully to you that our transformation is paying off.

Headline number four.

The modest headwinds, we're experiencing impact only a minor portion of our business and that portion continues to get smaller.

We see some recessionary softness in construction mining and general industrial end markets. The good news due to our transformation a little more than 15% of our A&H segment is exposed to those headwinds.

That's a much smaller portion than in the past.

We continue to face near term softness in our Asian precision rolled strip business Theres a lot of uncertainty there while we see some positive signals. We're forecasting this business to remain at current levels or even modestly contract until we see a clear upward trend.

What I can say for sure we will be ready when Asian demand picks up.

Okay now, let's go through a quick review of our markets and what we see heading into 2023.

These can be found on slide four in the accompanying slides on our website.

In commercial aerospace as I mentioned earlier, we're in the most significant production ramp this industry has seen in several decades.

2022 jet engine sales doubled from the prior year and.

An astounding ramp rates.

2022 airframe sales grew 79% versus 2021 recovery of the airframe market for ATI has lagged jet engine throughout 2022.

But looking ahead that's changing.

We've been watching for two signals to indicate the commercial aerospace market is at a critical positive inflection point.

Well, some analysts would call growth catalysts.

I am pleased to report we've seen both in recent weeks.

On the narrow body side, we've been awaiting increased clarity on future 737 Max demand.

December is Mega order from India is a big step towards reducing inventory.

Add to that the Chinese aviation authorities declaration in January that the Max is approved to return to service.

And then just this week Boeing announced a $4 737, Max Assembly line in Everett Washington.

These are growth catalyst number one.

The second signal we've been watching for.

The resurgence of 787 production on the wide body side.

Airlines order of 100, Boeing 780 Sevens was clearly good news on this front and reinforces exactly what we've been anticipating.

Even a little earlier than we expected.

Positive growth catalyst number two.

We expect ATI airframe product shipments to accelerate throughout 2023.

In our other core market defense growth in global spending continues to create significant opportunities for ATI.

In the near term, we're seeing a record level of demand for products like titanium armor going into new military vehicles.

In the fourth quarter of 2022, ATI defense sales grew 18% versus Q4 of 2021.

The sequential increase was driven largely by accelerated support for the Navy's carrier and submarine fleets and increased shipments for military rotorcraft applications.

We expect 2023 defense sales to be strong and the sub sectors as well as ground vehicle armor and military aircraft.

I think most of US saw the news of the Allied nations, sending tanks to support Ukraine.

Yes, just one more reminder of how quickly things have escalated in terms of demand for defense materials.

We expect that demand to be sustained for multiple years based on all the signals that we're getting from the federal government.

In addition to our core A&D markets, we leverage our expertise to critical adjacent applications with arrow like characteristics. This.

This includes specialty energy medical and electronics.

We're seeing growth in these markets too.

A little more color about these is on slide four of the accompanying presentation on our website.

I'll now turn the call over to Don to walk through financials and guidance I'll be back after that to conclude and take us into Q&A.

Thanks, Bob.

Today I'll share details on three areas of Ati's performance, one or 2022, Q4 and full year results to the 2023 outlook and three updates on the 2025 targets shared during our Investor Conference.

Let's start with highlights of our Q4 performance.

As Bob noted Q4 marked our second consecutive quarter with over $1 billion in revenue.

Not only are sales up.

We are on track with our strategy of shifting product mix to value add.

Aerospace and defense sales were 53% of total revenue in Q4.

That's up from 51% in Q3 and up 200 basis points from Q4 2021.

Q4, 2022, EBITDA margins were 13, 9% compared to 12, 4% in Q4 2021.

Value added sales mix increased production levels and diligent cost management, all contributed to the margin percentage expansion.

Fourth quarter EPS was <unk> 53.

<unk> higher than the midpoint of our guidance range.

As we dig further into our performance I'll highlight a few of the key takeaways as we see them.

First as you can clearly see in our numbers sales are growing and the differentiated markets, where we are valued the most.

Secondly, we're improving profitability are significantly higher adjusted EBITDA reflects the benefits of our business transformation.

Full year 2022, adjusted EBITDA was $549 million, an increase of $258 million and 89% from 2021.

Compared to full year 2019, EBITDA increased 25% on revenue that is nearly $300 million.

