Ati Inc Q2 FY2022 Earnings Call

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

Thank you. Good morning, and welcome to ATI's second quarter 2022 earnings call. Today's discussion is being broadcast on our website. Participating in today's call are Bob Wetherbee, Board Chair, President and CEO; and Don Newman, Executive Vice President and CFO. Bob and Don will focus on our second quarter highlights and key messages. A supplemental presentation is available on our website. It provides additional color and details on our results and outlooks. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now, I'll turn the call over to Bob.

Thanks, Scott. Good morning and thanks for joining us. After many quarters of saying we're preparing for the ramp, the time has come and I can say with confidence today that we are ramped. Our core markets, namely aerospace, defense and energy, are accelerating. That's largely due to end customer demand, technology shifts, and geopolitical events. Across our asset base, production is increasing to match this demand. This is what we plan for. We're ready, and it feels great. Admittedly, we're in the early phases of this ramp, but we're confident we're positioned to move forward. I'm not going to say it's easy. We're operating in challenging circumstances; labor markets are tight, and costs are rising with inflation being a global issue. Supply chains are fragile after two years of pandemic reshuffling. Just like during the pandemic, we're laser-focused on what matters most. I'm proud of how our team is responding. We worked hard to be on track or ahead in filling open positions. We're offsetting inflation with cost reduction initiatives and dynamic pricing. Our operations are producing and delivering high-quality parts and materials in a timely manner. But we are not perfect; we strive for perfection every day at every site. We owe it to our customers, and they appreciate our efforts. Across ATI, our actions are translating into strong financial results and significant long-term opportunities. Three things stand out for me in our Q2 results. First, revenue growth is accelerating. Our second quarter sales of $960 million were up 15% sequentially, equally supported by both business segments. This marked the highest quarterly sales since Q4 2019. It's worth noting that the previous period was before we exited standard stainless sheet and divested both our Flowform business and our Sheffield operation. The higher base in surcharge pricing provided tailwind; expanding customer demand is the real driver. Second, our margins continue to improve. Momentum is building in these early phases of the aerospace recovery. Q2 adjusted EBITDA margins were near 15% in the second quarter. This marks an improvement of more than 600 basis points year-over-year. Sequentially, margins were in line despite the second quarter results having significantly fewer government-related benefits. Actions taken during the pandemic to transform our cost structures and business portfolio are paying off. We expect this performance to continue. Let's take a step back from our short-term results. I have three big picture observations to put ATI's performance in context. First, the strong demand for air travel has returned to the vast majority of global markets and should grow consistently for the next several years. My recent travels for the Farnborough Airshow clearly illustrate this point. International flights were completely full in both directions. Each row was packed with people from around the world. Models that were sent to the desert at the start of the pandemic are returning to service. At the show itself, both airframe OEMs announced customer orders for narrow and wide bodies. While the narrow-body supply chain has recently encountered a few bumps, not unexpectedly, production rates on narrow bodies are still projected to ramp to record-setting levels. Demand for wide-body engine spare parts is spiking as airlines respond to the recovering strength in international travel. How is all this relevant to our shareholders and our team? These trends benefit ATI even more than they did in 2019 for two reasons. One, our market share has grown; and two, the industry is shifting almost exclusively to fuel-efficient next-generation jet engines where we have significantly greater content. Now, more than ever, you can't fly without ATI. My second significant observation: Russia's invasion of Ukraine is changing the world in many ways. Some changes are significant; others are minor, but most will stick around for some time. Let's be clear: the Russian aggression is having a tragic impact on millions of people's lives and is forcing significant migration primarily to other parts of Europe. We continue to stand in support of the people of Ukraine. We thank our employees, particularly those in Poland, who have directly helped affected Ukrainians. On the business side of this issue, the situation in Ukraine has intensified the industry's focus on shifting aerospace titanium purchases to western sources. Customer discussions on this subject are pervasive, active, and lively. We're disciplined in our response, balancing the need to help our customers reposition their supply chains with our commitment to benefiting our shareholders, balancing short-term and long-term interests for both. We announced a significant titanium share gain in July with GKN Aerospace. It's a great example of how we're finding the best ways to allocate our increasingly limited capacity to the greatest strategic benefit. The impact of Russia's aggression in Ukraine extends well beyond aerospace share shifts. I have three examples that are significant for ATI. First, countries in and connected to geopolitical hotspots are significantly increasing their national defense investments. In the near-term, this means heightened demand for combat weapon systems replenishment. We're also seeing growing demand for all types of military vehicles, some with near-term need and others extending into the medium-term. In the