Earnings Call
Ati Inc (ATI)
Earnings Call Transcript - ATI Q1 2025
Operator, Operator
Hello and welcome everyone to the ATI First Quarter 2025 Earnings Call. My name is Becky and I'll be your operator today. I will now hand over to your host, David Weston, Vice President of Investor Relations to begin. Please go ahead.
David Weston, Vice President of Investor Relations
Thank you. Good morning and welcome to ATI's first quarter 2025 earnings call. Today's discussion is being webcast online at ATImaterials.com. Participating in today's call to share key points from our first 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. It 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.
Kim Fields, President and CEO
Thanks, Dave. Good morning everyone and thank you for joining us. Q1 was an excellent start to 2025 for ATI, continuing the strong momentum we built in the fourth quarter. Our focus is firmly on execution and our results reflect that. Demand remains strong in our core aerospace and defense markets. Customers continue to turn to ATI for our differentiated products, recognizing us as a critical supplier in their value chain. Our ability to deliver high quality consistently at scale has led to expansion of long-term contracts and increased share positions across key platforms. Before we discuss our growth drivers, let's look at the Q1 results we announced this morning. Revenues grew 10% year-over-year, exceeding $1.1 billion for the quarter. Adjusted EBITDA reached $195 million, surpassing the top end of our guidance range by $15 million. Adjusted earnings per share came in at $0.72, again beating the top of our guidance range of $0.55 to $0.61. And last week, we reported that 1,000 USW represented employees in our AA&S segment ratified a six-year labor agreement. This is a good outcome for ATI and our team. It brings long-term labor stability to a critical part of our operations and sets the foundation for continued success. Don will walk through the financials in greater detail shortly, but the takeaway is clear. ATI started the year strong. We're confident in our position, particularly given the sustained strength in A&D demand. At the same time we're staying prudent amid the recent trade-related uncertainty affecting the industrial markets. As such, we're maintaining our full year 2025 guidance for adjusted EBITDA and free cash flow as we monitor how the environment evolves. Our capital deployment reflects that confidence. We continue to prioritize returning value to the shareholders. In Q1, we repurchased shares worth $70 million in line with our plan. Looking ahead, we intend to repurchase as much as $250 million in the second quarter, effectively pulling forward our full year buyback program. We see clear value in our current share price and recognize the opportunity to capture it. Now, turning to the evolving trade and tariff environment, we recognize this is top of mind for many. While the headlines continue to shift, we remain confident in our view that ATI is uniquely positioned to navigate the evolving tariff and trade landscape. Here's why. One, ATI is a U.S.-based producer with the majority of our production footprint located domestically even as we serve global aerospace and defense programs. Two, we have a flexible, diversified global supply chain. While certain raw materials must be imported due to the lack of domestic availability, our sourcing strategy allows us to adapt our supply chain to maintain quality and manage costs effectively. And three, our customer contracts are built to handle volatility. Many include built-in mechanisms like pass-throughs and surcharges to help offset inflation, raw material swings, and tariff costs. I'm pleased to report that to date these tools are working as intended, preserving income and limiting financial exposure. We're actively deploying all available levers, including duty drawback programs, defense-related exemptions, and ongoing operational efficiencies to mitigate remaining impacts. Let's talk about the tariffs announced in 2025 and currently in effect including those paused. These represent approximately $50 million in annual cost exposure prior to offset. Thanks to these mitigation offsets, we anticipate minimal impact on our full year earnings, allowing us to reaffirm our current guidance. From a demand standpoint, tariffs are having little effect on the aerospace and defense markets. Both airframers have recently reaffirmed robust backlog and ATI continues to see strong engine material orders with no cancellations or back pushouts. On the industrial side, which represents approximately 20% of our total business, some customers are taking a wait-and-see posture that impact, if any, would be confined to our AA&S segment. To illustrate how ATI creates value, particularly in A&D, consider a recent example. In Q1, we renewed a profitable sole source contract for an advanced alloy co-developed with a major engine OEM. This material is critical in MRO applications due to its unique performance characteristics. This agreement extends well into the next decade and reinforces ATI's role as a trusted partner in delivering high-performance materials for the most demanding applications. Commercial jet engines remain our most strategic end market, accounting for 37% of total Q1 revenue. Sales in this area grew 35% year-over-year. Our alloys for the rotating components in the hot section of the current and coming generation engines are essential. We're the sole source supplier for five of the seven alloys found in the hot section, secured under long-term contracts that extend well into the 2030s and even 2040s. Our relationships span all three major commercial engine manufacturers. As engine production ramps up, ATI is growing with it. We're proud to earn contract extensions and increase share by consistently delivering innovation, quality, and scale. Beyond engines, our airframe business is also growing, representing 18% of Q1 revenue. Our titanium capabilities are in high demand. We've just recently finalized a major new contract with a leading airframe OEM, establishing ATI as one of their top suppliers for flat products. In defense, our momentum continues to build. We are well positioned across a variety of funded platforms. We've recently qualified a new material for a long-term classified program and our R&D pipeline has strong backing from the U.S. government and our allies. Our defense sales grew 11% year-over-year in the first quarter. The bottom line, our strategy is working. We're increasing yields, strengthening reliability, expanding capabilities, and unlocking capacity through debottlenecking. The investments we have made in presses, forging, and downstream assets for testing and finishing are translating into higher output, improved reliability, and enhanced customer value. With strong order rates and a robust backlog, the message from our customers is clear. They need our products and ATI is delivering. Since 2020, we've been executing our growth strategy to focus on high-value A&D applications. This transformation is evident in our results. In Q1, A&D represented 66% of our total revenue. We are pleased to announce that effective today, ATI's Global Industry Classification Standard, or GICS code, has been reclassified to aerospace and defense. This reclassification validates our strategic evolution and provides greater visibility of ATI as a world-class A&D supplier. All of this is made possible by our ATI team, who continue to deliver high-quality products safely, on schedule, and at scale. It's the result of strategic focus, operational discipline, and execution. Our customers are gaining momentum and with them so too is ATI. With that, I will turn it over to Don.
