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Text: 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 full year and fourth quarter highlights and key messages, but may refer to certain slides within their remarks.
These slides are available on our website atimetals.com and provide additional color in detail on our results and outlook.
During the Q&A session, please limit yourself to two questions.
No surprise, we're glad 2020 is over.
It was a challenging year amplified by a 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.
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%.
In today's call, my remarks will focus on three major things: the 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 were made for a difficult year-over-year comp in the first quarter 2021, it did help to offset the significant headwinds we've 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 4 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.
Second, we took the necessary actions to preserve cash and maintain liquidity.
We ended the year with more than $950 million of total liquidity, including nearly $650 million of cash on hand.
We extended our debt maturity profile and now have no significant debt maturities before mid-2023.
Don will cover some additional achievements in more detail in a few minutes.
Third, we proactively and aggressively optimize our cost structure.
Our close customer relationships enabled us to match capacity with the rapidly declining demand expectations.
We did what was necessary to ensure ATI would not only survive the global recession, but emerged stronger in recovery.
By quickly reducing our costs, we've minimized detrimental margins limiting the steep demand drops impact on our bottom-line.
We eliminated approximately $170 million of costs in 2020.
We continue to pursue operational improvements.
We expect total cost reductions to grow to at least $270 million over the next few quarters as actions implemented in the second half of 2020 reached their full run rate.
Importantly, we expect about $100 million of these cost savings to become structural, continuing to benefit ATI as we return to growth over time.
It's worth noting that the additional savings we announced in December as part of our strategic transformation are incremental to these savings.
Fourth, we focused on supporting our customers through continued strong execution and operational excellence.
Our customers count on us to deliver the mission critical materials and components to keep their planes flying, vehicles moving, energy flowing and medical equipment and electronics working flawlessly.
I'm proud of how the team has led through 2020.
Focused on our people's health, our company's financial health and strengthening our customer partnerships.
Being recovery ready, our fifth leadership priority positions ATI to serve our customers and become a more sustainably profitable company over the long term.
We've been rewarded with more of our customers' business as a result.
In 2021, our share of jet engine materials and components on key programs is increasing.
We've also won new business on airframes and are well-positioned to win upcoming specialty energy projects.
The bottom line here, we've accomplished a lot in 2020.
Our actions created the necessary foundation for the transformation we announced in December.
You may recall, we're exiting standard stainless sheet products by year-end 2021 as we redeploy our capital to high return opportunities.
These actions are major steps to becoming a more profitable-focused aerospace and defense leader.
We're accelerating the creation of significant shareholder value.
In eight weeks since the announcement, we've hit the ground running and are executing.
On Slide 5, you'll see two of the leading indicators we're using to track our progress toward this transformation: a streamline footprint and an improved product mix.
We have a third metric that we'll share in future progress updates.
It attracts working capital release to largely self-funded projects' capital expenditures.
So, let me take a moment to review the major actions we're taking.
First, we're consolidating our Specialty Rolled Products finishing operations to create a more competitive flow path, focused on increasing production of high-value differentiated materials.
This includes closing five plants within the AA&S segment by year-end 2021.
In the fourth quarter, we closed two finishing facilities: one in Western Pennsylvania and the other in Connecticut.
The three additional closures are expected in the second half of 2021.
Second, we're on track to exit 100% of standard value stainless sheet products by year-end 2021.
In the fourth quarter, sales of these products represented 17% of AA&S segment revenues down from 22% in full year 2019.
And finally as a reminder, on the third action, we intended largely self-fund upgrades to our specialty finishing capabilities in Vandergrift Pennsylvania.
This investment of $65 million to $85 million spread over three years will be largely self-funded through working capital releases, triggered by the transformation.
We'll make progress on this initiative as we streamline our footprint and we'll report our results as part of our next transformation update later in 2021.
So let's cut to the chase here.
With these actions, we're on our way to a leaner, more competitive aerospace and defense focused powerhouse, poised to substantially increased margins in the AA&S segment and generate a significantly higher return on capital for ATI.
Success is largely within our control.
We know we have more work to do and we're doing it.
With the demand recovery that we know will come, we're confident we'll meet our longer term objectives.
Before Don provides detail about the fourth quarter financial results, let me share my thoughts about our recent experience in key end markets and provided near to mid-term outlook for each.
Let's start with commercial aerospace, our largest end market.
As predicted in our last update, demand for jet engine forgings increased modestly in the fourth quarter.
