Ati Inc Q1 FY2026 Earnings Call

Hello, everyone. Thank you for joining us, and welcome to ATI's First Quarter 2026 Earnings Call. I will now hand the conference over to David Weston. Please go ahead.

Good morning, and welcome to ATI's First Quarter 2026 Earnings Call. Today's discussion is being webcast at atimaterials.com. Joining me today are Kim Fields, President and CEO; and Rob Foster, Senior 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, capabilities 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.

Good morning, and thank you for joining us. We're off to a great start in 2026. We delivered strong first quarter performance by driving higher quality revenue, expanded margins and improved cash flow. This quarter demonstrates that the ATI model is working. We're prioritizing the right volume, expanding margins and converting demand into earnings and cash flows. First quarter results exceeded the high end of our guidance, supported by disciplined operational execution and richer mix. Demand across our core markets remains robust, and we continue to grow alongside our customers. I'll highlight the quarter's results. Revenue was $1.15 billion, in line with expectations, with 69% attributed to aerospace and defense. Adjusted EBITDA was $232 million, up 19% year-over-year and above the high end of our guidance. Adjusted EBITDA margin reached 20%, up more than 300 basis points year-over-year. Adjusted free cash flow was $75 million, a meaningful improvement from last year and a clear indicator of strong cash discipline. This performance reflects more than favorable market conditions. It signals a fundamentally stronger ATI. What sets us apart today is the improved quality and resilience of our earnings. We are strategically allocating capacity towards our highest value opportunities in aerospace, defense and specialty energy. That shift is driving better mix, stronger pricing and more consistent execution. Order activity continues to be strong with our order backlog growing by 10% sequentially to an all-time high of $4.1 billion. Additionally, lead times are extending for our most differentiated products, super alloy nickels, premium quality titanium, isothermal forgings and exotic alloys. This is a key point. This is not short-cycle demand. It is tied to long-term contracts, production schedules and well-funded programs, giving us strong visibility into future performance. This momentum accelerates throughout 2026. Operationally, our disciplined execution is delivering results. Across ATI, we are improving throughput, increasing yields and streamlining production flow, particularly in melting, forging and downstream processing. That demand strength is most valuable when we convert it to deliveries, and that's where execution is making a difference. Across operations, we are unlocking capacity through productivity. Weekly output at our primary melt facilities increased by more than 15% year-over-year. We achieved record shipment levels across multiple product lines in both segments, and we continue to improve flow through forging, testing and finishing operations. These structural operational improvements are being driven by better equipment reliability, tightened product quality control and targeted investments in the highest return areas of the business. Combining this execution with the strong market demand provides the foundation to raise our full year adjusted EBITDA guidance by $35 million, bringing the midpoint to $1.035 billion. This represents 20% growth year-over-year. Our full year outlook is now adjusted EBITDA of $1.01 billion to $1.06 billion, adjusted EPS of $4.20 to $4.48, adjusted free cash flow of $465 million to $525 million. Our outlook reflects continued strength across our core markets, focused execution and confidence in our ability to convert demand into earnings and cash flow. Importantly, a significant portion of this growth is already embedded in our $4.1 billion order backlog and long-term contracts, providing strong visibility into the second half outlook. Like others in the industry, we're closely monitoring the geopolitical developments in the Middle East. The primary areas we're watching are demand impacted by fuel price, MRO activity levels and aircraft retirements. We've seen no material impact on demand or order activity. There have been no changes to our order books or requests for delivery deferrals. In fact, last week, I personally had several calls from customers eagerly emphasizing they'll take any capacity that opens up. With our record backlog and the ability to redeploy assets to support multiple differentiated markets, our portfolio is designed for this kind of dynamic environment. Turning to defense. Revenues grew 9% year-over-year