Hello, everyone, and welcome to ATI's Third Quarter 2024 Earnings Call. My name is Lydia, and I will be your operator today. I'll now hand you over to Dave Weston, Vice President of Investor Relations, to begin. Please go ahead.

Thank you. Good morning, and welcome to ATI's third 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 third 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 me start by saying our team is motivated by our mission to support our customers, consistently providing the highest quality product even as we navigate market and supply chain turbulence. As you saw in our earnings release, the third quarter represents mixed results for ATI. While there are positive highlights and accomplishments achieved, the team and I are disappointed by the shortfall to our financial guidance. Our performance was not what we strive for. We can and we will do better. On today's call, I'll walk through the challenges we encountered this quarter and how we are responding to them. For the third quarter, our adjusted EBITDA was approximately $186 million, up from our Q2 EBITDA of approximately $183 million. However, it was below our guided range of $189 million to $199 million. Adjusted earnings per share was $0.60 below our guided range of $0.63 to $0.69 per share. We've adjusted our expectations for the coming quarter and the full year 2024 to account for ongoing headwinds related to supply chain uncertainties and one remaining operational challenge. We anticipate sequential growth for the fourth quarter, and we are continuing to pursue opportunities to exceed the guidance ranges that Don will walk you through today. We will be transparent in what these changes in business conditions could look like through the end of the year and what has been incorporated into our guidance. While our total growth fell short of expectations, the quarter did include several bright spots showing momentum in key focus areas. Segment adjusted EBITDA margins met or exceeded our expectations. In HPMC, we saw over 200 basis points of sequential improvement in segment EBITDA margin, moving closer to the mid-20s range that we see as achievable in the near term for this core A&D segment. In AA&S, our segment EBITDA margin was approximately 15%, consistent with our expectations as our mix of A&D work continues to build in this segment. Our consolidated EBITDA margins increased by 100 basis points as we continue to improve price and mix and take operating costs out of our business. Our A&D mix remains greater than 60%, and our backlog remains stable as we continue to book new business across both segments. These achievements underscore that the underlying fundamentals of our strategy are working to expand margin and drive value creation for the future. So why did this quarter's results fall short of our guidance? Let's set the foundation. Our ranges for guidance are intended to cover our high and low-end expectations based on customer demand and operational performance. They contemplate variables like supply chain performance and operating efficiency as well as non-operating items. This quarter, the impact of market volatility and operational performance issues exceeded what we had anticipated. Most notably, much of this volatility materialized late in the quarter, limiting our options to offset the risks that were realized. These risks were evenly split between customer demand changes and operational challenges. Let's touch on customer demand first. We've all witnessed the demand bumpiness of the commercial aerospace ramp. While backlogs and demand for commercial aircraft remain quite high, both aircraft OEMs are ramping more slowly than the industry expected. These delays worsened when Boeing's work stoppage began on September 13. While some customers in Boeing maintain their orders and shipments, others in the supply chain reacted quickly, managing orders around their production schedules and year-end inventory targets. Even ahead of the work stoppage, they began pushing out planned deliveries into 2025, canceling orders or not placing transactional orders. Looking closely at our results, we believe these rapidly emerging adjustments in demand for commercial airframe materials serve as one of the key drivers for our quarter shortfall. This impact extended to the transactional business as well, which historically has been a significant contributor on top of our LTA contracts, enhancing growth over the last 3 years. Comparatively, our jet engine customers have worked to maintain supply chain momentum and limit disruption. While new engine deliveries are delayed from build rate reductions, continued MRO activity drove ongoing demand for our products. However, MRO demand can be less predictable. Demand variations for specific parts on specific platforms caused operational disruptions as customers reordered priorities and pushed out excess parts not immediately needed to complete