Q4 2024 ATI Inc Earnings Call
Hello everyone and welcome to the ATI fourth quarter 2024 earnings call.
Becky: My name is Becky and I'll be your operator today. During the presentation you can register a question by pressing star followed by one on your keypad. If you change your mind please press star followed by two. If you're having any issues please press star followed by zero.
Speaker Change: Let me share the financial headlines first in the fourth quarter revenue was up 12% sequentially to $1 $2 billion.
Speaker Change: Adjusted EBITDA was $210 million above our guided range of $181 million to $191 million.
Speaker Change: On a full year basis revenue was nearly $4 4 billion, our highest since 2012 up 5% even with the challenges we and the industry encountered this year.
Speaker Change: Adjusted EBITDA was $729 million and EBITDA margins were almost 17% with both segments contributing strong performance free.
Free cash flow for 2024 with $248 million up more than 50% over last year.
Speaker Change: Our topline growth and expanding margins led to double digit percentage increases to adjusted EBITDA. These results demonstrate that our transformational strategy is on track we're confident in our performance in 2025 is on pace to be even better as a result, we're forecasting our 2025 adjusted EBITDA.
Speaker Change: <unk> will build each successive quarter during the year with our full year outlook above $800 million, Dan will get into these details in a moment.
Speaker Change: Three key areas drive our confidence in <unk> future.
Dan: Number one 2025 demand remains robust.
Dan: Hearing it and our customers earnings call.
Dan: Boeing is bouncing back ramping with the 737 Max on track.
Dan: Airbus remained steady with opportunities for upside as they push their ramp rates, we're seeing stability as anxiety comes out of the supply chain.
Dan: Demand for Hei materials comes from every segment of the aerospace industry. Our products are on every commercial platform find today.
Dan: Q4, we shipped more than Q3, yet our backlog remained steady it didn't drop.
Dan: Backlog isn't a pure indicator of the full demand picture remember through long term agreements our customers reserve their capacity based on anticipated upcoming needs. These orders are continuing to flow and are growing.
Dan: Our full year 2020 for airframe revenue was up four 5% year over year jet engine revenue was up 9%. Our isothermal forgings are a key driver of this growth in 2024. The team was able to increase ISO pushes by 32% in the fourth quarter they achieved.
Dan: Their highest quarterly total output ever.
In addition to OEM build rates MRO and the GTS engine overhaul program are also driving heavy engine demand.
Dan: We are continuing to ramp our support of this program with sales in 2024, almost triple 2023 sale and anticipate to increase another 50% in 2025.
Dan: Our defense business continues to grow as well.
Dan: All your revenues were up 22% to $490 million.
Dan: When the United States, and our allies need reliable high performance advanced materials, we're honored they turned to hei.
Dan: Continued growth of our defense business demonstrates both demand for our products and confidence in our ability to deliver.
Dan: Combined aerospace and defense exceeded 65% of fourth quarter revenue.
Dan: For the full year, they represent more than 62% delivering strong performance in growing markets.
Dan: In addition to our core A&D markets, you've heard US talk about Aero late this is where the differentiated hei materials come into play.
In the electronics and specialty energy markets continued demand for high performance chips and the resurgence of nuclear energy put our hafnium niobium zirconium alloys in high demand.
Dan: Generally long term demand for these products is predicted to exceed current supply.
Dan: It's interesting to note that our combined electronics and specialty energy sales in the fourth quarter were nearly equal to our defense sales, which I just mentioned were up significantly.
Dan: And remember we called these markets Aero like because of the growth in margins they typically deliver.
Dan: That brings me to my second key driver of confidence.
Dan: Operationally ATI is where we need to be we are on track not just having recovered from the challenges of Q3 being stronger from them. The continued investments we are making in equipment reliability and AI technology are allowing us to predict potential issues and proactively correct them before they occur are.
Dan: Productivity improvements give us the opportunity to participate in transactional business, where we want to where we're valued most.
Dan: One of the most rewarding parts of leading our team is getting calls when they hit a new record IRA.
Dan: I received a lot of those calls this quarter announcing things like record levels of premium quality heat smelted milestones and powder billet best flow times, all over the system and newly qualified operations as we gain share.
Dan: With our team operating as one ATI each business's Baskin raise the next operation to its new best I. Appreciate all they are doing and I'm honored to celebrate their successes.
Dan: Let's get to my third and final key driver of confidence I'm optimistic for the future based on growth activity, we're already seeing.
Dan: Today's 2025 guidance is in line with Boeing's projections and as an early in the value stream supplier will be one of the first to see increased Paul as they strive to meet ramping build rates for 2026 Boeing publicly stated that the 787 builds will increase from five to seven another sign of increasing stability.
Dan: The triple seven axis entering back into service something we've all been looking forward to.
Dan: We are beginning to see signs of this increasing demand for titanium and currently anticipate seeing an uptick in the back half of 2025.
Dan: In July we announced $4 billion in new sales commitments much of which were tied to a differentiated nickel products.
Dan: These commitments added new scope and long term agreements that both build and extend our core.
Dan: We believe that growing demand has tremendous upside.
Dan: You've likely heard of the emerging Dod budget inputs evolving around the philosophy of peace through strength.
Dan: With additional funding targeted to potentially increased defense spending by as much as $200 billion or a $100 billion per year for fiscal years 25 and 26 if.
Dan: If they move forward. It is expected that a portion of this increase would benefit production programs, where hei provides materials naval air and ground vehicles supporting our expectations for growth in defense.
Dan: Lastly, our team gives me great confidence with each goal, Matt they strive to set the bar higher often surprising themselves with what they can achieve.
Dan: When faced with an opportunity or a challenge our mindset is what would have to be true for us to succeed from that starting point the idea start flowing making each day better than the last.
Dan: Now Dan will share details about our 2024 results and the outlook for 2025.
