Hello, everyone. And welcome to the ATI Second Quarter 2024 Results Conference Call. My name is Seb, and I'll be the operator for your call today. I will now hand the floor over to David Weston, Vice President of Investor Relations to begin the call. Please go ahead.

Thank you. Good morning. And welcome to ATI's second quarter 2024 earnings call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our second quarter results are Kim Fields, President and CEO; and Don Newman, Executive Vice President and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlook and can also be found on our website at atimaterials.com. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the accompanying presentation. Now I'll turn the call over to Kim.

Thanks, Dave. Good morning, everyone. Let's dive in. ATI's second quarter results represent another strong quarter of execution and performance. What excites me the most are three key highlights. First, revenue growth. Quarterly sales reached their highest level in nearly a decade, nearly $1.1 billion, reflecting a 10% sequential increase in our strategic A&D and aero-like revenue categories. Second, strategic mix expansion. A&D sales made up 62% of our revenues this quarter, putting us on track toward our A&D mix target of over 65%. In total, 79% of our revenues come from A&D and aero-like markets, where our differentiation is most valued. Third, strong financial results. Adjusted EPS hit $0.60 at the high end of our guidance, and adjusted EBITDA came in at $183 million, exceeding the upper end of our guidance range. So what is driving these results? Let me break it down into three main points. First, it's about surging demand. At the Farnborough Air Show, the high demand for our products was clear. Interest has broadened beyond titanium to nickel, with commitments sought for the rest of this decade and into the 2030s. Customers are offering premiums for any available near-term slots that open up. We're currently in discussions with multiple customers about investing their capital for added capacity. Why are they investing? To guarantee supplies when they need it and secure their preferred position in line. They're increasingly facing the wide-body ramp while still supporting historic levels of shop visits and spare parts demand. In late July, we announced new sales commitments surpassing $4 billion, primarily for high-value nickel products for jet engines. These commitments not only support our 2025 and 2027 financial targets but also add approximately $100 million per year in incremental annual revenue. Some of these commitments extend as far as 2040, reflecting our customers' long-term confidence in sustained jet engine demand and ATI as a supplier to help them succeed. Second, as one ATI team, we are executing and delivering. Our strategy is clearly paying off. In the second quarter, ATI's largest end market, jet engines, grew 13% sequentially to over $350 million, driven by specialty nickel. As the industry reaffirmed in its most recent quarterly reporting cycle, more growth will follow as the OEMs resolve their challenges and planned production increases through 2024 and beyond. Titanium revenue for airframe increased 11% sequentially this quarter to more than $210 million—an all-time high for ATI and a 28% increase over last year. Our expanded titanium melt capacity is a key factor in this success. Defense sales rose 5% sequentially, led by increased demand for exotic alloys and continued strong demand for titanium armor plate used in military ground vehicles. I would like to recognize the Specialty Rolled Products team for the tremendous work they've done to earn that position; their hard work is paying off. Specialty energy was up 37% versus the prior quarter. We see building demand for nuclear and gas turbines for increased electricity consumption. We expect sustained global demand in this end market for the foreseeable future. Third, we're well positioned for the future and more confident that upside is possible. We are optimizing our operations to debottleneck flow paths, reduce costs, and drive productivity across our system from melt to ship. Our focus on increasing specialty nickel melt demonstrates the strength of our integrated One ATI approach. Since last year, we have significantly increased nickel throughput by improving turnaround times, optimizing melt plans, and implementing standard work—materials are flowing faster, and we expect to see the benefits of these actions towards the end of the year. It's great to see the experts from across the business units collaborating to optimize production output. These results represent a lot of hard work, and the team takes great pride in being able to work together to serve our customers' needs. Great job team! We are seeing the impacts of this optimization in both segments. In AA&S, we achieved over 16% adjusted EBITDA margins in the second quarter, reflecting the success of the Specialty Rolled Products transformation. In HPMC, revenues grew 6% sequentially on level shipment volumes. Overall, we are well positioned now and for the future. With that, I'll hand it over to Don.

