Hello, everyone and welcome to the ATI's First Quarter 2022 Results Call. My name is Charlie, and I'll be the coordinator for today's call. You'll have the opportunity to ask a question at the end of the presentation. I will now hand over to your host Adam Pechart to begin. Adam, please go ahead.

Thank you. Good morning, and welcome to ATI's first quarter 2022 earnings call. This is Adam Pechart filling in for Scott Minder, ATI's VP of Investor Relations and Treasurer, who is not with us today due to illness. 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, Executive Vice President and CFO. Bob and Don will focus on our first quarter highlights and key messages. A supplemental presentation is available on our website. It provides additional color and details on our results and outlook. After our prepared remarks, we'll open the line for questions. As a reminder, our forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now, I'll turn the call over to Bob.

Thanks, Adam. Good morning and thanks for joining us. What we accomplished this quarter builds additional momentum for what we anticipate will be a very strong year for ATI. Our team is performing well, continuing to execute operationally and strategically. Our market conditions are improving. Customer demand accelerated in the latter part of the quarter. These all enhanced our topline growth rate and added to our earnings. I'll use my time today to tell you about three things that really stand out for me about our performance. First, we delivered overall Q1 EBITDA margins of 15%. That's an increase of 430 basis points versus full year 2019. This margin level was achieved despite sales that were nearly 20% lower than 2019 on a run rate basis. Comparisons to 2020 and 2021 are even more favorable. We have fundamentally transformed our business over the past two years. Our results increasingly reflect the value of the actions we've taken. Second, the value of our strategic actions is truly evident in the AA&S segment results. Q1 segment EBITDA margins were over 15%. No question there were a few beneficial tailwinds, but what's really driving this segment's results, structural improvements in our footprint, product mix, and customer profile. Continued operational discipline is also increasing the bottom line. We all know the tailwinds inevitably turn to headwinds. When they do, these structural changes will ensure a solidly profitable business through the cycle. And third, our incremental margins were robust. While sales grew by 20% year-over-year, adjusted EBITDA doubled. That's truly impressive. It's a testament to our team's energy and focus to improve ATI. We all started 2022 with an optimism that the world return to corner on global volatility. What we recognize is that uncertainty remains the norm for all companies. Geopolitical issues in Europe…

Thanks, Bob for a great overview. Here are my headlines for the quarter. Q1 revenue was up 20% year-over-year and 9% sequentially. Our bottom line is growing and our margins are expanding. This reflects the strong underlying demand in our end markets and benefits from our transformation. As a result, we are raising our full year EPS guidance by nearly 60%. I'll explain how these results position ATI for a great 2022 and are creating momentum for 2023. Let's start with our first quarter performance. Sales of $834 million were up 20% year-over-year and 9% sequentially. Earnings growth was even more impressive. We earned adjusted EBITDA of $125 million, up 100% versus prior year, that's 32% growth over Q4 2021. This translated to an adjusted first quarter EPS of $0.40. These adjusted results exclude a few things, a $25 million non-cash charge related to the pending sale of the Sheffield UK operation, a $7 million dollar gain on sale of our Pico Rivera facility, and an $8 million dollar net increase to our reserves, primarily due to a proposed settlement made on a pending litigation matter. On a reported basis, we earned $0.23 per share. Before I cover the segment details, I want to provide some color on an ATI specific tailwind. Bob noted that we recognized some federal employment related subsidies in the first quarter. If you recall, we recognized these same subsidies in smaller amounts in the second half of 2021. First, we received a benefit under the Aviation Manufacturing Jobs Protection program or AMJP to maintain employment levels as the aerospace industry recovers. Second, we recognized employee retention subsidies for maintaining appropriate recovery ready employment levels during the pandemic. In aggregate, these benefits totaled $29 million in Q1. These are meant to offset prior year expenses and…

Thanks, John. I'm sure today's audience can sense just how excited and encouraged we and our leadership team are by our start to 2022. We've got a strong set up heading into the second quarter. Our growing end markets, solid execution, and the team's proactive and creative efforts to address challenges as they arise are driving results and beyond the second quarter, we have great long-term opportunities to profitably expand our business. As excited as we are about our first quarter performance, we also want to keep our long-term goals for ATI in the forefront. We outlined them at our Investor Day in February. They're straightforward, impactful and worth recapping. We intend to grow faster than the market, 9% to 11% annually through 2025. With that growth, we expect ATI's EBITDA margins to increase steadily to 18% to 20% over that same time period. When we hit our profitable growth milestones, we anticipate converting 90% of our net income to cash to further propel growth and returns to shareholders. With our first quarter results and strong second quarter guidance, we're on the path to hit these targets. If you haven't had a chance to go through our Investor Day materials, I encourage you to look -- take a look, listen at what's driving us to a better company than ever before. The video replay and slides are available on our website. Operator, we're ready for the first question.

