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ATI Inc. (ATI) Q4 2023 Earnings Call Transcript

ATI Inc. (ATI)

Q4 2023 Earnings Conference Call

Company Participants

Dave Weston - Vice President of Investor Relations

Bob Wetherbee - Chairman & Chief Executive Officer

Don Newman - Executive Vice President & Chief Financial Officer

Tom Wright - Vice President of Financial Planning & Interim Head of Investor Relations

Conference Call Participants

Seth Seifman - JPMorgan

Gautam Khanna - TD Cowen

Richard Safran - Seaport Research Partners

Timna Tanners - Wolfe Research

Michael Leshock - KeyBanc Capital Markets

Josh Sullivan - Benchmark Company

Presentation

Operator

Hello, everyone, and welcome to ATI's Fourth Quarter 2023 Earnings Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]

I will now hand over to your host, Dave Weston, Vice President Investor Relations to begin. Dave please go ahead.

Dave Weston

Thank you. Good morning, and welcome to ATI's Fourth Quarter 2023 Earnings Call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our fourth quarter results are Bob Wetherbee, Board Chair and CEO; and Don Newman, Executive Vice President and CFO.

Before starting our prepared remarks, I would like 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 they can also be found on our website at atimaterials.com.

It is important to note that all of our financial data, both results and outlook, as well as our sequential and year-over-year comparisons reflect a change in pension accounting policy we announced on January 19. 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 accompanying presentation.

Now, I'll turn the call over to Bob.

Bob Wetherbee

Thanks, Dave. Good morning, everyone. Q4 marked a strong end to another year of significant growth for ATI. This morning, I'll focus on three takeaways I believe best summarize the results we're announcing today.

Number one, we're doing what we said we would do, executing our strategy of aerospace and defense leadership, delivering on our customer and shareholder commitments. The benefits show in our bottom line.

Number two, we're sharpening our operational advantage, shifting our culture around inventory management. We're overcoming challenges uncovering new opportunities and positioning the business for long-term cash generation success and sustainable growth.

Number three, we're well positioned in strong markets with years of continued growth ahead.

Let's dive deeper into each of these, starting with my first point. What does it take to do what we said we'd do? It starts with execution across the enterprise, meeting our commitments is important to our team and it shows in our results.

In the fourth quarter, we delivered ATI adjusted EBITDA of $161 million, which is 15% of sales. That's driven by continued strength in Aerospace and Defense. It was our highest revenue quarter of 2023 and our sixth quarter in a row exceeding $1 billion.

Our quarterly adjusted earnings per share of $0.64 was above the midpoint of our November guidance. For the full year 2023, ATI adjusted EBITDA was $635 million including the benefits of our pension actions during the year.

Full year free cash flow was $165 million. That's above the high end of our guidance range. What drove this cash flow? Purposeful and targeted inventory management initiatives and significant operational efficiency improvements. We're building strong momentum at the operating level. It gives us philosophy, speed and power defined direction.

Let me share a few proof points of what made 2023, a great year. Isothermal forging output is up 20% and delivering record revenues as we support jet engine demand. We increased process yield by 40% for a key jet engine powder outlook.

Process flow time for a major titanium product line is down 53%. Production of high-value niobium and hafnium, those alloys critical to commercial space launches is up 37%. And aerospace and defense revenue is up 32% overall.

All of these examples are compared to 2022 and they illustrate the strong foundation 2024 is built upon. There's momentum that we're harnessing comes from our people. We have a great team. I drive my guys crazy for a moment and go off script for just a second. I mean this is a team effort. Our team has accomplished a lot. Their efforts are incredibly meaningful and very comprehensive. Thanks to every member of the team and the leaders who encourage them. The results speak to those efforts and are much appreciated.

My second takeaway today is that we're shifting the fundamentals of how we operate. Inventory management is at the heart. We faced a lot of growth-related challenges in 2023. We ramped every operation from melting to shipping, asking more from our people and our assets. Uncertainty of incoming materials and upstream operational reliability made that exciting at times. My drive for operational efficiency means we're consciously reducing the inventory cushion that requires our team to operate and lead differently.

Sufficient titanium supply to meet ramping demand remains a critical issue across the A&D industry. You'll recall that we restarted a significant amount of titanium mill capacity in 2023. By the end of this year 2024, we have expanded 45% over 2022 levels. Keep in mind, to-date only a portion of this additional titanium has been converted to revenue. We're targeting the second half of 2024 to achieve full run rate of that 45% expanded capacity.

When the Richland, Washington expansion is at full production in late 2025, our total titanium mill capacity will be up by 80% over our 2022 baseline. We're on track for Richland's first melt in Q4 of this year. Our philosophy is to be melt long at the start of a growth cycle. Melting tends to be a long lead time investment and defines the potential for the rest of our operations. Forward-looking and decisive, that's our competitive advantage. We and our customers are seeing the benefits of that now. Clearly we aren't going to melt if we can't flow it through to finished parts, which is why our work to address bottlenecks is so crucial.