longer-term, new capabilities like hypersonics are a priority for development, requiring extreme material science expertise, which is ATI's strong suit. Second note: security of national energy supply has become critical. Countries are assessing vulnerabilities related to procuring energy from potential adversaries. Renewables such as nuclear, hydrogen, and solar are the long-term environmentally friendly solutions for most. Meanwhile, increased fossil fuel usage from different sources will be necessary until these new sources can be built at scale. ATI serves both needs. Third, when looking beyond aerospace and defense, customers in other key ATI markets are working to eliminate Russian-made input materials. This shift is clearly evident in medical markets where sourcing titanium and other inputs is transitioning to Western-based suppliers. Again, ATI is well-positioned to service these supply chain shifts. My final observation is entirely our own making; we are now fully out of standard stainless sheet products. I expect this will be the last time I mention this product line in my earnings call remarks as we sold our last coil in the second quarter and closed our facility in Illinois, which was the fourth in our transformation of Specialty Rolled Products. The expansion of our Vandergrift, Pennsylvania operation is on track to be the best finishing facility for specialty materials. We're winding down those operations left at our Ohio facility and in the first weeks of July, we've idled all but one operation at that facility. The team is doing great work. With the exit of the standards team and the second quarter's divestiture of Sheffield, our portfolio transformation is largely complete. We're a leaner, more focused company. We're channeling our energies into growing our strategic core. We've adopted the name ATI as our official branding and moved our headquarters to Dallas. We're broadening our vision of what we can achieve. We've not only transformed physically but also evolved our culture. Our Specialty Rolled Products team continues to increase the percentage of business under long-term agreements with OEMs, building mitigations for raw material fluctuations. Our Specialty Alloys & Components team continues to explore innovative and valuable uses for the exotic alloys and materials we produce. The same can be said for our High-Performance Materials & Components segment, where our force products and Specialty Materials businesses are collaborating more closely than ever. It's about delivery, lead time, and quality. We have the winning combination in this market. Let's shift to a quick overview of our Q2 performance by market and our outlook for the upcoming quarters. First, in our largest end market, the commercial aerospace resurgence is well underway. Jet engine related sales increased year-over-year by over 90% and nearly 30% sequentially. What drives these significant demand increases are narrow-body production rates, LEAP engine share gains, and service part demand for wide-body engines. We're in an upcycle—early phases perhaps, but the trend lines are solid and moving upward. Rounding out commercial aerospace, airframe sales increased for the second consecutive quarter as we realized volumes from our previously discussed share gains and new business wins. With relatively low wide-body aircraft field rates and significant wide-body channel inventory, ATI’s aircraft OEM sales are expected to remain subdued into 2023, before accelerating in 2024. Last week's announcement regarding the resumption of 787 deliveries serves as an important positive catalyst for ATI and the industry. This is good news, providing clarity we can work with. Growth outside of production rate increases is possible with a likely additional share shift from Russian suppliers. Our airframe category also includes space applications, which we expect to grow. Next, let's discuss defense. Sales improved sequentially, largely due to higher naval nuclear volumes. Compared to the prior year, sales were down due to shipment and program timing for naval nuclear and rotorcraft customers. Looking ahead, we anticipate defense sales to advance, driven by ongoing geopolitical events and our broad-based new business development efforts. Moving beyond our core aerospace and defense markets, energy demand growth accelerated in the second quarter, increasing nearly 70% versus the prior year and 25% compared to the previous quarter. High oil prices and global energy supply chain disruptions propelled customers to fund exploration and expansion projects, including downstream processing. Specialty energy markets grew across technologies, including pollution control systems, natural gas turbines, and renewables. The ongoing push for energy security and reduced carbon emissions will continue to drive demand for ATI's materials and components in the coming quarters. Lastly, we observed year-over-year demand growth in medical and electronics markets. Sequential revenue comparisons were mixed, with medical sales up almost 10% and electronic sales down 4%. In medical markets, elective surgery volumes are continuing to increase post-pandemic, driving customer demand for implant and MRI materials. We expect this trend to continue, enhanced by ongoing customer shifts away from Russian-made materials. In electronics, demand for consumer devices has somewhat slowed due to customer supply chain issues and reduced discretionary spending. Additionally, our Asian Precision Rolled Strip sales decreased due to COVID-related lockdowns in Q2. Demand for ATI's hafnium and magnetic alloys is continuing to expand, partly to support 5G microchip production. I'll conclude by saying we're laser-focused on what makes ATI great: material science and our advanced process technologies, combined with strong operational execution that delivers exceptional product quality and reliability. We have positioned ourselves well, executing to meet strong demand. Now, let's hear from Don. I'll be back after that to wrap up and transition into Q&A.

