Q1 2023 ATI Inc. Earnings Call
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Hello, everyone and welcome to the Ati's first quarter 2023 earnings call. My name is Bruno and I'll be the operator of today.
This presentation you can register to ask a question by pressing star followed by one on your telephone keypad.
I will now hand over to your host Tom Wright. Please go ahead.
Thank you good morning, and welcome to <unk> first quarter 2023 earnings call today's discussion is being broadcast on our website.
<unk> in today's call are Bob Wetherbee Board Chair, President and CEO , Kim fields, Executive Vice President and COO, and Don Newman Executive Vice President and CFO .
Bob Kim and Don will focus on our first quarter highlights the key messages before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call those slides provide additional color and details on our results and outlook can be found on our website at ATI materials stock comp.
After our prepared remarks, we will 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 it in the slide presentation.
Now I'll turn the call over to Bob.
Thanks, Tom and good morning.
Q1 marked another strong quarter of consistent performance and sequential topline growth for ATI.
<unk> continues to build momentum driving our business forward.
I'll summarize my thoughts on our first quarter performance in three points.
Number one we're delivering.
What does this solid quarter include our quarterly revenue again exceeded $1 billion up 3% over the prior quarter and 25% higher than a year ago.
Sales in our high performance materials and components segment were up 6% over the prior quarter.
38% higher than a year ago.
And adjusted earnings per share for the quarter was 49 cents.
That on the higher side of our guidance range.
We know the importance of delivering on our commitments.
These results reaffirm the importance we place on that consistency.
Our results also reflect the incredible work being done every day by our team.
We're driving operational efficiencies capitalizing on new opportunities and growing our capabilities faster.
After my remarks, Hei, Chief operating officer, Kim fields will share her perspective on how we're doing that.
Message number two continuing momentum in aerospace and defense is driving historic demand for ATI is materials.
Despite some supply chain and delivery delays the signals are clear.
The Aero ramp continues.
Now I'll think any of us expected, a flawless ramp and we havent been disappointed in that expectation.
A couple of bumps in the supply chain around incoming materials of forgings from non ATI sources, it's probably the number one issue that we're dealing with.
Even so all signs indicate a positive trajectory this year OEM.
Oems are bullish about aircraft deliveries reaffirming future build rates.
We're seeing it firsthand in Q1 airframe sales grew by 81% versus the prior year period.
ATI is significant wide body content provides strong tailwind across our commercial aerospace portfolio.
We're excited to see this progress and expect growth in this core market to continue.
Quarterly jet engine sales grew by 58% over the same period last year, driven by continued growth in specialty materials and forging.
We expect this growth to continue as well quarter after quarter after quarter.
Quarterly defense sales grew 24% over the same period last year. These gains were led by growth in titanium armor.
Military jet engine materials survey Allied naval systems.
There you have it in defense, it's Ralph client float and business is really strong and we expect that to continue into the future.
In Q1, aerospace and defense markets represented 56% of ATI revenue.
That's up from 44% in the first quarter of last year and highlights the tremendous progress, we're making toward our 65% A&D sales targets.
Q1 energy sales were up 32% over the prior year period. This was driven by growing demand for materials, serving civilian nuclear power and conventional oil and gas applications.
As we shared with you last quarter, we continue to see softness in our smaller industrial markets.
Remember, we have dramatically reduced our exposure to cyclical changes in these markets through transformation of our specialty rolled products business.
More specifically, we're also seeing continued softness in China.
This pertains primarily to the electronics and automotive markets served by our Asian precision rolled strip business. Remembering also that this business accounts for about 5% of our total sales.
We see emerging signs of moderate year over year and sequential growth in China.
But the economy, there continues to significantly lag 2019 levels.
More information about ATI sales to critical applications in adjacent markets can be found in the corresponding presentation on our website.
Our titanium and specialty alloy customers are asking for all we can produce in many cases even more.
To deliver on these opportunities we have the right team and the greatest capabilities across the enterprise, we're laser focused on optimizing flow times accelerating inventory velocity and extracting every ounce of output possible.
We want the maximum value from every operation every flow path every asset every melt batch.
Thanks, Bob it's great to join you and Don and I will provide detail of how we are delivering this tremendous performance.
And to follow your lead and continue the trend by sharing three key highlights.
First I'll give an update on the new capabilities that we're bringing online.
First I am excited to share that would be on the final stages of commissioning the new bright line in our vandergrift, Pennsylvania operation completing the last step in the transformation of our specialty rolled products business. The new line is state of the art equipment and control systems that deliver best in the world finishing capability.
These include.
Higher quality surface finish for a wide range of sensitive specialty materials improved formability and dimensional control of cengage product.
Wider coils sizes that provide customer flexibility for their forming processes.