Thanks, Kim. What strikes me about Q2 is seeing the benefits of our strategy, sustained demand, and operating improvements delivered to our bottom line. Kim shared some of the headlines related to Q2 financial results. I'll add some color and then walk you through our outlook. The first area of highlighting is growth in our core aerospace and defense and aero-like end markets. Q2 revenue in those markets totaled 79% of our overall revenue, increasing 10% sequentially. Drilling in, our A&D sales were 62% in the quarter, putting us on track toward our A&D mix target of more than 65%. That's 13% sequential growth in jet engines and 28% year-over-year growth in airframe. Both segments contributed to the mix improvement and Q2 margin expansion. From the HPMC perspective, Q2 A&D sales were 85% of total segment revenue, continuing its upward movement. Jet engine accounted for 59% of segment revenue. The AA&S segment also saw mix improvement in the second quarter with 62% of total segment sales from A&D and aero-like markets. A&D sales representing 39% of Q2 revenue grew 19% sequentially, led by growth in defense and airframe. That’s a record level A&D mix for AA&S. Aero-like grew 33% year-over-year and 8% sequentially. Metal movements may affect our revenue in a given period but less so our bottom line, thanks to derisking pass-through mechanisms. We experienced that in Q2, which masked underlying growth. That created top line growth headwinds in the quarter of 6% for overall ATI, 2% for HPMC, and 11% for AA&S year-over-year. Overall adjusted EBITDA margin increased to 16.7%, largely on improved mix, that's an increase of 220 basis points sequentially and 100 basis points from Q2 of 2023. Adjusted EBITDA margins in the HPMC segment were back above the 20% threshold due largely to mix and operational improvements. We have hired more than 500 hourly workers in the HPMC segment year-to-date. This is part of our strategy to debottleneck production and leverage our existing assets. Q2’s margins of 20% reflect inefficiencies incurred while those new team members are being trained by our expert employees. We have also leveraged third-party staffing firms in the short term to accelerate production; that brings incremental cost. HPMC margins will become progressively better in the second half of the year as production increases and the new employees gain experience. AA&S margins were 16.4% in the second quarter, reflecting strong A&D mix, largely through increased titanium sales. As expected, certain industrial markets remained stable in the second quarter. Cash generation continues to improve. Cash provided by operating activities is positive year-to-date, that's an improvement of $219 million over the first six months of 2023. It’s also an improvement from our historical cash cycle. We're pleased with the positive free cash flow delivered in Q2 and our cash trending this year. We believe more opportunity lies ahead as we continue to lean out inventory cycles and improve production flows. With this improved cash generation comes stronger liquidity and reduced leverage. We closed the second quarter with almost $1 billion in total liquidity, including more than $425 million of cash on hand. Our net debt ratio decreased in the second quarter to 2.7 times, a trend that will continue with our increasing profitability and cash generation. Now let's look ahead to the second half of the year. We're raising the midpoint of our full-year guidance ranges for adjusted earnings per share and EBITDA while holding our free cash flow guidance range. We have strengthened diversity in our jet engine base and enduring demand in defense and growing aero-like markets. We're expanding output and making progress on our ongoing debottlenecking efforts. This drives the meaningful growth we expect to see in the second half of the year. For the full year, we estimate adjusted EPS will be in the range of $2.40 to $2.60 per share. We estimate full year adjusted EBITDA will be in the range of $720 million to $750 million. We are maintaining our full year estimated ranges for free cash flow and capital expenditures with free cash flow between $260 million to $340 million and CapEx at $190 million to $230 million. The midpoint of the free cash flow range represents an 82% year-over-year increase in this important metric. For the third quarter, we estimate adjusted EPS will be in the range of $0.63 to $0.69 per share and adjusted EBITDA between $189 million and $199 million. The Q3 and full-year guidance provide clear insight into how we view potential Q4 performance. We see Q4 as another robust quarter of sequential growth. Ongoing demand in core markets and increasing production levels support our view. We anticipate overall ATI adjusted EBITDA margins will increase sequentially from Q2 to Q3 and again from Q3 to Q4 to reach 17% to 18% by year-end. On a segment level, HPMC margins will expand in the second half on A&D growth. AA&S margins will remain in the mid-teens for the balance of 2024. We remain confident in our near-term outlook and long-term growth, with increased profitability reflected in our 2025 and 2027 targets. In terms of those 2025 and 2027 targets, keep two things in mind. First, the recently announced $4.2 billion in new sales commitments include roughly $100 million in annual incremental revenue along with related EBITDA. That $100 million was not reflected in our targets. Second, our backlog continues to grow even with increased throughput and newly deployed capabilities reducing our lead times. Backlog reached $4.1 billion this quarter. Importantly, backlog in the second quarter is up 9% in HPMC, including a 14% increase in forgings. Our strategy and transformation are delivering the performance and value creation intended. That's driven by growth, expanding margins, robust cash generation, and disciplined capital deployment. Our trajectory remains on track for 2024 and beyond with a lot of upside to look forward to. On that note, I will turn the call back over to Kim.

