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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 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.
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.
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.
And in Europe, we're seeing mixed signals as vaccination rates vary across the region.
Since 2020, we've been laser-focused on streamlining our cost structures to improve our competitiveness and maintaining healthy cash balances to weather a storm of unpredictable duration.
Looking forward, our cash balances will fund working capital to support long lead time customer orders as the economic recovery takes hold.
Self-improvement actions continue and they'll make us a stronger company.
On an earnings per share basis, as I mentioned earlier, we lost $0.06 per share versus our guidance range of a loss between $0.23 and $0.30.
Our dedication to more closely aligning capacity with near-term demand was a key contributor to achieving first quarter results that exceeded expectations.
There were two additional drivers of our financial outperformance, both related to the growing expectation for a global economic recovery.
First and foremost, raw material prices rose significantly leading up to and within the quarter.
Nickel, ferrochrome and cobalt increases led to higher surcharge pricing and favorable timing between higher selling prices and lower inventory values, largely in our Specialty Rolled Products business.
These year-over-year tailwinds are outside of our control and are neither predictable nor sustainable.
This quarter, favorable metal prices provided a benefit of over $20 million or about $0.19 per share in total and $0.08 more than the metal price assumptions used for our Q1 guidance.
Early in Q2, metal prices retreated but have recently stabilized.
As a result, we anticipate a modest headwind from raw materials in the second quarter.
Second, our Precision Rolled Specialty Strip business in China, known as STAL, exceeded expectations with the strongest quarterly earnings in its history.
Our local team following the Chinese government's recommendation to avoid travel over the Lunar New Year holiday, instead worked diligently to fulfill our significant customer order backlog.
I'm pleased to report that our third major increment of capacity, which came online in 2019, is performing well, serving continued strong customer demand in the region.
As I mentioned earlier, we're seeing continued modest demand recovery for our jet engine forgings and the first signs of recovery for our other jet engine materials.
Those positive signs were largely accounted for in our original guidance range.
While an extended recovery in our markets will continue to dampen our results, our focus on what's within our control is making a difference.
Don will provide additional details on our financial performance in a few minutes.
Now let's shift to what's going on within ATI.
As we often discussed in 2020, our decremental margins benefited from our decisive and structural cost reduction actions.
First quarter 2021, year-over-year decremental margins were 16% for ATI overall, marking a significant improvement from prior quarters.
It's worth noting that we've maintained this key metric below 30% in each pandemic-impacted quarter to date.
The actions required to make this trend possible were comprehensive and significant, and the results are visible and impactful.
Most importantly, they're sustainable for the long term.
Prior to the pandemic, we began a significant growth capital project within our HPMC segment.
This project expands our isothermal forging capacity and related heat treating, machining and testing capabilities.
It's required to support future jet engine demand, including our recent narrowbody-related share gain.
The new machining and testing capabilities are operational.
Don and I visited this new facility in Appleton, Wisconsin a few weeks ago, and were impressed by its advanced machining capabilities and technologies.
Over the next two quarters, additional portions of this multiyear investment will be completed.
At the same time, we're seeing a solid uptick in demand for components made possible by these new investments well ahead of industry production growth rate.
These new assets are on track to provide growth for HPMC's top line and improve its bottom line for years to come.
Moving to the AA&S segment.
In December, we announced plans to transform our Specialty Rolled Products business, exiting low-margin standard stainless sheet products and eliminating associated costs and investments.
We remain on track to complete this footprint rationalization in the second half of the year.
The current strike by the United Steelworkers does not change our plans or our time line.
Each of our business units must earn more than its cost of capital on a stand-alone basis.
This means having cost structures and capital investment aligned to its profit-making capability.
We dispassionately apply this standard across our business portfolio over a complete industry cycle.
The Specialty Rolled Products business has struggled to consistently meet this profitability threshold for some time.
Without transformation, it will not meet this objective in the foreseeable future.
So we're decisively taking the actions necessary to fix it.
This is critical not just to survive, but to thrive against global competitors.
Otherwise, the business will continue to wither and die.
The performance over the last quarter confirms that our strategic transformation is the right course of action.
When we successfully transformed, we'll have a streamlined, more profitable and thriving Specialty Rolled Products business, focused on delivering high value in our key end markets.
Our AA&S transformation strategy also includes growth in high-value materials and increased utilization rates at our HRPF.
I'm pleased to report progress on both objectives in 2021.
As a result of our commercial and operational team's hard work, we earned two significant customer wins that will benefit ATI and the AA&S segment going forward.
We were awarded a contract for roughly $40 million of specialty nickel alloy sheet materials for use in a pipeline off the coast of South America.
We're in the process of finalizing product testing with the customer and expect to deliver the full value of the contract in the second half of 2021.
Bidding activity in this market space remains active, and we expect continued success over the next several quarters.
Second, we signed a multiyear extension to our existing long-term agreement with Boeing to supply titanium mill products for both of our operating segments.
This share-based agreement provides the opportunity to gain share over the contract term through emergent demand.
Our long-term titanium raw material agreement, providing the inputs to our mill product supply chain, remains in place throughout this extension.
This removes the variability associated with raw material prices over the term of the Boeing agreement.
While important for our long-term market position, we expect subdued financial benefits from the airframe submarket until widebody aircraft production improves.
Now I'll address the ongoing strike by our USW-represented employees at several facilities within our Specialty Rolled Products business unit.
We're incredibly disappointed that the union leadership chose this course of action.
No one wins in a strike, not customers, not communities, not employees or their families.
At a time when we're losing money, we have a generous four-year contract proposal on the table.
We want our USW-represented employees to come back to work.
We're offering annual raises as well as a premium free healthcare plan for the first three contract years.
Beginning in year four, we're asking them to contribute modestly to their healthcare cost.
