Q3 2024 ATI Inc Earnings Call
Lydia: Hello everyone and welcome to ATI's third quarter 2024 earnings call. My name is Lydia and I'll be your operator today.
Lydia: After the prepared remarks, I'll be an opportunity to ask questions. If you'd like to ask a question today, you can do so by pressing staff, or by one, on your telephone keypad.
Lydia: on our hand you over today, Weston, Vice President Investor Relations to begin. Please go ahead. Thank you. Good morning and welcome to ATI 3rd Quarter, 2024 earnings call. Today's discussion is being webcast online at ATIMaterial.com.
Speaker Change: participating in today's call to share key points from our third quarter results, our Kim Fields, President and CEO, and Don Newman, Executive Vice President and CFO.
Speaker Change: Before starting our prepare remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. So, slides provide additional color and details on our Results and Outlook and can also be found on our website at at materials.com
Speaker Change: After our prepare remarks, we'll open the line for questions.
Speaker Change: 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 me start by saying our team is motivated by our mission to support our customers. Consistently providing the highest quality product even as we navigate, market and supply chain turbulent.
Kim Fields: As you saw in our earnings release, the third quarter represents mixed results for ATI. While they are positive highlights and accomplishments achieved, the team and I are disappointed by the shortfall to our financial guidance.
Kim Fields: Our performance was not what we strive for.
Kim Fields: We can and we will do better.
Kim Fields: Today's call, I'll walk through the challenges we encounter this quarter and how we are responding to them.
Kim Fields: For the third quarter, our adjusted EBITDA was approximately $186 million, up from our Q2 EBITDA of approximately $183 million.
Kim Fields: However, it wasn't below our guided range of 189 to $199 million dollars. Adjusted earnings per share with 60 cents, below our guided range of 63 to 69 cents per share.
Kim Fields: We've adjusted our expectations for the coming quarter and the full year 2024 to account for ongoing headwinds related to supply chain uncertainties.
Kim Fields: and one remaining operational challenge.
Kim Fields: We anticipate sequential growls for the fourth quarter and we are continuing to pursue opportunities to exceed the guidance ranges that Donald will walk you through today.
Kim Fields: We will be transparent in what these changes and business conditions could look like through the end of the year and what has been incorporated into our guidance.
Kim Fields: While our total growth fell short of expectations, the quarter did include several bright spots showing momentum in key focus areas.
Kim Fields: segment adjusted EBITDA margins, Matt or exceeded our expectations. In HPMC, we saw over 200 base-to-use points of sequential improvement in segment EBITDA margin, moving closer to the mid-20s range that we see as achievable in the near-term for this core A&D segment.
Kim Fields: In AANS, our segment EBITDA margin with approximately 15%. Consistent with our expectations is our mix of A&D work continues to build in the segment.
Kim Fields: Our consolidated EBITDA margins increased by 100 basis points as we continue to improve price and mix and take operating costs out of our business.
Kim Fields: Our A&D Mix remains greater than 60% and our backlog remains stable as we continue to book new business across both segments.
Kim Fields: These achievements underscore that the underlying fundamentals of our strategy are working to expand margin and drive value creation for the future.
Speaker Change: So why did this quarter's result fall short of our guidance?
Speaker Change: Let's set the foundation. Our ranges for guidance are intended to cover our high and low-end expectations based on customer demand and operational performance. They contemplate variables like supply chain performance and operating efficiency, as well as non-operating items.
Speaker Change: This quarter, the impact of mark-abilability and operational performance issues exceeded what we had anticipated.
Speaker Change: Most notably, much of this volatility materialized late in the quarter limiting our options offset the risks that were realized. These risks were evenly split between customer demand changes and operational challenges.
Speaker Change: Let's touch on customer demand first.
Speaker Change: We've all witnessed the demand bumpiness of the commercial aerospace ramp, while backlogs in demand for commercial aircraft were being quite high, both aircraft OEMs are ramping more slowly than the industry expected. These delays were sent when Boeing's work stoppage began on September 13.
Speaker Change: While some customers are Boeing maintain their orders and shipments, others in supply chain reacted quickly, managing orders around their production schedules and near-end inventory targets.
Speaker Change: Even ahead of the work stoppage, they began pushing out plant deliveries into 20, 25, canceling orders or not placing transactional orders.
Speaker Change: Looking closely at our results, we believe these rapidly emerging adjustments in demand for commercial air frame materials served as one of the key drivers for our quarter short fall.
Speaker Change: This impact extended to the transactional business as well, which historically has been a significant contributor on top of our LTA contracts and Hansen grows over the last three years.
Speaker Change: Comparatively, our Jet Engine customers have worked to maintain supply, and limit disruption.
Speaker Change: While new engine deliveries are delayed from build rate reductions, continued MROXivity drove on going demand for our products.
Speaker Change: However, Emma Rodiman can be less predictable.
Speaker Change: Demand Variations for specific parts on specific platforms caused operational disruptions as customers reordered priorities and pushed out excess parts, not immediately needed to complete an engine overall. Well, that's pronounced and with airframe, engine shipments were impacted over the last three weeks.
Speaker Change: the September reflecting accelerating supply chain dynamics.
Speaker Change: This rapidly pivoting customer demands led to increased changeovers and smaller lot sizes in our operations, and ultimately to crease what was actually available for us to ship.
Speaker Change: Beyond Underlying Demand, customer program changes can create bottlenecks in our operations.
Speaker Change: That's what we experience as we significantly increase production levels for a T-engine program. These requirement changes cause bottlenecks in our testing and inspection areas and impacted our shipment rates.
Speaker Change: We are working with the customer to implement improvements for testing outcomes and to decrease testing time. These efforts, along with our investments to triple testing capacity, will support the rapid increase in part production and reduce bottlenecks.
Speaker Change: We expect output to increase as our testing capacity expands.
Speaker Change: What is clear, underlying demand for new planes remains strong?
Speaker Change: These fundamental support long-term growth for the commercial aeromarket and for API. The current turbulence will likely continue until the growing work stoppage is resolved and the supply chain realized to consistent demand signals.