and are on track for mid-teens growth in full year 2026. Our materials support a broad range of platforms across air, land, sea and missile systems with accelerating demand across key programs. I am pleased to share that we have renewed a 5-year agreement supporting the naval nuclear program. This agreement is projected to generate $1 billion in revenue over the contract term at attractive aero-like margins and more than doubles annual revenue over the prior contract. Q1 marks the third consecutive quarter our Advanced Alloys & Solutions segment has achieved margins in the high teens, well ahead of plan. It reflects the success of our strategy to focus on differentiated products, driving stronger value capture and sustained margin expansion. The most notable evolution in recent months is the acceleration of missile-related demand. Q1 revenue in missiles and missile systems more than doubled year-over-year as customers are scaling production and replenishing inventories. We have seen a meaningful increase in customer inquiries and order activities tied to the production ramps, even in advance of program funding. Our materials, titanium, nickel and hafnium are vital to missile platforms like Tomahawk, PAC-3 and THAAD. These materials are used for structural applications and propulsion systems where high temperature performance, strength and durability are required. This is a small percentage of our business today but provides an opportunity for accelerated growth and strong visibility ahead. Our execution is also being recognized by our defense customers. In high-performance titanium plate and sheet for ground armor, we were honored to be named General Dynamics Land Systems 2025 Supplier of the Year. Selected from over 2,500 suppliers, this award recognizes our execution on key programs, including the XM30 prototype. This distinction reflects not only the quality and performance of our materials, but also our team's speed, adaptability and coordination. We appreciate the recognition and congratulate the ATI Specialty Rolled Products team for their outstanding work. Turning to aerospace. Fundamentals remain strong. Commercial aerospace continues to be supported by increasing build rates and significant aircraft backlogs. We are encouraged by progress at both Boeing and Airbus and are well positioned across these platforms. Airframe performance reflects timing and supply chain phasing. Customer schedules, backlog and production plans support a second half ramp. We remain confident in our full year outlook with revenue growth in the mid- to high-single-digits. Within aerospace, jet engine is our largest and most important growth market. Jet engine sales grew 12% year-over-year, supported by both OEM production and aftermarket demand. The full year outlook for revenue growth remains in the mid-teens. This is driven by high fleet utilization, increasing shop visits and continued growth in engine platforms like LEAP and GTF. Our materials are vital in the most demanding parts of these engines where performance and reliability are essential. We supply 6 of the 7 most advanced jet engine nickel alloys. This remains a capacity-constrained market where our differentiated capabilities allow us to capture both share and value. Finally, in specialty energy, strong momentum continues. Revenue grew 22% year-over-year, driven by nuclear and land-based gas turbine markets. We recently extended our long-standing partnership with Cameco through a new 5-year agreement, reinforcing ATI's role as a trusted supplier within the global nuclear supply chain. This $250 million agreement includes meaningful improvements in product mix and pricing. More broadly, our Advanced Materials portfolio, including highly engineered specialty alloys like zirconium and hafnium support specialized applications across energy, defense and space. Performance requirements in these markets are ever increasing and leverage the unique capabilities of ATI. Bringing it all together, our strategy is delivering measurable results. We delivered a strong first quarter with higher earnings, expanded margins and significantly improved cash flow. Our customers are ramping, our backlog is growing, and our portfolio is aligned with the most attractive highest value markets, especially in A&D and specialty energy. With strong core market demand and record backlog, we are confident in our increased full year outlook. $5 billion of revenue at 20%-plus margins is in clear sight with an increasing share converting into earnings and free cash flow. That performance enables us to reinvest in the business, create value and return capital to shareholders. We are focused on execution and raising the bar for performance. I'll now turn the call over to Rob.