Our first question comes from Seth Seifman of JP Morgan. Seth, your line is now open.

Hey. Thanks very much and good morning everyone.

Good morning, Seth.

Just wanted to make sure -- good morning. Just wanted to make sure I understand the dynamic kind of pass-throughs in HPMC and what kind of drove the margin, if we took out the subsidy, I hadn't really expected the margin to remain at the Q4 level, but the step down was significant. And so just understanding the pass-throughs there, especially on some of the mill products it sounds like, and how to think about the trajectory of the HPMC margins from here given the different drivers.

Sure. So, this is Don. Let me take a run at that. First of all, in terms of the pass-throughs, the way that you want to think about it for HPMC, we have long-term agreements that allow for the pass through of a good portion of metal price movements. We also have CPI types of adjustments that we're able to get through those same agreements. In addition to that, those are the LTAs. Under the non- LTA transactions or transactional sales, we're able to typically get good recovery in terms of our underlying cost increases through price increases. Now, one thing to keep in mind when you do you think about the pass-through mechanisms under the LTAs is there -- does tend to be a bit of a time lag where there is about a one quarter lag between when the inflation is seen in our cost structures and when the adjustment mechanisms within the LTA allow for the recovery in the prices, so that as you're thinking about the incremental margins in quarter-to-quarter margins, that's one way that you're going to want to think about it. The other thing to keep in mind as you kind of consider the employment incentives that we raised this quarter is the headline numbers $29 million of credits that -- or exempts rather that were recorded in the quarter '22, I believe was related to HPMC. But that's not the whole story. The whole story is those credits are really about helping to make businesses ramp ready. And how is that happening? Well, companies like us are adding new employees all the time. This quarter we added about 500 employees. As you can imagine, when we hire those employees there is training required multiple months ahead of those employees being able to be…

Perfect. Our next question comes from Richard Safran of Seaport Research Partners. Richard, your line is now open.

Bob, Don, Adam, good morning. Scott, hope you get better. So I wanted to follow up on your titanium comments. Boeing said two things on its call, it has a lot of inventory and it suspended imports from Russia. Clearly, there's a lot of share to be gained here. It's also true I think that Boeing isn't unique here de-risking from Russian titanium, this impacts Airbus and the engine manufacturers. So I thought you might expand a bit on your opening remarks and talk about share gains, what your incremental capacity is, the timing of those gains, when we might see it, and if you're already in those discussions with the customers right now and to pick up share? Thanks.

All right. This is a great way -- good morning, Richard -- a great way to get four questions in one here, so I'll try to work out in reverse order. So I would say that the major OEMs are very energetic and focused, making sure they have their titanium supplies in line for the long term. So we do see a lot of activity, expect the second quarter to be a really busy time working with the customers to try to sort that out. And the second piece of your question I think from an industry perspective, I think the titanium aero quality melt will be the primary stress point that people are going to work through. So I think you'll see people in the industry today that they're looking at some of the, I'd call it bottleneck management 101 techniques, or you look at the product mix that you have, are you optimizing through the bottleneck, and for us, I think it will be -- and the industry, it's going to be the melt side. It's probably about 30% of the world's titanium aero quality melt that's kind of at-risk here. So I think what you're going to see through the course of 2022 is positioning for 2023 and beyond. Our lead times are out into the fourth quarter today. That's really -- our order book is really driven by current demand, no real share shifts. And as we look to 2023, we'll do the usual incremental small projects to debottleneck some of our downstream and worry about the melt, but I think what you'll see is an opportunity for reallocation of shares 2023 and beyond. It's too early to speculate as to what that is. But from our standpoint, if you go back to Investor Day, we were clear that we feel we have the capacity to support the build rate projections through 2026 which was -- financially we built in about 100 narrow bodies and 20 wide bodies per month. So if you think about where we are in the widebody production today we have plenty of upside. And as we've said before, we don't produce to build rates, we produce to firm orders. And when we do that, we don't really invest capital without firm customer commitment. So at this point, I think we're probably about 90 days away from giving you a good answer on share shifts, but I think I would just leave you with the thought that there is a lot of activity and we expect to be in a good position to gain from that going forward, but too premature to really make any commitments.