Don Newman, Executive Vice President and CFO
Thanks, Kim. I'll provide additional insights into our first quarter performance and then look ahead to the Q2 and full year outlook. We finished the quarter well ahead of expectations from a revenue and profit standpoint. Revenue in the first quarter was approximately $1.14 billion, an increase of 10% year-over-year. You may recall that we expected a modest sequential decline in sales and earnings this quarter driven by some accelerations in seasonality as we completed Q4. Our guidance also considered anticipated slow recovery for commercial aero customers, particularly airframe, and expected seasonal timing and defense. Even with all of that, our adjusted EBITDA of $195 million was $20 million higher than the midpoint of our Q1 guidance. That's 11% favorable. Strong operational performance in both segments and robust customer demand drove results. Our consolidated adjusted EBITDA margins were 17%, reflecting HPMC margins of 22.4% and AA&S margins of nearly 15%. In HPMC, margin increases were driven by the building strength in our A&D core, which is 92% of Q1 segment revenues. HPMC margins were up 240 basis points sequentially and 400 basis points year-over-year. Even more than we expected, positive pricing and demand powered the step-up in margins. Solid, reliable production from our key melt and forging assets supports enhanced sales and improved absorption. We expect greater gains in the coming quarters. In AA&S, we expected a sequential step back in first quarter margins due to the timing of above-the-line tax reserve releases and 45x manufacturing credits in Q4 2024. As anticipated, margins were down 140 basis points sequentially. Year-over-year AA&S margins were up 90 basis points. Segment results this quarter exceeded our expectations. We realized timing benefits in specialty rolled products as our team worked with customers to mitigate risks and accelerate deliveries during our ongoing labor negotiations and the dynamic tariff environment. The SRP business also generated substantial gains in conventional energy centered on prioritized project delivery. Congratulations to our team for delivering under a tight schedule, supporting our customers when they needed us most. Turning to cash flow, Q1 free cash flow usage was $143 million. That was a lower cash burn than Q1 2024 and modestly favorable to our 2025 estimates. Better than expected performance was supported by improvements in cash used in operations and lower CapEx. We expect to be cash flow positive for each remaining quarter of the year as we drive a tightened cycle for working capital and profitable growth. With that, let's turn to our 2025 outlook. As we look ahead, many of our core assumptions in our outlook remain consistent. We are encouraged by the progress we see in A&D. At the same time, we appreciate that some customers still anticipate inventory drawdowns next quarter, largely tied to airframe sales. That keeps our first half outlook balanced. This timing is compounded by near-term uncertainty on the transactional side of the business as the world economy adjusts to the new norm of increased tariffs. With those conditions in place, we expect Q2 to look like the first quarter with more ramp and recovery expected later this year. For the second quarter, we are setting our guidance range for adjusted EBITDA at $195 million to $205 million. That equates to an adjusted earnings per share range of $0.67 to $0.73 per share. For the full year, we strive to balance positive signals of A&D demand and growth with conservatism tied to non-A&D markets such as industrials. We are affirming our full year adjusted EBITDA guide of $800 million to $840 million. We are increasing our full year EPS guidance to a range of $2.87 to $3.09 per share. This higher view of 2025 EPS is thanks to the benefit of the accelerated share repurchases Kim highlighted as we plan to reduce total share count ahead of our previous schedule. Let me add some color about how we are thinking about the top line mix and adjusted EBITDA margin so that you can better model our outlook. As we shared, A&D continues to show strength, especially in jet engine and defense. Based upon customer demand signals and Q1 performance, we expect full year 2025 jet engine sales to grow between 15% and 20% over 2024 levels. Defense, which grew 11% in Q1, also remains robust. We expect to maintain a growth rate in the upper single-digit percentages for full year 2025. Overall, we anticipate A&D sales will grow 12% to 14% in 2025 as momentum in jet engine and defense combines with modest airframe growth. A&D growth is expected to more than offset lower year-over-year sales in industrials and other areas impacted by lower U.S. demand and China's slowed economy. Our EBITDA margins are expected to continue to improve during the year. We anticipate full year