Q2 2024 ATI Inc Earnings Call
Hello everyone and welcome to the ATI second quarter 2024 results conference call.
Seb: My name is Seb, and I'll be the operator for your call today. If you would like to ask a question during the Q&A session, you can do so by pressing star 1 on your telephone keypad. And if you would like to withdraw your question, please press star 2. I will now hand the floor over to David Weston, Vice President of Investor Relations, to begin the call. Please go ahead. Thank you.
My name is Seth and I'll be the operator for your call today, if you would like to ask a question during the Q&A session. You can do so by pressing star one on your telephone keypad and if you would like to withdraw. Your question. Please press star two I will now hand, the floor over to David Westin Vice President of Investor Relations to begin Nicole. Please go ahead.
David Weston: Good morning and welcome to ATI's second quarter 2024 earnings call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our second quarter results are Kim Fields, President and CEO, and Don Newman, Executive Vice President and CFO. 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 and can also be found on our website at atimaterials.com.
David Weston: 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 accompanying presentation. Now, I'll turn the call over to Kim.
Kim Fields: Thanks, Dave. Good morning, everyone.
Kim Fields: Let's dive in. ATI's second quarter results represent another strong quarter of execution and performance. What excites me the most? Here are three key highlights. First, revenue growth. Quarterly sales reached their highest level in nearly ten years. Nearly $1.1 billion, reflecting a 10% sequential increase in our strategic A&E and Arrow-like revenue categories. Second, strategic mix expansion. A&E sales made up 62% of our revenues this quarter, putting us on track toward our A&E mixed target of 65 plus percent.
Kim Fields: In total, 79% of our revenues come from A&E and AeroLite markets, markets where our differentiation is most valued. And third, strong financial results. Adjusted EPS hit $0.60 at the high end of our guidance, and adjusted EBITDA came in at $183 million, exceeding the upper end of our guidance range. So what is driving these results? Let me break it down to three main points.
Kim Fields: First, it's about surging demand. At the Farnborough Air Show, the high demand for our products was clear. Interest has broadened beyond titanium to nickel, looking for commitments for the rest of this decade and into the 2030s; customers are offering premiums for any available near-term slot that opens up. We're currently in discussions with multiple customers about investing their capital for added capacity. And why are they investing? To guarantee supplies when they need them and secure their preferred position in line.
Kim Fields: They're increasingly facing the wide body ramp while still supporting historic levels of shop business and spare parts demand. In late July, we announced new sales commitments exceeding $4 billion, primarily for high-value nickel products for jet engines. These commitments not only support our 2025 and 2027 financial targets but also add approximately $100 million per year in incremental annual revenue.
Kim Fields: Some of these commitments extend as far as 2040, reflecting our customers' long-term confidence in sustained jet engine demand and ATI as the supplier to help them succeed. Second, as one ATI team, we are executing and delivering. Our strategy is clearly paying off. In the second quarter, ATI's largest end market, jet engines, grew 13% sequentially to over $350 million, driven by specialty nickel. As the industry reaffirmed in its most recent quarterly reporting cycle, more growth will follow as the OEMs resolve their challenges and plan production increases through 2024 and beyond. Titanium revenue for airframes increased 11% sequentially this quarter to more than $210 million.
And sustained jet engine demand and ATI is the supplier to help them succeed.
As one ATI team, we are executing and delivering.
Our strategy is clearly paying off in the second quarter H has largest end market jet engines grew 13% sequentially to over $350 million driven by specialty nickel.
As the industry reaffirmed in its most recent quarterly reporting cycle more growth will follow as the Oems resolve their challenges and planned production increases through 2024 and beyond.
Titanium revenue for airframe increased 11% sequentially this quarter to more than $210 million. That's another all time high for ATI and a 28% increase over last year.
Kim Fields: That's another all-time high for ATI and a 28% increase over last year. Our expanded titanium melt capacity is a key factor in this success. Defense sales rose 5% sequentially, led by increased demand for exotic alloys and continued strong demand for titanium armor plates used in military ground vehicles.
Our expanded titanium melt capacity is a key factor in our success.
Defense sales rose, 5% sequentially led by increased demand for exotic alloys and continued strong demand for titanium armor plate used in military ground vehicles.
Kim Fields: And here I'd like to take a second to recognize the Specially Rolled Products team for the tremendous work they've done to earn that position. Their hard work is paying off; specialty energy was up 37% versus the prior quarter. We see building demand for nuclear and gas turbines for increased electricity consumption.
Speaker Change: And here I'd like to take a second to recognize especially rolled products team for the tremendous work they've done to earn that position their hard work is paying off spur.
Speaker Change: Specialty energy was up 37% versus the prior quarter, we see building demand for nuclear and gas turbines for increased electricity consumption. We expect sustained global demand in this end market for the foreseeable future.
Kim Fields: We expect sustained global demand in this end market for the foreseeable future, and third, we're well positioned for the future and as confident an upside as possible. We are optimizing our operations to de-bottleneck flow paths, reduce costs, and drive productivity across our system from melt to ship. Our focus on increasing specialty nickel melts demonstrates the strength of our integrated one ATI approach. Since last year, we have significantly increased nickel throughput by improving turnaround times, optimizing melt blends, and implementing standard work. Materials are flowing faster, and we expect to see the benefits of these actions towards the end of the year.
Kim Fields: It's great to see the experts from across the business units collaborating to optimize production output. These results represent a lot of hard work, and the team takes great pride in being able to work together to serve our customers. Great job, team. We are seeing the impacts of this optimization in both segments. In AANF, we achieved over 16% adjusted EBITDA margins in the second quarter, reflecting the success of the specially rolled product transformation. In HPMC, revenues grew 6% sequentially on level shipment volumes. What's that telling me?
Don Newman: We're effectively capturing the impact of a tougher product mix and, equally important, price. Overall, we are well positioned now and for the future. And with that, I'll hand it over to Don.
Don Newman: Thanks, Kim. What really strikes me about Q2 is seeing the benefits of our strategy, sustained demand, and operating improvements delivered to our bottom line. Kim shared some of the headlines related to Q2 financial results. I'll add some color and then walk you through our. The first area of highlight is growth in our core aerospace and defense and aero like landmark. Q2 revenue in those markets totaled 79% of our overall revenue, increasing 10% sequentially, drilling into our A&D sales were 62% in the quarter, putting us on track toward our next A&D target of more than 65%. That's 13% sequential growth in jet engine and 28% year over year growth in airframe, both segments contributing to the mix improvement and Q2 margin expansion from the HPMC perspective.
Don Newman: Q2 A&D sales were 85% of total segment revenue, continuing its upward movement. Jet engine revenue accounted for 59% of segment revenue. The AANS segment also saw mixed improvement in the second quarter, with 62% of total segment sales from A&E and Arrow-like markets, and e-sales representing 39% of Q2 revenue grew 19% sequentially, led by growth in defense and airframe. That's a record level A&E mix for A&M.
Don Newman: AeroLite grew 33% year-over-year and 8% sequentially. Such movements may affect our revenue in a given period, but less so our bottom line, thanks to de-risking pass-through mechanisms. We experienced that in Q2, which masked underlying growth that created top line growth headwinds in the quarter of 6% for overall API. 2% for HPMC and 11% for AANS year over year; the overall adjusted EBITDA margin increased to 16.7%, largely on improved mix. That's an increase of 220 basis points sequentially and 100 basis points from Q2 of 2023. Adjusted EBITDA margins in the HPMC segment were back above the 20% threshold due largely to mix and operational improvement. We have hired more than 500 hourly workers in the HPMC segment here today.