Dan: Thanks, Tim let me provide some additional insights into the quarter, which was well ahead of our expectations from a revenue and profit standpoint.
Dan: Cash flow was in line with what we had anticipated.
Dan: I will also touch on some full year highlights before talking through our 2025 outlook.
Dan: Let's start by highlighting key results for the quarter and comparing against your guidance.
Dan: Revenue approached $1 2 billion in Q4 up $122 million or 12% sequentially.
Dan: That's up 10% year over year.
Dan: Q4 revenue was higher than we expected as customer demand improved from Q3.
Dan: Mix was a bit weaker than we anticipated due to short term shifts in customer requirements.
Our adjusted EBITDA for Q4 was approximately $210 million above our guided range of $181 million to $191 million. It's.
Dan: It's important to clarify that our adjusted results include approximately $18 million of non operational favorability from sale of oil and gas rates and clarification of tax credit rules by the IRS in Q4.
Dan: Some of those tax benefits related to activities that predate the quarter.
Dan: If we were to exclude those items as they were not embedded in our guidance. The underlying adjusted EBITDA would have been in the range of $192 million, that's still above the high end of our guided range.
Dan: We achieved this positive performance despite several offsetting unfavorable impacts noted in our earnings release.
Dan: Through meaningful growth in sales and an increasing mix of A&D content, our results reflect improved performance and the ongoing execution of our long term strategy.
Dan: Full year 2024 revenue was nearly $4 4 billion, our highest revenue since 2012.
Dan: For the full year revenue grew roughly 5% over 2023.
Dan: Excluding metal impacts full year 2024 revenue grew nearly 9% over 2023 levels.
Dan: We delivered almost 17% adjusted EBITDA margins across the business for the year.
Dan: At 17, 9% this quarter margins are approaching the targets, we set for the coming year.
Dan: And H P&C fourth quarter margins declined 230 basis points sequentially to 20%.
Dan: This was driven by more than $6 million in charges to address ongoing customer commercial negotiations as well as adjustments to incentive compensation tied to <unk> improved performance.
Dan: And Thats, our fourth quarter margins increased 150 basis points sequentially.
Dan: Those margins exceeded 16% as the mix and strength of A&D and Aero like volumes continue to increase.
Dan: This increase includes $10 million of favorable benefits from clarification from the IRS on the advanced manufacturing production credit.
Dan: Excluding this benefit margins for E&S would've been in line with our expectations and Q3 performance.
Dan: As we anticipated our fourth quarter was a very strong quarter for cash delivering approximately $400 million in free cash flow.
Dan: While full year free cash flow was within the range of our guidance underlying performance is lower than we originally expected in 2024.
Dan: It's been supplemented by proceeds from several divestitures that were not originally contained in our plan or guidance.
Knowing that we are encouraged by the reductions we made this quarter and manage working capital reducing sequentially from 40% to 31%.
Dan: We look to build on our improvements in free cash flow this year to deliver a more consistent and predictable cash generating business in 2025 and beyond.
Dan: In the area of capital investment our total spend for the year was $239 million, including $17 million of capital that was funded by customers through a direct investment in capacity.
Dan: That funding was included in cash from operations as required.
Dan: Our net debt ratio improved sequentially from two two to one six times this quarter with further reductions likely to come with profitable growth.
Dan: We continued returning cash to shareholders this quarter was $70 million of share repurchases.
Dan: We deployed $260 million in 2024 to repurchase shares representing 105% of 2020 for free cash flow.
Dan: We start 2025 with our existing authorization at $590 million.
This quarter represents a strong conclusion to 2024 and help shape our expectations for 2025.
Dan: With that let's turn to our 2025 guidance.
Dan: As we have said consistently over the past several months, we expect the first half of the year to reflect modest recovery as the commercial aerospace lie chain rebounds, and subsequently grows.
Dan: Taking that into account along with seasonality, we know exists in our business. We are setting our adjusted EBITDA guidance range for Q1 at $170 million to $180 million.
Dan: That equates to an adjusted earnings per share range of 55 to 61.
Dan: For the full year, we have narrowed our range within the previous target for 2025 <unk>.
Dan: That aligns with how we have seen this market recovery and the delays in the Aero ramp unfolding over the last half of 2024.
Dan: We are setting the full year 2025 range for adjusted EBITDA at $800 million to $840 million with a corresponding range of EPS at $2 80 to $3 per share.
Dan: As you would expect.
Dan: We will work all year to pursue opportunities to eliminate risks and build on this guidance.
Dan: Even though we don't provide direct guidance for revenue and margins on an ongoing basis, our previous targets remain unchanged for 2025.
Dan: Turning to free cash flow, we are setting the full year range at $240 million to $360 million.
This range contemplates how much more we believe we can improve managed working capital timing and efficiency within this time of growth.
Dan: We are assuming between 260 and $280 million in capital investment this year.
Dan: Portion of which may be funded by customers.
Dan: We're investing a portion of the proceeds from our 2024 divestitures to support profitable growth reliability and Debottlenecking.
Dan: $150 million in debt comes due in Q4, which we plan to repay with balance sheet cash.
Dan: We believe we can continue to reduce share count throughout the year with a disciplined and balanced approach to share repurchases.
Dan: Note the guidance I'm sharing today is based on the assumptions that actions of the new U S administration will not materially change the current business environment.
And then we are not impacted by any work stoppages.
Dan: To summarize the.
Dan: In the past, we outlined last quarter.
Dan: Underpinned by the strategy and financial targets, we have pursued for several years continues to guide our course for the year.
Dan: Despite the dynamics the A&D industry encountered 2024, we see significant opportunity ahead.
Kim: We are working everyday to fulfill that commitment to our customers and shareholders with that I will turn the call back over to Kim.
Kim: Thanks, Don.
Speaker Change: As I shared we are optimistic about the future.