Below 2019 levels.

Full year 2022, adjusted EBITDA margins were 14, 3%.

That's nearly 400 basis points better than 2021, and 360 basis points higher than 2019.

These significant improvements reflect the impact of our transformation structural cost reductions and continued focus on mix and price improvement.

What else contributed to the year over year gains.

Volume growth increased metal prices $34 million in covenant incentives and $10 million in tariff refunds.

Those COVID-19 incentives by the way helped to offset operating inefficiencies as we hired and trained nearly 1000 new workers.

Pass through revenues due to metal volatility dampen margin percentage performance since it typically generate little or even zero profits.

Otherwise, we would have delivered even better margin percentages in 2022.

2022, adjusted EPS was $1 99.

Up from 13 per share in 2021.

We recognize that cash generation is key to value creation.

In 2022, we generated $148 million of free cash flow compared to our guidance of greater than $90 million.

It is also significantly higher than our 2021 free cash flow of $6 million.

Third I want to share progress on two contributors to value creation.

Working capital and Capex.

We ended the year with managed working capital at 30% of revenue.

Last quarter I shared that we were targeting working capital to be in the low <unk> by the end of 2022 and expect it to hit our 30% target in 2023.

The operating teams continue to amaze outperforming expectations and hitting the 30% working capital targets sooner than planned.

It benefited 2020 to cash generation and liquidity.

And positions us for additional future improvements.

One more note on working capital and.

In Q4 customers made advanced payments to lock in their 2023 production slots.

This is another signal a strong titanium and nickel demand.

This serves to pull forward approximately $30 million of 2023 cash flow into Q4.

When it comes to Capex, we continue to maintain strict discipline.

Capital expenditures totaled approximately $130 million in 2022, we also accrued $38 million for capital items at year end.

This was due to supply chain equipment delays and resulting timing of payments.

You accrued capital items will roll into 2023 Capex.

Even so we expect to keep 2023 capex within the $250 million target. We set in our last February Investor conference more on that in a minute.

The fourth key takeaway to highlight.

Our strong balance sheet, which provides a stable foundation for value creation.

We closed out 2022 with more than $1 $1 billion of liquidity.

That includes $584 million in cash and $538 million available under the ABL facility.

The net debt ratio was two two times at the close of 2022 down from four times at the beginning of the year.

Great headway on our goal to Delever the balance sheet.

When it comes to pension we are now 88% funded on a GAAP basis.

Our net pension liability at the end of 2022 was $219 million down from $396 million at the end of 2021.

What accounts for the drop in net liability.

Increases in discount rates and company contributions offset by negative asset returns and.

The 20% negative asset returns in 2020 to reflect pullback in the broader financial markets.

Asset returns and discount rates can change from period to period, but I want to be clear, we remain focused on executing the pension glide path.

Our strategy remains the same and we are advancing.

We are near completion of our current stock buyback program and.

In 2022, we repurchased five 2 million shares for a cash cost of $140 million at an average.

Price of roughly $26 92 per share.

We have $10 million remaining on the current board approved program.

Now, let's talk about full year 2023 outlook.

You will see our targets captured on slide nine of the accompanying presentation on our website.

Bob painting, a clear picture of our markets.

Bottom line for 2023.

It will be another year of robust meaningful growth driven by strong and growing markets. The demand is there.

While inflation and supply chain challenged us we successfully offset the impact in 2022 through pricing actions pass throughs and capturing offsetting efficiencies.

While inflation seems to be slowing and the supply chain is normalizing a degree of uncertainty is still expected in 2023.

With the team well practiced in taking quick and deliberate action. We believe we can achieve similar success in offsetting negative factors.

Post retirement benefit costs, which include pension and <unk> expense will increase the net $36 million in 2023.

That's within the estimated $30 million to $40 million range shared in our last earnings call.

The expense increase is largely due to changes in actuarial discount rates and negative asset returns in 2022.

The additional expense will not impact 2023 contributions to the plan.

As a matter of fact, we laid our 2023 voluntary contribution of $50 million earlier this week.

Plan on another $50 million contribution in 2024 as planned.

We have made tremendous progress on the pension in recent years. Since 2013 total planned participants have declined more than 62% and there are now fewer than 900 active participants.