Speaker Change: Over the next two quarters, we anticipate modest growth as the supply chain ready for the next Bill right increase, which we believe will come in the back half of 2025.
Speaker Change: The other half of our mist is related to operational challenges during the quarter.
Speaker Change: Since the pandemic, our sales have grown approximately 45%.
Speaker Change: To achieve the significant growth, we've pushed production to record highs. These record production levels leave little room for missed steps.
Speaker Change: With that said, operations are most efficient with level, stable, product flow.
Speaker Change: Disruption Create bottlenecks and inefficiencies.
Speaker Change: When unexpected outages occur, surging the past city and emerging bottlenecks can be difficult to overcome, especially when they occur in the last few weeks of the quarter as they did in Q3.
Speaker Change: 1 example of high lengths this.
Speaker Change: As we've pushed performance levels along standing design flaw was discovered in our HPMC nickel melt chop. Last quarter, that part flaw allowed molten metal to escape and damage the equipment causing an operational outage.
Speaker Change: are teams of action immediately to restore operations. And once they identify the issue, they re-engineers apart, effectively eliminating this risk going forward.
Speaker Change: Today, the operation is achieving the melt targets needed to deliver our cue for anticipated growth.
Speaker Change: But as we were executing our recovery plan in Q3, transitory bottlenecks began to emerge due to the surging material.
Speaker Change: This, as well as transportation delays related to hurricane healing, restricted our ability to fully offset the impacts to the quarter. Each issue on its own was not significant, but aggregated they were difficult to overcome.
Speaker Change: In the AANF segment, we experienced an outage of our vacuum and meal first in Oregon due to a failure caused by a new water pump we recently installed.
Speaker Change: This asset serves as the final step in a proprietary operation that primarily serves the space industry.
Speaker Change: While restoration is underway, the team is working to rapidly qualify other assets in parallel to protect our customers and mitigate sales impacts.
Speaker Change: This will continue as a hybrid into the fourth quarter.
Speaker Change: Let me emphasize, progress has been made.
Speaker Change: are quarterly sales exceeded $1 billion for the ninth consecutive quarter and are expanding margins demonstrate that our strategy is on the right path.
Speaker Change: This continuing improvement throughout 2024 showcases momentum in key areas, increasing melt capacity, reducing finishing bottlenecks and improving mix and pricing.
Speaker Change: We continue to invest in reliability and deep model making of our production footprint.
Speaker Change: Our entire team is focused on the most vital priorities as we operate our business, safely, efficiently and reliably.
Speaker Change: The productivity and leveling work we're doing is building momentum. Already this quarter we see encouraging progress. Tech is meet confidence that our performance will continue to improve and that our strategy is directly aligned with the growth we believe is a head for ATI.
Speaker Change: What hasn't changed?
Speaker Change: The Future for H.I. Strong
Speaker Change: The Market Fundamentals are clear, aircraft production and maintenance will increase. A need to protect U.S. and Allied troops continues.
Speaker Change: Critical customers and specialty energy, electronic, medical, depend on our materials for the differentiated performance they need.
Speaker Change: We didn't expect this ramp to be a straight line. We are confident the current market turbulence in our operational challenges will resolve. Arrow and Defense Growth will re-energize in 2025.
Speaker Change: The end user for our products need us more than ever and we are focused on delivering for them every single day.
Speaker Change: with that, I will turn over to Donford's comments.
Donford: Thanks Kim. Fields volume is the Foundation of our growth and performance.
Donford: Many of the impacts incurred this quarter emerged as the quarter ended.
Donford: As a result, sales, earnings and cash flow were lower than we anticipated three months ago. As Ken Lyleided, roughly half of this impact was driven by customer demand, timing and requirement changes.
Donford: The other half was due to operational challenges.
Donford: Total sales were down 4% sequentially, up 2% from Q3 and 2023.
Donford: We do not guide for sales, but it is reasonable to estimate that our view of the shortfall this quarter is approximately $90 million.
Donford: This impact in sales timing brought our earnings below our guided ranges for adjusted even though and adjusted earnings per share, even with inclusion of benefits such as reduced incentive compensation and a $3.7 million gain on the sale of oil and gas rates.
Donford: I think it is fair to say that we performed well on the materials we did deliver this quarter.
Donford: I anticipate that trend to continue as volume increases.
Donford: We have spec growth to return in the fourth quarter.
Donford: Looking specifically at Adjusted Eva Daw, our midpoint of guidance was $194 million.
Donford: We delivered approximately $186 million, $8 million below midpoint.
Donford: Nat Consolidated Adjusted Bedam Margins were 17.7% of sales of 100 basis points from Q2.
Donford: This allowed us to partially offset the impact of reduced sales.
Donford: We believe the realized efficiencies of this performance are sustainable for the future.
Donford: From a segment perspective, HPMC margins increase sequentially and year-over-year, closing at 22.3%.
Donford: and we content remains at 86%.
Donford: We estimated that AANS margins would approach 15% in the second half of 2024 and we posted 14.8% this quarter.
Donford: The sequential 160 basis point decrease in a bedam margin is consistent with our previously announced expectations.
Donford: While sales in the segment declined to 20% to 70% you're over your sales work up to 3%.
Donford: Even with the volume impact we've explained.
Donford: and D-Content for A and S was 36%.
Donford: The consolidated margin expansion for HCI up 100 basis points this quarter and up over 300 basis points from Q1 is underscored by enduring myths of A&D and arrow-like and markets.
Donford: Q3 revenue in those markets total 79% of our overall revenues.
Donford: with sales in those markets up 6% year over year.
Donford: Let's turn to cash flow and manage working capital.
Donford: Reduce sales and delayed inventory liquidations resulted in cash usage in a third quarter.
Donford: Operating Cash Flow was $24 million.
Donford: Offset by $61 million in capital expenditures.
Donford: This resulted in a $37 million use of cash when netted for free cash flow.
Donford: You're today, our free cash will usage is $152 million.
