ATI Inc. (NYSE:ATI) Q1 2024 Earnings Call Transcript

ATI Inc. (NYSE:ATI) Q1 2024 Earnings Call Transcript April 30, 2024

ATI Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.41. ATI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello all and welcome to ATI’s First Quarter 2024 Earnings Call. My name is Lydia, and I will be your operator today. [Operator Instructions]. I’ll now hand you over to Dave Weston, Vice President of Investor Relations. Please go ahead.

David Weston: Thank you. Good morning, and welcome to ATI’s first quarter 2024 earnings call. Today’s discussion is being webcast online at atimaterials.com. Participating in today’s call to share key points from our first quarter results are Bob Wetherbee, Board Chair and CEO; Kim Fields, President and COO; and Don Newman, Executive Vice President and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlook that can also be found on our website at atimaterials.com. After our prepared remarks, we’ll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the accompanying presentation. Now I’ll turn the call over to Bob.

Robert Wetherbee: Thanks, Dave. Good morning, everyone. In the first quarter of 2024, our leadership team focused on the things within our control acting with urgency and a forward-looking perspective. The results reported today reflect those efforts. This morning, I’ll summarize the three key points I want you to take from our performance. Point number one, Q1 financial results surpassed expectations. We delivered adjusted earnings per share for the quarter of $0.48, exceeding the top end of our estimated range. Revenue was over $1 billion for the seventh consecutive quarter. Our Advanced Alloys & Solutions segment led the way, achieving a 14% EBITDA margin in Q1. This reflects a double-digit sequential growth in the electronics and medical markets and strong A&D sales in Specialty Rolled Products.

In addition, our Oregon team delivered an accelerated recovery from January specific Northwest storm-related outages, really was a great performance across the segment. We expected the High Performance Materials & Components segment to be down in the first quarter given the late year production outages we discussed in our last quarterly call. The good news is those impacts are fully behind us, and the business is leveraging the ramping melt rates and new billet forge press capacity. Equally important, our Forged Products business unit wrapped up another great quarter, best two in a row delivering the highest revenue in their history. All of this sets the stage for strong sequential growth and segment EBITDA margins back above 20% in Q2. Our commitment to managing working capital intensity delivered significant first quarter improvements for free cash flow over the prior year first quarter.

And we fully executed our share repurchase authorization of $150 million, directly showing the benefits of our strong performance with our shareholders. We did what we said we would do and what we needed to do in Q1. Point number two, demand for ATI aerospace and defense as well as aero-like products remains robust. While the percentage of A&D sales dipped slightly below 60% in the quarter due to near-term order patterns and the impact of the Q4 outages, the composite of A&D and aero-like business remained above 75%. We’re confident sales in the coming quarters will put us back on the trend line to our target of 65% A&D sales. ATI’s market position is very broad, significantly more diverse than before the pandemic. We’re producing for every commercial airframe and every jet engine program.

The struggles with the 737 MAX and the resulting impact on near-term LEAP-1B engine deliveries are much publicized. The impact on ATI is not meaningful. Any impact is more than offset by demand to support the Geared Turbofan accelerated overhauls, elevated engine spares and increased defense and commercial space activity. And for clarity, the revised lower 737 MAX and LEAP-1B orders are reflected in our 2024 full year guidance. Our focus is firmly on end markets and premium products where our differentiated capabilities and materials are most highly valued. Point number three, we’re increasing our 2024 EPS guidance, driven by strong demand, improved operational stability and a healthy pricing environment. We maintain our expectations for both top and bottom line growth in the second half.

Our operations are performing at rates that support the second half guidance. Kim will share more color on this in a moment. As we leave the first quarter and look ahead to the strong outlook for Q2 and the rest of 2024, we’ve reached an ideal intersection of the effective strategy, top line growth and bottom line performance. ATI has proven to perform and well positioned for the future. With that, I’ll turn the call over to Kim and return later in the call for a few closing comments. Kim?

Kimberly Fields: Thanks, Bob. I’m excited about ATI’s future and look forward to continue executing our strategy. We’ve invested a lot in this strategy, and I’m confident in our direction. Thank you for your leadership and vision. Looking ahead, let’s add a little color on the strength of the markets and why I’m confident in meeting the guidance for the year. First, let’s answer the question on everyone’s mind. How are the 737 MAX challenges and resulting build rate reductions affecting ATI. Let me emphasize, this is not impacting our orders in any meaningful way. As you will hear in Don’s guidance, what we do see is strong underlying market demand that overcomes any 737 MAX inventory burn down and LEAP-1B build rate reductions.