Thanks Bob. Let's start with the bottom line upfront. Our revenue growth is accelerating and is strong in both business segments. Each segment grew the top-line sequentially by at least 14%. Year-over-year growth was even more substantial due to the prior year period being impacted by the pandemic and a labor strike. Adjusted EBITDA margins were nearly 15% in the second quarter. Our adjusted earnings of $0.54 per share surpass our guidance range, driven by substantial volumes and the benefits of our advancing business transformation. As a result, we're increasing full-year earnings guidance for the second time this year, this time by nearly 40%. With increasing confidence in our forward visibility, we're also improving our free cash flow guidance. Now, let's dive deeper into the results for the second quarter. Q2 sales were just under the $1 billion threshold at $960 million. We fully anticipate crossing that billion dollar mark in the upcoming quarters, as we return to 2019 levels on a run-rate basis after exiting standard stainless sheet products and divesting of Flowform and Sheffield; it's a remarkable recovery in a short period. Our earnings and margin growth are equally impressive. In Q2, we generated an adjusted EBITDA of $143 million. For the second consecutive quarter, adjusted EBITDA margins hovered around 15%. This comes in contrast to full-year 2019 margins of 10.7%. We're proud of this achievement, which underscores the hard work of our team during the pandemic. They ensured we emerged ramp-ready, reflecting their efforts in streamlining cost structures, optimizing product mix, and completely offsetting the negative impacts from inflation through mid-2022. During our February Investor Day, we provided long-term EBITDA margin guidance of 18% to 20% by the end of 2025. Our 2022 year-to-date results clearly demonstrate that we're building momentum. Our Q2 adjusted EPS came in at an impressive $0.54, up $0.14 from the first quarter, despite significantly lower federal employment credits and grants in the second quarter. On a GAAP basis, we posted an EPS loss of $0.31. The second quarter adjusted EPS excludes non-cash charges related to the sale of our Sheffield operations, which we sold because it was not well aligned with our strategic focus and generated negative EBITDA in 2021. For us, this divestiture is a case of addition by subtraction. Now, let's delve into the segment results, starting with High-Performance Materials & Components or HPMC. The aerospace recovery is accelerating, driving increased demand for our specialty materials and forgings. In the second quarter, revenues reached almost $400 million, with 80% of those sales coming from the aerospace and defense markets. This is a significant milestone on our journey to achieving our long-term financial goals. Revenues increased 16% sequentially and 32% year-over-year, largely driven by sales to the jet engine market. HPMC adjusted EBITDA in Q2 was $60 million, representing a 62% increase over the prior year. However, earnings decreased by about $8 million sequentially due to reduced government employment benefits. Recall that our first quarter included $23 million of benefits from the Aviation Manufacturing Jobs Protection Act and other employment programs, while Q2 results contained only $6 million of similar benefits. This substantial difference in value more than accounted for the sequential earnings decline, despite the strong segment operating performance. What do these results showcase? Revenue growth potential, mix improvement toward next-generation materials, and the gains from our cost-cutting initiatives. We expect this progress to continue throughout the commercial aerospace ramp. Now let's shift to Advanced Alloys & Solutions or AA&S. Our transformation is significantly benefiting our financial results. Q2 revenues reached $563 million, an increase of 14% compared to Q1. Year-over-year, we experienced an increase of nearly 80%. Keep in mind that prior year revenues were impacted by the lengthy labor strike, which concluded in July 2021, affecting our Specialty Rolled Products business. Sequential and year-over-year gains were observed across most major end markets, led by aerospace and energy. From an earnings perspective, AA&S continues to deliver strong results. The second quarter adjusted EBITDA exceeded $105 million, which is remarkable, reinforcing our position as we achieved significant numbers within a single quarter. This reflects an increase of nearly $30 million sequentially and almost $70 million year-over-year from 2021 results, which were adjusted for the labor strike impact. Q2 margins were an impressive 18.6%, marking an increase of 330 basis points sequentially and 720 basis points compared to the previous year. Q2 2022 results included approximately $10 million of Section 232 recoveries from tariffs paid in prior periods. As Bob mentioned, we're entirely done with the standard stainless sheet business. However, the impact of our transformation stretches far beyond simply eliminating low-value products. The SRP business has improved its customer mix and grown the percentage of business under long-term agreements. As a consequence, we've significantly increased our capacity