Thanks, Kim. The first quarter delivered strong results, exceeding our plan despite typical scheduled seasonal maintenance. Looking ahead, we see robust demand across our aerospace and defense markets. Momentum is building through the year, supported by favorable trends in price, mix and volume in our highest performing markets. Our strong positive free cash flow generation in Q1 puts us in a great position to generate positive cash flow in every quarter of 2026. Q1 revenue was $1.15 billion, driven by 6% growth in aerospace and defense. Within that market segment, jet engine sales increased 12%, airframe revenue declined by 9% and defense-related revenue grew by 9% compared to the prior year. Specialty energy revenue increased by 22% year-over-year. Q1 adjusted EBITDA was $232 million, up 19% over 2025. This was $11 million above the midpoint and $6 million above the high end of guidance. Q1 consolidated EBITDA margin percentage was 20.1% as we realized a richer mix from 80/20 initiatives and other portfolio rationalization actions. Adjusted free cash flow was $75 million, compared to a use of $143 million in Q1 last year. This is a $218 million improvement year-over-year. Managed working capital as a percentage of sales at the end of Q1 was 34.8%, which is a 110 basis point improvement over Q1 2025. Capital expenditures were $55 million, including $21 million funded directly by customers. All key growth projects remain on schedule and on budget. Margins in both segments came in above our outlook this quarter. HPMC reported 24.9%, a 250 basis point increase over 2025. AA&S was 18.1%, a 320 basis increase over 2025. Both segments were powered by improvements in price and mix across our aerospace and defense and specialty energy markets. This proves the structural work to expand our margins is working. As Kim mentioned, we're increasing our full year guidance across all key financial metrics. For the second quarter of 2026, we are positioned for adjusted EBITDA of $245 million to $255 million, which equates to an EPS range of $0.98 to $1.04. At the midpoint, this represents a 20% increase in adjusted EBITDA over Q2 2025. This 8% sequential increase at the midpoint of guidance is driven by the strength of price and mix, particularly within A&D. For the full year, we are raising our adjusted EBITDA guidance to a range of $1.010 billion to $1.060 billion. The midpoint of $1.035 billion is a 20% increase over full year 2025 as we continue to execute strong operational performance and capture increased demand for our products in aerospace, defense and specialty energy. These earnings translate to a full year adjusted EPS range of $4.20 to $4.48. Turning to adjusted free cash flow. We are raising the midpoint of our range by $35 million, setting the range between $465 million and $525 million. The $495 million midpoint is $115 million higher than 2025, a 30% increase year-over-year. This is driven by our projected $35 million increase in earnings. We look forward to continuing gains in cash flow efficiency throughout the year. Our CapEx range remains consistent with our prior guidance. Gross CapEx investments of $280 million to $300 million will be partially offset with customer-funded CapEx of $55 million to $65 million. As we previously stated, returning capital to shareholders is a priority for ATI. In the first quarter, we repurchased $75 million in shares. We see share repurchases as the most efficient and effective way to return capital to shareholders. We increased our share authorization by $500 million in Q1, with the total remaining authorization now at $545 million. With strong and increasing free cash flow, share repurchases remain a priority. Now turning to end markets. We see strong demand in our major end markets and confidence in our outlook remains unchanged. In jet engines, our largest end market, we see growth rates in the mid-teens for the full year 2026 as we leverage price and mix to our advantage. In airframe products, we see mid- to upper-single-digit growth, with most of the growth occurring in the second half of the year as OEM production rates increase and customer inventory balances normalize. In defense products, we see growth rates in the mid-teens. Our A&D sales mix will continue to be a significant portion of our sales volumes. Aerospace and defense sales are in line to represent more than 70% of sales for full year 2026. Moving to specialty energy. We continue to evolve this business into a model of sustainable and profitable growth. We're leveraging long-term contracts with accretive A&D-like margins and are targeting mid-teens growth for the full year 2026. As we have previously mentioned, we strategically prioritized aerospace, defense and specialty energy, using 80/20 and allocating differentiated production capacity to capture further growth within these high-value markets. Sales for our industrial, medical and electronics are trending down by low- to mid-single-digits for the full year 2026. Looking forward to adjusted EBITDA margins, we see continued margin expansion in 2026 with full year consolidated margins in the range of 20% plus. We exceeded our margin outlook in Q1 due to favorable mix and price, and Q2 margins are tracking to be similar, expanding above 20% in the second half of 2026. In the second half, sales, profits and margins will be lifted by price increases and mix under LTAs. At a segment level, full year margins for HPMC will be in the range of mid-20s and AA&S in the upper teens. Full year consolidated incremental margins will average 40% with second half margins outpacing first half margins due to LTA pricing and mix. As stated, HPMC incremental margins are typically higher than AA&S, reflecting sales mix and end market pricing dynamics. Both are general guidelines that fluctuate by product, end market and customer, serving as primary indicators of ATI's future growth. To summarize, we are off to a strong start and remain confident in our outlook. We are focused on delivering consistent performance. We are well positioned to execute and deliver, meeting and exceeding the expectations of our customers and shareholders. Kim, I will turn the call back over to you.