Donford: That is $50 million better than our year-to-date position at this time last year.
Donford: However, our managed working capital increased to 40% of sales from 35.5% in Q2.
Donford: Delays and sales as we continue to melt and produce to meet customer requirements along with accelerations and timing of capital expenditures contributed to the year to date use of cash.
Donford: We continue to execute our balanced capital deployment strategy as we invest for growth, reduce debt, and return capital to our shareholders.
Donford: This quarter, we proactively redeemed our convertible notes. Almost a year ahead of their maturity date.
Donford: We retired nearly $300 million in outstanding debt and reduced 2024 interest expense by approximately $2 million.
Donford: in parallel, our Board of Directors based on our strong balance sheet in anticipated future cash generation authorized up to $700 million in a future share repurchases.
Donford: This quarter, we use the first 40 million dollars of this authorization to begin reducing share come.
Donford: We estimate that this authorization will be fully expanded by early 2027 to lowering significant value to our shareholders.
Donford: Now let's talk about our guidance to close out 2024.
Donford: with growth expected in the fourth quarter and continued operational efficiencies, we expect earnings to build upon our Q3 results.
Donford: Our estimate for a Jocity Beda's range from $181 million to $191 million, which equates to an earnings per share range of 56 cents to 62 cents for the quarter.
Donford: We believe there are opportunities to achieve that range, as we monitor how the industry responds to the Boeing work stoppage and we restore vacuum and the capacity in AANS.
Donford: Overall performance of the business in the fourth quarter will also be a key driver.
Donford: We are also tracking non-operational opportunities that could increase our Q-40 bidda, by as much as 10 to 15 million dollars. But it not included that potential in our guidance.
Donford: The Range Reforce Quarter equates to a full-year adjusted EBDA range of $770-$710 million. And an earnings per share range of $2.24 to $2.30.
Donford: This represents a $30 million reduction to our previous midpoint of a dress to David Doc with $10 million of the shortfall in Q3 and $20 million of adjusted expectations for Q4.
Donford: While we still expect cash in a nation to be strong in the fourth quarter, we have lowered the high end and low ends of our free cash will range by $40 million.
Donford: This accounts for near-term risks and sales timing and inventory flow.
Donford: This $40 million reduction includes $30 million of earnings timing.
Donford: and also considers a $10 million increase in our CAP-X guidance due to accelerating targeted investments to improve reliability and asset performance.
Donford: Free cash flow guidance, now ranges from $220 million to $300 million.
Donford: Q4 is expected to be a strong quarter for cast generation, consistent with our cast cycle.
Donford: This reflects a meaningful reduction in managed written capital.
Donford: We expect to end the year with managed working capital in a low 30% range.
Donford: This is a Bobber original year and target of 30% or less.
Donford: We continually look for opportunity to efficiently deploy capital.
Donford: That includes divesting assets that create little or no operational value, such as oil and gas rates.
Donford: In a fourth quarter, we anticipate monetizing as much as $40 million of non-core assets.
Donford: will likely redeploy proceeds to support improved reliability, debottle-making, and growth as an element of our existing capital investment plan.
Donford: As we react to the tightening of the impact to 2024, we are left with at least one more important question.
Donford: What is this reduced year end to exit rate mean to our 2025 and 2027 targets?
Donford: Consistent with past practice, we will not provide formal guidance for 2025 until we report fourth quarter earnings.
Donford: Let me offer some initial insights now.
Donford: It is reasonable to assume that 2025 performance, particularly in the first half of the year, will reflect adjusting supply chains.
Donford: Our views at this time suggest that we will be within the range of the original targets we issued last year, which was adjusted even though between $800 and $900 million.
Donford: Supply Chain Headwinds are expected to largely offset the impact of New Sales Committments announced earlier this year.
Donford: Our performance within this range will be affected by how quickly the voing works stoppages result in the aerospace market ramp recovers.
Donford: As for 2027, we remain confident.
Donford: Despite a reduced second half 2024 and pressure heading into 2025, we believe the revised near-term build rates and sustained demand for aircraft production support the range we suggested last year.
Donford: ATI is still on track to be about $5 billion in sales, about $5.2 billion to be more specific, and above $1 billion on a dress to the EVIDA by 2027.
Donford: For the near term, we are focused on supporting our customers, taking full advantage of operational opportunities to deliver our fourth quarter and fully your 2024 guidance.
Speaker Change: Now, that note, I will turn the call back over to Kim.
Kim Fields: Thanks, John.
Kim Fields: This has been a unique quarter for HCI.
Kim Fields: on certainties with our most critical customers and unexpected obstacles with our own operation. Weston's short of our goals and our commitments to you this quarter.
Kim Fields: We are taking action across the enterprise to deliver on those expectations now and every quarter going forward.
Kim Fields: What gives me confidence in our future success? Our end markets are strong and our products lead the industry. Our strategy is on point, delivering growth and margin expansion.
Kim Fields: and most of all, our team is focused on delivering value for our customers and shareholders.
Kim Fields: With that, let's open the line for your questions.
Speaker Change: Thanks again. Please press star for the by the number one if you'd like to ask the management team a question and ensure your devices are needed locally when it's your turn to speak.
Speaker Change: We kindly ask the United States to one question and one follow-up. And if your question's already been answered, you can withdraw your question by pressing start all the by the number two.
Speaker Change: As first question today comes round at Richard Safran with Seaport Research Partners. Your line is open, please go ahead.
Speaker Change: Kim's on day, good morning.
Speaker Change: So I just wanted to follow up on the comments down you just made about the...
Speaker Change: about 2025. And I want to ask you a bit more about how you recover from these unplanned outages. You know, for AAS is there risks, you know, the repair and restoration efforts, you know, impact your 25 results.
Speaker Change: and for both of these issues is the revenue recoverable. Do you expect a bump in 25 assuming the strike ends in a reasonably short period of time and production resumes?
Speaker Change: Thanks Rich and a good morning. First of all, for our thoughts around 2025.
