Good morning, and welcome to the Allegheny Technologies Incorporated Third Quarter 2020 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to the Allegheny Technologies Third Quarter 2020 Earnings Call. Today's discussion is being broadcast on our website at atimetals.com. Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Donald Newman, Senior Vice President and Chief Financial Officer. For today's call, we will not display or advance slides as Bob and Don speak. Their comments will focus on highlights and key messages. The slides provide additional color and details on our results and outlook. They are available on our website at atimetals.com. As a reminder, all forward-looking statements are subject to various assumptions and caveats as noted in the earnings release and in the slide presentation. Now I will turn the call over to Bob.

Thanks, Scott. Good morning. It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market. Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic. This morning, I'll share my thoughts on three key topics. First, how we're taking control of what we can control, thus accelerating cost savings and strengthening our position. Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth. And third, our view of the markets and our confidence in a stronger future for ATI, thanks to strategic share gains and ATI's unique capabilities. So first, where we are today. We began taking decisive action as soon as our forward-looking demand signals flashed red. Our customer connectivity continues to give us the insights to assess market dynamics in the moment. From this, we gain conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations. We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond. As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance. We accelerated benefits from our cost savings initiatives through aggressive implementation. This included capacity upgrades, reduced fixed costs, minimized variable costs with execution on our restructuring programs, eliminated costs to align with demand declines, and reduced overhead. We've intensely reviewed every administrative and non-production related expense, continuing only what was critical. Overall, we've significantly variabilized our cost structure. Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs. This will be a lasting impact of the actions we've taken during the crisis. Through it all, our people have been extraordinary. First and foremost, they're keeping each other safe while efficiently and consistently delivering critical materials and components to our customers. The frequent production adjustments we made in response to demand shifts and end market forecasts have not been easy for them. Growing levels and shift schedules have fluctuated as a result. I sincerely appreciate the entire team's effort and dedication and personal economic sacrifices. Their continued actions demonstrate a shared commitment to ATI's future success. The deliberate actions we've taken and will continue to take are crucial to our ability to emerge as a stronger company as the economy recovers. Looking ahead, we're confident demand will eventually recover. We expect these difficult times to continue for several quarters to come, but we do believe we're reaching the bottom with some signs of upcoming stability. Secondly, let's talk about our balance sheet and the solid position it puts us in. We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule. Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth. We're fueling growth in three ways: first, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021. Next, we're organically expanding our presence in adjacent high-value markets, where our material science expertise is valued. And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities, and capture profitable core market opportunities. As we accomplish our growth goals, we'll intensify our presence in aerospace and defense, materials, and components. We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace-like margins in adjacent markets along the way. Looking forward, we're confident that the demand for commercial aerospace products will recover. We see it as growth deferred, not lost. No matter what form you believe the coming economic recovery will take, it could be a V, U, or L-shaped. When you're at the bottom, it's difficult to predict when you'll reach the other side. But we know we'll get there. We're positioning ATI to emerge stronger, leaner, and more efficient, no matter how the recovery comes. There are some examples of how I believe we're doing just that. We're expanding our presence in growth markets like defense. We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability. Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term. Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn. Defense remains a notable positive exception. A little more color on our view of what we expect going forward. Let's start with commercial aerospace. Both jet engine and airframe production continued to decline significantly versus the prior year. Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with: quarantines, travel restrictions, and low 737 MAX production. Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand. Fourth quarter jet engine product sales will remain relatively weak as quarantines begin to slowly recover. Specialty materials will likely lag for an additional couple of quarters. API sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain. In 2021, ATI will benefit from engine market share gains and new airframe business. The positive impact from these wins will increase over time as aerospace industry volumes recover. Our second core market, defense, remains a source of strength. Excluding titanium armor, ATI's diversified defense sales were up more than 20% year-over-year, led by naval nuclear and military aerospace growth. Titanium armor plate sales were down significantly due to timing for both a domestic and an international program. We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect. Near term, we expect continued growth in the fourth quarter and into 2021. Next, let's talk about my thoughts on three important adjacent end markets. Third quarter sales were down significantly in the energy and medical markets and up in electronics. When it comes to energy's oil and gas sub-market, we saw a lack of end-customer demand and a resulting inventory glut, reducing exploration and downstream processing activities worldwide. We expect this market to remain weak in the fourth quarter. A bright spot within energy is the specialty energy sub-market, including solution control, nuclear, and renewables. These sales grew year-over-year. And we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects. Our medical market is principally comprised of biomedical implants and MRI materials. Sales versus the prior year were lower to customers in both categories, mainly due to the challenges presented by COVID. Patients postponed elective surgeries, and hospitals limited facility access to equipment suppliers. Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter their medical facilities, either due to an effective COVID vaccine or disease treatment protocols. Finally, electronic sales moved higher year-over-year. This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales. We anticipate modest growth trends to continue in the fourth quarter. With that, I'll turn the call over to Don to cover our third quarter financial results and outlook for the balance of the year. I'll be back to offer a few final thoughts before we open the line for your questions.

