Good morning and welcome to the Allegheny Technologies First Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Scott Minder. Please go ahead.

Thank you, Chad. Good morning and welcome to the Allegheny Technologies first quarter 2020 conference call. This call is being broadcast on our website at ATImetals.com.Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Don Newman, Senior Vice President and Chief Financial Officer. If you’ve connected to this call via the Internet, you should see slides on your screen. For those of you who dialed in, slides are available on our website.After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to 2 questions. We will attempt to get to everyone in the queue within the allotted call time. Please note that all forward-looking statements are subjects to various assumptions and caveats as noted in the earnings release and shown on this slide.Now, I’d like to turn the call over to Bob.

Thanks, Scott. Good morning and thank you for joining us today to discuss our first quarter results and 2020 outlook. I hope today we’re finding all of you in good health. These are unprecedented challenging times for all. After the current market conditions, a lot has been written and there is not much more I can add. So we’ve seen a dramatic change in a very short period of time.As we share our results and outlook today, I want to be clear that the crisis is in the global economy and our strategic markets. The crisis is not inside ATI. We see the challenge ahead of us and are taking the actions necessary to keep our employees safe and healthy, and to enhance – yes, enhance the solid foundation to ensure ample liquidity, future profitability and growth.My leadership team and I are confident in our ability to do that, because of our relentless innovative people. They are all in to do what’s necessary to emerge stronger from the actions we take and the experience we gain from this crisis.I want to start today with a heartfelt thank you to the people of ATI. The last 10 weeks have tested us, across our global organization as never before. First, our operational teams, all deemed essential operations based on the product supplied, have not missed a beat; stress and concern, yeah, of course; total commitment to keeping their people safe and our materials flowing, absolutely impressive.Our Asian team was the first to experience the COVID-19 challenge, found the appropriate methods to continue to work safely and return to work. And they share their experience with their global teammates for the benefit of us all.Our digital technology team acted quickly to provide highly reliable, highly secure, remote access for close to 1,000 employees,…

All right. Thanks, Bob. Before I dive into Q1 results, Bob laid out our priorities. In addition to aligning with our customers and protecting our employees, maintaining a healthy financial position despite end market headwinds is front and center in terms of priority. Fortunately, we are starting from a strong position with ample liquidity and a strong balance sheet, and we’re taking actions to protect and even improve that position.With that, turning to Slide 6, you can see that ATI generated solid first quarter results, despite significant global demand disruptions. First quarter 2020 revenues were in line with prior year, excluding divested businesses. Net income and earnings per share both increased by significant percentages year-over-year, largely driven by gains in the AA&S segment. This improvement was despite a higher than anticipated book income tax rate, up from 5% in 2019 to 31% in 2020, due largely to the release of tax asset valuation reserves in late 2019.On a segment basis, adjusted EPS revenues declined year-over-year primarily due to demand related slowdowns for our specialty metals late in the quarter as the impact of 737 MAX production stoppages and the COVID 2019 pandemic began to build. Forgings demand decreased modestly in aggregate with lower hot-die and conventional forgings, partially offset by increased isothermal forgings volumes due to the recovery of delayed units caused by a large OEM 2019 inventory management action.HPMC operating profits increased despite a revenue decline, largely due to favorable product mix generated by increased isothermal forgings and associated powder material pull-through. Additionally, segment expenses were lower as the business moved to reduce costs in the second half of the quarter.AA&S segment revenues increased year-over-year across all business units, led by specialty rolled products, principally due to higher HRPF conversion volumes and increased high value nickel product sales to…