We are getting signals that further into the year, we’ll see order increases to support 2025 wide-body build rates. We are very connected with our customers, and they recognize the importance of smoothing the impact to not derail the momentum that’s been built. With today’s lead time, if you jump out of line, you’ll face up to 12 to 18 months late for material when you get back in line to reorder. In the meantime, there is plenty of demand from others until the 737 MAX gets back on track and returns to a significant growth rate. Last summer, we announced $1.2 billion in sales commitments. These orders are ramping now. Additionally, we’re seeing opportunities for emergent demand and expanded share positions as customers eliminate single points of failure and move business from underperforming suppliers to those who perform like ATI.

Today, our customer base is more diverse than before the pandemic. ATI provides content to all major engine and airframe OEMs. The other large air framer in Talos is very busy these days and we’ve significantly grown our position in certain products, upwards of 50% share as they look to diversify their titanium supply chain away from Russian sources. We’re seeing very strong demand in engines, too. Across the board, higher shop visits are driving up spares demand, especially for the hot section materials and parts we produce. This continues to pace closer to 40% overall demand versus the 20% to 25% we’ve seen historically. We’re actively supporting the GTF accelerated overhauls and parts replacement. This multi-year replacement plan is driving GTF forging demand up 25% in the back half versus last year, and we see further growth in this important program in 2025 and beyond.

Another strong market is defense. Defense armor plate continues to grow due to Abrams re-armoring packages and foreign military sales. We enjoy a strong supply position on the U.K.’s Ajax vehicle program, and we’re winning new programs like the U.S. Army’s new armored fighting vehicle, which has doubled the ATI content versus previous designs. The robust demand we are experiencing across most of our markets create pricing opportunities as well. We anticipate seeing these wins hit the bottom line in the back half of the year. This potential is built into our updated guidance. Space provides significant opportunities for high growth, leveraging our material science capabilities. Commercial launch firms are targeting 100 launches this year, which provides a strong start to our new long-term agreements.

In fact, every business at ATI participates in this market and our material and parts are being designed into next generations of rockets, delivering strength at high temperatures for critical components. It may be a small percentage of our revenue today, but it is on track to double this year. The business is going where we want it to go. ATI’s products are in every major OEM aircraft and engine program. Bottom line, we have strong customer demand across our markets. Now let’s talk operations. I am confident we are operating at the rate needed to meet this demand in our 2024 guidance. Recently, we commissioned a new 12,500 tonne billet press capable of processing both nickel and titanium. This debottlenecking investment gives us maximum flexibility and is a key enabler to achieving our 2025 targets.

Another example, Forged Products is in the process of qualifying products on our fourth isothermal press. A major control system upgrade brought this asset up to best-in-class and increases our ISO forging capacity by up to 40% over the first half of 2024. These are both great examples of debottlenecking our nickel and titanium value streams. Last, with the increased industry focus on quality, testing and inspection capacity has been very tight. We have substantially expanded our ultrasonic inspection to support the increased testing requirements and relieve a critical industry supply chain bottleneck. By the second half, our testing capacity will triple. This goes a long way to addressing the urgent need of our customer base. Our team is firing on all cylinders and their hard work really shines through in this quarter’s results.

We’re operating at the rates needed to meet our second half guidance. I’m confident we’re taking the steps needed to have increased capabilities and capacity, so we’ll reach or exceed our stated 2025 targets. Before I conclude, I want to thank our teams. Every day, they are focused on safely delivering for our customers. As you can see, their efforts are paying off as we achieved solid financial returns for our shareholders. We appreciate all their hard work. With that, I’ll turn it over to Don for detail on this quarter’s results and the outlook for the second quarter and 2024.

Don Newman: Thanks, Kim. Let me start by noting that ATI continues to deliver on commitments to our shareholders. First quarter adjusted EPS exceeded the high end of our guidance range in a meaningful way. We also delivered noteworthy improvement to cash performance year-over-year. We used that liquidity in the first quarter to repurchase $150 million of stock. We are also raising full-year earnings and free cash flow guidance to reflect expected performance. There are three areas I want to cover today. First, Q1 showed continued improvement in a ramping demand environment. Second, we anticipate a meaningful increase in sales and earnings in Q2. And third, our expected performance in the second half of the year is well aligned to delivering 2025 financial targets.

Let’s start with color on the first quarter. The AA&S segment delivered stronger-than-expected performance in the first quarter, including revenue growth of 7% over fourth quarter 2023 as well as adjusted EBITDA margins of 14%. Aerospace, medical and electronics drove the sequential revenue increase. As expected, certain industrial end markets remain soft, continuing a trend started in 2023. Conventional energy sales increased due to a non-recurring product delivery. Beyond this singular event, we continue to expect recovery of industrial demand in the second half of the year. For HPMC, melt outages in late 2023 led to lower first quarter sales and unfavorable mix as well as lower earnings and margins. But the outages are behind us. Melt rates are where we need them to be to hit our targets.