Thanks, Don. Our performance underscores our leadership in aerospace and defense where our differentiated materials are valued the most. Today's results reflect the power of our strategy and come down to three things: one, strong demand for our specialty products, particularly nickel in addition to titanium; two, disciplined execution, meeting and exceeding our customer commitments; and third, we're well positioned today and for the wide-body ramp that's fast approaching. I'd like to close by recognizing the team's exceptional work. The results we reported today are possible thanks to their hard work. They're delivering every day, discovering what's possible, pushing, innovating and challenging the status quo, and then going back and doing it again. Their commitment to always producing the highest quality products with a focus on our zero injury culture are the foundation of what we do. Thank you to every employee for your hard work and perseverance. We are indeed proven to perform. With that, let's open the line for your questions.

Our first question comes from Seth Seifman at JP Morgan.

I wanted to ask about the ramp-up in titanium, as it's clear that all of your new capacity is coming online. During the quarter, we heard about one of the 787 suppliers slowing down. There are also some delays in the availability of other parts made by different suppliers, like interiors. Considering the production ramp, how do you see the potential impact on your titanium ramp due to these issues in the widebody supply chain?

I'm going to take a shot at answering your question. First of all, in terms of what we've seen in our business tied to demand, we do see some scattered pushouts when it comes to orders. But because of the broad-based demand in our business, if a slot opens up, we typically have a customer that steps in and says, 'Hey, I want to take that slot.' And that indicates a couple of things. Number one, we are continuing to see significant demand from an aerospace and defense standpoint as well as through other key markets like our aero-like. It indicates that we've done a very good and purposeful job around diversifying our business that derisks some of the risks you're talking about. What that looks like to us is we've diversified away from being more single-threaded dependent upon a particular airframer, for example, or have meaningful business with all of the major engine manufacturers. This supports our business quite well. It gives us confidence when you think about our outlook, whether it's 2024, 2025, or 2027. That's something I'd like to share regarding what we're seeing on a current basis.

And then maybe just a follow-up on the engine side. You spoke about the new business that you announced at Farnborough. When we think about the growth rates on the engine side of the business, can you talk about kind of the progression there? I assume we'll start to see pick up from this kind of mid-single-digit pace in the second half as that work ramps up and as new employees become more productive. Can you discuss the time frame and just the progression of improvement there over the course of your planning period?

