Allegheny Technologies Inc

NYSE:ATI

Hello, and welcome, everyone, to the ATI First Quarter 2025 Earnings Call. My name is Becky, and I'll be your operator today. [Operator Instructions] I will now hand over to your host, David Weston, Vice President of Investor Relations, to begin. Please go ahead.

Thank you. Good morning, and welcome to ATI's First Quarter 2025 Earnings Call. Today's discussion is being webcast online at atimaterials.com.

Participating in today's call to share key points from our first quarter results are Kim Fields, President and CEO; and Don Newman, Executive 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 and outlook and can also 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 accompanying presentation. Now I'll turn the call over to Kim.

Thanks, Dave. Good morning, everyone, and thank you for joining us.

Q1 was an excellent start to 2025 for ATI, continuing the strong momentum we built in the fourth quarter. Our focus is firmly on execution, and our results reflect that. Demand remains strong in our core aerospace and defense markets. Customers continue to turn to ATI for our differentiated products, recognizing us as a critical supplier in their value chains. Our ability to deliver high quality, consistently at scale, has led to expansion of long-term contracts and increased share positions across key platforms.

Before we discuss our growth drivers, let's look at the Q1 results we announced this morning. Revenues grew 10% year-over-year, exceeding $1.1 billion for the quarter. Adjusted EBITDA reached $195 million, surpassing the top end of our guidance range by $15 million. Adjusted earnings per share came in at $0.72, again, beating the top of our guidance range of $0.55 to $0.61. And last week, we reported that 1,000 USW represented employees in our AA&S segment ratified a 6-year labor agreement.

This is a good outcome for ATI and our team. It brings long-term labor stability to a critical part of our operations and sets the foundation for continued success. Don will walk through the financials in greater detail shortly, but the takeaway is clear.

ATI started the year strong. We're confident in our position, particularly given the sustained strength in A&D demand. At the same time, we're staying prudent amid the recent trade-related uncertainty affecting the industrial markets. As such, we're maintaining our full year 2025 guidance for adjusted EBITDA and free cash flow as we monitor how the environment evolves.

Our capital deployment reflects that confidence. We continue to prioritize returning value to the shareholders. In Q1, we repurchased shares worth $70 million, in line with our plan. Looking ahead, we intend to repurchase as much as $250 million in the second quarter, effectively pulling forward our full year buyback program. We see clear value in our current share price and recognize the opportunity to capture it.

Now turning to the evolving trade and tariff environment. We recognize this is top of mind for many. While the headlines continue to shift, we remain confident in our view that ATI is uniquely positioned to navigate the evolving tariff and trade landscape.

Here's why. One, ATI is a U.S.-based producer with the majority of our production footprint located domestically, even as we serve global aerospace and defense programs. Two, we have a flexible, diversified global supply chain. While certain raw materials must be imported due to the lack of domestic availability, our sourcing strategy allows us to adapt our supply chain to maintain quality and manage costs effectively. And three, our customer contracts are built to handle volatility. Many include built-in mechanisms like pass-throughs and surcharges to help offset inflation, raw material swings and tariff costs.

I'm pleased to report that to date, these tools are working as intended, preserving income and limiting financial exposure. We're actively deploying all available levers, including duty drawback programs, defense-related exemptions and ongoing operational efficiencies to mitigate remaining impacts.

Let's talk about the tariffs announced in 2025 and currently in effect, including those paused. These represent approximately $50 million in annual cost exposure prior to offsets. Thanks to these mitigation offsets, we anticipate minimal impact on our full year earnings, allowing us to reaffirm our current guidance.

From a demand standpoint, tariffs are having little effect on the aerospace and defense markets. Both airframers have recently reaffirmed robust backlog and ATI continues to see strong engine material orders with no cancellations or pushouts.

On the industrial side, which represents approximately 20% of our total business, some customers are taking a wait-and-see posture. That impact, if any, would be confined to our AA&S segment.

To illustrate how ATI creates value, particularly in A&D, consider a recent example. In Q1, we renewed a profitable sole-source contract for an advanced alloy co-developed with a major engine OEM. This material is critical in MRO applications due to its unique performance characteristics. This agreement extends well into the next decade and reinforces ATI's role as a trusted partner in delivering high-performance materials for the most demanding applications.

Commercial jet engine remains our most strategic end market, accounting for 37% of total Q1 revenue. Sales in this area grew 35% year-over-year. Our alloys for the rotating components in the hot section of the current and coming generation engines are essential. We are the sole source supplier for 5 of the 7 alloys found in the hot section, secured under long-term contracts that extend well into the 2030s and even 2040s.

