Good morning. My name is Lauren and I'll be your conference operator today. At this time, I would like to welcome everyone to the ATI Q4 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. A supplemental slide presentation to accompany the prepared remark can be found on the company's website. After the speaker's remarks, there'll be a question-and-answer session. [Operator instructions] At this time, I would like to turn over the call to Tom Wright, the Vice President, Investor Relations and FP&A. Tom, you may begin your conference.

Thank you. Good morning and welcome to ATI's fourth quarter 2022 earnings calls. 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 fourth quarter and full year highlights and key messages. Before starting our prepared remarks, I want to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlook and can be found on our website ATImaterials.com. 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, Tom. Good morning and thanks for joining us. We ended the year strong. ATI's quarterly revenue, once again topped a $1 billion. That's the second quarter in a row, we achieved this milestone. We ended the full year at a run rate of $4 billion in revenue, 37% higher than 2021. We're executing expertly against robust markets. We're meeting our commitments and getting better every day. Today I've summarized our performance in four key headlines. Headline one; we're achieving what we set out to do. In the fourth quarter, we delivered adjusted EBITDA of $140 million. This was driven by continued strength in our core aerospace and defence markets. Adjusted EPS of $0.53 surpassed the midpoint of our November guidance. The team is laser-focused on execution and it shows in our results. On a full year basis, ATI adjusted EBITDA was $549 million or 14% of sales and almost 400 basis point increase over 2021. Adjusted earnings per share was $1.99. We generated $148 million in free cash flow. Don will dive deeper into the financials in a few minutes. Headline two. Our deliberate actions and transformation are delivering the results we projected. It comes down to our team, our capabilities and optimizing our business with discipline. Let me add a little color here starting with our team. As 2022 began, we were on the frontlines of the war for talent, hiring nearly 1,000 new team members during the year. Now with our workforce largely in place, we're focused on accelerating. Our team is quickly moving up the learning curve, now cross-qualifying from one job to multiple jobs to gain flexibility. Their productivity and proficiency grow every day. To those 1,000 new employees, I say, you made a great decision to join ATI. We look forward to performing together…

Thanks Bob. Today, I'll share details on 3 areas of ATI's performance. One, our 2022 Q4 and full year results; two, the 2023 outlook; and three, updates on the 2025 targets shared during our investor conference. Let's start with highlights of our Q4 performance. As Bob noted, Q4 marked our second consecutive quarter with over $1 billion in revenue. Not only are sales up, we're on track with our strategy of shifting product mix to value-add. Aerospace and defence sales were 53% of total revenue in Q4, that's up from 51% in Q3 and up 1,200 basis points from Q4 2021. Q4 2022 EBITDA margins were 13.9% compared to 12.4% in Q4 2021. Value-add sales mix, increased production levels and diligent cost management all contributed to the margin percentage expansion. Fourth quarter EPS was $0.53, $0.01 higher than the midpoint of our guidance range. As we dig further into our performance, I'll highlight a few of the key takeaways as we see them. First, as you can clearly see in our numbers, sales are growing in the differentiated markets where we are valued the most. Secondly, we're improving profitability. Our significantly higher adjusted EBITDA reflects the benefits of our business transformation. Full year 2022 adjusted EBITDA was $549 million, an increase of $258 million and 89% from 2021. Compared to full year 2019, EBITDA increased 25% on revenue that is nearly $300 million below 2019 levels. Full year 2022 adjusted EBITDA margins were 14.3%. That's nearly 400 basis points better than 2021 and 360 basis points higher than 2019. These significant improvements reflect the impact of our transformation, structural cost reductions and continued focus on mix and price improvement. What else contributed to the year-over-year gains volume growth, increased metal prices, $34 million in COVID incentives and $10 million in…

Thanks, Don. I completely agree with you on the significant opportunity that's in front of ATI as well as the fact they were well positioned to go get it. 2022 as a year of growth and preparation for us. Our strategic efforts put us in a strong position across ATI. The markets, ready; orders, in capabilities and equipment, running faster every day with capacity increasing and the team already hard at work. Now we're building on our momentum. We're accelerating to meet and exceed our 2025 targets. We're proud of our 2022 results. More specifically, I'm extremely proud of the team that produced them. We're looking forward to even more to come. We are proven to perform. Operator, we're ready for the first question.

[Operator Instructions] Our first question comes from Richard Safran from Seaport Global.

Bob, I wanted to follow up on your opening continue remarks, Don, this may also be for you as well. I'm trying to get a sense of how to titanium going to affect your mix and margins as we look going forward. I'm wondering if titanium and alloy sales are going to be accretive to margins. And from what I'm gathering based on what you said, and correct me if I'm wrong, it looks like the impact is going to be in some time in '24, if not '25. Is that right?