Speaker Change: We would expect that number one when it comes to, for example, the back and the ill, how urgent we experience and we'll continue to experience and keep for. We would not expect that to create a headwind into 2025.
Speaker Change: when it comes to the titanium demand. It's not quite what you asked about, but just to touch on that. When we think about the work stoppage that is a key driver in that titanium demand disruption, so the boiling work stoppage.
Speaker Change: We have anticipated we'll be with us through the end of this year and we'll be resolved in either rate this quarter or early 2025 and that the industry and the related demand will get back on track.
Speaker Change: in terms of the ability to recover what we saw as Mr. Avenue and Q3 and anticipating Q4. It would be nice to believe that, but we are not increasing our 2025 targets under that assumption.
Speaker Change: Okay, thanks for the... and just quick here.
Speaker Change: I think we're going to agree that you know, you're more dependent on the engine manufacturers in the air framer's. I just want to know if you could maybe go into a bit about what GE roles and pride are saying that's a bit different from the air framer's.
Speaker Change: you know, Boeing and Airbus, you know, trying to get what's embedded in your outlook now, road and the differences between what you're getting from the engine and the airframe manufacturers.
Speaker Change: Chair Rich, I'll give you some some color here, and it's on wants to jump in with any numbers that helped get a view more clarity. You know, from an engine standpoint, everyone is consumed, consumed.
Speaker Change: I'm sorry everyone is continuing to assume that Boeing is going to get this work-stop-ed settled sometime, you know, hopefully end by the end of this corner.
Speaker Change: from an engine, demand standpoint. They've also stated that they're making sure that they're protecting the supply chain. So we're seeing, you know, steady orders. We're not seeing big drop offs, I'd say.
Speaker Change: There was some aligning that happened kind of mid-quarter end of August timeframe with some of the build rates that weren't lining up exactly or with the call down that the other was airbus did as well.
Speaker Change: So we saw some, I'd say, aligning to that earlier in the quarter but it's been steady, they're continuing to buy and
Speaker Change: Let me be clear, you know, worse our sales are going to continue to grow with jet engine, going forward, you know, assuming the labor dispute as Donald just said gets resolved and at this quarter early next quarter.
Speaker Change: There is strong MRO and that's continuing across all of the OEMs, they're each addressing their individual design challenges, upgrades and engines that are driving shot visits.
Speaker Change: but we're also seeing that we're continuing to gain positions with Pratt and Support of the GPS.
Speaker Change: We did have a milestone in September where we hit 2x.
Speaker Change: the shipments, double the shipments that we've done in the first half year run rate in September. And then we're going to be working towards a meaningful increase towards the back end of this quarter, you know, targeting something in the 15 to 20 percent increase going into next year.
Speaker Change: So all of that lines up to strong demand growth that we're expecting and you know.
Speaker Change: there continued support and pull both for the Amarro as well as maybe a little bit of shifting to support the Emily Fenge in the one A and continue to support that girl that's going to be continuing.
Speaker Change: Thank you.
Speaker Change: Sure I next question comes from Andre Madrid with BTIG, your line is open
Speaker Change: Good morning, thanks for taking my question. I guess if we look into the near term, you know, you mentioned pretty extensively, you know, the MRO demand. Do you think though?
Speaker Change: That broadly this is enough to offset the pressure on airframe and could you maybe just talk broad strokes about the margin differential between those two and markets?
Speaker Change: As we look at it, what we've seen most of the engine-o-m's have.
Speaker Change: shared in their public comments, you know, they're running much higher MRL. So, you know, anywhere from 40 to one of the OEMs, even shared 60% of their current demand is coming from the MRL standpoint.
Speaker Change: So that's continuing. I would say, you know, as we look at their support and how they're thinking about the bill rates.
Speaker Change: They're continuing to build, make sure that they can keep up once.
Speaker Change: the work stoppage is over, Boeing's back on track.
Speaker Change: They want to make sure that they're not impeding that growth on either going or airbus side to the point where some of them have shared their protecting the supply chain and continue to buy at level stable demand levels. So I would have to say, you know...
Speaker Change: If we look forward, there have to be, I think, a different assumption around the workstoppage that names ask that have them revisit that, but today they're pretty...
Speaker Change: assuring us that they're going to continue along this path.
Speaker Change: As far as margins, that's a little bit harder to define.
Speaker Change: Airframe, Yasko II, the two big Air OEMs, but it also goes through distribution, it goes through machine shops, there's multiple channels and multiple products that go into that. I'd say our position on engines is...
Speaker Change: More creatives to our business than airframe, but their both very positive from a margin standpoint.
Speaker Change: and you want to share something? Yeah, if you don't mind, I think would be what I'll add is.
Speaker Change: If you think about the profile of our revenue, so about 60%, 60% of our revenue is aerospace and defense, and as you unpack that, what you see as jet engine is about 2x.
Speaker Change: what our airframe revenues are in a given period. So, well, yes, we would expect jet engine would be a positive offset to headwinds in the airframe side.
Speaker Change: We don't see it as a one for one offset or a significant tailwind that would fully overcome.
Speaker Change: A and Airframe, a sustained Airframe, slow down likely, like we would say has happened at the end of Q3 and we'll probably be with us through Q4. But the good news is we do have offsets.
Speaker Change: that certainly dampen the effect of it. Another offset area that we have is defense.
Speaker Change: Defense has been and we expect we'll continue to be a good area of growth for us for us a staying period of time. Now, that represents about 10% of our revenues. And if you compare that to our airframe, it's more than half the airframe.
Speaker Change: So again, the separate set of drivers around that demand and those revenues, it's a very good pocket of business for us.
Speaker Change: but it will help to offset not necessarily fully offset the effect of airframe headwinds, likely saw this quarter and anticipating the next quarter.
Speaker Change: Thank you, I appreciate the color there. And if I could throw in one more, I mean, you guys talked to extensively about how, you know, titanium shipments being pushed out on the airframes, I was more due to obviously demand signal shifting. But on the defense side, it seems like it was more operational in driven. I mean, just to clarify, sorry if I missed this. But could you explain that that's the case if it was more operational challenges?