And it delivers the shortest material slow time in the world with cycle times reduced by more than 50% in many cases.
Creating advantages over their competition.
The project is on track to qualify for production by the end of Q2.
The new O'brien your line rounds out our specialty rolled products triple threat of capability first tremendous milk capabilities with our Latrobe, Pennsylvania upgrades, which were completed during the pandemic combined with the world's most powerful hot Rolling mill located in Brackenridge, Pennsylvania, and lastly, our world class <unk>.
You shouldn't capability in Vander Graf.
Why is this important is key to our commercial transformation, helping the specialty rolled products business established strong direct connections with major Oems and key market.
We are no longer relying on commodity stainless distribution channels as our primary go to market approach.
Our strategy is to be a leader in the aerospace and defense market. We are seeing results. The first quarter A&D revenue and our advanced alloys and solutions segment grew by 65% compared to the prior year period.
On to my second key point and highest priority this year.
Ross the system every single member of my team is focused on operational excellence. Our goal is to increase production output at existing assets through increased efficiencies and improved product yields. The demand is out there and these improvements will allow us to capture more of it with higher product quality and improve.
<unk>.
What this look like.
In some operations, we're seeing efficiency improvements of as much as 10% to 15% in one quarter relieving process bottlenecks, increasing product flow and ultimately, resulting in improved delivery performance for our customers.
Like Vince Lombardi sad.
The game of inches and and should make the champion. We are playing the game game with laser focus and disciplined execution that will position us to win.
Benefits from these efforts are already starting to show.
Cross both segments, we broke multiple operating records in Q1 for example, our specialty materials business unit said its highest Q1 sales record in decades.
Every major work center in this business unit is at or beyond in 2019 operating level.
Is key because it sets the pace for the majority of our vertically integrated aerospace and defense flow path.
In the advanced alloys, <unk> solutions segment, the benefits of our transformation are showing up in record levels for inventory flow time, leading to improved product velocity and significantly lower metal volatility in specialty rolled products the.
The benefits are incremental for now, but we know that inches add up.
As Bob mentioned last quarter most of our work force is in place after adding 1000, new employees last year now we're gaining on the training curve too.
Our newest team members are gaining experience through repetition in cross training, our multiple operation this add flexibility and nimbleness to our operation, allowing us to react and meet our customers' changing needs.
The benefits our team brings grow every day.
We've made great progress in the first quarter and I think every member of our team both new and experienced for all they're doing we have a great team out there.
We believe these efforts enable us to capture upside demand that our competitors can't.
In an industry, where lead times of 50 to 70 weeks are becoming the norm everything we do to increase yields and maximize uptime allows us to delight our customer.
My third topic.
The unprecedented demand for titanium, we're really working to increase titanium melt capacity with the tragic situation in Ukraine. The World has lost access to a third of the titanium supply that was in the market in 2021.
We're meeting our commercial commitments our customers. Appreciate this performance are asking for more.
As Bob shared in earlier calls, we're increasing production from existing titanium assets, 35% over the 2022 baseline. This includes restarting previously idled capacity in Oregon.
While we're coming online our team continues to exceed expectations using creative solutions to reach melting milestones faster than estimated while requiring minimal capital investment.
Still modest output for now, but they are on their way accelerating every day.
As this capacity comes on there will be initial bottom line impact in the back half of 'twenty, three and we expect to achieve the full run rate in 2024 cut.
Customers are taking full advantage of this increase in our titanium capacity.
From where I sit.
<unk> is well positioned thanks to our increased capabilities improved operational efficiency and expanding titanium capacity.
Operating as a system maximizing our assets in production across the business like never before.
Every aspect of our operations benefits from this rising tide, so to our customers.
That should do it for me Bob.
Thanks, Kim everyone benefits from what your team is doing our business our customers our team and our shareholders.
Keep up the great work.
Thanks to you and your leadership matters and we appreciate it.
Ken will stick around for the Q&A session. After our prepared remarks now.
Now, let's turn to share details of Q1 financial performance and what's ahead for the rest of the year.
Thanks, Bob and thanks, Kim for the operational update.
Today I will provide details on two key areas, our Q1 results and our outlook.
The first quarter marked the third quarter in a row in which we earned more than $1 billion.
Revenue was $1 4 billion.
25% increase year over year, driven by continued strength in aerospace and defense as well as growth in energy.
Declines in electronics, and automotive, partially offset that year over year revenue growth.
Bob highlighted our growth in A&D mix up 200 basis points year over year from Q1 2022.
The sequential increase also speaks to the velocity building and our mix improvement.
Andy as a percentage of sales improved 300 basis points sequentially.
That's on top of a 200 basis point quarter over quarter mix improvement between Q3 and Q4 of 2022.