consolidated 2025 adjusted EBITDA margins to be in the range of 18%. Consolidated Q2 margins should be similar or modestly better than our Q1 performance of 17%. Margins should expand in the second half of the year as A&D sales continue to grow. At the segment level, in the second half of the year, we anticipate HPMC margins to exceed 24% and AA&S margins to be in the range of 15% to 16%. These margin expectations exclude potential impacts of tariff pass-throughs. Stock prices for many A&D businesses have been impacted by recent volatility, yet our conviction around the opportunity for ATI value creation has never been stronger. Compare the contractually covered profitable growth in our forecast with our stock's current valuation multiple, we are compelled to invest in ourselves, returning even more cash to shareholders this coming quarter than previously planned. At this stock price, how can we not? In the second quarter, we expect to buy back as much as $250 million in shares, moving notably ahead of our previously planned timeline. The strength of our balance sheet and our confidence in current liquidity and favorable cash generation fuel this acceleration. With this confidence, we are reaffirming our full year free cash flow range of $240 million to $360 million. Our full year CapEx range remains at $260 million to $280 million, with continuing opportunities emerging for customer funding of these investments. The CapEx range includes redeployment of cash generated from the sale of non-core assets and businesses in late 2024. To summarize, we remain on track for profitable growth. We'll adjust and be agile as the world around us changes. The underlying strength of our A&D end markets, coupled with highly differentiated, contractually secure products in high demand guide our course for the future. We are on or ahead of schedule to deliver every day for our customers and our shareholders. With that, I will turn the call back over to Kim.
Kim Fields, President and CEO
Thanks, Don. Q1 was a great start to 2025 and we have so much more to look forward to. In summary, strong Q1 results demonstrate consistent execution. Aerospace and defense demand is continuing to grow. We're navigating trade uncertainty strategically and effectively, and ATI is growing, well positioned to deliver increasing value in the quarters and years ahead. We're confident in our team's ability to execute. The strength of our people, our products, and our customer relationships continues to drive our performance. Our long-term strategy is not just delivering results; it's unlocking greater promise ahead. The world around us is not without risk, but we believe the opportunities ahead far outweigh them. We are proactive in anticipating and mitigating these risks, backed by the expertise and dedication of our 8,000 team members. That collective experience positions us to maximize the tremendous opportunities we've created, together with our customers in this moment for aerospace and defense. And with that, let's open the line for your questions.
Operator, Operator
Thank you. Our first question comes from Andre Madrid from BTIG. Your line is now open. Please go ahead.
Andre Madrid, Analyst
Thanks. Good morning, Kim and Don. Real quick…
Kim Fields, President and CEO
Good morning.
Andre Madrid, Analyst
...to start out. Can you provide more color on aftermarket or MRO contribution to A&D growth this quarter?
Kim Fields, President and CEO
Well, why don't we? We'll do that in two parts. Let me just share a little bit of color and then Don can share some of the financials and so forth behind it. We continue to see strong demand from MRO. As we've shared in the past calls, MRO is running 40% to 50%, and it does seem that that's continuing, that demand is continuing to rise there. We're seeing it both on the materials as well as the forging side. We've talked in the past about some of the work that we're doing with the GTF, and that's continuing to grow. If I step back in 2024, we doubled our revenue from the work that we're doing with Pratt and supporting the GTF program. This year we're anticipating doubling or slightly more than that in 2025. And I think as we look forward, there is an opportunity for us to continue to double that even again between now and the end of the decade. And so that strength that we're seeing in the GTF program, we're seeing across the board for all of the OEM manufacturers as they are continuing to see strong demand on the MRO side, and it is driving both our margins and our revenues up. Don, I don't know if you want to share any details?
Don Newman, Executive Vice President and CFO
What I would add is one clarification, Andre. I thought I heard you say MRO related to defense. Is it aero and defense or just defense you're asking?
Andre Madrid, Analyst
Just overall. And then if you want to dig deeper into defense too, that's fine.