Speaker Change: I'm Drey on the on the defense side, what I would say is it's more timing, you know, if we're the orders and frankly there is a bottleneck in the supply chain at Aberdeen with their ballistic testing which is impacting and flowing.
Speaker Change: and Shipman, some of that armor plate that we provide. So, you know, we're working with the Army to get that resolved and look at their testing capability or capacity.
Speaker Change: But you know I'd say we're at the AUSA show you know the Army show just at the beginning of the month here and there's quite a bit of activity Both domestically and through form military sales around the rebuilding of the ground defenses over in Europe and so
Speaker Change: There is a lot of upside opportunity and as Donald said, there is opportunity for us to offset any softness that we see from an error frame standpoint with our titanium.
Speaker Change: Thanks so much.
Speaker Change: Sheriff.
Speaker Change: and next question comes from David Strauss with Bart Kase, please go ahead.
David Strauss: Thank you.
David Strauss: wanted to go on a dad about the...
David Strauss: Hey, good morning. One last about, you know, maybe helping us walk to the, to the two or either dogguines.
Speaker Change: You know, you're calling for relatively flat, you know, flat, even though sequentially and cue for, I would think the, you know, the supply chain impacts would be worse.
Speaker Change: and you're talking about it's template or assumptions about when you strike those on through the end of the quarter. It sounds like at least on the A and S I just are going to have this.
Speaker Change: Operational Issue there. So just, Donald, you could help us walk from Q3 to Q4 in terms of the EBITDA for that.
Speaker Change: I'll try to basket this in a way that I'm not dragging you through a minutiae. But the way to think about it is first of all we ended the quarter with about $186 million of EBITDA and Q3 then included.
Speaker Change: and about almost $4 million a gang related to an oil and gas sale that I don't expect is not expected and are Q4 guidance.
Speaker Change: Then when you take a step back and you think about the things that we've shared.
Speaker Change: Some of those things are going to be with us in Q4 to your point. Things like that back in needle, um, I would age that is going to repair process.
Speaker Change: that I'll probably last a bulk of Q4.
Speaker Change: and then we're not expecting a magical solution to the titanium demand reduction that we saw.
Speaker Change: So those of you with us, but there were some things that were in Q3 that shouldn't repeat. And, you know, we had some headwinds around, for example, you know, shipping.
Speaker Change: during the hurricane. No surprise when you're in a little bit of a hurricane. It's kind of tough to avoid trucks and get a moving.
Speaker Change: So, but the news is we did not forecast her can in Q4. We think that's probably a pretty good assumption. So that should not repeat.
Speaker Change: Then we had some just some other anomalies. You know, we talked a bit about the VAMM voltage.
Speaker Change: Right? Well, that Femmonage is, it was impactful to last quarter. We don't expect it to be impactful for this quarter. So, that impact is behind us. So, you go through those positive minuses, the things that were hit, were hits.
Speaker Change: and Q3 rather that we don't expect to repeat and Q4. Think of them in terms of, yeah, probably a total of about $10 million of good guys.
Speaker Change: and if you back into the revenues, it's about $30 million so grab a new that on bad guys and Q3 that won't repeat in Q4.
Speaker Change: and then I would reduce that 10 million of E.B. by the non-repeated good guys like the Island Gastin sale, for example. So what you really get to is, hey, there's about $5 million of bad guys in Q3 that shouldn't be there in Q4.
Speaker Change: Joe.
Joe: So what that indicates is when you look at our current guide for Q40Bid-A, 21191.
Joe: and so midpoint 186.
Joe: Looks like I kind of a flash.
Joe: Q3 to Q4, don't just explain, it should be better and Q4 by a few million dollars. Well, you know, one thing that you already raised is...
Joe: that, hey, we're going to have a full quarter, a fact of...
Joe: of the titanium and handy.
Joe: the back and heel, that will be something we're dealing with. And then I will be quite frank.
Joe: and we want to look at our Q4 guidance. We do not plan on missing.
Joe: and so as we looked at the risks that we see and Q4, we tried to be very, very thoughtful and how that affected our guidance. You can probably say...
Joe: Fairly that we view the Q4 as conservative, but that would probably be with all the volatility and change that's going on in the market at the moment with the stoppages and all that good stuff. It's a really good thing to do.
Joe: So that's in the map as well. Does that help, David?
David: Yep, that's helpful. And just as a fall, I know some time is it's hard to get you guys know exactly if you know what Rachel's shipping ad, but any help to kind of level set up.
Speaker Change: you know, particularly on the titanium side, you know, on the air frame side, where where your ship maybe take the, you know, the major platforms where where you've been shipping and where you're shipping right now, you know, what great.
Speaker Change: David Weston, David Weston, as I think about titanium, so the effects that we talked about coming from the supply chain reacting. Some of it before even though the strike began as they were hearing the rhetoric.
David Weston: That has mainly...
David Weston: I think it stabilized from a shipping rate and to be honest, we've seen some
David Weston: Spot, transactional business, I think, as some have come back in and said, we do need this product or some titanium or we miss this.
David Weston: Demand Signal that we've got to put back into the order book. But I do anticipate from the titanium side that we'll see level shipments that as we go into the fourth quarter.
David Weston: Black to maybe slightly up on the titanium side. Hopefully, does that answer your question?
Speaker Change: Yeah, I was just looking at, I don't know if you can blow it down to kind of where your shipping for example on the max or A320 of what kind of ray to you.
Speaker Change: We are aware of you think you are today, we are all at the, you know, maybe where you were, according to a girl or what you were expecting Q3Q4 to look like and where it actually is.
Speaker Change: So if I think about those programs, you know, on the airbus side, I do think those rates have...
Speaker Change: Continued, there are a few, I think, suppliers in there, supply chain that they were adjusting their build rates too. We did talk with them, we aren't seeing any impacts in this year. You know, of that, I would call that almost moving for them. They are continuing to build titanium to supply to be ready to move away from the FMPL as we go into next year.
