Welcome to the ATI Q2 2022 Earnings Call. My name is Ruby, and I'll be your moderator for today's call. [Operator Instructions] I will now hand over to the team to begin the presentation.

Thank you. Good morning, and welcome to ATI's second quarter 2022 earnings call. 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 second quarter highlights and key messages. A supplemental presentation is available on our website. It provides additional color and details on our results and outlooks. After our prepared remarks, we'll open the line for questions. As a reminder, all 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, Scott. Good morning and thanks for joining us. After many quarters of saying, we're preparing for the ramp, the time has come and I can say with confidence today that we are ramped. Our core markets, namely, aerospace, defense and energy, are accelerating. That's largely due to end customer demand, technology shifts, and geopolitical events. Across our asset base, production is increasing to match this demand. This is what we plan for. We're ready and it feels great. Admittedly, we're in the early phases of this ramp, but we're confident we're positioned in moving forward. I'm not going to say it's easy. We're operating in challenging circumstances, labor markets are tight, and per costs are rising with inflation a global issue. Supply chain are fragile after two years of pandemic reshuffling. Just like during the pandemic we're laser-focused on what matters most. I'm proud how our team is responding. We worked hard to be on track or ahead to fill open positions. We're offsetting inflation with cost reduction initiatives and dynamic pricing. Our operations are producing and delivering high-quality parts and materials in a timely manner. But we are not perfect; we strive for perfection every day at every site. We owe it to our customers and they appreciate our efforts. Across ATI, our actions are translating into strong financial results and significant long-term opportunities. Three things do that for me in our Q2 results. First, revenue growth is accelerating. Our second quarter sales of $960 million were up 15% sequentially, equally supported by both business segments. This marked the highest quarterly sales since Q4 2019. It's worth noting that the previous period was before we exited standard stainless sheet and divested both our Flowform business and our Sheffield operation. The higher base in surcharge pricing provided the tailwind;…

Thanks Bob. Let's start with the bottom line upfront. Our revenue growth is accelerating and is strong in both business segments. Each segment grew the top-line sequentially by at least 14%. Year-over-year growth was even more substantial. That's compared to a prior year period impacted by the pandemic and a labor strike. Adjusted EBITDA margins were nearly 15% in the second quarter. Our adjusted earnings of $0.54 per share is above our guidance range, driven by strong volumes and benefits of our accelerating business transformation. As a result, we're increasing full-year earnings guidance for the second time this year, this time by nearly 40%. With increasing confidence in our forward visibility, we're improving our free cash flow guidance as well. Now, let's dive a little deeper into the second quarter's results. Q2 sales were just below the $1 billion mark at $960 million. We fully expect to cross that billion dollar threshold in the coming quarters, getting back to 2019 levels on a run rate basis. That's after exiting standard stainless sheet products and divesting of Flowform and Sheffield, that's a stunning recovery in a short amount of time. Our earnings and margin improvement were equally impressive. In Q2, we generated adjusted EBITDA of $143 million. For the second quarter in a row, adjusted EBITDA margins roughly 15%. This compares to full-year 2019 margins of 10.7%. We're proud of this achievement. It's a testament to our team's hard work during the pandemic. They ensured we emerge ramp-ready. It also reflects their hard work streamlining cost structures, improving product mix and fully offsetting the negative impact from inflation through mid-year 2022. In our February Investor Day, we gave long-term EBITDA margin guidance of 18% to 20% by the end of 2025. Our 2022 year-to-date results clearly show that we're building momentum.…

