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Text: Today's discussion is being broadcast on our website.
Participating in today's call are Bob Wetherbee, Board Chair, President and CEO; and Don Newman, Senior Vice President and CFO.
Bob and Don will focus on our second quarter highlights and key messages, but may refer to certain slides within their remarks.
These slides are available on our website.
They provide additional color and details on our results and outlook.
Here we are over a year since the world went into lockdown as a result of the COVID-19 pandemic.
So much has changed in the last four quarters, and it's easy to focus on the more challenging aspects of this period.
At the same time, it's important to remember that we also changed some things, those within our control for the better.
Like many, we quickly innovated within our digital technology infrastructure to thrive on remote collaboration.
Technology allowed us to streamline our processes and work more efficiently overall.
We'll continue to drive these improvements utilizing new skills and tools to provide more flexibility to our employees and create better connections with our customers, and we'll capture the associated structural cost savings.
I'm pleased to see millions of people returning to the skies for the summer travel season.
Every day seems to bring another sign of recovery in airframe and jet engine demand.
The current economic reawakening and everything from travel to consumer goods to energy is real.
Despite lingering pandemic-related uncertainties, I'm confident the desire to travel is significant and growing worldwide.
Ultimately, that drives the sustained lengthy backlog for any airliner programs.
At ATI, we're ready to produce what our customers need.
With that as a backdrop, we generated second quarter financial results that showcase the improving trends in our end markets.
At the same time, they reflect the negative impact of the recently concluded strike by the United Steelworkers at our Specialty Rolled Products or SRP business.
Excluding the $40 million cost attributed to the strike and a small improvement in our restructuring reserves, we lost $0.12 per share in the second quarter.
Despite the earnings loss, the aerospace recovery is readily apparent beneath the headline numbers.
Our jet engine product revenues were up over 20% compared to the first quarter 2021.
The High Performance Materials & Components segment, or HPMC, saw its margins improve by more than 200 basis points sequentially and nearly 300 basis points year-over-year.
Very good news that Don will cover in more depth in a few minutes.
As we discussed on the first quarter earnings call in April, we were incredibly disappointed that the union leadership chose to call a strike at our major SRP operating locations.
Our robust continuity plans allowed us to maintain operations during the strike.
The new 4-year labor agreement was ratified on July 13.
Many represented employees returned to their positions within a week of ratification.
We're safely and efficiently ramping up operations to their prior production levels.
We're on track and expect to be back to full production capabilities in September.
I've been asked many times by many people inside and outside of ATI, some form of the question, was the strike worth it?
Clearly, we would have preferred to continue negotiating to reach an agreement without a work stoppage.
A competitive cost structure for this business is imperative.
Left unresolved, we'd be facing rapidly escalating healthcare costs that were on a trajectory to double every seven years.
Product pricing can increase fast enough to offset that level of healthcare inflation.
The SRP business would have fallen behind its competition.
We were compelled to act now to find a solution.
Under this contract, annual healthcare cost inflation will be capped at 3.5%.
The represented employees are responsible to take any necessary actions required to cover annual overage amounts.
The SRP business is now appropriately focused on getting back to full speed, providing our customers with the materials and components they need.
To close out my comments related to the SRP business, I have two pieces of good news to share.
First, the transformation initiative to exit standard stainless sheet products is on track and will be completed by year-end 2021 as planned.
We're making excellent progress on consolidating our footprint.
Second, we recently signed a long-term agreement with JSW Steel USA to toll convert a significant percentage of their Ohio-produced carbon steel slabs through our hot rolling and processing facility in Pennsylvania.
This multiyear agreement provides a meaningful opportunity to increase our asset utilization and cash flow.
We're happy to partner with JSW to bring the exceptional quality and gauge control of our world-class HRPF to their customers.
We're currently ramping up production.
Congratulations to the operating team for setting a production record for carbon steel toll conversion volume in the month of June, even in the midst of the strike at this facility.
So what are we seeing in our key end markets?
Well, for the first time in several quarters, the news is encouraging across most of our portfolio.
This removes the strike impact from the comparison.
I believe this provides the most realistic view of our underlying performance and the true market demand.
Using that context, sales increased sequentially in each of our major end markets with the exception of electronics, which is being compared to record results in Q1.
On a year-to-year basis, we grew sales in most of our key end markets, most notably Energy, up 60%; and Defense, up 22%.
We continue to gain momentum in our largest key market, commercial jet engines.
This is principally driven by the recovery of narrowbody platforms, particularly engine programs used on the A320 and A321 aircraft families.
As we said on the last few calls, the demand recovery began in our Forgings business where lead times are six to nine months ahead of engine production.
Due to the market recovery and our recent share gains, our Forgings revenue exceeded both the prior year and the prior quarter levels.
We expect this positive growth trend to continue and expand as increased production rates on the 737 MAX become a larger part of our order book.
The return to growth in Jet Engine Specialty Materials has lagged Forgings, largely due to pockets of stranded inventory throughout the supply chain.
As expected, this inventory is depleting, albeit at an uneven pace, according to customer and product form.