to recover higher input costs and have materially reduced our exposure to metal price volatility. Most importantly, we're being better compensated for the value we deliver. The transformation is proceeding as planned. We anticipate further cost eliminations in the second half of 2022 as the final stainless related facility is idled. We also expect ongoing improvements in product mix as we minimize lead times and enhance capabilities at our Vandergrift facility. Now, regarding our balance sheet, we are actively taking steps to decrease leverage and fortify our financial foundation. Late in Q2, the remaining $84 million of our convertible note converted into approximately 5.7 million shares. To help offset shareholder dilution, we've repurchased around 3.5 million shares in 2022. More details will follow shortly. Consequently, due to our rapidly improving EBITDA and debt reduction, our net debt to adjusted EBITDA ratio has fallen to 3.3x. As we look ahead, strong financial results and cash generation in the second half should help further improve our leverage metrics. We're moving closer to achieving our goal of maintaining a 2x net debt ratio across the business cycle. At the end of Q2, total available liquidity stood at $730 million, which includes $274 million in cash on hand. In the future, we expect to increase our cash balance as the year progresses. Managed working capital as a percentage of sales has improved sequentially by nearly 300 basis points, ending the quarter at 38.5%. This figure remains elevated largely due to: first, strategic raw materials purchased amid the Russian invasion; second, rising commodity prices; and third, maintaining inventory for our ramp-up. We anticipate this metric will continue to enhance in the latter half of 2022. Our expectation is to conclude the year much nearer to our long-term target of 30% of sales. Capital expenditures amounted to $29 million in Q2 and $55 million year-to-date. We expect this pace to accelerate due to organic growth-related projects in the latter half of the year, although we likely will spend less than the initial 2022 guidance range of $210 million to $225 million. Our new 2022 capital spending target stands at $205 million to $215 million, reflecting our continued discipline regarding capital allocation. I want to reiterate our capital allocation priorities and provide an update on our position. First and foremost, our priorities align with those stated at our Investor Day in February. We will fund growth, leveraging a robust list of organic growth projects boasting strong returns, as current market conditions support investments. While acquisitions remain enticing, we are committed to staying disciplined. Secondly, we aim to reduce debt and finance our pension obligations. Our debt has decreased by $84 million due to the convertible note maturity. Regarding the pension, we plan to contribute $50 million voluntarily to our defined benefit plans in the second half of the year. This contribution, alongside increased discount rates, could substantially bolster our pension funding goals by the end of 2022. Our third focus is to proactively return capital to shareholders. Year-to-date, we have repurchased 3.5 million shares under our buyback program at a total cost of $90 million. There is $16 million remaining on our current board authorization. We will be cautious in executing this mandate, balancing our cash needs, stock price, and shareholder interests. The promising news is that we can tackle multiple priorities simultaneously. Now, regarding guidance, we continue to exceed our earnings expectations due to robust customer demand, a healthy product mix, and our capacity to offset inflation. Following our strong Q1 results, we increased our Q2 and full-year expectations, placing us back in a favorable position today, thanks to our impressive Q2 performance. We are increasing expectations for Q3 earnings, forecasting Q3 EPS to range from $0.50 to $0.58. At the midpoint, this aligns with our Q2 adjusted results. Our revised forecast considers expected negative impacts from business seasonality, scheduled outages, and lower commodity costs. We don't anticipate further federal employment incentives or Section 232 tariff recoveries in Q3. In addition, we are substantially raising our full-year adjusted EPS guidance, owing to our year-to-date success and Q3 performance. Our new 2022 guidance range for adjusted earnings stands between $2.00 and $2.14 per share. This signifies an almost 40% increase at the midpoint compared to previous guidance. For reference, this is in comparison to adjusted EPS of $1.18 in 2019, excluding benefits from the sale of our oil and gas rights during that period. Our business is thriving, and we are focused on maintaining momentum. In closing, we are pleased with the momentum building within the business and the strong underlying demand in our key end markets. Our investments in ramp readiness and business transformation have fundamentally altered the trajectory of the business for the better. We have the right strategy and are confident in our team's ability to successfully execute for the benefit of our customers and shareholders. With that, I'll turn the call back over to Bob.