an engine overhaul. While less pronounced and with airframe, engine shipments were impacted over the last 3 weeks of September, reflecting accelerating supply chain dynamics. This rapidly pivoting customer demand led to increased changeovers and smaller lot sizes in our operations and ultimately decreased what was actually available for us to ship. Beyond underlying demand, customer program changes can create bottlenecks in our operations. That's what we experienced as we significantly increased production levels for our key engine program. These requirement changes caused bottlenecks in our testing and inspection areas and impacted our shipment rates. We are working with the customer to implement improvements for testing outcomes and to decrease testing time. These efforts, along with our investments to triple testing capacity will support the rapid increase in part production and reduce bottlenecks. We expect output to increase as our testing capacity expands. What is clear is that the underlying demand for new planes remains strong. These fundamentals support long-term growth for the commercial aero market and for ATI. The current turbulence will likely continue until the Boeing work stoppage is resolved and the supply chain realigns to consistent demand signals. Over the next 2 quarters, we anticipate modest growth as the supply chain readies itself for the next build rate increase, which we believe will come in the back half of 2025. The other half of our miss is related to operational challenges during the quarter. Since the pandemic, our sales have grown approximately 45%. To achieve this significant growth, we've pushed production to record highs. These record production levels leave little room for missteps. With that said, operations are most efficient with level, stable product flow. Disruptions create bottlenecks and inefficiencies. When unexpected outages occur, surging capacity and emerging bottlenecks can be difficult to overcome, especially when they occur in the last few weeks of the quarter as they did in Q3. One example that highlights this is that as we push performance levels, a long-standing design flaw was discovered in our HPMC nickel melt shop. Last quarter, that part flow allowed molten metal to escape and damage the equipment, causing an operational outage. Our team took action immediately to restore operations, and once they identified the issue, they reengineered the part effectively eliminating this risk going forward. Today, the operation is achieving the melt targets needed to deliver our anticipated growth in Q4. However, as we were executing our recovery plan in Q3, transitory bottlenecks began to emerge due to the surging material. This, along with transportation delays related to Hurricane Helene, restricted our ability to fully offset the impacts to the quarter. Each issue on its own was not significant, but aggregated they were difficult to overcome. In the AA&S segment, we experienced an outage of our vacuum anneal furnace in Oregon due to a failure caused by a new water pump we recently installed. This asset serves as the final step in a proprietary operation that primarily serves the space industry. While restoration is underway, the team is working to rapidly qualify other assets in parallel to protect our customers and mitigate sales impacts. This will continue as a headwind into the fourth quarter. Let me emphasize, progress has been made. Our quarterly sales exceeded $1 billion for the ninth consecutive quarter, and our expanding margins demonstrate that our strategy is on the right path. This continuing improvement throughout 2024 showcases momentum in key areas, including increasing melt capacity, reducing finishing bottlenecks and improving mix and pricing. We continue to invest in reliability and debottlenecking of our production footprint. Our entire team is focused on the most vital priorities as we operate our business safely, efficiently, and reliably. The productivity and leveling work we're doing is building momentum. Already this quarter, we see encouraging progress. That gives me confidence that our performance will continue to improve and that our strategy is directly aligned with the growth we believe is ahead for ATI. What hasn't changed? The future for ATI is strong. The market fundamentals are clear; aircraft production and maintenance will increase, the need to protect U.S. and allied troops continues, and critical customers in specialty energy, electronics, and medical depend on our materials for the differentiated performance they need. We didn't expect this ramp to be a straight line; we are confident the current market turbulence and our operational challenges will resolve. Aero and defense growth will reenergize in 2025. The end users for our products need us more than ever, and we are focused on delivering for them every single day. With that, I will turn it over to Don for his comments.