We have also worked down net liabilities executed numerous annuity <unk> transactions and made voluntary contributions to the plan.

We have a clear objective.

Execute the glide path strategy to eliminate pension impacts.

Now.

What our EPS expectations for 2023.

We expect 2023 adjusted EPS to be in the range of $2 to $2 30 per share.

That includes a 24% impact from the post retirement expense increase.

Nonrecurring items in 2022, and the increased post retirement expense in 2023 can impair visibility of our underlying EPS growth year over year.

Removed from the equation impacts of Covid incentives tariff refunds and the incremental post retirement expense the result.

Underlying EPS is increasing roughly 40% year over year at the midpoint of our 2023 guidance.

That's the bottom line about earnings.

Now how are we thinking about cash generation.

We expect full year 2023 free cash flow to be between 125 and $175 million.

As I shared we generated $148 million of free cash in 2022 now.

Now adjusted for the $30 million of cash pulled forward by customers prepaying for production slots.

That brings our 2022 free cash flow to roughly $120 million closer to where we previously guided.

Now think about the impact to 2023.

Our 2023 free cash flow would have been $30 million higher than the present guidance.

Again, let's remove the noise to understand the underlying growth.

2023 free cash flow at the midpoint of the range is essentially 50% higher than 2022. Once you consider the impact of customer prepayments in Q4.

We made solid progress improving working capital efficiencies in 2022, hitting our 30% target during a dynamic growth period in.

In 2023, we expect to make incremental improvement on our 30% working capital level.

Overall, we expect managed working capital to be a $100 million use of cash in 2023 give or take.

That magnitude is similar to the overall cash impact we saw from managed working capital in 2022.

We anticipate 2023 capital expenditures will be in the range of $200 million to $240 million, including the $38 million carryover from 2022 into 2023.

The high end of our range is still below the $250 million Capex placeholder, we shared at our Investor Conference.

We are carefully managing our maintenance capital spend to ensure assets are in ramp ready condition.

Our 2023 Capex includes capital for the titanium milk brownfield expansion project and 35% production increase from existing assets.

I do want to reinforce that this incremental capacity is largely committed under existing contracts.

And as a reminder, we target returns of 30% or greater on growth projects.

Let's talk about Q1.

For the first quarter, we see continued strength in our core markets and continued softness in industrial and consumer demand.

Our Asian precision rolled strip business will likely continue to be impacted by COVID-19 related challenges.

Those conditions could exist for the Asian business into Q2 as well.

It is important to remember that the additional post retirement expense I mentioned earlier will create roughly six cents of incremental expense each quarter in 2023% relative to 2022 levels.

We expect Q1 EPS to be in the range of 45 to <unk> 51 per share.

Excluding the incremental post retirement benefit expense EPS range is modestly better than Q4 2022.

Performance is obviously expected to ramp as the year unfolds, reflecting continued sales growth added capacity and recovery in our Asian precision rolled strip business in the second half.

Before I go into the extended outlook.

Let me give you some context related to metal price pass throughs to customers.

Metal prices generally increased in 2022 from 2021 levels.

We estimate full year 2022 pass through revenues represented $300 million to $350 million over 2021 levels.

Remember pass through revenues typically generate minimal profits and are generally dilutive to overall margin percentages.

I thought that might be helpful. As we now jump into our 2025 outlook.

In our Investor Conference, we shared that we expected to see revenue grow at a compound annual rate of between nine and 11% from 2021% to 2025.

That would bring our 2025 revenue to $4 $25 billion at the top end of the range.

Last quarter I shared that we expected to be at the top end of that CAGR range.

We see many positive indicators in our business, including continued strength in our key end markets pricing opportunities and added capacity.

While we are not going to update our targets I will share that we foresee potential upside to a 12% CAGR for the 2021% to 2025 period.

Note that this growth assumes moderated metal prices not the elevated levels that we've seen lately.

I can save you the math on that additional growth potential at.

12% CAGR from the 2021 levels with results in 2025 revenue of roughly $4 4 billion.

Our 2025 margin percentage targets remain at 18% to 20%.

The aerospace ramp with its improved sales mix and higher volumes should expand margin percentages from current levels.

Benefits of our ongoing transformation as well as growth in defense energy and our advanced alloys and ultra performance materials are expected to be accretive as well.

