Good morning everyone and welcome to the ATI announces First Quarter 2021 Result Conference Call. All participants will be in a listen-only mode. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Scott Minder, Vice President, Treasurer of Investor Relations. Please go ahead sir..

Thank you. Good morning, and welcome to the Allegheny Technologies First Quarter 2021 Earnings Call. Today's discussion is being broadcast on our website at atimetals.com. Participating in today's call are Bob Wetherbee, President and Chief Executive Officer; and Don Newman, Senior Vice President and Chief Financial Officer.

Bob and Don will focus on our first quarter highlights and key messages. Slides are available on our website, atimetals.com, and provide additional color and details on our results and outlook. After our prepared remarks, we will open the line for questions.

As a reminder, all forward-looking statements are subject to various assumptions and caveats as noted in the earnings release and in the slide presentation. Now I will turn the call over to Bob..

Thanks, Scott, and welcome to all who've joined us today. Navigating through the pandemic has sharpened our focus and provided absolute clarity on how we need to operate. We've consistently followed our guiding principles, keep our people safe, reduce costs quickly, strengthen and protect our balance sheet and remain recovery ready for our customers.

Focusing on these principles have been critical to mitigating the impact of the pandemic and the resulting global economic decline on ATI's financial results. As our key end markets began to show signs of coming recovery, ATI is positioned for significantly improved margins.

These are amplified by our recent share gains and new business awards, especially in our High Performance Materials & Components segment. That said, we still reported a loss for the quarter of $0.06 per share. Our objective, as with all public companies, is to generate a level of profitability greater than our cost of capital.

And we have the clear strategy, defined actions and passionate team to do that. The results achieved so far are a result of the relentless efforts of our entire global team. We value each of our employees for their commitment and hard work.

Thanks to their dedication, the actions taken during the pandemic will help to improve our competitiveness and generate significant bottom line impact in the coming recovery. Before Don reviews our first quarter financial performance and outlook in detail, I want to address four important topics.

First, my view of the current business environment and what it means for ATI. Second, update progress on and commitment to strategic transformation and share some good news on a few recent business awards.

Third, address the ongoing strike by our USW-represented employees at several facilities in the Specialty Rolled Products business unit; and finally, share my views on our performance and outlook by end market. Let's begin with the context of what we're seeing in the current business environment and what it means for ATI.

2021 began much like 2020 ended with optimism for a speedy vaccine rollout across the U.S. and Europe and slow but steady progress moving to the next normal. The vaccination statistics are encouraging predictors of what may be possible in the not-too-distant future.

We're seeing increased optimism in the jet engine supply chain as improved domestic leisure travel demand accelerates. More airplanes in the sky is a great thing. Beyond the U.S., demand for products produced in China continues to be strong, while India grapples with the effects of a major COVID infection surge..

Thanks, Bob. During the next few minutes, I'll provide my thoughts in several key areas. First, our Q1 financial performance; second, an update on our liquidity levels; and third, an updated view on our 2021 outlook. As a whole, ATI lost $0.06 per share in Q1, well ahead of our expected loss range heading into the quarter.

In many ways, our financial performance reflected benefits from our 2020 cost actions. The cost reductions have positioned us to take advantage of the coming global economic recovery, particularly within commercial aerospace, our largest end market.

As Bob noted, increased domestic travel rates are giving Boeing and Airbus the confidence to increase narrowbody production rates. In turn, we are seeing early demand signals for our specialty forgings and materials produced by the HPMC segment. Let me add some color to the Q1 results.

HPMC sales decreased year-over-year compared to a robust prior year pre-pandemic quarter. But as an encouraging sign that we have seen the bottom, HPMC sales increased nearly 10% sequentially. This growth was led by nearly 30% gain in commercial jet engine sales and a 17% pickup in defense sales.

Within jet engines, we saw a significant sequential uptick in engine forgings demand. To that end, we are pleased to note that we have moved from a minority to a majority share on several LEAP engine isothermal forge components. We're encouraged by these trends and expect them to continue expanding across 2021, and as domestic travel rates increase.

In the defense market, our growth was largely attributable to forgings and materials for military jet engines. As expected, airframe sales continued to lag due to ongoing customer destocking. Sequentially, HPMC earnings margins improved significantly due to revenue growth and favorable product mix.

Within our jet engine sales, highly profitable next-generations forgings and materials comprised over 40% of the Q1 total, up from 35% and 19% in the prior two quarters, respectively. In addition to product mix, margin enhancements included in our renewed LTAs provided a tailwind as did transitory benefit from rapidly rising cobalt prices during Q1.