Thanks, Rob. We are off to a great start. We are executing well and building momentum in 2026, supported by strong demand, differentiated products and consistent execution. Let's open the line for questions.

Your first question comes from the line of David Strauss with Wells Fargo.

I wanted to ask about the aero aftermarket piece of your business, Kim, maybe size that for us, how it performed in the first quarter? And if you're seeing any sort of impacts out of what's going on with the Middle East and higher fuel, or how you're thinking about that business from here?

Sure. So aftermarket continues to be very strong across the aerospace, especially in jet engine where we're continuing to see both MRO shop visits and upgrade packages driving demand. And as I look at our lead times, we did talk a bit about our backlog and our lead times; those are moving out substantially based on that demand that's coming in. Like others in the industry, we're continuing to monitor what's happening there in the Middle East. But we're not seeing any impact to our business. No changes in demand or deferrals or any disruption to the order book. In fact, just over the last week, the conversations I've been having with customers, the first thing they say is if there is any openings that come, that they want them, and they will contract and commit to them. So demand is very strong across the board. As you saw, that backlog went up to $4.1 billion, our highest level ever. And it really reflects that sustained demand. As we look forward, the things that I'm looking at and thinking about are possible retirements due to fuel-driven demand. But frankly, as we go forward, those types of retirements are going to be in the legacy, less-fuel-efficient engines, and the shift will accelerate towards the next-generation platforms like LEAP and GTF where our content is roughly 2x where we are on the legacy engines. And so that will continue, I think, to sustain that MRO demand as we go forward. So stepping back and just looking at it all, demand is strong, the backlog is growing, and we're not seeing any near-term impacts from the conflict.

Great. Quick follow-up, Rob. The guidance increase, especially on adjusted EBITDA, what is the source of that? It sounds like you kept the segment margin forecasts about the same, so where is the uplift in EBITDA guidance coming from?

Yes. We're really confident in where the guide is at. We're seeing the strength, primarily within the defense and jet engine business. So I didn't change the guide for the full year, right? We're still in the mid-teens for jet engine, and defense, low to mid-teens. But I'd say my bias is towards the upper end of that guide. So it's really the defense business and the jet engine business and the contracts that we're securing give us the confidence.

Okay. So HPMC.

Not just HPMC. We've got contracts in defense for our defense business in both of our segments that we're securing the contracts and the full year guide, like I said, I have confidence in that higher end of the low to mid-teens. The bias is towards the higher end of that defense business for both HPMC and AA&S.

Your next question comes from the line of Richard Safran with Seaport Research Partners.

I was very interested in your comment in the slides and opening remarks about pricing and HP margins. I wanted to know if you could expand on that. And maybe talk a bit more about pricing and why, in the midst of an OE ramp, where the model is typically to see a step-down in price, you're actually going in the opposite direction?

Yes. So Rich, we've shared over our past that we don't really see a differentiation between OE versus MRO, that our parts—we make a disk and we don't always have clear visibility to which use it's going to. And so really what you are seeing is that price and that mix is a material driver in the first quarter here. And we see that continuing to accelerate as we go through the year. And really where that's coming from is there is a constrained market. We're doing the most differentiated materials. Our backlogs are moving out for those differentiated materials on the engine side to a year plus. Now in some cases, titanium PQ is almost to 2 years. So we're seeing that tightness in these contracts as we're reviewing them. They're getting embedded. We're getting price. It's reflecting the value of what we supply. It's not just short term based on scarcity, but it's long term and contractual, and it's getting built in. And it's coming through all kinds of sources. There's step-ups, there's escalators, there's price resets given where markets have moved. And alongside that, we've talked a lot about increased content on these platforms and expanded scope. We're still getting calls today where there are others in the supply chain that may not be able to meet the full demand and are struggling to meet that level that our customers are looking for, and we're picking up share gains as well. And again, in those situations, we're able to capture a large portion of the value that we're creating to continue that ramp and helping them meet their commitments. And so as I look through, it's a structural shift. It is in HPMC, but it's also on the AA&S side. And I just wanted to add, that is a structural shift, and it's been deliberate around our portfolio management. You see it in some of our other end markets and some of the reductions and not growing in those non-core markets because we're really focusing, especially in our exotic alloys, on those differentiated markets where we can capture the value that we're really providing, particularly in aerospace, especially in defense and specialty energy. So a lot of great work by the team, and you'll see that continue to accelerate and it will be even more pronounced in the second half.