As we shared last quarter, we expect A&D mix to be above 60% by the end of this year.
Why is <unk>, so important we generate some of our highest margins in commercial airframe and latest generation jet engine sales.
Within our defense market margins are also typically accretive.
Reflecting our customers' recognition of the value of our differentiated products.
Overall revenue grew 3% sequentially.
High performance materials, <unk> components, or <unk> grew 6% quarter over quarter and advanced alloys, <unk> solutions or <unk> sales were flat from Q4 2022.
The strong H BMC increases tied to the growing A&D sales we.
We see this strength continuing enhanced by our increasing capacity and improving efficiencies.
What drove the flat revenues for Ams.
Aam's actually saw a 15% sequential growth in commercial aerospace sales and 6% growth in energy.
These gains were largely offset by declines in electronics and automotive markets sales primarily in Asia.
Now, let's talk margins Consol.
Consolidated adjusted EBITDA margins were down compared to a year ago 12, 8% in Q1 2023 versus 15% in Q1 2022.
Remember this quarter in 2022 included $29 million of Covid related employee retention incentives, which enhanced margins by 350 basis points.
Another factor impacting comparative margins is $9 million of incremental post retirement benefit costs in Q1 2023.
Those incremental cost do not impact our current pension contributions.
Year over year, they do create a 90 basis point margin headwind.
What if we exclude the impact of the non repeating COVID-19 incentives and incremental post retirement benefit costs.
While underlying adjusted EBITDA margins would be 220 basis points higher year over year.
Increasing from 11, 5% in 2022 to.
To 13, 7% in 2023.
What drove these underlying improvements.
Shifting to a more value added sales mix, increasing production levels and diligent cost management.
We successfully offset inflation impacts in 2022 and that success continued in the first quarter of this year.
Price actions and cost improvements more than offset inflation impacts.
We anticipate EBITDA margins will improve through the year due to continued growth mix improvement and cost management actions Kim described.
First quarter Unadjusted EPS was <unk> 48.
Adjusted EPS for the quarter was 49.
One <unk> higher than the midpoint of our guidance range.
Adjusted items are tied to costs related to the restart of our existing titanium mill facility.
It's part of the incremental 35% volume from existing assets Kim just spoke about.
We ended Q1 with total liquidity of approximately $750 million. This reflects the Q1 $50 million voluntary contribution to the pension plan and $10 million of share buybacks.
It also includes $30 million in Capex accrued at the close of 2022, but paid in Q1 2023.
Manage working capital this quarter increased $347 million.
That included $146 million in accounts receivable due to a late quarter surge in sales.
Those receivables are being collected in Q2.
Inventory increased approximately $90 million in Q1 due to investing in inventory to support ramping sales.
We ended 2022 with manage working capital at 30% of sales.
We expect to return to those levels or even lower by the end of the year.
Q1, Capex was $60 million.
As I mentioned earlier roughly half of that spend was related to the payment of Capex was accrued at the end of 2022.
Equipment deliveries were delayed due to supply chain challenges.
Overall, we remain on track with our disciplined capital investment plan.
In the first quarter, we completed the last $10 million of stock purchases under our previously authorized $150 million buyback.
We're announcing today, a new $75 million buyback program.
As I've said, we are committed to maintaining a balanced capital deployment strategy funding growth, while also delevering and returning capital to shareholders. This authorization is consistent with that goal.
Add in Q1 $50 million contribution to the pension plan, we're deploying $125 million of cash to Delevering and return of capital to shareholders.
This is consistent with our 2023 free cash flow guidance range of $125 million to $175 million.
Now, let's talk about Q2 and full year guidance for the second quarter, we expect adjusted EPS to be in the range of 53 to 59.
The midpoint of the range 56.
Represents a 14% sequential increase from the 49 adjusted EPS delivered in Q1.
The guidance reflects continued strength in our core A&D markets and energy.
It also reflects our expectation that sales in our Asian precision rolled strip business will continue to be pressured due to China's economic conditions.
For the full year, we are increasing our adjusted EPS guidance.
Our previous 2023 guidance range was $2 to $2 30 per share.
Even though it's early in the year, we have the confidence to raise the bottom end of our range by <unk> 10.
The new adjusted EPS range is $2 10 to.
To $2 30 per share.
This increases the midpoint of the range by five.
Two a new van point of $2 20 per share.
As the year progresses, we will continue to evaluate guidance updating when appropriate.
I want to reaffirm several other key items, we guided in our prior earnings call.
First we continue to anticipate 2023 full year free cash flow will be in the range of $125 million to $175 million.
In 2023, Capex will be in the range of $200 million to $240 million, including the organic growth investments that Kim noted.