Don Newman, Executive Vice President and CFO
No, you're good. You're good. My hearing is very good. So, I'll echo what Kim said when it comes to aerospace and defense and how MRO is impacting with the jet engine sales, which are now a substantial part of our overall A&D. This is a category that we really don't have specific discernment in terms of the split between what's driving revenue growth due to the MRO versus what is new builds. But clearly MRO continues to be an area of strength for us. So we think that a meaningful amount of the growth you're seeing period over period around jet engine sales, for example, is certainly tied to it.
Andre Madrid, Analyst
Got it, got it. That's super helpful. I guess beyond that and this might be a little bit more of a high level question and I mean, given the timing, it might be hard to give a definitive answer. But we did see the U.S. and Ukraine signed the mineral deal yesterday. Apparently, 6% of the global production comes from titanium mines. Do you think this could have any impact on ATI and sourcing of feedstock?
Kim Fields, President and CEO
Well, certainly, as you said, probably not in the near-term. Historically, Ukraine was a supplier and one of our partners in a joint venture that we had here. But I do believe that that will be a positive as we go forward and we look at this aerospace ramp in demand and continue to diversify the titanium sponge supply into the melters here in the U.S. So I do think again getting that deal confirmed and finalized will as they start to develop in Ukraine and they get the war behind them and they start to develop and put assets in the ground and we start to get access to that sponge. It is going to be a multiyear deal. And as you said, there is a lot of color here, but you have to go through any levels of qualifications first to get into airframe, then to get into jet engine. But historically they've been at that place. So I do think that there's opportunity for this to maybe expand that supply chain from a titanium sponge standpoint.
Andre Madrid, Analyst
Got it, got it. That's super helpful. I'll leave it there. Thanks so much.
Kim Fields, President and CEO
Thanks.
Operator, Operator
Thank you. Our next question comes from Richard Safran from Seaport Research Partners. Your line is now open. Please go ahead.
Richard Safran, Analyst
Thanks. Kim, Don, Dave, good morning. I wanted to know if you could talk a bit more about pricing.
Kim Fields, President and CEO
Good morning.
Richard Safran, Analyst
Good morning. I want to know if you could talk a bit more about pricing at HP. It's just that it appears to be improving in the face of higher volume and that's a bit countered the typical step down in pricing. I'm curious as to how much of the pricing was impacting your Q1 results? And just how we should think about the pricing from here in the phase of higher volume?
Don Newman, Executive Vice President and CFO
So I'll tell you what, I'll take that question. Yes. We are seeing price. And to give you some perspective on the HPMC side, the way to think about the Q1 price year-over-year, we saw prices increase both in titanium and nickel, generally in the 6% to 7% range. And we also saw some nice increase in terms of volumes for nickel in that segment. From a titanium standpoint, the volumes were down a bit. But we're very, very pleased with the direction of price. Of course a lot of our HPMC business is tied to LTA. And with each of the renewals of a contract, we are very purposeful in going after appropriate price increases. And because they're long-term agreements, when we capture those price increases, they stay with us for multiple years. So those trends are certainly looking in our favor.
Richard Safran, Analyst
Okay, thanks for that. One, just follow-up. Kim, on your opening remarks about the $50 million tariff impact, but mitigated by offsets, I thought you might elaborate a bit more, getting more specific about those offsets. What's driving you to maintain your outlook? And I'm just kind of wondering if the macro situation were to deteriorate, I mean, do you have further offsets that you can use to mitigate that?
Kim Fields, President and CEO
It's been a dynamic time with tariff headlines changing almost daily. However, we believe the overall cost impacts can be manageable. One of the key areas is cost management, and we have multiple strategies we can implement. A significant aspect is our diversified and adaptable supply chain, allowing us to shift our supply to lower-cost sources based on changes in the trade and tariff landscape. We're actively monitoring this and leveraging these strategies to ensure we're utilizing the lowest-cost supply. Additionally, we are focused on reducing costs and driving productivity to help offset impacts for our customers. You may have noticed improvements in reliability and productivity already starting to come through. We can also take advantage of duty drawbacks and defense exemptions, which we have utilized in the past and plan to continue doing. Our contracts are designed to manage this type of volatility, incorporating surcharges and mechanisms to handle material fluctuations, inflation, and tariffs. We began implementing these measures back in 2017 and 2018 when tariffs became more common. This allows us to pass through any tariff costs that we cannot offset, minimizing the impact on our financial results. On the demand side, it will take more time to fully understand the potential impacts. Clearly, if a recession occurs, the industrial markets will feel the effects. Currently, we observe some customers taking a wait-and-see approach as they assess market conditions. The outcomes of trade negotiations will influence both domestic distribution and international customers and their supply chain strategies. Despite this, our defense and aerospace sectors are showing very strong growth, with a solid backlog in airplane orders, new builds, and MRO activities continuing to expand. The engine manufacturers are working to keep pace with the demand they are seeing. Overall, this situation is evolving, but I feel confident that we will be able to mitigate or pass through any costs and respond to changes in demand within the industrial markets.
