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

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

Thanks, Adam. Good morning and thanks for joining us. What we accomplished this quarter builds additional momentum for what we anticipate will be a very strong year for ATI. Our team is performing well, continuing to execute operationally and strategically. Our market conditions are improving. Customer demand accelerated in the latter part of the quarter. These all enhanced our topline growth rate and added to our earnings. I'll use my time today to tell you about three things that really stand out for me about our performance. First, we delivered overall Q1 EBITDA margins of 15%. That's an increase of 430 basis points versus full year 2019. This margin level was achieved despite sales that were nearly 20% lower than 2019 on a run rate basis. Comparisons to 2020 and 2021 are even more favorable. We have fundamentally transformed our business over the past two years. Our results increasingly reflect the value of the actions we've taken. Second, the value of our strategic actions is truly evident in the AA&S segment results. Q1 segment EBITDA margins were over 15%. No question there were a few beneficial tailwinds, but what's really driving this segment's results, structural improvements in our footprint, product mix, and customer profile. Continued operational discipline is also increasing the bottom line. We all know the tailwinds inevitably turn to headwinds. When they do, these structural changes will ensure a solidly profitable business through the cycle. And third, our incremental margins were robust. While sales grew by 20% year-over-year, adjusted EBITDA doubled. That's truly impressive. It's a testament to our team's energy and focus to improve ATI. We all started 2022 with optimism that the world would return to calm from global volatility. What we recognize is that uncertainty remains the norm for all companies. Geopolitical issues in Europe and COVID-related lockdowns in China are the latest additions to the list. These events create short term raw material price volatility, supply chain disruptions and reduced consumer demand transparency. Yet every cloud has a silver lining. For us, it's our ability to nimbly react to ever changing conditions. And we are operating in an environment where underlying demand in our core markets continues to improve, particularly commercial aerospace. Amidst the ongoing uncertainty, we continue to focus on the things that we can control, executing the strategy we shared at our Investor Day. We're well on our way to becoming an aerospace and defense powerhouse. We're serving growing markets with our material science expertise and unique process capabilities. We continue to progress on the final steps in our business transformation plan. We're no longer producing standard stainless sheet products. In the quarter, we recognized the benefit from the sale of a stainless-related facility and are nearing the mid-year closure of the remaining two sites. We continue to take actions to ensure that we have a purpose-built portfolio aligned with our strategy. To that end, we recently announced the sale of our Sheffield UK facility. It's part of the HPMC segment and focuses primarily on oil and gas materials. This facility has struggled to be margin accretive and carries a legacy defined benefit pension liability that will stay with the business post sale. The UK government is conducting its customary review of the transaction and we expect it to close in the second quarter. Recent market dynamics created by the Russian invasion of Ukraine have created not only challenges but also opportunities for ATI. Raw material flows to global industrial markets including commercial aerospace are being impacted by economic sanctions on Russia. Disruptions to material availability have led to higher material prices. As a case in point, extreme price volatility caused the London Metal Exchange to close for several days in the quarter. With disrupted availability and no primary financial market, nickel prices rose by more than 30% in March. We also saw significant increases in the first quarter for other key raw material inputs including cobalt, ferrochrome, and molybdenum. How did we respond is the question. We focused on what we could control. To ensure ATI's ability to meet increasing demand requirements we took decisive procurement actions to create a near-term price-protected nickel safety stock. This will ensure an uninterrupted flow of materials to meet increasing customer demand. These actions increased our managed working capital balance in Q1, it's appropriate insurance, ultimately benefiting our customers. We're focused on protecting a continuous flow of ATI products to meet our customers' expanding production rates, overcoming supply shortages, and adding new employees. We raised prices to offset the additional raw material, labor and supply chain costs we're experiencing. In product lines with fewer long-term customer agreements, we're able to fully offset inflation in the first quarter. In our LTA oriented businesses prices are rising but the bottom line impact will lag higher cost by about a quarter. Current events also provide long-term opportunities. As customers rethink global supply chains there is a likely reallocation of demand to western suppliers. This is most evident in Aerospace Titanium where customers fear losing access to close to a third of the industry's capacity for Aerospace quality melt. As customers react to sudden changes in governmental policy and industry certifications, many are exploring long-term agreements to lock in future supply. We'll be disciplined as this process plays out over the coming quarters. As we speak, it's abundantly clear that we're well positioned to grow this part of our business. We have the needed qualifications, capabilities, and near-term capacity. Customers can and are making efficient and economical decisions to be more strategically aligned with ATI. As we move forward, we will diligently evaluate our opportunities. We're balancing the potential need for additional capital expenditures with our long-term return on capital expectations. Exciting times for sure, and exciting to be well positioned to take advantage of the opportunities ahead. With that, let's move to a brief discussion of what we saw in