Speaker Change: Bullish on demand and our markets operationally, we're stable and improving we're seeing our long term strategy deliver.
Speaker Change: Yes, there are risks ahead, both known and unknown let.
Speaker Change: Let me take a minute to address the dynamic macroeconomics, we're all experiencing including tariffs and trade actions.
Speaker Change: The steps we've taken to mitigate risks give me confidence that we're well positioned for any environment.
Speaker Change: Our dominant we are U S based manufacturer and in recent years, we've taken deliberate action to diversify our supply sources.
Speaker Change: We have purposely expanded pass through mechanisms in our contracts.
Speaker Change: We are nimble and experience in responding to uncertainty.
Speaker Change: As we overcome each challenge we know our success will make our business better and strengthens our ability to perform now and in the future and with that let's open the line for your questions.
Speaker Change: Thank you to ask a question. Please press star followed by one on those telephone keypad now.
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Speaker Change: We also today that you limit yourself to one question and one follow up.
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David Strauss: Our first question is from David Strauss from Barclays. David Your line is now open. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Good morning, Thanks, everyone.
Speaker Change: Good morning, David.
Speaker Change: Hey, So you gave you gave the guidance for for Q1 EBITDA can you just talk about the progression through the rest of the year. It looks looks like we're going to need you know youre going to need a pretty steep steep recovery in the second half to get to your guidance range.
Speaker Change: Sure I'd be happy to kind of walk you through that and you're right. When you look at our Q1 Q1 reflects some seasonal movement.
Speaker Change: That's from the Q4 performance down to two.
Speaker Change: Q1. It also reflects the removal of some of the non repeating items around asset sales and whatnot, but as you look at the pattern for the Q2 thousand 25 looking at it by quarter.
Speaker Change: What I would say is one place you get start I think that the consensus figures that are out there the market expectations show a reasonably good pattern of how to think about the progression through the quarters. So mid point in our guide for Q1 in the mid 100, Seventy's, but I would expect is that.
Speaker Change: With that seasonality behind US you get to Q2, you would be experiencing something closer to the low two hundreds and then in the second half of the year, we would expect to see.
Speaker Change: The recovery in a number of areas, which will create some lift.
Speaker Change: In the second half versus the first half so I would expect that youll see EBITDA kind of in the 200.
Speaker Change: Two tender to 20, plus kind of range for Q3, Q4 that give me an idea of the kind of pace and pattern to think about.
Speaker Change: Okay.
Speaker Change: Great. That's helpful and can you you touched on it briefly but.
Speaker Change: The potential terrorists with with Canada, especially for you guys I think you've you purchase a lager and Nicole from from Canada. So maybe if you could just.
Speaker Change: Touch on touch on that and then the mechanism that you have in place in your contracts to potentially recover.
Speaker Change: Covered if the if we do see a tariffs on nickel and in Canada.
David Strauss: Sure David.
David Strauss: As I mentioned as you commented.
David Strauss: We are well positioned as we think about tariffs we have diversified as you said a portion of our nickel comes from Canada, but it's much less than 50% in fact, it's probably closer to 25%.
David Strauss: And a lot of that is going for additional processing into Norway and other countries in Europe so that.
David Strauss: But we've got multiple sources, that's it's three or four or five.
David Strauss: Which does allow us a little bit of flexibility as we think about the changing and evolving situation.
David Strauss: The pass through mechanisms I'd say, you know were in place nickel, obviously based on an <unk> price we had surcharges in premiums that were already in place before the pandemic, but as we came out and we saw rapid inflation, we took that opportunity to really.
David Strauss: Enforce those mechanisms to make sure that we get close alignment and our intention is to pass through any increase in cost that we're seeing in our raw materials. So we feel like we're in a good place for that today.
David Strauss: And we will continue to monitor and be flexible based on the changing dynamics.
David Strauss: Thanks for the color Jim.
David Strauss: Sure.
David Strauss: Yeah.
David Strauss: Thank you.
Speaker Change: Our next question is from Seth Eastman from J P. Morgan. Your line is now open. Please go ahead.
Speaker Change: Thanks, very much and good morning.
Speaker Change: Hi, Good morning, I Wonder if Ah.
Speaker Change: I Wonder if you could maybe take apart a little bit more there.
Speaker Change: The expectations for growth, especially on the engine side and <unk>. This year in terms of a the programs.
Speaker Change: That will be driving it and then and then b kind of.
Speaker Change: Where the products that will be driving it more whether it's more on the specialty alloy side the forging side.
Speaker Change: And titanium and kind of how the execution is going in those areas and I guess, what I'm getting at is kind of also how we can think about the margin progression.
Speaker Change: <unk> and <unk>.
Speaker Change: We can get back on a track of kind of assessing margins in that business.
Speaker Change: Yeah.
Don: Sure. So let me I'll take a start at it and then I'll, let Don add some color here at the end.
Don: You mentioned titanium and you mentioned engine, so I'm going to I'm going to start broadly here and we can narrow it down to make sure that I get your question completely answered. So as we think about engine growth I believe is where where you started we saw about 9% growth in 2024 over 2023 and I'll.
Don: We are anticipating similar growth as we go into 2025.
Don: We're seeing that in both materials as well as forging I'd say MRO is driving quite a bit of activity and we're seeing a lot of that especially in our forged products.
Don: Business, where.
Don: The Hot section of the engine, we're making those disks they've got the highest backlog that we've had I think ever over a year of lead time for parts and a lot of that growth is coming as I said from MRO.
Don: The shop visits the lighting upgrades that are being made across all of the different Oems as well as the work that perhaps doing that we're partnering with them to continue to ramp up our production to support their accelerated shop visit program.
Don: I mentioned in the prepared remarks, our revenue was up three acts and in 2024.
Don: Just for the GTS programmed and we hit run rate full run rate in Q4 of that ramp increase on parts for them and we're expecting to see full year, 2025% to 50% increase.