Richard Safran, Analyst
Thank you very much.
Kim Fields, President and CEO
Sure.
Operator, Operator
Thank you. Our next question comes from Scott Deuschle from Deutsche Bank. Your line is now open. Please go ahead.
Scott Deuschle, Analyst
Hi, good morning. Nice results.
Kim Fields, President and CEO
Thanks, Scott.
Scott Deuschle, Analyst
Don, just to be clear and follow up on that last question, does the reiterated guide include significant contingency for softer sales in other industrial end markets for the second half of the year? Just wanted to double check on that and get a further sense for what specifically is being assumed there. Thank you.
Don Newman, Executive Vice President and CFO
Yes, I'm glad you asked the question. Just for clarity, when you look at our guide for 2025, we have built in risk that we see and the trend that we're seeing around those industrial ordering patterns. So yes, it should be included.
Scott Deuschle, Analyst
Great, thank you. And then Don, you spoke recently about spending a greater share of your growth CapEx on nickel alloys. I just wanted to get maybe a better sense as to what that looks like in terms of any specific product areas that growth CapEx might focus on? How much capacity that might add on a percentage basis? And over what period of time that would come online? And it may be more for Kim, just generally curious how you're thinking about balancing the need for capacity discipline with the growing demand impulse that you're seeing from customers? Thank you.
Don Newman, Executive Vice President and CFO
I’ll address that now. It seems like your question had multiple parts, so I might not cover everything. To give some context, we observed a significant increase in titanium demand, especially due to the invasion of Ukraine in 2022, which prompted us to accelerate our existing strategy. We restarted a plant efficiently and increased capacity through brownfield opportunities. As a result, our titanium business is performing well, even with some current destocking. Between 2022 and 2024, we've managed to double our titanium revenues, growing from about $400 million in 2022 to approximately $800 million in 2024. You mentioned nickel, and the reason I'm discussing titanium is that our strategies for nickel will be similar to those we employed for titanium. The demand for nickel, especially in applications like jet engines, is crucial. Our focus is on areas where we have competitive advantages, particularly in the hot section of the jet engine, whether it’s in melting, isothermal forgings, or powder applications. We're committed to protecting our strong market positions. Our capital expenditures will reflect our strategy, with an average of about $200 million annually on CapEx. The nickel investments necessary to meet current demand and our contractual obligations fall under this plan. Our priority is on melting capabilities; without achieving purity and scale, we can't access the value. We have efficient melting assets and are investing in upgrades to enhance capacity, including adding incremental VIM capacity and other production enhancements that promise good returns. This strategy is driven by stable demand for jet engine materials, and our customers, particularly major OEMs, consistently express that we are a key part of their supply chain, looking to us as a reliable partner. Our targeted investments are aimed at fulfilling these customer needs while maintaining discipline. I'm not sure if I addressed all your points, but please let me know what else you would like me to clarify.
Scott Deuschle, Analyst
No, I think I took up enough of the call. I appreciate that, Don. That was a good answer. I appreciate it.
Don Newman, Executive Vice President and CFO
I don't think you took up the call. I think it was me taking up the call, so all right.
Scott Deuschle, Analyst
Fair point.
Don Newman, Executive Vice President and CFO
Thanks, Scott.
Operator, Operator
Thank you. Our next question comes from Seth Seifman from JPMorgan. The line is now open. Please go ahead.
Seth Seifman, Analyst
Thank you very much, and good morning. Regarding the anticipated 15% to 20% growth in jet engine sales this year, I understand there will be some additional capital expenditures, but I assume they won't significantly impact our results just yet. Is that correct? Additionally, can you clarify how much of the expected growth in jet engine sales this year is attributed to increased capacity and capital investments made in previous years, and how much is due to productivity improvements compared to last year?