Perfect. Our next question is Phil Gibbs from KeyBanc Capital. Phil, your line is now open.

Yeah. Thanks very much. Don, on the side of high Performance Materials and Composites in the first quarter. If we were to assume that you effectively had proper timing of raw materials and pricing, you noted the one quarter lag, and I think in your adjusted result excluding subsidies it was something like 13.5% margin. Now, if those things were aligned, what would that margin -- what would have looked like? Is it a drag of 300 bps or 200 bps or what type of number should we be thinking that you're going to recover?

Well, so it's hard for me to give you a solid number on that lag effect. What I would say is if you just start with the margins for the quarter and adjust for -- directionally for credits to kind of pull out those credits and the offset -- offsetting expenses related to it, you'd be approaching about 16% EBITDA margins. Generally, yeah, I could see where that one quarter lag could push you up into probably the upper teens. At the present time, but it's just a swaying estimate off top of my head.

That makes sense. And then on the side of net working capital, clearly, a big increase there. I guess within that, how much of that was volume metric versus inflation related because obviously, everything that you consume has gone up materially in the last three months to six months. And then what's the path as we should think about beyond potential net working capital release or stabilization moving ahead?

Sure. So the first answer is if you look at what happened with managed working capital in, in the quarter, the inventory was up about $140 million, about two-thirds of that increase was tied to commodity price increases. The remainder is, I would say volume related. It has to do with us ensuring that we've got adequate materials in place for the ramp to satisfy our customers' needs. It's also addressing some of the underlying risks that came up with Russia's invasion of Ukraine. We took some proactive steps to make sure that we had inventory for things for example like nickel that were on the ground and it's a disruption of supply which there hasn't been at this present time, but if there was a disruption then we are in a good position to continue to produce for our customers. And I think, as you look further out what you should expect is, number one, we absolutely have not side of our target of getting our managed working capital back down into that 30% range. We certainly expect that we'll be there by the end of the year, all other things being equal. And I think also I mentioned in the prepared remarks, some of the headway that our teams are making around managing our inventory in a more efficient way. And we saw a 10% improvement in inventory turns management. I think that's early indicator that what we're focused on as a team is working.

Our next question comes from Gautam Khanna of Cowen. Gautam, your line is now open.

Hey, thank you. I was curious if you could talk about on the titanium share opportunity, are you guys engaged with not just the air-framers but the engine manufacturers like specifically Safran, which you talked about sourcing about half of its titanium needs from VSMPO. I'm just wondering -- you guys used to be a big supplier there, I don't know if you still are and if those conversations are happening now.

Yeah. Good morning, Adam. In terms of titanium, we break our business down into the industrial side, which we're actually taking a break in the short term with our joint venture and kind of moving away from that in the short term, but then you get into this standard quality for structures and then the rotating quality for engines. And I would just be really clear that everyone who is in the rotating quality titanium industry is looking at alternatives. So I think the answer to your question is, yep, we've heard from them, right? And we continue to hear from everyone. I think some of the engine manufacturers are more titanium intense than others based on the parts they manufacturer and where they fit in the supply chain. But I think they're all acting reasonably and proactively looking to make sure that this is not the issue that slows down the supply chain. So I give them credit for that. I'm trying to get real estimates in terms of how much of a potential Russian supply is going to be displaced and for how long. It's probably the biggest issue. I think in the current time there is a lot of focus on 2023, making sure they're positioned for 2023 and into early 2024, and then there's kind of some longer term opportunities that come after that. So I've kind of bifurcated near-term, long term. But the long-winded answer to your simple question is yep, we've heard from them.

Okay. And I would presume that you guys, like you said, looking for long-term volume commitments and attractive pricing. Do you think the customers are willing to go down that path of better commitments for you guys or are they threatening to self-certify? I'm just curious like what's the urgency on their end to move forward, and then I that.

Yeah. Good question. Just to be really fair to them, I think they are acting with urgency, and I think they are acting deliberately and intentionally to make sure that they have the supply commitments in place, I think they are understanding that the world is a changing place as it relates to inflation around energy, transportation and certainly the raw material component. So – in my conversations and it does get to my level, we do hear a lot about how they're thinking differently about their procurement. Clearly, they would not want to miss an airplane delivery for a dollar or a pound here or there. So the bottom line is, we're in a good position to solve the challenge they're now facing. It wasn't a problem of our making and it was a problem of their making, but because of the capabilities and the range of products that we supply, we're in the mix because we have to be part of their solution. So I think that the answer is, they're acting with urgency, they leave in what we can bring to them. And over the last few years, we've become very good at quickly assessing potential issues and dynamically reacting and that's kind of one of the outcomes of leadership in the COVID environment is they just have to adapt and I think that's what they're doing. It's hard politically in some areas of the world to do those kinds of things, but I think they're trying to do the right thing.