Don: Again all of this is being supported probably by the ISO capacity increase if you remember we did an upgrade to our fourth peso press that was online.
Don: We had 32% of ISO output in 2024, and as I said, we're hitting full run rates on that press and overall and so we're going to see continued growth for the full of 2025, and we've been focusing on downstream bottlenecks around ultrasonic testing, which is an industry constraints kind of across the.
Don: Bored, but with our minimal capital investment as well as investing in qualified technicians and training, we've increased that over 50% and so really reducing cycle time, increasing throughput.
Don: In the shop there. So overall engine demand strong we're continuing we continue to see it kind of across the board, especially from MRO I think I'd say I'm hearing kind of 40 50, 60% of their order demands are being driven by MRO today.
Don: Mentioned titanium just briefly there is titanium that's included with that we do have our new <unk> two melter, that's coming online in Washington, We are commissioning today, we're waiting on final permit approvals because.
Don: Because we do have commit customer commitments for that asset and so we're anxious to get going and start qualifying that asset.
Don: Titanium you know I think a little bit as I'm looking at the airframe market and as that starts to ramp I think Airbus is very stable and were anticipating that going into 2025, you heard from Boeing their growth they're on track with the 737 and we anticipate that will continue to ramp is.
Don: We get into the back half of the year I think the one area I'm keeping an eye on is wide body.
Don: Think both air Framers have talked about ramping in 2026 and increasing the build rates.
Don: And we're starting to see some of that activity and we'd love to see that our order activity come in in the back half of the year.
Don: So pretty strong demand on engines airframe I'd say is a little more muted you know flat to slightly up.
Don: In the first half of the year for sure and then as they gain momentum going into the back half and as the wide bodies start to hopefully ramp and they hit those those build rates that they've advertised we'll see that additional order rate come in.
Don: And Dan I don't know if you want to change their margins I would be happy to do that so as Kim said really strong broad based demand around jet engine, which is helping to drive our growth and you can see the impact of that on our margin profile as you look at 2025 Seth.
Don: So the way to think about our margin profile for <unk>.
Don: For 2025.
Don: I would expect that you know and I think I mentioned this Q1 that we would see the margins.
Don: Kind of 20% to 21% kind of range and then youre going to see those ramp up to north of 23% as the year progresses, and we continue to see that expansion well, what's driving that that increase in margin. It's all the dynamics, we've talked about it in the past number one we're seeing this.
Don: <unk> based demand we have a position with all of the major jet engine Oems. So we get tail winds around the MRO, we get tailwind around the builds.
Don: As a wide body.
Don: Build rates ramp, but that's something that we're certainly we're going to meaningfully participate in that means that our volumes are increasing but also.
Don: Increasing is our absorption.
Don: And then we get the favorable mix impact so we've talked in the past about expectations that the H PMC margins should be north of 25%, we clearly believe that that's true.
Don: Don't expect that we're going to get there in 2025, but as we get into 2026 and head towards 2027 that is absolutely one of the objectives and we believe we've got the underlying reasons that will drive us to that level.
Don: Okay, Okay, great. Thanks.
Don: Thanks, Doug.
Don: That was a long one long question on my part so I'll leave it there for this morning, but thank you.
Speaker Change: Sure sure Thanks, Jeff.
Speaker Change: Thank you our next.
Speaker Change: <unk> is from Gautam Khanna from T D. Cowen. Your line is now open. Please go ahead.
Speaker Change: Yes, thanks, good morning, guys.
Good morning.
Speaker Change: Was wondering if you could.
Speaker Change: Provide some context around the customer concessions.
Speaker Change: We think it is.
Speaker Change: Pricing the pricing environment to be pretty strong for suppliers like hei.
Speaker Change: Does that work.
Speaker Change: Specifically led to those and does that speak to.
Speaker Change: Any incremental pricing pressure.
Speaker Change: Broadly and then I have a follow up.
Speaker Change: Yeah, Let me answer that question first I wouldn't describe them as concessions as you can imagine got them, we have a robust portfolio of L. T A's and on a daily basis, we're having conversations with our customers on all sorts of terms is not just price. It's it's term.
Speaker Change: Mix, it's many different dynamics and it happened that this quarter, we had a charge that we took related to some of those discussions.
Speaker Change: Also keep in mind, when we're dealing with are our customers and addressing contract changes in contracts, sometimes those contracts can impact.
Speaker Change: The current period, but it does not mean that your detriment, it or giving up value in the future as a matter of fact, it's quite the contrary for us when we talk about changing contracts and making amendments to key terms. It is always with the intent of improving our position for the long run and so the way to think about this.
Speaker Change: We won't share specifics around those conversations, but I would say.
Speaker Change: Don't view this as a negative indicator for our position.
Speaker Change: Our demand strength of demand under business or the the the strong negotiating position that we have with our customers don't look at it in that way it would be.
Speaker Change: An incorrect way to interpret it.
Speaker Change: And what I would also say is you should not expect to see a charge like this.
Speaker Change: Anywhere.
Speaker Change: Recurring basis system.
Speaker Change: Something I wouldn't expect to see again, just because of the unique circumstances that resulted in this charge.
Speaker Change: Okay. That's helpful context, absolutely yes.
Speaker Change: And just a quick follow up I know the guidance assumes no work stoppages, just curious if you could give us an update on.
Speaker Change: How far along you are on the Union contract.
Speaker Change: Negotiation.
Speaker Change: Thank you sure.
Speaker Change: Yeah sure discussions are ongoing they began in January and Theyre very constructive and positive. So far so yes, we remain confident that we're going to reach an agreement that rewards our employees as well as maintaining our competitiveness I think they are progressing well and you know we're having.
Speaker Change: Good dialogue on a weekly basis, there, including a large group of employees. So that we're making sure that we're considering all the needs and so again I'm not anticipating any work stoppage not planned for one and our guidance and I'm looking forward to getting to an agreement with our employees for a fair contract for them as.