Kim Fields, President and CEO
Yes, I'll take a crack at that and just add a little color to what, as you said, Don just talked a little bit about. So we have been spending on capacity. We've talked about some of our downstream debottlenecking, ultrasonic inspection, heat treat. We have a brand new heat treat facility that's come on with our forged products. And as you mentioned, additionally, the work we're doing about debottlenecking and reliability upstream in our melt are all coming and we're seeing good results and momentum from the work that we've been doing. We do have several projects in the pipeline that have been installed, are getting installed and are coming up to speed. And really what's driving this is the demand from that jet engine. And I'll direct everyone to kind of Page 5 in our presentation materials. In that jet engine, we're producing most of the proprietary alloys at a sole source position well into 2030s and in some cases into 2045. And so as our engine customers are growing and their MRO needs are growing, they're really looking for us to keep pace with them, so that we can continue to supply those critical alloys for those applications. I would say just around the discipline around capital, we are being very disciplined where we see if customers want to put in capital or accelerate capital investment, we're looking for their contribution and participation in that capital cost. And as we've shared on past calls, we are seeing multiple customers that are willing to do that again to have that charity of supply and position. So that's really what we're thinking about and that's what's driving that demand. And so it is a combination, as you said, of both process and productivity improvements, reliability, as well as some of those prior investments in downstream testing and finishing.
Seth Seifman, Analyst
Great, great, thanks. And then maybe as a quick follow up. And when you think about AA&S and on the titanium side, when you think about the progression on wide-bodies through the year and the pull from the OEMs, how are you thinking about that with regard to 787, A350, and 777X?
Kim Fields, President and CEO
Certainly. From the airframe perspective, the wide-body aircraft utilizes significantly more titanium compared to single-aisle planes, which has led to increasing demand. We've received positive updates that Boeing is increasing production, and we're beginning discussions about expected demand in the latter half of this year and into next year. It's important to note that our titanium production has a long lead time ahead of any changes in production rates. I want to highlight our new titanium investment in Oregon, which is now operational and in the qualification phase, providing us with additional capacity to meet the ramp-up in demand. Additionally, I'm thrilled to announce that we recently signed a new five-year agreement with Airbus worth nearly $1 billion, solidifying our position as their primary flat-rolled supplier. Overall, we are experiencing substantial progress and are well-positioned with our capacity coming online in tandem with the growing demand from both Airbus and Boeing.
Seth Seifman, Analyst
Great, that's super helpful. Thanks.
Kim Fields, President and CEO
Thanks.
Operator, Operator
Thank you. Our next question comes from Phil Gibbs from Keybanc Capital. Your line is now open. Please go ahead.
Phil Gibbs, Analyst
Hi, thanks so much. Good morning.
Don Newman, Executive Vice President and CFO
Good morning, Phil.
Kim Fields, President and CEO
Good morning, sorry.
Phil Gibbs, Analyst
The isothermal forgings business, can you talk about how that business has developed and grown over the last several quarters and what you see moving ahead? And sub-question to that, where your headcount addition specifically related to that business now and looking forward, meaning are you still adding folks to grow that business? Because I know it wasn't imperative last year.
Kim Fields, President and CEO
Yes. Our forged products business has experienced significant growth over the past few years. Currently, our lead times extend to 2027, indicating very high isothermal demand. We have been focused on increasing our workforce and shifts to achieve a 24x7 schedule. Additionally, we have implemented new capacity in finishing processes, including testing and heat treating, which are being ramped up. We have completed the addition of new crews and are currently focused on their training and development. The qualification period for our ultrasonic testers is quite extensive, lasting up to six months for many, and we are approximately two-thirds of the way through that process. We anticipate that about one-third of our new employees will qualify at level two, with hopes for a few to reach level three. From a hiring perspective, we have reached a stable point; our crews are fully staffed, training is ongoing, and they are becoming operationally effective. This is already translating into increased productivity in both of my HPMC businesses, which are effectively meeting growing demand. Looking ahead, we expect them to surpass one billion dollars in revenue this year, reflecting a 20% to 25% increase from the previous year. Given our lead times and backlogs, we see ample opportunity and are actively discussing ways to further expand our capacity with our customers.
Phil Gibbs, Analyst
Perfect. And then I have one question as it relates to titanium. So the new titanium upstream capacity that you talked about just a little bit ago, are you harboring some of those P&L costs given some of the qualifications you're talking about and early stage production prior to adding stronger volumes meaning is that a drag on the results right now? And then secondly, the Airbus contract you talked about the five years for $1 billion. Was that specifically for titanium? Thank you.
Don Newman, Executive Vice President and CFO
So for the new facility, I would say, number one, it's certainly a use of cash. In terms of our adjusted earnings, it is not a drag on our earnings at this point. And then your last question, could you repeat that, Phil? Last part of your question…
Phil Gibbs, Analyst
I asked if the $1 billion you mentioned for the five-year contract with Airbus was specifically for titanium.
Don Newman, Executive Vice President and CFO
Yes, it is. It would largely be titanium.
Operator, Operator
Thank you. Our next question comes from David Strauss from Barclays. Your line is now open. Please go ahead.
Josh Korn, Analyst
Hi, good morning. This is Josh Korn on for David. So wanted to ask, you mentioned…
Kim Fields, President and CEO
Good morning.