Thanks, Kim. Sales volume is the foundation of our growth and performance. Many of the impacts incurred this quarter emerged as the quarter ended. As a result, sales, earnings and cash flow were lower than we anticipated 3 months ago. As Kim highlighted, roughly half of this impact was driven by customer demand timing and requirement changes. The other half was due to operational challenges. Total sales were down 4% sequentially and up 2% from Q3 in 2023. We do not guide for sales, but it is reasonable to estimate that our view of the shortfall this quarter is approximately $90 million. This impact on sales timing brought our earnings below our guided ranges for adjusted EBITDA and adjusted earnings per share, even with the inclusion of benefits such as reduced incentive compensation and a $3.7 million gain on the sale of oil and gas rights. I think it is fair to say that we performed well on the materials we did deliver this quarter. I anticipate that trend to continue as volume increases. We expect growth to return in the fourth quarter. Looking specifically at adjusted EBITDA, our midpoint of guidance was $194 million. We delivered approximately $186 million, $8 million below midpoint. Net consolidated adjusted EBITDA margins were 17.7% of sales, up 100 basis points from Q2. This allowed us to partially offset the impact of reduced sales. We believe the realized efficiencies of this performance are sustainable for the future. From a segment perspective, HPMC margins increased sequentially and year-over-year, closing at 22.3%. A&D content remains at 86%. We estimated that A&S margins would approach 15% in the second half of 2024, and we posted 14.8% this quarter. The sequential 160 basis point decrease in EBITDA margin is consistent with our previously announced expectations. While sales in the segment declined sequentially this quarter by 7%, year-over-year sales were up 3%, even with the volume impacts we've explained. A&D content for AA&S was 36%. The consolidated margin expansion for ATI, up 100 basis points this quarter and up over 300 basis points from Q1, is underscored by an enduring mix of A&D and aero-like end markets. Q3 revenue in those markets totaled 79% of our overall revenues, with sales in those markets up 6% year-over-year. Let's turn to cash flow and manage working capital. Reduced sales and delayed inventory liquidations resulted in cash usage in the third quarter. Operating cash flow was $24 million, offset by $61 million in capital expenditures. This resulted in a $37 million use of cash when netted for free cash flow. Year-to-date, our free cash flow usage is $152 million that is $50 million better than our year-to-date position at this time last year. However, our managed working capital increased to 40% of sales from 35.5% in Q2. Delays in sales as we continue to melt and produce to meet customer requirements, along with accelerations in the timing of capital expenditures contributed to the year-to-date use of cash. We continue to execute our balanced capital deployment strategy as we invest for growth, reduce debt, and return capital to our shareholders. This quarter, we proactively redeemed our convertible notes, almost a year ahead of their maturity date. We retired nearly $300 million in outstanding debt and reduced 2024 interest expense by approximately $2 million. In parallel, our Board of Directors, based on our strong balance sheet and anticipated future cash generation, authorized up to $700 million in future share repurchases. This quarter, we used the first $40 million of this authorization to begin reducing share count. We estimate that this authorization will be fully extended by early 2027, delivering significant value to our shareholders. Now let's talk about our guidance to close out 2024. With growth expected in the fourth quarter and continued operational efficiencies, we expect earnings to build upon our Q3 results. Our estimate for adjusted EBITDA is ranged from $181 million to $191 million, which equates to an earnings per share range of $0.56 to $0.62 for the quarter. We believe there are opportunities to exceed that range as we monitor how the industry responds to the Boeing work stoppage and we restore vacuum anneal capacity in AA&S. Overall performance of the business in the fourth quarter will also be a key driver. We are also tracking nonoperational opportunities that could increase our Q4 EBITDA by as much as $10 million to $15 million but have not included that potential in our guidance. The range for fourth quarter equates to a full year adjusted EBITDA range of $700 million to $710 million, and an earnings per share range of $2.24 to $2.30. This represents a $30 million reduction to our previous midpoint of adjusted EBITDA, with $10 million of the shortfall in Q3 and $20 million of adjusted expectations for Q4. While we still expect cash generation to be strong in the fourth quarter, we have lowered the high end and low end of our free cash flow range by $40 million. This accounts for near-term risks in sales timing and inventory flow. This $40 million reduction includes $30 million of earnings timing. It also considers a $10 million increase in our CapEx guidance due to accelerating targeted investments to improve reliability and asset performance. Free cash flow guidance now ranges from $220 million to $300 million. Q4 is expected to be a strong quarter for cash generation, consistent with our cash cycle. This reflects a meaningful reduction in managed working capital; we expect to end the year with managed working capital in a low 30% range. This is above our original year-end target of 30% or less. We continually look for opportunities to efficiently deploy capital. That includes divesting assets that create little or no operational value, such as oil and gas rights. In the fourth quarter, we anticipate monetizing as much as $40 million of non-core assets. We'll likely redeploy proceeds to support improved reliability, debottlenecking, and growth as an element of our existing capital investment plan. As we react to the timing of the impacts to 2024, we are left with at least one more important question. What does this reduced year-end exit rate mean to our 2025 and 2027 targets? Consistent with past practice, we will not provide formal guidance for 2025 until we report fourth quarter earnings. Let me offer some initial insights now. It is reasonable to assume that 2025 performance, particularly in the first half of the year, will reflect adjusting supply chains. Our views at this time suggest that we will be within the range of the original targets we issued last year, which was adjusted EBITDA between $800 million and $900 million. Supply chain headwinds are expected to largely offset the impact of new sales commitments announced earlier this year. Our performance within this range will be affected by how quickly the Boeing work stoppage is resolved and the aerospace market ramp recovers. As for 2027, we remain confident. Despite a reduced second half of 2024 and pressure heading into 2025, we believe the revised near-term build rates and sustained demand for aircraft production support the range we suggested last year. ATI is still on track to be above $5 billion in sales - about $5.2 billion to be more specific - and above $1 billion on adjusted EBITDA by 2027. For the near term, we are focused on supporting our customers, taking full advantage of operational opportunities to deliver our fourth quarter and full year 2024 guidance.