And third we made the planned $50 million contribution to our pension plans in Q1, completing our expected contributions for the year.
In short we are on track and confident we will deliver on our 2023 commitments.
With that I'll turn the call back over to Bob.
Thanks, Don.
Should we take away from the call today.
That ATI is in full growth mode.
And remember 2023 is really the first full year of the commercial Aero recovery.
We expect topline growth in our core markets to continue for years to come.
We've effectively built a resilient supply chain to ensure a steady flow of materials.
Delivering reliably to our customers and we're living up to our commitments to add value every day.
We're not saying it's easy.
Heard Jim talked about how we are fighting for every inch we put ourselves in a great position consciously deliberately actively choosing each step.
This is a big year for US we have the right product mix, we're commanding the right price, we're hitting our stride with production and the bottom line to all of that we are performing.
There's one more piece that gives us all confidence our people.
We have the right people in the right roles and their productivity is climbing.
As the bar goes higher our team strives to achieve more as.
So it makes us proven to perform.
Operator, we're ready for the first question.
Yeah.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
That's star followed by one on your telephone keypad.
Do we draw your question Press Star followed by two and please also remember to old mutual microphone when is your turn to speak.
Yeah.
We have our first question from Richard Safran from Seaport Research partners.
Your line is now open. Please go ahead.
Yes, good morning, everybody.
So.
One of your competitors was with.
He was talking about titanium share gains this week from <unk> and so since you made a bunch of comments about titanium in your opening remarks.
I just wanted to know if you could update us on the titanium share gains.
And it.
Could you also discuss capacity utilization a bit more I'm just wondering what your remarks say about how close you are to being sold out on capacity.
Great. Good morning, Rich this is Bob I'll take the first part of that question and then hand, it off to Kim fields to talk about the capacity issues there.
As discussed around the market today, so <unk> pretty well right sponge to melt to mill products to <unk>. So.
I think the key for us is milk.
Milk products and some of the bar and plate products that are a subset of that.
We're seeing growth to support Aerostructures engines and are actually in the medical space as well. So I think the easiest way to summarize the share issues with <unk> is more than our fair share and the melt and our operating performance have been key enablers to that so we were focusing on programs with sustained growth.
Potential and we're focusing on new positions that could come along with that share gain at the same time, So I would say in a nutshell more than our fair share is where we ended up.
Demands here now the growth is on the horizon, but.
She who has the melt will get the order for the next couple of years and so we feel really well positioned for that so I'd say on the share gains hopefully that answers your question and I'll turn it over to Kim to talk a little bit about the capacity situation alright, yeah.
Rich we are fall, but I would tell all of our operations are pretty full but as you heard in my remarks, we don't stop there and we are continuing to set new records across the the processes in the businesses. For example, I mentioned titanium is up just in the first quarter, 10% to 15% our melt assets are operating at higher levels than we are.
And the challenge nameplate capacity. So we are really focused on maximizing our assets and challenging challenges and those limits and we are continuing to get more.
The bottom line as I think about.
Where we're at when we take an order we deliver on that commitment our customers acknowledges they've been sharing it with assets become even more apparent in the marketplace today, and we get recognized by getting more opportunities and more business and orders from them. So.
As always as everyone else, we're very full and we're working to continue to exceed that the team's done a fantastic job I do think there is upside.
And there is some additional capacity coming with some assets in Oregon coming online as well.
Okay. Thanks for that.
John This one next one may be for you.
And because I've asked you. This before so if you don't want to answer again.
Glad we go to something else, but.
Boeing and Airbus has set a lot.
Just since you gave out your 2025 outlook. So I just wanted to know if you'd like to give an update.
On the numbers you have been out there given the changes that we've seen.
Sure.
I will attempt to add some more information to the 2025 targets. So as you think about rich last quarter, we upped the high end of our expected potential growth rate through 2025.
By about $150 million of revenue that takes our targeted.
Revenue to $4 $4 billion at the high end of the growth rate I think what I would say is number one we're very confident in our ability to achieve that those growth rates towards that high end of our range. I think also what I would say is Kim share today some of the productivity.
<unk> opportunities that we're seeing within the business and.
While she was modest about the inch by inch we certainly see meaningful opportunity to create value for those kinds of activities.
The punch line is I would say I think even at the high end of the range, where we're very confident with our ability to hit and and we do see some potential upside beyond that.
At the right time, we will share updated 2025 targets and also talk past 2025, no surprise to you or probably anybody on the phone we do not expect our growth to stop after 2025, we see a lot of growth opportunity beyond that but that's what I would say at this point in terms of 2025 looking good.
Confident and then as you take that together goals that we shared for 2025.