Overall, we're encouraged by the improving aerospace trends in both HPMC business units and expect to continue to gain momentum as Airbus and Boeing increase narrowbody production volumes. Turning to AA&S, segment revenues decreased 16% year-over-year largely due to a 25% decrease in Specialty Rolled Products, or SRP, business unit sales.

The decline in SRP sales was across all major markets, except automotive. Sales at our STAL JV increased by over 50% year-over-year, fueled by demand for consumer electronics and elevated automotive production in China.

Looking at the sequential revenue change, AA&S sales improved 4%, largely due to SRP's 15% increase in standard value stainless products, which generate minimal profit. AA&S segment EBITDA improved year-over-year and sequentially, led by record STAL earnings.

Our Specialty Alloys & Components, or SA&C, business unit, along with STAL continued to generate double-digit percentage margins. Those business units are also well positioned to take advantage of coming demand in their respective markets. SRP posted a positive EBITDA this quarter.

It's important to note that nearly 75% of the SRP Q1 EBITDA was due to rising nickel and, to a lesser degree, ferrochrome prices in the quarter. If this unpredictable benefit is removed, SRP earned an EBITDA margin of about 2% and generated a loss after appropriately considering depreciation and interest charges.

The SRP business has the potential to be a solid and consistent contributor to ATI's profitable growth story. SRP's first quarter results are a reminder of why a transformation is needed within this business. The cost structure does not allow for acceptable returns, and we make far too many products that generate little or no margin.

The good news is that we know exactly what needs to be done to transform SRP into an outstanding business; exit Standard Stainless Sheet Products, consolidate the footprint to streamline product flow, and maximize production capabilities. The cost structures in the SRP unit need to be fixed and the product mix improved. We are on it.

We are hitting the milestones laid out in our transformational plan. SRP's performance will look dramatically different in 2022, no longer dependent on good luck from metal prices to generate meaningful profits. We're optimistic about these changes, and we will keep you in the loop as the transformation unfolds.

Before jumping to the balance sheet, I want to highlight that we've limited year-over-year decremental margins to 16% this quarter. Soon, the conversation should shift from decremental margins to outsized incremental margins, driven by increasing aerospace volumes and ongoing cost structure reductions.

Looking beyond the income statement, 2020's groundwork to strengthen our balance sheet and generate and preserve cash continues to benefit us. We reshaped our debt maturity profile, shifting our next significant maturity to mid-2023, and we've lowered our annual interest costs.

Beyond traditional base debt, we made progress on reducing the financial burden from our U.S. defined benefit pension plan in 2020. The combination of strong pension asset returns and 2020 calendar year contributions overcame the decline in discount rates.

The result, an improved funding status and reduction in required 2021 pension contributions and expense. During the market chaos, we've maintained a strong total liquidity, ending the first quarter with roughly $540 million in cash and about $360 million of ABL availability.

This is below year-end 2020 levels due to our anticipated seasonal cash usage in Q1. We will continue to actively manage our debt maturity profile in the coming quarters. We will leverage available cash and liquidity to further improve our long-term leverage profile and our profitability.

Before I turn the call back over to Bob for closing remarks, I want to provide our second quarter outlook and update for full year 2021 expectations. As we've said several times today, the fundamentals underpinning our jet engine business are improving for both forgings and materials.

We anticipate HPMC's sequential revenue and earnings growth in Q2, driven by improving commercial aerospace, energy and defense demand. As a result of the improved outlook, we've eliminated all planned Q2 facility outages and are preparing for an expected production ramp in the second half of 2021.

The ramp is needed to fulfill increased customer demand levels, including elevated isothermal forgings due to our share gains, exciting developments as we respond to the coming road. Within AA&S, we have line of sight into STAL and SA&C for Q2.

But the ongoing USW strike clouds the visibility and degrades the near-term expectations for the SRP business. Sticking with what we can accurately predict, we expect continued solid performance from STAL in Asia as customer demand remains strong. We anticipate higher revenues and earnings from SA&C, driven mainly by defense end market sales.

And lastly, in our SRP business, we see improvement in some end markets, but we'll be unable to capitalize on this strength if the USW strike continues. As a result, SRP will produce and ship fewer materials in Q2 than we did in Q1. Additionally, we expect a modest raw material headwind as the price of nickel has declined quarter to date.

In aggregate, we expect sequential Q2 financial improvements in our HPMC segment, along with continued solid results from our SA&C business and STAL JV. However, we are not able to provide Q2 earnings guidance due to the uncertainty caused by the USW strike.