Thanks, Don. This has been a unique quarter for ATI. Uncertainties with our most critical customers and unexpected obstacles within our own operations left us short of our goals and our commitments to you this quarter. We are taking action across the enterprise to deliver on those expectations now and every quarter going forward. What gives me confidence in our future success is that our end markets are strong and our products lead the industry. Our strategy is on point, delivering growth and margin expansion. And most of all, our team is focused on delivering value for our customers and shareholders. With that, let's open the line for your questions.

Our first question today comes from Richard Safran with Seaport Research Partners. Your line is open. Please go ahead.

So I just wanted to follow up on the comments you just made about 2025. And I wanted to ask you a bit more about how you recover from these unplanned outages. For AA&S, is there a risk that the repair and restoration efforts impact your '25 results? And for both of these issues, is the revenue recoverable? Do you expect a bump in '25, assuming the strike ends in a reasonably short period of time and production resumes?

Thanks, Rich. First of all, regarding our outlook for 2025, we don't anticipate that the VIM outage we experienced and will still face in Q4 will negatively impact 2025. Concerning titanium demand, although it's not the main point of your question, I want to mention that we expect the work stoppage affecting that titanium demand disruption to last until the end of this year, with resolution expected either late this quarter or early 2025. We believe the industry and related demand will return to normal. As for recovering the missed revenue we encountered in Q3 and expect in Q4, while we would like to think it's possible, we are not raising our 2025 targets based on that assumption.

And just quick here. I think we're going to agree that you're more dependent on the engine manufacturers and the airframers. I just want to know if you could maybe go into a bit about what GE roles in Pratt are saying that's a bit different from the airframers Boeing and Airbus trying to get what's embedded in your outlook now relative and the differences between what you're getting from the engine and airframe manufacturers.

Sure, Rich. I'll provide some details, and if Don has any numbers that can add clarity, he can chime in. Regarding engine demand, there is a general expectation that Boeing will resolve its work stoppage, hopefully by the end of this quarter. They have also indicated their commitment to safeguarding the supply chain, resulting in steady orders without significant declines. There was an adjustment in mid-quarter around late August related to build rates that didn't align, particularly influenced by actions from Airbus. However, overall demand has remained consistent, and purchases are continuing. To be clear, we anticipate that our sales of jet engines will keep growing, provided the labor dispute is resolved by the end of this quarter or the start of the next. The maintenance, repair, and overhaul sector remains strong across all original equipment manufacturers, each tackling their specific design challenges and engine upgrades, which drive shop visits. We are also gaining ground with Pratt in support of the geared turbofan engines. In September, we achieved a milestone by doubling our shipments compared to the first half of the year. As we move toward the end of this quarter, we aim for a meaningful increase in shipments, targeting a rise of about 15% to 20% for next year. All these factors suggest strong demand growth, along with ongoing support for both MRO services and possibly some shifts towards the LEAP engines, specifically the 1A, to sustain ongoing growth.

Our next question comes from Andre Madrid with BTIG. Your line is open. Please go ahead.

I guess if we look into the near term, you mentioned pretty extensively the impact of MRO demand. Do you think though that broadly, this is enough to offset the pressure on airframe? And could you maybe just talk broad strokes about the margin differential between those 2 end markets?

As we look at it, what we've seen most of the engine OEMs have shared in their public comments is that they're running much higher MRO. So anywhere from 40% to one of the OEMs even shared 60% of their current demand is coming from the MRO standpoint. So that's continuing. I would say as we look at their support and how they're thinking about the build rates, they're continuing to build to make sure that they can keep up once the work stoppage is over, Boeing is back on track. They want to make sure that they're not impeding that growth on either Boeing or Airbus side. To the point where some of them have shared, they're protecting the supply chain and continuing to buy at level stable demand levels. So I would have to say, if we look forward, there has to be, I think, a different assumption around the work stoppage that may have them revisit that. But today, they're pretty assuring us that they're going to continue along this path. As far as margins, that's a little bit harder to define airframe, yes, goes to the two big air OEMs, but it also goes through distribution. It goes through machine shops. There are multiple channels and multiple products that go into that. I'd say our position on engines is more accretive to our business than airframe, but they're both very positive from a margin standpoint. Don, do you want to share something?

