ATI Inc. 2026 Q2 Earnings Call

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. Good morning, everyone. Thank you for joining us. Turning to slide three, 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 margins 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 multi-year 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, strengthened 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 three 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 five years ago. Second, we've leveraged ATI's unique technical capabilities in high-purity hafnium and zirconium.

ATI is one of three 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. Third, we've translated that scarcity into stronger commercial performance. Improved pricing for high-purity hafnium and zirconium benefits our defense and specialty energy businesses and also flows through to our jet engine alloy materials, 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 EB2, shifted some shipments into future periods.

The important point is 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 one strong quarter. We now have two businesses capable of generating durable earnings growth, supported by differentiated products, stronger commercial performance, operational excellence, and a record backlog that provides meaningful multi-year visibility into the future. Turning to slide four. 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, an 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 five. ATI's operating model is helping convert strong demand, improve 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 increase the productivity of the assets we own. Second, we make targeted investments where ATI has differentiated technology, committed customer demand, and the highest returns. 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 Elevation. We've increased year-over-year throughput by 30% in ultrasonic inspection, 15% in isothermal forging, and 15% in primary nickel melts. 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 expands ATI's differentiated capabilities. Moving to slide six. Let me remind you about our capacity investments. Our new Chihuahua, Mexico facility supports next-generation aerospace engine testing and inspection, and our EB2 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%-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 seven. 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 toward 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 produce six of the seven most advanced nickel-based superalloys, including five where we are the sole source supplier. That differentiation translate 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. 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 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, THAAD, and PAC-3. We've already begun receiving orders in support of the Tomahawk program.