We will return to providing quarterly earnings guidance in our normal cadence as soon as we can do so with confidence. Despite not being able to provide Q2 earnings guidance, we remain confident in our full year 2021 free cash flow guidance range of $20 million to $60 million, excluding pension contributions.

A longer time horizon and actionable cash flow levers make achieving this metric more predictable. From a cadence perspective, we anticipate a working capital release in the second quarter that will likely be offset within the calendar year when inventories are rebuilt after a new labor agreement is reached. Now let's discuss the pension.

Last quarter, we announced that we anticipated contributing $87 million to the pension plans in calendar 2021. During the first quarter, the federal government passed new pension plan legislation, effectively reducing our 2021 minimum contribution requirements.

Under new rules, we would not be required to make any further pension contributions in 2021. While we appreciate the flexibility that new rules provide, I want to be clear, we are committed to our pension glide path.

We intend to manage our net pension obligation to a fully funded status within a handful of years, given the anticipated recovery in our key end markets. We will evaluate throughout the year what, if any, additional contributions will be made in 2021. We will share those plans with you in future quarters.

For the time being, assume no further pension contributions this year as we ensure efficient capital allocation in the business. Let me wrap this up by saying that the team's aggressive 2020 cost reduction efforts, coupled with improving market conditions, have put ATI squarely on the path to recovery.

Four out of our five business units are moving in the right direction and the need to transform our SRP business was confirmed by its Q1 financial results. Our North Star remains the same, and we are excited about the future. For SRP specifically, the current production disruption is temporary.

It does not change our commitment or time line to reshape the SRP business into a more profitable, consistent and growing enterprise, one that out earns its cost of capital and competes for investment within our business portfolio. We will be successful in this effort. With that, I will turn the call back over to Bob..

Thanks, Don. I agree with you regarding our excitement for the future. A lot of great work being done by really some hard-working people across the globe for ATI. Our first quarter financial results showed solid sequential improvement and reinforced our belief that commercial aerospace recovery is on the horizon.

Demand for new fuel-efficient planes is growing, and we can feel momentum building at ATI, particularly within our HPMC segment. Improving aerospace market conditions will create an outsized benefit for ATI as we've streamlined our cost structures and have higher shares of our critical customer programs.

I'm confident that when these volumes return to pre-pandemic levels, we'll be an even stronger, more profitable company. Transformation is on track in our Specialty Rolled Products business.

Without significant and structural changes to rationalize our product portfolio, align our footprint and cost structure, the business will not survive against continuously intensifying global competition.

We're focused on building a leaner, more profitable SRP business that out earns its cost of capital, has substantial profitable growth opportunities and competes successfully for investment within the company. I'll close by saying that ATI is a growth-focused company, set to benefit from the coming commercial aerospace and broad economic recovery.

With a clear strategy and innovative team, we're taking action to accelerate our future. With that, I'll turn it back over to Scott.

Scott?.

Thanks, Bob. Quickly, there are a few parameters for today's Q&A session. First, please limit yourself to two questions to ensure time for all analysts questions.

Second, since we are in the midst of a strike and ongoing labor negotiation, please avoid questions seeking to quantify the USW strike's financial impact to the cost of our labor contract proposals on this call. Thanks for your understanding in advance. Operator, we're ready for the first question..

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 Richard..

So first, a nonaerospace question from an aerospace analyst. Look, the strike is a concern for everyone. And I wanted to know if you could maybe expand a bit on some of your opening remarks here. Could you tell us why you think holding firm on your offer to the union is worth it? Now I understand, Scott, your clear instructions here.

You're not giving out numbers and impact. But I want to know if you could tell us what the company gains here because you must have crunched the numbers and take a long-term look here and then decided to take a stand.

So maybe you could just help us a little bit more with your thinking, what the thinking is behind your actions?.

Yes, Rich, this is Bob. I'll take your question. And just to be really clear, the strike wasn't our choice. It was the union leadership's choice to do that. I think we're actually very close to having an agreement. It comes down largely to one fundamental issue, which is managing healthcare cost inflation.

7% to 10% annual inflation on products that can have labor content in the value-added space of 25%, 30%, it's significant for the long term. And most of our customers, as we shift our mix, are going to be OEMs, long-term relationships. We have to make sure that we're controlling our costs.

And that's what we're asking for and this contract is really to make sure that our employees contribute and help to manage and control our overall spend. And we think the proposal on the table is fair.