Speaker Change: and so we've got pretty close alignment from that standpoint. I'm the leapside as I mentioned, we have seen some shifting over to the 1a versus the 1b.
Speaker Change: and the first two, those parts are similar, but they're not exactly the same. So again, that whole idea of bottlenecks and material getting caught up as they just did and said, okay, we want more of these one-eight parts, which might have been six or sevens in line and we kind of had to push one in two out. And so that created some bottlenecks and efficiencies.
Speaker Change: but from an overall shipment standpoint, you know, working with the NGNOMs, it's been fairly stable. And I anticipate that, you know, in our guidance going through to four.
Speaker Change: Now, as I look at 2025, you know, that's where we're spending some time, you know, if there's something that the work stop the gen.
Speaker Change: How long does it take going to bring their folks back, get them requalified and certified and then get back to the rates they were at in an August.
Speaker Change: We would anticipate that probably takes a couple of months to get that work done and get back up to that rate But there could be some opportunities because I do think some of the supply chain with the distribution and the machine shops
Speaker Change: reacted very aggressively, you know, as they're concerned around cash flow and being stuck with inventory as the end of the year came up. So I do think that as they come back towards we could see some emergent opportunities that come from that.
Speaker Change: Okay, thanks very much for the color.
Speaker Change: Here.
Speaker Change: Next in QE we have SoGips with Keybank Capital to Market. Please go ahead.
Speaker Change: Thank you for watching.
Speaker Change: Morning, Morning Fub.
Speaker Change: in terms of the direction of back log after Q2. And then relative to Q2 and then also you would, you can, and your prepared remarks, you had mentioned some push out, some cancellations. Where have you seen that, I guess, in the specific products?
Speaker Change: So from a back-leg standpoint as you said that's been fairly stable around $4 billion. As I'm looking at it about...
Speaker Change: Three-quarters of that is in the HPMC segment, and the other quarter is in the AA and S segment. And that again, as you said, pretty stable. We're continuing to use strong steady demand across those two.
Speaker Change: as far as, and I think you asked about pushouts, where did we see that and what products?
Speaker Change: Yeah, you had mentioned some pushouts and I think you had also mentioned some cancellations as well and some curious where those were those fell.
Speaker Change: So those were mainly related to the airframe, um, titanium. Probably took the biggest hit as we look across the portfolio. As I said, the engine folks won their, they're still buying very steadily, they're planning on following getting back to working, getting back to rate and obviously.
Speaker Change: We've got Airboss that's continuing to produce and are building to their stated Builderates as well. So we did see it with some titanium. A lot of it was canceling or swapping.
Speaker Change: A thing okay, we don't need titanium for that product, we'd like to pull this product in and so there was a lot, I see there was a lot of...
Speaker Change: Joyce, like that that came in or they said let's switch orders around and switch the timing of those orders. So those pushouts that went out, there were some, yeah, from a cancellation standpoint, there were some mainly in the distribution space.
Speaker Change: A little bit in the machine shop, but mostly distribution, as they are looking at buying speculatively, either when they think demands going to rise or they think demands going to fall. And the whole supply chain everyone's been buying.
Speaker Change: to continue to make sure they stay ahead of the ramp. One particular customer I can share, give you a little bit more collar around landing gear. I think we're running well ahead of what the build rates were. Again, to make sure that they were not the flowist.
Speaker Change: Part of that supply chain and with some of these slow downs, said, okay, look, we're over inventory. We need to correct that inventory level and we're pushing this into 2025.
Speaker Change: Thank you Kim and then Dawn, just a question for clarification. I think you mentioned that there's going to be about 40 million of the best of her related inflows and Q4. Is that within your free cash flow framework or is that outside your free cash flow framework?
Speaker Change: Yeah, it is within. It's part of probably historically defined that calculation. So we include the cash proceeds.
Speaker Change: from discrete asset sales or just from asset sales in general. The logic there is...
Speaker Change: if you're including your cat backs as an element to your free cash flow, if you turn around and someone else asks that it's wouldn't you, you know, include that proceed. So, short answer is yes.
Speaker Change: I next question comes from Tim Natanas where the Wolf Research, your line is open.
Tim Natanas: Yeah, he can morning down in Kim. I wanted to circle back first off just quickly on the 40 million that divestiture. As soon as they're lower margin businesses that doesn't change your outlook for your targets for 2025 and beyond.
Speaker Change: You are 100% correct.
Speaker Change: Those are non-corrections.
Speaker Change: there.
Speaker Change: Sometimes they're discrete assets, which there's little to no margin attached to own gas, right? Sometimes they're non-corporations.
Speaker Change: They would be immaterial from a top-line standpoint. They would almost always be diluted from a margin standpoint.
Speaker Change: So we unlocked that and it improves the metrics.
Speaker Change: and gets us cash to read a point. I think the thing I'd add to that is in this case with these assets that...
Speaker Change: We will be able to continue to supply material to the...
Speaker Change: The buyer, so we will get the benefit of that material supply.
Speaker Change: while aligning that business with another owner who this is their strategic focus and they're, you know, we anticipate they're going to invest and they're going to grow that business. So as Don said, it's not a creative but I think it does provide us an opportunity to continue to support it with growth potential.
Speaker Change: Okay, got it. Thanks. I wanted to follow up on that.
Speaker Change: and the past on the Q3 call, he said some of the lost volumes to Eric.
Speaker Change: that the Andy segment could be sold into other segments and talk about industrial. So maybe if you could give us an update on how the industrial markets are working. And then similarly in the past, you talked about, and this maybe goes back too far, but Boeing, you had MinMax contact, so they would keep taking the minimum even when they didn't need it, like when they were on work stoppages in the past. And that ultimately led to prolonged periods of low margin and a lighter volume. So I'm just wondering, is there a risk that that repeats itself? So that's, I guess, that's two questions. Thanks.
Speaker Change: Yeah, so I'll start with the industrial question so you know we are not heavy and automotive or housing so those aren't really, um...