Thanks, Don. As I listened to your commentary this morning, I think we agree it's fair to describe our Q2 results as robust, not a word we use a lot, but certainly appropriate for this time. They reflect our decisive actions taken to position us for this moment, this moment with a strong market recovery. Our outlook demonstrates that we expect these positive trends to gain momentum. We expect higher sales, earnings and cash flows. Our end markets are improving, particularly commercial aerospace. Demand for new aircraft and the materials needed to keep them flying are expected to benefit our business for years to come. The defense and energy markets are also contributing to our positive performance and outlook. Our success is not only a function of great markets, but also our team's heavy lifting. And I use the word team purposefully. It's been a total team effort. I'm proud of their achievements, and I know they're proud of what they've done as well. It's not always fun, easy or on a simple schedule, but I'm proud of how they've gotten what they needed to get done, done. We've had a lot going on at ATI. We've put ourselves in a position to be successful and it's paying off. Our cost structures are lean. Our footprint is streamlined and we have the workforce largely in place to accelerate along with our customers' production plans. Our assets and capabilities are unmatched. We've transformed our physical structure, our culture and our performance. Our incredible people are leveraging these tools to unlock new opportunities, create long-term shareholder value like never before. And we recognize we have more work to do. We're challenging ourselves, setting high expectations, and we do what we say we will, we raise those expectations higher. We're truly proven to perform and our customers recognize and reward us for it. Operator, we're ready for the first question.

Thank you. [Operator Instructions]. Our first question is from Richard Safran of Seaport Research Partners. Your line is now open. Please go ahead.

Listen. I'd like to get an industry perspective from you and then I have a follow-up. So given the constraints, what do you think is the ability to supply chain to support a narrow-body rate ramp? And where do you see the major issues? We heard Boeing mentioned 38 a month. We know Airbus is looking for higher rate. But how steep of a narrow-body rate ramp is possible in your view?

Yes. Rich, this is Bob. Good morning and thanks for the question. The question I've been getting pretty regularly for the last six months. Well, the good news in all this though Rich is ATI is not the bottleneck, so that's a good thing. We don't intend to be the bottleneck. But to your question, I think on the ramp speed, we kind of look at the history of how I'm going to talk about narrow-bodies, but narrow-bodies it kind of go up about a build rate of 5 per OEM every six months until they get stable, maybe six months to eight months get that stability in and then make the next ramp, the next five and the next five. So I think we only produce to orders. We don't produce to build rates, but we factor it into our long-term planning with kind of a five for every six months to eight months until they achieve stability. I think they recognize that a stable supply chain that's coming along at their pace is really critical. I think the second part of your question was around where are the problems today? I won't speak to the castings issue. I think a lot of people have talked about that and they're probably closest to it, but I think it's somewhat broader than that. And it's little things, so you see some specialty alloy forging billet supply issues pop-up and become a problem on some of the specialty stuff. You'll see a fire here or a fire there and a melt shop. You'll see deferred maintenance causing a press to break down. I think we're going to see those kinds of issues, coming up that I think castings is probably the biggest issue and then make sure that the forgings demand is keeping up. But we're keeping up with what the industry's forecasting and we have really confidence in the customer dialogue and there've been some recent announcements lately, but we're not seeing anybody take their foot off the accelerator or handoff that throttle. I think 2022 into 2023 is going to be a good ramp for the industry. And we're going to get to these record levels in due time. So hopefully that helps answer your question.

Yes, of course, it does. So next up maybe for Don, because I'd like to ask you about the remarks you just made and I'm not trying to put you on this spot, but in light of GKN, what can you tell us about further share gains and what this means to that long-term forecast you gave back in February? Your remarks now just mentioned like EBITDA margin. So here we are six months later and it looks to me like advanced alloy EBITDA margins ex the Section 232 are pretty much in line with your 2025 guide for mid to high teens. So I'm kind of wondering if share gains make your February guide a bit obsolete. I'm just trying to get a sense of at least how you're thinking about it now.

Yes, I appreciate that perspective. And I agree with you, the business is performing really, really well. To get to the core of what you're asking, we're seeing broad-based demand across many of our key end markets. And in February, in our Investor Conference, we shared a 2025 guidance. And with that, at that point we had what we believe were very healthy and somewhat aggressive growth rates for the top-line and for margin expansion. Then after the conference, obviously some events happened in the world, including the Russian invasion of Ukraine impacted a number of dynamics in the market and has created some opportunity for us. So the core question, I think that you're asking is done with the new world as it exists today are your numbers low. And what I would say is the VSMPO related share gains, for example, that that have come up since our Investor Day are 100% incremental to the information that we shared in our Investor Day in our 2025 targets. So I see upside there would reinforce Rich that the opportunities we're seeing are beyond aerospace. It includes other key end markets in medical and energy. And I would say that the tailwinds that we're seeing are also not just related to the geopolitical stuff that we saw happen with the Russian invasion, although it's certainly impactful. So good news for us is our strategy and our capabilities have put us in a fantastic position and I think we'll see performance certainly at the high-end of the targets that we laid out in our February conference, and it's our goal to certainly beat those targets as time unfolds. We think we have a great opportunity to do that. And then we're also excited this broad-based demand, these tailwinds that we're seeing, look to us to be sustainable for our business and so that's good for all of us.