And part of the reason we think it's fair is that our other USW-represented employees and those USW members employed by our close competitors, they're already there and sharing in their healthcare costs. So we're not really asking for something that the industry and the union hasn't already given.

So not to get lost in the moment, though, this is just one of the many issues we're addressing to transform this business. And I want to stress for long-term success. The investments we're making to transform it will carry it a long way into the future with the competitiveness we need to go global.

And I think the contract is fair, it's actually the workers under this contract, the average worker will still be in the top 15% of U.S. wage earners. So it's a pretty good contract, pretty good jobs, actually great jobs, great benefits. But -- so we're in it for the long term. And we think it's the right approach.

Again, we didn't choose this course of action, but we're certainly responding to it with the long term in view..

Okay. Thanks for that. And second, you didn't mention in the slides this time, but last quarter, you noted that you were on hypersonics programs. And I think this is a little important because this could be a meaningful growth driver here.

So could you tell me to the best you can, which programs you're on, what you're supplying? There's an obvious question here about -- because of your remarks about -- opening remarks about defense, there's an obvious question here about what this does to your long-term outlook for defense growth?.

Yes. Great question, Rich. I'll take that one, too. We're excited about the future of what hypersonics mean to ATI. You think about the core of the company being material science, advanced process technologies and the innovative people that we get involved with every day.

Hypersonics is actually going to stretch us, and that's a good thing, stretching us into applications that have incredible strength at extreme temperatures. And I think what you'll see us bringing to the party are the advanced alloy powder metal technologies. You'll see us with the thermal mechanical processes that are core to what we do.

And I think we've invested in design for manufacturing and performance. And I think those three things are what we bring. But how we're engaged, you asked about specific programs. We're engaged with a wide array of OEM customers and government agencies.

And our view is we want to be part of defining the technology, specking the materials and that puts us in a great position long term. So if there's a program in hypersonics, we're probably involved with it somewhere. And we feel that hypersonics is a great platform to show ATI's strengths.

And we've been in the space programs for a long time, and it leverages that legacy and positions us well for the future. So I think bottom line, material science is our core. Hypersonics is going to require advanced material science to be successful. And we think we're well positioned. But I think we're everywhere, so to speak..

Thanks. Thanks for that. Appreciate it Bob..

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

Hey Good morning..

Good morning..

When we look at AA&S, that segment did about $50 million in EBITDA, obviously very strong.

Can you give us an idea how much STAL contributed to that number? And then secondly, can you also tell us what the transitory benefit was from the raw material inflation timing?.

Sure. Two parts. First, in terms of the transitory benefit from metal, that was largely in the SPR -- SRP rather, segment and the benefit there's a couple of ways to look at it. Bob highlighted in his script, the benefit relative to our guidance, amounted to about $0.08 for the overall business.

And then as you translate that to EBITDA for SRP, it was actually about $8 million. So the majority of the metal benefit was in the SRP business. And the majority of that related to nickel price movements. In terms of STAL contribution, we mentioned that it hit an all-time high in terms of its revenue.

Also, from an EBITDA standpoint, extremely good performance. EBITDA margins, I will share with you, even though we don't specifically share the EBITDA generated by the SBUs. I would say that the margins have -- are very, very strong in STAL. They've been in the double-digit range.

And we expect that we're going to continue to see strong performance, largely because the end markets that it serves continue to be very, very strong in China in regard to electronic demand and consumer electronics as well as automotive..

Thank you. And I think that there were some comments in the script about moving from minority to majority positions on certain forgings, presumably that's engine business.

But curious if you could give any -- any color on that? Is that related to your new GE contract effectively just kicking in here on a lag as we all expected it would? Anything there would be helpful. Thanks so much..

Yes. It's -- what I would say is, yes, you're not far off in terms of what the source of that growth was. It is, I would say, isothermal-related forgings primarily, and it is another good sign in terms of not just waiting for the end markets to recover.

We're aggressively going after building on our relationships with our key customers and continuing to increase the shares that we have with them. So we're pretty excited. It's another good guy and our trend toward share levels..

Thank you. .

Our next question comes from Gautam Khanna from Cowen. Please go with your question. .

Yes. I was wondering if you could talk a little bit about the renewed Boeing titanium agreement.

What specifically changed? Was there added duration? Any change to minimum contractual volumes? Anything you can comment there?.

Yes. I think, -- this is Bob. And I think on the Boeing situation, we're pleased to see it is a multiyear extension, for the first point that you're asking about. I think it's following kind of some of the industry norms and kind of aligns with the backup contract for the titanium spun supply. So we feel pretty good about that.