The EBITDA margin guidance of 18% to 20% again, our confidence level is very very strong when it comes to our ability to generate to the mid or high end of that range, which creates a really interesting value proposition for investors. When you think about a business that.
2022 delivered $550 million of EBITDA and you do the math to 2025.
It's simple math based upon the targets that we gave and you see a business that should be generated 850 or more of EBITDA. So I think that speaks walter to the opportunities and that cascades by the way to cash generation. We are still very confident and focused on our cash conversion of 90% or better.
<unk>.
And we're on track to achieve those targets. So hopefully that's a bit helpful to you.
And.
And answered your question.
Thank you.
Our next question comes from Phil Gibbs from Keybanc.
Your line is now open. Please go ahead.
Hey, good morning.
Good morning, Phil.
Yes.
Any tax free to provide on the increase.
Earnings expectations in the second quarter versus the first quarter.
You know me.
Maybe you talked about a seven ish type that pick up sequentially is that.
Is that volume is that mix does it include both segments.
You could help us on there.
Yes. So this is Don I'll take I'll take a run at answering that so first of all yes, we are expecting a sequential growth into Q2, there's a couple of drivers one we're expecting continued topline growth in the business and mix improvement as we've seen that that mix continue to move into direct.
And we want it to go I think what you should also expect to see is if you think about the Q1 earnings we did carry over from the end of 2022, some elevated costs that were that were.
Carried over in the form of inventory.
Do you think about the NSA.
NSM for example, we're.
Not just SM the broader business, we added about 1000 employees and with those new employees as they were learning their new roles. They they of course were not as efficient.
Through that process as they are today that increased costs. Those costs ended up getting carried through in inventory that inventory is largely worked through in Q1, and so I would expect to see a benefit from that.
From lower costs to the tune of probably.
Maybe $5 million to $6 million.
As you move from Q1 to Q2, so that'll be a tailwind as well.
So those are a couple of things that come to mind.
Yeah.
Now is this going to touch both segments in terms of improvement in <unk>.
And both of them.
You'll see our margin improvement.
No I think youll see it in both businesses, but maybe it makes sense to just kind of take a step back and not so much focus on Cuba, Q2, but hey, it was a full year look like.
And for full year to give you some context.
Well, we would expect is that the.
The EBITDA margins for the overall business it would be growing two to probably something in the range of 14% on a consolidated for the full year period that means that you are seeing growth in.
The <unk> margins.
Think in terms of they should be north of 19% certainly for the full year and then we would expect of course.
Increases with the E&S side as well.
And then just as a follow up.
Okay.
I mentioned some startup costs are for the restart of the Albany, Oregon titanium upstream operations.
Can you take us through how that how that cadence move through the year in terms of.
Restarting kind of ramping when do they contributing how meaningful could it be that sort of thing I assume you didn't really see much in Q1. Thank you.
So why don't I touch on kind of how we're thinking about the costs and the contributions and I'll open. It up also to see if she wants to share anything from a operational standpoint, but from a cost standpoint from a restart.
Costs have been relatively modest and I just wanted to one of the reasons why you love.
Doing projects like this because the cost of a restart for example can be very modest relative to the cost of putting in new assets also the speed at which you can bring those assets into position to to produce earnings and cash can be that much faster. So I think.
As far as startup costs, we saw between 1 million and $2 million of restart costs in Q1, I would expect it to be.
In that range, maybe possibly at modestly higher than that but you are talking about may.
Maybe it's a one to two to three.
Just as a placeholder in your model and then.
That production is ramping up well.
<unk> talked a bit about expecting to see the run rate benefits of that new production really in 2024, and we will see.
Kind of stealing some of ken's likely script here, but.
We're expecting it to be too.
A full run rate production.
At the beginning of.
The second half and then that production is going to start working through our business, resulting in revenues and earnings.
As it is converted into finished goods and so we would expect from an earnings standpoint.
Off of that restart probably maybe a penny to two of earnings and the Q3 timeframe and then a bit more in Q4, but then when you get to a full run rate kind of scenario. What I would say is we would expect 2024 revenues off of this 35.
Cent increase in production, which is by the way, it's not just the 34th plant but.
Draw Lupron all of that.
And say, okay at full run rate what would we expect the.
<unk> financial effect from this incremental capacity would be and what I would say is think in terms of $115 million to $125 million top line.
And then assume a.
Probably a 30 ish percent.
Incremental margin off that unless you can tell us.
Very modest investments that we're making restarting these assets and taking advantage of.
The assets that are sitting idle or underutilized.
The returns on those assets and those investments are just incredible.
<unk> shared before that we're expecting to spend less than $10 million to restart three for that for example, I mean youre not going to it's hard to find a better returning kind of investment then than that so I don't know if I left anything for you to contribute but that's alright, I will turn you into an obsolete or yeah. So just to add I think Dan covered most of it just to give a.