our key end market in the first quarter and what we foresee in the coming quarters. I'll start with commercial aerospace. Demand for domestic travel is strong, specifically U.S. domestic travel statistics in January and February 2022 were nearly on par with 2019 as industry labor shortages and travel restrictions eased. International travel rates improved almost 100% year-over-year in January and February but are still 60% below 2019 levels. These trends are encouraging. There is still significant upside to this market's full potential. We're also encouraged with increasing demand for narrow body airframes as the 737 MAX received clearance to resume commercial flights in China. This is very helpful to releasing a significant portion of this model's order backlog. For ATI our jet engine business continues to gain momentum. Specialty Materials sales growth is accelerating, and we continue to see steady progress in forgings where our recovery began in early 2021. This growth supports our jet engine customer's increasing narrow body production rates. Our 2021 share gains magnify the benefits for ATI. Demand for wide-body engine materials and forgings also grew in the quarter primarily supporting MRO programs for engine overhauls as airlines prepare their fleets for increased international travel. One big milestone for us, for the first time since 2019 more than half of HPMC's quarterly jet engine sales were ATI's NextGen materials. That's a really positive sign for ATI. We expect these beneficial trends to continue in the coming quarters further propelling our bottom line. When it comes to widebody airframes, sales also improved despite ongoing low widebody aircraft production rates. We're seeing the benefit of new business wins that began in late 2021 with Airbus and for an electric autonomous taxing vehicle. As I mentioned earlier, there are substantial new business opportunities in titanium over the next several years. Most significant potential impact will begin in 2023. Our current lead times for most titanium products are well into the fourth quarter of 2022. Next up, our defense markets. Sales were down versus both prior periods. The year-over-year decline is heavily influenced by the divestiture of our Flowform business in mid-2021. Rotorcraft sales are affected by a timing issue. We're seeing the volume for the now completed programs decline faster than the CH-53K program grew. Looking ahead, our decades-long partnership with Sikorsky to produce U.S. military helicopters continues. They recently announced ATI is a supplier on the newly proposed DEFIANT X program. This is a contender to replace the Apache and Black Hawk. Lastly, as expected, titanium armor sales increased in support of U.S. and British armored vehicle production. Our defense sales should increase in 2022 with growth in some categories, partially offset by declines in programs at or near their lifecycle ends. Longer term, we expect ongoing growth that's supported by replenishment of vehicles and weapon systems consumed by the conflict in Ukraine, increased U.S. and allied defense spending, and new programs like Hypersonics. Shifting to Energy Markets. Sales to our oil and gas customers expanded versus both prior year periods despite the completion of a large pipeline project in the fourth quarter and our exit from production of standard stainless sheet products. Market demand remains elevated as oil prices have steadily risen in 2022. As a result, offshore investments have recovered to pre-pandemic levels. We expect this trend to continue as offshore activity increases including for nickel clad pipeline projects in Latin America, the Middle East, and Asia. In our specialty energy markets, revenues were in line sequentially but down year-over-year. The latter is largely due to the timing of shipments for civilian nuclear applications and pandemic-reduced pollution control project work in Asia. Shipments for land-based gas turbines remains strong in the quarter. Looking ahead, we anticipate specialty energy demand will increase as the transition to greener energy accelerates. We see two drivers, one, the need for more secure energy supplies in the wake of the Russian invasion of Ukraine; and two, increasing momentum to decarbonize. Additionally, advancements like modern nuclear power reactors, hydrogen as a fuel, and efficient gas turbines will likely play a larger role in future energy policies. We will require extraordinary material science expertise and advanced process technologies, the core of ATI's differentiated capabilities. Finally, in our smaller medical and electronics markets, first quarter sales performance was mixed. Sales to medical markets were in line sequentially and increased significantly year-over-year. This was led by materials for MRI machines as hospitals upgraded equipment to support elevated demand for elective surgeries. In our electronics markets, sales declined versus both prior periods. Sequential declines were largely due to the Lunar New Year holiday shutdowns in Asia. Year-over-year decreases were more modest and compared to record Q1 sales in 2021. In the near term, we see lower sequential revenues as the COVID-driven Chinese lockdowns continue. That said, we expect strong underlying market demand for electronic devices and chips to lead the market recovery later in the year. From my perspective, that's where we stand. In the past, I spoke of pivoting to growth. Now the markets have pivoted and we're fully accelerating. The path forward is clear. Our largest and most profitable end markets are strong and accelerating, fueled by underlying market demand and our team's ability to execute for our customers. We have significant growth opportunities ahead driven by four things. First, commercial jet engine demand expansion. Second, airframe demand growth acceleration in 2023 aligned with international travel growth. Third, potential reallocation of aerospace titanium market shares. And fourth, defense market growth as global spending increases. We've made tremendous progress thus far. The ATI team is committed to improving every aspect of our operations and it shows. Concurrently, we've put ourselves in a great position to win. I'm confident in our team and our future. Now I will turn it over to Don to give you some additional detail on our Q1 and financial results, and forward outlook. Don?

