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Text: Today's discussion is being broadcast on our website at atimetals.com.
Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Donald Newman, Senior Vice President and Chief Financial Officer.
For today's call, we will not display or advance slides as Bob and Don speak.
Their comments will focus on highlights and key messages.
The slides provide additional color and details on our results and outlook.
They are available on our website at atimetals.com.
It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market.
Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic.
First, how we're taking control of what we can control, thus accelerating cost savings and strengthening our position.
Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth.
So first, where we are today.
Our customer connectivity continues to give us the insights to assess market dynamics in the moment.
From this, we gain conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations.
We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond.
As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance.
We accelerated benefits from our cost savings initiatives through aggressive implementation.
This included capacity up, gold dark and quiet facility islands reduced our fixed costs, minimized variable costs with execution on our restructuring programs, eliminated costs to align with demand declines, reduced overhead.
We've intensely reviewed every administrative and nonproduction related expense continuing only what was critical.
Overall, we've significantly variabilized our cost structure.
Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs.
This will be a lasting impact of the actions we've taken during the crisis.
Through it off, our people have been extraordinary.
First and foremost, they're keeping each other safe, while efficiently and consistently delivering critical materials and components to our customers.
The frequent production adjustments we made in response to demand shifts and end market forecasts have not been easy for them.
Growing levels and shift schedules have fluctuated as a result.
I sincerely appreciate the entire team's effort and dedication and personal economic sacrifices.
Their continued actions demonstrate a shared commitment to ATI's future success.
The deliberate actions we've taken and will continue to take are crucial to our ability to emerge a stronger company as the economy recovers.
Looking ahead, we're confident demand will eventually recover.
We expect these difficult times to continue for several quarters to come, but we do believe we're reaching the bottom with some signs of upcoming stability.
Secondly, let's talk about our balance sheet and the solid position it puts us in.
We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule.
Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth.
We're fueling growth in three ways: first, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021.
Next, organically expanding our presence in adjacent high-value markets, where our material science expertise is valued.
And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities and capture profitable core market opportunities.
As we accomplish our growth goals, we'll intensify our presence in aerospace and defense, materials and components.
We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace like margins in adjacent markets along the way.
Looking forward, we're confident that the demand for commercial aerospace products will recover.
We see it as growth deferred, not lost.
No matter what form you believe the coming economic recovery will take, it could be a leak, could be a U, it could be L-shaped.
When you're at the bottom, it's difficult to predict when you'll reach the other side.
But we know we'll get there.
We're positioning ATI to emerge stronger, leaner and more efficient, no matter how the recovery comes.
There are some examples of how I believe we're doing just that.
We're expanding our presence in growth markets like defense.
We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability.
Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term.
Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn.
Defense remains a notable positive exception.
A little more color on our view of what we expect going forward.
Let's start with commercial aerospace.
Both jet engine and airframe continued to decline significantly versus the prior year.
Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with: quarantines, travel restrictions and low 737 MAX production.
Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand.
Fourth quarter jet engine product sales will remain relatively weak as quarantines began to slowly recover.
Specialty materials will likely lag for an additional couple of quarters.
API sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain.
In 2021, ATI will benefit from engine market share gains and new airframe business.
The positive impact from these wins will increase over time as aerospace industry volumes recover.
Our second core market, defense, remains a source of strength.
Excluding titanium armor, ATI's diversified defense sales were up more than 20% year-over-year, led by naval nuclear and military aerospace growth.
Titanium armor plate sales were down significantly due to timing for both a domestic and an international program.
We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect.
Near term, we expect continued growth in the fourth quarter and into 2021.
Next, let's talk about my thoughts on three important adjacent end markets.
Third quarter sales were down significantly in the energy and medical markets and up in electronics.
When it comes to energy's oil and gas submarket, we saw a lack of end-customer demand and a resulting inventory glut, reducing exploration and downstream processing activities worldwide.
We expect this market to remain weak in the fourth quarter.
A bright spot within energy is the specialty energy submarket, including solution control, nuclear and renewables.
These sales grew year-over-year.
And we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects.
Our medical market is principally comprised of biomedical implants and MRI materials.
Sales versus prior year were lower to customers in both categories, mainly due to the challenges presented by COVID.
Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers.
Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter their medical facilities, either due to an effective COVID vaccine or disease treatment protocols.
Finally, electronic sales moved higher year-over-year.
This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales.
We anticipate modest growth trends to continue in the fourth quarter.
I'll spend the next few minutes sharing highlights in three key areas: one, our better-than-expected third quarter financial performance; two, our strong balance sheet and cash position; and three, a look at our Q4 and 2021 expectation.
From a performance standpoint, the adjusted earnings per share loss of $0.38 per share in Q3 is significantly better than our previous guidance of a loss of between $0.62 and $0.72 per share.