Here, I want to call out the team’s efforts to improve GAAP performance. Q1 has historically been a quarter of seasonal cash burn. Cash used in operating activities this quarter was $99 million. Compared that to the first quarter of 2023, when we used $285 million for operating activities. That’s a $186 million year-over-year improvement. Working capital management and the absence of pension contributions led to the favorable change. Good progress to date, but we still have many opportunities to unlock when it comes to cash conversion. We are putting that cash to good use. In Q1, we repurchased $150 million of our stock, completing the program our board approved last November. Executing the program early in the year reflects strong liquidity and a stable balance sheet.

It also reflects confidence in our improving operating cycle and cash generation profile. We closed the first quarter with more than $950 million of total liquidity including nearly $400 million of cash on hand. That’s after executing the share buyback. Our net leverage ratio was 2.8x at the end of the quarter and should continue to improve because of cash generation and increasing profits. Looking beyond Q1, we remain committed to delivering maximum value as we; one, invest for growth; two, de-lever the balance sheet; and three, return capital to our shareholders. With that, let’s talk about our Q2 outlook and our updated expectations for 2024. To provide greater clarity into our financial outlook, we have added an estimated range for adjusted EBITDA to complement the guidance we offer for adjusted earnings per share.

Demand for ATI products remains strong, particularly in the A&D and aero-like markets. When combined with the improved operational performance and production capacity that Kim highlighted, the expectations for future performance are compelling. For the second quarter, we estimate adjusted EPS will be in the range of $0.54 to $0.60 per share. We expect adjusted EBITDA in the second quarter to be between $170 million and $180 million. Where is that growth coming from? Sales growth in our core end markets, post-outage debottleneck production levels and stable industrial demand. Expected strength in the second quarter carries over to the full-year. We expect full-year adjusted EPS to be in the range of $2.30 to $2.60 per share. At the midpoint of the range, that is a $0.13 increase from the full-year guidance provided last quarter.

We also narrowed our guidance range by $0.10 to reflect confidence in our ability to deliver. Adjusted EBITDA for the full-year is expected to be in the range of $700 million to $750 million. This strong performance and improved outlook carries over to cash flows, where we have increased our full year free cash flow range by $15 million from previous guidance. The new range is $260 million to $340 million. The $300 million midpoint represents an 82% increase from 2023 free cash flow of $165 million. We are not changing our CapEx range. It remains at $190 million to $230 million. I know my audience. Most of you have already done the math regarding what this guidance indicates for the second half. The message is that we anticipate strong earnings, margin, and cash generation momentum as we exit 2024 and focus on delivering our 2025 financial targets.

With that, I’ll turn the call back over to Bob.

Robert Wetherbee: Thanks, Don. Today’s call is my 22nd as ATI’s CEO. Those of you into material science like we are, now the 22 is the atomic number for titanium. So I guess it’s fitting. Since being named CEO in August of 2018, it’s been a privilege to collaborate with our team to develop ATI’s strategy and guide our efforts to execute on that strategy to the benefit of shareholders, customers, and employees. Almost from day one, I got great counsel from our directors to build a succession plan for whenever the time was right. We’ve been doing that, building a strong team across the enterprise. That includes investing in Kim Fields. She’s learned and led each business unit within ATI, strengthening our operations and championing our growth.

Kim equally invested herself in the development experience and the development of our A&D strategy. Our deliberate succession plan has paid off. She’s ready to become ATI’s next CEO on July 1. I’m really pleased to her and she’s learned it. And I’m excited for ATI and as Executive Chairman, I might be stepping away from the day-to-day, but I’ll support Kim and whenever were she needs. As I reflect on the last six years, it’s been a great run. Some days it felt a lot more like a sprint than a run, but a little more geopolitical and market uncertainty than anyone could have anticipated came along, but we’ve used every opportunity to our advantage. Yet to be clear, the best days of value creation at ATI are ahead. My confidence in ATI’s future is driven first, by the strength of the aerospace and defense market demand.

This robust growth is expected for the balance of the decade. Second, ATI is positioned in our core markets with a very broad customer and end-use application base. And third, our capabilities are extraordinary. Our operational advantage is formidable and our velocity speed and at the fine direction is accelerating. It’s a great position to begin for sure. I’m extremely proud to have led the team that has transformed ATI and positioned us so strongly for the future. And we really have a great team. Thanks to them for all we’ve accomplished together. We are and will continue to be proven to perform. With that, let’s open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question today comes from Michael Leshock of KeyBanc. Your line is open. Please go ahead.

Michael Leshock: Hey, good morning. And Bob, congrats on 22.

Robert Wetherbee: Thank you.

