ATI Inc. (ATI) Earnings Call Transcript

Thank you for joining us, and welcome to the ATI Second Quarter 2026 Results Conference Call. [Operator Instructions]. I will now hand the conference over to [ Rob Rengel], Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to ATI's Second Quarter 2026 Earnings Call. I'm excited to step into this role, and I want to begin by recognizing Dave Weston and the significant contributions he made to ATI before his retirement. Today's discussion is being webcast at atimaterials.com. Joining me are Kim Fields, Board Chair, 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. 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. After our prepared remarks, we'll open the line for questions. Now I'll turn the call over to Kim.

Thanks, Rob, and welcome to the team, and good morning, everyone. Thank you for joining us. Turning to Slide 3. ATI delivered another strong quarter, demonstrating the increasing earnings power of our business. Second quarter adjusted EBITDA was $284 million, $29 million above the high end of our prior guidance. Excluding a $10 million asset sale gain, underlying performance still exceeded the high end of our guidance by $19 million. Adjusted EBITDA increased 37% year-over-year making this ATI's strongest quarterly EBITDA performance since 2007. Second quarter adjusted EBITDA margin expanded 440 basis points year-over-year to 22.6%, reflecting stronger commercial terms, favorable mix, disciplined execution and operational improvements through elevation. Revenue this quarter increased 11% year-over-year to $1.3 billion, an annualized run rate of more than $5 billion. That expanding revenue was supported by another record backlog of $4.4 billion, up 18% from a year ago and 7% sequentially. Importantly, that backlog increasingly reflects long-term agreements, sole-source positions and strategic programs that provide meaningful multiyear visibility into future shipments and earnings. Adjusted free cash flow in the quarter was $69 million, bringing first half free cash flow to $143 million, an improvement of $193 million versus the first half of last year. Cash generation will accelerate meaningfully in the second half, putting us on track to generate positive free cash flow in every quarter of 2026. Our second quarter performance was led by our AA&S segment and it's one of the most important stories from the quarter. Over the last several years, we've transformed AA&S. What was once viewed as a more cyclical lower-margin business has become a second durable earnings engine for ATI. We've improved the portfolio strengthen our commercial discipline and focused our investments where ATI's differentiated capabilities create the greatest value. The result is a fundamentally different business. Excluding the asset sale gain, AA&S generated an underlying EBITDA margin of approximately 22% compared with 14% a year ago. That's not simply the result of stronger markets. It's the result of better mix, better pricing and better execution. We built the transformation on 3 key priorities. First, we've optimized the portfolio shifting AA&S toward higher-value aerospace, defense and specialty energy applications while at the same time exiting lower-value products. Today, Aerospace and Defense accounts for approximately 44% of AA&S revenue, more than double their share 5 years ago. Second, we've leveraged ATI's unique technical capabilities in high-purity hafnium and zirconium. ATI is one of 3 qualified producers in the Western world capable of manufacturing these materials to the purity standards required for aerospace and nuclear energy applications. With China limiting exports to these markets, our capabilities have become even more valuable. And third, we've translated that scarcity into stronger commercial performance. Improved pricing for high-purity hafnium zirconium benefits our defense and specialty energy businesses and also flows through to our jet engine outlay material, where hafnium and zirconium are critical alloy additions, combined with better product mix, and disciplined commercial execution that has materially increased the earnings power of AA&S. Now let me be equally clear about HPMC. Nothing about this quarter changes our long-term strategy. HPMC remains ATI's largest long-term growth platform and the foundation of our aerospace strategy. For HPMC, performance in the quarter was within our expectations. Although qualification timing at both our new facility in Mexico and our new titanium electron beam furnace or [ EV2 ] shifted some shipments into future periods. The important point is that our confidence in HPMC's growth trajectory remains intact. Commercial terms and operational productivity are improving, and we're systemically increasing the productive output of the manufacturing system through elevation and targeted investments. Those improvements support sequentially stronger performance through the second half and position HPMC for additional growth into 2027. Taken together, these results show a stronger, more balanced ATI. We are not benefiting from just one favorable market or 1 strong quarter. We now have 2 businesses capable of generating durable earnings growth supported by differentiated products, stronger commercial performance, operational excellence and a record backlog that provides meaningful multiyear visibility into the future. Turning to Slide 4. Based on our first half performance and improved visibility into the balance of the year, today, we are meaningfully raising our full year outlook across every key financial metric. As a result, our updated outlook now includes