Yes. If you think about our revenue profile, approximately 60% to 65% comes from aerospace and defense. Within that, jet engine revenue is about twice that of our airframe revenue in any given period. While we expect jet engine performance to provide some relief against challenges on the airframe side, it won't fully counteract a significant slowdown in airframe demand, such as what we've experienced at the end of Q3 and likely into Q4. However, we do have additional factors that can mitigate the impact. One such factor is our defense segment, which accounts for roughly 10% of our revenues and is more than half of our airframe revenue. This area is expected to continue growing and will help alleviate, but not completely negate, the challenges posed by airframe headwinds that we've observed this quarter and foresee in the next quarter.

And if I could throw in one more. I mean, you guys talked extensively about how titanium shipments being pushed out on the airframe side was more due to obviously demand signal shifting. But on the defense side, it seems like it was more operationally driven. I mean just to clarify, sorry if I missed this, but could you explain if that's the case, if it was more operational challenges?

No, Andre. On the defense side, what I would say is it's more timing where the orders and frankly, there is a bottleneck in the supply chain at Aberdeen with their ballistic testing, which is impacting and slowing shipments on some of that armor plate that we provide. So we're working with the Army to get that resolved and look at their testing capability or capacities. But I'd say we were at the AUSA show, the Army show just at the beginning of the month here. And there's quite a bit of activity, both domestically and through military sales around the rebuilding of the ground defense in Europe. And so there is a lot of upside opportunity. And as Don said, there are opportunities for us to offset any softness that we see from an airframe standpoint with our titanium.

Our next question comes from David Strauss with Barclays. Please go ahead.

I wanted to ask for clarification on the Q4 EBITDA guidance. You're predicting relatively flat EBITDA sequentially in Q4. I would have expected the supply chain impacts to be more significant. It seems your assumption is that the Boeing strike will continue through the end of the quarter. Additionally, on the AA&S side, it appears you'll still face operational challenges. Don, could you help us understand the transition from Q3 to Q4 regarding the EBITDA forecast?

Sure. I'll try to basket this in a way that I'm not dragging you through minutia. But the way to think about it is, first of all, we ended the quarter with about $186 million of EBITDA in Q3 that included almost $4 million of gain related to an oil and gas sale that I don't expect is not expected in our Q4 guidance. Then when you take a step back and you think about the things that we've shared, some of those things are going to be with us in Q4. To your point, things like that back and yield outage that is going through a repair process that will probably last the bulk of Q4. And then we're not expecting a magical solution to titanium demand reduction that we saw. So those will be with us. But there were some things that were in Q3 that shouldn't repeat. For example, we had some headwinds around shipping during the hurricane. No surprise when you're in the middle of a hurricane; it's kind of tough to load trucks and get moving. But good news is we did not forecast a hurricane in Q4. We think that's probably a pretty good assumption. So that should not repeat. Then we had some, just some other anomalies. We talked a bit about the VIM outage. Well, that VIM outage is impactful to last quarter. We don't expect it to be impactful for this quarter. So you go through those pluses and minuses, the things that were hits in Q3 rather that we don't expect to repeat in Q4. Think of them in terms of they're probably a total of about $10 million of good guys. And if you back into the revenues, it's about $30 million of revenue that bad guys in Q3 that won't repeat in Q4. And then I would reduce that $10 million of EBITDA by the non-repeated good guys like the oil and gas gains sale, for example. So what you really get to is, when you look at our current guide for Q4 EBITDA, it's $181 million to $191 million. And so midpoint $186 million looks like a kind of a flattish Q3 to Q4. Don just explained it should be better in Q4 by a few million dollars. One thing you already raised is that, hey, we're going to have a full quarter effect of the titanium and the vacuum. That will be something we're dealing with. And then I will be quite frank, when you look at our Q4 guidance, we do not plan on missing. And so as we looked at the risks that we see in Q4, we tried to be very, very thoughtful on how that affected our guidance. You can probably say fairly that our view of Q4 is conservative, but that would probably be with all the volatility and change that's going on in the market at the moment with the stoppages and all that good stuff. It felt like a prudent thing to do. So that's in the math as well. Does that help, David?