Thanks, Don. I’m sure it’s clear to everyone on the call that you and your team have been just a little bit busy, but highly focused over the last couple of weeks. And just to be clear, it’s much appreciated.While we didn’t choose the current economic environment we’re operating in, we have an experienced leadership team that understands what needs to be done and the speed that is required. We’ll keep these leadership priorities as our North Star as we navigate these challenging times.First and foremost, as I said earlier, our success begins and ends with the ATI team. Our priority is to keep every team member safe and we have collectively done a great job in that regard so far, with no significant production disruptions from COVID-19 infections. We remain on alert and ensure that our employees have the tools they need to work safely during this public health crisis for as long as required.Leveraging the foundation provided by our team, we take pride in our role as supplier of choice for our customers. We strive to earn the first call when a customer has a corrosion or a high-temperature challenge and appreciate their trust when awarding us with multiyear supply agreements and increased market shares. Each of those customers can be sure that we will serve them with a high degree of operational excellence, advanced process technologies that they expect from ATI.We will be recovery-ready when the time comes. In addition to support for our people and customers, we acknowledge the current economic environment and are taking action to align our cost structure with the reality of future demand in the markets we serve. The incremental cost-outs described on this call totaling approximately $125 million of 2020 savings at the midpoint of our range, built upon our earlier restructuring actions.These efforts are necessary to ensure that we emerge from this period a stronger ATI. That’s our commitment, lean, focused and prepared for growth. Finally, we will remain vigilant about preserving, and when possible, improving our balance sheet. We’ll do this and we’ll continue to generate free cash flows.Our actions in recent years provide us with nearly $900 million of cash and available liquidity, and will be prudent stewards of these assets and work to maintain the strength that we’ve built. In closing, I believe we have the right strategy and our priorities are clear. Over time, our end-markets will recover. We remain focused on creating long-term shareholder value through the combination of materials science, advanced process technologies, and our relentless innovative people.Scott, back to you.

Thanks, Bob. That concludes our prepared remarks. Operator, we’re ready for the first question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question today will come from Gautam Khanna with Cowen. Please go ahead.

Yeah, hey, guys, this is Dan on for Gautam. Thanks for the question. So we were curious how – like say OE rates were to drop by 40%, is ATI able to remain profitable in that environment?

Yeah, good morning. Are you talking about specifically the aerospace market? Are you talking…

Yeah, sorry, sorry. I’m referring to, yeah, Boeing and Airbus.

Yeah, right. So I think it’s – if you look at the markets, we’ll give you a tag team here in terms of our response. So from an aerospace perspective, yeah, I think you have to look at the mix of our products. So the jet engine business, I don’t know if we’re going to see, yes, 40%, over time, little bit long, but probably good based on the balance we have with the military as well as commercial airframe and our engine guys.On the airframe side, our business is actually relatively stable there, we’ve expanded our share positions growing, so we’re supplying almost every major aerostructure guy, but it’s been a relatively stable business for our mill products business. But I think you have to look across the breadth of ATI and see the stability of defense, medical and electronics.And certainly, energy is going to go up and down. But I think we’ve rightsized our business and optimizing our cost structure to manage that demand. So our expectation is to be profitable over the long term. Don, you want to add any color to that?

No, I would emphasize, we do have diversification in end-markets. We’ve got great relationships with our customers, we’re synched up with them. And I think the cost actions that we’re announcing, in this call are pretty reflective of the focus that we have to maintain profitability. Those $115 million to $135 million, let’s call it the midpoint to keep it simple, $125 million, that’s $125 million of incremental cost-takeouts that were accomplished within a pretty short period of time, about 45 days.And so, we have a team that understands the business. We understand how to leverage our cost structures to meet demand. You’ll see the same commentary around inventory levels and working capital release. So I think as we see changes in pockets of our business, I think that we’re in a good position to move quickly to react to it.

Yeah, I think I’d add one more piece to that on the aerospace market. In particular, I think, Dan, the Q2 and Q3 would probably fit into what people would describe as the triage phase, where we’re reacting quickly to the new reality of demand. Then 2021 probably looks like a trough in the aerospace business, such that we want to be profitable in that trough. That’s – and we certainly expect to be cash positive during that period of time, before the initial recovery in aerospace starts to emerge in 2022.Right, so I think we’ve got a window of time here in Q2 and Q3 that we’ll be going through, as Don said, not fully at run rate in Q2, but by the end of the year we should be there.