Our relationships span all 3 major commercial engine manufacturers. As engine production ramps up, ATI is growing with it. We're proud to earn contract extensions and increase share by consistently delivering innovation, quality and scale. Beyond engines, our airframe business is also growing, representing 18% of Q1 revenue. Our titanium capabilities are in high demand. We've just recently finalized a major new contract with a leading airframe OEM, establishing ATI as one of their top suppliers for flat products.

In defense, our momentum continues to build. We are well positioned across a variety of funded platforms. We've recently qualified a new material for a long-term classified program, and our R&D pipeline has strong backing from the U.S. government and our allies. Our defense sales grew 11% year-over-year in the first quarter.

The bottom line, our strategy is working. We're increasing yields, strengthening reliability, expanding capabilities and unlocking capacity through debottlenecking. The investments we have made in press, forging and downstream assets for testing and finishing are translating into higher output, improved reliability and enhanced customer value.

With strong order rates and a robust backlog, the message from our customers is clear. They need our products and ATI is delivering. Since 2020, we've been executing our growth strategy to focus on high-value A&D applications. This transformation is evident in our results.

In Q1, A&D represented 66% of our total revenue. We are pleased to announce that effective today, ATI's Global Industry Classification Standard, or GICS code has been reclassified to aerospace and defense. This reclassification validates our strategic evolution and provides greater visibility of ATI as a world-class A&D supplier.

All of this is made possible by our ATI team who continue to deliver high-quality products safely, on schedule and at scale. It's the result of strategic focus, operational discipline and execution. Our customers are gaining momentum and with them, so too is ATI. With that, I will turn it over to Don.

Thanks, Kim. I'll provide additional insights into our first quarter performance and then look ahead to the Q2 and full year outlook.

We finished the quarter well ahead of expectations from a revenue and profit standpoint. Revenue in the first quarter was approximately $1.14 billion, an increase of 10% year-over-year. You may recall that we expected a modest sequential decline in sales and earnings this quarter, driven by some accelerations in seasonality as we completed Q4.

Our guidance also considered anticipated slow recovery for commercial aero customers, particularly airframe and expected seasonal timing in defense. Even with all of that, our adjusted EBITDA at $195 million was $20 million higher than the midpoint of our Q1 guidance. That's 11% favorable. Strong operational performance in both segments and robust customer demand drove results.

Our consolidated adjusted EBITDA margins were 17%, reflecting HPMC margins of 22.4% and AA&S margins of nearly 15%. In HPMC, margin increases were driven by the building strength in our A&D core, which is 92% of Q1 segment revenues. HPMC margins were up 240 basis points sequentially and 400 basis points year-over-year. Even more than we expected, positive pricing and demand powered the step-up in margins. Solid, reliable production from our key melt and forging assets support enhanced sales and improved absorption. We expect greater gains in the coming quarters.

In AA&S, we expected a sequential step back in first quarter margins due to the timing of above-the-line tax reserve releases and 45X Manufacturing credits in Q4 2024. As anticipated, margins were down 140 basis points sequentially. Year-over-year, AA&S margins were up 90 basis points. Segment results this quarter exceeded our expectations.

We realized timing benefits in Specialty Rolled Products as our team worked with customers to mitigate risks and accelerate deliveries during our ongoing labor negotiations and the dynamic tariff environment. The SRP business also generated substantial gains in conventional energy centered on a prioritized project delivery. Congratulations to our team for delivering under a tight schedule, supporting our customers when they needed us most.

Turning to cash flow. Q1 free cash flow usage was $143 million. That was a lower cash burn than Q1 2024 and modestly favorable to our 2025 estimates. Better-than-expected performance was supported by improvements in cash used in operations and lower CapEx. We expect to be cash flow positive for each remaining quarter of the year as we drive a tightened cycle for working capital and profitable growth.

With that, let's turn to our 2025 outlook. As we look ahead, many of our core assumptions in our outlook remain consistent. We are encouraged by the progress we see in A&D. At the same time, we appreciate that some customers still anticipate inventory drawdowns next quarter, largely tied to airframe sales.

That keeps our first half outlook balanced. This timing is compounded by near-term uncertainty on the transactional side of the business as the world economy adjusts to the new norm of increased tariffs. With those conditions in place, we expect Q2 to look like the first quarter with more ramp and recovery expected later this year.

For the second quarter, we are setting our guidance range for adjusted EBITDA at $195 million to $205 million. That equates to an adjusted earnings per share range of $0.67 to $0.73 per share. For the full year, we strive to balance positive signals of A&D demand and growth with conservatism tied to non-A&D markets such as industrials.