These forces should drive growth well beyond 2025, but we'll save that discussion for another day.

Given our growth trajectory, coupled with disciplined capital allocation, we see significant opportunity to create value for our shareholders.

And with that I will turn the call back over to Bob.

Thanks, Dan I completely agree with you on the significant opportunity that's in front of ATI as well as the fact that we're well positioned to go get it.

2022 is a year of growth in preparation for us.

Our strategic efforts put us in a strong position across ATI.

The market's ready.

Ready.

Borders.

And.

Capabilities and equipment running faster every day with capacity increase.

And the team.

Already hard at work.

Now we are building on our momentum.

We're accelerating to meet and exceed our 2025 targets.

We're proud of our 2022 results.

More specifically I am extremely proud of the team that produce them.

We're looking forward to even more to come.

We are proven to perform.

Operator, we're ready for the first question.

Okay.

Thank you.

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Our first question comes from Richard Safran from Seaport Global. Please go ahead.

Okay.

Bob Dan Tom Good morning, how are you.

Yeah.

Good morning, Richard.

So Bob I wanted to follow up on your opening titanium remarks dawn.

This may also be for you as well I'm trying to get a sense of south titanium is going to affect your mix and margins as we look going forward.

Im wondering if titanium alloy sales are going to be accretive to margins and from what I'm gathering based on what you said and correct me if I'm wrong. It looks like the impact is going to be in sometime in 'twenty four if not 25 is that right.

Yes. This is Don I'll give you the short answer yes, as titanium increases in our mix, we would expect that to be accretive to our margins.

And as far as timing goes we're actually seeing and we're seeing unfold now and it will continue to build momentum through 2024 and 2025.

Okay.

And.

Second here.

On your comments about defense I wanted to know if you could take.

A little bit longer view on defense growth, how youre thinking about that and how you think thats going to reshape the portfolio and impact your mix and.

Since youre selling materials.

You own the IP I'm, just wondering how defense margins might compare with commercial margins.

Yes, a couple of questions in there I'll take the last one first I think over time defense margins will approach commercial Aero margins for the same basic metal units commercial aerospace tends to have more differentiation in some of the more exotic titanium.

Titanium grades and nickel grades, but overtime for the common specifications I think they'll be.

The same because that's how we're going to manage our capacity.

In terms of the opportunities we are excited about what's going on in defense other than the tragedy in Ukraine, Thats driving ground vehicle sales, we feel well positioned.

With the naval carriers submarine fleets.

We are benefiting and we expect to see the benefits of the Argus program and those are huge long term programs. We're excited about that.

We've gotten some awards from the next generation military vehicles, the mobile protected firepower activity that's out there we see those vehicles coming.

Certainly the Abrams tank is a heavy titanium user.

For lightweight reasons and that's exciting.

And then all kinds of things, including more space, we put kind of defense.

Crosses over between.

Where it was what we see in commercial versus defense, but the commercial space and defense space is really picking up and we see opportunities a little bit longer term, but in our lifetime and hypersonic strike. So you put all those things together.

That said double digit.

Mid teens kind of growth.

For the long term and again based on differentiated materials.

And that really bring value to the NAND products. So.

Well positioned and.

Bottomline lots of mission critical platforms for the U S and its allies I hope that does that help Richard.

Of course, if those thank you good Sir I appreciate it.

Yes.

Thank you.

Our next question is from Phil Gibbs from Keybanc capital markets. Please go ahead.

Hey, good morning.

Good morning, Phil.

This titanium debottlenecking the 35% from 25% you had mentioned a couple of months ago.

Does that.

Involve re scoping the brownfield because I remember the brownfield was 35% so as this staying at 60 or is this moving to 70.

It's additive to the total mix. So it does not change what we expect to get out of the brownfield investment.

So you're right. Our total capacity is actually going up to closer to 70% you did the math right. So we're excited about it the long lead time items that are on the books ordered wise and.

It's going to be really big were happy actually that the demand has been so strong and the customer commitments that really been strong which is why we raised the short term demand our capacity number from the 25% to 35.

And we're out there last week put our hands on them and it's pretty exciting to see the ramp is underway.

You feel all of this added capacity is supported by <unk>.

Customer.

Commitments.

Yeah.