Don Newman: This is part of our strategy to de-bottleneck production and leverage our existing assets. Q2's margins of 20% reflect inefficiencies incurred while those new team members are being trained by our expert employees. We have also leveraged third-party staffing firms in the short term to accelerate production, which brings incremental costs. HPMC margins will become progressively better in the second half of the year, and production will increase as the new employees gain experience. ANS margins were 16.4% in the second quarter, reflecting a strong A and D mix largely through increased titanium sales. As expected, certain industrial markets remained stable in the second quarter.
Don Newman: Cash generation continues to improve, and cash provided by operating activities is positive year to date. That's an improvement of $219 million over the first six months of 2023. It's also an improvement from our historical cash cycle. We are pleased with the positive free cash flow delivered in Q2 and our cash trending this year. We believe more opportunity lies ahead as we continue to lean out inventory cycles and improve production flow. With this improved cash generation comes stronger liquidity and reduced leverage. We close the second quarter with almost $1 billion in total liquidity, including more than $425 million of cash on hand. Our net debt ratio decreased in the second quarter to 2.7 times.
Don Newman: A trend that will continue with our increasing profitability and cash generation. Now, let's look ahead to the second half of the year. We're raising the midpoint of our full-year guidance ranges for adjusted earnings per share and EBITDA while holding our pre-cash flow guidance. We have strength and diversity in our jet engine base and enduring demand in defense and growing aero-like markets.
Don Newman: We're expanding output and making progress on our ongoing debottlenecking effort, which drives the meaningful growth we expect to see in the second half of the year. For the full year, we estimate adjusted EPS will be in the range of $2.40 to $2.60 per share. We estimate full-year adjusted EBITDA will be in the range of $720 to $750 million. We are maintaining our full-year estimated ranges for free cash flow and capital expenditure, with free cash flow between $260 to $340 million and CapEx at $190 to $230 million.
Speaker Change: To our existing assets.
Speaker Change: To those margins of 20% reflects inefficiencies incurred while those new team members are being trained by our expert employees.
Speaker Change: We have also leveraged third party staffing firms in the short term to accelerate production that brings incremental cost.
Speaker Change: H P. M C margins will become progressively better in the second half of the year and production will increase as the new employees gain experience.
Speaker Change: A N S margins were 16, 4% in the second quarter, reflecting strong A&D mix largely through increased titanium sales.
Speaker Change: As expected certain industrial markets remained stable in the second quarter cash generation continues to improve cash provided by operating activities is positive year to date.
Speaker Change: That's an improvement of $219 million over the first six months of 2023.
Speaker Change: It's also an improvement from our historical cash cycle.
Speaker Change: We are pleased with the positive free cash flow delivered in Q2, and our cash trending this year.
Speaker Change: We believe more opportunity lies ahead as we continue to lean out inventory cycles and improve production flows.
Don Newman: The midpoint of the free cash flow range represents an 82% year-over-year increase in this important metric. For the third quarter, we estimate adjusted EPS will be in the range of $0.63 to $0.69 per share and adjusted EBITDA between $189 and $199 million.
Don Newman: The Q3 and full year guidance provide clear insight into how we view potential Q4 performance. We see Q4 as another robust quarter of sequential growth. Ongoing demand in core markets and increasing production levels support our view. We anticipate overall ATI Adjusted EBITDA margins will increase sequentially from Q2 to Q3 and again from Q3 to Q4 to reach 17 to 18% by year-end. On a segment level, HPMC margins will expand in the second half due to A&E growth.
Don Newman: AANX margins will remain in the mid-teens for the balance of 2024. We remain confident in our near-term outlook and the longer-term growth and increased profitability reflected in our 2025 and 2027 targets. In terms of those 2025 and 2027 targets, keep two things in mind. First, the recently announced $4.2 billion in new sales commitments include roughly $100 million in annual incremental revenue, along with related EBITDA. However, that $100 million was not reflected in our target.
Don Newman: Second, our backlog continues to grow; even with increased throughput and newly deployed capabilities reducing our lead time, backlog reached $4.1 billion this quarter. Importantly, backlog in the second quarter is up 9% in HPMC, including a 14% increase in forging. Our strategy and transformation are delivering the performance and value creation intended. That's driven by growth, expanding margins, robust cash generation, and disciplined capital deployment. Our trajectory remains on track for 2024 and beyond, with a lot of upside to look forward to. On that note, I will turn the call back over to Kim.
Kim Fields: Our performance underscores our leadership in aerospace and defense, where our differentiated materials are valued the most. Today's results reflect the power of our strategy and come down to three things. One, strong demand for our specialty products, particularly nickel in addition to titanium, to disciplined execution meeting and exceeding our customer commitments, and third, we're well positioned today and for the wide body ramp that's fast approaching.
Kim Fields: I'd like to close by recognizing the team's exceptional work. The results reported today are possible thanks to their hard work. They're delivering every day, discovering what's possible. They're pushing, innovating, and challenging the status quo. And then they go back and do it again. Their commitment to always producing the highest quality products with a focus on our zero injury culture is the foundation of what we do. Thank you to every employee for your hard work and perseverance. We are indeed proven to perform. With that, let's open the line for your questions.
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you'd like to withdraw your question, please press star 2. Our first question comes from Seth Seifman at J.P. Morgan. Please go ahead.
Seth Seifman: Hey, thanks very much and good morning. Um, I wanted to ask, you know, morning.
Seth Seifman: You know, you guys spoke about the ramp-up in titanium, and it's clear that all of your new capacity is coming online. During the quarter, though, we heard about one of the 787 suppliers slowing down. You know, we know there are some delays in terms of availability of other parts made by other people, like interiors. You know, when we think about the production ramp there, you know, how do you think about the potential impact on your titanium ramp from other things going on in the wide body supply?
Don Newman: So Seth, this is Don. I'm going to take a shot at answering your question. First of all, in terms of what we've seen in our business tied to demand, we do see some scattered pushouts when it comes to orders. But because of the broad-based demand in our business, if a slot opens up, we typically have a customer that steps in and says, Hey, I want to take that slot. And that indicates a couple things.
Don Newman: Number one, we are continuing to see significant demand for our business, from an aerospace and defense standpoint, as well as through other key markets like our aero-like. And, you know, it also indicates that we've done, I think, a very good and purposeful job around diversifying our business, which de-risks some of the items or some of the risks that you're talking about. What that looks like to us is that we have diversified away from, you know, being more single-threaded dependent upon a particular air framer, for example, or, you know, now where we've got meaningful business with all of the major engine manufacturers.
Speaker Change: And on our business from an aerospace and defense standpoint, as well as two other key markets like our Aero like and it also indicates that we've done I think a very good and purposeful job around diversifying our business that de risks some of the items are some of the risks that you have.
Speaker Change: Talking about.
Speaker Change: And what that looks like to US is we have diversified away from being more single threaded dependent upon a particular airframe here for example, or now where we've got meaningful business with all of the major engine manufacturers. So I think thats.
Speaker Change: That's supporting our business quite well. It also gives us a lot of confidence when you think about our outlook, whether it's 2020 for 2025 or 2027. So that's something that that I would share in regard to what we're seeing on a on a current basis.
Don Newman: So I think that's supporting our business quite well. It also gives us a lot of confidence when you think about our outlook, whether it's 2024, 2025, or 2027. So that's something that I would share in regard to what we're seeing on a current basis.
Speaker Change: Great. Thanks, Thanks very much.
Seth Seifman: Great. Thanks. Thanks very much.
Speaker Change: And then maybe just a follow up on on the engine side you spoke about the new business.