Thanks, Bob for a great overview. Here are my headlines for the quarter. Q1 revenue was up 20% year-over-year and 9% sequentially. Our bottom line is growing and our margins are expanding. This reflects the strong underlying demand in our end markets and benefits from our transformation. As a result, we are raising our full year EPS guidance by nearly 60%. I'll explain how these results position ATI for a great 2022 and are creating momentum for 2023. Let's start with our first quarter performance. Sales of $834 million were up 20% year-over-year and 9% sequentially. Earnings growth was even more impressive. We earned adjusted EBITDA of $125 million, up 100% versus the prior year, that's 32% growth over Q4 2021. This translated to an adjusted first quarter EPS of $0.40. These adjusted results exclude a few things, a $25 million non-cash charge related to the pending sale of the Sheffield UK operation, a $7 million gain on sale of our Pico Rivera facility, and an $8 million net increase to our reserves, primarily due to a proposed settlement made on a pending litigation matter. On a reported basis, we earned $0.23 per share. Before I cover the segment details, I want to provide some color on an ATI specific tailwind. Bob noted that we recognized some federal employment related subsidies in the first quarter. If you recall, we recognized these same subsidies in smaller amounts in the second half of 2021. First, we received a benefit under the Aviation Manufacturing Jobs Protection program or AMJP to maintain employment levels as the aerospace industry recovers. Second, we recognized employee retention subsidies for maintaining appropriate recovery-ready employment levels during the pandemic. In aggregate, these benefits totaled $29 million in Q1. These are meant to offset prior year expenses and current cost inefficiencies relating to sustaining employment levels. In reality, these benefits allowed us to retain the employees needed to be ramp-ready for our customers. We expect a roughly $6 million AMJP benefit in Q2. As a company, we generated robust year-over-year incremental margins up 50% in the first quarter. Our business transformation is reducing cost and eliminating less profitable businesses and product lines. We are also capturing benefits of employment subsidies, tailwinds from higher raw material prices, and strong demand. We have consistently maintained incremental margins above 30% since our recovery began in mid-2021. Our employees have worked hard to get us into this position. Now, let's dive into segment performance starting with High Performance Materials & Components or HPMC. First quarter segment revenues were $342 million, up 40% year-over-year and nearly 10% sequentially. The segment continues to benefit from the expanding commercial aerospace recovery. We see that particularly in jet engines where sales increased almost 90% versus prior year as a result of increasing material sales and steady forgings growth. Defense sales were lower while medical sales increased versus the prior year. Segment EBITDA was $68 million resulting in a nearly 20% margin. This included $22 million of employment subsidies partially offset by labor and other costs related to ramp readiness. Results also reflected higher material input costs from increased commodity prices and temporary global scrap shortages. Segment EBITDA grew 12% sequentially compared to the Q4 2021, which also included AMGC benefits as well as a large customer credit. Excluding those benefits from Q1 2022, margins increased year-over-year. When the subsidies are removed from both periods, we saw sequential declines for two reasons. First, we experienced temporary margin compression when raw material costs drove higher surcharges in revenue while EBITDA dollars remained constant. Second, a high percentage of the HPMC revenues are generated under long-term agreements, many have price recovery mechanisms that tend to lag actual input costs by approximately one quarter. This causes a drag on margins when prices increase rapidly, but will unwind when prices fall, benefiting margins. In Advanced Alloys & Solutions or AA&S, the benefits from our ongoing transformation are clear in our results. Revenues increased by 9% versus both prior periods due to broad-based expansion in several core markets. Growth was led by aerospace and defense sales which increased by 47% year-over-year and by 29% sequentially. These gains were largely in airframe applications which benefited from new business that began in mid-2021. Sales to markets focused on standard stainless products declined as we entered production in those materials. Segment EBITDA of $75 million grew by over 50% year-over-year and sequentially. This included $7 million of employment subsidies and benefits from higher raw material prices. Margins increased by over 500 basis points versus both prior periods. We were able to