ATI Inc. 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome to ATI's Third Quarter 2026 Earnings Call.

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 beginning 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. They 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 presentation. After our prepared remarks, we'll open the line for questions. Now, I'll turn the call over to Kim.

Thank you, Rob. Good morning, everyone, and thank you for joining us. ATI delivered another strong quarter, exceeding the high end of our adjusted EBITDA guidance by $13 million. Today, we are raising our adjusted EBITDA guidance by $35 million for the year, which includes an improved fourth-quarter outlook. This is the third increase this year following last quarter's $125 million increase. Our continued outperformance reflects the growing contribution of the structural improvements we've made across the business. Demand remains strong across all of our key end markets, with sales growth both year-over-year and sequentially this quarter. Slide 4 highlights our key results. Revenue increased 26% year-over-year to $1.4 billion, up 13% sequentially. Within that increase, jet engine revenue grew 39% year-over-year and 19% sequentially, driven by higher production of next-generation engines and continued demand for our differentiated products.

Adjusted EBITDA was $328 million, up 46% year-over-year. This was our highest quarterly result since 2007. Adjusted EBITDA margin expanded 300 basis points to 23%. Adjusted EPS increased 72% to $1.46. Backlog was near an all-time record at $4.3 billion, up 20% from a year ago. Combined with extended lead times for our most differentiated products, backlog provides visibility and confidence in our outlook. Adjusted free cash flow was $80 million in the quarter, bringing year-to-date cash flow to $223 million, up $73 million or 49% from the same period last year. For the second quarter in a row, AA&S delivered record performance with EBITDA margin of 25.8%, up 850 basis points from a year ago. This durable performance reflects a full quarter of improved contracts and a richer A&D mix.

The segment's jet engine sales increased 45% sequentially, reflecting the benefit of ATI's interconnected jet engine flow path. AA&S's performance reflects the transformation of the business. We exited lower-value commodity stainless steel products and applied 80-20 to focus resources on higher-value Aerospace & Defense and specialty energy products. Aerospace & Defense now accounts for approximately 45% of AA&S sales, compared with 18% in 2021. Along with long-term agreements and improved pricing, these changes have created a more durable earnings profile and position AA&S for profitable growth. Turning to slide 5. HPMC sales grew approximately 20% year-over-year, supported by strong demand for nickel and titanium. Third quarter segment margin was 23.2%. At the beginning of this year, HPMC began ramping production of a new alloy following a contract win. This is the sixth of seven advanced alloys used in the hot section of a jet engine.

We qualified the alloy and moved it into production in just nine months. A strong example of the technical expertise that helps us win business and expand our share. ATI is now one of only two producers worldwide making this alloy. The additional cost from the production ramp reduced HPMC's third-quarter margin by approximately 200 basis points versus our plan. We have made meaningful progress through the ramp, and we expect the remaining impact to be behind us by year-end. This is a near-term cost of bringing a valuable new product into production. In return, this alloy expands our content on next-generation engines and positions HPMC for meaningful growth and improved profitability over time. Now on slide 6. Based on our year-to-date performance and strong backlog, we are raising our full-year adjusted EBITDA and adjusted EPS outlook.

We now expect full-year adjusted EBITDA of $1.19 billion to $1.2 billion, with a midpoint of $1,195,000,000. That is a $35 million increase from our prior outlook and represents 39% full-year adjusted EBITDA growth from 2025. The higher outlook reflects continued strength in AA&S and stronger fourth-quarter profit expectations in both segments. AA&S is benefiting from durable contract pricing and a stronger Aerospace & Defense mix. We are also seeing improved pricing for differentiated hafnium and zirconium products. HPMC is expected to improve sequentially as production efficiencies increase and the new alloys production process matures. We continue to expect full-year consolidated adjusted EBITDA margins in the low 20% range and consolidated incremental margins of approximately 50%. The fourth quarter will be our strongest quarter of 2026 for sales and profit. Our outlook reflects committed customer schedules, contracted pricing, and planned shipment timing. Turning to slide 7. elevATIon is our operating model for converting strong demand, improved commercial terms, and targeted investments into higher earnings, margins, and cash flow.