Seth Seifman: And then maybe just to follow up on the engine side, you know, you spoke about the new business that you announced at Farnborough. When we think about the growth rates on the engine side of the business, maybe if you could talk about kind of the progression there. I assume we'll start to see pickup from the kind of mid single digit pace in the second half as that work kind of ramps up and as new employees become more productive. But if you talk about the, you know, the timeframe and just the progression of improvement there over the course of your planning period.
Don Newman: Sure, happy to talk about that. So, first of all, we are continuing to see some very, very strong jet engine signals, and it wasn't just at Farnsboro, by the way. These are conversations that are happening with our OEM customers on a regular basis, although Farnsboro certainly reinforced it.
Don Newman: As far as we see demand continuing to expand there, I think, you know, we've heard some pretty good and positive feedback or announcements, rather, from folks like GE, who have made some pretty clear and strong statements around how they're going to run the supply chain and meet the demand that they see coming toward them. That demand profile, by the way, is not unique to GE. We're seeing those signals of very broad-based engine demand across all of the major engine manufacturers. And, you know, there are a couple drivers to it.
Don Newman: One driver that we all think about, because we read the headlines from the air framers and think about build rates, that's a key driver. In that regard, there are a couple of triggers that we monitor, and we think when they are triggered, they're going to create a step change in demand, whether it's for the airframe or certainly for the engine. Those two triggers are really related to the 777X certification and then the FAA dropping the limitations on the 737 build rates.
Don Newman: You know, when those two items are cleared off the deck, what we suspect is that the good growth that we're expecting under the current circumstances will potentially see a step change in a positive way. And so, at that point, we'll be kind of reassessing how we think about the trajectory of our business and see if we need to make some positive adjustments to that.
Seth Seifman: Does that answer your question? Thank you very much.
Gautam Khanna: Great, thank you. Yes, very good. Thanks. Our next question is from Gautam Khanna from TD Cowan.
Gautam Khanna: Our next question is from Gautam Khanna from TD Cowan. Please go ahead. Hey, good morning, guys.
Gautam Khanna: Please go ahead. Hey, good morning, guys. Good morning. I was wondering if you guys have any... fidelity on whether the products are shipping or being consumed and or used as opposed to inventory.
Unknown Executive: bottom line, I think, um, you know, as you're asking here, we pay stay pretty closely aligned with our customers. And so we do have some insights into what their true demand signals are and what's happening with each part. You know, forecasting and changing backlogs is a very active process these days.
Unknown Executive: And as Don mentioned, we almost talk about that weekly with each of our customers. So we do have some insight into that, you know, and I just want to emphasize, as Don said, we haven't seen any de-stocking or, you know, pushouts. And I think to your specific question, we have a couple of very targeted areas, you know, with one airframer around maybe plate, titanium plate, that might be slightly over-inventoried that, frankly, as we look at our other markets, you know, both defense and our other, you know, aerospace airframe customers, those more than absorb any, you know, capacity. Although, to be honest with you, we have not seen any push-outs.
Unknown Executive: I think there's an commitment to smoothing and maintaining the momentum in the supply chain by all the customers, so we're working pretty closely together. So the other thing I'd mention, you know, just on the engine side is that most of our products go directly into the hot section. And so, you know, you've heard from others in the last couple weeks that there's really strong demand for MRO and shop visits. And so a lot of those products go into those MRO visits and are driving much higher, in some cases, 2x the MRO that we've seen in the past.
Unknown Executive: And then if you layer on top of that some of the challenges the GTF has had with, you know, accelerating their shop visits, we are, you know, a significant partner in that work with them and will ramp up to meet that increased demand over the next several years as they work through those aircraft on the ground. And I'd say lastly, I just want to touch on, you know, we did the announcement a couple weeks ago.
Unknown Executive: We do continue to sign new contracts and gain share, either through our competitors, where they may not be performing to the level our customers are looking for, or as customers look to diversify away from a single source of risk in their supply chain. So lots of moving parts there, but we do stay pretty close. I'm not seeing high inventory levels in any one particular area. And we are, you know, we're pretty nimble as a company, and we're adjusting as we need to to respond to where the demand is and where things may be smoothing out.
Speaker Change: Our competitors, where there may not be performing to the level of our customers are looking for or as customers look to diversify away from single source of a risk in their supply chain. So lots of moving parts in there, but we do stay pretty close.
Speaker Change: Not seeing high inventory levels in any one particular area and we're you know we're pretty nimble as a company and we were adjusting as we need to to respond to where the demand is and where things may be smoothing out.
Speaker Change: Thanks, I appreciate it guys.
Scott: Thanks Scott.
Scott Schneeberger: Our next question is from Scott still show from Deutsche Bank. Please go ahead.
Scott Deuschle: Our next question is from Scott Deuschle from Deutsche Bank. Please go ahead.
Scott Shellstrom: Hey, good morning, Don sorry, if I missed this but can you give us an update on your assumptions for the non A&D and medical markets in the second half here are you still expecting that.
Scott Deuschle: Hey, good morning. Don, sorry if I missed this.
Speaker Change: Marissa going to industrial markets to trough out in the second half or are you embedding any incremental conservatism there. Thanks.
Marissa: Sure no when you just to be clear I will talk about the the arrow like as well as the industrial if you don't mind, because we spent a lot of time talking about aerospace and defense as we should to your core but I want to make sure that I would touch on both so you have the benefit of that thinking in terms of our era.
Don Newman: But can you give us an update on your assumptions for the non-A&D and medical markets in the second half here? Are you still expecting, you know, those more cyclical industrial markets to trough out in the second half? Or are you embedding any incremental conservatism there? Thanks.
Don Newman: Sure. Now, just to be clear, I'll talk about the aero-like as well as the industrial, if you don't mind, because we spend a lot of time talking about aerospace and defense, as we should, it's our core, but I want to make sure that I touch on both so you have the benefit of both types of thinking. In terms of our aero-like, that would be medical specialty energy as well as electronics.
Don Newman: We're expecting to see some continued healthy, broad-based growth on that side of the business in the second half. That's going to continue through 2025 and beyond. In terms of the industrial part of our portfolio, that's something that we've been continuing to reduce over time. It's part of our transformation.
Don Newman: And as you know, we saw starting in the second half of last year, a pullback and certainly a softening around those end markets. And so what we saw in Q2 was really stabilization around those end markets. And, and, you know, that's encouraging; it has got to become stable before it starts to turn around and go the other way.
Don Newman: But as you think about what we've assumed in our second half guidance, what we've assumed is that we haven't started to see any meaningful recovery in those industrial end markets, like oil and gas, for example. Because we haven't started to see it, we have not built in any significant growth in those parts of our portfolio for the second half. So the really strong growth that you're seeing in our guidance is really about aerospace and defense and aero, and so that's very encouraging because you're seeing that 80% of our business is really driving some robust outcomes, some robust top line and bottom line.
Don Newman: Same thing would be true, by the way, if we drilled in a little bit and talked about our precision roadstrip business in Asia. You know, sometimes we talk about that, at the same time, we talk about the general industrials. And they're, again, just like with the other industrial parts of our portfolio, we've seen them pretty stable, pretty flat. And I think that's largely tied to the lethargic Chinese economy. And our guys have done a really good job diversifying the sales mix by selling outside of China.
Don Newman: But you know, the issue is, you know, that's not enough to really increase the performance of that business. And so it's, it's steady generating probably around 250 million a year in revenue. And it produces accretive margins, which are nice, but it's not part of our real growth profile.