We are affirming our full year adjusted EBITDA guide of $800 million to $840 million. We are increasing our full year EPS guidance to a range of $2.87 to $3.09 per share. This higher view of 2025 EPS is thanks to the benefit of the accelerated share repurchases Kim highlighted as we plan to reduce total share count ahead of our previous schedule.

Some color about how we are thinking about the top line mix and adjusted EBITDA margin so that you can better model our outlook. As we shared, A&D continues to show strength, especially in jet engine and defense. Based upon customer demand signals and Q1 performance, we expect full year 2025 jet engine sales to grow between 15% and 20% over 2024 levels. Defense, which grew 11% in Q1, also remains robust. We expect to maintain a growth rate in the upper single-digit percentages for full year 2025.

Overall, we anticipate A&D sales will grow 12% to 14% in 2025 as momentum in jet engine and defense combines with modest airframe growth. A&D growth is expected to more than offset lower year-over-year sales in industrials and other areas impacted by lower U.S. demand and China's slowed economy.

Our EBITDA margins are expected to continue to improve during the year. We anticipate full year consolidated 2025 adjusted EBITDA margins to be in the range of 18%. Consolidated Q2 margins should be similar or modestly better than our Q1 performance of 17%. Margins should expand in the second half of the year as A&D sales continue to grow. At the segment level, in the second half of the year, we anticipate HPMC margins to exceed 24% and AA&S margins to be in the range of 15% to 16%. These margin expectations exclude potential impact of tariff pass-throughs.

Stock prices for many A&D businesses have been impacted by recent volatility. Yet our conviction around the opportunity for ATI value creation has never been stronger. Compare the contractually covered profitable growth in our forecast with our stock's current valuation multiple. We are compelled to invest in ourselves, returning even more cash to shareholders this coming quarter than previously planned. At this stock price, how can we not?

In the second quarter, we expect to buy back as much as $250 million in shares, moving notably ahead of our previously planned time line. The strength of our balance sheet and our confidence in current liquidity and favorable cash generation fuel this acceleration.

With this confidence, we are reaffirming our full year free cash flow range of $240 million to $360 million. Our full year CapEx range remains at $260 million to $280 million with continuing opportunities emerging for customer funding of these investments. The CapEx range includes redeployment of cash generated from sale of noncore assets and businesses in late 2024.

To summarize, we remain on track for profitable growth. We'll adjust and be agile as the world around us changes. The underlying strength of our A&D end markets, coupled with highly differentiated contractually secured products and high demand guide our course for the future. We are on or ahead of schedule to deliver every day for our customers and our shareholders. With that, I will turn the call back over to Kim.

Thanks, Don. Q1 was a great start to 2025, and we have so much more to look forward to. In summary, strong Q1 results demonstrate consistent execution. Aerospace and defense demand is continuing to grow. We're navigating trade uncertainty strategically and effectively. And ATI is growing, well positioned to deliver increasing value in the quarters and years ahead. We're confident in our team's ability to execute. The strength of our people, our products and our customer relationships continues to drive our performance.

Our long-term strategy is not just delivering results, it's unlocking greater promise ahead. The world around us is not without risk, but we believe the opportunities ahead far outweigh them. We are proactive in anticipating and mitigating these risks, backed by the expertise and dedication of our 8,000 team members. That collective experience positions us to maximize the tremendous opportunities we've created together with our customers in this moment for aerospace and defense. And with that, let's open the line for your questions.

[Operator Instructions] Our first question comes from Andre Madrid from BTIG.

Real quick to start out, can you provide more color on aftermarket or MRO contribution to A&D growth this quarter?

Well, why don't we -- we'll do that in 2 parts. Let me just share a little bit of color and then Don can share some of the financials and so forth behind it. We continue to see strong demand from MRO. As we've shared in the past calls, MRO is running 40% to 50%, and it does seem that, that's continuing -- that demand is continuing to rise there. We're seeing it both on the materials as well as the forging side.

We've talked in the past about some of the work that we're doing with the GTF, and that's continuing to grow. If I step back in 2024, we doubled our revenue from the work that we are doing with Pratt and supporting the GTF program. This year, we're anticipating doubling or slightly more than that in 2025.

And I think as we look forward, there is an opportunity for us to continue to double that even again between now and the end of the decade. And so that strength that we're seeing in the GTF program, we're seeing across the board for all of the OEM manufacturers as they are continuing to see strong demand on the MRO side, and it is driving both our margins and our revenues up. Don, I don't know if you want to share any details.