overcome the impact of higher costs in the quarter through improved product mix and brace pricing along with volume-related benefits. The Specialty Rolled Products team is doing a fantastic job at quickly changing the business mindset from a producer of commodity products to a true high-value specialty materials provider. The numbers tell the story. Let's turn to the balance sheet, where cash and available liquidity totaled nearly $700 million at the end of the first quarter. For normal seasonal patterns, cash from operations declined versus year end 2021 levels, as we work to build inventories in support of the ongoing market recovery. In addition, as Bob shared, Russia's invasion of Ukraine has negatively impacted the price and availability of many industrial commodities. We took proactive steps to procure additional raw materials required in order to ensure on-time customer deliveries throughout 2022. Managed working capital as a percent of sales increased versus year end 2021. This was a result of increased volume demand particularly late in the quarter as well as higher raw material costs. As a partial offset, gross inventory turns improved by nearly 10% in the first quarter as the work of our dedicated inventory flow teams gained traction. We intend to closely manage inventory as the year progresses continually assessing the need to maintain additional strategic quantities. At our Investor Day, in February, we laid out our capital deployment plans in detail. To summarize, we will focus on one, funding organic and inorganic growth as opportunities arise. Two, reducing debt and pension obligations. And three, opportunistically returning capital to shareholders. In support of these objectives, we spent $26 million on capital expenditures in Q1. We expect this pace to accelerate as we plan to hit our 2022 CapEx range of $210 million to $225 million. We also acted on our recent Board authorization to repurchase up to $150 million of ATI stock. In the first quarter, we bought back approximately 3.5 million shares at an average price of $25.57, that's 6% below Monday's closing price. These repurchases will go a long way toward offsetting the expected dilution when our convertible notes mature on July 1 of this year. We expect to issue 5.8 million shares at that time since settlement in shares is required above the $14.45 conversion price. We're excited to be in the position to return cash to shareholders while still funding our business priorities. To date, we've spent about $90 million and $60 million remains on our $150 million authorization. We'll continue to provide quarterly updates on our progress. Now, let's spend a few minutes pulling it all together. What do these results mean for our second quarter and full year 2022 outlook? We expect underlying market conditions in our core aerospace business and our strong execution to drive increased sales and earnings across 2022. Demand expansion in other key markets should also support our growth. In the second quarter, tailwinds from governmental subsidies and raw material benefits will likely be significantly smaller than in Q1. COVID-related logistical challenges in China and production output at our Asian Precision Rolled Strip business. Finally, we expect a non-cash charge of about $110 million related to the expected Sheffield sale, which will be excluded from adjusted earnings. On the positive side of the ledger, we anticipate a $9 million benefit from our portion of the Section 232 tariff recovery made by our A&TS joint venture. We anticipate second quarter earnings in the range of $0.32 to $0.40 per share. Despite the strong market conditions, net unfavorable sequential headwinds will likely cause second quarter earnings and margins to contract somewhat compared to first quarter. Year-over-year earnings and margins are expected to continue to expand. Looking a little further out, the picture becomes a bit hazier. There is raw material volatility, the impact from ongoing geopolitical events, supply chain disruptions, and COVID resurgence in China, however, the team is managing challenges and driving results. Given Q1 performance, Q2 outlook, and anticipated growth in the second half of the year, we're increasing our full year guidance. Our revised full year 2022 EPS guidance is a range of $1.40 to $1.60 per share. This represents a midpoint increase of $0.55 per share versus the prior guidance range that's nearly 60% higher. We are confident underlying market fundamentals support growth, and we have sufficient levers to meet this increased EPS outlook. Due to the uncertainty of raw material pricing and the potential need for higher strategic inventory levels, we're keeping our full year free cash flow guidance in place. We'll reevaluate as events unfold across the second quarter and provide an update on our next earnings call. With that, I'll turn the call back over to Bob.