Demand for engine-related specialty materials principally ingot and billet continue to soften as customers destock to align inventories with near-term demand expectations.
Looking ahead, we expect jet engine product sales to recover slowly in the first half of 2021 with the pace increasing in the second half of the year.
We expect continued weakness in airframe sales throughout 2021 due to excess supply chain inventories.
This is consistent with the guidance we provided last quarter, which already accounted for decreasing widebody production rates.
Next up, defense sales.
In the fourth quarter we returned the year-over-year double-digit percentage growth.
Each of ATI's defense market verticals expanded.
Naval nuclear products in support of the U.S. Navy's increased long-term demand for new ships grew by nearly 50%.
Military aerospace and ground vehicle armor each grew at a strong double-digit rate versus the prior year.
We expect continued defense growth in 2021 albeit at a slower pace due to uneven demand levels across major platforms supplied by ATI.
Let me give a couple of examples to illustrate what I mean by uneven demand across platforms.
In naval nuclear, we expect continued demand growth.
In ground vehicle armor, we expect a temporary contraction due to a one-year pause in demand on the customer's major program.
Longer term, we expect ATI's advanced materials to be integral to the success of future government defense initiatives such as hypersonics.
We're also pursuing increased participation and defense applications in other parts of the world.
Shifting to our energy markets.
Sales continue to decline in the fourth quarter compared to prior year, but at a slower pace than in the third quarter.
Our fourth quarter oil and gas and chemical processing submarket sales dropped by more than 35%.
Sales to our specialty energy markets were more resilient declining only 6% versus the prior year.
Growth continued in our civilian nuclear and pollution control product sales while demand for electrical energy generation products remained weak.
We expect fourth quarter trends to hold in the coming quarters as demand for oil and gas remain soft, especially energy demand will improve due to ongoing nuclear refueling requirements and strength in Asia from land-based gas turbines, solar and applications to reduce fossil fuel emissions.
Robust demand for our consumer electronics products was driven by two factors: first, customer product launches in China; and second, the increased need for our specialty alloy powders to support the growth of next-generation consumer products globally.
We expect increased demand levels to continue in 2021 with first quarter sales falling sequentially mainly due to the impact of Lunar New Year shutdowns with our precision rolled strip operation in China.
Our medical markets continued to decline, both for MRIs and implant materials, primarily due to the effects of the pandemic.
Fewer elective surgeries and restricted hospital access to install new equipment have reduced end customer demand and created excess supply chain inventory.
We expect these negative trends to continue until vaccination programs reach critical mass.
Over the next few minutes, I will 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 the number of our key end markets by 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 earnings per share was a loss of $0.33 per share in Q4.
This was better than the optimistic end of our earnings per share 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.
Speaking of cost reductions, in our 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 $180 million of cost reductions that will benefit full year 2021.
Those cost reductions, continue to contribute to favorable detrimental margins, which are below 30% for the third consecutive quarter.
We expect approximately $100 million of those reductions to be structural.
Those take outs should continue to benefit earnings in the up cycle, increasing incremental margins in the future.
Working capital actions initiated in Q2 and Q3 gain momentum in Q4.
Our free cash flow was $168 million for full year 2020, well in excess of the top end of our guidance range of $135 million to $150 million.
We're extremely pleased that we closed 2020, with nearly $650 million in cash and more than $950 million of total liquidity.
That's a great outcome and one that we can build on in the future.
We ended Q4 with managed working capital at 41% of revenue, down 1,000 basis points from the end of Q3, great progress.
Our goal is to reduce managed working capital for less than 30% of revenue over time.
I can assure you this will remain a key focus in 2021 and beyond.
In addition to a strong cash and liquidity position, we continue to maintain a manageable debt maturity profile.
Our nearest significant debt maturity does not occur until Q3 of 2023.
Another area of success in 2020 was CapEx management as we adjusted capital spending to fit the new demand levels.
We started 2020 with a CapEx forecast $200 million to $210 million.
Actual CapEx spend in 2020 totaled $1.37 million, 33% below the initial forecast.
We manage that reduction by carefully analyzing future demand requirements, including recent share gains and adjusting timing on large growth-related projects.
We also ensured that our facilities were not over maintained in the current period of low demand.
We understand the importance of being recovery ready and we are prepared to handle our customer's desired pace of recovery.
Now, let's move to pensions.
Despite the broader demand challenges, we also made meaningful strides managing our pension glide path.
Our goal is to reduce our net pension obligations each year.
We ended 2020 with a net pension liability of $674 million that's nearly $60 million lower than the opening 2020 level.