Speaker Change: Markets that we have that are very impactful. We have a small part of our business, I think, to ensure that in the past 10 to 15 percent, one with Masonic Namely, the A and S segment. I say that I look across our other strategic segments, you know, the arrow like.
Speaker Change: You'll see in our results
Speaker Change: that medical and electrical specialty electrical took a step down. Those are really related to order timing, inventory, realignment, not really due to underlying core demand, we're still seeing very strong demand and specialty energy.
Speaker Change: as well as medical with elective surgeries are starting to catch up. I heard there's a shortage of saline. I think some of those things are creating a little choppiness in that medical market. But we are seeing those again, those aero-like markets are still very strong demand and as you're saying, give us an opportunity to sell our products into those when we see any openings.
Speaker Change: Like most of our other aerospace contracts were renegotiated during the pandemic.
Speaker Change: And so we are currently at a share position now with them, with MinMaxes, as I've shared
Speaker Change: before all of our contracts have maxes. One, because they contemplate what is their total capacity and make sure we can continue to support these customers.
Speaker Change: But then it also, when demand starts to ramp quickly, it does give us an opportunity to participate on the transactional side as their demand starts to exceed what that contract is. So, you know, as we're thinking about this, we are working closely, you know, with Boeing.
Speaker Change: Unfortunately, they've had just a series of setbacks here, you know, coming out of the pandemic and so
Speaker Change: They were starting to work towards that build rate to rate 38, to talk with the FAA to kind of move past that, but they had not been up to full, I'd say full power from a build rate standpoint since the MAX crashes, frankly. So a lot of our growth.
Speaker Change: If you look at our portfolio, we shared this in the past, we have a very diverse customer base now. So we're supporting both of the airframes and all of the engine programs in a meaningful way. And so, you know, unfortunately,
Speaker Change: Boeing continues to have some issues, but we anticipate they're going to get to build right. But the rest of the industry is very robust at trying to meet the airline's demands and their needs for new planes and before the new planes get there to keep those engines in the air.
Speaker Change: That's how we're managing, that's how we're thinking about those markets and the dynamics that we see at least through the end of this year and into the first quarter, first half of next year as Boeing gets back to that August rate.
Speaker Change: Bob, Don, thank you. Yeah, one thing I would add just to go back to I think part of the question asked about industrial
Speaker Change: Demand. We've talked about the anticipation that industrial demand
Speaker Change: would be coming back throughout this year and
Speaker Change: and you know it hasn't it hasn't returned like we expected it would.
Speaker Change: and in this particular quarter, we did see industrial sales down sequentially.
Speaker Change: and I think that was one of the things you were looking for, Timna. And, you know, as you look at, to kind of echo some of the things that Kim had said,
Speaker Change: Where we saw some headwinds from an industrial sales standpoint, quarter over quarter, were in areas like automotive, construction and mining, as well as our food and equipment materials that we provide.
Speaker Change: We're not anticipating, when you think about our Q4 guidance, we're not anticipating that those industrial sales are going to come roaring back in Q4.
Speaker Change: We certainly would expect, as we look out to 2025, a more normalized sales level, but this year that would be, I would say, a sales group that's generally disappointed us from a sales level.
Speaker Change: Thanks again.
Speaker Change: Thanks, Jemma.
Speaker Change: The next question comes from Seth Safeman with J.P. Morgan. Your line is open.
Seth Safeman: Thanks very much and good morning, everyone.
Seth Safeman: Hey, Shep. Morning. I wanted to ask... ... ... ... ... ...
Seth Safeman: Morning. I wanted to ask on the airframe side and some of the challenges you're seeing there, generally think of that
Seth Safeman: and Mark. It is being more tied to wide body production and on the Boeing side, you know, that's more 787, which is, you know, not really subject to the to the work stoppage and in quite the same way. But, you know, wondering if you're seeing unevenness.
Seth Safeman: there in terms of demand just because of the, you know, some of the delays that they've had in being able to deliver aircraft due to feed certification and other issues.
Seth Safeman: And then on the 777X also, how you think about the pushouts there affecting, you know, the growth trajectory that you guys have expected over the next couple of years.
Speaker Change: Yes, so that's an interesting question. You know, as we're looking at, like you said, there's a lot going on in the Boeing portfolio.
Speaker Change: So, on the 787, to your point,
Speaker Change: We do see growth opportunities. So that is a bright spot as we're looking at 2025, talking with Boeing, they are moving forward, they're making planes and those wide body planes use
Speaker Change: We shared the statistic before, about five times the titanium as the single aisle. So we are seeing increased demand coming from Boeing for that aircraft and they've already set up their forecast with us for next year.
Speaker Change: So we anticipate seeing that growth and as they get those planes and that production ramped up, seeing that continue to grow through 2025.
Speaker Change: On the 777, yeah, that was disappointing, that push out on, you know,
Speaker Change: the entry into service, that plane does have a very heavy titanium load. So, you know, I believe that there's a design issue that they're working through that's not related to our material or us, but
Speaker Change: You know, we anticipate that they design and engineer that, hopefully working on that even with
Speaker Change: The furloughs and other challenges they've got going on that we'll see some improvement in that timeline as we go into 2025.
Speaker Change: But we didn't have that, I would say, substantially built into any forecasts or estimates as we looked at 2025, as that was still really early in the production ramp.
Speaker Change: Okay.
Speaker Change: Okay, great. And then just maybe as a follow up, you know, you mentioned
Speaker Change: the opportunity to drive margin being more significant in periods when production is stable. And so, you know, maybe now with some of these challenges kind of, you know, persisting into the early part of the first half of next year, you know, does that provide some opportunity to really drive efficiency through the operations?
Speaker Change: and also to be prepared for the next ramp now that they're maybe not always running so hard to, you know, be in line with rising demand.
Speaker Change: So, Seth, I'll take that one. The short answer is, you're absolutely right, and it's great, it's very insightful that you picked up on that, but it doesn't mean that we're
Speaker Change: that we're slowing down in terms of the delivery of margins toward our targets. So let me take that part of the answer first.
