Good morning everyone and welcome to the Allegheny Technologies Incorporated Fourth Quarter 2020 Result Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. At this time, I would like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations.

Sir, please go ahead..

Thank you. Good morning and welcome to the Allegheny Technologies fourth quarter and full year 2020 earnings call. Today’s discussion is being broadcast on our website at atimetals.com..

Thanks Scott. Good morning. No surprise. We're glad 2020 is over. It was a challenging year amplified by significant uncertainty. Yet we made the best of it. Our team persevered and focused on doing the right things quickly and decisively to position ATI to emerge from the crisis stronger, a company focused on aerospace and defense.

The fourth quarter results reported this morning exceeded expectations as we safely delivered for our customers continued strong cost controls and improved working capital efficiency. For the year, our free cash flow generation was positive overall. At $168 million pre-pension contributions, free cash flow exceeded our full year guidance by 18%.

On today's call my remarks will focus on three major themes, our leadership priorities that drove our actions and results, our transformation to a more profitable aerospace and defense focused company and our outlook for our key markets. So, let's start with our leadership priorities.

2020 began with reasonably strong customer demand and without a hint of a looming global pandemic. ATI posted solid first quarter 2020 financial results. We enjoyed the benefit of stable jet engine demand bolstered by increased customer volumes that were delayed from the second half of 2019.

While these results will make for a difficult year-over-your comp in the first quarter of 2021, they did help to offset the significant headwinds we faced in the subsequent three quarters of 2020. When the pandemic took hold late in the first quarter, we responded quickly and decisively.

The leadership priorities, shown on slide four, drove our results and continue to guide our actions today. First and foremost, we focused on keeping our people safe. Safety is a core ATI value. We quickly enacted policies and procedures around the world to ensure a virus free work environment, mitigating the risk of spread.

Our efforts continue to be largely successful. We remain vigilant to ensure our people go home safely each and every day..

Thanks Bob. Over the next few minutes, I'll focus on highlights from two key areas. First, our Q4 financial performance; and second, our expectations for 2021. 2020 was a difficult year for all of us. For ATI, it started with 737 MAX challenges that carried over from 2019. Of course, those challenges grew exponentially with the global pandemic.

Its impact on our key end markets, including commercial aerospace, energy and medical was profound. Even with those challenges, we took the strategic and tactical steps necessary to improve our business and position it for a healthy future. Now let's discuss Q4 performance. For the third quarter in a row, our results exceeded expectations.

In the Q3 earnings call, we noted seeing signs of stabilization in a number of our key end markets, like commercial aerospace. At that time, we said we expected our Q4 performance to be similar to Q3. In fact, Q4 revenue increased 10% to $658 million versus Q3 levels.

We see this as a further indication of stabilization in our key end markets and a sign that the worst of the lingering aerospace downturn is behind us. Our adjusted EBITDA increased 39% to $23 million in Q4 from Q3 levels. Adjusted EPS was a loss of $0.33 per share in Q4.

This was better than the optimistic end of our EPS guidance range, which was a loss of between $0.36 and $0.44 per share. Our improved performance was largely due to stronger cost reduction actions and a higher than expected sales.

Thinking of cost reductions, in early 2020 we announced targets to cut costs by between $110 million and $135 million for the year. We increased those targets multiple times in 2020, as we built momentum. In the last earnings call, we shared a target of $160 million to $170 million of 2020 savings.

The final tally, reductions near the high end of our guidance and nearly $170 million in 2020. That means a run rate of $270 million to $280 million of cost reductions that will benefit full year 2021..

Thanks Don. Although, we have some pretty good outcomes and we're proud of it. We accomplished a lot in 2020. Even still -- it's still great to be starting 2021 with a clear plan. And we're boosted by the first signs of favorable multi-market trends we've seen in over a year.

As Don described, we ended the year with a strong performance in a challenging market environment. Our progress in 2020 was a total team effort that delivered results. We worked diligently to control what we could and responded nimbly to what we couldn't. Our entire organization remains relentlessly focused on cash generation.