Thanks, Don. As I listened to your commentary this morning, I think we can agree it's fair to describe our Q2 results as robust—a term we don't use often, but certainly appropriate at this time. They reflect our decisive actions taken to position ourselves for this moment, a moment with strong market recovery. Our outlook illustrates that we expect these positive trends to gain momentum. We anticipate higher sales, earnings, and cash flows. Our end markets are improving, especially in commercial aerospace. Demand for new aircraft and the materials necessary to keep them flying is predicted to benefit our business for years to come. The defense and energy markets are also contributing to our positive performance and outlook. Our success is not solely a result of favorable markets but also the heavy lifting by our team. I use the term 'team' purposefully; it's been a complete team effort. I'm immensely proud of their achievements, and I know they take pride in what they have accomplished as well. This journey has not always been fun, easy, or straightforward, but I commend how they have executed their plans. We have a lot to celebrate at ATI. We've positioned ourselves for success, and it is paying off. Our cost structures are lean. Our footprint is streamlined, and we have the workforce primarily in place to accelerate alongside our customers' production plans. Our assets and capabilities are unmatched. We've transformed our physical structure, culture, and performance. Our extraordinary team is leveraging these resources to unlock new opportunities and create long-term shareholder value like never before. We recognize that more work lies ahead. We are challenging ourselves by setting high expectations, and we strive to keep our promises by raising those expectations even higher. We have proven to perform, and our customers recognize and reward us for it. Operator, we're ready for the first question.