Let me give you a great example of how we're addressing one of the biggest, a new billet forging press in North Carolina is coming online in Q1. As we speak, this added capacity is converting rounding its to dimensionalized billets. This opens up more downstream capacity to take advantage of the increased note. Don will be disappointed in me if I didn't emphasize that this investment was within our previously announced capital spend.

Equipment reliability is another opportunity to improve our performance. In an effort to support the ramp we pushed maintenance cycles longer. The slides are both planned and unplanned outages late in Q4 that will affect shipments in Q1. We don't expect year-end outages to be an issue going forward as we reevaluate outage space than more evenly across the year. This all stands from our significant growth in titanium and nickel. We're focused on resolving each bottleneck we encounter. These and a few additional capital-efficient projects already in the works, give us clear line of sight to a significant step-up in results in the second half of 2024.

We made significant progress in the fourth quarter toward our managed working capital target of 30% of sales or lower. We ended 2023 at 31% of sales. ATI President and COO, Kim Fields is a champion in this space. Under her leadership, the team is accelerating flow, removing idle inventory, while finding and driving operational efficiencies. As our free cash flow performance indicates that work is yielding tangible results.

We're not yet where we want to be and that's not lost on our team. We've learned a lot. We're taking action and we're committed to doing even better in 2024. Our extended growth trajectory means inventory management will remain a key priority for quite some time. The process improvements locked in this far set the stage for what we can achieve.

Looking forward, the first quarter brings unique challenges. We're working through weather-related outages from January-specific Northwest Arctic storm, continuing headwinds in our industrial end markets and lower metal prices or key inputs. Don will add more clarity with our Q1 guidance.

What you should keep top of mind is the fundamentals that influence the fourth quarter mainly enduring demand and proven performance, support our profitable growth in 2024. This brings me to my third and final takeaway today. ATI is well positioned within strong markets with years of continued growth ahead.

In Q4, ATI achieved 63% in sales from aerospace and defense, up from 61% in the third quarter and 10 points above last year. It speaks to the magnitude of growth we're capturing. We expect that to continue over the next several years. It also highlights how critical our melt capacity expansions are to ATI's ability to capture and meet that demand.

Fourth quarter jet engine shipments increased by 7% sequentially and 15% year-over-year. We expect growth to continue in 2024 and beyond, driven by continued acceleration of OEM jet engine builds and ongoing elevated spares demand. Demand for ATI airframe materials, predominantly titanium remains at historic highs. Airframes shipments surpassed $200 million for the second quarter in a row. We saw significant airplane growth in the first and third quarters of 2023. This market doesn't grow in a linear fashion. It rises then stabilizes as build rates ramp.

We're generally synced to airframe build rates over the medium to long-term but sometimes in the process of getting there. It's a little choppy. You got to think about stair steps, not necessarily a nice gentle hill.

Before I leave the topic of commercial aerospace, let me address how we're thinking about narrow-body disruptions that have been in recent headlines. Uncertainty has been the norm of recent years for a lot of reasons. It's the market reality we deal with. We don't expect it to impact our long-term growth potential and our market position has broadened materially to help diminish any significant near-term implications.

Three points to keep in mind. One, our long-term directional targets are based on monthly build rates reaching 120 narrowbodies and 24 wide-bodies in 2027. Even if the industry adjusts its expectations, the actual build rate is likely still above our projections.

Second, we saw narrow-body disruptions in 2023, and still achieve record titanium sales. And third, remember, we're still in the early innings of the wide-body ramp and several years away from overall peak airframe build rates.

Moving beyond commercial aerospace. ATI's defense business continues to grow at a significant pace. Sales expanded 21% sequentially and 16% year-over-year. At ATI, we fly, float and roll in this segment. The increase was broadly driven by growth in shipments of military rotorcraft, naval propulsion materials serving US and allied navies and titanium ground vehicle armor.

Overall, 2023 ATI Aerospace and Defense title grew by 32% versus the prior year. So let's add it up here for a minute. Increasing build rates for frames and engines for the positive trend the defense markets strong in almost every product we serve and we're well-positioned with the right customers for the long-term, a recipe for success that's delivering results.

Now great demand isn't just limited to aerospace and defense. You've heard me talk about our work in airline markets where barriers to entry are high and so are the returns. Late last month, our customer Confluent announced their $50 million investment in ATI's Nitinol melt and materials conversion infrastructure. That expansion will more than triple our capacity with this life-saving material used in heart stents and related devices.

It's really unique to have customers so excited about the product that ATI makes, investment support is great. It's their money that they're investing and the confidence in what we can achieve together. They're a great partner and we look forward to tremendous success together. In industrial markets, demand remains soft. The good news is that these conditions remain transitory and they affect an even smaller portion of the ATI portfolio than in years past.

As I said last quarter, we're taking actions operationally to align our near-term cost structure with this lower demand. We remain focused on adjusting the portfolio as needed using our 80/20 toolkit to optimize the product mix....

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