We know it's possible.
Our other USW-represented and nonrepresented employees already do, so do their USW-represented counterparts at our close competitor.
We must find an equitable mechanism to mitigate the impact of healthcare cost inflation.
We can't continue to shoulder this burden alone.
We're committed to reaching an agreement that both rewards our hard-working employees and contributes to the long-term viability of our Specialty Rolled Products business.
We'll persevere to create an appropriate and predictable cost structure for this business.
In the meantime, we're successfully deploying our business continuity plan to operate the affected facilities.
While this plan will take time to fully implement, the operations are gaining momentum, and we expect to reach our run rate goals in June.
We're absolutely delivering on orders at the required quality levels.
We're quoting and winning new business.
We've partnered with our customers to understand their needs against our projected capacity, prioritizing our production for what's most critical to them.
This includes the high-value nickel alloys for the pipeline project I mentioned earlier.
They're protecting our business, investing their time and energy in ATI's future.
Their dedication provides the opportunity for the USW-represented employees, who have chosen to strike to their jobs, to return to.
Our competitors are hoping we fail.
I'm confident we won't.
Let me emphasize one more point.
Would we rather be operating with our longtime USW-represented employees in place?
That's why we've improved our offer repeatedly throughout negotiations and worked hard to address the issues between us.
And with that, let me conclude my opening comments with a perspective on our performance and outlook by end market.
Let's start with our most significant market, commercial aerospace, specifically for our jet engine forgings and materials.
The fourth quarter 2020's modest improvement trend continued with sales of our advanced isothermal and hot-die forgings improving faster than our specialty material.
Although jet engine sales declined significantly versus a robust prior year quarter, they grew nearly 30% sequentially.
As a reminder, our forgings are more finished components with shorter lead times compared to our other engine materials.
Forgings demand growth is directly linked to higher jet engine builds and additionally, in our case, to share gains.
All of this is driven by increasing narrowbody production rates.
Our specialty materials tend to have longer lead times and are delivered to intermediate forgers, both internally and externally.
Inventory levels differ between materials and customers, which leads to today's multispeed demand recovery.
With increasing OEM production rates, we expect jet engine customer destocking to be largely complete in the second half of the year.
At that point, we anticipate our forgings and materials growth rates will more closely align with our customers' requirements.
We expect our jet engine product sales and related earnings to continue improving across 2021, again, driven mainly by narrowbody production increases, share gains and our previously implemented margin improvement actions.
We saw continued lower year-over-year sales, as expected, due to lackluster international travel demand, impacting widebody production rates.
These planes consume a large percentage of our total airframe titanium sales.
We expect our primary OEM customer to continue to destock across 2021, with new business from another large global OEM, partially offsetting the decline in the second half of the year.
We agree with industry analysts' projections that widebody production will remain at low levels for an extended time.
We've adjusted our cost structure accordingly.
We continue to see sales growth adding to our double-digit year-over-year gains in 2020.
First quarter sales growth was very robust for military aerospace products, including jet engines, airframes and rotorcraft.
As expected, this was partially offset by a steep decline in ground vehicle armor plate as our primary customer completed the initial phase of a large product program.
Looking ahead, we expect continued military aerospace growth and ongoing solid demand levels for naval nuclear products.
We'll see lower armor sales in the second quarter in advance of a new customer program kicking off later in 2021.
In total, we anticipate overall defense market growth in 2021 and beyond as we expand in new applications, materials and customers.
Shifting to our broader energy markets.
Sales declined year-over-year but at a slower pace than in previous quarters.
Sales to our specialty energy markets expanded including robust double-digit growth for nuclear energy and pollution and control material.
Sales to our traditional oil and gas markets declined versus prior year, but at a slower rate than in the most recent quarters.
Improving demand for fuel needed to support travel and commerce is driving an increase in upstream production activity.
Additionally, the market for clad pipe applications continues to gain momentum.
As I noted earlier, we recently won a contract worth roughly $40 million for nickel alloy clad pipe materials to be produced and shipped in the second half of 2021.
Looking ahead, we expect oil and gas market conditions to continue to improve with the coming economic recovery.
We anticipate ongoing growth in specialty energy markets, likely at a slower pace as compared to the first quarter.
In our smaller electronics and medical markets, Q1 produced mixed results.
On the positive side, we saw ongoing strong electronics customer demand for both Precision Rolled Specialty Strip in Asia and for our growing specialty alloy powders globally.
The latter materials are used in a wide variety of next-generation consumer products, including 5G networks, autonomous vehicles and advanced computing.
We expect continued year-over-year electronics market growth in 2021, but at a slower pace than the first quarter.
In our medical markets, in the first quarter, both MRI and implant material sales continued to be negatively impacted by COVID challenges that included restricted access to hospitals and lower elective surgery volume.
As we enter Q2, we're seeing increased forward order commitments.
We expect our sales in the medical market to improve in the second half of this year.
Finally, another potentially significant development is a likely national infrastructure improvement plan currently unfolding in the U.S. ATI would indirectly benefit in two ways: first, this program will create jobs, leading to increased discretionary spending for travel and consumer goods.
The delivery of people, products and materials require airplanes, trucks and cars that consume fuel.
This will benefit ATI's two largest markets, aerospace and energy.
Second, and opportunistically, ATI will indirectly benefit from increased building material consumption.
While ATI does not produce these basic materials, we're a key link in a cost-effective supply chain for those who do.
Our HRPF is uniquely positioned to generate increased cash flow from rolling carbon steel slabs for domestic producers.
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.
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.
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.
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.
Operator, we're ready for the first question.

user
q1 loss per share $0.06.
looking ahead to q2, expect continued modest demand recovery for our jet engine products.
expect to see continued margin improvement in our hpmc segment in 2021.

assistant