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

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

Yes, Rich, this is Bob. Good morning, and thanks for the question. This inquiry has come up frequently over the last six months. The good news is that ATI is not the bottleneck, which is a positive. We don't plan to be the bottleneck. To address your question regarding ramp speed, we look at narrow-bodies, and they usually ramp up about a build rate of five per OEM every six to eight months until they stabilize, after which they make the next five and the next five. We only produce to orders, not to build rates, but we incorporate that into our long-term planning. They understand that a stable supply chain aligned with their pace is critical. Regarding problems faced today, I won't delve into the casting issues many have discussed since those are likely closest to the issue you've raised. The problems appear to be slightly broader, as we see some specialty alloy forging billet supply issues arise unexpectedly. Occasionally there might be fires or breakdowns in melt shops caused by deferred maintenance. I anticipate challenges like these arising frequently. Casting seems to be the biggest issue, while we must also ensure forging demand keeps pace. We are keeping up with industry forecasts, and customer dialogues have been supportive. Recent announcements indicate that no one is reducing their production commitments; the industry is set for a good ramp from 2022 into 2023.

Yes, of course, it does. So next up, maybe for Don, because I'd like to ask you about the remarks you just made. I'm not trying to put you on the spot, but in light of GKN, what can you tell us about further share gains and what this means for the long-term forecast you provided back in February? Your remarks now just mentioned EBITDA margin. Here we are six months later, and it looks to me like advanced alloy EBITDA margins, excluding the Section 232 impacts, are pretty much in line with your 2025 guidance for mid to high teens. So I'm kind of wondering if share gains may make your February guidance somewhat obsolete. What's your take on that?

Yes, I appreciate that perspective. I agree that the business is performing exceptionally well. Getting to the essence of your inquiry: we're seeing broad-based demand across many of our key end markets. In February, at our Investor Conference, we outlined a 2025 guidance that we believed encompassed healthy and somewhat aggressive growth rates for both the top-line and margin expansion. But post-conference, several global events have occurred, including the Russian invasion of Ukraine, altering numerous market dynamics and creating opportunities for us. The crux of your question revolves around whether our figures were conservative considering the current landscape. I can assert that the VSMPO-related share gains since our Investor Day are entirely incremental to the information we provided during our February targets. I foresee upside from that situation and want to stress that the opportunities we're observing extend beyond aerospace to include medical and energy markets. We have noted durable tailwinds that are not solely dependent on the geopolitical shifts resulting from the Russian invasion. Our strategy and capabilities have positioned us well, and we anticipate performance at the high end of the targets initially proposed in February, striving to exceed those targets as developments unfold. Our excitement lies in the broad-based demand trends that appear to be sustainable for our business.

Last quarter, you provided significant detail regarding your jet engine business, emphasizing its heavy involvement in MRO. I believe this quarter, while we await your perspective, it seems you would have had to see an uptick based on the robustness of the baseline numbers from the first quarter with respect to MRO. Could you elaborate on that and provide texture regarding the jet engine business in the second quarter?

Yes, absolutely, Phil. You're correct on both themes. Over the past 900 days, our team has invested considerable time with customers, including face-to-face meetings, and we have noted a positive and sustained uptick in wide-body MRO demand. The repair business has been encouraging and looks to be sustainable, likely to continue through this mid-term cycle before transitioning into narrow-body engine spare demand. Historically, we’ve stated that spares constitute around 25% of our business, but based on recent feedback from clients, that number is now closer to 40%. We believe this trend will persist for the next few years. We’ve gained clarity on that over the last 90 days. Regarding OE demand, I presented charts demonstrating some staggering percentage increases and while we are beginning from a low base, you'd notice all our major programs remain well-positioned with the next-generation alloys. Also, given that we’re shipping a substantial amount of those products 12 to 15 months in advance, as long as our supply chain stays synchronized—this is an ongoing challenge—we can expect significant growth in OE demand. I believe the spares demand will continue to be robust during the short to medium term. I hope that response assists you.

Yes, it sounds to me like the spares side has indeed surprised you positively over the last three to six months regarding its strength. Lastly, about your third quarter guidance. The mid-point of $0.54 aligns with your recent achievement of $0.54. While I understand the impacts from tariffs and labor credits are diminishing, you seem to have a firm recovery in aerospace. Is it reasonable to assert that your stability in the sequential outlook is strengthened by a possible pickup in HPMC while being offset by a decline in AA&S?

I wouldn't characterize it as a decline in AA&S. Both segments are performing exceptionally well, and broad-based demand is present. Therefore, I expect positive results from both sectors as conditions unfold during the remainder of the year.

Hey, thanks very much, good morning. I wanted to ask about a key theme we've been hearing in the aerospace and defense sector regarding labor sourcing and supply chain issues. With the ramping activity you have planned, especially in aerospace and increasingly in energy, how are you positioned regarding labor supply, and what risks remain about having a sufficient labor pool to meet your anticipated growth over the next two to four quarters?