an adjusted EBITDA midpoint of $1.16 billion, representing 35% year-over-year growth. And adjusted EPS midpoint of $5.04, an increase of 56% year-over-year and an adjusted free cash flow midpoint of $575 million, an increase of 51% year-over-year. Importantly, these increases reflect a sustainable step change in AA&S performance and our ongoing confidence in the HPMC ramp. Turning to Slide 5. ATI's operating model is helping convert strong demand, improved commercial terms and targeted investments into higher earnings, margins and cash flow. Elevation is the foundation of that operating system. Let me give you some insight into how we operate. First, we increased the productivity of the assets we own. Second, we make targeted investments where ATI has differentiated technology, committed customer demand and the highest returns. And third, we embed our operating system to make those improvements repeatable across the enterprise. That combination is increasing ATI's earning power, strengthening cash generation and creating long-term shareholder value. Most importantly, we're seeing measurable results through elevations. We've increased year-over-year throughput by 30% in ultrasonic inspection, 15% in isothermal forgings and 15% in primary nickel melt. Those aren't isolated improvements. When combined with our targeted capacity investments, we'll realize higher productive output from our manufacturing network. Every major investment we're making supports existing customer demand and expand ATI's differentiated capabilities. Moving to Slide 6. Let me remind you about our capacity investments. Our new Chihuahua, Mexico facility supports next-generation aerospace engine testing and inspection. And our EV2 furnace expands premium-quality titanium capability and capacity. Our nickel remelt expansion remains on schedule with our new VIM furnace coming online by the end of 2027. Together, these investments are targeted to increase nickel capacity by approximately 15% to 20% by early 2028 compared with year-end 2025. Across these combined nickel investments, we will deliver approximately $350 million of incremental annual revenue by 2028. The important point is that these investments, combined with elevation progressively increase the productive output of the manufacturing system. Turning to Slide 7. Across all of our end markets, we're seeing the same underlying dynamics. Customers have increasing need for qualified capacity, differentiated technology and certainty of supply. Those are areas where ATI has built durable competitive advantages through proprietary materials, unique manufacturing capabilities and decades-long customer qualifications. That competitive position supports stronger commercial terms, long-term agreements and attractive growth opportunities across our portfolio. Jet engines remains ATI's largest and most important growth market. Revenue increased 13% year-over-year and 8% sequentially, reflecting ongoing strength across both OEM production and aftermarket. The industry is transitioning to our next-generation engine platforms and ATI is exceptionally well positioned to benefit. Our content on these engines is more than double that of legacy platforms, reflecting our differentiated materials in the hottest, most demanding section of the engine. Industry forecasts project next-generation engines will grow from about 35% today to over 50% of the installed fleet by 2030. Currently, we support every major next-generation commercial engine platform and produced 6 of the 7 most advanced nickel-based super alloys, including 5 where we are the sole source supplier. That differentiation translates into stronger pricing, richer product mix and long-term growth opportunities. Market conditions are developing largely as we anticipated. We continue to see high teens jet engine revenue growth for the full year. In airframe, supply chain inventories have largely normalized and customer order patterns are now aligning with announced OEM build rates. Our planned production for the balance of the year is supported by firm customer orders. Landing gear alloys remain our strongest airframe product category, while plate demand is improving. As a result, we continue to see mid- to high single-digit full year airframe revenue growth weighted towards the second half. Defense delivered another outstanding quarter as one of our fastest-growing markets. Revenue increased 36% year-over-year, reaching an all-time high as demand accelerated across naval nuclear, missile and missile defense applications. Our recently announced naval nuclear renewal extends through 2030 and with improved pricing and product mix, it more than doubles annual revenue compared to the prior contract. We're also seeing strength build across titanium, nickel and niobium products, supporting strategic missile platforms, including [ Tomahawk, FAD and PAC-3]. We've already begun receiving orders in support of the Tomahawk program. As a result, we've increased our expectation for full year defense growth to the high teens, reflecting growing momentum across the portfolio. Specialty Energy declined in the quarter as we prioritized production toward defense orders with more immediate delivery requirements. That mix will rebalance in the second half supported by nuclear shipments and durable industrial gas turbine demand. We continue to see mid-teens specialty energy revenue growth for the full year. In closing, we're building the ATI of the next decade, a stronger company with durable demand, better execution, expanding margins and greater cash generation. With that, I'll turn the call over to Rob.