Michael Leshock: I wanted to start here on the commercial aerospace side. I know the 737 MAX is incorporated in guidance, and it sounds like you have ample room to mitigate some of the near-term challenges across of your whole portfolio, but wanted to ask on how long it would take for subdued MAX build rates to meaningfully impact ATI? So hypothetically, if Boeing’s rate stayed the same for another year, what would the impact look like on 2025 numbers for ATI? And are there ways to mitigate this if the 737 issues become a longer-term issue?

Kimberly Fields: Well, hi, so I think I’ll take this one, Bob. So just to give you a little bit of color, as we mentioned, there’s been minimal impact on us. And primarily because it’s more than offset by demand across all our other programs. So even if it was, as you said, further out and multiple quarters forward, as we’re looking at it, a couple of things are true. One is wide-body demand is starting to ramp, which has much higher titanium content than the 737 MAX, which is more of an aluminum plane. The engines programs kind of across the board, we’re seeing really strong demand on all of those programs, engine spares, and MRO visits are up, which are some OEMs are predicting increases in that as well. We’re a key part of the GTF overhaul and parts replacement.

And that’s going to be elevated for several years as we work with them to help lower their AOGs. And lastly, you can’t forget the LEAP-1A has just as much jet engine content in titanium as the IB, and that is continuing to grow, and we anticipate that. So as we said in the near term, minimal impact, and we anticipate that for many quarters out that we’re going to be in good shape.

Michael Leshock: Got it. That’s really helpful. And then on industrial demand, just wanted to get your take on what gives you confidence in a second half recovery? And what are the moving pieces that you’re seeing on the industrial side? Thanks.

Don Newman: This is Don. I’ll take that question. Really, we’ve talked for a while now about our expectations that industrial is going to recover largely in the second half of the year. And what we’re looking at is signals within the individual end markets that make up our industrial. And what I would say is, this last quarter, we saw some positives in oil and gas. Some of those are recurring, some are not. But we are seeing some indications from an order, a book order volume standpoint that there’s positive trend. So what it does is it gives us great confidence that our expectation for Q2 is still strong. In addition to that, we’ve seen recoveries in Asia demand with our Asian precision rolled strip business and stability in industrials overall.

Michael Leshock: Great. Thank you.

Operator: Our next question comes from Richard Safran of Seaport. Please go ahead.

Richard Safran: Good morning. Bob, congrats to you.

Robert Wetherbee: Thanks, Rich.

Richard Safran: Kim, I have one question for you and I have one for you, Don. Any time, Bob. Kim, could you expand a little bit more on this widebody demand you were mentioning in your opening remarks? Is that coming from both Boeing and Airbus? And is it possible, could you discuss the 787 orders? Does it — that you’re getting right now? I mean is it supporting higher rates than what we’re seeing right now given your lead times?

Kimberly Fields: Thanks, Rich. Appreciate the question. Yes. There’s been some — obviously, the 350, they’ve come out and stated higher rates as they’re going forward. And I got to take everyone back to material lead times for these programs are 12 to 15 months out. So we are starting to see and talk with our customers, and we’re very aligned with them. So we’re starting to see that demand as they’re talking to us around how do we ensure that the material flow is going to be available as they’ve start to ramp up. As you said, the 787 has continued to ramp. And so we’ve started having those conversations on that side, and we anticipate seeing those orders being placed to get into the lead time for the second half of this year as we gear up for shipments into 2025.

Richard Safran: Okay. Thank you for that. Don, just quickly, could you go over — discuss a bit about how you’re thinking about capital deployment now given that you used up the $150 million in the first quarter. At one point in time, I think you were talking about M&A also. So if you include a bit of a discussion about that in your answer? Thanks.

Don Newman: Sure. Happy to do that. We talked many times about our balanced capital deployment strategy. We’re focused on three elements growing the business, de-levering and returning capital to shareholders. That — those three priorities and the balance around them is not expected to change. But you’re pointing out that we did fully consumed the authorization that we had for share repurchases in Q1 with $150 million. So are we expecting to do additional share purchases this year would be a fair conclusion of the question that you’re asking. The short answer to that is we have clearly prioritized returning capital to shareholders. Since early 2022, we repurchased almost $400 million of our shares. We are in a very fortunate position where we expect to have healthy cash generation, just have to look at the targets that we’ve shared.

And so that, coupled with our strong balance sheet and liquidity, Rich, we’re in a great position to continue to make choices. So what does that mean for maybe an additional share repurchase program this year? And the short answer on that is I don’t want to get ahead of my board, but I would point out that our Board has been extraordinarily supportive of this balanced capital deployment strategy and prioritizing return of capital to shareholders. I would not expect that the $150 million program we just completed will be the last program quite the contrary. In terms of M&A our bias has been — yes, our bias on growing the business and investment has really been toward organic investment. And we’ve got a long list of great projects that provide robust returns, and we don’t see that changing.