Speaker Change: Well as you know maintaining that competitive as I mentioned.
Speaker Change: Thank you guys.
Speaker Change: Thank you sure.
Speaker Change: Thank you. Our next question is from Richard Safran from Seaport Research Partners. Your line is still open. Please go ahead.
Speaker Change: Thanks, <unk> good morning.
Kim.
Speaker Change: If I heard you right I think.
Speaker Change: Mentioned something about share gains.
Speaker Change: We're always interested in.
Speaker Change: New customers, new long term agreements. So I wanted to know if you could just us two related things first new a new long term agreements with new customers and then how you think that's going to impact capacity utilization.
Speaker Change: Sure.
Speaker Change: So in the summer, we announced $4 billion in new customer commitments, you know as I look at that that was predominantly on the nickel side.
Speaker Change: Think about half of that in the rest of this decade will come through in in orders and commitments.
Speaker Change: From our standpoint, we are continuing to negotiate there are several large contracts that are out there right now and we're making good progress.
Speaker Change: We've locked up a couple that I can't share a lot of those details yet because we haven't talked about them publicly but for.
Speaker Change: From a capacity standpoint were in good position to support these commitments that are coming you know a lot of our conversations with our customers are really around today I really around what is that demand going to be as we get to the back half of this decade and into 'twenty thirty's. So we are starting those discussions around capacity.
Speaker Change: The gross expectations and builds so I'm here for the rest of this decade.
Speaker Change: We're making good progress I mentioned in the past we're on every program.
Speaker Change: Across the industry with with each customer I'd say, you know our relationships with Archie acts as really growing not just with Pratt, but the overall company. So we're continuing I think to gain.
Speaker Change: To gain share to gain relationships working on next generation products.
Speaker Change: And and that capacity is well aligned to support that.
Speaker Change: Okay. Thanks on defense.
Speaker Change: As a follow up a bit of a standout in the fourth quarter.
Speaker Change: Up 38% sequentially and you had an 11% decline.
Speaker Change: And three Q.
Speaker Change: And I thought that was related to a titanium armor plate, but you didn't even mention that so I thought maybe you could discuss this a bit more I'm wondering if we're now looking at more of a sustainable higher run rate for defense sales here.
Speaker Change: Yeah.
Speaker Change: I appreciate you asking about that I do agree we did have a very good quarter for defense and I anticipate again, depending where the administration goes.
Speaker Change: Some of that increase in the fourth quarter came from some of the volatility we're seeing in the geopolitical space, where some of our partners are looking to bring in material and ramp some of their growth rates. As you mentioned, we do have participation on the ground vehicles as well.
Speaker Change: <unk> nuclear naval applications and so both of those are have been very active.
Speaker Change: I'd say you know the $200 billion that Congress is talking about possibly increasing defense spending in the next two fiscal years.
Speaker Change: When you look at the White paper on that it's time earmarked and targeted to go with two programs over 50%, maybe 50% of that is earmarked to go into programs that we participate in materials are in so I do think especially given the volatility we're seeing an entre.
Speaker Change: Good and geopolitical that there is this whole focus around piece through strengths and we're also seeing really strong pull from some of our European counterparts, where they're re armoring as well in response to the Ukraine, Russia and conflict. So yes, we did see an uptick a were expecting.
Speaker Change: <unk> to see that number go up maybe 7%. So as we go into 2025, so we're expecting to see additional growth and that's without this additional spending if that were to come to fruition that would be an.
Speaker Change: An additional tailwind for us as well.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from Phil Gibbs from Keybanc capital markets.
Speaker Change: It's not open. Please go ahead.
Phil Gibbs: Hey, good morning.
Phil Gibbs: Good morning, Phil Good morning.
Phil Gibbs: Kim Ann.
Speaker Change: Dan was there any revenue catch up in the fourth quarter from from some of the third quarter.
Phil Gibbs: Issues.
Phil Gibbs: Remember there were some operational issues and some some hurricane impact so was there a timing issue associated with some of those shipments perhaps going out in the fourth quarter and making up for some of the third quarter deficit.
Phil Gibbs: So I'm going to take that one the short answer is yes, we did see some of that as you pointed out with the operational challenges that we had in Q3 also there were some bottlenecks. If you recall back in Q3, we had some material that was towards the end of the production and shipping process that was held up.
Phil Gibbs: Right at the end and do things like Hurricanes right.
Phil Gibbs: And so we saw a re.
Phil Gibbs: Release of some of that so yeah, you would have seen some of some of that benefit. Our Q3. It's one of the reasons I would say we over performed a bit from a topline standpoint magnitudes, probably think in terms of $20 million.
Phil Gibbs: Something in that range, plus or minus but there is another element that I would also point out because as you look at our revenue performance in Q4. It was very good reflected order patterns.
Phil Gibbs: That were very positive part of those order order patterns patterns reflected that when the Boeing work stoppage and ended and the supply chain started to become more confident we started seeing some of our customers more on the jet engine side say, Hey, we wanted.
Phil Gibbs: To take some of the material that's ready and was intended to ship in Q1, and we'd like to see that we want to see that in our in our inventory by the end of the year, we wanted to position for the impending ramp and so the way to think about that was probably something in the range of 25 to 30.
Phil Gibbs: Million of revenue that that moved from Q1 into Q4.
Phil Gibbs: And you know we.
Phil Gibbs: Those are positives to the top line, we did have if you're if you're following it to the bottom line. We did have some some less than favorable mix involved with the revenue in the quarter that that took some of the heat off of those.
Those additional revenues as they drop through but but still those are the dynamics do you want to think about when you see that $1 billion 170 of Q4 revenue.
Anne: Thank you Anne.
Anne: And when you when you all talked about the $18 million benefit to EBITDA in the oil and gas rights one was that in.
