ATI(ATI) - 2019 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In 2019, ATI generated solid earnings per share and net income growth, aided by the sales of non-core assets. Revenues increased year-over-year in both operating segments despite challenging market conditions [11] - Total segment operating profit declined versus the prior year, with an increase in High Performance Materials and Components (HPMC) driven largely by specialty materials offset by a decrease in Flat Rolled Products (FRP) [11] - In the fourth quarter, excluding special items, ATI increased earnings per share by 20% year-over-year, driven by operating profit improvements in both segments [11] Business Line Data and Key Metrics Changes - The HPMC segment increased revenues and profits in 2019, with fourth quarter financial results showing the best year-over-year improvement, with sales excluding divestitures increasing by 10% [13][14] - The FRP segment achieved profitability for the third consecutive year, with solid operating results in the fourth quarter despite challenges from tariffs and increased retirement benefit expenses [21][22] - Sales to aerospace and defense markets grew by over 30% year-over-year, while sales to medical markets declined due to competition [18][25] Market Data and Key Metrics Changes - In 2019, commercial airframe product sales grew by more than 20% year-over-year, while defense market sales saw robust expansion [17][18] - The energy market revenue grew significantly, led by increased demand for marine scrubbers and flue gas desulfurization materials [25] - Sales to smaller non-aerospace and defense markets were mixed, with medical declining and energy market sales increasing primarily due to exports to Asia [19] Company Strategy and Development Direction - ATI continues to focus on being an industry leader in on-time delivery of high-quality materials and components, with a strong emphasis on aerospace and defense markets [8] - The company is actively assessing options for capital allocation and liquidity management, particularly in light of the uncertainty stemming from the 737 MAX production suspension [10] - Strategic investments are being made to support organic growth opportunities and commitments under key contracts, including a focus on improving cost structures and operational efficiencies [9][35] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in long-term aerospace demand fundamentals despite current industry turbulence, and emphasized the importance of controlling costs and managing working capital [37] - The company anticipates that the 737 MAX production suspension will impact operating profits in 2020, but expects to mitigate some of this decline through increased production shipments with other OEMs [15][30] - Management highlighted the importance of maintaining a disciplined approach to inventory and production levels while being prepared to ramp up when demand increases [53][54] Other Important Information - ATI ended 2019 with over $490 million in cash, achieving a managed working capital stretch goal of 30% of sales [27] - The company reduced gross debt by $150 million in the fourth quarter, which will lower annual interest expense by approximately $9 million starting in 2020 [28] - The company is engaged in negotiations for a new labor pact with US Steel Workers, with progress expected to finalize a mutually beneficial agreement [24] Q&A Session Summary Question: Leap build rate assumptions for 2020 - Management indicated that they are aligned with Boeing and other key players in the supply chain regarding production rates and expectations for the LEAP engines [42][43] Question: Impact of 787 production rate changes - Management expects to smooth out the impact of any changes in the 787 production rate and does not anticipate significant effects in 2020 [55][56] Question: Cost savings initiatives in the near term - Management is focused on sustainable cost reductions and maintaining working capital discipline while being prepared to ramp up production as needed [61][62] Question: Effects of coronavirus outbreak on STAL - Management noted some minor impacts on production due to government guidelines but remains confident in strong customer demand [64][66] Question: Pension contributions and cash flow - Management confirmed that pension contributions will be approximately $130 million in 2020, with ongoing efforts to reduce pension obligations [70] Question: Timing of new contracts with GE - Management stated that new contracts with GE will kick in at the beginning of 2021 and are not tied to specific build rate assumptions [72][73]