Our Q3 performance reflects accelerated cost reductions and an improved mix in portions of our business.
First and foremost, we are managing decisively.
We are making the most of external demand despite market headwinds, and we're controlling what we can, our costs and capital deployment.
Consider this, our third quarter revenue dropped by more than 40% versus prior year, including a 60% decline in our high-value commercial aerospace business.
The revenue drop was largely due to market factors that were not within our control.
When market declines became clear earlier this year, we responded quickly, focusing on cost containment.
Benefits of those efforts can be seen in our Q3 results.
Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin in Q3.
That's a meaningful improvement from the 28% decremental margins captured in Q2, clear improvement resulting from quick action.
Our cost actions are having meaningful impact and they're accelerating.
As Bob described it, we have significantly variabilized our cost structure.
Costs once considered fixed are now variable.
This means we are better prepared to deal with future demand fluctuation.
Also keep in mind that structural cost savings will accelerate profitability in the recovery, expanding margins and increasing our cash conversion.
Looking beyond the income statement, our efforts to preserve free cash flow are producing results as well.
We expect to be free cash flow positive in 2020.
This is made possible through capital spending discipline and our ability to convert working capital into cash.
They took quick actions to protect cash in the near term while maintaining our ability to grow and be recovery ready.
We ended the quarter with approximately $950 million of total liquidity, including $572 million of cash in the bank.
Our debt maturity profile also adds strength to our financial position.
Our next meaningful debt maturity does not occur until 2023, three fiscal years away.
We are focusing on three key levers to drive cash generation: cost structures, inventory levels and capex.
Expect to see continued focus on these three areas in 2021 as we adapt our business to fit dynamic end market demand.
At the same time, we'll continue to protect our strong balance sheet.
These actions will enable us to manage through the down cycle and capitalize on opportunities in the coming up-cycle.
In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing demand stabilization in commercial aerospace.
This starts with jet engine OEMs working to better align production and demand levels.
Airframe OEM inventory destocking is expected to persist in the fourth quarter.
Beyond aerospace, some industrial markets are seeing modest recovery.
Others, namely oil and gas, will likely remain at low levels.
As a result, we expect a fourth quarter adjusted earnings per share loss in the range of $0.36 to $0.44 per share, similar to our third quarter's adjusted EPS.
Moving to our free cash flow guidance.
Our consistent efforts to generate and preserve cash have produced tangible results.
We reduced managed working capital by $115 million in the third quarter in the midst of the steep economic decline.
We expect to further reduce inventory in Q4.
Just as the team quickly pivoted to cost reductions, we managed our capex spending to better match demand.
To that end, we're again lowering our capital spending target for the full year.
Our updated capex forecast range is $125 million to $135 million, about 60% of the original 2020 projections.
We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contribution.
We're able to do this because of the successful achievements in working capital, capex and cost structures, a great accomplishment in the midst of a very challenging environment.
Looking beyond the fourth quarter, we will stay diligent to preserve or even improve on the gains that we made in 2020.
First, we believe that working capital represents an opportunity for further cash flow improvement.
At the end of the third quarter, managed working capital was approximately 50% of revenue.
This compares to 30% at the end of 2019.
We understand what it takes to get back to those 2019 levels, and we plan to make further improvements in 2021.
Next, we'll continue to keep a close eye on our capital spending.
We'll balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels.
Finally, we will stay disciplined on costs.
We will carefully preserve our structural reductions and minimize additions as volumes return to the business.
The way we operate today is fundamentally different than how we used to work.
We will strive to maintain the hard-fought gains.
Your points were right on.
It's been a real team effort in a very uncertain time and much appreciate the contributions of everyone who's part of ATI, our customers and our suppliers.
Our comments today focused on what matters most to our shareholders and to us.
These priorities are at the core of how we lead on a daily basis.
First, we're managing decisively in times of great market uncertainty.
That includes quickly and effectively adjusting our cost structures and inventories to match demand, and we're keeping our people safe.
Secondly, we're preserving cash and maintaining liquidity.
We're preserving our ability to deploy cash accretively for our shareholders.
We'll be recovery ready, capitalizing on industry volume growth as well as our strategic share gains and new business awards.
Finally, we're working with our customers, new and long standing, who value our material science capabilities and advanced process technologies.
Our goal is to be integral to their success, helping them grow, solving even greater challenges together, in so doing, earning an ever-increasing share of their business.
We're taking the actions necessary to emerge from this crisis a stronger, leaner and more focused ATI.
Scott, back to you.
Operator, we are ready for the first question.

user
q3 adjusted loss per share $0.38 excluding items.
expect q4 to be negatively affected by the ongoing pandemic.

assistant