We do.

It's moving from the talk about it to the commit to face a lot of those commitments have been made based on what we're seeing in the market I think by.

Probably the last 90 days the reality of the demand in 2023 is coming to the market and we're seeing lots of interest in our lead times are stretching out to show it so.

Simple answer is yes, we feel that customers are committing and have committed in many cases to the capacity.

Do those.

Do those involve some of these prepayments that you had mentioned it sounded like it was a $30 million tailwind to cash in the fourth quarter. Now is that does that $30 million become a $30 million headwind as you ship against those commitments.

Next year.

Right.

Yes, I wouldn't call it a headwind.

Do you have to give it back.

Well the way I would look at it.

Phil is number one the indicator as to how strong the demand is in the market that customers are willing to make those prepayments in order to reserve their slots. The reality is what what's happened is that's cash flow that we would've expected to hit in 2023 that has been accelerated into Q4 now we do.

Don't look at that as necessarily creating a debate for us in 2023, clearly when you look at our cash flow guidance for 2023.

We didn't take that down by.

By respective 100 100.

Excuse me $30 million, we set the midpoint of $1 50 so.

That's the way to look at it.

And I think that again, the strongest takeaway that you can you can make on that those advanced payments are the demand, which we keep the same demand we send it 50 times already in the call but demand is truly.

Strong and our customers this is not a blip or customers.

Are seeing a sustained need for our materials.

And it's going to increase from here.

Thank you go go go.

Thank you.

Our next question is from Seth Sigman from J P. Morgan Stanley . Please go ahead.

Yes.

Thanks, very much and good morning, everyone.

Good morning wanted to start off asking Justin good morning start off asking about the profitability in <unk> and <unk>.

How we should think about the drop through in 2023, some quarters were stronger than others in 2002 that last quarter looked a little bit lighter than we expected and kind of moving from the.

18% this year.

Year two.

Low to mid Twenty's out in 2025.

How to think about that progression, whether its kind of back end weighted or or.

More even across the years.

Yes, I think the easiest way to think about it as we've talked about incremental margins.

Going forward north of North of 30% I think is what I have shared we still expect that that is intact.

We did note that with the additional $36 million of post retirement expense in 2023, that's going to create some earnings headwinds and will also be a bit dilutive to the overall.

Overall margins for the business. This is not <unk> specific but for the overall margins. The good news is we're going to more than make up for that that roughly 80 to 90 basis point headwind due to the post retirement now when do you think about <unk>.

The strong.

The strong growth that we're seeing in that business the mix is changing.

As we get more and more of the Nexgen.

Products that are being sold so I think I think you should expect to see continued expansion.

<unk> that kind of range that we've talked about in our Investor Conference, which I believe we said expect expect for each BMC.

Margins in 'twenty.

Low to mid twenties.

We still see ourselves on track to accomplish that in that timeframe.

Okay, Okay excellent.

And then on an <unk> or I guess on the titanium.

About the incremental.

Titanium growth coming in 2023.

On the airframe side I guess should we think about most of that coming at us.

And then you talked a little bit about the growth catalysts for 787, and we are at a place now where you think Boeing.

Should be moving toward.

The higher rate, but.

More I guess is that the main driver of the increased demand that youre seeing or.

Is it much more broad based than to the extent, it's more broad based can can you touch on the other the other drivers.

Yeah, a couple of questions in there Seth I think the question. The first one was around near term titanium impact.

So we're going to be ramping up here in the first half and it takes a little while to go from melt to final product in the back half.

So from a topline perspective, we.

We would expect $50 million to $60 million of top line revenue from this additional milk in 2023 is probably a good estimate that Don Wood, let me get out there for you and then in the second half yet clearly in the second half.

Asked about Aaas in PMC.

<unk>.

It could probably be 50 50 between the two.

No. It's titanium six four for the most part so it can go a lot of different ways. So if you're modeling it I feel comfortable 50 50 between the two segments.

I think that was the first set of question. The second part was around 787 demand and is that the principal issue.

I would say, we're not done with the.

Titanium share reapportionment from the prior sources people still have material falling from Russia, and they are working hard to get their supply chain reshot or re re firmed up for what they want.

You remember that the <unk> guys are a very integrated.

Business.