I'm proud of how we're living our values, guiding us every step of the way Today, in 2021, we still battle a fair amount of uncertainty, but there's already a lot less turbulence than we saw last year. We're gaining velocity, aligned and accelerating in a clear direction as we move ahead.

We're well-positioned to emerge in this downturn leaner, more profitable ATI, A fierce competitor not waiting for markets to recover as we gain momentum. Scott, back to you..

Thanks Bob. That concludes our prepared remarks. Operator, we're ready for the first question..

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. And our first question today comes from Richard Safran from Seaport Global. Please go ahead with your question..

Bob, Don, Scott, Good morning.

How are you?.

Good morning, Rich. Welcome back..

Thank you, sir. So, two questions, both related to what a recovery looks like. First, with respect to jet engine products, I wanted to know if you could talk a bit about how jet engine products recover with higher volume. Now, Bob, I think you mentioned forgings in your opening remarks.

I think materials lag, but I was curious about how different types of forgings castings and alloy manufacturing, what that looks like in a recovery..

Okay. Great. Yeah. So, let me take the first part on the shape of the recovery from the market aspect. And then I'll let Don talk about kind of the shape of the recovery from the API perspective in light of the transformation that we're going through. So, that's how it will help get to that answer.

I think when it comes to the jet engine materials, you're right. Our isothermal forgings are really kind of the leader of the pack for us in terms of the jet engine business. We've started to see -- I guess, during the downturn, our jet engine customers were pretty aggressive at adjusting their supply chain inventories and the demand pretty quickly.

And so, we don't see tremendous amount of inventory in the pipeline. We have a little bit of stranded inventory ourselves that we're working through. But you're right, the isothermal forgings will go -- will kind of pace with increases in demand pretty quickly. Lead times being what they are. We're starting to see real demand coming back.

I think, it will accelerate through mid-year and be stronger in the back half, that's coupled with some share gains that we have coming into 2021 as well. So, I think that the isothermal forgings will be our leader of the pack. We have some smaller aerospace forgings that will go along with that.

We're not in the castings business anymore, so we don't have quite as much visibility there, but I would expect they'll follow a similar trend. When it comes to billet, bar, ingot, we're starting to see what I'd call emerging demand.

One of the things that happened in the downturn was that every company -- I hate to say every man for himself, but every company was doing what they thought they needed to do to manage their cash. So not everyone in the supply chain that we supply is well-positioned for an uptake. So we'll see it a little lumpy.

There should be some good emergency demand, and we think we're well-positioned to respond to that. And you didn't ask specifically about airframe, but I think -- by mid-year, I think the billet, ingot, bar will be moving in the right direction for us. We'll start to see it tracking with engines.

But I think the airframe side plate, in particular titanium plate, could be slow for most of 2021 before it starts to kind of work its way. And then 2022, we should start to see some increase there. So, hopefully that helps on the jet engine side. But I think the worst of it for us was Q4, and Q1 is still a little bit of stabilization.

We're not seeing the ups and downs that we saw in the order book before. So, Don, maybe I'll turn it over to you and you can talk a little bit about the transformation..

Sure. There's a few different transformation elements that we're talking about in the overall business.

But on terms specifically of the jet engines and how we're managing our inventory and being recovery ready, I think, one point to reinforce is we've done, I think, a very good job in managing down our inventory levels, but it's always been with us the mindset of being recovery ready.

So as the market does turn and the demand signals are sent, we're in a good position that we can meet those demand. But there's a broader effort around transformation that we've been doing in the business that are going to benefit us beyond just the jet engine space that you're talking about.

And I think it's an important thing to think about as you consider what this business looks like in the recovery. And so, let me kind of walk you through and give you some perspective. We've got a number of initiatives that we've got in place that we've talked about throughout 2020.

Those initiatives include a lot of cost takeout that were delivered in 2020 that are going to have a wrap around effect in 2021. And we've got a transformational project that we announced in December, that's going to materially change our specialty rolled products business.

A fair question to ask Richard, if this was kind of what you were pointing toward is, Hey, how do you -- when you add up all this transformation, what does the new business look like at normalized -- at a normalized level? And so, as you think about that in 2019, which has called it a normalized period for us, we generated $440 million of EBITDA and we generated about 11% EBITDA margins off of that.