And just as a follow-up, I know sometimes it's hard for you guys to know exactly at what rates you're shipping at. But any help to kind of level set up particularly on the titanium side, on the airframe side, where you ship maybe take the major platforms, where you've been shipping and where you're shipping right now? What rates?

So David, as we talked about, coming from the supply chain reacting, some of it before even the strike began as they were hearing the rhetoric. That has mainly subsided. I think it's stabilized from a shipping rate. And to be honest, we've seen some spot transactional business, I think as some have come back and said, we do need this product or some titanium or we missed this demand signal that we've got put back into the order book. But I do anticipate from the titanium side that we'll see level shipments that as we go into the fourth quarter, flat to maybe slightly up on the titanium side. Hopefully, does that answer your question?

Yes. I was just wondering if you could break down where your shipping stands, for instance, on the MAX or A320, in terms of rates and how they compare to a quarter or two ago or to what you expected for Q3 and Q4 versus what it actually is.

From what I see regarding the programs on the Airbus side, I believe those rates have remained steady. There are some suppliers in their supply chain that are adjusting their build rates, and we've had conversations with them. This year, we aren't observing any significant impacts; I would categorize it as almost a stabilization for them. They are continuing to develop titanium supply to prepare for a transition away from VSMPO as we move into next year. We are aligned closely in that regard. On the LEAP side, as I mentioned, there has been a shift towards the 1A parts instead of the 1B. While those parts are similar, they are not identical. This has led to some bottlenecks and inefficiencies as material became backed up; they decided to prioritize the 1A parts, which may have been lower on the priority list, pushing the production of 1 and 2 parts out. Overall, in terms of shipments while working with the engine OEMs, things have been stable. Looking ahead to our guidance for Q4 and into 2025, we are considering how long it will take Boeing to bring their workforce back, get them requalified and certified, and resume the production rates achieved in August. We estimate this process will take a few months to complete. However, there may be new opportunities arising, as the supply chain and machine shops reacted strongly to concerns about cash flow and ending up with excess inventory at year-end. Therefore, as operations resume, we could see some new opportunities emerge from that.

Next in queue, we have Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Can you provide insights on the backlog, particularly how it has changed across your segments since Q2? Additionally, you mentioned in your remarks about some delays and cancellations. Which specific products have been affected by this?

From a backlog perspective, it has remained stable at around $4 billion, with approximately three-quarters in the HPMC segment and the remaining quarter in the AA&S segment. Demand in both segments continues to be strong and steady. Regarding pushouts, most of these were linked to airframe titanium, which experienced the largest impact across our portfolio. Meanwhile, the engine sector continues to purchase consistently, anticipating that Boeing will resume operations and return to their production rates. Airbus is also maintaining its production at the stated build rates. Some pushouts involved titanium orders, where customers opted to cancel or swap items, indicating a preference to substitute certain products instead of utilizing titanium for a specific order. There has been considerable activity in adjusting order timings and switching products. The cancellations have mostly occurred in the distribution segment, with a small number in the machine shop, as customers are making speculative purchases based on their predictions for demand fluctuations. Throughout the supply chain, customers have been proactive in ensuring they stay ahead of increases in demand. One particular customer in the landing gear sector has been significantly ahead of previous build rates to avoid becoming the bottleneck in the supply chain. Recent slowdowns have led to a realization of excess inventory, prompting a need to adjust inventory levels, and this is pushing some production into 2025.

Yes, it is within. It's part of how we've historically defined that calculation. So we include the cash proceeds from discrete asset sales or just from asset sales in general. The logic there is if you're including your CapEx as an element of your free cash flow, if you turn around and sell one of those assets, wouldn't you include that proceed. So short answer is yes.

Our next question comes from Timna Tanners with Wolfe Research.

I wanted to circle back, first off, just quickly on the $40 million that divestiture. I assume those are lower-margin businesses that doesn't change your outlook for your targets for 2025 and beyond?

You are 100% correct. Those are non-core assets. Sometimes they're discrete assets, which there's little to no margin attached, like the oil and gas rights. Sometimes they're non-core operations. They would be immaterial from a top line standpoint. They would almost always be dilutive from a margin standpoint. So we unlock that and improve the metrics and get us cash to redeploy.