So first of all, we are continuing to see some very strong jet engine signals. It wasn't just at Farnborough; these are conversations that are happening with our OEM customers on a regular basis. Farnborough certainly reinforced it. Regarding demand continuing to expand, we've heard some pretty good and positive feedback from folks like GE, who made some clear and strong statements about how they're going to run the supply chain and meet the demand coming toward them. That demand profile is not unique to GE; those signals of broad-based engine demand across all major manufacturers are present. There are a couple of drivers to it. One driver that we all think about because we read the headlines from the airframers about build rates; that's a key driver. However, there's MRO, and MRO demand is certainly driving growth on the engine side of the business. As we look at our positions and align that to what we're hearing from our customers, we are seeing some sustained growth. That growth is not just a 2024 and 2025 situation as the build rates ramp up. We think there are a couple of triggers that could create a positive step change in demand related to the 777X certification and then the FAA dropping the limitations on the 737 build rates. When those items are cleared off the deck, we suspect that good growth will lead to other positive adjustments. Does that answer your question?

Our next question is from Gautam Khanna from TD Cowen.

I was wondering, do you guys have any fidelity on whether the products are shipping or being consumed or used as opposed to inventoried? Because one of the concerns that we hear a lot about is the risk of a destock or a shallower ramp that, in fact, the aerospace build rates don't ramp according to plan. But do you have visibility downstream as to whether the mill products and the like that you're selling are being actually consumed right now?

As you're asking here, we stay pretty closely aligned with our customers. We do have some insights into their true demand signals and what's happening with each part. Forecasting and changes in backlogs is a very active process, and as Don mentioned, we talk about that weekly with our customers. We do have this insight. I would emphasize—we haven't seen any destocking or pushouts. It's been more smoothing quarter-to-quarter. To your specific question, there are a couple of very targeted areas with one airframer around titanium plate that might be slightly over-inventoried. But as we look at our other markets, both defense and aerospace airframe, those absorb any capacity. We have not seen any pushouts so far. I think there's a commitment to smooth the momentum in the supply chain by all the customers, so we’re closely connected. Additionally, most of our products go directly into the hot section of engines, and there’s strong MRO demand and shop visits. We are seeing much higher MRO visits compared to the past. We continue to sign new contracts and gain share either through competitors or as customers look to diversify away from single-source risk in their supply chain. We're staying close to gauge inventory levels, and we are pretty nimble, adjusting as necessary.

Our next question is from Scott Deuschle from Deutsche Bank.

Don, sorry if I missed this, but can you give us an update on your assumptions for the non-A&D and medical markets in the second half? Are you still expecting those more cyclical industrial markets to trough out in the second half, or are you embedding any incremental conservatism there?

To be clear, I'll talk about the aero-like as well as the industrial segments. We spend a lot of time discussing aerospace and defense, which is core. In terms of our aero-like, including medical specialty, energy, as well as electronics, we're expecting continued broad-based growth on that side of the business through 2025 and beyond. In terms of the industrial portfolio, we've been reducing this over time as part of our transformation. We saw a pullback in these end markets starting in the second half of last year. What we saw in Q2 was stabilization around those end markets. That's encouraging, it must stabilize before turning around. In thinking about our second half guidance, we haven't started to see any meaningful recovery in industrial end markets like oil and gas. We haven't built in any significant growth in those. The strong growth in our guidance is primarily from aerospace and defense as well as aero-like. Same is true for our Precision Rolled Strip business in Asia; it has been steady, generating around $250 million a year in revenue. It produces accretive margins, but it’s not part of our growth profile.

And then, Don, at the Investor Day, I think you mentioned that no one else in the industry is taking more price than ATI is. It's clear other companies are taking large amounts of price and seeing impact. Is it still true that ATI is taking more price than them? If you are, why isn't that flowing through more particularly at HPMC?