With the cost takeouts that we have captured through 2020, as well as the transformational project that we spoke to in December, between those two efforts, the result is upward of $200 billion of run rate EBITDA added to what we delivered in 2019. And so, the effect of that is pretty profound.

That's 11% 2019 EBITDA margin, and with a pro forma reflection of what we've captured on cost reductions and where we are capturing and high confidence in head capture with the transformation in the SRP business, really makes it a 17% plus EBITDA margin at 29, 2019 volume level. And so, that's a 600 basis point expansion in EBITDA margin.

So as you're talking about transformation, as you're talking about how all the businesses evolving for 2021 and beyond, that's really how we think about the business and the benefits of these actions that we carried..

Thanks for that. And just quickly as a follow-up.

So specialty energy projects that were referenced in your opening remarks, could you just discuss a bit about how much they're worth and when do you see those decisions being made?.

Yeah. So, those are -- lot of those decisions have actually been made in terms of other two types of things we were talking about. I think there's a pollution control activity, which is kind of nickel, alloy type materials that are going into Asia. A lot of those decisions have been made and, and that'll actually happen in 2021.

I think their orders, if they're not in hand, they're here the commitments have been made. We're also seeing continue to strength in the solar space. Certainly, we're starting to see signs of land-based gas turbines kind of coming back. And then the last piece of that is really probably you referring to as the clad pipes.

And a lot of those are being less like right now, right? So, I think there's a pretty good order stack up over the next two, three years of some fairly major projects. We won't win them all, but we're going to be competitive on all of them. And so, I think, we'll start to see that probably hitting in Q2 from a shipment standpoint.

That's our expectation.

Does that help Rich?.

It really does. Thanks for that color guys. I appreciate it..

Yeah..

And our next question comes from Gautam Khanna from Cowen. Please go ahead with your question..

Yeah. Hey guys. Good morning..

Good morning, Gautam..

Just wanted to ask maybe two questions, just first on the quarter itself. The high-performance EBIT margin, stripping out D&A and everything, was a negative 5.4%. I was wondering if there was anything -- it didn't look like mix was materially different sequentially.

Was it just working days or something of that nature that brought it down sequentially? And then I have a follow-up. .

Okay. So I'll take the first one, Gautam. I think what you saw in Q4 in addition to a slightly weaker mix, a little more transactional business that wasn't in the aerospace category, so that contributed to a dosing that was going on in Q4. We actually have some proactive inventory management.

So, we wrote off some inventory that obviously affected the margins in Q4, but there's not going to be an ongoing concern..

Okay. And just to be clear on your -- it's a follow-up. The -- you're quite convinced, it sounds like that engine destocking has sort of peaked at this point. So on a sequential basis, Q1, Q2, it should get better than what we saw in Q3 and Q4. And obviously, then pick up with rates on the A320 and alike in the second half of the year.

I just want to make sure I understood that. And secondly, as a related airframe titanium, despite all the Boeing 787 development since the third quarter where they haven't been delivering aircraft, that does not change what you previously were expecting on airframe tite in 2021. Thanks..

Okay. So, let's see.

So the first answer to your question and I'll add a little cover is yes, we're confident and there's jet engine side, partly because of that the day-to-day pulse with those customers -- I would say there's always going to be adjustments to schedules, but I think what we're seeing is more clarity and we were fairly confident that a lot of the adjustment that came to us really, and jet engine started in late 2019, related to -- issues related to the MAX.

So, I think most of those supply chains got adjusted quickly and I think the wide-body issues where we've had probably three quarters since a lot of that activity started to become known.

So, I think the jet engine side, there's always going to be exceptions, but I think generally the answer to your question is yes, we're confident that we should see improvement in really throughout the year, but accelerating in Q or in the first half, and then looking much better in the second half as we get ready -- the pipeline gets ready for 2022.

I guess the jet engine question. And I think going back to your other question about tite plate, yeah, we believe 2021 will be the low watermark. I think we're following and tracking with Boeing's announcement of where they're going on a build.