Scott Deuschle: Does that answer your question? Yeah, that's great.
Scott Deuschle: And Don, at Investor Day, I think you said that no one else in the industry is taking more price than ATI is. And, you know, it's becoming very clear from the results of the other companies that they're taking large amounts of price, and they're seeing it in their numbers. So I guess my question is, is it still true that ATI is taking a higher price than them? And if so, why isn't that flowing through more, particularly at ATI? Hello,
Don Newman: Well, sure. Yeah. Well, let me let me answer it this way.
Don Newman: What I would say is, first of all, we all understand it's tough to compare one company to another company. You're talking every company has some overlap in our industry, but at the same time, there are differences, right? Differences in products that are offered, differences in end markets, differences in customer base, and that ultimately results in differences in, I believe, growth rates and how the businesses perform in the short term.
Don Newman: In the long term, it's a bit different. So, to answer your specific question, we are absolutely getting value. And what I would say is we are getting our fair share of value. How do you see that?
Don Newman: Well, first of all, the specific areas that we know quite strongly that we're getting prices are in things like titanium. If you drill in and you look at the performance around our titanium portfolio, you would see that both on the HPMC side of the business as well as the AA and F side of the business, our titanium offerings have seen meaningful increases in price. And we believe that we are absolutely keeping pace with anybody out there when it comes to that. On the nickel side, nickel side for HPMC, so think in terms of engine applications, for example, we know we have absolutely gotten the price.
Don Newman: Now, the price that we're getting is, there's something to keep in mind. We are a company that has a significant amount of LTAs. And so those LTAs can affect the timing of when you see those price increases hit your financials. What do I mean by that?
Don Newman: Well, even though we have a lot of LTAs, and those LTAs can expire over varying lengths of time, we've been very, very active when there's an opportunity to sit down with a customer to really address pricing, even for existing LTAs. And so we also do that, by the way, with renewals. And so what we know is that part of that price increase that we're getting is coming. It's coming in the form of when that new contract begins. It might be 25 in some cases, 26, in other cases, and it comes with higher prices. So that's on its way.
Don Newman: And then beyond that, transactionally, we're very confident that we're getting our fair share of pricing increases. Now that's on aerospace and defense, which is part of our core business. We're also getting our fair share and more pricing in our aero-like end markets. Things like, you know, we sell hafnium, and it's a fantastic product, has very unique characteristics. And we understand the value that we bring to our customers and medical and specialty energy and electronics.
Don Newman: And we have seen significant opportunities for adding price in that space, so we know we're getting it. It's not just about volume increases in this business. And we believe that we are, we strongly believe that we are getting our fair share across our portfolio.
Marissa: And we believe that we are strongly believes that we're getting our fair share across our portfolio.
Marissa: Yeah.
Scott Deuschle: All very helpful. Thank you.
Speaker Change: All very helpful. Thank you.
Marissa: Alright.
Marissa: Our next question comes from Richard Safran Seaport from Research partners. Please go ahead.
Richard Safran: Our next question comes from Richard Safran at Seaport Research Partners. Please go ahead.
Richard Safran: Thanks, Kim David Good morning, so.
Richard Safran: Thanks, Kim, Don, Dave, good morning. So, um, good morning. I want to ask you a bit more about good morning.
Richard Safran: Good morning, I wanted to ask you a bit more about.
Richard Safran: I want to ask you a bit more about this press release from Farnborough where you talked about share gains and solutions. The solutions really mean forging, and Also, RTX said it was doubling or increasing, I forget which, its forging capacity. Now, you had a long-term agreement with Pratt. So are RTX's comments about increasing forging capacity really you? Are they the ones, for example, that are thinking about making investments to increase capacity at ATI?
Richard Safran: So I wanted to ask you a bit more about this.
Speaker Change: Press release from Farnborough, where you talked about share gains in solutions.
Speaker Change: The solutions really forgings.
Marissa: And.
Marissa: Well also.
Speaker Change: So Rts said, it was doubling or increasing I forgot, which it's fortunately capacity now you had a long term agreement with Pratt. So is rpx's comments about increasing forging capacity really you are they the ones. For example that are thinking about making investments to increase capacity at <unk>.
Speaker Change: Hi.
Speaker Change: So I'll take this one Richard on cell.
Kim Fields: So, I'll take this one, Richard. So, you know, while we don't talk about any specific customer contracts or agreements, you know, I shared in the first quarter in the earnings file that we are a significant partner and in supporting the GTF accelerated shop visits. So, we're working very closely with them to look across the full value chain and all of the assets and saying, "How do we, you know, work together to optimize all of the different assets that we have?"
Speaker Change: While we don't talk about any specific customer contracts or agreements you know I shared first quarter in the earnings call that we are a significant partner and then ended supporting the GTS accelerated shop visits and so we're working very closely with them to look across the full value chain and all of the asset.
Speaker Change: And saying how do we you know work together to optimize all of the different assets that we have.
Kim Fields: And so, you know, I think I shared in the last call that our plan is to double our foraging output and participation next year. And so, you know, we are on a path to help support them and help accelerate that work. The other thing I'd mention, though, is that we've already been working with them on, and I mentioned this again last quarter, to increase our machining output by 10 to 20% and our ultrasonic inspection capacity by 3X.
Speaker Change: And so you know I think I shared in the last call that our plan is to double our forging outputs and participation next year and so you know we are on a path to help support them and help accelerate that work.
Speaker Change: The other thing I would mention though we've already been working with them on and I mentioned this again last quarter to increase our machining output by 10% to 20% and our ultrasonic inspection on capacity by three acts and and this is important not just for the G T Aston and the challenges there but for the industry overall, we're seeing.
Kim Fields: And this is important not just for the GTF and the challenges there, but for the industry overall. We're seeing increased inspection protocols and testing that's being done to ensure safety, which is good, but is a bottleneck in the industry. And we are continuing to, you know, work with them so that we have excess capacity to help offset any kind of bottlenecks or any issues that may come. I do believe as we continue to work together and partner, we have a very close relationship with them, that we're going to continue to find new opportunities to grow and work together and grow our participation. Just as an aside, the $4 billion announcement that we made about sales a couple weeks ago, about 20% of that, just to your earlier question, 20% of that is probably forage products, comes from forage products.
Speaker Change: <unk> inspection protocols and in testing that's being done to ensure the safety, which is good but is the bottleneck in the industry and are continuing to work with them. So that we have excess capacity to help offset.
Speaker Change: Any kind of bottlenecks or any issues that may come I do believe as we continue to work together and partner, where we have a very close relationship with them that we're going to continue to find new opportunities to grow and work together and grow our participation as just as an aside the four.
Speaker Change: Dollar announcement that we made on sale of a couple of weeks ago about 20% of that just to your earlier question, 20% of that is probably for its products comes from forged products.
Speaker Change: Okay, hopefully I can just quickly.
Richard Safran: Okay. Hopefully, I can answer both of those questions. Just quickly.
Richard Safran: Very helpful. And just quickly, Don, you took up your EBITDA guide, roughly 10 million; you left your free cash flow guide intact. Just wondering why that didn't go up as well. I'm just wondering if there's some, if that's just conservatism, or maybe you're thinking about you have some other work in capital headwinds in the second half. Thanks.
Speaker Change: Very helpful.
Speaker Change: Just quickly.
Speaker Change: You took up your EBITDA guide of roughly $10 million you left your free cash flow guide intact, just wondering more than go up as well I was just wondering if there's hum if that's just conservatism or maybe you're thinking about you have some other working capital headwind in the second half.