It is for a share of their business. And I think we're well positioned to capture emergent demand as we grow through time. So beyond that, we probably wouldn't disclose necessarily the finite details based on our customer's desires.

But I think what we can say is it positions us for good growth as they burn off -- as the supply chain destocks, right? Is the -- we expect that to last on the widebody side for a while and go from there. So -- hopefully, that helps..

Okay.

I guess what I was -- maybe more specifically, I was wondering if you could -- do you guys have better visibility on 2022 titanium Boeing volume? Could it grow in '22? Or what do you think?.

Yes. Yes, that's a fair question. And what we see is really about narrowbody versus widebody demand trends, right? So whether it's 50-50 or not, you guys can be the judge. But I think the narrowbody, we're starting to see it flatten out the destocking in '21, some upticks in '22, not getting back to where we want to be into probably 2023, 2024.

And I think on the widebody side, anything's fair game in terms of when that's going to come back, we listen to what our customers say. So it's going to be extended. I think, we've adjusted our cost structure to do that. Now the other thing that's been going on is there's two guys who build major airframes.

And I think we announced probably in the late last year that we had gained a share position with the other guy. And we expect that to mitigate to some degree, the lower widebody production here in the United States. So I think it's going to take a while for the titanium supply chain to destock.

I would say probably by 2023, 2024, we'll start to be back to 2018, 2019 levels. And hopefully, that helps..

It does. I guess -- but you do expect that in '22, it will be above the '21 levels. I mean, they'll gradually get back to that..

That's right. We expect the destocking to come and then we'll see improvement in 2022. It's just not going to be back to the 2018, 2019 levels..

Great. That makes sense. Thank you very much..

And our next question comes from Paretosh Misra from Berenberg Capital Markets. Please go ahead with your question. .

Thank you. Good morning, Bob, Don and Scott. A question on your high-performance business.

Is there any way to think about how much of the tailwind was from higher metal prices, such as cobalt and nickel?.

Yes, this is Don. I'll give you a sense. Generally, what I would say is they were -- the tailwinds related to metal in HPMC side of the business, not nearly the same as what you saw on the SRP side of the business. So it would have been kind of low single-digit millions of tailwind.

So a good guy for us, but certainly not a highlight on that part of the business from a performance standpoint. And that stands to reason, right? There's not nearly the metal volatility exposure on the HPMC side that we have on the AA&S side or SRP specifically because the contract structures are very different on the HPMC side..

Got it.

So I guess, more generally, in this segment, do you pass it through to your customers or hedge it? Or how does it work?.

It's a variety of contract structures. So the bottom line is that because of the agreements that we have, and I wouldn't want to get into a great deal of detail.

But what I would say is we've constructed in a way that we've been able to minimize the metal risk and really highlight the value creation that we bring to the table, which is in our melt and other forging capabilities, for example. So we're happy with that construct.

The other thing I would point out, which is really important, as you think about the transformation project that we've got going on in the SRP business, is because a significant portion of our metal volatility rests in that part of the business, that transformation program that we're putting in place will reduce our metal volatility exposure by two-third.

And so that's going to dramatically affect our risk profile. We run this business on fundamentals. And so eliminating that uncontrollable volatility is a priority to us..

Got it. Thanks for all the details. And then also on your titanium and titanium-based alloy products, it looked like that revenue stream sequentially declined, which is likely from the widebody frame destocking.

But I just want to make sure if that's all it is, because it looks like it went up sequentially in the previous quarter, but it's down this time.

So just want to make sure if it's largely still driven by the widebody or if there are other things going on?.

Yes. Good question, Paretosh. There's -- obviously, the widebody issue and I'd say, general destocking in aerospace and airframe. The other thing that's going on, and we talked about it briefly is the armor plate transition. So armor is going to be down a little bit only because of a transition in major programs.

We expect it to be back of -- coming back stronger in the second half. And clearly, as we look into the second half, we start to see the signs of the jet engine recovery that are very positive. So we know it's coming. We just can't exactly predict when.

But we think, as we mentioned earlier, that the supply chain destocking will make great progress on titanium in 2021. And then the armor should come back in the back half of the year. But it's a combo..

That's very helpful. Thanks, guys..

And ladies and gentlemen with that we've reached the end of today's question and answer session. I'd like to turn the conference call back over to Scott Minder for any closing remarks. .

Thank you to all joined us today. We appreciate your continued interest in ATI. This concludes our first quarter 2021 conference call. .

Ladies and gentlemen with that our conference has concluded. We do thank you for attending today's presentation. You may now disconnect your lines..