Yeah, I guess, one more thing I’ll add. I think we’re going to keep it rolling. So as we look at our business, we’re also quite fortunate that even though you read the headlines around end-markets and certain end-markets for certain customers, seeing their businesses drop, we’re in a beneficial spot, because our team has been – has put us in the position where we get the call.And what that means is that we have been quite fortunate in increasing share with customers. So when you at a headline number around build rates, dropping a certain percent. It doesn’t necessarily mean that we’re going to experience the same decline for that customer base, because we may well have picked up incremental share or will be turning on incremental share in a future period that’s going to offset part of that decline. So it’s – I think our diversified footprint is putting us in a pretty good spot.

Thanks, guys. I really appreciate that detail. That’s really helpful. And then, just a quick follow-up, do you have any idea on the level of aero destocking expected in 2020 and how long that may last? Thanks.

Yeah, I think – so first and foremost, from our perspective, we produce to specific customer orders. We do expect some ups and downs back and forth as people adjust. So we don’t really have a clear view of what’s in that inventory pipeline. But I think the majority of that information has been communicated to us. And I think we’ll see some of that in 2021. But it should be pretty much resolved by then.

Yeah. And I would say, even though most of our major customers don’t send us their inventory details, we are in really close contact with those customers. And there’s a real open dialogue around what their demand is. And part of that conversation that happens, in some cases multiple times a week is their underlying demand and what they might have in their pipeline that isn’t impacting it.So we do have some visibility, but those close relationships especially with the large customers is very, very helpful in addressing what you’re talking about.

Yeah, thanks, Dan. You started the conversation or the question around changes in the aerospace side of our business. I would tell you that we didn’t wait until March to work on our inventories. There were some big announcements late in the fourth quarter, December in particular. And we adjusted our melt schedule almost immediately. And then, going down the path to take melt schedules out and adjust our inventory immediately.And so, it’s not been a land rush so to speak here in the last few weeks. It’s actually been something that was planned and relatively orderly, and in concert with both our major airframe and engine customers. So I think we’re a little bit ahead and a little bit of proactivity in terms of how the inventory is going to flow out.

One thing that I would add on that is, as you look at what’s happening from a demand standpoint, of course, we have long-term contracts, especially on the HPMC side of the business, and with key customers. Many of those contracts have minimums. And so, we’re able to cushion the blow a bit on the downside in terms of their demand dropping. It doesn’t fully insulate us by any stretch of imagination from declines in demand. We don’t mean to imply that. But it certainly gives us a bit of a safety net or a floor, if you will.

Thanks, guys.

Thank you. Our next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Just really curious about these cost reductions that you’re outlining, $125 million at the midpoint, presumably much of that did not hit in Q1. So should we view it as $125 million over the balance of the year made in the last 3 quarters? So, in other words, your true annualized cost reductions are between $150 million and $200 million?

Yeah. So, Phil, this is Don. I’ll take it and good morning.

Good morning.

Yeah, I will – what I would say is, you’re right. The incremental $125 million is not in Q1 results, so $0 in Q1. The way to think about that $125 million is we’re actually feeling really good about the ability. We’ve already started by the way to quote and capture these savings. These are not pie in the sky cost reductions.And so, we expect that we will see steady ramping throughout the second quarter. We should be able to hit a run rate on those savings early Q3 and so have the – largely the run-rate benefit in Q3 and Q4. And again, feel really good about the ability to capture those savings.

And then as that carries over that, call it, $150 million plus run rate carries over to 2021, how much of that is structural in nature? Let’s just say – let’s just paint a picture that revenues for simplicity stay in a range between, call it, 2Q 2020 and 2Q 2021. Would any of those costs come back or majority of these structural at these volume levels?