Strong pension asset performance and Company contributions in 2020 more than offset an 80 basis point decrease in discount rates.
This drove the drop in net liability.
The lower net pension level at the end of 2020 brings multiple earnings and cash flow benefits in 2021 and the coming years.
I will detail that when I share the 2021 outlook.
2020 will be a year remembered for severe economic challenges and personal hardships for many.
As a company, we have worked through this crisis to improve the business and prepare for the upcoming recovery.
The team's work on strategic positioning, liquidity and cost structure's should benefit our shareholders into the future.
With that, let's look ahead to 2021.
While we are seeing stabilization there is still uncertainty in terms of end market recovery timing as the COVID vaccines are in the early stages of distribution.
With that uncertainty we are going to continue the guidance structure that we started in Q2 2020.
We will provide earnings per share guidance for the upcoming quarter, as well as certain elements of our full year cash flows that we believe we can reasonably estimate.
We'll also provide insights into what we're seeing as key trends and indicators in our business.
Bob shared his thoughts regarding our key end markets.
Let me recap our forward demand views and the pace of recovery within our business.
We expect jet engine product sales to recover slowly in the first half of 2020 with the pace increasing in the second half.
Weakness in airframe materials will continue throughout 2021 consistent with our prior estimates.
Our defense sales will likely grow it at a more modest pace, compared to 2020 rates.
Recovery in our other significant markets, namely, energy, and medical is dependent on the global pace of containing the pandemic.
Finally, our electronic sales should continue to expand.
We expect adjusted earnings to improve in Q1 of 2021 relative to Q4 2020 due to a modest demand pickup in segments, continued cost management and lower pension expense.
We expect to Q1 2021 adjusted earnings per share loss of between $0.23 and $0.30 per share.
Let's talk about free cash flow.
We expect to generate between $20 million and $60 million of free cash flow in 2021 prior to our required US defined benefit pension contributions.
Although we get there using the same disciplined applied in 2020 by managing our cost, being disciplined with capital investments and reducing manage working capital and pursuit of our working capital targets.
Now CapEx; we plan to spend between $150 million and $170 million on capital investments in 2021.
We adjusted our 2020 capital spending to reflect the new demand levels.
In 2021 we will maintain that discipline but plan to increase spending marginally in anticipation of coming market recovery.
As announced in December, we will also invest modestly to enhance specialty finishing capabilities within our specialty rolled products operations.
I have good news on our expected 2021 pension plan contributions.
As you know contributions to the US pension plans in 2020 were $130 million.
Due in part to strong 2020 pension asset returns required contributions to the US plans are anticipated to be $87 million in 2021, a reduction of more than $40 million year-over-year.
2021 pension expense will also decrease dropping $17 million year-over-year.
Pension expense will be $23 million in 2021, down from $40 million of recurring pension expense in 2020.
In regard to working capital, we expect to continue improving our levels in 2021.
We will pursue our goal of returning working capital levels to 30% of sales as our key end markets recover.
Working capital reductions related to our transformational project, but will also support the significant improvement.
Overall we expect working capital to be a modest source of cash in 2021 even after contributing significantly to our cash balances in 2020.
Finally, in terms of income taxes we do not expect to be a cash taxpayer in the US for years to come.
That said, we do anticipate paying taxes in certain foreign jurisdictions.
We are not able to provide an estimated annual tax rate for 2021 due to uncertainty of the rates and low earnings.
However we can say that we expect to pay between $10 million and $15 million in cash taxes during the year.
We are proud of what our team has achieved in 2020 and look forward to continuing to build on our efforts to make ATI a leaner and more profitable company.
We are well positioned to benefit from the coming aerospace recovery.
Well, there you have it some pretty good outcomes and we're proud of it, we accomplished a lot in 2020.
Even still great to be starting 2021 was a clear plan and were 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 where 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 is 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 emerging this downturn leaner more profitable ATI.
A fierce competitor not waiting for markets to recover as we gain momentum.
Scott, back to you.
Operator, we are ready for the first question.

user
q4 adjusted loss per share $0.33.
q4 sales rose 10 percent to $658 million.
actions to exit standard stainless sheet products and enhance high-return capabilities on-track.
looking ahead to q1, we expect a continued difficult market environment.
q1 2021 compares to a robust pre-pandemic quarter for ati that included a surge in wide-body jet engine product sales.
for full year 2021, we are optimistic that worst is behind us.
expect our demand to improve in second half of year.

assistant