Little color. The crews are in place the assets are up and running to you to your point, we didn't see a lot of that plus during the first quarter you will start to see that come through given our flow times through our processes. Our late Q3 into Q4, you'll see the majority the one.
Add that I would add to this is this is a seller's market and so as we are bringing more capacity online both through our incremental efforts around productivity and yield improvements as well as the new assets.
Idled assets in Oregon, coming online, we're more we're able to get transactional selling prices and customers as youre seeing maybe others in the marketplace that are missing delivery dates and so forth, we are being able to pick up that transactional business until it is going to be giving us the lift as well as though those towns start to come.
I'm thrilled when you see them in our statements.
Thank you.
Thanks Bill.
Yeah.
Our next question comes from Seth <unk> from Jpmorgan your.
Your line is now open. Please go ahead.
Great. Thanks, very much and good morning, and good results good morning.
Wanted to ask so on the jet engine revenues, we've seen a little bit of a plateau here.
And the the airframe revenues continue to grow obviously theres a lot of jet engine growth out in front of us given production increases.
Aftermarket.
In terms of the plateau in revenue that we've seen is that is that more of a supply side issue at that point at this point is it more that the customers have said, okay. We have what we need for this round of increases and then we will be starting and excellence in and how do we think about when that trajectory kind of moves forward and then likewise on the airframe.
<unk> side is that is that primarily wide body driven and do you have a status that that is kind of 787 driven.
Alright, I will try to unpack that a little bit.
I'll take the first part and then hand it off to Tim.
Let's talk a little bit about it so I think in Q1.
We had a very backend loaded Q1 in terms of shipments, which is what Don talked about on the receivable side, you said well how can that happen well remember when those orders were booked right. They were coming out of Covid early 2022, and the lead times really started to grow and we were not willing to take orders that we didn't have.
Confidence that we could deliver so a lot of it got loaded.
Right.
So I think I don't think Q1 is the greatest indicator of where the market is today. If we were able to disclose what March was you'd say Holy Smokes. That's why Bob said in his earnings call quarter over quarter over quarter growth in jet engine. That's just a timing issue in Q1, and we feel confident.
And that's why we invited him to join US today, because a lot of that work that theyre doing took us to catch up in March and now will be in place.
Going forward, but you asked a couple of specific questions I will turn it over to Kevin let her add some extra color on wide bodies airframes, all the other stuff that he had in that question.
Sure sure. So I would say in our supply chain and just to mention on that piece.
It's more stable than it was last year and I would say, we're not immune to challenges there, but we're just been focused on creative solutions.
Like industrial gases, which are problematic, we were able to put in larger tanks and hydrogen generator backups and in some cases second and third sources. So I think we're managing the supply chain.
I am seeing all of that continues to be tight and creating some some bottlenecks is around forging billet.
Mainly in the nickel alloy powder billet and specialty steel mill it and there is a widely reported Q4 tied melt shop explosion, so where we don't provide and aren't vertically integrated on our billet supply we are seeing some delays due to bill it and a lot of these are directed buys.
So we are working with our customers to identify opportunities where applicable providing it ourselves or looking for other sources, but rest.
<unk> isn't lost on our OEM they recognize the issue as well and are working to get that material.
As far as the airframe, yes, we can talk a little bit about that this was not.
Not necessarily driven by wide body, we are starting to see those orders come in but I would say this is more of the single aisle demand that youre seeing and I believe we've talked about some of the contracts we have gotten in the past and we're seeing substantial.
Growth against those contracts, especially as everybody starts to get full and orders are moving.
<unk> on the E&S side in particular on the airframe.
That answers side I'm trying to remember.
If I answered all your questions.
Yes. It was an overloaded question, so, but I got all of that and so.
Since it was so overloaded I'll just.
For a follow up maybe just a really easy quick one when we think about the <unk>.
Capex trajectory through.
The year here, because I know Q Q4 of last year some of that kind of.
Slipped into Q1 here.
How do we think about that sort of.
Investment trajectory for the rest of the year.
What I would do you obviously saw our guidance.
At $200 million to $240 million I would I would expect it to be probably build throughout the year, just if youre looking for a pattern to model.
But I will tell you I don't I.
I don't have in my projections, any sort of anomalies from from quarter to quarter, but sometimes those things do happen it doesn't take much with the big invoice.
To shift $20 million from one quarter to another but for modeling purposes, I would just assume it's relatively straight.
Alright, okay, great. Thanks.
Thanks very much.
Our next question comes from David Strauss from Barclays. David Your line is now open. Please go ahead.
Thank you.
Don could you help us I mean, you have this EBITDA margin guidance out there for 25.