Okay. Second, it's no secret the Department of Defense has been pressing industry for additional capacity. At the same time, we're seeing a rate ramp in aerospace, which you've been talking about. I want to know if you'd be willing to discuss planned or anticipated capacity additions and maybe comment on when they might come online?

Sure. So defense has been very strong in the first quarter. And I know we've guided to low and mid-teens. But as Rob just shared, our bias is to the upside on that. And so to your point, we're seeing very strong demand across our whole portfolio. And as we look at the capacity to meet that, especially in missiles, that's been an area that's really upticked from inquiries and order placements even in advance of that funding by the Department of Defense. But as we look at capacity, we've announced previously our titanium investment. Our nickel investment is in progress. Both of those are on track and on schedule to come online. Nickel remelt will be this year and then the primary VIM melting will be online next year. In titanium, we're already in qualifications for premium quality engine. So both of those are on track, and we're in a good position. I think as we think about some of the missile and some of the nuclear naval applications, we've got capacity in place to support that ramp as we go forward. Now that said, as we go and think about some of our other exotic alloys or isothermal forgings, which has consistently been over 2 years' worth of backlog, that's an area that we'll continue to have conversations with our customers and make sure that we're aligned with them. We're not at a stage to announce any new significant projects today. But we are talking with those customers. We have very strong, close relationships with regard to capacity planning, how they're seeing that landscape change. And I do believe though as you look forward, defense is going to be an important growth market for us for 2026 and beyond.

Your next question comes from the line of Scott Deuschle with Deutsche Bank.

Rob, did AA&S see any benefit from this new Cameco contract in the first quarter? And if not, when should we start to see that benefit flow through the P&L?

Yes. Thanks, Scott. There wasn't much benefit accrued into Q1. That's really going to be a prospective benefit. And as Kim mentioned, that's going to be some of those exotics, the zirconium and hafnium. And we're really making structural changes in that business. And what you're going to see is, I'll call it, more aero-like margins starting to come through. So that's going to go into the AA&S segment and benefit that segment here for the foreseeable future.

Okay. And then are you seeing firm purchase orders today that support the second half ramp in airframe sales? Or are those purchase orders expected to come a little bit closer to the second half?

As you think about our airframe story, we're looking at it as a story of really two halves. The first half of the year, which, as I shared at the last call, is going to be flat as that inventory normalization continues to align more closely with production orders, and we are expecting to see that acceleration ramp in the second half. These are all contract driven. Our orders are typically placed around 12 to 18 months, and so most of those orders and certainly all of the forecasts have been shared with us and we are aligned to those. And even in the last week, I've had conversations and reconfirmed. And as many, I won't speak for our customers, but they've come out and reaffirmed that they're sticking to those targets and build rates. So we have strong visibility based on these relationships and contracts to those backlogs and shipments. So we feel confident where we are today. It is not short-cycle buying. Most of these long-term agreements allow us that visibility and alignment. We've been talking, in some cases, since last September around what they were going to be looking for as we went into the year, and we have frequent updates with them. So most—again, we're 9 to 12 months ahead of the production schedule. So most of those forecasts are all in and most of those orders are already booked in our books. And our contracts, just to remind everyone, have—most of them have minimum quantities and frozen order windows, where changes can be made, and we're rapidly approaching where the rest of the year, the back half of the year, will be frozen.

Your next question comes from the line of Andre Madrid with BTIG.

Looking—you made a comment backlog is the highest it's ever been, over $4 billion right now. Could you give us a split as to how that looks across all the different end markets you play in?

Yes. So the backlog is at the highest level ever, just almost a year's worth of business. And as I've shared in the past, it really needs to be taken in conjunction with our lead times, which as I just mentioned earlier, they are moving out substantially based on demand coming in. So we're at a year plus and for forgings and PQ billet, titanium PQ, it's close to 2 years. So you need to look at both of those together. We are seeing those extend. As I look at the distribution, I would say about three quarters of that is in our HPMC segment given the strong demand in jet engine.