Thanks, Bob. I'll spend the next few minutes sharing highlights in three key areas: one, our better-than-expected third quarter financial performance; two, our strong balance sheet and cash position; and three, a look at our Q4 and 2021 expectation. From a performance standpoint, the adjusted EPS loss of $0.38 per share in Q3 is significantly better than our previous guidance of a loss of between $0.62 and $0.72 per share. Our Q3 performance reflects accelerated cost reductions and an improved mix in portions of our business. First and foremost, we are managing decisively. We are making the most of external demand despite market headwinds, and we're controlling what we can: our costs and capital deployment. Consider this, our third quarter revenue dropped by more than 40% versus the prior year, including a 60% decline in our high-value commercial aerospace business. The revenue drop was largely due to market factors that were not within our control. When market declines became clear earlier this year, we responded quickly, focusing on cost containment. Benefits of those efforts can be seen in our Q3 results. Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin in Q3. That's a meaningful improvement from the 28% decremental margins captured in Q2, clear improvement resulting from quick action. Our cost actions are having meaningful impact and they're accelerating. As Bob described, we have significantly variabilized our cost structure. Costs once considered fixed are now variable. This means we are better prepared to deal with future demand fluctuation. Also keep in mind that structural cost savings will accelerate profitability in the recovery, expanding margins and increasing our cash conversion. Looking beyond the income statement, our efforts to preserve free cash flow are producing results as well. We expect to be free cash flow positive in 2020. This is made possible through capital spending discipline and our ability to convert working capital into cash. I want to take a minute to acknowledge the fantastic efforts of our operating teams. They took quick actions to protect cash in the near term while maintaining our ability to grow and be recovery-ready. We ended the quarter with approximately $950 million of total liquidity, including $572 million of cash in the bank. Our debt maturity profile also adds strength to our financial position. Our next meaningful debt maturity does not occur until 2023, three fiscal years away. We are focusing on three key levers to drive cash generation: cost structures, inventory levels, and CapEx. Expect to see continued focus on these three areas in 2021 as we adapt our business to fit dynamic end market demand. At the same time, we'll continue to protect our strong balance sheet. These actions will enable us to manage through the down cycle and capitalize on opportunities in the coming up-cycle. In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing demand stabilization in commercial aerospace. This starts with jet engine OEMs working to better align production and demand levels. Airframe OEM inventory destocking is expected to persist in the fourth quarter. Beyond aerospace, some industrial markets are seeing modest recovery. Others, namely oil and gas, will likely remain at low levels. As a result, we expect a fourth quarter adjusted EPS loss in the range of $0.36 to $0.44 per share, similar to our third quarter's adjusted EPS. Moving to our free cash flow guidance. Our consistent efforts to generate and preserve cash have produced tangible results. We reduced managed working capital by $115 million in the third quarter in the midst of the steep economic decline. We expect to further reduce inventory in Q4. Just as the team quickly pivoted to cost reductions, we managed our CapEx spending to better match demand. To that end, we're again lowering our capital spending target for the full year. Our updated CapEx forecast range is $125 million to $135 million, about 60% of the original 2020 projections. We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contribution. We are able to do this because of the successful achievements in working capital, CapEx, and cost structures, a great accomplishment in the midst of a very challenging environment. Looking beyond the fourth quarter, we will stay diligent to preserve or even improve on the gains that we made in 2020. First, we believe that working capital represents an opportunity for further cash flow improvement. At the end of the third quarter, managed working capital was approximately 50% of revenue. This compares to 30% at the end of 2019. We understand what it takes to get back to those 2019 levels, and we plan to make further improvements in 2021. Next, we'll continue to keep a close eye on our capital spending. We'll balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels. Finally, we will stay disciplined on costs. We will carefully preserve our structural reductions and minimize additions as volumes return to the business. The way we operate today is fundamentally different than how we used to work. We will strive to maintain the hard-fought gains. With that, I'll turn the call back over to Bob to add some closing comments.