Thanks, Kim. I'll start with the second quarter performance, explain the different profiles of HPMC and AA&S and close with the supporting details for our updated guidance. As shown on Slide 8, we delivered strong overall results. Adjusted EBITDA and EPS exceeded the high end of our guidance, while we expanded our consolidated margins and generated strong cash flow. These results demonstrate the strength of ATI's differentiated portfolio and the earnings power of our business model. Second quarter revenue was $1.3 billion, up 11% year-over-year, driven by 13% growth in Aerospace and Defense. Within that market segment, jet engine sales increased by 13% and reflecting increasing strength in high temperature nickel alloys and favorable pricing. Airframe revenue declined slightly, consistent with our expectations with growth accelerating in the second half of the year. Defense-related revenue grew by 36% compared with the prior year, driven by robust demand and meaningful price gains supported by new long-term contracts. Specialty Energy revenue declined 6%, reflecting our decision to prioritize available production capacity toward higher-value naval nuclear demand during the quarter. Second quarter adjusted EBITDA was $284 million, up 37% year-over-year. This was $34 million above the midpoint and $29 million or 11% above the high end of our guidance. Excluding the $10 million asset sale gain in A&S, Underlying operating performance still exceeded the high end of our guidance by nearly $28 million, reflecting stronger pricing and mix. Second quarter consolidated adjusted EBITDA margin was 22.6%, and up 440 basis points year-over-year. First half free cash flow improved significantly to $143 million compared with the use of $50 million in the first half of 2025. We managed working capital as a percentage of sales at the end of Q2 was 34%. We see further opportunities to improve inventory performance. For example, we are implementing a customer consignment strategy for forging input material to improve working capital efficiency. Capital expenditures were $69 million, including $23 million funded directly by customers. All key growth projects remain on schedule and on budget. Now on Slide 9, I'll review segment performance. HPMC sales increased 5% year-over-year to $637 million primarily driven by growth in nickel products for jet engines. Segment margins expanded 40 basis points from the same period last year to 24.1%. Demand remains strong, while the timing of customer qualifications related to our new facility in Mexico and the EV 2 titanium furnace shifted certain deliveries into future periods. These are timing effects and were partially offset in Q2 by higher volume and pricing on rotating jet engine nickel alloys. We see the deferred demand converting in the second half. In AA&S, sales increased 17% year-over-year to $624 million. Growth reflected multiple drivers, including pricing, mix and defense performance. Segment margin expanded 930 basis points to an all-time high, 23.7%, reflecting stronger pricing, execution and a more favorable mix. As Kim mentioned, A&S is a fundamentally different business today. Through portfolio optimization, including 80/20, we have shifted this segment toward higher value applications. We've been building an integrated interconnected business as our unique alloys are used across both HPMC and AA&S. Looking ahead, we see AA&S EBITDA margins consistently above 20%. This improvement in AA&S means both segments will now contribute to durable profitable growth. We are raising our full year outlook across every key financial measure. Our confidence is supported by contracted pricing committed customer schedules, a higher structural earnings base in our AA&S segment and HPMC shipments that moved from Q2 to the second half. In AA&S, our renewed nuclear agreements, accelerated defense deliveries and shipments and improved hafnium and zirconium pricing provides support for sustained performance through the balance of the year. In HPMC, completed contract renewals are providing improved pricing and mix for jet engine materials. While customer qualification timing affected the second quarter, the associated demand remains a strong element in our second half production plan. Momentum will build in the third quarter carrying into the fourth quarter and next year. Our improved outlook reflects not only support of end markets, but a stronger and more balanced ATI. As shown on Slide #10, in the third quarter of 2026, we anticipate adjusted EBITDA of $305 million to $315 million, translating to adjusted EPS of $1.31 to $1.37. At the midpoint, adjusted EBITDA would increase 38% compared with the third quarter of 2025 and 9% sequentially. We anticipate sequential profit improvement driven by AA&S pricing and mix strength, particularly in aerospace and defense. HPMC performance will strengthen as deliveries built through the second half with momentum starting in the third quarter and building into the fourth quarter. We see consolidated adjusted EBITDA margins expanding in the third quarter compared to the second quarter of 2026. Turning to Slide 11. Our higher full year outlook reflects the second quarter outperformance in AA&S and a better second half baseline. The increase versus our prior outlook is primarily supported by stronger AA&S pricing, mix and defense performance. Our full year HPMC outlook continues to reflect sequential improvement in performance as we previously anticipated. Specifically, we have committed contracts in place. This is not speculative. In addition, we will capture the second quarter timing effects during the second half. We are raising our full year adjusted EBITDA guidance to the range of $1 billion $135 million to $1.18 billion. The midpoint of the range represents 35% increase over prior year. This outlook translates to full year adjusted EPS range of $4.90 to $5.18. We see margin expansion in 2026 with full year consolidated adjusted EBITDA margins now projected in the low 20% range. We now expect full year consolidated incremental margins in the range of 50%. This is an improvement over the 40% we previously communicated, driven by additional strength in our AA&S segment. We anticipate second half performance to build sequentially. In the third quarter, the primary drivers are continued pricing and mix strength in aerospace and defense for both segments. We see the fourth quarter as our strongest quarter of 2026 for sales and profit. Our midpoint guidance implies approximately $335 million of EBITDA in Q4. That translates to roughly $1.35 billion annualized exit rate. While we are not providing 2027 guidance today, the commercial and operational drivers supporting that performance extend into next year. At a segment level, we see full year EBITDA margin for HPMC in the mid-20% range, consistent with our outlook from previous quarters. AA&S full year EBITDA margin will be in the low 20% range, an improvement over the upper teens level we communicated last quarter. The uplift is supported by stronger pricing and mix shifting towards aerospace and defense, as we've discussed. Note that the performance of our segments is increasingly driven by similar market dynamics. Turning to adjusted free cash flow. We are raising the midpoint of our range by $80 million setting the range between $550 million and $600 million. The $575 million midpoint is $195 million higher than the 2025 free cash flow, a 51% increase year-over-year. This implies adjusted free cash flow generation of $430 million in the second half, driven by higher earnings, inventory conversion associated with scheduled shipments and customer-funded capital. Our capital deployment strategy is unchanged. Our gross CapEx range remains consistent with prior guidance at $280 million to $300 million. This includes the greenfield expansion facility in Mexico, which Kim mentioned. Customer-funded CapEx of $55 million to $65 million will be a partial offset. Share repurchases remains a priority for deploying incremental free cash flow. We view them as the most efficient way to return capital to shareholders. As of today, after our $50 million repurchase in Q2, we have $495 million remaining under our current repurchase authorization. Overall, we delivered a strong first half and expect even better second half. Our increased outlook is supported by contracted pricing, a record backlog, committed customer schedules and planned shipment timing. Kim, back to you.