Got it. Got it. That makes sense. And then looking at jet engines, pretty impressive, rose to about 41% of total company sales in the quarter. Should we expect this to grow any higher as a percent of sales? And with the rebound of airframe in the second half, how should we expect the percent of titanium sales to shift going forward?

Yes. So jet engine, as you said, it's about 40% of our market today. This is where some of our most differentiated capabilities are, both for nickel alloys as well as our isothermal forgings. As we look at jet engine, jet engine and aerospace in total could go up another point or two. A&D is around 69%, 70%. Those are going to continue to grow, and that's going to be intentional. We're prioritizing that valuable capacity to those highest value opportunities where we're able to get long-term contracts and margins are the strongest. So as I look at that, A&D mix is going to continue to go higher, which will help us continue to drive higher margins along with stronger value creation. So I would expect they'll be above 70% and it could trend up. Jet engine may be up a couple of points as well. As far as titanium sales, with airframe sales, the first half is going to be somewhat flat and it will start accelerating through the second half. So you will start to see some of that titanium demand that typically goes into the airframe start to increase. But I would anticipate much stronger titanium sales growth in 2027 as widebody starts to gain in their ramp and build rates. The one area that we are seeing quite a bit of demand though for titanium is in defense. It goes into structural applications that are used for high temperature and performance. And so that we are seeing now and is starting to come into our mix. So you may see that uptick here through the year as well. But you'd probably see much stronger titanium sales growth in 2027.

Your next question comes from the line of Myles Walton with Wolfe Research.

Kim, last quarter, you talked about the missiles as a percent of your defense exposure. Can you remind us where that is now given what seems to be a constant doubling of revenue? And then are you party to the 7-year frameworks? Are they trying to lock in your supply for longer-than-normal duration?

Yes. So missiles is one of those markets that we're seeing a really meaningful uptick in demand and inquiries. It is a small portion of our revenue, as you referenced, but the rate of acceleration is really what's notable there. Yes, we've seen that increased inquiries and order activity. As I mentioned, folks are placing orders because of the lead times that we've got; they're placing orders in advance of that total funding that's come through just based on the replenishment needs for our military and missiles and munitions. So the programs that we're on that really require the performance materials that we have are PAC-3, THAAD, Tomahawk, all substantially advertised; they're up 3x, 6x, 10x as they're trying to build the supply chain. And we're really working with those folks in the supply chain to increase our—and align our capacity to those needs. And it's really across a couple of key areas. I talked about titanium, our premium-quality titanium, our exotic alloys like zirconium, hafnium, niobium, and that's continuing to drive this uptick. And yes, it grew triple digits. I expect that will continue to grow at that rate to become a meaningful part of the portfolio, both from a growth and margin perspective. Just to remind you, right now, we've kind of laid out the low to mid-teens growth for the year. But I would say my bias is to the upside given just the recent activity here in the last month to six weeks.

Okay. And Rob, can you just remind us of your tariff outlook for '26 after the changes with IEEPA and 232, where we are positive, negative?

Yes. Just to jump in there. So for tariffs, we've kept—right now, we're status quo. We've got pass-throughs for all of our contracts. So any tariffs that we're still experiencing, we're passing those through. Clearly, given the administration, we're still trying to work through what may be a refund policy, although, I'll be honest, there has not been a lot of progress in that regard. So we're continuing as those come in. We've got alignment with our customers, and we're able to recover any tariffs that we're seeing.

Your next question comes from the line of Gautam Khanna with TD Cowen.

I was wondering if you could opine on where we are on that debottlenecking initiative that you announced about 3 quarters ago? And if you could characterize kind of what percentage of your nickel alloy capacity is being utilized at this point and how that might change over the next 6 to 18 months? I'm just curious how close to 100% utilization you're at?