The alternative is not showing integrated so there's still a lot of work to be done I think in that supply chain. So we're seeing part of that is still continuing.

I can't speak for our customers, but we basically exited our joint venture with the Russians and we did what was right for our customers. It just took us a little while to.

Exit from that so it's not unusual that they would do that.

The wide bodies in general.

Repositioned, our mix that we're more and more agnostic as to which which.

OEM, we're supplying and certainly the wide body phenomenon in the short term has been in the U S. In terms of the shortfall by the.

Europe's been good Airbus has been good on the wide body and we are benefiting from our relationship with them. There. So I think.

The catalysts that I would say is 87 demand.

Wide body in general.

Realignment of supply chains, and then I think we're on the verge of starting to see some of that early triple seven stuff I know it's.

A ways before it enters into service, but I think that catalyst has come back very very quickly probably in.

The 2024 timeframe given the long lead times that we see so.

We're pretty excited across the board on wide body in general and your long term guidance when we did our 2025.

Guidance of about 100, narrow bodies 20 wide bodies by 2025.

Those estimates are looking a little more conservative than we thought so.

We're pretty excited about all the catalysts coming together.

Great. Thank you very much helpful.

Thank you.

Our next question comes from good time, calling in from Cowen. Please go ahead.

Yes.

Hi, good morning, guys.

Good morning.

Yeah.

I wanted to ask you about lead times right now.

What are you guys quoting on your various aerospace.

Products, so airframe jet engine.

And how has that changed over the last six months.

Yeah. So the last six months good question Gautam good morning.

So one thing that is kind of gone on for us during the.

Covid pandemic was a shift from <unk>.

Distributors is a key part theres still important distributors are key part, but the team has done an excellent job of the law.

<unk> more closely with OEM demand. So we are getting.

A few more direct signals then.

Percentage of our mix in aerospace and defense. So that's been positive I would say.

Today, depending on the part and the flow path.

Customers are willing to commit orders and some products into Q1 of 2025 believe it or not so we do have a fairly controlled order entry program against those commitments they have that kind of visibility and they want to make sure. They get their pipeline, though I would say more of the mill products type things.

Plate.

Price they'll get some titanium in Q4 of 2023.

But those slots are going fast so right around but and then the general more specialized alloy mill products that come out of our North Carolina melting.

Probably.

Into 2020 for early 2024.

Not Q2 of 2024, so where we six months ago, I know, where we were eight quarters ago eight quarters ago, you could place an order in the quarter and get it right. So that was eight six to eight weeks and that was obviously in 2000 22021.

Those days are gone so yes really.

I would say the average lead time is $50 $60 70 weeks, depending on the product.

Wow Okay.

You guys have any long term contracts coming up for renewal.

Over the next year.

I'm, just curious like how pricing.

It sounds like this is a good environment for pricing to move higher even on LTA since they come for renewals is that.

Is that meaningful in any way.

Yeah, we don't have any opportunity.

Yes.

Do we have any major ones in 2023.

They are kind of layered in so.

2024, 2025, probably 2025 will be the first major transition year to other contracts most of the big Oems.

Out.

No.

We have quite a few that go into 2030 to 2035, those kinds of numbers and most of those have inflationary pricing pass throughs.

Would say for people, who don't have contractual commitments or don't have long term relationships spot.

Spot pricing is up significantly in the market and.

<unk>.

It's the market price. So we're taking advantage of the opportunity. So I think there are pricing opportunities both on the raw material pass through as well as just fundamental demand.

Yes.

Okay and last one just on the <unk> opportunity.

Has Boeing moved a little more urgently if have you heard from other oes.

OEM Besides Airbus.

Who want to go ahead and lock up supply with you guys.

Yes.

In Seattle earlier this week enjoying great celebration of final 747 being delivered it was a great moment in history and proud to have been part of that I think.

I do think all of the Oems are moving with urgency.

I think the wide body recovery across the board is driving that.

It's a complex issue, it's not as simple as just redirecting Oh, yes, we'll buy this stuff over here and everything is going to be fine, it's a complex supply chain.

Complex and very important specifications, but I do think over the last six months I think they have.

Started there's a lot of urgency.

Everywhere I go anytime I get a phone call from a customer.