Speaker Change: So when you look at our margins this quarter, we delivered 17.7% on a consolidated basis. If you strip out the oil and gas right sales, I think you're in the low 17%. So it's still above the debt threshold.
Speaker Change: We would expect our EBITDA margins in Q4 to be in that 17% range.
Speaker Change: A little bit lighter than what we had anticipated when we last talked last quarter, but not much of a surprise being the reduction in production with the lower guide brings some inefficiencies around absorption and those kinds of things.
Speaker Change: But still, the business is going where we want it to from a margin standpoint.
Speaker Change: But there's also significant opportunity. We have this line of sight to get to our 18 to 20% range in 2025. Feel very, very good about that. But, you know, if there is, if there's any sort of pause,
Speaker Change: in the ramp, you know, of course, we'll take full advantage of that by accelerating our actions to improve efficiencies and yields and all those good things that are part of our plan.
Speaker Change: and take full advantage of the resources that might or might not be available.
Speaker Change: Great. Thank you very much.
Speaker Change: And our next question comes from Scott Dishaworth, Deutsche Bank.
Speaker Change: Your line is open.
Speaker Change: Hey, good morning.
Scott Dishaworth: Kim, on the engine side, we know this demand change is primarily on Ford.
Scott Dishaworth: Yeah, Kim, on the demand side, were the demand changes on engines primarily on forged products or are there any customer pushouts in products like nickel alloys as well?
Kim Fields: I would say, based on Airbus updating their build rates and then people realigning, and this was earlier, you know, in the quarter realigning to where Boeing's build rates were at. They were, I would say, small and they were pushing quarter to quarter, not cancellations or pushing out of even, you know, this year.
Kim Fields: So the majority of them, I would say it's probably split between Forged Products and SM. There, you know, a lot of the material that goes to Forged Products we produce and it did hit
Kim Fields: It did hit both of the OEMs. I will say the GTF is a unique situation, right? So we're continuing to ramp and work with them. So there was no impact from that program.
Speaker Change: Okay, and then Don, does the guidance for 2025 and 2027 leave meaningful cushion for things like you've experienced over the last several years like demand disruption, operational challenges and outages, or weather-related challenges?
Speaker Change: Yeah, generally it does.
Speaker Change: But let me drill in a little bit, okay?
Speaker Change: So when you think about 27s, let's get that off the table, our 2027s, yep, it includes a number of scenarios and those scenarios drive the range of our guidance.
Speaker Change: and so we believe we've been pretty thoughtful in that. Then let's look at 2025. So as you think about 2025, we gave an original guide of 800 to 900 million.
Speaker Change: And as we talked about that, and we gave that guide in November of 2023, as we talked about that guide, we said, you know, the range is, you know, it's driven by what we expect revenue is going to be, and our margin profile, and
Speaker Change: felt really good about that range. I still feel good about that original range.
Speaker Change: So, as we think about the headwinds that will probably carry into the early part of 2025, those will, even though those headwinds will be there, we are still expecting modest growth and certainly in the first half, an accelerated growth in the second half of 2025.
Speaker Change: And that's driven by our underlying end markets are strong.
Speaker Change: Regardless of the work stoppage with Boeing and you know some of these some of these growing pains in the supply chain you know we're seeing significant positive signals.
Speaker Change: and Judd Injun.
Speaker Change: and defense in the arrow like that we talked about and so we anticipate the business will do well and hit and be within that original range. Now we had announced some additional sales sales commitments at the Farm Bureau Air Shield.
Speaker Change: You know, that would add about $40 million of EBITDA to the original range. That is an area where we believe with these headwinds, we're probably in 2025 not going to see the full effect of that incremental $40 million.
Speaker Change: But, you know, this business being able to deliver 800 to 900, obviously 850 is the midpoint there, is I think a pretty good indicator of how positively we feel about this business.
Speaker Change: Did that help answer your question? Thank you.
Speaker Change: Yeah, thank you. And Don, just to clarify, were the asset sales in the prior free cash flow guide as well?
Speaker Change: Yeah, somewhere. So these are discrete asset sales. You never quite know what you're going to get. We do, we really do.
Speaker Change: kind of go through our asset portfolio on a regular basis and identify if there's any capital in there that we could redeploy through a sale process. So it's in a normal course for us to do that. I would say $40 million in a given quarter is on the high side. We wouldn't have expected that much.
Speaker Change: but there would have been some element of cash generated through this process. And as we think about the capital guide that we've given that, you know, on average we expect to spend about $200 million of CapEx.
Speaker Change: you know, each year.
Speaker Change: We, as part of doing the calculation for that kind of spend, we take into consideration things like
Speaker Change: Customer Funded CapEx, you know, we don't, we don't, you know, somebody's going to give us $20 million for putting in an asset on their behalf. Hey.
Speaker Change: We'll take it, we don't put it into our spending calculation because they're paying for it.
Speaker Change: Same idea here.
Speaker Change: As we think about cash proceeds from asset sales.
Speaker Change: We'll typically tuck that in as a net offset funding source for our CapEx program. Not huge dollars, typically, but helpful in getting the returns that our shareholders deserve.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes our Q&A session so I'll pass you back over to Dave Weston.
David Weston: Thank you. As we move to close our call, I'd like to thank everyone for their time and invite everyone to reach out to our investor relations teams with any other questions. With that, I'll pass it over to Kim for some closing remarks. Thanks, Dave. So let me just reiterate before we wrap up here, one, thank you for all those questions. You know, the fundamentals in the aero and the defense markets are strong.
David Weston: and we're seeing quarter over quarter growth and margin expansion.
David Weston: ATI is well positioned with differentiated products where there are only a few companies in the world and in some cases only us are able to make the materials that we do.
Kim Fields: Our customer relationships are growing and getting stronger every day because we are delivering for them when they need it. We are producing the highest quality products, and they can rely on that, and we are developing new solutions for tomorrow's design challenges.
Kim Fields: So again, appreciate the time and thanks everyone for joining the call.
Speaker Change: This concludes our call today, thank you for joining. You may now disconnect your line.