Don Newman: Yeah, straight up, it's what I would call conservatism. We tend to be conservative, you know, Rich, in general, around our guidance. And, you know, more so when we get past the current period. And, but when you look at that correlation between the EBITDA guide and the free cash flow guide, you know, clearly EBITDA was rising, we had overperformance in Q2 that would, we didn't want to ignore and send a negative message by not rolling that in to our full-year guidance. So that seemed quite clear.
Speaker Change: Oh, yeah straight up it's a I would call. It conservatism, we tend to be conservative you know rich in general around our guidance.
Speaker Change: And you know more even more so when we get.
Speaker Change: Past the current period.
Speaker Change: But even when you look at our that correlation between the EBITDA guidance and the free cash flow guide.
Speaker Change: Clearly the EBITDA was rising we had over performance in Q2 that would we didn't want to ignore and send a negative message by not rolling that in to our our full year guidance. So it'd seem quite clear when it comes to our free cash flow, we do guide on an annualized.
Don Newman: When it comes to our free cash flow, we do guide on an annualized basis, but we have some really positive data points. One positive data point is the cash performance year to date. When you look at our cash from operations and it improves to more than $200 million a year, that is a really good fast. Another thing that we're seeing is a meaningful improvement in our inventory efficiency, which is really encouraging.
Speaker Change: Basis, but we have some really positive data points.
Speaker Change: One positive data point is the cash performance year to date, when you look at our cash from operations and it improving to more than $200 million year over year that is a really good fact, another thing that we're seeing is a meaningful improvement in our inventory efficiency, which is really encouraging.
Don Newman: So the fair question is all that's good news, Don, why don't you tighten your free cash flow range or raise your free cash flow? But what I would say is the majority of our free cash flow is generated in Q4. And some in Q3, but, you know, some in Q4. And so at this point, do not interpret that we are softening in our belief of delivering, you know, something and certainly in the middle of that guidance range because, you know, that is absolutely the target that we have in mind.
Speaker Change: So the first question is all that is good news done why don't you why don't you tightened your free cash flow range or a raise your free cash flow range.
Speaker Change: I would say is the majority of our free cash flow is generated in Q4.
Speaker Change: And some in Q3, but you know some in Q4 and so at this point do not interpret that we are.
Don Newman: But we felt at this point, after getting halfway through the year, it would be, you know, the right thing at the moment to keep that free cash flow range where it was. Keep in mind that at the midpoint of that guidance, Rich, it's an 82% increase in year over year free cash flow. And so there are a lot of good things that the team is delivering to accomplish that, but it is a significant increase, and we acknowledge that.
Don Newman: Again, things are progressing really well, it's going in the right direction where we need it to be to deliver, but that's just one data point on the significant improvement that we're pursuing. Yeah, hopefully, does that give you what you need?
David Strauss: It does, as always. Thanks, Tom.
David Strauss: Our next question is from David Strauss at Barclays. Please go ahead.
David Strauss: Great. Thanks.
David Strauss: Good morning, everyone. Good morning. Good morning.
David Strauss: Just one to ask about how far we are through the titanium capacity expansion in terms of it manifesting itself actually in the numbers. I know titanium was up a lot year over year, but that was a really easy comp relative to last year. It looks like, sequentially, the last couple quarters, you know, titanium revenue has been in a relatively tight range. So just, you know, I know the new capacity is still to come, you know, that's still to come online. But in terms of the, you know, restarting the, you know, the existing capacity, how much of that is actually manifesting itself at this point?
Don Newman: I'll take a shot at answering that, and Kim may add something at the end.
Don Newman: But so, first of all, from a production standpoint, let me actually step back for a second, David, just for other people's benefit. So we're increasing our titanium melt capacity by 80%. There are two baskets. The first basket is 45%. And that's what David's asking about.
Don Newman: That 45% is tied to production off of existing assets. The second basket is something that's in the process, on time, on budget, but doesn't really hit until 2025 and 2026. So let's focus on the first 45%, from a production standpoint, the restart of that facility that underpins most of the 45% has gone really, really well. It has ramped up really on schedule. Its cost to restart has been on budget, which was roughly $10 million; that facility should, at a run rate, contribute between 10 and $15 million a quarter in EBITDA.
Don Newman: That has been ramped up. And so, you know, we don't expect to hit the full rent run rate related to the benefit of that 45% basket until we get into Q4 of this year. So, you know, when you look at the overall titanium revenue growth and performance, there's, you know, we do see where our volumes are increasing for titanium; we've seen a very clear pickup in average price, which is, I think, an indication of capturing price and of mix. And we remain very confident that our titanium capacity, which is largely under contract, is going to contribute to the magnitudes that I described. And I think all I would do is
Kim Fields: And I think all I would add, David, to that is... You know, as we've seen, depending on what flow path it goes down, there are extended lead times or cycle times as things move through if they're going to a forge product part. You know, if you look at, you know, just slide 4 in the DAC, you can see that we are seeing the titanium flow through on the AA and S sides, particularly around the airframe, and you see that growth starting to come through.
Kim Fields: On the HPMC side, those cycle times are a little bit longer as they work through SM, especially materials, or then through forge products. And as we've been talking about, there are multiple, you know, that bottleneck moves around as we put more melts in. Melts are the first step.
Kim Fields: And then you've got, we've talked about the new process coming online down in Monroe, as well as some of the new testing capabilities that we've brought on to relieve and eliminate those bottlenecks. And so we're continuing to do that. As Don said, we anticipate to see on the HPMC side the impact of that in the 4th quarter, and that's progressing well.
Speaker Change: You've got we've talked about the new process come online down in Monroe.
Speaker Change: As well as some of the new testing capabilities that we bring brought on to relieve and eliminate those bottlenecks and so we're continuing to do that as Don said, we anticipate to see on the H P. M. C side, the impact that in the fourth quarter and that's progressing well.
Speaker Change: Okay, Great that's helpful and just a follow up there.
David Strauss: Okay, great. That's helpful.
David Strauss: And just to follow up there, you know, the ANS margins, Don, it sounds like you're assuming it's gonna be, you know, relatively in line and second half with Q2, which was really strong. But, you know, as I understand it, a lot of the, you know, titanium upside will run through ANS, and then I believe it's margin accreted to ANS. So, you know, kind of if you could just kind of walk through that, and you're thinking around ANS margins in the second half. Yeah.
Speaker Change: The VA and us margarine gone.
Speaker Change: It sounds like Youre, assuming its going to be.
Speaker Change: Relatively in line in the second half with both Q2, which was really strong but as I understand a lot of the titanium upside will run three in SME I believe it's margin accretive three in that so you know kind of if you could just kind of walk through that in your thinking around the U S margin.
Speaker Change: Margins in the second half.
Speaker Change: Yes, I appreciate you asking that question because it's good for us to clarify a bit.
Don Newman: Yeah, I appreciate you asking that question, because it's good for us to clarify a bit. So first, really strong margin performance from AANS in the quarter 16.4%. So significant uptick year over year and sequentially. So how should you think about that 16.4% from a sustainment standpoint, right? So let's unpack it a little bit.
Speaker Change: So first really strong margin performance from <unk> in the quarter was 16, 4%.
Speaker Change: So significant.
Speaker Change: Tick.
Speaker Change: Year over year and sequentially. So how should you think about that 16, 4% from a sustainment standpoint, right. So let's unpack it a little bit. So first of all one of the benefits that helped to deliver that 16, 4% was mix.
Don Newman: So first of all, one of the benefits that helped to deliver that 16.4% was MIPS. The team did an incredibly good job in shifting that business to be more concentrated in the aerospace and defense end market, to the point where AANS, A and D, was 38, almost 39% of the overall share of AANS revenues that grew at 19%. It was very healthy.