Yes, this is Don. I'll give you the short answer. Yes, as titanium increases in our mix, we would expect that to be accretive to our margins. And as far as timing goes, we're seeing it unfold now and it will continue to build momentum through 2024 and 2025.

And second here, on your comments about defence, I wanted to know if you could take a little bit longer view on defence growth, how you're thinking about that and how you think that's going to reshape the portfolio and impact your mix. And since you're selling materials, where you own the IP, I'm just wondering how defence margins might compare with commercial margins.

Yes. A couple of questions in there. I'll take the last one first. I think over time, defence margins will approach commercial aero margins for the same basic metal units commercial aerospace tends to have more differentiation in some of the more exotic titanium grades and nickel grades. But over time, for the common specifications, I think they'll be about the same because that's how we're going to manage our capacity. In terms of the opportunities, we are excited about what's going on in defence other than the tragedy in Ukraine that's driving ground vehicle sales. We feel well positioned with naval carriers, submarine fleets, we're benefiting, and we expect to see the benefits of the ACAS program, and those are huge long-term programs. We're excited about that. We've gotten some awards from the next-generation military vehicles, the Mobile Protected Firepower activity that's out there. We see those vehicles coming. Certainly, the Abrams tank is a heavy titanium user for lightweight reasons, and that's exciting and then all kinds of things, including more space. We put kind of defence kind of crosses over between what we see in commercial versus defence, but the commercial space and defence space is really picking up and we see opportunities a little bit longer term, but in our lifetime in hypersonics, right? So you put all those things together, it's a double-digit mid-teens kind of growth for the long term and again, based on differentiated materials that really bring value to the end product. So we feel well positioned and bottom line, lots of mission-critical platforms for the U.S. and all. I hope that -- does that help, Richard?

Of course, it does. Appreciate it.

Our next question is from Phil Gibbs from KeyBanc Capital Markets.

Is this titanium debottlenecking, the 35% from 25% you had mentioned a couple of months ago. Does that involve rescoping the brownfield because I remember the brownfield was 35%. So is this staying at 60%? Or is this moving to 70%?

It's additive to the total mix. So it does not change what we expect to get out of the brownfield investment. So you're right, our total capacity is actually -- is going up to closer to 70%. You did the math right. So we're excited about it. The long lead time items that are on the books order-wise it's going to be really big. We're happy actually that the demand has been so strong and the customer commitments have really been strong, which is why we raised the short-term demand or capacity number from the 25% to the 35%. And we were out there last week, put our hands on them, and it's pretty exciting to see the ramp is underway.

And you feel all this added capacity is supported by customer commitments.

We do. And it's moving from the talk about it to the commit to it phase and a lot of those commitments have been made based on what we're seeing in the market. I think probably the last 90 days, the reality of the demand in 2023 is coming to the market, and we're seeing lots of interest and our lead times are stretching out to show it. So the simple answer is yes. We feel the customers are committing and have committed in many cases, to the capacity.

Do those involve some of these prepayments that you've mentioned? So it sounded like it was a $30 million tailwind to cash in the fourth quarter now, is that $30 million become a $30 million headwind as you ship against those commitments next year?

I wouldn't call it a headwind.

Do you have to give it back?

Well, the way I would look at it, Phil is, number one, the indicator as to how strong the demand is in the market. that customers are willing to make those prepayments in order to reserve their slots. The reality is what's happened is that's cash flow that we would have expected to hit in 2023 that has been accelerated into Q4. Now we don't look at that as necessarily creating a divot for us in 2023. Clearly, when you look at our cash flow guidance for 2023, we didn't take that down by respect excuse me, $30 million. We set the midpoint at 150. So that's the way to look at it and I think that, again, the strongest takeaway that you can make on that -- those advanced payments are the demand, which we keep. We said it 50x already in the call, but demand is truly strong and our customers, this is not a blip. Our customers are seeing a sustained need for our materials, and it's going to increase from here.

Our next question is from Seth Seifman from JPMorgan.

I want to start off asking start off asking about the profitability in HPMC. And how we should think about the drop-through in 2023. Some quarters were stronger than others in '22 that last quarter looked a little bit lighter than we expected and kind of moving from the 18% this year to the low to mid-20s out in 2025. How to think about that progression, whether it's kind of back-end weighted or more even across the years.