That’s a great question. So I’ll give you a couple of different answer – elements to an answer here. So first, when you think about the $125 million, I would say, we’re really pleased with the outcome of that initial effort. But as you can imagine, it happened really quick. The $125 million we were really disciplined when we identified it. It’s very orderly. It’s not high level bullet points on a whiteboard. These are detailed cost takeouts with supporting plans. But the reality is, we need to do some more work around a couple of things. One is the structural changes that will allow us to keep these costs out of our cost structures going forward.And I think there’s real opportunity here. I think a placeholder for you right now is probably think in terms of we’d like to keep up the half of that $125 million out of the cost structures in the long-term, so that means structural changes. It’s not to say that we might not be able to do more than that, but we really as a team need to spend some time doing that.And then as you look at the $125 million, as you move over to 2020 or 2021 rather, there’s no magic in crossing that date line. And so there will be a couple elements of cost reductions like we have bonuses as a modest element of the $125 million. Those bonuses won’t be paid in 2020, but then you get to 2021, and the bonus targets would presumably be reset, which means there’s a real potential that bonuses would go back to normal levels.On the other hand, we have a list of things that are not in the $125 million that we’re continuing to work. And so I think this is going – it’s going a great direction. It’s a great outcome for an initial effort over about a 45-day period, and there is more work to come.

I think that’s right, Don. I think at this point, Phil, 45 days into it, everything is on the table for us. A couple of my leaders would say that the only difference between fixed and variable cost is time. And so we know where we are in the first 45 days and we continue to do that. But we can emphasize or let me emphasize that our primary focus is to minimize the decremental margins that we’re facing by reducing our costs.

And one last one…

Sure.

And then one last one, if I could. On the – just the side of pension, and then also net working capital. Don, I just wanted to read you correctly that $130 million of pension contributions, you anticipate making this year despite the ability legally to move those out? And then secondarily, what’s the net working capital goal for the balance of the year? Is it something like $200 million, $300 million, just trying to square those 2 things up? Thanks.

Yeah. So in terms of the pension, the federal relief really just allows you instead of making the payments on December 31, you can make it on January 1, okay. So there’s not like a – it’s not a huge relief. I mean, it is a relief intra-year, because we don’t have to make your payments. So that’s great. But it’s not a solution to long-term liquidity or even short-term liquidity really. The reason that we would make the contribution in 2020 instead of 2021, so December 31 versus January 1, is because we get a benefit in terms of the accounting and the calculation of liabilities and contributions going forward, and so that there is some mechanical reason – that there is a mechanical reason why we would choose to do it a day earlier.In terms of our working capital, what I would say about working capital, and if you don’t mind, Phil, I’d like to tie it to our liquidity goal. So right now, we ended the quarter with about $900 million of liquidity. We expect that with ex-pension contributions are going to be cash flow positive. That means if you add $130 million of cash flow or pension contributions, it brings you to kind of a cash flow neutral, if you will.Our goal is, we want to end the year in a position we have at least the liquidity level that we do now, which if you go back and look in history, we’re actually at one of the high points of liquidity, I think, in the company. And so maintaining that, but yet continuing to go after the reductions in, especially inventories, absolutely a priority for us. And so we’re going to continue to go after that to add liquidity. But our first goal is let’s not drop below where we’re at even though there’s a lot of dynamics in the end markets, and then let’s add what we can.

The next question will come from Josh Sullivan with The Benchmark Company. Please go ahead.

Hey, good morning.

Good morning, Josh.

Good morning.

Yeah, if we just think about the downturn in 2015 and 2016, just compared to the operations today and the structural changes that you’ve done? Is there any way to either qualitatively or quantitatively think about how ATI is positioned to manage this cycle versus it was in the previous cycle?

Yeah. Good morning, Josh. Thanks for that. Yeah, I think when we look back, whether it’s 2015, 2016 or even the finance crisis of 2008, 2009, we’re fundamentally a differently structured business than we were back in those times. The 2015, 2016, was clearly related to work stoppage followed by a massive restructuring of our flat-rolled products business at that time. We’ve also from a structural standpoint, seen significant growth in our HPMC segment. The additions of the forgings that came with the Ladish acquisition, just prior to 2015, 2016, we’re certainly seeing the growth in powder in the next generation applications. And I think, that’s been a big part.So structurally, we’re different. In terms of what that leads to is the product mix. I think, we’ve had a steady cadence over the last 18 months of long-term agreements that have increased our business content as well as the margin enhancements that come with that in the HPMC segment. And I think we’ve made a significant shift in our product mix in the Advanced Alloys & Solutions segment with a focus on value over volume. And I think the changes we made to close our pension to new entrants’ kind of takes care of that. We’ve got some increased flexibility with our workforce to respond quickly to changes in our business.On the bottom line, I think, is we’re a different company than we were back then, more resilient going into the crisis. And as Don mentioned, our liquidity is in a peak position.