The new guidance I mean, we can kind of compute.
The implied incrementals they seem really high.
If you could maybe help us think about.
The right level of incremental EBITDA margins by business going forward, obviously, you have pension in and some of this one time stuff that was in last year's numbers, but.
What should we target as kind of normalized.
Incremental EBITDA margins by business.
First before I get into metrics some color as to why you would be seeing what appears to be a strong building on on the Incrementals and that's because there is a strong build on incrementals in part because of the mix change that's happening when do you think about where we're getting revenue growth, we're getting revenue growth.
Largely in the.
Latest generation jet engine sales for example, some of our richer margin parts of our business and so that's beneficial to US I think also whats incremental what's affecting the incrementals and Youre seeing it is the fact that as we continue to squeeze more production.
Out of our asset base that means we are getting better absorption that better absorption means improved margins at the same time as we're doing that we're also attacking cost structures and finding more efficiencies within the business. So all of that comes together for <unk>.
Probably some.
Some higher numbers that you look out and say hey get could that be right, but really when you look at the underlying underlying incrementals.
Are right in line with what we've talked about in the past, which is I expect incrementals in the business to be north of 30%.
And I know thats, not I'm, not saying $37, four or <unk> or <unk>.
$33 six to eight but the reality is it does change from period to period.
But.
I doubt that.
The numbers that Youre seeing in your model that.
That require us to get to those 18% to 20% EBITDA margins and the growth there.
They probably are very sensible when you consider all of those those elements.
So does that helpful to you.
Yeah, Yeah, I mean, I'm coming up with a number of well above 30% thats implied to if I take the.
$4 4 billion in revenue and 25 versus your run rate today, and the implied EBIT EBITDA based on your margin coming out with a number way higher than 30, but.
We can talk about it later that's fine.
What is one thing I would add you might find helpful. As youre thinking about that so as youre looking at Youre doing the absolute right math right on the calculation of the incremental but when there is a mix change that's happening and we're shedding lower profitability sales and we're redeploying that material to higher valley.
New opportunities it will increase.
The apparent incremental.
Incremental margin right. Because every dollar you are selling is also adding to the bottom line. So it will cause what appears to be kind of a distortion in your incrementals, but it's because of that mix change is happening.
And then also we do expect as we as we evolve into 2025, we do see where that richer mix is also bringing some.
Some better pricing from period to period, we don't highlight what we're getting on pricing, we don't call that out like some folks maybe may do.
But but that's part of the element too as we get deeper into these latest generation profiles.
Okay.
Helpful.
And then I think I've asked this before but I'll come back to it I mean, the 90% free cash flow conversion that you're targeting.
Why wouldn't it be better than that I mean are you assuming that the.
I thought you had been talking about capex coming down in the in the out years, So a lot closer to DNA.
Are you just assuming.
Pension contribution on those numbers.
Why wouldn't it be closer to 100%.
Just like the other 2025 targets that we have out you can assume that they are on the conservative side.
And I can tell you internally, we are targeting better than 90% when it comes to cash conversion. Another thing thats important to US is it's not about a strong cash conversion for a year, it's about consistent strong cash conversion and so we put out the 90% target in 2025.
But rest assured that's not that's not the number that we consider our ceiling and its not a one timer from our standpoint.
Okay.
Alright, thanks very much.
Alright, thank you.
Yeah.
As a reminder, ladies and gentlemen to ask a question. Please press star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
Our next question comes from Gautam Khanna from Cowen Gautam. Your line is now open. Please go ahead.
Hey, good morning, guys.
Hey, good morning Gautam.
Morning.
You covered a lot of ground I wanted to ask on.
Your comment on pricing.
Just at one point I thought the urgency of some of the.
Potential titanium customers, who want to move away from <unk>.
I thought there.
Rice sensitivity was.
A little bit too high I'm, just curious what what has.
It happened over the last quarter in terms of their urgency and their willingness to.
To sign up at what should be in a more reasonable returns for you guys.
As you fill that void for them.
Thanks for that question Gautam, I'll take a little bit of that and Kim can add some color at the back end I think we are actually at an inflection point here kind of in the second quarter around the worries that the big Oems have right. So the first priority really for the last 12 months was realignment of their global.
Supply chains.
And a lot of the contracts were not fixed volume they were shares or they were share ranges. So a lot of the early work was within that range. So the guiding priority was I got to displace upper.
<unk> upwards of 30% to 40% of my supply chain as fast as I can and that was really starting to take effect in 2023, I think youll see the full benefit because of inventory flow for people like us in 2024, right. But then now once they are realigning their supply chains I'll turn it over to Kevin.
Can you talk about kind of how theyre looking at growth and kind of where they go from here as they start to start to really address the ramp.