Yes. I think the easiest way to think about it is, we've talked about incremental margins going forward north of 30%, I think is what I've shared. We still expect that, that is intact. We did note that with the additional $36 million of postretirement expense in 2023, that's going to create some earnings headwinds. It will also a bit dilutive to the overall margins for the business. This is not HPMC specific, but for the overall margins. The good news is we're going to more than make up for that that roughly 80 basis point to 90 basis point headwind due to the postretirement. Now when you think about HPMC, there's strong growth that we're seeing in that business. The mix is changing as we get more and more of the next-gen products that are being sold. So I think you should expect to see continued expansion into the kind of range that we talked about in our investor conference, which I believe we said expect for HPMC margins in the 20 -- kind of low to mid-20s, and we still see ourselves on track to accomplish that in that time frame.

Okay. Excellent. And then on -- or I guess on the titanium, we think about the incremental titanium growth coming in 2023 -- on the airframe side. I guess, should we think about most of that coming in AA&S? And then you talked a little bit about the growth catalysts for 787, and we are at a place now where you think Boeing should be moving toward higher rates, but more -- I guess, is that the main driver of the increased demand that you're seeing? Or is it much more broad-based? And to the extent it's more broad-based, can you touch on the other drivers?

Yes, a couple of questions in there, Seth. I think the question. The first one was around near-term titanium impact. So we're going to be ramping up here in the first half, and it takes a little while to go from melt to final product in the back half. So from a top line perspective, we'd expect $50 million, $60 million of top line revenue from this additional melt in 2023 is probably a good estimate that Don would let me get out there for you. And then in the second half, yes, clearly, in the second half, you asked about AA&S and HPMC, I think it could probably be 50-50 between the 2. It's titanium 64 for the most part. So it can go a lot of different ways. So if you're modeling it, I feel comfortable 50-50 between the 2 segments. I think that was the first set of questions. The second part was around 787 demand. And is that the principal issue I would say we're not done with the titanium share reapportionments from the prior sources. People still have material flowing from Russia, and they're working hard to get their supply chain resort or reaffirmed up for what they want. You remember the VSMPO guys are a very integrated business. And the alternative is not so integrated. So there's still a lot of work to be done, I think, in that supply chain. So we're seeing part of that still continuing. I can't speak for our customers. But we obviously exited our joint venture with the Russian and we did it for our customers. It just took us a little while to exit from that. So it's not unusual that they would do that. The widebodies in general, we've repositioned our mix that we're more and more agnostic as to which OEM we're supplying. And certainly, the wide-body phenomenon in the short term has been in the U.S. in terms of the shortfall, but Europe's been good. Airbus has been good on the wide-body and we're benefiting from our relationship with them there. So I think the catalyst that I would say is, yes, 87 demand, wide-body in general, realignment of supply chains. And then I think we're on the verge of starting to see some of that early 777 stuff. I know it's a ways before it enters into service. But I think that catalyst is coming very, very quickly, probably in the 2024 time frame given the long lead times that we see. So we're pretty excited across the board on widebody in general. And our long-term guidance when we did our 2025 guidance of about 100 narrow bodies, 20 wide bodies by 2025, those estimates are looking a little more conservative than we thought. So we're pretty excited about all the catalysts coming together.

Our next question comes from Gautam Khanna from Cowen.

I wanted to ask you about lead times right now. How far out are you guys quoting on your various aerospace products, so airframe jet engines? And how has that changed over the last 6 months?

Yes. So the last six months, good question, so one thing that's kind of gone on for us during the COVID pandemic was a shift from distributors as a key part, they're still important distributors, are a key part, but the team has done an excellent job of aligning more closely with OEM demand. So we are getting a few more direct signals than as a percentage of our mix in aerospace and defence. So that's been positive. I would say, today, depending on the part and the flow path, customers are willing to commit orders and some products into Q1 of 2025, believe it or not, so we do have a fairly controlled order entry program against those commitments. They have that kind of visibility, and they want to make sure they get their pipeline. Now I would say more of the milk products type things flat you could probably still get some titanium in Q4 of 2023. But those slots are going fast. So I'll let around. But -- and then the general more specialized alloy mill products that come out of our North Carolina melting probably into 2024, early 2024 if not Q2 of 2024. So where were we 6 months ago? I know where we were 8 quarters ago, and 8 quarters ago, you could place an order in the quarter and bid it, right? So that was 8 -- 6 to 8 weeks, and that was obviously in 2020, 2021, and those days are gone. So yes, really I would say the average lead time is 50, 60, 70 weeks depending on the product.

Wow. Okay. And do you guys have any long-term contracts coming up for renewal over the next year? And I'm just curious like how pricing -- it sounds like this is a good environment for pricing to move higher, even on LTAs as they come for renewal. Is that meaningful in any way?