Speaker Change: The team has done an incredibly good job and shifting that business to more concentrated in the aerospace and defense end market to the point, where E&S A&D was with.
Speaker Change: It was 38, almost 39% of the overall share of.
Speaker Change: Aam's revenues that grew at 19% it was very healthy.
Speaker Change: If you drill in a little bit on that just for perspective.
Don Newman: You know, if you drill in a little bit on that, just for perspective, you know, so when you think about AANS, there are two business units; SRP, specialty roll products, is a large portion of AANS. This is a business we've been transforming and moving away from commodity products, moving away from selling through distributors and instead selling more and more through OEMs. That business, which a few years ago would have been mid-teens A&D exposure, we saw it hit over 40% this last quarter. incredibly strong, going in the right direction, and they're not done.
Speaker Change: When you think about the E&S, there's two business units SRP specialty rolled products is a large portion of aam's.
Speaker Change: This is a business, we've been transforming and moving away from commodity products moving away from selling through distributors and instead selling more and more through Oems that business, which a few years ago would have been mid teens A&D exposure, we saw a hit over 40% this last quarter.
Speaker Change: Incredibly strong growing the right direction and they're not done they are going to continue to push that business toward value add higher margin opportunity. So that's encouraging.
Don Newman: They are going to continue to push that business toward value-add, higher margin opportunities, so that's encouraging. But it doesn't actually answer your question, so I'll let you think about it in the near term. Well, one of the other things that's driving the Q2 margins that is important to understand, we did include in my scripted portion of the call. It's also in the deck that you guys can see online.
Speaker Change: Doesn't actually answer your question, obviously, you think about it in the near term well one of the other things Thats driving the Q2 margins that it's important to understand we did include in my scripted portion of the call. It's also in the the the.
Speaker Change: Deck that that you guys can see online.
Don Newman: We noted that pass-through revenues did have an impact on our revenue year over year. It's much less sequentially, but certainly year over year. What am I talking about?
Speaker Change: Noted that pass through revenues did have an impact in our revenue year over year, it's much less sequentially, but certainly year over year.
Speaker Change: What am I talking about well.
Speaker Change: We've really reduced our sensitivity to metal impacts, especially to the bottom line through the transformation that we've been executing but we do have pass through mechanisms that de risk our business, we like the mechanisms they allow us to pass through.
Don Newman: Well, you know, we've really reduced our sensitivity to mental impacts, especially to the bottom line, through the transformation that we've been executing. But we do have pass-through mechanisms that de-risk our business. And we like those mechanisms.
Speaker Change: <unk> and metal prices to our customers, but they can create some pretty wonky math year over year. When youre looking at growth rates are you looking at incremental margins et cetera. So let me cut to the chase. So when you look at Q2.
Don Newman: They allow us to pass through changes in metal prices to our customers. But they can create some pretty wonky math year over year when you're looking at growth rates, or you're looking at incremental margins, etc. So, here, let me cut to the chase.
Don Newman: So when you look at Q2, there was about a $55 million reduction, year-over-year reduction, and pass-through revenue. And that served to actually lift the Q2 EBITDA margins for ANS to a lesser degree, the overall business. And so let me right-size it; if you ran the map and said, Okay, well, if I stripped out that part of that element of ANS performance, the 16.4% would go to about 15.9%. So that right there is a good way to think about where AANS performed when you kind of look through the pass-through. Then how should you think about it going forward?
Speaker Change: There was about a $55 million reduction year over year reduction in pass through revenues.
Speaker Change: And that served to actually lift the Q2 EBITDA margins for <unk> and <unk>.
Speaker Change: To a lesser degree the overall business and so let me right size. It. If you ran the math and said, okay, well, if I stripped out that part of that element of Aam's performance to 16, 4%.
Speaker Change: Go to about 15, 9% so that right. There is a good way to think about where did <unk> performed when you when you kind of look through the pass throughs.
Don Newman: You know, I'll be honest, in my numbers, where I project, I view AANS delivering something closer to 15% EBITDA margins in Q3, Q4. Now, part of that has to do with, you know, we did have some really strong, strong mix in Q2. I think it's going to be challenging for the team to replicate some of those some of those elements of the rich mix from Q2 in the future quarters. So, you know, my thought is, when I say mid teams, I'm actually saying, hey, I think we're on 15%. Does that help?
Speaker Change: Then how should you think about it going forward.
Speaker Change: I'll be honest and my numbers were I project.
Speaker Change: I view aaas, delivering something closer to 15% EBITDA margins in Q3 Q4.
Speaker Change: Part of that has to do with we did have some really strong.
Speaker Change: <unk> mix in Q2, I think it is going to be challenging.
Speaker Change: For the team to replicate some of those some of those elements of the rich mix from Q2.
Speaker Change: In the future quarter so.
Speaker Change: My thought is when I say mid teens, I'm actually, saying, Hey, I think around 15%.
Speaker Change: Does that help.
Speaker Change: Absolutely terrific color. Thank you.
David Strauss: Absolutely terrific callers. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Andre <unk> from <unk>.
Andre Madrid: Our next question is from Andre Madrid from BTIG. Please go ahead.
Speaker Change: Please go ahead.
Andre: Good morning, Thanks for taking my question.
Andre Madrid: Good morning. Thanks for taking my question. I know you called it out in the remarks and a little bit in the Q&A, but I kind of wanted to go a little bit further and just see how much MRO demand contributed to jet engine growth in the quarter and how much you kind of anticipate that to contribute moving forward.
Speaker Change: I know you.
Andre: Called it out in the in the remarks, and a little bit in the Q&A, but I kind of wanted to parse it out a little bit further and just see how much MRO demand contributed to jet engine growth in the quarter and how much you kind of anticipate that to contribute moving forward.
Speaker Change: Okay.
Speaker Change: I'll take I'll take that question so.
Kim Fields: I'll take I'll take that question. So it's significant. You know, you've heard from all of our customers, they've talked about it in their earnings calls, there's a significant amount of MRO coming through. I'd say historically, you know, we typically don't have, so let me start with this, we don't have full visibility of does it go into an MRO part or a new build engine. As I mentioned, our products and our forging go into the hot section, the discs in the engine, and they can be, you know, in either place.
Speaker Change: It's significant yeah, you've heard from all of our customers have talked about it in their earnings calls there is a significant amount of MRO coming through I'd say historically, we've typically we don't have so let me start with US we don't have full visibility does it go into an MRO part or a new build engine as I mentioned our.
Speaker Change: <unk> and our forging go into the Hot section the desks in the engine and they can be in either place.
Speaker Change: But you know, we historically and estimate that MRO being you know, 25% and today, it's closer to 40, 50%, sometimes higher than that and you know when we when I look at the demand and look at our order book, we are seeing increased demand across all of the engine Oems.
Kim Fields: But you know, we historically estimate that MRO at, you know, 25%. And today, it's closer to 40, 50%, sometimes higher than that. And, you know, when I look at the demand and look at our order book, we are seeing increased demand across all of the engine OEMs for both the materials as well as the forging, as they continue to ramp up the OE rates, as well as keep pace with the shop visits.
Speaker Change: For both the materials as well as the <unk>.
Speaker Change: As they continue to ramp.
Speaker Change: The OE rates as well as its keep pace with the shop visit so I'd say, it's a significant portion of it.