Good morning, Seth. Regarding our hiring initiatives, starting with recruitment: this is a highly competitive recruiting environment. We have adjusted our approach for this ramp compared to strategies we've employed in the past. We now have a dedicated, qualified, and aggressive recruitment team active in the four to five major hubs where we operate—North Carolina, Pennsylvania, Wisconsin, and Oregon. Our primary focus has been in Wisconsin and North Carolina, where our team has excelled in assembling talent. Yes, this has posed challenges, but we believe we are ahead of our targets each week. We established weekly scorecards focused on onboarding. In Q1, we discussed our intention to hire about 1,000 positions to support ramping efforts, and we anticipate needing an additional 20 to 25 percent to meet our requirements for the balance of the year. Our progress has been satisfying, and we feel confident while ramping up recruitment efforts. We implemented various strategies during the pandemic that aid us now. Unlike some others in our supply chain, our strategy involves maintaining all our operations. This approach has allowed us to shift staff, enabling more technical and skilled employees to contribute to lesser-skilled roles during the pandemic so that they can seamlessly return to their respective functions. As we continue to onboard new hires, we are ensuring that they receive adequate training without compromising our productivity. This strategy has worked effectively. Hiring and recruiting are paramount, but the speed at which employees acclimate to their roles is essential. Thus far, we are content with our pace regarding fulfillment of our hiring plans for the remainder of the year.

That's very insightful. Additionally, I would like to inquire about Richard's earlier question regarding earnings in AA&S. You mentioned highlighting the achievement of approximately $100 million in the second quarter. Excluding the one-time impacts, it appears that according to EPS forecasts for the year, this level may not decline significantly soon. While anticipating growth in business may lead to potential upside in the future, it’s essential to remain cautious of what is sustainable from the current year, aside from the tariff reimbursements.

Yes, there are a few points to keep in mind. First, both segments are performing well. As we transition from the first half to the second half of the year, you might expect outages in Q3, which is typical for us considering the seasonal nature of our operations. There is also generally a reduction in activity in Q3 due to extended vacation periods observed in Western Europe and the U.S. It’s worth noting the Section 232 recoveries, which contributed roughly $10 million to our second quarter results, will not recur going forward. Additionally, we had some moderate HPMC employment program benefits amounting to $6 million, which may not be repeated. Thus, it's important to factor in these aspects. Our earnings may also be influenced by fluctuating metal prices. The volatility we've experienced in the first half, especially surrounding nickel prices, continues to affect us, albeit at a reduced level. Although we've lessened volatility in relation to metal price fluctuations significantly, we are still somewhat affected. Recently, we've noted a moderation in nickel prices, and therefore could expect to encounter friction as commodity prices drop. The pricing could soften in conjunction with the decline in metal prices. However, several key strengths remain, including tailwinds in multiple end markets to bolster performance. The aerospace sector is certainly clear in demonstrating strong potential. We'll maintain focus and progress as 2022 unfolds, intending to finish the year vigorously, as reflected in our guidance.

Good morning. I have a quick follow-up regarding the titanium share opportunity. I'm curious whether the EU sanctions, particularly those regarding VSMPO, decrease the urgency for Airbus or Safran to transition away from that titanium source. Are you witnessing any shifts in the pace of negotiations, and do you anticipate these two potential customers will contribute to share gains for you over the next few years given the current situation with Russia?

Good morning, Gautam. Regarding the urgency of the situation you mentioned, we haven't observed a shift in the urgency level among stakeholders in the aerospace supply chain. There has been a tremendous amount of effort devoted to setting up additional qualifications. As Don noted, this is relevant across multiple markets; hence it is more about a decentralized strategy. There's a concerted effort to manage risk levels. While I believe Russian supply won't vanish entirely, the industry is certainly dedicated to diversifying to manage overall risk. Many of us qualified suppliers will gain traction and market share, and this uptick will coincide with the resurgence in demand; it's not just about aerospace but extends to defense, medical, and even energy sectors. We've adjusted our strategy concerning the industrial titanium aspect to optimize and increase our capacity; we aim to capitalize on this growing demand in the future, particularly as geopolitical events develop. Yes, regarding demand in precision forging, we've observed notable upticks in this sector, as our customers are exploring options amid supply chain bottlenecks. While good opportunities exist, I believe the true surge in bookings will occur in late 2022 and into 2023. Our established positions in Europe continue to grow, but there is potential for enhancements in orders as we expand our share. Overall, I regard this as positive for the upcoming quarters.