I think the one thing I'd add to that is in this case with these assets that we will be able to continue to supply material to the buyer. So we will get the benefit of that material supply while aligning that business with another owner who this is their strategic focus. We anticipate they're going to invest and they're going to grow that business. So as Don said, it's not accretive, but I think it does provide us an opportunity to continue to support it with growth potential.

I wanted to follow up on your previous comments during the Q3 call regarding lost volumes to certain segments potentially being sold to other segments. Could you provide an update on how the industrial markets are performing? Also, you've mentioned in the past about the MAX contracts with Boeing, where they continued to take the minimum even during work stoppages, which resulted in prolonged low margins and lighter volumes. Is there a possibility of that happening again? That's two questions.

Sure, I'll begin with the industrial market question. We are not heavily involved in the automotive or housing sectors, which means those areas do not significantly impact us. They represent a small portion of our business, about 10% to 15%, primarily within the AA&S segment. Regarding our other strategic segments, we noticed a decline in medical and specialty electrical, but this is mainly due to order timing and inventory adjustments rather than a decrease in actual demand. We still observe robust demand in specialty energy and medical, especially as elective surgeries begin to recover. There is currently a shortage of some medical supplies, causing some fluctuations in that market. However, the aero-related markets continue to show strong demand, and we are prepared to take advantage of selling opportunities when they arise. Concerning our contracts with Boeing, like most aerospace agreements, these were renegotiated during the pandemic, and we are currently engaged with them under a shared position with min/max agreements. All our contracts include maximums to help us manage capacity and ensure we can continue supporting our customers efficiently. When demand increases rapidly, we can also engage on a transactional basis as their needs surpass the terms of current contracts. We are collaborating closely with Boeing, but they have faced a series of challenges since the pandemic, which affected their build rates. While they have been working towards a build rate of 38 and engaging with the FDA, they have not returned to full operational capacity since the MAX incidents. Nevertheless, our portfolio is diversified, allowing us to support various airframes and engine programs effectively. Despite Boeing's ongoing issues, we expect them to reach their build rate goals, and the overall industry remains strong, working to meet airlines' requirements for new aircraft while maintaining engine operations.

Yes. I want to revisit the question regarding industrial demand. We had expected that industrial demand would pick up this year, but it hasn't returned as we anticipated. In this quarter, we experienced a decline in industrial sales compared to the previous quarter, which I believe is what you were inquiring about, Timna. To reinforce what Kim mentioned, the areas where we faced challenges in industrial sales included automotive, construction, mining, and the food and equipment materials we supply. Therefore, in terms of our Q4 guidance, we do not expect a strong rebound in industrial sales during that quarter. Looking toward 2025, we do foresee a more normalized level of sales, but this year has generally been disappointing for that sales segment.

The next question comes from Seth Seifman with JPMorgan. Your line is open.

I wanted to inquire about the airframe sector and some of the challenges you are experiencing there. Generally, I view that end market as being more connected to wide-body production, particularly with Boeing, which is primarily associated with the 787, not really affected by the work stoppage in the same manner. However, I am curious if you are noticing inconsistencies in demand due to the delays they have faced in delivering aircraft caused by certification and other issues. Additionally, regarding the 777X, how do you believe the delays will impact the growth trajectory you expect over the next few years?

Yes, Seth. That's an interesting question. There’s a lot happening in the Boeing portfolio. Regarding the 787, we do see growth opportunities, which is a positive aspect as we look towards 2025. Boeing is progressing and manufacturing planes. The wide-body planes utilize significantly more titanium compared to single-aisle planes. We are noticing increased demand from Boeing for that aircraft, and they've already raised their forecast for next year. We expect to see that growth continue as they ramp up production through 2025. As for the 777, it was disappointing to see the entry into service pushed back, and that model has a substantial titanium load. There are design issues they’re addressing, but those are not related to our materials. We anticipate that they will resolve those issues, and despite the current challenges, we hope to see improvements in the timeline as we move into 2025. However, we did not incorporate significant expectations regarding that into any forecasts or estimates for 2025 because it is still early in the production ramp.

And then just maybe as a follow-up, you mentioned the opportunity to drive margin being more significant in periods when production is stable. And so maybe now with some of these challenges kind of persisting into the early part of the first half of next year. Does that provide some opportunity to really drive efficiency through the operations, and also to be prepared for the next ramp now that they're maybe not always running so hard to be in line with rising demand?