And our next question comes from Josh Sullivan of The Benchmark Company. Josh, your line is now open.

Hey. Good morning.

Good morning, Josh.

Just on the widebody MRO activity, what type of product flow are you seeing or expecting through the year? Are you able to see any difference between demand for heavier versus a lighter maintenance? Just anything to point to either uptick existing fleet usage, bringing back aircraft from long-term storage. Just trying to get some more color on what you're seeing in that widebody demand in the aftermarket?

Yeah. We normally say well, we don't really see aftermarket demand separated from OEM original equipment type demand, but because of the unique nature of the widebody business we are actually seeing more specific MRO activity. So I think there is some engine programs that are going through. I call them upgrades or upgrade packages, so we're seeing some of that. We're seeing the shop visits accelerating in older product lines plus freighters, seeing a lot of activity there. And I think we're starting to see getting ready to refresh for the uptick on the international routes. So I would say at the moment our MRO business is anywhere from 50% to 75% kind of above the normal rate percent of -- if you look at our business and you say, hey, what percent is MRO? It's probably a quarter or so. We're probably as a percentage seeing much higher MRO business to the tune of 50%, 60%, 70% depending on the hard, depending on the program, depending on the supplier, but it's been strong coming into ‘20 -- started in 2021, it's been strong through 2022, and every indication is it's going to be strong through 2023.

Got it. And then just one aerospace titanium gets the headlines on potential Russian supply chain de-risking, but just given the special capabilities at the HRPF facilities, are there any emerging Russian related opportunities there?

Yeah, we think so. One of the products that we have to figure out for ourselves would be what people call pack rolled sheet and the titanium space. It's not a place that we've historically played, but there is a tremendous pull and customer commitment to pull us into that. The HRPF is a huge enabler to be able to move forward there. So I think you'll see that. As also from our -- the plate perspective in terms of capabilities that we didn't have, it seems like pre HRPF was a long time ago but it really wasn't from an aerospace contracting perspective. So we're able to leverage things like gauge control and profile control which is key to manufacturing in the aerospace machining space. So I think we are seeing some of those. I think we're going to take full advantage of it. The other thing we're doing as part of our transformation away from stainless is a beautiful new bright and neo (ph) furnace as part of our transformation will give us better properties. For formidability you think about super plastically form car. So you think about dimensional control going into a press. There was -- the combination of the HRPF plus this new bright and neo, it's going to be exciting news to the industry versus the competitive benchmarks. So I think to answer your questions, yeah, we're getting a lot of pull and we're pretty excited to finally be talking about the startup and ramp of this stuff versus just the building of it.

Our next question comes from David Strauss of Barclays. David, your line is now open.

Hi. Good morning. This is actually Josh Corn on for David. So you had mentioned the 90% free cash flow conversion target at the Investor Day back in February. So can you just talk about why free cash flow conversion is only around 90%. If CapEx is going to be near DNA levels? No pension contributions and working capital contributing to cash.

53:59 Yeah. This is Don. So there was a target for everyone else's benefit, that was a target that we talked about in our Investor call as we discussed 2025 and in our trajectory to our 2025. What I would say is that, Josh, we understand all the levers that are available to us. I'll start with profitability and then obviously, managing your capital deployment including managed working capital. We are in the right glide path to pension and what I would say in direct answer to your question, 90% is a great start. And it doesn't mean that's our endpoint. We're planning on attacking that objective and doing everything we can to push right past it and do better than 90%.

Perfect. Our next question comes from Paretosh Misra of Berenberg. Paretosh, your line is now open.

Thanks. Good morning and thanks for taking my question. I was hoping you could just discuss the major moving parts in your guidance versus three months ago. So 787 delays were probably a drag, but maybe you saw incremental strength that -- narrowbody demand. So, yeah, just if you could recap what has changed in your outlook versus three months ago?