Josh Korn, Analyst
Good morning. You mentioned the potential for AA&S, some of the industrial markets to see declines in the rest of the year. In that scenario, how do you expect margins to hold up? Thanks.
Don Newman, Executive Vice President and CFO
Let me address that. In my prepared remarks, I discussed our expectations for margins. Currently, we're in the mid-teens with AA&S. Despite the anticipated challenges in industrials and a possible decline in sales demand, we still expect that business to generate EBITDA margins in the mid-teens. I mentioned a range of 15% to 16% for the second half of the year. This segment encompasses industrial, but also includes other strong businesses. Our Aero-Like specialty energy and electronics sectors, as well as medical, are performing well and producing impressive margins. We believe this will help sustain the AA&S margins for the remainder of the year.
Josh Korn, Analyst
Great, thanks. And then just wanted to ask about any financial impact on the new labor contract.
Kim Fields, President and CEO
Yes, I can let Don take that. I would say, just generally that it was in line with what we expected and it's built into our guidance. And we're very pleased that we came to a fair contract for the employees and for the business, so that we can continue to support these aerospace customers that have come to rely on us in this new contract, so that we can support their ramps. But Don, if you have any specifics…
Don Newman, Executive Vice President and CFO
I can't add a single word. You hit it all.
Josh Korn, Analyst
Okay, great. Thanks for taking the questions.
Kim Fields, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from Gautam Khanna from TD Cowen. Your line is now open. Please go ahead.
Gautam Khanna, Analyst
Yes, thanks. Good morning, guys.
Don Newman, Executive Vice President and CFO
Good morning.
Kim Fields, President and CEO
Good morning.
Gautam Khanna, Analyst
I had two questions. I was curious on the Airbus contract, which is very promising. Any sense, can you size how much of a increase the contract represents relative to what you have been doing kind of over the last five years? Is it 30% more, 50% more? Do you have a sense that you can give us?
Kim Fields, President and CEO
I can provide some insight on that. Don can elaborate further if he chooses. To take a step back, in 2020 we had no presence with Airbus. We had recently announced winning the contract bid and securing a position in that contract. Over the past five years, we have significantly increased our support for them, particularly in light of the conflict in Ukraine. Looking ahead, this contract is expected to double our participation with Airbus next year.
Gautam Khanna, Analyst
That's great. Thank you. I really liked the slide you presented showing the various sole source alloys on the nickel side. I'm interested in knowing the duration of the contracts for those alloys. Is there a chance that we might see a second source emerge for any of them within the next five years? Are there any particular alloys that are significantly contributing to the business today that we should be more focused on?
Kim Fields, President and CEO
Yes, thank you for your question. There's been considerable discussion regarding these alloys. I can't provide details about any specific customer or contract, but these alloys are contracted through the middle of next decade, with some extending to the mid-2040s. This is primarily because, as the sole source provider of these essential alloys, our customers want to ensure a reliable supply, as they lack alternatives. Regarding the alloys, particularly the RR1000, we manage both the forgings and the powder supply. We are actively optimizing our collaboration on this and it impacts both our specialty materials and forged products business. We have invested significant time with them, co-developing their next-generation alloy, and we are eager to further our partnership. It’s important to note that these alloys are crucial to our customers, with no substitutes available. They need assurance in capacity, quality, and consistency to continue support. Given that these alloys are primarily used in the hot section of jet engines, specifically in the disks, they are associated with high frequency maintenance, repair, and overhaul parts. This demand is driving a 35% growth in the jet engine market.
Gautam Khanna, Analyst
May I follow up? Is there no second supplier due to exclusivity with ATI for the next decade, or is there still a chance for a second supplier, but they just haven't qualified yet?
Kim Fields, President and CEO
No, with these contracts they are largely exclusive. More importantly, the barriers to entry are quite high. These alloys are challenging to produce and require significant focus and discipline to control both the melting and forging processes. The heating and forming times are exceptionally difficult mainly due to the specific composition needed to endure the high temperatures and stresses in the engine's hot section. Our contracts have long-term exclusive agreements and have taken years to develop and refine the processes involved.
Gautam Khanna, Analyst
Excellent. Thank you. Great job guys.
Kim Fields, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from Timna Tanners from Wolfe Research. Your line is now open. Please go ahead.
Timna Tanners, Analyst
Yes. Hi, thanks and good morning. Wanted to probe a little bit more on the industrial side not taking away from all the strength obviously in A&D, but given that that is one area that you called out. How easy or desirable would it be to try to pivot some of that business to some of the stronger areas?