We don't have any -- yes, I don't believe we have any major ones in 2023. They are kind of layered in. So 2024, 2025, probably 2025 will be the first major transition year to other contracts. Most of the big OEMs are out, we have quite a few that go to 2030, 2035, those kinds of numbers and most of those have inflationary or pricing pass-throughs. I would say for people who don't have contractual commitments or don't have long-term relationships, spot pricing is up significantly in the market. And it's the market price. So we're taking advantage of that opportunity. So I think there are pricing opportunities both on the raw material pass-through as well as just fundamental demand.

Yes. Okay. And last one, just on the VSMPO opportunity. Where -- has Boeing moved a little more urgently? Have you heard from other OEMs besides Airbus who want to go ahead and lock up supply with you guys?

Yes. I was in Seattle earlier this week enjoying a great celebration of final 747 being delivered. It was a great moment in history and proud to have been part of that. I think -- I do think all the OEMs are moving with urgency. I think the widebody recovery across the board is driving that. I think it's a complex issue. It's not as simple as just redirecting, Oh, yes, we'll buy this stuff over here and everything is going to be fine. It's a complex supply chain, complex and very important specifications. But I do think over the last 6 months, I think they have started. There's a lot of urgency everywhere I go. Anytime I get a phone call from a customer there's a reason for it, but we're in a great position to be able to take advantage of it. And I've been talking to more customers along with our Chief Operating Officer, Kim Fields. We talked a lot about to customers on a regular basis, and that's really trying to get clarity of demand, and they're working on it with urgency.

Our next question is from David Strauss from Barclays.

Is there any capital deployment assumed in your guidance for 2023?

So David, when you say capital deployment, could you be more specific?

Yes. I guess, returning cash to -- or debt paydown or share buyback, anything assumed in the guidance you gave?

Yes. So what I would say is there's a couple of elements that I would highlight. One, of course, when we think about capital deployment, we kind of have 3 legs to that stool. One is investing for growth. That's, for us, primarily focused on the CapEx. We've talked about our CapEx guide at $200 million to $240 million in 2023 and then the second leg on that stool is about delevering and so to us, there's 2 things that come to mind. One is the pension and first and foremost, we're making voluntary contributions to the pension plan. This year, we have a $50 million contribution. We actually made that contribution earlier this week. So that is out of the way for 2023. We have another $50 million contribution that we have planned for 2024. And then in terms of other debt actions, we really don't have any imminent debt maturities that we're going to have to deal with. So there's no repayments that are required when it comes to bank debt or anything of that sort. And nothing is planned. I don't plan to take out any of our ABL term loans or anything like that. And then the third leg, of course, is returning capital to shareholders. That's extraordinarily important to us. In 2020, we -- excuse me, 2022, we repurchased about $140 million of shares. We've got $10 million left on that $150 million program. So we'll finish that share repurchase program up in early 2022. And then, of course, we're expecting that we're going to generate a healthy amount of cash flow as the aero ramp unfolds. And our expectation is that we're going to put that money to work and returning capital to shareholders continues to be a very, very important thing to us, and so it will continue to be a feature. So at this point, the board has not approved additional share repurchases beyond the remainder of the existing program, but I wouldn't read anything into that fact because of the timing of an approval would be after we finish up the existing program. I hope that helps.

Yes, sure. And then a question on longer-term free cash flow conversion. So looks like in 2023, you're targeting somewhere around 50% free cash flow conversion on net income close to the -- probably 25% or so, 20% on EBITDA. I think before you've talked about 90% free cash flow conversion, is the target in 2025, where it looks like you're targeting somewhere around $800 million or so, some $750 million, $800 million of EBITDA. What -- maybe the building blocks are free cash flow out there?

Yes. So I'm happy to touch on that. Your math is right, by the way. If you do -- you take the EPS guidance and you back into cash and cash conversion, we're in that 50% range right now. We've made a significant improvement, by the way, in that metric over the last couple of years. But our stake in the ground is 2025 cash conversion of greater than 90%. And what's going to happen is, of course, everything on cash generation starts with profitability. Our profitability is -- has increased and is expected to increase significantly. That's going to play a key part. We're unlocking the efficiency in our managed working capital. So a huge step in that already in 2022 when we hit our target at 30%. We're going to continue to make progress and improve on that working capital efficiency. Another important part of it is going to be CapEx, capital spending. And so this year, our capital spending range has a midpoint of about $220 million. And what I shared previously still holds as you look at between now and 2025, what I expect is our CapEx spend is going to edge down. And by the time we get to 2025, I would expect our capital spending to be close to our depreciation rate and our depreciation rate at that point will be somewhere between probably $150 million and $170 million. So that's helpful as well. And so all those are some of the building blocks to improving this cash conversion metric. I also expect, by the way, that when we're out in the 2025 time frame, I still expect to be a limited cash taxpayer, which is going to be helpful in -- at least in that period when it comes to cash conversion.

Our final question is from Timna Tanners from Wolfe Research.

The first question is really -- we talked a lot about aerospace and defence. So I just we should probe some of the other end markets. I know they're deemphasized. But on the positive side, you sound more constructive on specialty energy. So just wondering for a little more color on that and if you've quantified any of the IRA benefit and timing. And then on the more cautious side, your industrial headwinds contrast with what we're hearing from others. So I'd love to get a little more color on that and why you're confident in the H2 timing for China demand recovering. Why not earlier? Why H2? That would be really helpful.

All right. There's a lot in that one. Do you want to take the first one, Don on the China, or you want me to do.

Sure. No, I'm happy to do it. As far as the China headwinds, the restrictions, of course, have fallen off significantly. The downside is there's more COVID. And so what we're seeing in our business and in a more broad circumstance. We're seeing those actual COVID cases that are creating the headwinds in China and we have seen that -- we saw that in kind of latter Q4. I think we've seen a bit of a step down in early Q1. And we'd like to see that headwind go away. We're just -- based upon the current pace of things, our expectations is that it's going to be with us in the first half. Now it could be that the COVID cases recover much quicker than we're planning. And our business is ready to roll. I can tell you that. But in an abundance of caution for how we view the business and the trajectory, our sense is it's going to take us the first half.

That's right. I think the thing is we want to see it before we forecast it. That's the bottom line. Let's see it materialized because there's been a lot of ups and downs in that market over the last couple of years. I think your other question, Timna, was around oil and gas and energy in particular. I think we see strength specialty, specialty energy, yes, we definitely see the oil and gas side with the subsea, the offshore and the subsea systems, Nickel clad, various things, specialty alloy things for the deepwater or subsea systems. That's growing and continues to come back strong. We continue to see in the specialty side, lots of activity in next-generation technologies, civilian nuclear is actually coming back. So we feel pretty optimistic about those applications. And I would say, we've had a long history with fuel gas desulfurization of coal plants in Asia. And although that market kind of goes up and down a little bit with the nickel price in terms of how they want to purchase. But bottom line is we feel pretty good about those markets with continued growth, I would say, high single digits, low double-digit kind of growth through 2023 and you asked about inflation reduction act impact and timing. To be candid, we haven't factored that in. That would be an upside if it came. I'm not sure it will come to the markets we're serving. A lot of the opportunities we see for specialty energy actually are outside the United States. So probably not such a big impact for us.

Okay. And if I could sneak one more in. You mentioned a couple of times in the outlook slides the ongoing or benefits from restoring trends and material sourcing. I just wonder if you can explain a little more what that means and along those same lines, I know in the past, you've talked about moly prices, molybdenum is exploded. Does that even matter anymore for you?

All right. Let's see. There's a couple in there, Timna, you're getting like 6 today. That's pretty good. On molybdenum, we always care about molybdenum. But I think with the material pass-through, we work hard to pass it through and not take that risk. I think the team has done a good job of that. But it's always an issue in terms of how fast and what kind of pattern it goes up. So that's kind of number one. I think your second question was around reshoring. So the first and obvious one is in commercial aerospace. Second and less obvious one is in the medical space over the last few years, we had seen material purchases that were more common purchases. I wouldn't say commodity, but we're more standard moving to places like Russia, China, various other sources. I think that particular supply chain is interested in reshoring. We're also seeing some activity in the electronics space. Obviously, there's a huge activity if you're -- if you have been to Phoenix lately, you'll see a lot of building of chip manufacturing and we actually provide some specific materials that go into the precursors that go into chip manufacturing. That's been positive for us. And I think it's the surety of the supply chain, the surety of the quality. So between electronics and medical, I think those are probably 2 other good examples. And then we do a lot of work that has historically brought materials out of China. And I think the growing sensitivity to near-term supply chains of input materials -- everything we make is alloyed in one shape form or another, and those alloying ingredients come from all over the world. So we've been able to really focus on how do you near shore or reshore some of those kind of things. So hopefully, that's a couple of good examples to give you some color on where else that's going on.

Thank you. That is now the end of the Q&A session. And I will now hand back over to Tom Wright For closing remarks.

Thank you for joining us today. A replay of this call will be available on our website. This concludes the ATI fourth quarter earnings call.

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