Sure. The debottlenecking you're talking about is in our primary nickel melting. There is some other work that's going on downstream, but that's what you're referring to on the nickel side. That's progressing very well. I shared in my prepared remarks that we've seen a 15% uptick in output. And maybe more importantly, we've seen significantly improved product quality control parameters. So not only are we getting more output, but we're also making a higher percentage of material that doesn't need to be reworked or have any additional steps taken to make it ready for delivery. And so we are well ahead, I will say, walking through the plants. They are doing a phenomenal job. And quite frankly, this was in advance and in preparation for the capital investment that I shared around our remelt assets that are going to be coming online towards the end of the year in the fourth quarter. And it will be just in time. We are rapidly working on how we increase productivity through our remelt operations across our system to take advantage of that increased primary melt. But there's still some work to do. As I look over the next 6 to 18 months, I do think we are already seeing upticks. You're seeing that both in output and mix and pricing as well, because we really are focusing that in our highest value products. But as I'm looking forward, you'll see the first uptick in the beginning of next year where we really unleash, call it, 5% or so more volumes through the operations. And then we've got the primary melt that's coming in at the end of next year, which I've talked about is kind of that 8% to 10% uptick that will continue to allow us to take advantage of all the improvements and all of the investments that we're making. From an overall standpoint, we are being selective and deliberate in how we're directing our capacities. We're going after the hardest-to-make, most differentiated products. I talked a lot about those 6 of 7 alloys that in 5 of those cases, we're the only ones making those today. And so, we are prioritizing that. You're seeing it in the margin uplift. But we're continuing to drive those bottlenecks and finding meaningful capacity through the work that the team is doing and the learning curve improvement of our employees as we continue to move up that base and people get more experienced and learn our operations.

And Rob, I just wanted to get your opinion on incrementals by segment. I remember Don used to talk about 40% and 30%, respectively, HPMC and AA&S. Is that what you think we should be penciling in over the next 1.5 years, 2 years, whatever?

So I'll break it down. First, consolidated: for the full year 2026, modeling something close to a 40% consolidated incremental is how I'm thinking about it. By segment, you'll see margins on the incremental basis kind of drifting higher from the HPMC segment and maybe a bit lower from the AA&S segment, for the overall composite of about 40%. That's an improvement from where we've been historically. If you think about where we would historically guide, it was in the mid-30s to maybe the upper end of 40%. I think we're now pretty confident in that 40% year-over-year incremental margin on a consolidated basis.

Got you. And any view on '27 with that framework?

I won't talk about 2027 other than, from a model standpoint, we have the guidance out there from 2027. I'm very familiar with that guidance. Overall, my confidence is really high in our ability to get into that guide range. If you look at the second half run rate here, which we're thinking about, you'll see if you connect the dots, that puts you well within the range. I have a bias towards the upper end of that 2027 guide for the EBITDA dollars and consolidated margin percentage. We'll go through our normal process and you can expect an update sometime in the Q4 time frame.

Your next question comes from the line of Seth Seifman with JPMorgan.

I wonder if you could talk a little bit about the supply side angle of things that are going on in the Middle East. When we think about upward pressure on anything in your cost base, whether that's energy costs or any particular inputs or the availability of any inputs, anything you're monitoring? And any way, maybe in particular to think about the way that you can pass through higher energy costs?

Coming out of COVID, supply chain monitoring has become one of our strengths. We are monitoring a couple of things. We have not seen any uptick, so there's been no impact to date. One key input is helium that goes into our processes; several suppliers have started to export that from the U.S., so we're monitoring that closely. It's a small portion of our costs and we do have alternatives that are readily available. From an energy cost standpoint, we are seeing other impacts outside of just what's happening with the Middle East; rising demand in other sectors is putting more pressure on some electricity pricing and other costs. We have multiple mechanisms to deal with that. One, we do pass through inflationary costs in our contracts, and so we've got protections and mechanisms to do that. We manage natural gas hedges and have become more conservative looking out 12 to 18 months and, in some cases, longer, which allows us to stay aligned with those mechanisms from an inflation indexing standpoint. Then there are other projects we're pursuing around energy generation that long term may help manage those costs. But to date, no impact from the Middle East on our cost base. We'll continue to monitor a couple of items, but so far it's been stable. Energy cost was on our agenda even before recent events and remains a focus.

Great. That's super helpful. And then just maybe thinking a little bit about the cadence. Obviously, a lot of demand, and so high confidence in the revenue outlook for this year. The A&D growth rate, and in particular also the jet engine growth rate, I guess, should be accelerating from here. Should we look for some of that acceleration in Q2? Or is that something that's going to be more back half weighted?