Thanks, Rob. As we look ahead, our priorities remain clear: continue improving execution through elevation, bring differentiated capacity online and allocate capital where returns are highest. We are confident in our ability to convert strong demand into sustained growth, higher earnings and cash flow. Now let's open the line for questions.

[Operator Instructions] Your first question comes from the line of Richard Safran from Seaport Research Partners.

I have one question and one quick follow-up. On the guidance raise, if I did the math right, you did -- at the midpoint, you took EBITDA up by $125 million but you took up your free cash flow guide by $80 million. So I just wanted to know if you could go over what drove that and how we should be thinking about cash and cash conversion going forward?

Thanks, Rich. I appreciate the question. So yes, I'll start. I'll share a little bit on the guide and then I'll hand it over to Rob, who can talk a little bit about the free cash flow and the outlook. I'll say our guide and our raise is really based on the strong performance we've had this quarter, and it's based on things that are already in place. So this is a contracted pricing improvements that we're seeing flow through recently committed long-term agreements and customer orders that are already committed. And so we have high confidence that this is based on all those things I just mentioned, committed orders and a stronger business and the structural improvement that I shared in the prepared remarks around AA&S. You add in there some of the timing changes for HPMC and that's what drives our confidence as far as our outlook. And to your point around cash flow, typically, we start the first half off. We started from $143 million this year. It typically accelerates as we go through the year, and we anticipate that continuing as we go forward. But Rob, do you want to add any more color on that?

Yes, Rich, when I think about the cash flow, if you think about the increase in Really, we're talking about higher shipments in the second half. And essentially, the reason why that's not all going to convert is really 2 things. One, it's the timing of conversion through accounts receivables. So we'll expect some of that higher volume with those late Q4 shipments to be in receivables. And the second piece is we do plan on a little bit more inventory as we prepare for the early part of 2027. So I think it's important to call out that when you look at our full year cash flow and the guide at the midpoint of $575 million, that represents an increase of over 51% from the full year 2025 and when I think about the free cash flow conversion, that assumes a high 80%. And as we've stated several times, our goal is to drive well over 90% free cash flow conversion. So I think we're trending in the right direction. And as I think about going forward into 2027, I'm not going to give updated guidance here today on 2027, but the free cash flow conversion at 90% or greater is where we're thinking about the target.