Right. Thanks for that. And then just with regard to the continued strong outlook for the defense business, the F-35, the submarine business, those are complex supply chains. Are you seeing any logistic challenges just given that complexity? Do you think there’ll be any delay there? Or is it still a pretty strong pull-through?

So my team will be happy to hear the answer is nope, we’re not seeing any real supply chain issues. Candidly, early on in the COVID-19, there was a little bit of a challenge with just ballistics testing with the government, but that’s pretty much behind us. And we don’t see any real disruptions. And we see – actually, I would never call it business as usual, because that’s a growing part of our business for us. But it’s been very stable and the growth is set to continue based on the backlog that we have.

A bright spot.

And then can you just provide any color, what you’re seeing on the ground in China with the STAL operations? I know you said you expect an increase in the second half of the year with consumer electronics. But is there any way to characterize how STAL’s markets are reopening, just currently on the ground?

Yeah. So if you look at China, obviously, the Lunar New Year, everybody knows what was happening. And so we saw a significant decrease in demand in February, which was planned. And as we reported, we had Q1 growth this year over last year. I would talk about 2 specific markets, consumer electronics took a dump down in Q2. I think we’re expecting that to look like a V-shaped recovery in the electronic space, when we get into the second half. I think in automotive, which we don’t – that’s not a core strategic market for us, but it’s important for precision rolled strip. And that market is down about 25% compared to 2019. And candidly, we expect that to be flat for the balance of the year unless there’s some other kind of government intervention.And the other thing that we’re seeing in with our STAL businesses going beyond China and growth in the broader Asia, and as people get ready for the next generation of electronics, whether it’s the 83-inch flat screens or various other things, the price points on those will come down to the point where demand is up. So we expect growth in the Asian region for STAL outside of China in the second half of the year as people get ready for the year-end holiday season.

Yeah. Thank you.

The next question will come from Paretosh Misra with Berenberg. Please go ahead.

Thanks. Good morning. Yeah, thanks for taking my question. So first, on this titanium contract with a major OEM that you mentioned. Can you provide some more color on that, like how is it versus your expectations? What sort of ramp-up should we expect in the second half and then in 2021? And then I realize you have withdrawn your guidance, but was that already included in your previous guidance for 2020?

Why don’t you take the guidance question, Don? And I’ll come back on the contract.

You go first.

Okay. So on the contract, we’re not really going to talk too much about it today other than, I would say, probably not too surprising that our aerostructures’ customers have their plates full at the moment adjusting their contracts. It is multi-year, and it is titanium mill products. And we’ll have more information as we go forward. But we’re excited about it, because we should see production in late Q4 2020 to increase our participation going into 2021.

Yeah. What I would say in terms of guidance is we are getting orders. So you would see the benefit of some of the production and cost absorption in 2020 because of it. But in terms of delivery of those, I would expect no material deliveries in 2020, but you would expect that to hit 2021.

Got it. And then about your powder production asset base, I believe, you said that you’ve shutdown 2 small plants in Pennsylvania. So can you just maybe talk about how many plants are operating? Or what’s the total capacity utilization right now?