And I think, we are picking up share in the airframe business globally, so that'll help us in the back half of 2021. But I think it's going to be -- it'll be for tite plates specifically what you asked about, I think 2021 will be the low watermark for us there..

Thanks a lot guys..

Our next question comes from Phil Gibbs from KeyBanc Capital Markets. Please go ahead with your question..

Hey, good morning..

Hey, good morning, Phil..

So, my first question is just on the free cash flow bridge. I think you had pointed to being $40 million positive at the midpoint, excluding pension. When I think, Don about cash contributions, I've got about $100 million of interest, $160 million of CapEx and cash taxes. And then you've got some offset from networking capital.

So, I'm ranging somewhere between $225 million and $250 million of cash needs for you all this year.

Should we kind of take that as a decent range in terms of what you're trying to communicate and then add free cash flow to that to back into an EBITDA view in terms of what you all view as the potential for the year?.

Yeah. I think, Phil, your logic is sound. What I would say is I wouldn't expect that kind of cash burn. But you think about where we're at from a cash generation standpoint, we've done a pretty good job pulling the right levers to manage cash through 2020 and ended at a really good -- really, really good spot.

I do expect net-net to be a cash burner in 2021. I mean, not to the degree that you're thinking. But one thing that was a great benefit for us in 2020, that will be less of a benefit for us in 2021 is working capital releases.

And why is that? Well, with the decline that we had in the first half of 2020, we had pretty significant releases around our accounts receivables. And then later in the year, we were picking up momentum on our inventory releases.

As you think about 2021, as we see 2021 second half, we would expect to see some growth in the business, which would then be a requirement for putting working capital on the ground. But we still think net- net that working capital is going to provide a source of cash for us. So that may be missing a bit from your calculation.

That plus, we are pretty disciplined when it comes to managing our levers. What we did in 2020, we adjust our CapEx pretty significantly to reflect the new demand. Expect that we're going to do the same things in 2021, and we will adjust our CapEx and we will adjust our inventory to really respond to the market signal.

So that could be again, a bit of a positive relative to the burn number that you were talking about. All that said ….

Don, I wasn't talking about a burn. I was talking about the slide nine, from what I gathered you had free cash flow -- positive free cash flow of $20 million to $60 million, unless I'm looking at that wrong..

We had a positive of -- that's pre -- yeah that is pre pension contribution. And so that's right. I think that the key takeaway, when you think about our cash flow for 2021 is I would expect based upon what we know today to be a cash uner -- our user rather.

But I think it will be a modest use and we're going to exit 2021 with still a very, very healthy level of liquidity. And it will adjust to the end market signals from a demand standpoint accordingly, whether that means we need to add more working capital in the form of inventory or whether we need to pull levers to reduce CapEx..

Okay. And then just in terms of a follow-up. I know clearly there were absorption issues for you on the second half. I think, Bob, you had just mentioned, you had written out some -- written down some inventory.

Any way to calibrate in terms of how much the under absorption plus some of these inventory write-downs impacted your P&L in the second half of the year. Could it have been $20 million a quarter, that type of thing and when do you expect some of these things to desist in terms of the magnitude of impact? Thank you..

Yeah. I think back of the envelope is not that far off so. As you look at it, there are some adjustments we took in terms of carrying value around inventories. And there's the effect of the under absorption. And to think in terms of $10 million to $20 million a quarter as a combination for those two through 2020, that I think you're not that far off.

How to think about it for 2021? Again, it really depends upon the production level and the demand signals would get in the first half. If we expect first half to look similar to the second half of 2020, then you can -- they can similar -- similar effects to under absorption.

And I think from an inventory carrying value standpoint, I would like to think that any net realizable value reserves that we had to had to book, we've already been taken, so we shouldn't see significant effect there. But under absorption would still be a potential for us, especially in the first half.

To get to the second half it's a little bit different. And that really depends upon the pace of growth, right? And so it's hard -- a little bit harder for us to speak to that..

Thank you all. Appreciate it..

Our next question comes from Josh Sullivan from The Benchmark Company. Please go ahead with your question..