Yeah, I think as Bob just mentioned.
Early in this in the reset on the supply chain our customers are calling from just in time to just in case and so there was this rush in and as you've seen our backlogs of ground were at a record $3 3 billion now.
It's not just in the aerospace industry, we are seeing demand across all four of our businesses and all of the markets defense medical and electronics that Bob talked about so I think there is a reset that has happened and now theyre looking at strategic inventories, especially as the wide body starts to gain.
Momentum and they're placing much longer strategic positions with with companies and thinking about between now and 2000 32035, how do we ensure that we've got the supply that we need.
As we look at the build rates that where we're anticipating that.
Tim and I have been part of numerous customer conversations and I would say quality and reliability are really going to be the enablers for having the supply chain work for them going forward. So the shift from.
Just in case too, but I got to have it right and so to your point Gautam I think Kim said earlier, it's a sellers' market.
Almost I would say every renewal or every extension or everything is really.
Reflecting appropriate pricing for the long term and that's that's been helpful.
Wait time to.
Renewed some contracts for sure for from our perspective.
Yes, Thank you and as a follow up you mentioned in the.
Release jet engine sales were up approximately 2% sequentially.
And I think you mentioned that some of those were positions later in the.
And then there are melted later in the cycle and Thats why you had a backend load to the deliveries in the first quarter.
Could you talk a little bit about.
Where what is the potential capacity constraint to doing better than a 234% sequential.
Kind of level of improvement in jet engine output like what is what is possible. This year as you look.
At the jet engine capacity you guys have.
Okay.
Yes, so the first thing I would say is.
But we always answer the question the same way, we produced orders not to build rates right. So it's really critical in how we we.
We take those orders.
And I'll, let Kevin talk a little bit about the work that's going on to increase the capacity.
Yes, I think I think we've mentioned a couple of them.
And we are seeing that ramp up our production rate.
And as I mentioned titanium for example was that 15% to 20% in.
In the quarter versus Q4, and I anticipate you could see another 10% to 15% of our assets a couple of different things you asked about specific bottlenecks one our employees' experience are increasing we're going up the learning curve. We are doing some cross training. So we're having the ability to move.
Labor to where we need it to help produce we're streamlining turnaround we're working I think like a pit crew, they're coming and we're getting the machine and equipment back up and running as fast as possible and reducing unplanned downtime. We are looking at our equipment, we've talked about electrical upgrades that we're doing.
As well as changing out some of the equipment and the most harsh conditions in the mountains. So that we get longevity and so we're doing all those things are current assets and obviously as we've talked about we are bringing on idled assets in Oregon that are coming on ahead of schedule right now the crews are in place and the equipment.
Running and so that continue to flow through so step one for US is focus on melt capacity and we're seeing substantial gains there that will flow through the downstream processing.
Activities in businesses that we've got and then Youll start to see that coming out I would anticipate third quarter into fourth quarter.
I think that.
Hopefully MLR.
Yeah.
Absolutely that's helpful.
Maybe one for Don just could you talk a little bit Don you mentioned, the two $3 million sequential.
Pressure.
Yeah.
High performance metals I was curious if you could just talk about all the sequential headwinds that you guys incurred whether it be retirement benefit expense at that segment.
Or any other items just so.
You kind of calibrate sure.
Yes, so couple of things and so I talked about the carryover of some inefficiencies.
Inventory and we saw a lot of that release.
Not just related to the <unk> segment, but also ians, we did see some modest metal headwinds.
And so while we don't highlight metal because it isn't a headline for us as you're digging and of course, you need to consider it.
For both of the segments, we did see modest headwinds in that regard.
And.
And.
I guess I'm not surprised when you think think about some of our primary inputs nikko being one of them. We saw some really robust increases in nickel prices in 2022.
And while there is still at a robust level, they're at a lower robust level and so we saw them pull back modestly in Q1, which which has.
A modest impact to our business.
From a headwind standpoint.
Other than that we've been pretty open about the pension and we've been pretty open about year over year.
Changes around things like cobalt credits and things like that.
Okay.
Okay. Thank you arby's sequentially, though how much was that up in HPLC.
I'm, sorry say that again please.
Pension sequential impact at H M H.
So let me give you some of the pension impact year over year, Let me give you. The impacts. So you think about ians that year over year impact was $7 million in the quarter.
And for <unk>, it was between $1 million and $2 million.
Thank you guys.
You bet.
We currently have no further questions. So I would like to hand, the call back to Tom rightful final remarks, Tom. Please go ahead.
Thank you for joining US today. This concludes Ati's first quarter 2023 earnings call a replay will be available on our website at ATI materials Dot com.
Okay.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank.
Thank you.
Yeah.
[music].
Today's call.