In the second quarter, sales of our Specialty Materials like Rene 65 for LEAP engines grew significantly compared to the first quarter, but were still below prior year.
We anticipate demand for materials to continue to increase for narrowbody engines, but lag for widebody engines.
This uneven pull, coupled with any remaining channel inventory will make for a somewhat choppy growth trajectory quarter-to-quarter for the balance of the year.
Rounding out commercial aerospace, the airframe market continues to be soft.
This is largely due to the much discussed sluggish demand for widebody aircraft due to subdued international travel and stranded supply chain inventory.
We expect this trend to continue throughout 2021 and possibly into early 2022 as the industry awaits the catalyst for increased widebody production rates.
Our newly won European OEM Airframe business begins production in the second half of 2021, initially at low levels.
This will partially offset the anticipated destocking pressure at our primary domestic airframe customer.
As I mentioned earlier, Defense continues to be a growth market for ATI.
Our broad materials portfolio serves customers with a wide range of demanding applications, ensuring we can be successful under almost any defense budget or economic backdrop.
Our second quarter growth was driven by naval nuclear applications and rotorcraft products to support increased demand for U.S. navy ships and heavy-lift helicopters.
We expect our Defense business to continue to grow and are seeing titanium armor plate demand return in the second half of 2021, in support of a new U.K. armored vehicle program.
Turning to the Energy markets.
We experienced significant growth, largely in our specialty energy portfolio.
These increases primarily supported land-based gas turbine production in Asia where energy demand is increasing.
Sales to civilian nuclear customers added to this growth.
Looking ahead, we see continued improvements in Energy markets as the world slowly reopens from pandemic lockdowns and economic growth drives increasing energy needs.
Wrapping up the market's discussions, results were mixed in our two smaller differentiated markets.
We saw the expected return to growth in medical applications as hospitals perform more elective surgeries and diagnostic testing procedures.
Both our MRI and Implant Materials sales increased sequentially.
We expect demand to improve modestly over the coming quarters, led by MRI.
In the Electronics market, sales decreased from record levels in the first quarter of 2021, but grew year-over-year.
Sales of ATI's specialty alloy powders increased versus both prior periods.
We expect demand to remain strong for these products for the balance of 2021.
I'd like to cover several areas, including our Q2 financial performance, our balance sheet and our outlook.
On a reported basis, ATI lost $0.39 per share in the second quarter.
Excluding $40 million of costs associated with the strike and a small favorable true-up to our restructuring reserves, the company lost $0.12 per share in the second quarter.
To get a true sense of our performance, you have to go beyond the headlines.
As we told you on the last two earnings calls, the commercial aerospace recovery, particularly in jet engines, is gaining momentum and becoming more broad-based within our business.
This is readily apparent in our HPMC segment results where jet engines account for more than 40% of overall segment revenues.
As Bob shared, jet engine revenues increased by more than 20% sequentially for ATI as a whole and for HPMC.
Volumes in our Forgings business continue to expand, building on growth in the prior two quarters.
Underlying demand for our Specialty Materials accelerated meaningfully for the first time since the pandemic began.
In addition to jet engines, revenues in each of HPMC's key end markets grew versus the first quarter, led by specialty energy, including materials for land-based gas turbines produced in Asia.
As a result of our profitable jet engine growth and increased asset utilization, HPMC EBITDA margins increased by 220 basis points compared to the first quarter and nearly 300 basis points versus the second quarter of 2020.
We anticipate third quarter growth across HPMC's key end markets, most notably jet engine and specialty energy and further utilization benefits from increasing production rates across our network.
We expect robust incremental margins over the coming quarters as profitable jet engine revenues increased and structural cost improvements executed throughout 2020 are maintained.
Q2 financial results were clearly impacted by the 105-day strike in the SRP business.
It should be noted that while we removed strike-related costs from segment earnings, segment revenues also declined nearly $140 million versus the first quarter due to plant outages and resulting production declines.
No adjustments were made for these revenue headwinds.
Despite the short-term impacts to 2021 performance, we achieved the needed long-term cost structure changes that will help SRP compete more effectively in the specialty materials marketplace.
Sticking with the AA&S segment, our Precision Rolled Strip business in Asia continues to operate at robust levels with revenues in line with its record-setting first quarter, well above prior year.
Earnings from this business were below first quarter levels due to unfavorable mix.
Earnings from our SA&C business were below the first quarter and prior year, largely due to unfavorable mix and the elevated production costs.
Looking ahead in the AA&S segment, we expect the SRP business to begin to recover in August.
As a result of the strike continuing throughout most of July and the inefficiencies associated with the production reramp, we anticipate approximately $25 million of additional third quarter costs.
We expect the Asian Precision Rolled Strip business to produce solid results in what is generally its strongest seasonal quarter as device manufacturers prepare for the year-end holiday season.
Our SA&C business will likely have marginally lower sequential earnings due to its traditional third quarter preventive maintenance outages.
It's worth noting that second quarter corporate costs and closed company expenses were elevated compared to prior year and prior quarter.