Thanks, Don. Your points were right on. It's been a real team effort in a very uncertain time, and I greatly appreciate the contributions of everyone who's part of ATI, our customers, and our suppliers. Our comments today focused on what matters most to our shareholders and to us. These priorities are at the core of how we lead on a daily basis. First, we're managing decisively in times of great market uncertainty. That includes quickly and effectively adjusting our cost structures and inventories to match demand, and we're keeping our people safe. Secondly, we're preserving cash and maintaining liquidity. We're preserving our ability to deploy cash accretively for our shareholders. We'll be recovery-ready, capitalizing on industry volume growth as well as our strategic share gains and new business awards. Finally, we're working with our customers, new and long-standing, who value our material science capabilities and advanced process technologies. Our goal is to be integral to their success, helping them grow, solving even greater challenges together, and in so doing, earning an ever-increasing share of their business. We're taking the actions necessary to emerge from this crisis a stronger, leaner, and more focused ATI. Scott, back to you.

Thanks, Bob. That concludes our prepared remarks. Operator, we are ready for the first question.

Operator Instructions. And our first question today comes from Josh Sullivan of the Benchmark Company.

Just you highlighted defense as the key market going forward. Can you just talk about how do you take share there? Or is it on new program growth? Just as we think about defense budgets, looking into '21 and '22, can the strength today carry over into the out years?

Certainly. When we examine our progress in defense, it's very targeted on specific programs. A significant area for us is supporting naval operations, particularly regarding the nuclear navy and its propulsion systems, which we anticipate will remain a strong market for the foreseeable future due to both fuel replenishment needs and other factors. This presents a solid growth opportunity. Additionally, we focus on military propulsion for both helicopters and fixed-wing aircraft. We are engaged in select programs that are expanding, and we continue to identify new opportunities there. These programs typically have long lifecycles and also present aftermarket opportunities that benefit us. Regarding ground vehicles, we are involved in specific programs that are beginning to gain international traction, especially within armored vehicles, contributing to our confidence in these markets that appreciate our material science expertise. Moreover, our HRPF capabilities and facilities at SA&C have played a significant role in this success.

Got it. Got it. And then just curious if you had thoughts on comments from Raytheon's announcement to do some more turbine airflow production. I know you guys have a very good relationship with the company. Just curious on your thoughts on what they might be doing and how you might be involved there, just what you're thinking as far as that announcement?

Yes. We're still adjusting to the new name for Raytheon. And so our connection really, obviously, is with the Pratt & Whitney family that's there, and we feel we have some good strong relationships to grow in the future. I can't really comment on what their plans are, but we continue to be very actively engaged with what they need on a material science basis. And so we're confident that they still have a good growth projection profile.

Got it. And then just one last one. On commercial aftermarket, for engines that are out of large-scale OEM production or even out of production altogether, is there any demand-pull on the aftermarket side for those engines? Or how does the order flow look like for those engines that are out of large-scale OEM production at this point?