Yeah. This is -- again, this is Don. So let me kind of give you the high level in terms of the reason for the increase. And if it's all right, I mean there is interesting information I guess around the move to Q2. But I think what's more interesting is what's driving the full year guidance that we provided, up 60%. So long-short, we are seeing increased demand across all of our key end markets, point that's just a period end point. And so with the strong demand in our Aerospace or jet engine as well as airframe going beyond that, we are seeing growth in the defense end markets as well as medical and other key end markets. That is a key driver in the increase in our expectations around earnings. And that's -- those are our tailwinds that we saw certainly late in 2021, but certainly they picked up pace in the first quarter. And there's a number of reasons for that I think, underlying demand, recovery of the -- of air travel. Certainly, the market opportunities that are being created through the disruptions that happened through Russia, et cetera., all of those are positive in terms of increasing demand in our business. That's all that, so that's a top line, right? That's all that, we put in place the right mechanisms to manage our cost structures, starting in 2020 and through 2021, those structural cost changes that we made are continuing to benefit our bottom line. Our organization learned a lot through the downturn in terms of managing costs and so those are benefits that we expect will continue to deliver. Add to all of that the transformation around our Specialty Rolled Products business is being executed extremely well, and in combination with the other initiatives we have around improving our mix, all of those contribute to a significant uptick in terms of our expectations for the full year.

Perfect. Our final question of the day comes from Timna Tanners of Wolfe Research. Timna, your line is now open.

Okay. Thanks very much. Just wanted to understand and sorry if I missed it, the new comment on Slide 7 that says evaluating need for additional strategic raw materials. And I was still a little perplexed with the comment that you have a modest use of managed working capital, but obviously a big move. So maybe you can also help us understand what's embedded in your guidance to raw materials prices. Thanks.

Yeah. As you know Timna, we haven't changed our guidance in terms of free cash flow for the full year. We adjusted our EPS guidance by about 60%. But the long and the short as you take a step back and you look at okay, what's happening with their managed working capital in Q1, and then how should you think about that for the balance of the year. Let me give you some data points. In Q1, we saw our inventory balances increased by $140 million, and I think I mentioned earlier, two-thirds of that increase is due to commodity prices increase in Q1. Secondly, with a number of dynamics, first dynamic will be the ramp. The ramp at least in our business is picking up pace. And so we made the decision that we would ensure that we have the right inventory in place to meet the ramp demand that our customers are signaling to us. So we put some additional inventory in place for that. Add to that, the disruptions in raw material supply chains around things like nickel that are tied to what's happening in Russia. And in that regard, we made some proactive decisions very early on in Q1 to make sure that we had nickel supply tied up so that if there was a disruption of nickel coming out of Russia or some ripple effect of it, we are still in the position where we can make the products and meet our customers' demand. So with all that, we continue to look at the ramp, the pace of the ramp, as well as the supply chain. What's happening geopolitically and making decisions as to whether we need to continue to maintain safety stock or whether we would look to release some of that safety stock and unlock that cash and bring it back into our cash balances. So trying to be very thoughtful and strategic, and that's what you're seeing in terms of our current working capital balances and why we decided that at this point, we kind of hit the pause in terms of giving updated cash flow guidance and like Q2 play out a little bit.

Perfect. At this time, we currently have no further questions. So I'll hand back over to Adam Pechart for any closing remarks.

Thank you. Bob, any last thoughts before we conclude the call?

Yeah. Thanks, Adam. I certainly do. Number one, best wishes to ATI's Scott Minder. He's a little be one of the weather today, which is really unusual for Scott. So -- but its impact on the prep for today, it was significant, and I appreciate it. These -- one of our best salespeople in the industry. So that helps a lot. We'd be back in action soon. For those of you who missed them probably later this afternoon, but you got hard man to hold down. The other one is Adam, thanks for jumping in. I'm sure managing Don and I through a call process like this is as close to a career building experience as we can offer today. So thanks for doing that. And with Scott on the bench, it's a great appetite for me to go off script for a minute and I was probably a little nervous but a couple of final thoughts. Number one is a shout out to our 400 employees or so at our forging operation in Eastern Poland, it's 50 miles, 60 miles from the Ukrainian border and we appreciate all day and their community are doing to support the influx of Ukrainian refugees. We're proud of what they're doing and support them from a far, but the big scheme of things we're talking about today, that's a bigger issue we appreciate what they're doing. But as far as the balance of ATI and all those things that are going on, we are moving quickly to being that aerospace and defense leader that we talked about in Investor Day. Q1 should demonstrate the progress we're making. I'd leave you with the thought that we have the team to win, they are totally committed to doing the right things the right way to…

Thanks, Rob. And thanks to everyone for joining us today. This concludes our Q1 2022 earnings call.