Let’s see, across the world, we’ve got a lot. So I would say the only 2 that are down are just in the powder business. One of them was related more to the aerospace demand, actually, both of them are related to the aerospace demand, and we were able to consolidate that production in other facilities. So I would say on the broader utilization, those are the only 2 plants that we really have down. What we’re doing to manage our capacity is what we call temporary or rolling idles, where you might see us take a mill shutdown for a week.We took our Carolina facilities down for a week or 2 depending on what kind of operations they were. Don talked about what we’re doing up in our forgings business. So what you’ll see is – if you say, hey, what are we running, I would say, most of our most of our major facilities are probably down 1 week a month in some shape or form, so probably about a 75% utilization.Now, the reason we’re doing it, is to get our inventories in line and making sure we can make the right stuff at the right time for our customers, and then make sure we understand what the long-term demand is going to be, long-term being defined as 2021 at this stage, and then, adjusting our crewing, to match through the balance of the year.

Yeah, and just for some perspective for those plants that were idled, they would represent probably something in the range of 25% to 30% of that production capacity, so temporary idling and not a huge percentage of our footprint. But it does certainly help to optimize the production process and the plants.

Our next question will come from Matthew Fields with Bank of America. Please go ahead.

Hey, everyone. I want to ask a couple of balance sheet questions. I know you said $260 million of availability on the revolver as of March 31. And I understand you repaid the $300 million in April. But I thought the revolver was $500 million in total. With $300 million drawn, I’m not sure how you get $260 million as availability. Is that including some of your accordion option on that revolver?

Yeah, the way to think about it is, so there are kind of 3 elements to the facility. If you’d let me – if I can just describe those to you. So you have your $500 million revolver, that’s the headline. And we have a modest amount of letters of credit that are outstanding against it. Something in the range of about $50 million, then you got a term-loan element that is outstanding, that’s a $100 million.And then, the final piece is the delayed draw $100 million that I talked about in my script that we can draw by the end of June. When you look at the availability, it does move from period to period depending upon the underlying collateral base. And so, it depends upon the accounts receivable and inventory and whether or not they happen in that period to qualify for draw rates.And so that’s where some of the dynamic around available capacity can change from a $500 million headline to a different dollar amount. But generally, the way to think about it is $500 million revolver, 2 $100 million term loans, and we’ve got pretty much near full availability, where we’ve drawn the term loan, first term loan. And we’ll – we may well draw the second term loan.

So it’s $160 million available on the revolver, and then $100 million potential, if you draw the second term loan. Is that the way that’s placed? And then…

You got it. And that was during – that was after we had drawn the $300 million. You’re right.

Right, right, right.

You got the math. You got the math.

And that excludes the $200 million accordion feature you have on your revolver.

That is absolutely true. And so, good point. That’s another opportunity for us to potentially increase liquidity. But as you can imagine, Matt, one of the things we look at is our inventory and AR balances. Right now, we have more collateral than we have capacity under the revolver. And so, one thing we evaluate is how do we optimize our collateral base, yeah, relative to the ABL facility. And that’s an element that we look at as a potential lever to pull if it makes sense. But, good catch.

All right, thanks. And then, sort of related to that, you have that $100 million delayed draw term loan at a ridiculously low rate. I think it’s LIBOR plus 125.

Yeah.

Your 27 notes are trading at $0.80 on the dollar. I under understand that, first and foremost, preserving liquidity is the key, but why not issue some of that delayed draw or issue, boost the revolver a little bit and buy back note to the discount, capture some capture some debt discount and reduce sort of overall debt burden?

Yeah, you’re 100% right. So, first, the priority for us is we want to make sure that we have ample liquidity, especially during this time of disruption and get better line of sight to what this down-cycle looks like, to make sure that we got the proper amount of liquidity in the business.Then you’re right. What we would end up doing is – if we had excess capital available, based upon our assessment, we would start hunting for what’s the proper place to deploy that capital to get max return. And you’re right, there’s probably an interest arbitrage opportunity for us, with some of our outstanding debts, so you’re dead on right.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bob Wetherbee for any closing remarks.

All right. Thank you. And thanks for joining us on the call today. Stay healthy. And thank you for your continued interest in ATI.

Thank you, Bob. Thank you to all the participants and listeners joining us today. That concludes our first quarter 2020 conference call.

Thanks for attending today’s presentation. You may now disconnect your lines.