Kim Fields: So, I think the significant portion is Hard for me to give you a precise number on that. But talking with our customers, it does seem like there is very heavy demand on both sides, and more upside. Frankly, if we could continue to increase the capacities and reduce the bottlenecks, as we've been talking about, there's more upside and more demand than we are currently putting into our outlook and our forecast today.
Speaker Change: Hard for me to give you a precise number to that but talking with our customers. It does seem like there is very heavy demand on both sides and more upside if frankly, if we could continue to increase the capacity then reduce the bottlenecks as we've been talking about theres more upside and more.
Speaker Change: Demand then.
Speaker Change: Then we are currently put into our our outlook in our forecast today.
Speaker Change: Yeah.
Speaker Change: That's very helpful. Thank you.
Andre Madrid: That's very helpful. Thank you. No, that's the perfect color.
Speaker Change: Perfect color, and then I guess moving or pivoting to.
Andre Madrid: And I guess moving or pivoting to the electronics out of the business. I know half of them were kind of dampened in the first half from the winter storm outage. But do you expect to make that up for the balance of the year? Or is this kind of being pushed out?
Speaker Change: The electronic side of the business I know happening was kind of dampened in you know in the first half from the winter storm outage, but do you expect to make that up through the balance of the year or is this kind of being pushed out.
Speaker Change: Yeah.
Speaker Change: So the teams are working very hard on Q.
Kim Fields: So the team's working very hard to close that gap. Demand is overwhelming on the electronic side. I just bought a new appliance that has a chip in it that can tell me, you know, when the washing machine ends and so forth. You know, all of our, everything around us is getting smarter every day.
Speaker Change: Two to close that gap demand is overwhelming on the electronic side I just bought a new appliance that has a chip in it that can tell me when the washing machine ads and so forth all of our everything around US is getting smarter every day and I will say that.
Kim Fields: And I will say that, you know, our business out in Oregon is one of very few, maybe one or two in the world that can provide and produce the purity at scale needed for electronic chip manufacturing. So we are working, and we've got some investments that are ongoing right now. We anticipate to see those coming online as we come into the fourth quarter.
Speaker Change: That's you know our business out in Oregon is one of very few maybe one or two in the world that can provide and produce security at scale needed for these electronic chip manufacturing. So we are working we've got some investments that are ongoing right now we anticipate to see those coming online as we come in.
Speaker Change: The fourth quarter and that's just phase one we've got two phase two phase three that we're also working on increasing our capacity and outputs of hafnium.
Kim Fields: And that's just phase one. We've got two, you know, phase two, phase three, that we're also working on, increasing our capacity and outputs of hafnia. The other thing I'd mention here with hafnium is, in addition to electronics, it goes into several other really important industries for us, one being the hypersonics industry and the space industry. That is a really critical component that goes into a material that's used for very, very high temperatures. Think of second stage rockets from a space standpoint that maintain their strength at these very high temperatures. And so that's another one. Pull on.
Speaker Change: The thing I'd mention here with Hafnium is in addition to electronics. It goes into several other really important industry for us one being the hypersonic industry and space industry that is a really critical component that goes into a material that's used.
Speaker Change: For very very high temperature things kind of second stage rockets.
Speaker Change: From a space standpoint that go that maintain their strength that at these very high temperatures and so that's another two Paul on that's another pull on that hafnium supply that we're continuing to maintain and again, we've been told by a couple of customers that we're the only ones in the world are able to make the quality and purity.
Kim Fields: That's another pull on that hafnium supply that we're continuing to maintain. And again, we've been told by a couple customers that we're the only ones in the world able to make the quality and purity that withstand that type of application. So, as I mentioned, we'll be doing investments. One is ongoing today; we've got two more phases, all of those are contemplated and included in our CAPEX guidance. But we are We're working very hard, and that team's working very hard out there to increase our output and capacity.
Speaker Change: That must stand that type of application.
Speaker Change: So as I mentioned, we will be we're doing investments one is ongoing today, we've got two more phases. All of those are contemplated and included in our Capex guidance.
Speaker Change: But we are working very hard and that team is working very hard out there to increase our output and capacities.
Speaker Change: Super helpful. Thank you.
Ralph: This is Ralph. Thank you.
Speaker Change: Our next question is from Phil Gibbs of Keybanc capital markets. Please go ahead.
Phil Gibbs: Our next question is from Phil Gibbs at KeyBank Capital Markets. Please go ahead.
Phil Gibbs: Hey, hey, thank you. Good morning.
Phil Gibbs: Hey, Thank you good morning.
Phil: Good morning, Phil Good morning.
Phil Gibbs: Morning, Phil. Good morning.
Phil Gibbs: So the increase in head count of 500, was that all in the quarter, and what production locations were that at specifically, and do you expect more hiring?
Phil Gibbs: So the increase in head count of 500 or was that all in the quarter and what production locations, where that are specifically and do you expect more iron.
Speaker Change: I'll take a stab at that Phil.
Kim Fields: I'll take a stab at that, Phil. So the 500 are all in the first half of the year. I'd say you can look across the two businesses, and it's probably 60-40, you know, down in Carolina, and 60-40 up in Wisconsin.
Speaker Change: So the 500 are all in the first half of the year I would say you can look across the two businesses and it is probably 60 40, you know down the Carolina 60, 40 up in Wisconsin, We are continuing to hire as we've talked about a lot of this is looking at our assets and.
Speaker Change: And saying how can we increase the output and Debottleneck. Some of these downstream activities, we've talked a lot about milk and milk capacity, but that's really just step one of this debottlenecking story and we are looking at the assets that we have on you know in the on the ground today and some new capital takes.
Kim Fields: We are continuing to hire. As we've talked about, a lot of this is looking at our assets and saying, how can we increase output and de-bottleneck some of these downstream activities? We've talked a lot about melts and melt capacity, but that's really just step one of this de-bottlenecking story. And we are looking at the assets that we have on, you know, on the ground today since New Capital takes two years minimum to get put in place.
Speaker Change: Two years minimum to get put in place and we're saying how do we increase the output and capacity here.
Kim Fields: And we're saying, "How do we increase the output and capacity here?" So we are adding shifts, we are adding crews. In the case of Forge Products, we talked about that ultrasonic capacity that we're expanding 3X. Those folks take about six months to get qualified to a level two or level three inspector that's required for the inspection protocols for the jet engine parts.
Phil: We are adding shifts we are adding crews.
Phil: In the case of forged products, we talked about that ultrasonic capacity that we're expanding three ex those folks take about six months to get qualified to a level two or level three inspector that's required for the inspection.
Phil: Protocols for the jet engine parts. So we are we've been working very hard at that this is probably the third year in a row that we've added you know, we're anticipating 1000 or more employees.
Kim Fields: So we've been working very hard at that. This is probably the third year in a row that we've added, and we're anticipating a thousand or more employees, but we're getting really good throughput and productivity. You hear that from some of the other OEMs in the industry.
Phil: But we're getting really good throughput and productivity youre hearing it from some of the other Oems in the industry. You know you talked a little bit about the G. T apps and things we're doing there. So we are seeing the benefits of that starting to come through and that will continue as we get into the back half of the year and we get up the learning curve.
Kim Fields: We talked a little bit about the GTF and things we're doing there. So we are seeing the benefits of that starting to come through, and that'll continue as we get into the back half of the year and we get up the learning curve. Don, do you want to add some color on that? I would like to.
Don: Don do you want to add some color on that but I like it might be helpful to just dimensionalize, a little bit how to think about the cost the incremental cost in the inefficiencies that I talked about earlier in the call. So.
Don Newman: It might be helpful to just dimensionalize a little bit how to think about the cost, the incremental cost, and the inefficiencies that I talked about earlier in the call. So the investment in additional heads is not new to us, right? We were doing that as we exited COVID, and we learned how to do it quite well.