Our next question is from Phil Gibbs of KeyBanc. Your line is now open. Please go ahead.

Last quarter, you gave a lot of good texture on your jet engine business and it was very heavy in terms of MRO. I think this quarter, while we don't have your opinion yet, it looks like, oh, you would have had to have picked up just given the strength of the baseliner or numbers in the first quarter for MRO. So maybe explain that, the texture of the jet engine business in the second quarter?

Yes. Sure, Phil. I think you're right on both themes, right. So as you might imagine over the last 900 days, our team has spent a lot of time with customers, not only at the air show but one-on-one, and I think the uptick in wide-body MRO demand, the repair business has actually been quite good, quite positive and looks to be sustained, probably sustained through, kind of, this middle-term cycle before they -- the new bills get delivered, and then transitioning into probably some of the narrow-body engine spares demand. So, we've seen an increase -- historically we've said, 25% of our business is really spares. I would say today based on the feedback, it gets closer to 40%. And we think that's going to be for the next couple of years a sustained trend, based on the engine side. So we've gotten more clarity on that over the last 90 days. Now, on the OE demand, I'll tell you, I showed you some of the charts the percentages are staggering, but again, we're starting from a low base, right. So when you look at the percent increases on that, all our major programs, we're well-positioned with the next-generation alloys, we're well-positioned on our next programs, and because we're shipping a lot of those products 12 to 15 months in advance, as long as we get our supply chain stays in sync, which is a day-to-day challenge to make sure we're in sync, we're going to see the OE demand increase pretty well. But I think the spares will stay pretty hot here for the short to medium term. So hopefully that helps.

Yes. So it sounds like to me that if anything, the spares side has really been what's surprising to you all the less, maybe three to six months in terms of its strength.

That would say the last, yes, three to four months. It's been -- it started strong. We got a lot of indications in the middle of the first quarter that since we don't produced anything, but the orders have come in, I mean, just, want to buy incremental forging from us today, we're definitely into Q2 of 2023 booking. And so I think on the spare side, our team is being very conscious of it because it's we've some good products in the wide-body sector on the engine side, and we want to be supportive of those customers because they're -- they've got a engine in for repair or overhaul they want to make it work. So I think that what we're seeing now is more of a sustained trend than just an initial blip.

Okay. Well, that's encouraging. And then one more follow-up just on the third quarter guidance. Mid-point, Don, is $0.54. You just did $0.54. Clearly, the tariff is moving away, labor credits moving away, but you do have the sustained recovery in aerospace. So it's fair to say that in that sequential stability you've got a pickup in HPMC, and that's equally offset by a decline in AA&S?

I don't know I would look for a decline in AA&S. I think we're -- like I said, we're seeing broad-based demand. Clearly the AA& S segment is performing very, very well, as is HPMC. So I think you're going to see good guys on both sides, especially as things unfold for the balance of the year.

Our next question is from Seth Seifman of JPMorgan. Your line is now open. Please go ahead.

Hey, thanks very much, and good morning. So just wanted to ask about one of the key themes we've heard on across the aerospace and defense sector this quarter has been of about sourcing labor and supply chain, but particularly, about sourcing labor given the, the ramp up in activity that you guys have in front of you, both in aerospace, and increasingly it seems in energy, as well. How you're positioned for that? And what, kind of, risks remain around, kind of; having the labor pool to make sure that you can deliver on, on the growth you expect over the next two, three, four quarters?

Yes, great Seth, and good morning. I think when you look at the hiring it starts with recruiting, right. This is a recruiting market, and so we've deployed differently in this ramp than we've ever done before to make sure we have a really qualified, broad, aggressive recruiting team, in the four or five major hubs that we operate, so North Carolina, Pennsylvania, Wisconsin and Oregon. And most of our focus candidly is in Wisconsin, North Carolina, and the team's done a great job. So yes, it's been challenging but we're ahead, at or ahead of pace every given week. It's a onboarding, so it's a weekly scorecard that we look at. In Q1, I think we talked about adding about a thousand positions. To fill that ramp we probably got about 20% to 25% more to go balance of the year. So we feel we're at pace confident when recruiting aggressively. We did a couple of things during the pandemic that are helping us at this point. It's different than some others in the supply chain. Our strategy is to keep each of our operations open. So it was a matter of moving people around, and maybe we had more technical, more skilled people doing less skilled jobs during the pandemic that they'd be able to get back to their jobs. And as we add people we're getting really good employees and onboard and trained quickly without a degradation in productivity. I think that's really been a key, it's hiring and recruiting is one thing but how quickly can you get them up to speed. So I think our strategy there has been good. The Aviation Jobs Protection was helpful. It allowed us to do some things aggressively that we probably wouldn't have done otherwise. And we try to keep as much of the technical talent as we could. But to say the least we're pulling every lever, but we feel like, so far, we're keeping on pace with what we need to do through the balance of the year.

Great, great. That's very helpful. And then maybe just a follow-up a little bit on Richard's question earlier, the level of earnings in AA&S, you mentioned, emphasized that you sought on $100 million in the second quarter. There's a one-timer in there, but based on the EPS guidance for the rest of the year, it doesn't seem like that is coming down materially in the near term. And just in order to make sure that all of our expectations remain in check and don't get out ahead of ourselves, run rating at something close to 100 here for a good part of 2022, are there things in that that are, that we should think about as maybe not sustainable going forward because as we -- as we head to 2023, 2024, 2025, you would think that there's going to be growth in the business and that would lead to potential upside off this level. But just to kind of level that, is there anything in this year that's really not sustainable other than the tariff reimbursement?

Yes. So a couple of things to keep in mind. First, the underlying businesses, both segments are performing really well. As you think about transitioning from the first half of the year into the second half of the year, how should you think about it? Well as you go into Q3 in both of the segments what you would expect to see is some outages in Q3, that's kind of seasonal for us. There's also broader seasonal pullback into Q3 and that has to do with, for example, Europe taking their extended vacations in Western Europe, in the U.S. as well. It's a heavy vacation period, which can impact production that's normal. I think another thing to keep in mind, you pointed out the 232 recoveries, obviously you would pull that out that was roughly $10 million good guide for us in Q2 that won't be repeating in the future. And then we had a modest amount on the HPMC side, in terms of these employment program benefits $6 million. I wouldn't expect that to repeat. So that's one set of things that I would note. Another thing to keep in mind is that how is our business affected by metal prices. Now we've seen a lot of volatility in the first half of the year around commodity prices like nickel. And although, we have significantly reduced the volatility in our business related to metal price movements like nickel, we're -- we still are impacted by it. And so we've been seeing recently where nickel prices have moderated some. And so you would expect that that would create some sequential headwind for AA&S as those metal prices come down. And it affects surcharges and things of that sort, pricing may soften a bit as a result of those commodity prices coming down. So not a lot of specific quantifiable things in that second group, but those are things that you would want to consider. Good news is, we do have this underlying tailwind in multiple end markets. Arrow is an easy thing for everybody on the performance it's point to understand. And we expect that as 2022 unfolds, we'll continue to see full on the business from that standpoint and finish the year quite strong as you can see by the math in our guidance for the full-year. Does that help you a bit?

Our next question is from Gautam Khanna of Cowen. Your line is now open. Please go ahead.

I have a -- good morning. I had a quick follow-up on the titanium share opportunity. I was curious if the EU sanctions, which were I guess taking off of VSMPO specifically, does that reduce the urgency of Airbus or Safran to move away from that source of titanium? Are you seeing any -- I'm just curious, like did that do anything to the pace of negotiations and are those two prospective customers you do expect to gain share with over the next couple years based on the Russia situations?