Don Newman, Executive Vice President and CFO
Well, so the strategy of continuing to attack our product mix is something we work on a regular basis. It's one of the reasons why we've been able to really accelerate our focus on aerospace and defense. So as far as the industrial, we're going to continue to look for opportunities to maximize where the demand is as it aligns to our capabilities and especially our core capabilities. And so if there's room there for us to create value and it makes sense to the corps, of course we would do that.
Kim Fields, President and CEO
And I would just add that was a big portion of the transformation. Timna, I was just going to add. That was really where our focus on the transformation was, was to move into those higher margin aerospace and defense alloys, and it's been very successful. You've seen the AA&S margins come up over the last three or four years. And with this announcement, we are now producing almost. We're reaching parity for both of the large airframers. So, I think, it's been very successful. We'll continue to drive in that direction and go after more opportunities to leverage the strengths of that business.
Timna Tanners, Analyst
Of course, I know, but you've also mentioned that because of the strength in A&D you're able to have some leverage with some of the stronger components outside of A&D. So just wondering if that was still the case and wondering if there was opportunity to do further pivoting or if it would require further investment.
Don Newman, Executive Vice President and CFO
We don't anticipate that it will require significant investment. However, we are definitely exploring opportunities that better utilize our assets. If we can expand our business with customers and leverage our additional capabilities, we are eager to pursue that. It's important to note that currently, we are observing a pause in industrial demand as distributors assess how things will stabilize in the macro environment. Just as this pause can happen quickly, recovery can also occur rapidly. We haven't factored into our guidance the expectation that industrial demand will surge in the third quarter; we've assumed it will remain flat. However, a rebound is indeed possible. Therefore, we are focused on maximizing cash generation and profitability throughout this process.
Timna Tanners, Analyst
But keeping some spare capacity for that potential recovery is part of your strategy, it sounds like.
Don Newman, Executive Vice President and CFO
Yes, yes, I would say and whatever capacity we have, we certainly want to maximize it. We're also continuing to develop new products that open up new opportunities for us. One example would be we built a titanium alloy sheet facility in South Carolina in 2024. That facility is in service. That's something we're bringing to the market that, again, is a product offering that opens up not just capabilities to sell that product, but can open up opportunities to sell other products, including some that you might classify as industrial, for example.
Timna Tanners, Analyst
Okay, I'll leave it there. Thank you.
Operator, Operator
Thank you. Our next question comes from Josh Sullivan from The Benchmark Company. Your line is now open. Please go ahead.
Josh Sullivan, Analyst
Hi, good morning.
Kim Fields, President and CEO
Good morning.
Josh Sullivan, Analyst
Where does the buck stop with pass-throughs as they relate to tariffs most of the supply chain outlining, passing through tariff costs? And then this morning, another large, historically very vocal European airline talking about canceling orders of tariffs materially affect the price of aircraft. How does this evolve? There's just greater leaning on MRO. Is this figured out or there just only so many options for lift and that demand will move elsewhere? Maybe just too early to know, but curious on your thoughts.
Kim Fields, President and CEO
Yes, I believe it’s still early and things are going to change. I’ve noticed some airlines opting not to take delivery of new aircraft, and there was mention of an airline in Asia accepting deliveries to avoid U.S. tariffs and focus on long-haul flights. We still have to see how this all unfolds. However, the demand for air travel remains, especially considering the aging aircraft currently in the market, which won't be addressed without new planes. There are only two manufacturers globally working on developing and building these aircraft. It’s possible that in the short term, we could see a slowdown in plane deliveries. I haven't heard from Airbus or Boeing about any cancellations or significant delays that would signal immediate concerns. In the long term, the outcome will likely depend on how trade agreements progress. If the 1979 treaty returns, which has been beneficial for the global aerospace industry, it could help resume deliveries. At this moment, as I mentioned earlier, there have been no delays or cancellations, and companies are genuinely trying to meet the demand. As they begin to increase production of wide-body aircraft, we can expect even more demand in the market.
Josh Sullivan, Analyst
Got it. And then maybe just on that wide-body comment, as we look at the airframe inventory drawdowns currently, and then just as you look at that skyline expectation, what inning do you think we're in the destock right now?
Kim Fields, President and CEO
I believe they have experienced some positive early success in their ramp, which is beneficial for the entire industry. From my perspective, we've noticed some slight emerging demand in orders, but that seems to be compensating for where demand may be lacking. Overall, they are managing their inventory levels effectively. As I see it, the quicker they ramp up, the greater the opportunities for 2026. This is when we expect to see those orders increase and demand accelerate faster than our current outlook suggests. Thank you. We just want to thank everyone for their time today. We're very pleased with our first quarter results. Please reach out to Clay and myself and the investor relations team if you have any further questions. Have a great day.
Operator, Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines.