Hello everyone, welcome to the ATI First Quarter 2023 Earnings Call. My name is Bruno, and I'll be the operator of today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Tom Wright. Please go ahead.
Thank you. Good morning and welcome to ATI's First Quarter 2023 earnings call. Today's discussion is being broadcast on our website. Participating in today's call are Bob Wetherbee, Board Chair, President, and CEO; Kim Fields, Executive Vice President and COO; and Don Newman, Executive Vice President and CFO. Bob, Kim, and Don will focus on our first quarter highlights and key messages. 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 and can 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 slide presentation. Now, I'll turn the call over to Bob.
Thanks, Tom. Good morning. Q1 marked another strong quarter of consistent performance and sequential top-line growth for ATI. Our team continues to build momentum, driving our business forward. I'll summarize my thoughts on our first quarter performance in three points. Number one, we're delivering. What did this solid quarter include? Our quarterly revenue again exceeded $1 billion, up 3% over the prior quarter and 25% higher than a year ago. Sales in High-Performance Materials & Components segments were up 6% over the prior quarter. That's 38% higher than a year ago. Adjusted earnings per share for the quarter was $0.49. That on the higher side of our guidance range. We know the importance of delivering on our commitments. Today's results reaffirm the importance we place on that consistency.
Our results also reflect the incredible work being done every day by our team. They're driving operational efficiencies, capitalizing on new opportunities, and growing our capabilities. After my remarks, ATI Chief Operating Officer, Kim Fields, will share her perspective on how we're doing that. Message number 2, continuing momentum in aerospace and defense is driving historic demand for ATI's materials. Despite some supply chain and delivery delays, the signals are clear. The aero ramp continues. I don't think any of us expected a flawless ramp, and we haven't been disappointed in that expectation. You know, a couple bumps in the supply chain around incoming materials and forgings from non-ATI sources is probably the number 1 issue that we're dealing with. Even so, all signs indicate a positive trajectory this year. OEMs are bullish about aircraft deliveries, reaffirming future build rates. We're seeing it firsthand.
In Q1, airframe sales grew by 81% versus the prior year period. ATI's significant wide-body content provides strong tailwinds across our commercial aerospace portfolio. We're excited to see this progress and expect growth in this core market to continue. Quarterly jet engine sales grew by 58% over the same period last year, driven by continued growth in specialty materials and forgings. Obviously, we expect this growth to continue as well, quarter after quarter after quarter. Quarterly defense sales grew 24% over the same period last year. These gains were led by growth in titanium armor, military jet engine, and materials serving allied naval systems. There you have it in defense. It's roll, fly and float, and business is really strong, and we expect that to continue into the future. In Q1, aerospace and defense markets represented 56% of ATI revenue.
That's up from 44% in the first quarter of last year. It highlights the tremendous progress we're making toward our 65% A&D sales target. Q1 energy sales were up 32% over the prior year period. This was driven by growing demand for materials serving civilian nuclear power and conventional oil and gas applications. As we shared with you last quarter, we continue to see softness in our smaller industrial markets. Remember, we've dramatically reduced our exposure to cyclical changes in these markets through transformation of our Specialty Rolled Products business. More specifically, we're also seeing continued softness in China. This pertains primarily to the electronics and automotive markets served by our Asian precision rolled strip business, remembering also that this business accounts for about 5% of our total sales.
We see emerging signs of moderate year-over-year and sequential growth in China, but the economy there continues to significantly lag 2019 levels. More information about ATI sales to critical applications and adjacent markets can be found in the corresponding presentation on our website. Now, my third message. We are executing. Our titanium and specialty alloy customers are asking for all we can produce, in many cases, even more. To deliver on these opportunities, we have the right team and the greatest capabilities. Across the enterprise, we're laser-focused on optimizing flow times, accelerating inventory velocity, and extracting every ounce of output possible. We want the maximum value from every operation, every flow path, every asset, every melt batch. Now I'll turn it over to Kim, so she can share recent actions on our path to unlocking ATI's full potential.
Thanks, Bob. It's great to join you and Don, I'll provide details of how we're delivering this tremendous performance. I'm going to follow your lead and continue the trend by sharing three key highlights. First, I'll give an update on the new capabilities that we're bringing online. Second, share the success we are having in getting more capacity from existing assets. Third, give insights to the steps we are taking to meet the historic demand for titanium. First up, I'm excited to share that we are on the final stages of commissioning the new bright anneal line in our Vandergrift, Pennsylvania operation. Completing the last step in the transformation of our Specialty Rolled Products business, the new line has state-of-the-art equipment and control systems that deliver best-in-the-world finishing capabilities.
These include higher quality surface finish for a wide range of sensitive specialty materials, improved formability and dimensional control of thin gauge products, wider coil sizes that provide customer flexibility for their forming processes, and it delivers the shortest material flow times in the world with cycle times reduced by more than 50% in many cases. This has the potential to meaningfully lower fabricating costs and reduce metal risk for our customers, creating advantages over their competition. The project's on track to qualify for production by the end of Q2. The new bright anneal line rounds out our specialty rolled products triple threat of capabilities. First, tremendous melt capabilities with our Latrobe, Pennsylvania upgrades, which were completed during the pandemic, combined with the world's most powerful hot rolling mill located in Brackenridge, Pennsylvania. Lastly, our world-class finishing capabilities in Vandergrift. Why is this important?
It's key to our commercial transformation, helping the Specialty Rolled Products business establish strong direct connections with major OEMs in key markets. We're no longer relying on commodity stainless distribution channels as our primary go-to-market approach. Our strategy is to be a leader in the aerospace and defense markets, and we are seeing results. The first quarter A&D revenue in our Advanced Alloys & Solutions segment grew by 65% compared to the prior year period. On to my second key point and highest priority this year. Across the system, every single member of my team is focused on operational excellence. Our goal is to increase production output of existing assets through increased efficiencies and improved product yields. The demand is out there, and these improvements will allow us to capture more of it with higher product quality and improved margins. What's this look like?
A lot of hard work and incremental improvements at every step in our operational process. We're increasing our productivity right first time and throughput day after day. In some operations, we're seeing efficiency improvements of as much as 10%-15% in 1 quarter, relieving process bottlenecks, increasing product flow, and ultimately resulting in improved delivery performance for our customers. It's like Vince Lombardi said, "It's a game of inches, and inches make the champions." We are playing the game with laser focus and disciplined execution that will position us to win. Benefits from these efforts are already starting to show. Across both segments, we broke multiple operating records in Q1. For example, our specialty materials business unit set its highest Q1 sales record in decades. Every major work center in this business unit is at or beyond its 2019 operating level.
This is key because it sets the pace for the majority of our vertically integrated aerospace and defense flow paths. In the Advanced Alloys & Solutions segment, the benefits of our transformation are showing up in record levels for inventory flow times, leading to improved product velocity and significantly lower metal volatility in Specialty Rolled Products. The benefits are incremental for now, but we know that inches add up. As Bob mentioned last quarter, most of our workforce is in place after adding 1,000 new employees last year. Now we're gaining on the training curve too. Our newest team members are gaining experience through repetition and cross-training on multiple operations. This adds flexibility and nimbleness to our operations, allowing us to react and meet our customers' changing needs. The benefits our team brings grow every day.
We've made great progress in the first quarter. I thank every member of our team, both new and experienced, for all they're doing. We have a great team out there. We believe these ATI efforts enable us to capture upside demand that our competitors can't. In an industry where lead times of 50-70 weeks are becoming the norm, everything we do to increase yields and maximize uptime allows us to delight a customer. My third topic, the unprecedented demand for titanium. We're really working to increase titanium melt capacity. With the tragic situation in Ukraine, the world has lost access to a third of the titanium supply that was in the market in 2021. We're meeting our commercial commitments. Our customers appreciate this performance and are asking for more.
As Bob has shared in earlier calls, we're increasing production from existing titanium assets 35% over the 2022 baseline. This includes restarting previously idle capacity in Oregon. While we're coming online, our team continues to exceed expectations using creative solutions to reach melting milestones faster than estimated while requiring minimal capital investment. Still modest output for now, but they're on their way, accelerating every day. As this capacity comes on, there will be initial bottom line impact in the back half of 2023, and we expect to achieve the full run rate in 2024. Customers are taking full advantage of this increase in our titanium capacity. From where I sit, ATI is well-positioned, thanks to our increased capability, improved operational efficiency, and expanding titanium capacity. We're operating as a system, maximizing our assets and productions across the business like never before.
Every aspect of our operation benefits from this rising tide, and so do our customers. That should do it for me, Bob.
Thanks, Kim. Everyone benefits from what your team is doing, our business, our customers, our team, and our shareholders. Keep up the great work. Thanks to you and your leadership. It matters, and we appreciate it. Kim will stick around for the Q&A session after our prepared remarks. It's Don's turn to share details of Q1 financial performance and what's ahead for the rest of the year.
Thanks, Bob. Thanks, Kim, for the operational update. Today, I'll provide details on two key areas, our Q1 results and our outlook. The first quarter marked the third quarter in a row in which we earned more than $1 billion. Revenue was $1.04 billion, a 25% increase year-over-year, driven by continued strength in aerospace and defense, as well as growth in energy. Declines in electronics and automotive partially offset that year-over-year revenue growth. Bob highlighted our growth in A&D mix up 1,200 basis points year-over-year from Q1 2022. The sequential increase also speaks to the velocity building in our mix improvement. A&D, as a percentage of sales, improved 300 basis points sequentially. That's on top of a 200 basis point quarter-over-quarter mix improvement between Q3 and Q4 of 2022.
As we shared last quarter, we expect A&D mix to be above 60% by the end of this year. Why is the A&D mix so important? We generate some of our highest margins in commercial airframe and latest generation jet engine sales. Within our defense market, margins are also typically accretive, reflecting our customers' recognition of the value of our differentiated products. Overall revenue grew 3% sequentially. High-Performance Materials & Components, or HPMC, grew 6% quarter-over-quarter, and Advanced Alloys & Solutions, or AA&S, sales were flat from Q4, 2022. The strong HPMC increase is tied to the growing A&D sales. We see this strength continuing, enhanced by our increasing capacity and improving efficiencies. What drove the flat revenues for AA&S? AA&S actually saw 15% sequential growth in commercial aerospace sales and 6% growth in energy.
These gains were largely offset by declines in electronics and automotive market sales, primarily in Asia. Let's talk margins. Consolidated adjusted EBITDA margins were down compared to a year ago, 12.8 in Q1 2023 versus 15% in Q1 2022. Remember, this quarter in 2022 included $29 million of COVID-related employee retention incentives, which enhanced margins by 350 basis points. Another factor impacting comparative margins is $9 million of incremental post-retirement benefit costs in Q1 2023. Those incremental costs do not impact our current pension contributions. Year-over-year, they do create a 90 basis point margin headwind. What if we exclude the impact of the non-repeating COVID incentives and incremental post-retirement benefit costs?
Well, underlying adjusted EBITDA margins would be 220 basis points higher year-over-year, increasing from 11.5% in 2022 to 13.7% in 2023. What drove these underlying improvements? Shifting to a more value-added sales mix, increasing production levels, and diligent cost management. We successfully offset inflation impacts in 2022, and that success continued in the First quarter of this year. Price actions and cost improvements more than offset inflation impacts. We anticipate EBITDA margins will improve through the year due to continued growth, mix improvement, and cost management actions Kim described. First quarter unadjusted EPS was $0.48. Adjusted EPS for the quarter was $0.49, $0.01 higher than the midpoint of our guidance range. Adjusted items are tied to costs related to the restart of our existing titanium melt facility.
It's part of the incremental 35% volume from existing assets Kim just spoke about. We ended Q1 with total liquidity of approximately $750 million. This reflects the Q1 $50 million voluntary contribution to the pension plan and $10 million of share buybacks. It also includes $30 million in CapEx accrued at the close of 2022, but paid in Q1 2023. Managed working capital this quarter increased $347 million. That included $146 million in accounts receivable due to a late quarter surge in sales. Those receivables are being collected in Q2. Inventory increased approximately $90 million in Q1 due to investing in inventory to support ramping sales. We ended 2022 with managed working capital at 30% of sales.
We expect to return to those levels or even lower by the end of the year. Q1 CapEx was $60 million. As I mentioned earlier, roughly half of that spend was related to the payment of CapEx was accrued at the end of 2022. That's when equipment deliveries were delayed due to supply chain challenges. Overall, we remain on track with our disciplined capital investment plan. In the first quarter, we completed the last $10 million of stock purchases under our previously authorized $150 million buyback. We're announcing today a new $75 million buyback program. As I've said, we are committed to maintaining a balanced capital deployment strategy, funding growth while also de-levering and returning capital to shareholders. This authorization is consistent with that goal.
Add in Q1's $50 million contribution to the pension plan, we're deploying $125 million of cash to de-levering and return of capital to shareholders. This is consistent with our 2023 free cash flow guidance range of $125 million-$175 million. Let's talk about Q2 and full year guidance. For the second quarter, we expect adjusted EPS to be in the range of $0.53-$0.59. The midpoint of the range, $0.56, represents a 14% sequential increase from the $0.49 adjusted EPS delivered in Q1. The guidance reflects continued strength in our core A&D markets and energy. It also reflects our expectation that sales in our Asian precision rolled strip business will continue to be pressured due to China's economic conditions. For the full year, we are increasing our adjusted EPS guidance.
Our previous 2023 guidance range was $2.00-$2.30 per share. Even though it's early in the year, we have the confidence to raise the bottom end of our range by $0.10. The new adjusted EPS range is $2.10-$2.30 per share. This increases the midpoint of the range by $0.05 to a new midpoint of $2.20 per share. As the year progresses, we will continue to evaluate guidance, updating when appropriate. I want to reaffirm several other key items we guided in our prior earnings call. First, we continue to anticipate 2023 full year free cash flow will be in the range of $125 million-$175 million.
Second, 2023 CapEx will be in the range of $200 million-$240 million, including the organic growth investments that Kim noted. Third, we made the planned $50 million contribution to our pension plans in Q1, completing our expected contributions for the year. In short, we are on track and confident we'll deliver on our 2023 commitments. With that, I'll turn the call back over to Bob.
Thanks, Don. What should we take away from the call today? That ATI is in full growth mode. Remember, 2023 is really the first full year of the commercial aero recovery. We expect top-line growth in our core markets to continue for years to come. We've effectively built a resilient supply chain to ensure a steady flow of materials. We're delivering reliably to our customers, and we're living up to our commitments to add value every day. We're not saying it's easy. You heard Kim talk about how we're fighting for every inch. We put ourselves in a great position, consciously, deliberately, actively choosing each step. This is a big year for us. We have the right product mix. We're commanding the right price. We're hitting our stride with production. The bottom line to all of that, we are performing.
There's one more P that gives us all confidence: our people. We have the right people in the right roles, and their productivity is climbing. As the bar goes higher, our team strives to achieve more. It's what makes us proven to perform. Operator, we're ready for the first question.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. To withdraw your question, press star followed by two, and please also remember to unmute your microphone when it's your turn to speak. We have our first question from Richard Safran from Seaport Research Partners. Richard, your line is now open. Please go ahead.
Yeah. Good morning, everybody. One of your competitors was talking about titanium share gains this week from VSMPO. Since you made a bunch of comments about titanium in your opening remarks
I just wanted to know if you could update us on titanium share gains. In that, could you also discuss capacity utilization a bit more? I'm just wondering what your remarks say about how close you are to being sold out on capacity.
Great. Good morning, Rich. This is Bob. I'll take the first part of that question and then hand it off to Kim Fields to talk about the capacity issues, that are much discussed around the market today. You know VSMPO pretty well, right? Sponge to melt, to mill products to forgings. I think the key for us is mill products and some of the bar and plate products that are a subset of that. We're seeing growth to support aerostructures, engines, and actually in the medical space as well. I think the easiest way to summarize the share issues with VSMPO is more than our fair share, and the melt and our operating performance have been key enablers to that.
We were focusing on programs with sustained growth potential, and we're focusing on new positions that could come along with that share gain at the same time. I would say in a nutshell, more than our fair share is where we ended up. You know, the demand's here now. The growth is on the horizon, but she who has the melt will get the order for the next couple of years. We feel really well positioned for that. I'd say on the share gains, hopefully that answers your question. I'll turn it over to Kim to talk a little bit about the capacity situation.
All right. Yeah. Rich, you know, we are full, and I'd say all of our operations are pretty full, but as you heard in my remarks, we don't stop there, and we are continuing to set new records across the processes and the businesses. For example, I mentioned titanium is up just in the first quarter, 10%-15%. Our melt assets are operating at higher levels, and we're continuing to challenge nameplate capacity. We are really focused on maximizing our assets and challenging those limits, and we are continuing to get more. You know, the bottom line, as I think about where we're at, when we take an order, you know, we deliver on that commitment. Our customers acknowledge this. They've been sharing it with us.
It's become even more apparent in this marketplace today, and we get recognized by getting more opportunities and more business and orders from them. As always, as everyone else, we're very full, and we're working to continue to exceed that. The team's doing a fantastic job. I do think there's upside, and there's some additional capacity coming with some assets in Oregon coming online as well.
Okay. Thanks for that. Don, next one may be for you. Because I've asked you this before, if you don't want to answer again, I'll go ahead and go to something else. Boeing and Airbus, you know, have said a lot, a lot of changes since you gave out your 2025 outlook. I just wanted to know if you'd like to give an update on the numbers you've been out there, given the changes that we've seen.
Sure. I'll attempt to add some more information to the 2025 targets. As you think about it, Rich, last quarter, we upped the high end of our expected potential growth rate through 2025 by about $150 million of revenue. That takes our targeted revenue to $4.4 billion at the high end of the growth rate. I think, you know, what I would say is, number one, we're very confident in our ability to achieve that, those growth rates, you know, toward that high end of our range.
I think also what I would say is, you know, Kim shared today some of the productivity opportunities that we're seeing within the business, and while she was modest about the inch by inch, you know, we certainly see meaningful opportunity to create value through those kinds of activities. You know, the punchline is, I would say, you know, I think even at the high end of the range, we're very confident with our ability to hit and we do see some, you know, potential upside beyond that. You know, at the right time, we'll share updated 2025 targets and also talk past 2025. No surprise to you or probably anybody on the phone, we do not expect our growth to stop after 2025. We see a lot of growth opportunity beyond that.
That's what I would say at this point in terms of 2025. It's looking good. We're very confident. As you take that, take the other goals that we shared for 2025, the EBITDA margin guidance of 18%-20%, again, our confidence level is very, very strong when it comes to our ability to generate, you know, to the mid or high end of that range, which creates a really interesting value proposition for investors when you think about a business that, you know, in 2022 delivered $550 million of EBITDA. You do the math to 2025 and, you know, it's simple math based upon the targets that we gave. You see a business that should be generating $850 million or more of EBITDA.
I think that speaks well to the opportunities. That cascades, by the way, to cash generation. We are still very confident and focused on our cash conversion of 90% or better, and we're on track to achieve those targets. Hopefully that's a bit helpful to you, and answered your question.
Thank you.
Our next question comes from Phil Gibbs from KeyBanc. Phil, your line's now open. Please go ahead.
Hey, good morning.
Morning, Phil.
Any, any texture you could provide on the increase in earnings expectations in the second quarter versus the first quarter?
you know, maybe you talked about a $0.07-ish type pickup sequentially. Is that volume? Is that mix? Does it include both segments? anything you could, help us on there?
Yeah. This is Don. I'll take a run at answering that. First of all, yep, we are expecting some sequential growth into Q2. There's a couple of drivers. One, we're expecting continued top-line growth in the business and mix improvement as we've seen that mix continue to move in the direction we want it to go. I think what you should also expect to see is if you think about the Q1 earnings, we did carry over from the end of 2022 some elevated costs that were, you know, carried over in the form of inventory. You know, you think about the in SM, for example. Not just SM, the broader business, we had about 1,000 employees.
With those new employees, as they were learning their new roles, they, of course, were not as efficient, you know, through their process as they are today. That increased costs. Those costs ended up getting carried through in inventory. That inventory was largely worked through in Q1. I would expect to see a benefit from that, from lower costs, to the tune of probably, I don't know, maybe $5 million-$6 million as you move from Q1 to Q2. That'll be a tailwind as well. Those are a couple things that come to mind.
Is this going to touch both segments in terms of improvement in both of them?
Yeah. I think you'll see improvement...
largely just the narrow. Yeah.
No, I think you'll see it in both businesses, but maybe it makes sense to just kind of take a step back and not so much focus on Q2, but, you know, hey, what does that full year look like? For full year, to give you some context, what we would expect is that the EBITDA margins for the overall business, it would be growing to, you know, to probably something in the range of 14% on a consolidated for the full year period. That means that you're seeing growth in the HPMC margins. You know, think in terms of they should be north of 19% certainly for the full year. Then we would expect, of course, you know, increases with the AA&S side as well.
Just as a follow-up, the mentioned some startup costs or for the restart of the Albany, Oregon titanium upstream operations. Can you take us through how that cadence moves through the year in terms of them restarting, kind of ramping? You know, when are they contributing? You know, how meaningful could it be? That sort of thing. I assume you didn't really see much in Q1. Thank you.
Well, why don't I touch on kind of how we're thinking about the costs and the contributions, and I'll open it up also to Kim, see if she wants to share anything from an operational standpoint. From a cost standpoint, from a restart, you know, the costs have been relatively modest. This is one of the reasons why you love doing projects like this, because the cost of a restart, for example, can be very modest relative to the cost of putting in new assets. Also, the speed at which you can bring those assets into position to produce earnings and cash can be that much faster.
I think, you know, as far as startup costs, we saw, between $1 million and $2 million of restart costs in Q1. I would expect it to be, you know, in that range, may possibly, mostly higher than that, but you're talking about, you know, maybe instead of $1 million to $2 million, $2 million to $3 million, just as a placeholder in your model. Then, you know, as that production is ramping up, you know, we've talked a bit about expecting to see the run rate benefits of that new production really in 2024. We'll see, you know, kind of stealing some of Kim's likely script here, but we'll, you know, we're expecting it to be to full run rate production, you know, at the beginning of this, of the second half.
That production is gonna start working through our business, resulting in revenues and earnings, you know, as it's converted into finished goods. We would expect from an earnings standpoint, you know, off of that restart, probably maybe $0.01-$0.02 of earnings in a Q3 timeframe and then a bit more in Q4.
When you get to a full run rate kind of scenario, what I would say is, you know, we'd expect 2024 revenues off of this 35% increase in production, which is, by the way, folks, not just the 34th Avenue plant, but, you know, let's just draw a loop around all of that and say, okay, at full run rate, what would we expect the financial effect from this incremental capacity to be? What I would say is think in terms of at a $150 million-$125 million top line and then assume a probably a 30-ish% incremental margin off that.
What you can tell is, you know, these very modest investments that we're making, restarting these assets and taking advantage of the assets that are sitting idled or underutilized, you know, the returns on those assets and those investments are just incredible.
You know, we've shared before that we're expecting to spend less than $10 million to restart 34 THAP, for example. I mean, you're not It's hard to find a better returning kind of investment than that. I don't know if I left anything for you to contribute.
That's all right, Don. We'll turn you into an ops leader yet.
Okay.
Just to add, I think Don covered most of it. You know, just to give a little color, the crews are in place, the assets are up and running. To your point, we didn't see a lot of that flow through in the first quarter. You will start to see that come through given our flow times through our processes, late Q3 into Q4, you'll see the majority. The one add that I would add to this is, you know, this is a seller's market, as we are bringing more capacity online, both through our incremental efforts around productivity and yield improvements, as well as the new assets or the idled assets in Oregon coming online. You know, we're able to get transactional selling prices.
Customers, you know, as they're seeing maybe others in the marketplace that are missing, delivery dates and so forth, we are being able to pick up that transactional business. It is gonna be giving us a lift as well as those pounds start to come through, and you see them in our statements.
Thank you.
Thanks, Phil.
Our next question comes from Seth Seifman from JPMorgan. Seth, your line's now open. Please go ahead.
Great. Thanks very much, and, good morning, and, good results.
Good morning.
Wanted to ask, on the jet engine revenues, we've seen a little bit of a plateau here, and, you know, the airframe revenues continue to grow. Obviously, there's a lot of jet engine growth out in front of us given production increases and the aftermarket. In terms of the plateau in revenue that we've seen, is that more of a supply side issue at this point? Is it more that the customers have said, "Okay, you know, we have what we need for this round of increases, and then we'll, you know, be starting the next one soon." You know, how do we think about when that trajectory kind of moves forward? Likewise, on the airframe side, is that primarily wide body driven?
you know, do you have a sense that that is kind of 7 87 driven?
All right. We'll try to unpack that a little bit. you know, I'll take the first part and then hand it off to Kim to talk a little bit about it. I think in Q1, we had a very back-end loaded Q1 in terms of shipments, which is what Don talked about on the receivable side. You said, "Well, how can that happen?" Remember when those orders were booked, right? They were coming out of COVID early 2022, the lead times really started to grow. We were not willing to take orders that we didn't have confidence that we could deliver. A lot of it got loaded, you know, late. I don't think Q1 is the greatest indicator of where the market is today.
If we were able to disclose what March was, you'd say, "Holy smokes." That's why Bob said in his earnings call, quarter-over-quarter-over-quarter growth in jet engine. It's just a timing issue in Q1, and we feel confident. That's why we invited Kim to join us today because a lot of the work that they're doing took us to catch up in March, and now will be in place, you know, going forward. You asked a couple specific questions. I'll turn it over to Kim and let her add some extra color on wide bodies, airframes, all the other stuff that he had in that question.
Sure, sure. I'd say, you know, our supply chain, you know, just to mention on that piece, it's more stable than it was last year. I'd say we're not immune to challenges there, but, you know, we're just been focused on creative solutions. You know, like industrial gases, which were problematic, we were able to put in larger tanks and hydrogen generator backups and, in some cases, second and third sources. I think we're managing the supply chain. You know, what I am seeing, though, that continues to be tight in creating some bottlenecks is around forging billet. Mainly in the nickel alloy powder billets and specialty steel billets, and there's a widely reported Q4 Ti melt shop explosion.
You know, where we don't provide and aren't vertically integrated on our billet supply, we are seeing some delays due to billets. You know, a lot of these are direct buys, so we are working with our customers to identify opportunities where applicable, providing it ourselves or looking for other sources. You know, rest assured this isn't lost on our OEMs. They recognize the issue as well and are working to get that material. As far as the airframe, you know, we can talk a little bit about that. This is not necessarily driven by wide body. We are starting to see those orders come in, but I would say this is more the single aisle demand that you're seeing.
I believe we've talked about some of the contracts we've gotten in the past, and we're seeing substantial growth against those contracts, especially as everybody starts to get full and orders are moving to us on the A&D side in particular on the airframe. That answers. I'm trying to remember if I answered all of your questions in there.
Yeah, yeah. It was an overloaded question, so, but I got all of it. Yeah, since it was so overloaded, I'll just, for a follow-up, maybe just a really easy quick one. When we think about the CapEx trajectory through the year here, 'cause I know Q, you know, Q4 last year, some of that kind of slipped into Q1 here. You know, how do we think about that sort of investment trajectory for the rest of the year?
You know, what I would do, you obviously saw our guidance.
At $200 million-$240 million. I would expect it to be, you know, probably build throughout the year, just if you're looking for a pattern to model. You know, I'll tell you I don't have in my projections any sort of anomalies from quarter to quarter, but, you know, sometimes those things do happen. Doesn't take much with a big invoice to, you know, shift $20 million from one quarter to another. For modeling purposes, I would just assume it's relatively straight.
All right. Okay. Great. Thanks very much.
Our next question comes from David Strauss from Barclays. David, your line is now open. Please go ahead.