Anne: N S.
Anne: I would assume that was all gain or credit and no revenue associated with it and if that's correct. What was the what was the earnings positive earnings impact from that.
Speaker Change: So for the $18 million so the $18 million had two components just to make sure. We're talking about the same thing so the $18 million that related to the oil and gas gain that was booked at the corporate level as again, so not as any revenue whatsoever then.
Speaker Change: The other part of the $18 million, we mentioned related to tax credits that the IRS had changed there our updated there.
Speaker Change: Rules related to the recognition of those credits they are above the line credits.
Speaker Change: That represented 10 4 million of out of period and that $10 4 million was recorded in a DNS and it would've been recorded non us revenue, but as a as a reduction to expense.
Speaker Change: Okay. So out of the 18 million 10 four of it was this IRS credit in.
Speaker Change: The remainder of the seven six would have been the oil and gas game.
Speaker Change: That's correct, yeah broad strokes, yes, yes in the oil and gas I mean, we were kind of rounding the numbers right, but the oil and gas gain for the quarter was $8 million for the full year by the way it was $11 million, which are.
Speaker Change: There are things to get excited about one of the things we get excited about is the redeployment of capital selling it selling assets like that those gas rates are a great example of redeploying capital into more value.
Speaker Change: Value added activities. So that's just a side note.
Speaker Change: Okay. Thank you so much.
Speaker Change: Alright.
Speaker Change: Thank you.
Speaker Change: Next question is from Andre Michel Madrid Summit P. T O G. The line is not open. Please go ahead.
Speaker Change: Kim Don good morning.
Speaker Change: Good morning, let's see.
Speaker Change: Uh huh.
Speaker Change: Looking back on some of what you've outlined before I think roughly three quarters of your zirconium supply comes from China.
Speaker Change: How should we think about the potential impact of tariffs there, especially just relations with China moving forward. I mean is this anything that we should see as a risk or are you actively seeking ways to.
Speaker Change: Diversify away or if that's even possible.
Speaker Change: Yeah. Thank you, yes so.
Speaker Change: So not quite the quarters, but it is a mixture between our materials from China, and then and material that comes from a couple of other sources. So yes, we have been working especially with our customer on the program at identifying other sources and we have identified some second sources. So that we could use that to <unk>.
Speaker Change: Offset if the material becomes difficult to.
Speaker Change: Received I think tariffs we've been paying tariffs on this material I do think we've been working and some of that uptick you saw in the fourth quarter was us getting into position with our customer to be able to.
Speaker Change: Be prepared depending on how this volatile situation continues to evolve.
Speaker Change: And I'd say the third thing that we're doing is we have been and we're going to continue to place a physical hedge we are bringing in material ahead of.
Speaker Change: You know this kind of ongoing trade.
Speaker Change: Discussions back and forth between us and China, and so it's it well.
Speaker Change: We're doing many things I think to offset that.
Speaker Change: Sunday mentally it won't stop demand it would have some you know our production it would have some impact if we were unable to get any material, but I do think we've got other sources that will allow us to continue to get that and continue to produce its just going to be a matter of you know what is the volatility.
Speaker Change: And the supply and the pricing over here in the next few months and maybe going into the year.
Speaker Change: Yeah.
Speaker Change: Super helpful color. Thank you and then I guess sticking on just material supply.
Speaker Change: How much recycled material from your operations are you able to reuse.
Speaker Change: And it also varies depending on the specific material, but any color there would be helpful.
That is a good question because it does vary across the the materials. It is something that we're pushing so you know, it's a pretty high percentage when you think about titanium.
Speaker Change: In particular, I'd say anywhere from 50% to 75% of the materials that we use in our melting operations are coming from recycle or revert in the recycle stream coming back in on the zirconium side that is something especially on half him as well that we've been really pushing because.
Speaker Change: It is in such high demand prices are very very high today. So we've been working with the chip manufacturers the precursors manufacturers to develop reverb and recycle streams. So that we can recapture that and put it back into good product.
Speaker Change: And they've been very very supportive of those activities on the nickel side as well I'd say you know we run pretty high blend rates on that in and there's a pretty robust recycle loop. So yes, generally if I step back from it it's anywhere from 30% to 75%.
Speaker Change: Of our products at any one time could be made with with scrap and recycled materials, obviously, we make those decisions based on availability and pricing.
Speaker Change: And we tried to adjust to it to get the best optimize blend for our customers. So.
So yes. It is something that we're continuing to drive the both from a footprint standpoint and.
Speaker Change:
Speaker Change: Green standpoint, as well as cost and availability.
Speaker Change: Thanks for the thanks for the detail really appreciate it I'll jump back in thank you.
Speaker Change: Sure.
Speaker Change: Thank you. Our next question is from Timna Tanners from Wolfe Research. Your line is now open. Please go ahead.
Speaker Change: Yeah, Hey, good morning, I wanted to ask about the operational disruptions I know you identified and one of them is solidly in the rear view mirror, but there was one that was going to trickle into Q2. So can you just remind us where that stands and also you know any updated measures to kind of keep ensuring that the operations are.
Speaker Change: Truly running thank you.
Speaker Change: Sure sure I'll take that one.
Speaker Change: Let me address that question in two parts are that she asked there. One is just to give an update on the Q3 status and the challenges that we face towards the end of the quarter and then secondly, more broadly how we're investing in our operations to continually improve reliability and productivity. So to your first point Q3, we did.
Speaker Change: <unk> several challenges many of them towards the end of the quarter that made it difficult for us to fully recover but the team did a nice job at resolving the nickel them mouth issues into them shop, and these are behind US today, the sharpest operational stable and in fact, some of the engineered solutions I talked about last quarter that we put into place.
Speaker Change: Are allowing us to exceed targets and close new records.