Corporate costs were above prior year largely due to incentive compensation accruals and higher than the prior quarter, mainly due to foreign exchange losses.
Closed company expenses were above first quarter and prior year, primarily due to nonrepeating benefits in both prior periods.
As we've discussed over the past several quarters, our decisive 2020 cost actions continue to benefit the business.
They serve to limit decremental margins while year-over-year revenues declined.
We fully expect them to benefit the bottom line when revenues return to year-over-year growth.
The HPMC segment's second quarter results offer a preview of what is expected in future quarters.
While HPMC revenues were flat versus prior year, earnings grew 30%.
We achieved this earnings growth largely as a result of increasing production rates at many segment facilities coupled with streamlined cost structures.
However, we still have room to improve.
Some facilities such as our nickel powder operations at Bakers, North Carolina, continue to operate on limited schedules due to low demand levels.
While others still produce large quantities of lower-margin transactional products as commercial aerospace markets recover.
Now let's move to the balance sheet and liquidity.
As has been the case throughout the pandemic, we've taken actions to improve our debt profile and have prioritized our balance sheet to ensure an ample cushion to weather any storm.
Despite the recent strike, we ended the quarter with roughly $830 million of total liquidity, including at least $475 million of cash.
Our second quarter managed working capital levels increased, partially from elevated inventories in our SRP business due to strike-related inefficiencies.
Accounts receivable and accounts payable balances also contributed to the second quarter's higher working capital levels.
We continue to focus on inventory velocity as we ramp production.
We expect working capital levels as a percent of sales to improve significantly in the second half of the year.
Looking ahead, we anticipate contributing up to $50 million to our U.S. defined benefit pension plan in the third quarter to improve our funding status and long-term leverage profile.
The deposit is above and beyond minimum contribution requirements, but it is consistent with our intent to reduce our pension exposure.
Additionally, we'll continue to actively manage our debt maturity profile in the coming quarters.
As I said earlier, we expect our Jet Engine business to continue to improve, led by growth in Specialty Materials and our ongoing cost structure benefits.
In the AA&S segment, we anticipate higher sequential SRP volumes.
We'll also see increased maintenance and production costs due to a temporary production outage related to our transformation efforts.
Our SA&C business will be negatively impacted sequentially by its traditional summer maintenance outages, creating lower revenues and higher expenses versus the second quarter.
We expect earnings from our Asian Precision Rolled Strip business to increase sequentially due to higher electronics volumes.
As a result of the new USW labor agreement, we reduced our contractual funding requirements for post-retirement medical benefits.
This will result in a onetime noncash pre-tax gain of approximately $65 million in our third quarter results.
This benefit and associated $15 million tax charge will be excluded from our adjusted earnings.
In aggregate, we expect third quarter adjusted earnings to be between breakeven and a loss of $0.08 per share, excluding strike-related costs and the $65 million post-retirement medical accounting gain.
HPMC segment gains will likely be partially offset by AA&S segment maintenance outages and production expense headwinds.
While we are not able to accurately predict fourth quarter results due to lingering uncertainties in the aerospace production ramp, we expect adjusted earnings to return to profitability in Q4 and continue to improve in 2022.
Finally, due to the negative strike-related earnings impact, we now anticipate full year free cash flow to be at breakeven to slightly positive levels.
We'll work diligently to offset the strike cash impact, continuing to be disciplined on capital spending and aggressively seeking working capital improvements throughout the back half of the year.
I'm confident we'll meet our goal of generating positive free cash flow in 2021.
We're excited to accelerate along this path of end market recovery and fully expect a leaner ATI to showcase its capabilities, expanding market shares and margins along the way.
Our second quarter financial results showed solid sequential improvement.
We're seeing commercial aerospace recovery and our forward order load.
We feel momentum building at ATI, particularly within our HPMC segment.
Improving aerospace market conditions will create an outsized benefit for ATI as we streamlined our cost structures and have higher shares of critical, high-growth customer programs.
I'm confident that when these volumes return to pre-pandemic levels, we'll be an even stronger and more profitable company.
The AA&S segment will be well served by growth in defense, energy, medical and electronics.
Transformation is on track in our Specialty Rolled Products business.
We've made significant and structural changes to rationalize our product portfolio, consolidate and upgrade our footprint and align our cost structure for future success.
We're building a leaner and more profitable SRP business that out earns its cost of capital, has substantial profitable growth opportunities and compete successfully for investment within the company.
I'll close with three important points.
ATI is a growth-focused company with the cost structure we need for success.
We're well positioned in key markets to achieve higher than GDP growth over the long term.
And transformation of our product portfolio is on track and will deliver significant benefits.
With a clear strategy and innovative team, we're accelerating our future.

user
q2 loss per share $0.39.
qtrly adjusted net loss attributable to ati was $0.12 per share.
anticipate continued recovery in our jet engine market in q3 driven by increasing narrow body aircraft production rates.
allegheny technologies - while we expect lingering effects on srp business, production will ramp back toward pre-strike levels across balance of q3.

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