Thank you. Don, could you help us? I mean, you have this EBITDA margin guidance out there for 25, revenue guidance. I mean, we can kind of compute the implied incrementals. They seem really high. If you could maybe help us think about, you know, the right level of incremental EBITDA margins by business going forward. Obviously, you have pension and some of this one-time stuff that was in last year's numbers, but what should we target as kind of normalized incremental EBITDA margins by business?
You know, first, before I get into metrics, you know, some color as to why you would be seeing what appears to be a strong building on the incrementals, that's because there is a strong build on the incrementals, in part because of the mix change that's happening. When you think about where we're getting revenue growth, we're getting revenue growth, you know, largely in latest generation jet engine sales, for example, some of our richer margin parts of our business. That's beneficial to us. I think also what's incremental, what's affecting the incrementals, You're seeing it, is the fact that as we continue to squeeze more production out of our asset base, that means we're getting better absorption. That better absorption means improved margins.
At the same time as we're doing that, we're also attacking cost structures and finding more efficiencies within the business. All of that comes together for, you know, probably some, you know, some higher numbers that you look at and say, "Hey, could that be right?" Really, when you look at the underlying incrementals, are right in line with what we've talked about in the past, which is I expect incrementals in the business to be north of 30%. I know that's not I'm not saying 37.4 or, you know, 33.68, but the reality is it does change from period to period.
you know, I, I doubt that, you know, the numbers that you're seeing in your model that require us to get to those 18%-20% EBITDA margins and the growth, you know, they're, they probably are very sensible when you consider all those elements. Is that helpful to you?
Yeah. Yeah. I mean, I'm coming up with a number well above 30 that's implied to, you know, if I take the $4.4 billion in revenue in 2025 versus your run rate today and, you know, the implied EBITDA based on your margin, I'm coming up with a number way higher than 30. you know.
Yeah
... we can talk about it later. That's fine.
Here is one thing I would add that you might find helpful as you're thinking about that. As you're looking at, you're doing the absolute right math, right? You're on the calculation of your incremental. When there's a mix change that's happening and we're shedding lower profitability sales and we're redeploying that material to higher value opportunities, it will increase what the apparent incremental incremental margin, right? Because every dollar you're selling is also adding to the bottom line. It will cause what appears to be kind of a distortion in your incrementals, but it's because that mix change is happening. Then also we do expect as we evolve into 2025, we do see where that richer mix is also bringing some better pricing from period to period.
We don't highlight what we're getting on pricing. We don't call that out like some folks maybe may do. You know, that's part of the element too, as we get deeper into these latest generation profiles.
Okay. That's, that's helpful. Then, I think I've asked this before, but I'll come back to it. I mean, the 90% free cash flow conversion that you're targeting, why wouldn't it be better than that? I mean, are you assuming that, you know, I thought you've been talking about CapEx coming down in the, in the out years a lot closer to D&A. Are you just assuming a, you know, pension contribution in those numbers? Why wouldn't it be closer to 100%?
I just like the other 2025 targets that we have out, you can assume that they're on the conservative side. I can tell you internally, we are targeting better than 90% when it comes to cash conversion. Another thing that's important to us is it's not about a strong cash conversion for a year, it's about consistent strong cash conversion. You know, we put out the 90% target in 2025, you know, rest assured that's not, that's not the number that we consider our ceiling, and it's not a one-timer from our standpoint.
All right. Thanks very much.
All right. Thank you.
As a reminder, ladies and gentlemen, to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Our next question comes from Gautam Khanna from Cowen. Gautam, your line is now open. Please go ahead.
Hey, good morning, guys.
Hey, good morning, Gautam.
Good morning.
You covered a lot of ground. I wanted to ask on your comment on pricing. Just at one point, I thought the urgency of some of the potential titanium customers who want to move away from VSMPO, I thought their price sensitivity was a little bit too high. I'm just curious, what has happened over the last, you know, quarter in terms of their urgency and their willingness to sign up at what should be, you know, more reasonable returns for you guys as you fill that void for them?
Thanks for that question, Gautam. I'll take a little bit of that, and Kim can add some color at the back end. I think we're actually at an inflection point here, kind of in the second quarter around the worries that the big OEMs have, right? The first priority really for the last 12 months was realignment of their global supply chains. A lot of the contracts were not fixed volume, they were shares or they were share ranges. A lot of the early work was within that range. The guiding priority was, "I got to displace, you know, upwards of 30%-40% of my supply chain as fast as I can." That was really starting to take effect in 2023. I think you'll see the full benefit because of inventory flow for people like us in 2024, right?
You know, now, once they've realigned the supply chains, I'll turn it over to Kim, and she can talk about kind of how they're looking at growth and kind of where they go from here, you know, as they start to really address the ramp.