Yes, that's a question you've asked before. We've indicated that it's challenging for us to pinpoint exactly where the aftermarket stands, which is a significant component of our business, comprising about 20% to 25% of our operations. We monitor it at the forging level and can see that segment specifically. However, we believe it will remain stable for a while, although it is not a growth area for us as engines exit production. We are well-positioned for the next generation, especially with advancements in geared turbofan technology, which is where our future focus lies.

And our next question will come from Phil Gibbs of KeyBanc Capital Markets.

So as you guys look at your cost reductions and your new targets for 2020, which, Don, I think you listed this morning. What's the implication in terms of how much incremental cost savings we can get in the fourth quarter relative to the third?

Yes. We've made fantastic progress in terms of the cost initiatives that we triggered early on as soon as we saw the changes going on in the market. To give you some perspective, Phil, if you think about it, we captured about $60 million to $65 million of cost reductions in Q3. That was roughly twice the size of the capture that we got in Q2. So as you think about Q4, we feel like we've kind of hit a good pace. I would take some marginal improvement in Q4 relative to Q3, but still in that, probably $65 million range for the quarter. That sets you up for a run rate in the $260 million to probably $275 million range for 2021. And of course, the other key area of the cost reductions is how much of those cost reductions are we going to keep, what's structural. And for that, I would stick with the guideline that we gave you before, which is we said we were targeting 40% to 50% of our cost reductions to be structural. I would lean toward the 40%, and that, as you do the math, will set you up for about $100 million plus of structural cost reductions. And of course, I don't know have to tell you the math on that, those structural cost benefits are gifts that are going to keep giving through the up-cycle. They're going to be beneficial to expanding our margins and increasing our cash generation. And it should create some really substantial enterprise value for our shareholders. So we're really happy with the outcome that we've had so far on our cost reduction and the quick response that we've had from our team.

What is left for pension contributions in the fourth quarter, considering you had a healthy contribution in the third quarter which we anticipated would be more in the fourth quarter?

Yes, you're right. We had in excess of $60 million of contributions in the third quarter. We're still targeting $130 million for the full year. That means you've got about $35 million left in Q4. So that sets us up on this glide path for getting our pension plan really fully funded or at least to a de minimis level over the next number of years. And so as you think about, again, 2021, as everybody is trying to wrap their head around those expectations, we've said before that $130 million for 2020. As you look to 2021 to 2023, we should be averaging closer to probably $80 million, with 2021 kind of in the $100 million range. Again, really pleased with the glide path that we're in with our pension. We're heading in the right direction, and it's still a clear priority for us.

The next question comes from Gautam Khanna of Cowen.

I would like to inquire about your current visibility in the aerospace sector. There was a mention of a potential recovery in the latter half of next year. Could you share your confidence regarding that? What is your outlook for jet engine or airframe deliveries? Do you have any insights regarding the second half of next year or how fluid the situation is?

Yes, that's the key question. I appreciate you asking. There is indeed a supply chain, which is an ever-evolving ecosystem in a dynamic environment. Our forging business serves as a solid foundation as we focus on specific parts and programs, leveraging our relationships with major OEMs. They have been proactive in adjusting their inventories since the fourth quarter of last year into early 2020. Therefore, we believe we are managing inventory effectively. As we approach the latter half of 2021, we anticipate seeing that inventory decrease. This is contingent on ongoing discussions with our customers. We gather various insights and also consider what financial analysts say about build rates, but ultimately it hinges on our customers' tactical actions. I believe on the airframe side, we all acknowledge that the airframe supply chain was consuming more than necessary in 2019 due to the situation with the MAX. We are also observing decreased production of wide-body aircraft. A crucial measure for us is the level of inventory that does not align with current order demand. As mentioned, one significant opportunity for us is that we currently have about a 50% working capital to sales ratio, whereas we should ideally be closer to 30% or better in the long run. This serves as our internal indicator regarding the state of the supply chain. As we begin to release our trapped materials, I can say that they have started to diminish. However, the real challenge lies in the wait for the MAX return to service. Assuming that happens, we anticipate gaining visibility in January and February, which will provide our first accurate insight into the expected recovery. Nonetheless, we are still focusing on inventory levels, maintaining communication with key suppliers, and actively investing with our customers. There is certainly ongoing dialogue; however, the most significant uncertainty for us right now is the MAX return to service.