First, it's tough to compare one company to another because each company has differences in products, end markets, and customer base. To answer your question, we are absolutely getting price. The specific areas where we know strongly that we're getting price include titanium. Our titanium portfolio prices have seen meaningful increases on both the HPMC and AA&S sides, and we believe we are keeping pace with everyone in that area. Regarding nickel for HPMC, particularly engine applications, we know we have absolutely received price increases. Keep in mind, we have a significant number of long-term agreements, which can affect timing for financial reflections of those prices. We've been very active when there's an opportunity to sit down with the customer and address pricing, even in existing contracts. Some of those price increases will hit in 2025 or 2026 as the new contracts begin. Beyond that, we're confident that we're getting our fair share of pricing increases. We're also seeing significant price increases in our aero-like end markets—like hafnium, which has unique characteristics. We fully understand our value to those customers, and we have seen significant opportunities to raise prices there.

Our next question is from Richard Safran at Seaport Research Partners.

I wanted to ask you a bit more about the press release from Farnborough where you talked about share gains and solutions. Did solutions really mean forgings? RTX said it was increasing forging capacity. You had a longstanding agreement with Pratt. Is RTX's comment about increasing forging capacity really you? Are they the ones thinking about making investments to increase capacity at ATI?

While we don't discuss specific customer contracts or agreements, I shared in the first quarter that we are a significant partner supporting the GTF accelerated shop visits. We're working closely with them to look across the full value chain and assets, asking how we can optimize what we have. We've already shared that our plan is to double our forging output and participation next year. The work with them on increasing our machining output by 10% to 20% and ultrasonic inspection capacity by 3 times is also significant for the industry overall. We are positioned well to handle bottlenecks occurring in industry as we work together. Lastly, 20% of the $4 billion sales announcement comes from Forged Products.

And just quickly, Don, you raised your EBITDA guide by roughly $10 million. You left your free cash flow guide intact. Just wondering why that doesn't go up as well? Is that just conservatism, or do you think you have some other working capital headwinds in the second half?

I would call it conservatism. We tend to be conservative regarding our guidance and more so when we get past the current period. When you look at our correlation between the EBITDA and free cash flow guides, the EBITDA was rising. We had Q2 overperformance that we wanted to reflect in our guidance. Regarding free cash flow, we guide on an annualized basis, but most of it comes in Q4. So I do not think we are softening in our belief that we will deliver something in the middle of that guidance range. Yet, after halfway through the year, it felt right to keep that free cash flow range as it was. At the midpoint of that guidance, it signifies an 82% increase in year-over-year free cash flow. We acknowledge that, but it is a significant increase and many good things are happening to accomplish that.

Our next question is from David Strauss at Barclays.

Just wanted to ask about how far through the titanium capacity expansion we are in terms of it manifesting itself in the numbers. I know titanium was up a lot year-over-year, but that was a really easy comp. Sequentially, the last couple of quarters, titanium revenue has been in a relatively tight range. So just to clarify, I know new capacity is still to come online, but how much of the existing capacity restart has actually manifested itself?

I'll say this: We're increasing our titanium melt capacity by 80%. The first part, 45%, is tied to production off of existing assets. The restart of that facility has gone really well. It has ramped on schedule, and costs to restart were on budget; that was roughly $10 million. That facility should contribute between $10 million and $15 million a quarter in EBITDA. We expect to hit the full run rate related to the benefit of that 45% basket in Q4 of this year. When you look at the titanium revenue growth and performance, we see increases in titanium volumes and average prices. We expect that our titanium capacity is largely under contract and will contribute in the aforementioned magnitudes.

Regarding flow paths, depending on where it goes, there may be longer lead times. The AA&S side is seeing growth in titanium, particularly around airframes. On the HPMC side, cycle times are longer as they work through specialty materials and forged products. We anticipate seeing the impact here in Q4 with new press additions and testing capabilities alleviating bottlenecks. Progress is ongoing.

And just a follow-up there: The AA&S margins sound like they're going to be relatively in line in the second half with Q2. But as I understand, a lot of the titanium upside will run free and I believe it's margin accretive to AA&S. Can you walk through that and your thinking around AA&S margins in the second half?