Hey, good morning and congratulations on the quarter here. Actually just following up on those cash burn comments for 2021, is there a scenario in 2022 where demand is going to potentially be picking up a little stronger, where we would continue to see it working capital build in a cash burn.

But do you think you'll be set up exiting 2021 where 2022 shouldn't see a burn even in a very strong demand environment?.

So, there's a -- the short answer is if there's strong demand, I would expect that we will be adding working capital in 2022. It really depends on the pace of the recovery. It also depends upon our -- we've talked a lot in 2020 about our focus on improving our working capital efficiency. And we did a phenomenal job of that in Q4.

I mentioned in the prepared remarks that we reduced our percentage of working capital from 50% at the end of Q3, down to 40% in Q4. Our internal goal is we want to get back to the 30% level and lower. Well, the pace for our being able to achieve that goal is going to be an offset to what we need to add to our working capital because of an uptick.

And so, if we're really fortunate, we can do a good job offsetting the requirement for investing in working capital with becoming more efficient with working capital.

But generally, I think you should think of 2022 as a year of investing for additional working capital to fund the growth that we're seeing in 2022, which is -- obviously that's a good thing, right? We don't mind investing for growth..

Good. No, thanks for that.

And then just switching over to the strength in the STAL venture in China, can you just provide us some color on the strength in those markets sequentially? And what we had Apple deliver its largest number of iPhones by pre-summit Smith's ever, is that strength for STAL more broad based than consumer electronics, or is that really the focus market for you guys?.

Great question. So, I'll start off with congratulating the team that runs our precision rolled strip business in China. The fourth quarter was a record performance for them. And that it's -- based on the investments we made, they're probably year and a half to two years ago. So they were well-positioned and they took advantage of it.

Now, in terms of the broad base, I think you start with consumer electronics at the core. We started to see the initial opportunities in solar that we've been kind of waiting for to be candid for a year or two, but we think there's growth there. There are things in our precision rolled strip businesses there that go into medical applications.

You can see some things, hypodermic needles, various other things that PRS, precision rolled strip, goes into. And in automotive, it's still an automotive play for us in Asia. There are -- we're making stainless -- especially stainless, that is the thickness of a human hair.

So, there's a lot of applications and more sophisticated automotive applications that are there. So, I think it is broader than just consumer electronics. So, we feel good about. Other than the lunar New Year, which we can't do much about in Q1 seasonally. We expect that trend to continue based on the strength of the underlying markets..

Thank you..

Our next question comes from Timna Tanners from Bank of America. Please go ahead with your question..

Yeah. Hey, good morning..

Good morning, Timna..

Good morning. I just wanted to ask two things. One is if we could kind of continue the discussion about cash usage, but talk a little bit instead of working capital, maybe about CapEx needs going forward.

Because I caught onto your comments about putting out some projects and just wondering what that looks like when you catch up and how you're thinking about that. And then I have a high level question..

Sure. Timna, I'll take a run in answering that. As you think about 2020, we went into 2020 with the intent that we were going to invest somewhere between $200 million, $210 million in CapEx. And then, of course, when the pandemic hit, we hit the brakes.

We did it in a very thoughtful way, but we really peeled back on that investment, took it down to the mid 130s ultimately for 2020. As we look at 2021, our guidance is $150 million to $170 million.

The increase year-over-year is a modest increase with the idea that we -- we do expect to see some end market recovery that is going to create some demand pull for investment and certain assets. It's in support of specific customers. This is not a bill that, and they will come kind of approach. That's not how we -- how we do our CapEx.

So, I think, if the 2021 plays out like we expect it will be, we're going to be in that $150 million to $170 million range.

Then to think -- if you're thinking past that, okay, what's the right way to think about capital investment post 2021, I think the $200 million to $210 million investment level that we were thinking for 2019, which was part of a normalized -- coming off of a normalized 2019, getting ready for organic growth that we saw in the business.

I can see where that number could come back to life in 2022 CapEx, as we're preparing them for that delayed growth that we -- that was put on pause with the pandemic. And, of course, that -- I wouldn't expect that that's going to be an ongoing run rate for CapEx, but that's one way to think about 2021 and 2022..