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

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

Hey. Thanks very much and good morning everyone.

Good morning, Seth.

Good morning. I want to ensure I understand the dynamics of pass-throughs in HPMC and the factors influencing the margin. Without the subsidy, I didn't expect the margin to hold at the Q4 level, but the decrease was substantial. I'm looking to clarify the pass-throughs, particularly regarding some of the mill products, and how to assess the future of HPMC margins considering the various influences.

Sure. This is Don. Let me address that. Regarding the pass-throughs for HPMC, we have long-term agreements that allow for the pass-through of a significant portion of metal price fluctuations. We also have adjustments tied to the Consumer Price Index included in these agreements. For non-LTA transactions, we usually manage to recover our underlying cost increases through price increases. However, it's important to note that there is often a time lag of about one quarter between when inflation impacts our costs and when the LTA mechanisms allow us to increase prices. This is a factor to consider when analyzing incremental margins from quarter to quarter. Additionally, in terms of employment incentives highlighted this quarter, there were $29 million in credits related to HPMC, but this is just part of the picture. These credits are aimed at preparing businesses for increased operations. We are continually adding new employees, approximately 500 this quarter, and training them involves significant costs and time before they can effectively contribute to meeting demand. It's essential to factor in these offsetting expenses alongside the credits when evaluating Q1 results. For context, we anticipate about $8 million to $10 million in inefficiencies linked to these new hires and other ramp-related issues within our cost structure. Looking ahead at margins, we've performed well, and we expect incremental margins of 30% to 40% as the business progresses. This outlook applies to HPMC as well, and we believe that as the year progresses, we'll continue to see improved margins, revenue growth, and increased net income, all of which is reflected in our guidance for the year. There are some challenges in the current quarter, but after making the necessary adjustments, it’s clear that the underlying performance of the business remains strong.

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

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

Good morning, Richard. This is a great opportunity to address multiple questions. I'll start by saying that the major OEMs are very active and focused on securing their long-term titanium supplies. We anticipate the second quarter will be quite busy as we collaborate with customers to address this. Regarding the industry's perspective, the titanium aero quality melt will be a key challenge everyone will need to navigate. Companies are looking into basic bottleneck management techniques and assessing their product mix to optimize through these limitations. For us and the industry, the melt side presents about 30% of the world's titanium aero quality melt as at-risk. Throughout 2022, we expect to position ourselves for 2023 and beyond. Currently, our lead times extend into the fourth quarter, with our order book driven by present demand rather than share shifts. As we approach 2023, we plan to undertake small projects to relieve some of our downstream bottlenecks and address the melt situation, which may present opportunities for reallocating shares in the future. However, it's too soon to make predictions about that. Reflecting on our Investor Day, we believe we have the capacity to meet the projected build rates through 2026, which amounts to about 100 narrow bodies and 20 wide bodies per month. While our widebody production offers significant upside, we produce based on firm orders rather than build rates and do not invest capital without firm customer commitments. In about 90 days, we'll have a clearer view on share shifts, but for now, I want to emphasize the high level of activity and our favorable position to capitalize on it in the future, though it's too early for definitive commitments.

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

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

It's difficult for me to provide an exact figure regarding the lag effect. However, if you consider the margins for the quarter and make adjustments for credits to exclude those credits and the related offsetting expenses, you would be looking at approximately 16% EBITDA margins. Generally speaking, I can see that a one-quarter lag could likely push you into the upper teens. However, this is just an estimate off the top of my head. Sure. So the first answer is if you look at what happened with managed working capital in, in the quarter, the inventory was up about $140 million, about two-thirds of that increase was tied to commodity price increases. The remainder is, I would say volume related. It has to do with us ensuring that we've got adequate materials in place for the ramp to satisfy our customers' needs. It's also addressing some of the underlying risks that came up with Russia's invasion of Ukraine. We took some proactive steps to make sure that we had inventory for things for example like nickel that were on the ground and it's a disruption of supply which there hasn't been at this present time, but if there was a disruption then we are in a good position to continue to produce for our customers. And I think, as you look further out what you should expect is, number one, we absolutely have not side of our target of getting our managed working capital back down into that 30% range. We certainly expect that we'll be there by the end of the year, all other things being equal. And I think also I mentioned in the prepared remarks, some of the headway that our teams are making around managing our inventory in a more efficient way. And we saw a 10% improvement in inventory turns management. I think that's an early indicator that what we're focused on as a team is working.