You will see that acceleration sequentially stepping up as we go through the year. So you'll start to see it in Q2. It's coming through in demand, enhanced mix and expanded content, as well as price. You'll see that coming through. We are being deliberate about how we allocate resources and capacity. You'll probably see those impacts more heavily weighted toward our margin and EBITDA line than the revenue line as we pivot our mix and portfolio to support the high-value markets.

Your next question comes from the line of Pete Skibitski with Alembic Global.

Kim, going back to the start of the Q&A, you were talking to Dave about the impact of higher jet fuel prices on potentially driving the retirement of legacy aircraft. I just want to get a sense, if we think about commercial aftermarket for jet engines, is your revenue at this point on the newer jet engines aftermarket the same as or above the aftermarket revenue for legacy jet engines? Or are we not there yet? I'm trying to get a sense of where we are sort of in the cycle for you.

I would say it's heavily weighted towards the next-gen. We've got roughly twice the content on the next-gen engines. Many of these next-gen engines are still in the early life cycle, so there's upgrade packages and durability packages. We're seeing that demand on top of OEM build rates and initial shop visits for LEAP and others. So there's more revenue and demand that is weighted to next-gen. For legacy engines, our assets are fungible and useful in other markets like specialty energy, which uses similar material and capabilities, so we're able to pivot into those markets as legacy engines retire.

Okay. Great. Just one last one. On the defense growth this year, obviously missiles is growing really fast but it's still small. I'm trying to get a better sense for the core driver for you in military. It seems like shipyards are showing a lot of improvement in throughput and supply chain. Is it the exotics for you within defense, like zirconium for the nuclear navy, that's driving the military growth? Or are there other factors as well?

The naval nuclear business is our largest contributor when you look at overall defense sales. It's very long-cycle funded programs and they are expanding capability. We signed a new naval nuclear contract that about doubles revenue over the next five years versus the prior contract. We're seeing strong growth there, and it is an area we continue to invest in. It is predominantly coming from exotic alloys—zirconium, hafnium, some nickel as well—so it translates a bit into HPMC but predominantly into AA&S. You're seeing that with the margin accretion over the last three quarters.

Your final question comes from the line of Samuel McKinney with KeyBanc Capital Markets.

Just given the rich margins that you guys get in defense and aero, can you talk to us about how you're thinking about managing or prioritizing line time on some of these assets that can serve both defense and commercial in the context of the OEM build ramp?

I'm sorry, it cut out a little bit. Could you repeat that question?

Given the rich margins in defense and aerospace, how are you prioritizing line time on assets that can serve both defense and commercial in the context of the OEM build ramp?

We are prioritizing capacity and line time. Jet engine has been our highest-margin business, but defense and specialty energy are accelerating quickly given the tightness in the market and differentiated materials. Some military programs are priorities, and we align capacity to support those. With long-term contracts, we have conversations about forecasts and needs so we can also prioritize jet engine customers. You will see us deemphasize medical, electronics and industrial applications and move capacity to the higher-margin markets.

That makes sense. Next, you called for mid-teens revenue growth in specialty energy this year, but that's off the back of a 20-plus percent increase in the first quarter. Could you give more color on what's exciting for you in that market and the rationale for the softer comps you're implying later this year?

With specialty energy, Q1 was strong and full-year guidance is mid-teens. Growth will be somewhat lumpy as orders come in larger chunks. It's driven by two core areas: land-based gas turbines—demand driven by data centers and energy security, which taps our high-performance nickel alloys—and nuclear, where the Cameco agreement and life extensions/refueling cycles drive demand for zirconium, nickel and hafnium. Orders and deliveries in this market tend to be intermittent and larger in size, which explains the lumpiness even with a strong first quarter.

We have reached the end of the question-and-answer session. I will now turn the call back to Kim Fields for closing remarks.

All right. Thanks, everyone, for your time and for your continued interest in ATI. Just to wrap up today, our message is clear: ATI's executing at a high level in a strong demand market. We're expanding margins, we're generating meaningful free cash flow, and we're continuing to strengthen our position in the most attractive aerospace and defense markets. Our teams are focused on delivering for our customers, capturing the opportunities in front of us and driving long-term value for shareholders. We look forward to updating you next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.