Okay. Great. That's exactly what I was looking for. Thanks for that. And then, I guess, I know I'm asking you to kind of speculate here a little bit, but -- and some of these things are still evolving.

But in light of the Biden administration kind of announced interest in shifting away from fossil fuels and kind of -- it seems a bit aggressively toward alternative energy.

Can you remind us of the ATI suite of products and opportunities and where you might get hit because you used to supply some of those other areas, but also the opportunities? I know you've in the past been big in nuclear and maybe other green energy focused..

Yeah. Good question. I think when you start with -- you started with nuclear and we're still big in the nuclear space. So, I think that's an upside opportunity for us out of our Oregon operations.

I think we're starting to see opportunities in solar, which although they tend to have a stainless space, they tend to be on the specialty end and really light gauge, tight tolerance types of things, kind of following the same issues with consumer electronics from a product standpoint. Then you add into that emission control systems.

I think the flue gas desulfurization as to what we used to call it, but it's really about what's going on with emissions globally. It's not really a U.S. issue. It's more of a global issue. And then I think the other thing you'll see more of is a resurgence of land-based gas turbines. There's still a shift from coal and oil to various things.

I think when you look at our product mix in the energy space, it's going to be the bigger chunk for us in the future. It's going to probably be 60% to 70% of what we do versus historically the oil &gas -- we spent in the old ATI, not the old, too all the ATI.

But the prior product mix had a lot of oil & gas, consumer -- or I'm sorry -- chemical processing, hydrocarbon processing. I think you'll see us play less there. They tend to be more standard stainless type pipes and infrastructure types of things. So, I think, the -- we're going to be worth corrosion, franked high temperature, unique issues are.

And I think for the specialty energy sector, corrosion is kind of be a big material science issue that people are going to have to work through. So, I think we're well-positioned in some parts of the world. That's a matter of which parts of the world go first.

And I think, an electric vehicles, battery storage, hydrogen as a fuel -- hydrogen as -- and producing hydrogen there's opportunities there for more specialty materials. So, I think, nickel and titanium will play probably more on the nickel side in most of these applications.

So, does that help with the answer you were looking for Timna?.

Yeah. It does. I just don't know how much of what you'd be losing that used to be hydrocarbon focused is versus what you'd be gaining with regard to the green energy.

Is there a mix that's higher value add, or is it an offset or just rough numbers? What you think about incremental?.

Okay. Yeah. So, two parts to that. So, our decision to exit the standard stainless sheet is obviously a lower margin stuff. And the stuff we're moving into is definitely on the higher margin nickel, alloy type products that are harder to make different dimensions and specifications.

So, we think it's a positive from a product mix standpoint, and it's a positive from -- fit with our material science technology. And it's part of the fundamentals of why exiting stainless was the right thing for us to do. So, yeah. It's a positive margin shift for us..

Okay. Thank you..

Our next question comes from Paretosh Misra from Berenberg. Please go ahead with your question..

Thanks and good morning guys. I was hoping if you could just elaborate a little bit about your isothermal forging business a little bit.

So, first of all, just to confirm that is that 13%, 14% of your total sales? And then how much of that is direct sales to OEM versus selling powder or feedstock to those customers so that they can forge it at their own facility..

Okay. There's a lot of questions in there, Paretosh. I'm going to have to quibble about. So far a kind of at the end. So, yeah, isothermal forging is obviously what we do in our forged products business primarily in Cuday, Wisconsin. I don't know if we've actually ever said what percentage of our business is isothermal.

You asked the secondary question, which was, Hey, are you selling, ingot, billet and bar to other foragers? I would say today, depends on the grade, depends on the alloy -- I mean, our long-term goal was to make sure that our forging operation was 100% supplied by our own feedstock. Some customers provide the feedstock to forging.

So over time, I would say today probably 40% is what we consume and 60% would be sold to other people to forge, but it's somewhat -- it's a directed by situation. And then back to your first question, when you look at our forgings business in general, it's in the HPMC segment obviously.