Yes. Good morning, Gautam. And I think the issue about urgency is your first question. We haven't really seen any change in the level of urgency with anybody in the aerospace supply chain. There's been a tremendous amount of work to set up additional qualifications. There's certainly multi-market that Don referred to in terms of the markets that are looking for titanium shifts. And certainly multi-tier. I think a lot of the commentary focuses on the OEMs, but there's a tremendous amount of procurement or directed buying where people are really concerned about that supply. So I never believe that, they would totally go away from Russian's supply. But I do think they're committed to managing their overall risk levels. And that's kind of what they've said publicly, and it's very much a diversification play to make sure they can deal with any eventual circumstance. So I think most of us who are in this position will qualify and we will win some share. I think they'll also be emergent demand like there always is in this uptake -- uptick. So I do think the industry is repositioning itself, not a 100%, but significantly and yes, we do expect to win share across multiple different places. Not only airframe, but we're seeing it in defense, clearly in terms of armor systems, rotorcraft, engines, all those kinds of things, medical, and then even in the industrial and energy space. We backed away from our unity joint venture on industrial titanium to free up some units and those haven't lasted very long. So there's a lot going on, but I do believe they are going to shift and I do believe there's long-term benefit that will gain from that across the tiers.

That's helpful. And I was wondering if you -- have you guys seen any emergent demand on the precision forging side because of potential bottlenecks with some of your competitors? Did that show up in the quarter or is it showing up in the bookings, right?

Yes. I would say the answer to your question is, yes. I mean, we obviously talked to our customers on a regular basis. I mean, they're looking at various options. There are some places that we're qualified that they haven't fully taken advantage of yet. But Q2 was -- I have to go back and say, the Russian situation developed in late February, early March. So I think with the order lead times, it's probably a late 2023 -- wait late 2022 into 2023 opportunity for us. We're still growing into our share position in Europe that we announced, oh geez, a while back that I hadn't fully been exercised. But on the opportunity side, I would say, yes, there's some upside but it's going to be 2023 answer your question it's in the bookings, right.

Our next question is from David Strauss of Barclays. Your line is now open. Please go ahead.

Hi, thanks. Don, just to follow-up on I think it was Seth’s question. Your EBITDA was $143 million I think in the quarter. What do you view kind of the recurring number as when you strip out the one-timers and kind of the big benefit that you've had from higher nickel prices?

So I mean the easy math of course is to grab the two big chunks that I talked about. So if you start at $143 million and you strip out, it was $9 million to $10 million of 232 recoveries. And then we had about $6 million of federal employment grant types of benefits that gets you to a number kind of in the $130 million range. As far as metal tailwinds in Q2, I would say they're modest. If you're trying to get -- trying to wrap your head around what is kind of a recurring Q2 number, I would say in that certainly $125 million to $130 million plus range, as you think about Q2. And then as you look into the second half of the year, Q3 I laid out, hey, we've got some seasonality, it's normal for our business, but we have this underlying demand. That's really creating some positive tailwinds in the business. And we have a continued transformation of the SRP business. And that that's really -- that transformation is pretty profound. It's impacting the top-line and it's impacting the bottom line of the AA&S segment results. It's improving mix. It's improving margins. We expect that that's going to continue to add benefit as well. And I shared in the pre-prepared comments that, we expect some good guys in the second half around costs related to that transformation, because we have another facility that's going to be shutdown. And we've got some other mixed benefits from the transformation we're expecting. So that's the best -- probably the best color I can give you in terms of how to think about Q2 and then how to think about the go-forward from the second half.

Okay. And on your free cash flow guide, can you walk us through the moving piece on working capital? How you get there? I mean obviously you've had a pretty big inventory and receivable build here in the first half of the year.