Hi, thanks. Don, just to follow up on one of Seth's inquiries, your EBITDA was $143 million this quarter. What do you perceive as the recurring number when you eliminate one-offs and the substantial benefits you've seen from increased nickel prices?

The straightforward mathematics require considering two major components. Starting with $143 million and deducting approximately $9 to $10 million related to 232 recoveries, there’s also about $6 million associated with federal employment grants. This brings you to a figure approximately in the $130 million range. Regarding the metal price tailwinds in Q2, those have been moderately impactful. For a representative number regarding Q2, I'd suggest a recurring range of around $125 million to $130 million plus. Looking at half-year performance, our forward guidance remains optimistic due to ongoing demand as we anticipate some positive developments in earnings. To delve into free cash flow guidance, consider the factors affecting working capital. It is critical to our projections. Our historical managed working capital percentage has been roughly around 30%, which we aim to achieve once more. By the end of Q2, we noted managed working capital at 38.5%, marking a decline of about 300 basis points. We should expect to see significant improvements in working capital metrics as the year progresses, particularly as we work towards our 30% goal. A few contributing factors exacerbated our heightened capital levels. Among these, strategic inventory additions during the Russian invasion were pivotal. Additionally, elevated commodity prices influenced our inventory levels. As we move toward the year's end, we anticipate substantial depletion of the strategic inventory we introduced, which was meant to manage risk effectively. Our quarterly free cash flow generation is typically robust in the second half, concentrated mainly in the fourth quarter. This trend will likely continue in 2022.

Thank you. At your Hot-Rolling and Processing Facility, what type of utilization rates are you observing? Additionally, could you share insights on how conversion service sales are trending?

Good morning, Paretosh. I'm happy to report that the conversion business at the HRPF is performing well. We currently observe utilization rates in the range of approximately 60%. This may fluctuate weekly or monthly, but overall, it's become a reliable revenue and cash generator for us.

It's encouraging to hear. As a follow-up, do you anticipate any significant changes in Q3 regarding corporate costs or depreciation?

No, we do not expect any significant changes in those cost categories.

Regarding incremental defense opportunities in ground vehicles, how could this cycle differ from past cycles? A couple of years back, you expanded your presence in Washington and undertook titanium programs. How do you foresee this current ground vehicle cycle, if any, exceeding historical significance?

The straightforward answer is: yes, we expect this cycle to carry more weight. We're witnessing an industry trend towards lightweighting military vehicles in preparation for emerging conflict scenarios—something we've not wholly perceived before. Titanium armor is in high demand. We've previously discussed some ongoing programs we are involved with, such as Abrams and AJAX. Recently, there's been mention of the Mobile Protected Firepower (MPF) opportunity, which is a significant prospect in the titanium armor segment. Regarding naval nuclear programs, there have been expanded opportunities for both submarines and carriers beyond our previous forecasts. You asked specifically about ground vehicles, and we do foresee considerable upside compared to prior cycles, driven largely by the geopolitical responses prompting an increase in investment from various NATO countries.

Turning our focus to strategic M&A at this point, while details will be kept vague, our emphasis aligns with what we've previously discussed at our February Investor Conference regarding M&A. We prioritize aerospace and defense along with unique capabilities, which enhance our competitive advantage. Consequently, we are discerning in our interests. While we are evaluating several opportunities, rest assured that any potential acquisition will maintain a strong focus on the aerospace and defense sectors.

Thank you all for joining us today. This concludes our Q2 2022 earnings call.

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