I apologize for the mix-up, Bob. I'm curious about the jet engine sales figure you shared in the slide deck. Do you see that as the lowest point? From here, do you think Q4 might dip slightly lower due to typical year-end channel destocking? Will Q3 and Q4 represent a low point, indicating a level below the end user's actual consumption? Or could we see levels like this or even lower in the first half of next year? I'm trying to grasp the difference between underlying consumption and what you're currently experiencing.

Yes. I want to share my thoughts with one caveat. If you consider Q3, it was still a transition quarter. Q4, Q1, and Q2 all seem to follow a similar pattern. I believe we are beginning to recover. When I review current news, it appears to be more positive than negative. It's hard to believe that we have only been in this pandemic for 180 days, as most of the news has been negative. The overall sentiment has changed significantly. I expect demand to remain stable from Q4 to Q1 to Q2. However, we will face some challenging comparisons in Q1. Looking at the sequential data should show a positive trend. Not all of our partners in the OEM sector manage their future demand effectively. We often have to wait and see how they adjust, especially in the first quarter, so we might see some minor inventory corrections from one or two of them. However, for our main customers in the jet engine market, we believe we have reached the lowest point, and things should stabilize over the next few quarters. Additionally, our focus on decremental margins remains important.

The next question will come from Timna Tanners of Bank of America.

If you could elaborate a little bit more on the CapEx and where it was cut and how low it can go going forward. And then also, there was a comment I caught on the discussion about possible acquisitions. Just wanted a little more detail on that also.

Sure. This is Don. Let me take a run at that question. First, from a CapEx standpoint, we reacted very, very quickly to right size our CapEx where we were seeing demand going. When we entered the year, we were expecting to spend in excess of $200 million. If you look at our Q3 numbers, Timna, what you're going to see is a run rate closer to $120 million. So very positive. In terms of where the cuts have happened, it's really been pretty broad-based across all of the segments. And it's really about prioritizing where we're spending the CapEx. We're looking at it just like our cost structures. We're dismantling our capital spending. We're looking at what the highest priorities are from a maintenance standpoint. And then when it comes to any growth CapEx whatsoever, we're, of course, interested in growing, but we can't spend a dime ahead of when it needs to be spent. And we have to be dead certain that we're going to get the returns that we believe we're going to get with these investments. So what you've seen in 2020, you should expect to see in 2021. Similar discipline, similar flexing based upon what the customer needs and what the demand levels are in the end market. The second part of your question, would you repeat that?

Yes. Sure.

Acquisitions. Acquisition, that's right.

Yes. M&A.

Okay. So the way to think about it is it really comes down to what's your priorities with your capital. And our priorities around capital allocation, Timna, has not changed. Number one, we have to ensure that we have adequate liquidity in the business to keep it healthy. And we're there, check that box, $950 million of liquidity. Second priority is we make sure that we're taking care of our people and we make sure that we're maintaining our assets. Check, we're doing that. Third, we are on a glide path to the pension. We're going to continue to make our pension contributions and see ourselves work down that pension commitment to a de minimis level over the next several years. Check, we've got that covered. At that point, our priorities really are focused on where we deploy capital to do kind of effectively two things, prudently grow and the second is really take care of our maturing debt facilities. So let's focus on the growth. It's organic or inorganic and we do measure the differences. We understand that organic growth will only get us so far in terms of our business. Inorganic growth may be an enhancer. How do we look at that inorganic growth and are we open to inorganic growth is what you're asking us, Timna. And the reality is, we are. We have put ourselves very intentionally in a position to have choices, but it's also choices that are going to be executed based upon the discipline you've seen over these last few quarters. As we consider mergers and acquisitions, it's crucial to clarify our priorities. Our main focus is on growth in aerospace and defense, which is our core area where we achieve our highest margins and have seen the most substantial growth. Therefore, when we allocate capital for growth, whether it’s through internal investments or acquisitions, our preference is clearly towards aerospace and defense. We remain opportunistic and frequently encounter opportunities, but we also approach those decisions with careful discernment. We do see the potential for pursuing these options.