It helps us increase output from the assets we already own and apply expertise across ATI. One recent example is a project to recover and reuse a critical raw material that has become increasingly difficult to source. Historically, this material could not be reclaimed and reused. Our team brought together ATI's melting and manufacturing capabilities, metallurgical expertise, and processing assets to develop a solution. We are now recovering enough material to support most of our ongoing operating needs. That lowers costs and helps secure supply for our customers. We expect this project to generate several million dollars in annual savings beginning in 2027. This is the kind of benefit elevATIon enables, combining capabilities across ATI to solve emerging industry challenges and improve our performance.

Slide 8 gives a summary of our core markets. All four key end markets show strong growth, both year-over-year and sequentially. These customers need qualified capacity, differentiated technology, and certainty of supply. ATI has built durable advantages in each of these areas through proprietary materials, specialized manufacturing processes, and complex customer qualifications. Those advantages support stronger commercial terms, long-term agreements, and attractive opportunities to invest in additional capabilities and capacity. Jet engines remains ATI's largest and most important growth market. Revenue increased 39% year-over-year and 19% sequentially, reflecting strength in both OEM production and aftermarket. There has been some discussion about whether retirements of older aircraft could pressure MRO demand. ATI serves both demand streams. The disc forgings we make go into new engines and are also used as replacement parts in MRO, with comparable margins across both.

The fleet transition from legacy engines to next-gen engines creates a significant growth opportunity for ATI. Next-generation engines use our differentiated materials to operate at higher temperatures and pressures, and our content on these platforms is more than double our content on legacy engines. We are seeing that opportunity in our results. Demand for our jet engine products continues to strengthen. We now expect full-year jet engine revenue growth in the low to mid 20% range, up from our prior expectation of high teens growth. Just last week, a key engine OEM told us that if we doubled our current production for them today, they would take it all. We hear that kind of demand signal consistently. In airframe, revenue increased 11% year-over-year and 14% sequentially. At the beginning of the year, we expected airframe demand to build as the year progressed, with stronger growth in the second half.

That is exactly how the year is unfolding. We saw a clear uptick in demand in the third quarter, and momentum is building into the fourth. Our committed backlog and strong orders for Q4 support our confidence in continued growth through year-end. We remain confident in our full-year outlook for mid to high single-digit airframe revenue growth. Defense delivered another strong quarter and remains one of ATI's most important long-term growth opportunities. Revenue increased 6% year-over-year and 6% sequentially, building on the 36% year-over-year growth of the second quarter. This was our highest-ever revenue in defense. Missile demand is strengthening, with multiple inquiries for our titanium, nickel, and niobium products to support strategic platforms, including Tomahawk, THAAD, and PAC-3. We continue to expect high teens defense revenue growth for the full year.

Specialty energy revenue increased 49% year-over-year and 36% sequentially as we shifted production to meet customer needs. As we discussed last quarter, our flexible assets allow us to balance production between defense and specialty energy demand. Specialty energy is largely driven by commercial nuclear demand, which continues to outpace supply. Demand for industrial gas turbines also remains strong. We continue to expect mid-teen specialty energy revenue growth for the full year. Overall, demand remains strong across all our markets, and our differentiated positions are translating into growth. ATI delivered another strong quarter, and we have raised our full-year outlook for the third time this year. We expect the fourth quarter to be even stronger. Rob will walk through the financial results and our updated outlook.

Thanks, Kim. I will start with the third quarter performance, dig into segment results, and close with the supporting details for our updated guidance. As shown on slide nine, we delivered strong overall results. Adjusted EBITDA exceeded the high end of our guidance. We also expanded consolidated margins and generated solid cash flow. These results reflect the strength of ATI's differentiated portfolio and the earnings power of our business model. Third quarter revenue was $1.4 billion, up 26% year-over-year. Aerospace & Defense led the revenue growth and accounted for nearly 70% of our total revenue in the quarter. Within A&D, jet engine sales increased significantly, reflecting the next generation production ramp, supported by high-temperature nickel superalloys and favorable pricing. Third quarter adjusted EBITDA was $328 million, up 46% year-over-year.