Speaker Change: The second is the back Aneel and as expected as we communicated and as you mentioned this is targeted to be completed in Q2. It is on track, but that those repairs are in progress and ongoing and the team did a nice job there as well at putting in place outside processors.
Speaker Change: To help us restore flow and continue to get the material flowing until the fixes completed so both of those are stable. We're continuing to work on the vac in yellow and we still expect that to be back online in the second quarter.
Speaker Change: The second point around.
Speaker Change: Just how are we thinking about this from a broad routine maintenance standpoint, and as you mentioned you know routine maintenance happens all the time every quarter in different areas of operations. These outages are incorporated into our guidance and the team is always working to reduce that down downtime to make it more effective for.
Speaker Change: Maintenance and more broadly we are continuing to invest in reliability as you mentioned and permit preventative maintenance programs.
Speaker Change: This has been an ongoing priority for us and isn't a reaction to the recent issues.
Speaker Change: And and you know a big part of this is going to be the asset redeployment you know that we sold some assets that Don just talked about here a moment ago somewhat the oil and gas rights, one with an operating asset and redeploying those into growth reliability and debottlenecking and so we're continuing to invest in technology.
Speaker Change: <unk> solutions, you know is the use of artificial.
Speaker Change: Artificial intelligence, which I talked about a little bit in my prepared remarks too.
Speaker Change: To really put in sensors and automation that will allow us to predict what equipment seems to be drifting when we start to see issues and then eliminate those equipment issues proactively as they occur. So there's a lot of great work I mentioned some of the records that the teams are achieving I do.
Speaker Change: Think this is an ongoing focus we've been talking about debottlenecking, we've been talking about reliability I think each quarter, we're continuing to improve and get momentum there.
Speaker Change: I'll say the last quarter has been very stable operationally in it and the team's doing a nice job and you can see start to see some of these results coming through.
Speaker Change: Okay. That's great to hear I wanted to ask a follow up I know, we've been talking a lot about tariffs and for all we know this will all get resolved fairly quickly, but Europe has been also now we can tell I just wanted to yeah, it's hard to predict but with Europe I just wanted to ask if there were tariffs on Europe and for the retaliatory tariffs how do you think.
Speaker Change: Those even if you have any thoughts on like the likelihood that would be great. Thanks.
Speaker Change: Yeah.
Speaker Change: Wow.
I'll take your second question the likelihood is hard to predict I think the likelihood is high that there will be some discussion from our president and administration of some tariffs I think he has indicated that right as he's talking and I've seen statements. So.
Speaker Change: Will those come to fruition, well they'd be implemented in what way and at what level that is hard to predict I do think we are in a good position similar to the tariffs that he was talking about with our near partners share with with Canada and Mexico.
Speaker Change: We've dual source as far as incoming materials and.
Speaker Change: And we do have those pass through mechanisms in place in those contracts as well and so again it was very important we focused on passing through inflation and making sure that we capture things like tariffs as well as building tariff language into our contracts. So all I'll give or our legal department a few props there they did a nice job at.
Speaker Change: Anticipating you know some things that could be coming on the horizon and so I do think we're in good position to be able to respond to two probably are changing situation. You know I think the one comment I'll make is you know that I am monitoring at the the relationship between Russia, and the U S and frankly, Russia and the rest.
Speaker Change: The world. So that dynamic is another one that we're going to continue to watch I don't see significant impacts in 2025, but depending on how that evolves there could be impacts you know further out in the in the quarter I'm sorry, not in the quarter, but in this decade.
Speaker Change: Okay. Thanks again.
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question is from Scott Deutsche Ho from Deutsche Bank. Your line is now open. Please go ahead.
Speaker Change: Hey, good morning, Don is the elevated capex for 2025, a pull forward of future capex versus the level, we should run rate going forward.
Speaker Change: I wouldn't run rate it and actually I appreciate you asking the question.
Speaker Change: Been very very consistent in terms of what we.
Speaker Change: We had what we've communicated as the expectation for capital investment so going to $2 70 this year.
Speaker Change: It's really a reflection of a couple of things first of all it's still a part of that.
Speaker Change: On average $200 million a year as a matter of fact, if you go into the appendix of the <unk> of the.
Speaker Change: Presentation deck for today's call Youre going to see we added a schedule and that schedule shows you, how we calculate where.
Speaker Change: Other or not we're on track to that $200 million commitment for capital investment for growth and our reliability and maintenance and what youll see in that in that calculation is we.
Speaker Change: We first put out our $200 million per year target. In 2022 are you reiterated that in 2023. If you look at the schedule that we show it shows that that rolling average rolling annual average for Capex.
Speaker Change: And it is oh for since 2022 it averages in that.
Speaker Change: $184 million I believe 180 $284 million. So we are absolutely within the range of the guidance that we've given I do view the $2 70 as an increase.
Speaker Change: Above that what would you what you would normally describe as gross capex.
Speaker Change: Keep in mind, though we are redeploying the proceeds from asset sales that we executed in 2024 and a lot of that was late 2024, we're going to take that capital and we're going to put it into higher returning higher value users and that is largely going to.
Speaker Change: Through Capex investment.
Speaker Change: So it's been a part of our key strategy. It happened that the proceeds from asset sales in 2024 were higher than we typically see.
Speaker Change: It's still part of the same strategy.
We still expect the same kind of return profile, which is north of 30% on those investments. So we're it's all holding together so as you look out into the future. What you should expect is.
Speaker Change: Past 2025, youre going to see a similar pattern for us as we as we keep that commitment around spending something in the range of $200 million on average for Capex annually.
Speaker Change: Does that help.
Speaker Change: Yeah. That's great. Thank you and then Tim just on the jet engine side are you starting to see a healthier balance of wide body jet engine growth at this point in the cycle or is most of the jet into growth, you're saying still in the narrow body side.
Speaker Change: As I think about it.