But it's about 30% of HPMC businesses, the actual forging business, and that would include the forging itself, plus the value out of the raw material that we pull through. But that's 2020, and obviously that's depressed in the current environment.

And as we look forward that team's done a great job of positioning the business for share increases and kind of focusing on jet engine and still has a non-jet engine business, but it's less important.

So, let's go back -- and did that kind of cover the ground you were looking for an answer in?.

Yes, very much. Appreciate all the details here. And then maybe as a follow-up on your free cash flow guidance.

So just a quick one, is that also the free cash flow guidance after the -- any dividends paid to non-controlling interest? Like I'm guessing primarily your JV in China, because it seems like you paid $7 million in 2020, but a bigger amount about $15 million dividend in -- sorry -- $7 million in 2020 and $15 million in 2019, so is that guidance after that?.

Yeah. That would be excluding, because the dividends that are paid to the minority owner are actually in the finance section. So, they're not a part -- they're not part of the free cash flow definition or calculation. And the numbers that you -- that you've mentioned are kind of in that right area.

I expect them to be kind of in the seven plus million dollar range..

And our next question comes from Matthew Fields of Bank of America. Please go ahead with your question..

Hey, everybody. I just wanted to sort of touch on liquidity and sort of uses of cash. And I just find it interesting that you ended the year basically with exactly the same amount, $956 million of liquidity that you ended 2019, just a weird quirk there..

It is hard work. It's hard work to get to that number..

Yeah. Maybe that's not such a coincidence. But you kind of said heading into the pandemic that you wanted to sort of boost liquidity and you didn't -- you wanted to get your hands around kind of how deep the hole was going to be and for how long the hole was going to be before you kind of made any other moves.

I just want to -- if you see kind of demand picking up in the second half of 2021, when do you feel like you're going be at a point where you can kind of deploy some of this potential excess liquidity on maybe debt reduction, or other things?.

Sure. This is Don. Let me take a run at that. The -- yeah, the outcome for 2020 was an outstanding outcome.

As you can imagine, when you look at what was happening in the business and the decline to the top line, being able to maintain flat liquidity in that kind of environment was an outstation, right? You have the choices wanting to start pulling the lever, and that's going to be driven by how we're seeing our end markets.

What we see as a trajectory for the end market recovery, nine months before that demand really hits us. We're not going to deploy the capital any sooner than we need to. And so, it's hard for me to give you a definitive answer other than to tell you….

Demand comes back, it seems like you're trying to signal that there'll be a use of working capital, CapEx could kind of ramp back up to that $200 million number. It seems like 2022 will be sort of a more demanding cash year.

Can you talk about kind of when we get further down the road this year in 2021, as you see 2022 coming more into focus, what the choice might be between organic investment and debt reduction and kind of where you ultimately want to end up on that debt reduction lever and sort of how we get there?.

Sure. The temptation runs around cash as to look at one element of it and try to extrapolate and understand. The reality is we get to 2022 we're going to have a few different impacts to our cash flow. First and foremost is profitability. So, it's easy for -- as we're talking about cash to see the downside of needing to invest more in capital.

But the reality is that means we're generating more cash through our activities through sales, which is a good guy for us. We're still going to have the same leverage available to us to manage our capital, to manage your liquidity in 2022 as we do today. And that will be our working capital.

Again, we've been, I think, pretty successful in becoming more efficient with working capital and we intend to continue to become more efficient as we continue to make progress toward our longer term goals. Same thing with CapEx. We'll be making decisions around CapEx, that'll be driven by the opportunities that exist at that time.

And so I wouldn't read too much into 2022 at this point, other than the say, if you're in the up cycle and you're seeing robust growth in the core business guys, that's what we make money. That's what we print cash.

And so, if I need to dedicate some more of that to working capital, specifically, inventory and receivables on the shelf, it's not a bad environment to do that. We're happy in a high growth environment. We'll manage that very, very well. So that kind of answers your question..

Yeah. That's -- those are all fair points. Thanks a lot and good luck in 2021..

All right. Thanks, Matt..

Okay..

Okay. Well, thank you to all the participants and listeners for joining us today. That concludes our third quarter 2020 conference call..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..