There's a reason for it but we're in a great position to be able to take advantage of it and I've been talking to our customers along with our Chief operating officer, Kim fields, we talked a lot about the customers on a regular basis and thats really trying to get clarity of demand and they are working on it with urgency.

Got it thank you very much.

Thanks, Kevin.

Thank you our next.

Next question is from David Strauss from Barclays. David. Please go ahead.

Okay.

Thanks, Good morning, everyone.

Good morning, David.

Yeah.

<unk>.

So is there any capital deployment assumed in your guidance for <unk> for 2023.

So David when you say capital deployment could you be more specific.

Yes, I guess returning cash.

Debt pay down or share buyback any anything assumed in the guidance you gave.

Yeah. So what I would say is there's a couple of elements that I would highlight.

One of course, when we think about capital deployment, we kind of have three legs to that stool, one is investing for growth.

For us primarily focused on the Capex and we've talked about our Capex guide at 200 to $2 40 in 2023.

And then the second leg on that on that stool is about delevering and so to US there is theres two things that come to mind, one is the pension and.

First and foremost, we're making voluntary contributions to the pension plan.

This year, we have a <unk>.

$50 million contribution we actually made that contribution earlier. This week. So that is out of the way for 2023, we have another $50 million contribution that we have planned for 2024.

And then.

In terms of other debt actions and we really don't have any.

Imminent debt maturities that were going to have to deal with so theres no repayments that are required when it comes to bank.

Bank debt or anything of that sort and nothing is planned I don't plan to take out any of our ABL.

Term loans or anything like that.

And then the third leg of course is returning capital to shareholders. That's extraordinarily important to us in 2020, we are excuse me 2022, we repurchased about $140 million of shares. We've got 10 million left on that $150 million program. So we'll finish that share.

Program up in early 2022 and then.

We're expecting that we're going to generate a healthy amount of cash flow.

As the Aero ramp unfolds and our expectation is that we're going to put that money to work and returning capital to shareholders continues to be a very very important thing to us and so it will continue to be a feature.

So at this point.

The board has not approved additional share repurchases beyond the remainder of the existing program, but I wouldn't read anything into that fact, because of the timing of an approval would be after we finish up the existing program.

I hope that helps.

Yes sure.

And then a question on longer term free cash flow conversion so it looks like.

In 2023, you're targeting somewhere around 50% of free cash flow conversion on net income close to the <unk>.

25% or so of 20% on EBITDA.

Yes, I think before you talked about 90% of free cash flow conversion is the target.

F 2025, where it looks like you're targeting somewhere around $800 million ourselves that the 800 million EBITDA.

Maybe the building blocks for free cash flow out there.

Yeah, So I'm happy to happy to touch on that your math is right by the way. If you do you take the EPS guidance and you back into cash and cash conversion.

We're in that 50% range right now.

We made significant improvement by the way in that metric over the last.

A couple of years, but our stake in the ground is 2025 cash conversion of greater than 90%.

And what's going to happen is of course everything everything on cash generation starts with profitability. Our profitability is has increased and is expected to increase significantly that's going to play a key part we're unlocking the efficiency in our our managed working capital saw a huge step in that already in 2000.

'twenty two when we hit our targeted 30%, we're going to continue to make progress and improve on that working capital efficiency. Another important part of it.

Is going to be Capex capital spending.

So this year our capital spending range has a midpoint of about 220 and what I shared previously still holds as you look at between now and 2025, what I expect is our capex spend is going to.

Edged down and by the time, we get to 2025, I would expect our capital spending to be close to our depreciation rate and our depreciation rate at that point will be somewhere between probably $150 million to $170 million. So that's helpful as well and so all of those are some of the building blocks to <unk>.

Improving this.

Cash conversion metric.

I also expect by the way that when we're out in the <unk>.

The 2025 timeframe I still expect to be a limited cash taxpayer, which is going to be helpful.

At least in that period when it comes to two.

Cash conversion.

Okay. Thanks, very much Tom.

You bet.

Thank you.

Final question is from Keith you kind of is from Wolfe Research. Please go ahead.

Yeah, Hey, good morning, everyone.

Thank you. This does really had good morning talked a lot about aerospace and defense. So I just thought we should perhaps some of the other end markets I know there.