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

Thank you. I was wondering if you could discuss the titanium share opportunity. Are you engaging not only with the air-framers but also with engine manufacturers like Safran, which sources about half of its titanium needs from VSMPO? I'm curious if you are still a significant supplier there and whether those discussions are currently taking place.

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

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

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

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

Hey. Good morning.

Good morning, Josh.

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

We usually don't distinguish between aftermarket demand and original equipment demand, but due to the specific characteristics of the widebody business, we're noticing an increase in MRO activity. There are engine programs undergoing upgrades, and we're seeing an uptick in shop visits for older product lines and freighters. We are preparing for a rise in international routes as well. Currently, our MRO business is performing 50% to 75% above our usual levels. Typically, MRO accounts for about a quarter of our business, but we're observing significantly higher MRO activity, ranging from 50% to 70%, depending on various factors like the program and supplier. This trend began in 2021, continued strongly through 2022, and all signs point to sustained strength throughout 2023.

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

We believe there is potential for us in the pack rolled sheet and titanium market, which is new for us but has strong customer interest. The HRPF is a significant asset that will allow us to advance in this area. We are also enhancing our plate capabilities, leveraging aspects like gauge and profile control that are essential for aerospace manufacturing. We are optimistic about the opportunities arising from this. Additionally, as we transition away from stainless steel, our new bright and neo furnace will improve material properties, allowing for better dimensional control in manufacturing processes. The combination of the HRPF and the new furnace will provide exciting advancements that set us apart from competitors. Overall, we are seeing a strong demand and are eager to discuss the startup and ramp-up of these developments rather than just focusing on the construction phase.

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

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

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

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

Thanks, good morning, and I appreciate you taking my question. Could you discuss the key factors that have influenced your guidance compared to three months ago? The delays with the 787 were likely a setback, but perhaps you've noticed some improvement in narrowbody demand. Could you provide an overview of what has changed in your outlook since then?

This is Don. Let me give you a high-level overview of the reasons for the increase. There is some interesting information regarding the shift to Q2, but what’s more significant is what’s driving the full-year guidance, which has risen by 60%. We are experiencing increased demand across all of our key end markets. The growth in our Aerospace sector, particularly in jet engines and airframes, is complemented by growth in defense and medical markets. This demand surge is a key factor in our enhanced earnings expectations. We noticed these positive trends beginning late in 2021, and they gained momentum in the first quarter. Factors contributing to this include underlying demand, a recovery in air travel, and market opportunities arising from disruptions, such as those related to Russia, all of which are beneficial for our business's demand. Additionally, we implemented effective cost management mechanisms starting in 2020 and continuing through 2021, which are positively impacting our bottom line. Our organization has learned valuable lessons about cost management during the downturn, and we expect these benefits to persist. Furthermore, the transformation in our Specialty Rolled Products business is being executed successfully, along with our initiatives to improve our mix, all of which contribute to a significant increase in our full-year expectations.

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

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

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

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

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

Thanks, Adam. I appreciate it. First, I want to send best wishes to ATI's Scott Minder, who is feeling unwell today, which is quite rare for him. This has significantly impacted today's preparation, and I am grateful for his efforts. He is one of our top salespeople, and we look forward to his return. I also want to thank Adam for stepping in. Managing Don and me during this call is probably one of the most challenging experiences he will face today. I appreciate that. With Scott unavailable, I have the opportunity to share a few final thoughts. First, I want to acknowledge our approximately 400 employees at our forging operation in Eastern Poland, located around 50 to 60 miles from the Ukrainian border. We are thankful for everything they and their community are doing to assist the influx of Ukrainian refugees. We are proud of their efforts and support them from a distance. In terms of ATI's direction, we are rapidly working towards becoming the aerospace and defense leader we discussed during Investor Day. We expect Q1 to showcase the progress we've made. I believe we have the right team in place, fully committed to doing things correctly to help our customers succeed, especially in challenging conditions. Execution will be crucial, and we are wholly focused on that. Ultimately, delivering real value for our shareholders is our primary goal as we make these moves. Looking ahead, Don mentioned the potential for growth, and our order lead times are extending into the fourth quarter, indicating strong demand. We are thriving, and while expectations are high and barriers to entry in titanium remain steep, our focus is on managing global changes and finalizing deals in the next 60 days. This is where we excel and demonstrate our value. I am proud of our team for unlocking our potential and proving that we can perform effectively.

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