Yes. I think that's right, Don. I think it's about expanding into material science capabilities that can go into components. We understand our material science capabilities, but almost everything we sell, something else happens to it before it gets on the end use. So we see some really unique opportunities coming in defense for high-temperature structures. Powder metallurgy plays into that game. The form. There are times, Timna, you might accuse us of being in the lumberyard business in some aspects of our business. And we think going up the value chain to be nearer to the end state is actually where there's an opportunity for further differentiation, leveraging our advanced processes and certainly our material science. So hopefully, that helps with the color you were looking for.

Okay. Yes, I'm trying to understand if you're going to complete the isothermal forge press capital expenditures and how that relates to considering mergers and acquisitions and future priorities. I can follow up offline. Please proceed.

Timna, I can actually answer that question for you. The answer is, yes, in due time. But it's really going to be dependent upon what the demand in the market is and when we would need those assets to be in place to meet the demand for that our customers put in front of us. We're not going to rush to spend the money. There's still good investments at the right time.

That makes sense. My other question is about the upcoming election day. Could you share any insights on its potential impact on trade? Specifically, do you think it's still possible to revive some of the slab rerolling opportunities at the rolling mill or discuss defense spending? What are your thoughts?

Yes. I think I'll start with defense spending. In the near to medium term, I believe defense spending will continue. The opportunities for the programs we are involved in seem relatively strong for an extended period, not necessarily influenced by politics, but by global threats and defense needs. We have a dedicated team in Washington, D.C., working closely with the Pentagon and various stakeholders. Therefore, we feel quite positive about our defense sector. Regarding assets that might be idle, they are always maintained in a condition that allows for them to be brought back into operation. However, we are continuing to reduce our focus on stainless steel. We are interested in utilizing the HRPF we have in Pennsylvania for cash generation, as we still see many opportunities. We receive inquiries about using that capability, which was established with both capability and capacity. The markets have fluctuated over the past 180 to 200 days, so it’s a bit difficult to predict where things may lead. Our primary focus is on aerospace and defense, as that's the direction we aim to pursue. We also see potential in adjacent markets like electronics and medical sectors. We plan to invest in areas that mirror the profitability observed in aerospace. There are promising opportunities in these markets. Additionally, we are open to selling assets if someone expresses interest in investing in lower-value segments.

The next question comes from David Strauss of Barclays.

Apologies if any of these have been asked. I joined late from another call. Regarding free cash flow in 2021 and the various components involved, including CapEx, working capital, cash taxes, and considering pension contributions, do you expect it to grow in 2021 compared to 2020?

David, this is Don. We haven't given guidance yet for 2021, but let me give you some color. Of course, in 2020, we're expecting to generate somewhere between $135 million and $150 million of free cash flow in a pretty challenging environment. How do we get there? Well, there's three levers that we're managing: it's about our cost structures, it's about our CapEx, and it's about our working capital. The way to think about 2021 is you're going to see, number one, the same discipline around the same levers. As we look at our cost structures, we're going to work very hard to continue to capture cost savings and maintain the gains that we've already captured in 2020. I've already talked about the structural savings in the range of $100 million even in the recovery. So I feel very positive about that. When it comes to our CapEx, the same discipline that you see in 2020, where we took our CapEx spend, really shaped it to the new demand, took it from $200 million down to a run rate after Q3 at about $120 million. I expect to see that very, very same discipline applied as we look at what the market demand is in 2021. And then the last lever and what's, I think, really key to understand how we're viewing 2021, and this will likely be reflected when we give our guidance for free cash flow, is how we're thinking about our managed working capital levels. So Bob already touched on this, but I want to drive home how important this is. We ended Q3 with a managed working capital as a percent of revenue at about 50%. And you know, David, that we ended in 2019, that metric was managed working capital at 30% of revenue. That 20% delta, we see as a massive opportunity and we are going after it aggressively today.