Yeah, I think, you know, as Bob just mentioned, you know, early in this, in the reset on the supply chain, our customers were going from just in time to just in case. There was this rush. As you've seen, our backlogs have grown. We're at a record $3.3 billion now. I think it's not just in the aerospace industry. We are seeing demand across all four of our businesses in all of the markets, defense, medical, electronic, as Bob talked about.
I think there is a reset that's happened. Now they're looking at strategic inventories, especially as the wide body starts to gain momentum. They're placing much longer strategic positions with companies. Thinking about, you know, between now and 2030, 2035, how do we ensure that we've got the supply that we need, you know, as we look at the build rates that we're anticipating.
Yeah. Kim and I have been a part of numerous customer conversations. I would say quality and reliability are really going to be the enablers for having the supply chain work for them going forward. The shift from, you know, just in case to, I got to have it, right? To your point, Gautam, I think Kim said earlier, it's a seller's market. Almost, I would say every renewal or every extension or everything is really reflecting appropriate pricing for the long term, right? That's, that's been helpful. It's a great time to renew some contracts for sure from our perspective.
Thank you. As a follow-up, you mentioned in the release, jet engine sales were up approximately 2% sequentially. I think you mentioned that some of those were positioned later they were melted later in the cycle, and that's why you had a back-end load to the deliveries in the first quarter. Could you talk a little bit about what is the potential capacity constraint to doing, you know, better than a 2%, 3%, 4% sequential kind of level of improvement in jet engine output? Like, what is, what is possible this year as you look at the jet engine capacity you guys have?
Yeah. The first thing I would say is, like, we always answer the question the same way. We produce to orders not to build rates, right? It, it's really critical on how we take those orders. I'll let Kim talk a little bit about the work that's going on to increase the capacity.
Yeah. I think, you know, I think we've mentioned a couple of them, and we are seeing that ramp of our production rate going. As I mentioned, titanium, for example, was up 15% to 20% in the quarter versus Q4. I anticipate, you know, you could see another 10% to 15% of our assets. You know, a couple different things. You asked about specific bottlenecks. One, our employees' experience are increasing. We're going up the learning curve. We are doing some cross-training, so we're having the ability to move labor to where we need it to help produce. We're streamlining turnarounds. You know, we're working, I think, like a pit crew. They're coming in, we're getting the machine and equipment back up and running as fast as possible. You're reducing unplanned downtime. You know, we are looking at our equipment.
We've talked about electrical upgrades that we're doing, as well as changing out some of the equipment in the most harsh conditions in the melting so that we get longevity. We're doing all those things on our current assets. Obviously, as we've talked about, we are bringing on idled assets, in Oregon that are coming on ahead of schedule. Right now, the crews are in place and the equipment's running, and so that's continuing to flow through. Step one for us is focus on melt capacity, and we're seeing substantial gains there. That will flow through, the downstream processing.
Activities and businesses that we've got, then you'll start to see that coming out. I would anticipate third quarter into fourth quarter. I think.
Thank you. That's very helpful.
Does that help give you some color?
Yeah. Absolutely. No, that's helpful. Maybe one for Don, you mentioned the $2 million-$3 million sequential pressure at High Performance Metals. I was curious if you could just talk about all the sequential headwinds that you guys incurred, whether it be retirement benefit expense at that segment or any other items, just so we kind of calibrate properly.
Sure. A couple things. I talked about the carryovers of some in-inefficiencies into inventory, and we saw a lot of that release. You know, and not just related to the HPMC segment, but also AAS. We did see some modest metal headwinds. While we don't highlight metal, 'cause it, it isn't a headline for us, as you're digging in, of course you need to consider it. So for both of the segments, we did see modest headwinds in that regard. You know, I guess I'm not surprised when you think about some of our primary inputs, nickel being one of them. We saw some really robust increases in nickel prices in 2022. While they're still at a robust level, they're at a lower robust level.
We saw them pull back modestly in Q1, which has, you know, a modest impact to our business from a headwind standpoint. Other than that, you know, we've been pretty open about the pension. We've been pretty open about year-over-year, you know, changes around things like COVID credits and things like that.
Okay. Thank you. RBE sequentially, though, how much was that up at HPMC?
I'm sorry. Say that again, please.
Pension. sequential-
Pension.
impact at HPMC. Yeah.
Let me give you... The pension impact year-over-year, let me give the impact. You think about AAS, the year-over-year impact was $7 million in the quarter. For HPMC, it was between $1 million and $2 million.
Thank you, guys.
You bet.
Yeah.
We currently have no further questions, so I would like to hand the call back to Tom Wright for final remarks. Tom, please go ahead.
Thank you for joining us today. This concludes ATI's first quarter 2023 earnings call. The replay will be available on our website at atimaterials.com.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.