Don: The investment in the additional heads is not new to US right. We were doing that as we exited COVID-19 and we've learned how to do it quite well the learning.
Don Newman: The learning, and setting up processes for our current expert employees to teach new employees how to become excellent at our production methodologies. However, inefficiencies exist in a transitory Way. So that 500 employees, that is a first half number, not specifically tied to the second quarter. But how should you think about the dollar magnitude of the inefficiencies that we carried in that 20.2% margin for HPMC? Think in terms of probably between $5 and $10 million of higher costs in the quarter.
Phil: Setting up processes for our expert current expert employees to two.
Phil: To teach new employees how to become excellent.
Phil: Our production methodologies, but inefficiencies exist.
Speaker Change: Transitory way so that 500.
Speaker Change: Employees that is a first half number not specifically tied to the second quarter, but how should you think about the dollar magnitude of the inefficiencies that we carry in that 22% margin for H P. M. C think in terms of probably between five.
Speaker Change: Five and $10 million of inefficiency.
Don: The higher costs in the quarter a fair question is well how long is that going to be with us Don.
Don Newman: A fair question is, well, how long is that going to be with us, Don? And the way to probably think about it is that we would expect that those inefficiencies would largely be behind us by Q4. And so, our guidance contemplates these additional heads and the training and inefficiency costs related to them.
Speaker Change: The way to probably think about it is we would expect that that those inefficiencies would largely be behind us by Q4, and so our guidance contemplates that.
Phil: These additional heads and the training and inefficiency costs related to it.
Speaker Change: Yeah.
Speaker Change: Thank you.
Phil Gibbs: And just to follow up for me. Regarding your 2025 financial targets, are you maintaining that? Or are you increasing that this morning when considering the new airshow winds and the Nicolae Arena? How would you, kind of, square that up? Thank you. So.
Speaker Change: Just a follow up for me.
Speaker Change: Regarding your 2025 financial targets are you maintaining that or are you increasing that this morning, when considering the new air show.
Speaker Change: Wins in the nickel alloy arena, how would you how would you.
Speaker Change: Kind of square that up thank you.
Don Newman: So, what I would say is we're not officially changing our guide, but it would be a rational thing to add roughly $40 million to our prior guidance range. How do we get there?
Speaker Change: So so what I would say is we're not officially changing our guide, but it would be irrational.
Speaker Change: Thing to add.
Speaker Change: Roughly $40 million to our prior guidance range, how do we get there I know Phil you've already done the math, we said that $100 million.
Don Newman: I know, Phil, you've already done the math. We said that $100 million a year is the incremental revenue that we expect will be added as a result of these new sales commitments, $100 million every year. And these are higher-margin products that are being encompassed. The nickel mix here is quite strong.
Phil: Our year is the incremental revenue that we expect will be added as a result of these new steel sales commitments of $100 million every year and these are richer margin products that are being encompassed the nickel. The nickel mix here is quite strong is pointed towards.
Don Newman: It's pointed toward jet engines, so we would expect higher than typical incremental margins. And I think a good placeholder to use is something in the 40% range, $100 million times 40%, $40 million of EBITDA. If you layered that on to the previous 2025 guidance range, which we guided at $800 to $900 million of EBITDA in 2025, I don't think that's an irrational thing for you to do. Now, it's worth adding one more point to that, and that is there are a couple of data points or triggers that we do look for as we think about our 2025 and 2027 targets.
Phil: Jet engine. So we would expect higher than typical incremental margins and I think a good placeholder used as something in the 40% range 100 million times, 40% 40 million of EBITDA, if you layer that onto the previous 2025 guidance range, which we guided at 802 <unk>.
Speaker Change: <unk> $900 million of EBITDA in 2025, I don't think Thats, an irrational thing for for you to do now that it's worth adding one more point to that and that is there are a couple of data points or triggers that we do look for as we think about our 2025 and 2020.
Don Newman: We believe those targets, by the way, are generally conservative. But the two triggers are the 777X and the current FAA limits on 737 build rates. So when those two triggers are pulled, I would expect that it will be another opportunity for us to assess our outlook targets and see if it's appropriate to adjust them. At the latest, what I would say are those 2025 numbers we're going to be talking about when we talk about our Q4 performance and full year, 2024 performance. But that, again, would be the latest. We would probably give them a fresh look.
Speaker Change: Seven targets, we believe those targets by the way are generally conservative.
Speaker Change: But the two triggers are the the triple seven acts and and the current FAA limits on 737 build rates. So when those two triggers our pool I would expect that we'll it'll be another opportunity for us to assess our R. R outlook target.
Speaker Change: And see if it's appropriate to adjust them.
Speaker Change: At the latest what I would say is those 2025 numbers, we're going to be talking about.
Speaker Change: When we talk about our Q4 performance and full year 2020 for performance.
Speaker Change: But that again would be the latest we would probably give a fresh look at those.
Speaker Change: Right.
Phil Gibbs: Can I just squeeze one more in here on the buyback? I don't know if it was talked about, but I think you're effectively exhausted there. And I think your last comment was that it needed to see some board approval. You're obviously going to have pretty good free cash flow here for the next 18 months. Where do we stand on that? That's my last one. Thanks. Sure, yeah.
Speaker Change: Squeeze one more in here just on the buyback I don't know if it was talked about but I think you you're effectively exhausted there.
Speaker Change: And.
Speaker Change: I think your last comment was that it needed to.
Speaker Change: See some board approval, you're obviously going to have pretty good free cash flow here for the next 18 months.
Speaker Change: Where do we stand on that that's that's my last one thanks.
Don Newman: Sure. Yeah, I'll take that one.
Speaker Change: Sure Yeah.
Speaker Change: Take that one so first.
Speaker Change: We are deploying.
Speaker Change: We have a very consistent capital deployment strategy and that includes returning capital to shareholders.
Speaker Change: We've completed the current program to your point I don't want to get ahead of my board, but what I would point to is that we are expecting to generate a healthy amount of cash flow, that's largely going to be in the fourth quarter, that's our cash.
Speaker Change: Rhythm at the curb to current time.
Don Newman: So first, you know, we were deploying a very consistent capital deployment strategy, and that includes returning capital to shareholders. We've completed the current program, to your point. I don't want to get ahead of my board.
Speaker Change: Our board is pretty pretty supportive of returning capital to shareholders. Our bias has been towards share repurchases. So I don't think you've.
Don Newman: But what I would point out is that we are expecting to generate a healthy amount of cash flow that's largely going to be in the fourth quarter. That's our cash rhythm at the current time. Our board is pretty supportive of returning capital to shareholders. Thus, our bias has been toward share repurchases. So I don't think you've seen the last share repurchase program in the ATI organization. I'm sure the board will take that up as a topic in the coming quarters.
Speaker Change: I don't think you've seen the last share repurchase program in <unk> and the Hei organization. So.
Speaker Change: I'm sure the board will take that up as opposed to a topic in the coming quarters.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: This now concludes the Q&A session I'll hand, the floor back to David Gladstone for closing remarks.
David Weston: This now concludes the Q&A session. I'll hand the floor back to David Weston for closing remarks.
David Gladstone: Thank you for joining the call today, we appreciate your attention to ATI with any follow up questions. Please reach out to our Investor relations team with that thank you and have a great day.
Thank you for joining the call today. We appreciate your attention to ATI. With any follow-up questions, please reach out to our investor relations team. With that said, thank you, and have a great day.
Speaker Change: Yeah.