Great. That's helpful. So you think the biggest lever to get back down towards that 30% range is on the inventory side more so than anything still to be done in terms of receivables and payables?

We are managing receivables well and are not experiencing any issues or delays as they decrease normally. In terms of payables, there hasn't been a significant change in our Days Payable Outstanding. We have gained a few days in our favor regarding payables, but I don't anticipate a major change there. The real focus and opportunity for us is in inventory, which we believe is a significant area for improvement.

Okay. Considering the outlook for aerospace and your comments about the second half of the year or next year, things might improve somewhat. In the meantime, should we anticipate that your incremental margins will continue to perform well? Do you expect that the level of decremental margins will keep decreasing from here? Or do you think maintaining around 25% decrementals, as you've shown this quarter, is a reasonable expectation for the next few quarters?

Yes. I'm glad you asked the question. You're right. We made some really good progress around our decremental margins. Last quarter 2, we were at 28%. We worked that down to 25%. So how should we think about decremental margins going forward? Really, I think as you're modeling it, you want to think about our decrementals in the 25% to 30% range. Remember the fact that as we look at what's created those really favorable decremental margins, it's really about our cost initiatives. There's two baskets to that. One basket is what I'd call variable related. We're variablizing our cost structures, which is going to enable us to continue to flex as the end markets are moving up and down. So we're in good shape there. The other key thing and it will continue to benefit our decremental margins as you go through 2021 and even the up-cycle are those structural changes. I know I've mentioned it several times, but it is quite important. As you guys are thinking about 2021 and beyond, as we keep that $100 million of incremental savings as structural, that's a gift that keeps giving. And it's going to contribute not just to beneficial decremental margins and incremental margins, but also our cash flow.

Okay. Following up on that, Bob, in the past with this kind of business, we have been accustomed to decrementals of around 40% to 50%. How has the approach changed this time to enable you to maintain much lower levels of decrementals?

Yes. We've been very proactive in ensuring that we're utilizing the right facilities. As of this morning, we have six facilities that are currently idle indefinitely, which were our higher-cost facilities. The challenge is that we refer to them as cold, dark, and quiet, meaning we need to take these facilities offline and minimize costs as much as possible. For these facilities to be brought back online, there needs to be justification for reinvesting working capital and adding capacity. In the meantime, we are making structural changes to ensure they can be viable when they are operational again. So I think what's different this time is primarily driven by the magnitude and probably the duration of the economic situation, and we were able to take more structural change than we ever had before. And so that's been a huge contributor to that. Don, did you want to add some more color to Dave's question?

Yes. I think, certainly, we're facing unprecedented times. And one of our key models internally is don't waste a good crisis. And so really the dramatic changes in the end markets driven by COVID have opened up new opportunities for us to make fundamental changes that may be in the past were a more difficult thing to do. So for us and for our teammates in the operations, everything is on the table. And so that opens up new opportunities that maybe others hadn't seen in the past. And it's not bad. It's actually a really good outcome of a really tough situation with the crisis.

Yes. And I think that crisis gets us to recovery-ready, right? We recognize that being recovery-ready is important for our key customers. It's not a generic term or a blank check, actually. It's really driven by what specific actions would we take in the supply chain, what's the lead time to take those. And candidly, on a weekly basis, we're looking at customers' forward look. And candidly, the reports you put out and some of the other analysts as you look out, we try to gather where do we need to be and when do we need to be there. But we've taken a more conservative view, I think, of what demand is going to be in the near term to be positioned on a cost basis to achieve that.

Our next question comes from Paretosh Misra of Berenberg.

A question about next year 2021 regarding your jet engine and airframe business. Are you expecting any contribution from price increase also to your top line because maybe some new contracts starting with the new calendar year? Or it's mainly a volume story as we look into next year, volumes stabilizing and gradually recovering?

Yes. I would say three components to that. Some of the contract renewals we had did have, we call it, margin enhancement and it came from one of two sources. It could be unit price, but it also could be product mix. So we continue to drive as we get more share in the jet engine space. And even in some of our airframe spaces, we've been able to get a better product mix that plays more favorably to either the alloys and/or dimensions of products that we make. So I'd say there's some that is going to be driven by that, but the majority of it would be increasing in volume.