Okay. And then just a quick follow-up on AA&S and at the risk of pressing you on something. So given your remarks about transforming the business, your comments about 20% EBITDA margins. Would you be willing to talk a bit more about the EBITDA margin potential at AA&S? How we should be thinking about it if growth and mix continues to improve? Would you be willing to give out a bit more specific on that?

Sure. Yes, from -- as you said, fantastic performance in the quarter by AA&S in the segment, and it's a transformation that we've been working on for several years. You've heard me talking about it. As we look out, we anticipate we can see AA&S in the mid-20% range going forward. And really, because this is based on structural changes that we've been making in this segment for, as I said, the last few years. One, it started with the transformation in our flat-rolled business, exiting the standard stainless and focusing our resources on that highest value products through 80/20. And here most recently, we strengthened our commercial model and restructured long-term agreements, improved pricing and mix. And now we're benefiting from the acceleration around defense and nuclear demand as we look forward. I mentioned in my prepared remarks that A&D is more than double where we were 5 years ago at 44% and maybe even more impressive if I look year-over-year, at the AA&S segment. A&D is up 34% year-over-year. And so as you said, really focused on structural change, both from a market mix, pricing and contractual agreements. I think the last thing just to mention here that we're also benefiting from is that our business, SA&C on the West Coast is one of 3 qualified Western producers of high purity hafnium and zirconium. And that provides another durable competitive advantage, especially given, as I mentioned in my remarks, supply chain continue to tighten and trade continues to change and create more demand, which allows us to capture that value. So as we think about it and look at A&S today, we're talking about a business that's fundamentally different from an earnings profile than it was a year ago. And that gives me the confidence to say that we're going to be in that mid-20% range going forward.

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

I wanted to ask about the outlook in HPMC in the second half, you talked about catching up on some of the revenue. And to the extent that you also see margin expansion. I think the first half margin is kind of in the range, mid-20s type of range that you've talked about, but had also been thinking about some LTA rollovers and mix improvement driving second half margin expansion there? And if that's still part of the outlook.

Yes. So as I think about it and we look at HPMC, we've been talking about through this year, we had a step-up coming in the back half of the year, so here in the third quarter. And it is based on a couple of things, some I talked about. One is the work we're doing through elevation and the improvements around productivity and taking cost out of our operation. But more importantly, as you mentioned, we've got contractual renewals that are kicking in and step up in pricing, and we are still expecting to see that. In addition, as you said, we had some timing changes with our 2 new facilities that we are in qualifications, one in Mexico and then the [ EB ] premium quality titanium. So those are also moving out. As I look at the quarter, we had probably around $30 million to $40 million of revenue that moved from the first half into the second half where the margins were maybe 40% to 50% shifting into the future periods. And that will accelerate as those facilities continue to ramp and come online. But we do continue to see sequential improvement through the balance of the year based on those new contract pricing. And these are the same drivers that underpin our confidence in that stronger half outlook and the improvement in our HPMC outlook as well.

And just one clarification, that 40% to 50%, that's kind of an incremental margin cadence that we're discussing there?

Yes.

Your next question comes from the line of David Strauss from Wells.

Rob, you touched on kind of the implied Q4 EBITDA as an ex-rate into next year. I guess, is there anything unusual in that number? Is there anything -- any reason as to why we wouldn't kind of -- or you guys wouldn't kind of grow off of that level as we head into '27. And kind of within that, are you thinking as we look at '27 is 50% incrementals for the overall business with what you're talking about for A&S now. Is that a sustainable kind of run rate to use for incrementals from here?

Yes. Thanks, David. Well, when I look at Q4 and you think about what that implies for the exit rate for the full year, it implies $1.350 billion of EBITDA and while I'm not going to give 2027 guidance today, I think I can say that it kind of directionally makes sense. And when you look at those incrementals, we have increased our incrementals from 40% to 50%. And so I think it's fair to think about this business from all the structural changes that we've made to be a business that can deliver margins in that 40% to 50% incremental range. But again, we're not going to put a fine point on the 2027 today. but we do expect to give some additional guidance here coming forward.