So Seth, I'll address that. The quick answer is that you're absolutely correct, and it's impressive that you observed that. However, it doesn't indicate that we are slowing down in our efforts to meet our margin targets. Let me address that part first. This quarter, we achieved a consolidated margin of 17.7%. If you exclude the oil and gas sales, I believe we are in the low 17% range. This is still above the debt threshold. We expect our EBITDA margins in Q4 to stay around 17%, slightly lower than we previously forecasted due to the reduction in production and lower guidance, which introduces some inefficiencies. Nevertheless, the business is progressing as we intended in terms of margins. There is also a significant opportunity for us. We aim to reach our 18% to 20% margin range by 2025, and I am very optimistic about that. If there’s any delay in this ramp-up, we will certainly capitalize on it by accelerating our efforts to enhance efficiency and outputs as part of our strategy, making the most of any resources that may or may not be available.

And our next question comes from Scott Deuschle with Deutsche Bank. Your line is open.

Tim, regarding the engine side, has there been a change in demand? Kim, on the demand side, are the changes in engine demand mainly for forged products, or have there been any delays from customers for products like nickel alloys as well?

The demand changes affected both HPMC businesses due to updates from Airbus regarding their build rates, which led people to realign with Boeing's build rates. These changes were relatively minor and involved pushing timelines from quarter to quarter rather than cancellations or delays into the current year. Most of these changes were likely divided between forged products and SM. A significant portion of the materials supports the products we manufacture, and both OEMs were impacted. It's worth noting that the GTF situation is unique, and we are continuing to ramp up and collaborate with them, so there was no negative impact from that program.

Yes, generally it does. Let me explain a bit more. When considering 2027, we have a range of scenarios that inform our guidance, and we believe we’ve approached this thoughtfully. Looking at 2025, we initially projected guidance of $800 million to $900 million back in November 2023. This range is based on our revenue expectations and margin profile, and I remain confident in that range. Although we anticipate some headwinds carrying into early 2025, we expect modest growth in the first half and accelerated growth in the second half of the year. This is supported by strong underlying end markets, despite the work stoppage with Boeing and challenges in the supply chain. We are seeing significant positive signals in the jet engine, defense, and aerospace sectors. Therefore, we expect the business to perform well within that original range. Additionally, we announced some sales commitments at the Farmborough Air Show, which would contribute about $40 million of EBITDA to that range. However, given the current headwinds, we likely won't see the full impact of that additional $40 million in 2025. That said, delivering $800 to $900 million, with $850 million as the midpoint, indicates our strong confidence in this business.

Yes. And Don, just to clarify, were the asset sales in the prior free cash flow guide as well?

Yes, they were. These are discrete asset sales, and it's uncertain what we might receive from them. We regularly review our asset portfolio to identify any capital that could be redeployed through a sale process. It's common for us to do this. While $40 million in a quarter is on the higher end of our expectations, we anticipated generating some cash from this process. Regarding our capital guidance, we expect to spend about $200 million on capital expenditures each year. In calculating that amount, we consider customer-funded capital expenditures. If someone contributes $20 million for us to install an asset on their behalf, we don't include it in our spending calculations since they are financing it. Similarly, when we look at cash generated from asset sales, we typically factor that into our capital expenditure program as a net offsetting funding source. While these amounts are usually not large, they are beneficial in achieving the returns that our shareholders deserve.

Thank you. This concludes our Q&A session. So I'll pass you back over to Dave Weston.

Thank you. As we move to close our call, I'd like to thank everyone for their time and invite everyone to reach out to our Investor Relations team with any other questions. With that, I'll pass it over to Kim for some closing remarks.

Thanks, Dave. So let me just reiterate before we wrap up here. One, thank you for all those questions. The fundamentals in the aero and the defense markets are strong, and we're seeing quarter-over-quarter growth and margin expansion. ATI is well positioned with differentiated products where there are only a few companies in the world, and in some cases, only we are able to make the materials that we do. Our customer relationships are growing and getting stronger every day because we are delivering for them when they need it. We are producing the highest quality products, and they can rely on that, and we are developing new solutions for tomorrow's design challenges. So again, appreciate the time, and thanks, everyone, for joining the call.

This concludes our call today. Thank you for joining. You may now disconnect your lines.