Speaker Change: It's been probably more active on the single aisle, we are starting to see some polls. We've had some conversations at the end of last year I do think the engine engine Oems are getting ready for the wide body ramp we have heard indications of increased order rates. This year as those poles keep coming but.
Speaker Change: I would say, it's probably the most predominant demand signal that we're seeing today is really around MRO.
Speaker Change: And the shop visits and you know the upgrades for life thing issues on on all the programs and again it really shows up when you look at our forged products business with their lead times out over a year, it's probably the largest backlog that they've had in their history and and you know as.
Speaker Change: I'm talking with the Oems and they're sharing.
Speaker Change: A large percentage of their demand and is from our MRO kind of 40, 50, 60% and theyre not forecasting that to drop I'm certainly not this year, but in the next few years. So I would expect like I said I'm watching them. If the wide bodies start to take you know work towards that step change that.
Speaker Change: I think I heard this week and at least one airframe or talk about preparing for that step rate change.
Speaker Change:
Speaker Change: That will start to see those orders being placed in being confirmed committed rather than just talking about reserve capacity.
Speaker Change: Okay, and then just to clarify our wide body jet engine sales typically higher margin than narrow body jet engine sales for similar products or is it pretty similar just trying to get a sense. If you do get that wide body jet engine recovery.
Speaker Change: That's beneficial to your incremental margins in the future. Thank you.
Speaker Change: Yeah, I would say.
Speaker Change: Maybe not as related to the wide body versus single engine, a single aisle engines, but the materials that go into those wide body engines are.
Speaker Change: Very differentiated and so we would expect to see a slight uptick in margins given.
Speaker Change: Those materials are very difficult to make a lot of them are powder alloys, and so youre going to see that that is going to be an accretive to our margin.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Thank you. Our next question is from Josh Sullivan from the Benchmark Company. Your line is now open. Please go ahead.
Josh Sullivan: Hey, good morning.
Speaker Change: Good morning, Martin can you just.
Speaker Change: Can you just expand on the comments about Russia, you just mentioned what do you see as the scenarios that Ukrainian deal is reached how should we think of that headline obviously potential titanium supply returning versus what you actually think that will evolve in the titanium market and then maybe Conversely, I guess are there any exotic minerals from Russia that might be.
Speaker Change: Helpful or ETF.
Speaker Change: Yeah. So there's lots of lots of chatter and talk about you know specifically the S. N P O coming back into the markets and providing titanium parts and forging.
Speaker Change: Yeah, I'd say from our perspective as we're looking at about you know we're monitoring both the relations and how the U S reacts and frankly, how the European players react because they may be different and that their acceptance and their rate of normalizing relations.
Speaker Change: As I look at it there is going to be and I recognize there's going to be a re qualification period, that's going to take some time.
Speaker Change: Even once negotiate relations have normalize and things are starting to progress theres going to be this re qualification that we have to work through.
Speaker Change: And you know what I'm hearing is that a lot of expertise that were there that help lead. These programs lead. These operations have are no longer there and so you know I.
Speaker Change: Do you think it's going to take some time for that to re ramp and come back online to meet the high standards from a quality standpoint. So you know in the short term for 2025, I don't see that as a significant threat I do think it's something to monitor as it continues to evolve and we'll see how rapidly they're able.
Speaker Change: To get that expertise in and start on <unk>.
Speaker Change: Restarting their operations and re qualifying but I do think there will be.
Speaker Change: Some significant qualifications that need to be re redone as far as a benefit for us yeah I mean.
Speaker Change: Russia was a very large source of nickel for us in the past and it's something that we moved away from and start stopped purchasing there. So there could be some benefits of norilsk coming back into the market and providing materials on and and again it was very high quality. It was a good relationship they weren't good supplier in the past.
Speaker Change: So that could be a positive for us. So another another thing that we're continuing to to look at I'd say the last thing just to mention you know as I think about the supply chain.
Speaker Change: Do you believe in and I shared it a couple of times today around our resiliency to trade and tariffs that we've built dual sourcing and derisked our supply chain I do believe across the industry. That's all of the players have learned that lesson and it's a very recent lesson around making sure you Derisked can you have.
Speaker Change: Got two sources and you can stay nimble in the face of uncertainty in changing times and so I am not sure that I see the industry going back to his heavy of a reliance on any one source b B S N P or any other one.
Speaker Change: So I don't know if you know the dynamic they they may come back in and May normalize, but I'm not it's not going to go back to what it was because I think that lesson has been firmly learned by all of US here in the in the supply chain.
Speaker Change: Got it. Thank you for that and then just sneak one last one in here. Thanks for taking it just on the Arab light markets. What are your lead times look like just given the very long cycle nature of those markets.
Speaker Change: I believe those lead times are about six to nine months I most of those products. There's very high demand you know the specialty energy nuclear products I would say that demand continues to grow, especially I know theres a lot of energy around data centers and energy.
Speaker Change: Needs, but on the resurgence of nuclear are having those come back pretty pretty strongly globally.
Speaker Change: And from obviously electronics, you know chip production, especially with the investments here in the U S and from a global standpoint lead times are very long kind of across the across the <unk>.
Speaker Change: Cross the whole markets. So Errol Errol like I said, it's great I'm very excited about the growth there I think the team's doing a great job working to get more capacity, but lead times do you continue to be very long.
Speaker Change: Okay. Thank you for the time.
Speaker Change: Sure. Thank you.
Speaker Change: Thanks.
Speaker Change: Thank you. This concludes our Q&A session. So I'll now hand back to David for closing remarks.
David Strauss: Yes. Thank you very much for your time today on our fourth quarter call. Please feel free to reach out to myself included on the Investor Relations team with any follow up questions and have a great day.
David Strauss: This concludes today's call. Thank you for joining you may now disconnect your lines.
David Strauss: Yeah.
David Strauss: [music].
David Strauss: Okay.