Yes. I'm happy to do that. So there's a couple of key data points to think about -- as you're thinking about our managed working capital, which is a really important influence when it comes to our free cash flow guidance. So on the one hand, keep in mind, our target around managed working capital hasn't changed. We were at 30% of sales in 2019. Our target is to get back to 30% of sales and then improve upon that. So as you look at where we ended Q2, we're at 38.5% I believe at the end of the quarter made about 300 basis point improvement in that position, that's great. As you think about going forward, by the time we get to the end of 2022, we expect to be a lot closer to our 30% target. We're going to be in the neighborhood. We're not going to quite get there. But what it clearly indicates is a significant reduction in measuring capital levels from where we are today to where we're going to be at the end of the year. So how's that going to happen? Well, first you want to think about why we're at where we are from our working capital standpoint. For one thing, we did add some strategic inventory and that was tied to what was happening with the Russian invasion of Ukraine. When that was transpiring, we made a strategic decision to add safety stock, strategic inventory in the business. Good news on that is, that elevated our inventory in the short-term de-risked us and we expect that by the end of this fiscal year, we'll burn through that inventory. So that would be a good guide for us. Then one of the reasons why inventory has been elevated in the short-term is…

Our next question is from Paretosh Misra of Berenberg. Your line is now open. Please go ahead.

Thank you. At your Hot-Rolling and Processing Facility, what sort of utilization rates are you seeing? And if you could give us any sense of how these conversion service sales are trending?

Hey, good morning, Paretosh. So this is Bob. I would say we're very pleased with the conversion business at the HRPF. It's actually settling in to being kind of a normal part of the process and we're probably in 60% plus or minus range. It depends on the week, it depends on the month, but it's turned out to be a positive and a positive earnings and cash generator for us, so, so far so good.

And that's good to hear. And then maybe a follow-up are you expecting any major changes in Q3 versus Q2 in any of the corporate items, so corporate cost or depreciation, any of those things?

So short answer is, no, we're not expecting any significant changes in that -- those cost categories.

Our next question is from Josh Sullivan of The Benchmark Company. Your line is now open. Please go ahead.

Just on the incremental defense opportunities in ground vehicles, what could that look like versus previous cycles? You know, a couple of years ago you made an effort to grow your Washington presence, or some titanium programs you've had exposure to. Just wondering what this ground vehicle cycle, if could be more meaningful than historically?

The simple answer is, yes, we expect this cycle to be more meaningful. I think, what we see as an industry trend that plays to our strength is actually light-weighting of military vehicles for a different potential conflict and it was contemplated in the past. So very strong for titanium armor. We've talked in the past about some of the programs we're on, Abrams, AJAX, and recently, there's been the announcement of the MPF opportunity that we see, and also saw the, our Mobile Protected Firepowers is what MPF stands for, I guess, to make sure the acronyms are clear. That's a big opportunity in the titanium armor space and titanium prices. The other thing that's developed over the last six months is the opportunity related to ACUS [ph] and certainly naval nuclear programs have broadened, both submarines and carriers bigger than what we probably anticipated six months ago. Not necessarily in the titanium side, but, you asked ground vehicles, and we do see fairly significant upside to that compared to where we've been basically due to the geopolitical response that, a lot of the NATO countries are investing themselves in.

And what are your thoughts on strategic M&A at this point. You've done a great job seen some portfolio shifting here. What do you see as far as a need or even an opportunity to maybe grow into some new markets at this point?

This is Don. What I would say is we don't want to get too specific in terms of the types of capabilities that we'll be looking for. But what I would say is, and this is going to be consistent of what we talked in our February Investor Conference about when it came to M&A. We are prioritizing A&D and we are prioritizing really unique capabilities that will increase our competitive advantages. And so with that, that means it is focused on differentiated businesses, businesses that have moved a needle from an economic standpoint, from margin standpoint, for us. And so we're being very discerning in terms of what we're interested in and why? And so are we considering opportunities? Yes. But assume that it will be extremely disciplined and well you won't be surprised if we were to pick something up, it will have an A&D focus on generally.

We have no further questions. So I'll hand back to the team for their closing remarks.

Thanks again for all -- to all for joining us today. This concludes our Q2 2022 earnings call.

This concludes today's call. Thank you for joining. You may now disconnect your line.