He emphasized but on the positive side, you sound more constructive on specialty entity and I'm, just wondering for a little more color on that and if you've quantified any of the IRI benefit and timing and then on the more cautious side you know Youre industrial headwinds contrast, with what we're hearing from others. So I'd love to get a little more color on that and why you're confident in that age.

Two timing for China demand recovering why not earlier white Kitty that would be really helpful.

Alright, there is a lot in that one.

Do you want to take the first one down on the China issue you want me to do sure no I'm happy to do as far as the China headwinds.

The restrictions of course have fallen off significantly.

The downside is theres more COVID-19 and and so what we're seeing.

In our business and and.

More on a more broad.

In a more broad.

Circumstance, we're seeing those actual COVID-19 cases that are creating the headwinds in China and.

We have seen that we saw that in the kind of latter Q4.

I think we've seen.

Bit of a <unk>.

<unk> down in early Q1, and well, we'd like to see that that headwind go away.

Based upon the current pace of things our expectations is that it is going to be with us in the first half now it could be that the COVID-19 cases recover much quicker than were planning in our business is ready to roll I can tell you that.

But.

In an abundance of caution for how we view the business and the trajectory.

Our sense is it's going to take us the first half.

That's right I think the thing is we want to see it before we forecast at the Bottomline, let's see it materialize because there's been a lot of ups and downs in that market over the last couple of years.

Thank you another question Timna was around oil and gas and energy in particular.

We see strength.

Salty, especially energy, yes, we definitely see the oil and gas side with the subsea in the offshore in the subsea systems nickel clad various things as specialty alloy things.

For the deepwater or subsea systems, Thats growing and continues to come back strong.

We continue to see in the specialty side.

Lots of activity in.

Next generation technologies civilian nuclear is actually coming back.

So we feel pretty optimistic about those applications and I would say.

Had a long history with flue gas <unk> of coal plants in Asia, and although that market kind of goes up and down a little bit.

With the nickel price.

Terms of how they want to purchase but bottom line is we feel pretty good about those markets with continued growth I would say high single digits low double digit kind of growth.

Through 2023.

Asked about.

Inflation reduction act impact in timing to be candid.

We haven't factored that in that would be an upside if it came not sure it will come to the markets we're serving.

A lot of the opportunities we see for.

For specialty energy actually are outside the United States, So probably not such a big impact for us.

Okay, Thanks, and if I could sneak one more in.

You mentioned a couple of times in the outlook slide the ongoing benefits from the soaring trends and material sourcing and just wondering if you can explain a little more what that means and along those same lines I know in the past you've talked about moly prices molybdenum has exploded does that even matter anymore for ya. Thanks again.

Alright, let's see this couple of them there timna youre getting like six today.

Today.

On molybdenum, we always care about molybdenum, but I think with the material pass through.

We work hard to pass it through and not take that risk I think the team's done a good job of that but it's always an issue in terms of how faster.

What kind of pattern. It goes up so that's kind of number one I think your second question was around re shoring. So the first and obvious one is in commercial aerospace.

Second and less obvious one is in the medical space over the last.

A few years.

We had seen material purchases that were more common purchases I wouldn't say commodity, but we're more standard moving to places like Russia, China. Various other sources I think that particular supply chain is interested in re shoring where else.

So seeing some activity in the electronics space, obviously, there's a huge activity if youre going to have to have been the Phoenix lately, you'll see a lot of.

Building of chip manufacturing and we actually provide some specific materials that go into the precursors, but go into chip manufacturing.

That's been positive for us.

Yes, I think as the surety of supply chain maturity of that quality.

So between electronics and medical I think those are probably two other good examples and then.

We do a lot of work that has historically bought materials out of China and.

I think theyre growing sensitivity to near term.

Fly changed of input materials.

Everything we make is alloyed in one shape form or another and those alloying ingredients come from all over the world. So we've been able to.

Really focus on how do your near shore or re shore. Some of those kind of things. So hopefully thats a couple of good examples to give you some color on.

Where else that's going on.

Okay. Thank you.

Thank you.

Is now the end of the Q&A session and I will now hand back over to Tom I'd like to the patient.

Thank you for joining us today.

A replay of this call will be available on our website. This concludes the ATI fourth quarter earnings call.

Okay.

This concludes today's call. Thank you for joining you may now disconnect your lines.

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