First, the strong margin performance for AA&S in the quarter was 16.4%, a significant uptick year-over-year and sequentially. To sustain that, a key benefit was a shift towards aerospace and defense end markets; A&D contributed almost 39% of our overall share and grew at 19%. The Specialty Rolled Products business, a large part of AA&S, has been transforming, moving away from commodity products, and growing A&D exposure. One thing driving Q2 margins was the reduction in pass-through revenues, which lifted Q2 EBITDA margins for AA&S. If you ran the math considering this factor, the 16.4% would become about 15.9%. Looking ahead, we project AA&S delivering something closer to 15% EBITDA margins in Q3 and Q4.

Our next question is from Andre Madrid from BTIG.

I know you called it out in the remarks and a little bit in the Q&A. But I wanted to parse it out a bit further and see how much MRO demand contributed to jet engine growth in the quarter and how much you anticipate that to contribute moving forward?

It's significant. Our customers have talked about it in their earnings calls; there is a considerable amount of MRO coming through. We typically estimate MRO as 25%, and today it's closer to 40%, 50%, sometimes higher. The demand and our order book are indicating increased demand across all engine OEMs for both the materials and forgings. There is more upside if we could continue increasing capacities and reducing bottlenecks as we've noted.

Moving to the electronic side of the business, I know hafnium was dampened in the first half due to the winter storm outage. Do you expect to make that up for the balance of the year, or is this kind of being pushed out?

The team is working hard to close that gap. Demand is overwhelming on the electronic side. There are many new smart appliances that contain chips. Our business in Oregon is one of very few in the world able to produce the purity required for chip manufacturing at scale. We are making ongoing investments. We anticipate those to come online in Q4 with additional phases following. Hafnium is also critical in hypersonics and space industries for high-temperature applications. We're committed to increasing output and capacities.

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

The increase in headcount of 500, was that all in the quarter? What production locations were that at specifically, and do you expect more hiring?

The 500 new hires were all in the first half of the year. Approximately 60% are down in Carolina and 40% up in Wisconsin. We continue to hire to increase output and debottleneck activities. We have been discussing our assets and how to increase output. Hiring is consistent with our strategy to do so. We are adding ships and crews. In Forged Products, we've mentioned expanding ultrasonic capacity by 3 times. Employees take about six months to qualify as required for inspection. We've seen good throughput and productivity increases and will continue hiring accordingly as we push ahead.

To clarify, the 500 employees are not just tied to Q2; they include the entire first half. The learning curve and inefficiencies related to training new team members produced approximately $5 million to $10 million of inefficiencies in the quarter. We expect these inefficiencies to largely dissipate by Q4.

Regarding your 2025 financial targets, are you maintaining that or are you increasing that this morning considering the new air show wins in the nickel alloy arena?

We’re not officially changing our guide, but it would be rational to add roughly $40 million to our prior guidance range. We’ve noted that $100 million in annual revenue will be contributed from the new sales commitments. It points towards richer margin products, leading us to expect higher than typical incremental margins. We'd expect around 40% margins from this additional revenue. If layered onto prior guidance at $800 million to $900 million of EBITDA in 2025, it isn't irrational to think this adjustment is reasonable. Also, keep in mind triggers like the 777X and FAA dropping build rate limits could create even more positive adjustments. We will revisit these numbers as we discuss Q4 and full-year 2024 performance.

Can I squeeze one more on the buyback? You're effectively exhausted there, and the last comment was that it needed to be revisited by the Board. What is the status on that?

First, we have a consistent capital deployment strategy, which includes returning capital to shareholders. We've completed the current program, but I won't get ahead of my Board. I can say, however, that we expect to generate healthy cash flow, especially in Q4. Our Board supports returning capital to shareholders, and our bias has been toward repurchases, so it’s reasonable to expect a new share repurchase program in the near future.

This now concludes the Q&A session. I'll hand the floor back to David Weston for closing remarks.

Thank you for joining the call today. We appreciate your attention to ATI. For any follow-up questions, please reach out to our Investor Relations team. Thank you, and have a great day.