ATI, Inc. (NYSE:ATI) Q2 2022 Earnings Conference Call August 4, 2022 10:30 AM ET Company Participants Scott Minder - VP, Treasurer & IR Bob Wetherbee - Board Chair, President & CEO Don Newman - EVP & CFO Conference Call Participants Richard Safran - Seaport Research Partners Phil Gibbs - KeyBanc Seth Seifman - JPMorgan Gautam Khanna - Cowen David Strauss - Barclays Paretosh Misra - Berenberg Josh Sullivan - The Benchmark Company Operator Welcome to the ATI Q2 2022 Earnings Call. My name is Ruby, and I'll be ...

PART I [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents ATI Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Cash Flows, and accompanying notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) ATI's total assets decreased to **$4.23 billion** as of June 30, 2022, driven by reduced cash, while equity increased to **$893.9 million** | Balance Sheet Items (In millions) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $2,311.7 | $2,306.7 | | Cash and cash equivalents | $274.0 | $687.7 | | Inventories, net | $1,270.9 | $1,046.3 | | **Total Assets** | **$4,229.4** | **$4,285.2** | | **Total Current Liabilities** | $799.9 | $856.4 | | Long-term debt | $1,703.3 | $1,711.6 | | **Total Liabilities** | **$3,335.5** | **$3,452.5** | | **Total Equity** | **$893.9** | **$832.7** | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Q2 2022 sales increased **55.7%** to **$959.5 million**, but a **$115.9 million** loss on asset sales led to a **$38.0 million** net loss | Operating Results (In millions, except EPS) | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Sales | $959.5 | $616.2 | $1,793.6 | $1,308.7 | | Gross Profit | $175.3 | $42.7 | $344.7 | $128.5 | | Operating Income (Loss) | $(11.6) | $(11.3) | $65.4 | $20.5 | | Net Loss Attributable to ATI | $(38.0) | $(49.2) | $(7.1) | $(57.1) | | Diluted Net Loss per Share | $(0.31) | $(0.39) | $(0.06) | $(0.45) | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash used in operating activities significantly increased to **$222.4 million** for the six months ended June 30, 2022, resulting in a **$413.7 million** decrease in cash | Cash Flow Summary (In millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash used in operating activities | $(222.4) | $(102.6) | | Cash used in investing activities | $(55.7) | $(58.8) | | Cash used in financing activities | $(135.6) | $(12.0) | | **Decrease in cash and cash equivalents** | **$(413.7)** | **$(173.4)** | | Cash and cash equivalents at end of period | $274.0 | $472.5 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed notes explain revenue by segment, the **$141.0 million** loss from the Sheffield divestiture, joint venture benefits, debt conversions, and share repurchases - Total revenue for Q2 2022 was **$959.5 million**, with the HPMC segment contributing **$396.1 million** and the AA&S segment contributing **$563.4 million**. Aerospace & Defense remains the largest market, accounting for **$436.4 million** in sales[25](index=25&type=chunk) - The company's order backlog increased to **$2.6 billion** at June 30, 2022, up from **$1.6 billion** at June 30, 2021[31](index=31&type=chunk) - A total loss of **$141.0 million** was recognized on the sale of the Sheffield, UK operations, which included a **$55.6 million** loss related to the UK defined benefit pension plan and **$20.0 million** of cumulative translation adjustment losses[41](index=41&type=chunk) - The A&T Stainless joint venture recognized approximately **$19.7 million** in income from a Section 232 tariff refund settlement, of which ATI's share was **$9.9 million**[47](index=47&type=chunk) - During Q2 2022, **$82.5 million** of the 2022 Convertible Senior Notes were converted into **5.7 million** shares of ATI common stock[64](index=64&type=chunk) - In the first six months of 2022, ATI repurchased **3.5 million** shares of its common stock for **$89.9 million** under its authorized repurchase program[103](index=103&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 2022 sales growth driven by market recovery, segment performance, liquidity, and critical accounting policies including asset impairment and deferred tax assets [Overview](index=30&type=section&id=MD%26A%20Overview) Q2 2022 sales increased **56%** to **$959.5 million** with an **18.3%** gross margin, despite a **$115.9 million** loss on the Sheffield divestiture | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Sales | $959.5M | $616.2M | | Gross Profit | $175.3M | $42.7M | | Gross Margin | 18.3% | 6.9% | | Net Loss Attributable to ATI | $(38.0)M | $(49.2)M | | Adjusted EBITDA | $143.1M | $53.7M | - Q2 2022 results include a **$115.9 million** loss on the sale of the Sheffield, UK operations, while Q2 2021 results included **$40.3 million** of costs related to a labor strike[122](index=122&type=chunk)[123](index=123&type=chunk) [Business Segment Results](index=34&type=section&id=Business%20Segment%20Results) Both HPMC and AA&S segments achieved strong Q2 2022 growth, with HPMC sales up **32%** and AA&S sales up **79%**, driven by market recovery and strategic benefits | Segment Performance (Q2 2022 vs Q2 2021) | Sales | % Change | EBITDA | EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | | **HPMC** | $396.1M | +32% | $60.3M | 15.2% | | **AA&S** | $563.4M | +79% | $104.6M | 18.6% | - HPMC's growth was led by a **90%** increase in commercial jet engine sales, with aerospace and defense markets comprising **80%** of the segment's total sales[140](index=140&type=chunk) - AA&S performance was boosted by a stronger product mix following the exit from standard stainless products, improved operating performance, and a **$9.9 million** benefit from the A&T Stainless joint venture's settlement of Section 232 tariff claims[151](index=151&type=chunk) [Liquidity and Financial Condition](index=39&type=section&id=Liquidity%20and%20Financial%20Condition) ATI maintains strong liquidity with **$274 million** cash and **$456 million** ABL availability, improving its Net Debt to Adjusted EBITDA ratio to **3.34x** - Total liquidity includes **$274 million** of cash and cash equivalents and approximately **$456 million** available under the ABL facility as of June 30, 2022[162](index=162&type=chunk) - In Q1 2022, the company repurchased **3.5 million** shares for **$89.9 million** under its **$150 million** stock repurchase program[164](index=164&type=chunk) | Leverage Ratio | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Net Debt to Adjusted EBITDA | 3.34x | 4.04x | [Critical Accounting Policies](index=41&type=section&id=Critical%20Accounting%20Policies) Key accounting policies include asset impairment, with a **$22.3 million** charge for Sheffield operations, and income taxes, maintaining a valuation allowance on U.S. deferred tax assets - A **$22.3 million** long-lived asset impairment charge was recorded in Q1 2022 related to the Sheffield, UK operations, which were classified as held for sale[173](index=173&type=chunk) - ATI continues to maintain valuation allowances on its U.S. federal and state deferred tax assets due to a three-year cumulative loss from U.S. operations, which limits the ability to realize these assets[177](index=177&type=chunk) - A potential complete withdrawal from the Steelworkers Western Independent Shops Pension Plan (WISPP) could result in a liability estimated at approximately **$35 million**, payable over **20 years**[181](index=181&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) ATI manages market risks through derivative instruments, hedging interest rates with a **$50 million** swap, energy prices, and raw material volatility, particularly for nickel - The company has a **$50 million** floating-for-fixed interest rate swap, converting a portion of its Term Loan to a **4.21%** fixed rate, maturing in June 2024[188](index=188&type=chunk) - As of June 30, 2022, ATI has hedged approximately **75%** of its forecasted domestic natural gas requirements for the remainder of 2022, **50%** for 2023, and **15%** for 2024[190](index=190&type=chunk) - The company has financial hedging arrangements for approximately **9 million pounds** of nickel through 2024, representing about **15%** of a single year's estimated purchase requirements, primarily at customer request[193](index=193&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[195](index=195&type=chunk) - There were no material changes to the company's internal control over financial reporting during the second quarter of 2022[195](index=195&type=chunk) PART II [Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) ATI is involved in legal proceedings, notably a lawsuit with US Magnesium, LLC, for which an **$8.6 million** litigation reserve was recorded in Q1 2022 - ATI Titanium LLC is in a lawsuit with US Magnesium, LLC, with a trial date set for October 11, 2022[197](index=197&type=chunk)[198](index=198&type=chunk) - An **$8.6 million** litigation reserve was recorded in Q1 2022 for the US Magnesium matter following a failed mediation[198](index=198&type=chunk) [Risk Factors](index=47&type=page&id=Item%201A.%20Risk%20Factors) Key risks include the Russia-Ukraine conflict impacting raw material supply and prices, and the COVID-19 pandemic affecting end-market demand and operations - The Russia-Ukraine conflict creates risks of significant volatility in commodity prices and potential disruption to the supply of raw materials sourced from Russia, such as nickel and chromium[200](index=200&type=chunk)[201](index=201&type=chunk) - In response to the conflict, ATI announced the termination of its Uniti, LLC joint venture with the Russian-based company VSMPO-AVISMA[201](index=201&type=chunk) - The COVID-19 pandemic continues to impact end markets, with commercial aerospace demand still recovering. Operational risks persist, as demonstrated by the near-term impact of lockdowns in China on the STAL joint venture[204](index=204&type=chunk)[206](index=206&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details Q2 2022 stock repurchases of **21,255** shares at an average price of **$27.13**, primarily for tax satisfaction on share-based compensation | Period (2022) | Total Shares Purchased | Average Price Paid | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 1-30 | 7,866 | $26.87 | $60,076,705 | | May 1-31 | 2,639 | $26.39 | $60,076,705 | | June 1-30 | 10,750 | $27.50 | $60,076,705 | | **Total Q2** | **21,255** | **$27.13** | **$60,076,705** | - The shares repurchased during the quarter were from employees to satisfy taxes on share-based compensation and were not part of the publicly announced repurchase plan[207](index=207&type=chunk)[208](index=208&type=chunk) [Exhibits](index=49&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with the Form 10-Q, including corporate governance documents, the 2022 Incentive Plan, and required CEO/CFO certifications - Filed exhibits include CEO and CFO certifications (Rule 13a-14(a) and Section 1350), corporate governance documents, and Inline XBRL data files[210](index=210&type=chunk)

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