Got it. And regarding the inventory of your products that your customers have for the jet engine and airframe segments, is it typically around 3 to 6 months, or possibly higher?

Yes, I don't have specific figures on the inventory they maintain. However, historically, the lead time from shipping forged components to when they are installed on a plane has averaged around 6 months. In some cases, this can be tighter, possibly down to 4 months. So, regarding the time frame from engine production to delivery of our forged parts, it typically ranges from 4 to 6 months. For other products like billets and plates, the lead time can extend to 12 to 15 months, depending on the product and the complexities of the supply chain.

Got it. And if I could just ask one quick follow-up on the last question about decremental margin. I apologize if I didn't understand it correctly, but I think you're saying that you could keep the decremental close to 25% because of the structural cost saving, right? Like that's the target, I guess, it's closer to 25%. Did I understand it correctly?

Yes, partially. What I meant was that when considering our decremental margins in the future, they should be viewed in the range of 25% to 30%. This perspective holds true as we move through 2021 and analyze how changes in revenue will impact the bottom line. My comment about structural changes pertains to how we should approach the benefits of the cost actions we've implemented once we enter recovery. We have achieved significant cost reductions amounting to approximately $260 million to $275 million in annual savings. However, the crucial aspect is what occurs after the downturn. The key question is how much of those savings can be retained, and I believe the structural changes will provide ongoing benefits, valued at around $100 million or more. Thus, as you consider decremental margins moving into the future, especially after 2021 during the recovery phase, it's essential to recognize that these margins, along with our incremental margins, are expected to remain quite strong.

And our next question will come from Matthew Fields of Bank of America.

Just wanted to ask about liquidity. You've obviously done a fantastic job of kind of managing the working capital. But I noticed that the ABL availability dropped this quarter presumably because your borrowing base shrunk in accordance with that. How do you think about the trade-off between kind of squeezing out cash flow and kind of managing that ABL availability?

Yes. I'm really glad you asked that question. So when you think about what's going on with availability, you're right. Usually, there is a trade-off between the release of working capital, get it into your cash, but hey, you're losing some of your availability on your ABL. We, of course, are very aware of those mechanics. So here's what we're doing. We actually have a very healthy set of initiatives that we're targeting and we're capturing that looking at our existing collateral baskets. There are some of those collateral baskets that have historically not been included in our borrowing base, things like international receivables. There are some inventory categories that may exist with third parties. What we're doing is we're working with our banking group to get those baskets of collateral included in our ABL borrowing base going forward. The benefit is that while you're converting some of your borrowing base into cash, you're also replenishing the collateral, which can be considered free collateral. This is very advantageous for us. Currently, we have $950 million in liquidity, and we plan to keep increasing our cash balance because it's the right strategy. We aim to maintain our overall liquidity even in tough conditions by adding previously underutilized baskets. We are taking the right steps to remain in a strong position.

That's great. That's very helpful. And obviously, you've built up a kind of war chest of liquidity for a downturn. But now that we're another 90 days to this, how do you feel about your maturity window? Obviously, your first maturity of size isn't until 2023. Do you think that that's still plenty of time? Or do you think about wanting a longer runway? Or are you comfortable that the downturn won't be as deep as you initially feared? Any thoughts on that kind of maturity schedule, the policy?

Yes, we're in a solid position regarding our debt maturities. With the current cash and liquidity we have, our goal is to give ourselves options for managing these debt maturities. We have ample time before these maturities come due. As for refinancing the bonds maturing in 2023, that will depend on the situation at the time. There are many factors to consider when managing our capital structure and funding our business, especially with the growth opportunities mentioned earlier. Right now, we are well-placed to make informed decisions, and the market conditions have also been favorable, which is beneficial.

And this concludes our question-and-answer session. I would like to turn the conference back over to Scott Minder for any closing remarks.

Thanks, Laura, and thank you to all the participants and listeners for joining us today. That concludes our third quarter 2020 conference call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.