What I would add and one clarification, Andre, I thought I heard you say MRO related to defense. Is it aero and defense or just defense you're asking?

No, just overall. And then if you want to dig deeper into defense too, that's fine.

No, you're good. You're good. My hearing isn't always very good. So I'll echo what Kim said when it comes to aerospace and defense and how MRO is impacting with the jet engine sales, which are now a substantial part of our overall A&D, you're -- this is a category that we really don't have specific discern in terms of the split between what's driving revenue growth due to the MRO versus what is new builds. But clearly, MRO continues to be an area of strength for us. So we think that a meaningful amount of the growth you're seeing period-over-period around jet engine sales, for example, is certainly tied to it.

Got it. Got it. That's super helpful. I guess beyond that, and this might be a little bit more of a high-level question. And I mean, given the timing, it might be hard to give a definitive answer. But we did see the U.S. and Ukraine sign the mineral deal yesterday. Apparently, 6% of global production comes from titanium mines. Do you think this could have any impact on ATI and sourcing of feedstock?

Well, certainly, as you said, probably not in the near term. Historically, Ukraine was a supplier and one of our partners in a joint venture that we had here. But I do believe that, that will be a positive as we go forward and we look at this aerospace ramp in demand and continue to diversify the titanium sponge supply into the melters here in the U.S.

So I do think, again, getting that deal confirmed and finalized will -- as they start to develop in Ukraine and they get the war behind them, and they start to develop [indiscernible] and we start to get access to that, get them all year done, as you said, there's a [ lateral ] here, but you have to go through any levels of qualification first to get into airframe and then to get into jet engine. But historically, they've been at that place. So I do think that there's opportunity for this to maybe expand that supply chain from a titanium sponge standpoint.

Our next question comes from Richard Safran from Seaport Research Partners.

I wanted to know if you could talk a bit more about pricing at HP. It just appears to be improving in the face of higher volume, and that's a bit counter to typical step-down pricing. I'm curious as to how much of the pricing was impacting your 1Q results and just how we should think about pricing from here in the face of higher volume?

So I'll tell you what, I'll take that question. We are seeing price. And to give you some perspective on the HPMC side, the way to think about the Q1 price year-over-year, we saw prices increase both in titanium and nickel generally in the 6% to 7% range. And we also saw some nice increase in terms of volumes for nickel in that segment. From a titanium standpoint, the volumes were down a bit.

But we're very, very pleased with the direction of price. Of course, a lot of our HPMC business is tied to LTA. And with each of the renewals of a contract, we are very purposeful in going after appropriate price increases. And because they're long-term agreements, when we capture those price increases, they stay with us for multiple years. So those trends are certainly looking in our favor.

Okay. On -- just a follow-up on Kim, on your opening remarks about the $50 million tariff impact, but mitigated by offsets. I thought you might elaborate a bit more, get more specific about those offsets. What's driving you to maintain your outlook? And I'm just kind of wondering if the macro situation were to deteriorate, I mean, do you have further offsets that you can use to mitigate that?

Sure. Yes, it's certainly been a dynamic time with tariff headlines changing almost daily, it seems. But as you mentioned, we do believe our overall cost impacts can be manageable with that where we might see from tariffs.

One of them is, like you said, the cost management. I think we've got multiple levers there that we can pull. You mentioned one of the big ones, which we talked about here earlier is we have a pretty diversified nimble supply chain. We're able to move our supply to low-cost sources depending on how the trade and tariff environment evolves and how those trade deals evolve. So we're continuing to monitor that and use those levers to make sure that we're tapping into the lowest cost supply.

Secondarily, we're also looking at taking cost out, driving productivity to help offset this for our customers as well. And so those are things that, as you mentioned, you've seen some of the uptick from the improvements in reliability and productivity that we've got already starting to come through.

Then there's levers like duty drawback and defense exemptions that we can utilize as well. And we are taking advantage of those, and we've used those in the past. So we anticipate doing that. I think the last one, and we talked a lot about this, our contracts are really built to manage this type of volatility. They're set up with surcharges and mechanisms to pass through, material fluctuations to pass through inflation and to pass through tariffs, which, frankly, and we started implementing and incorporating this into our contracts back in like 2017, 2018 during the first administration when we started to see the use of these tariffs become more prevalent.

And so that allows us, if there are any of these tariff costs that we aren't able to offset to pass through to our customers to make sure that it doesn't impact our financial results. Now I think the more -- the one area that we are looking at is on the demand side. I do think it's going to take a little bit more time for us to fully understand what the impact might be.

Clearly, if there is a recession, the industrial markets will start to feel that. I'd say today, as I mentioned, we do see some behavior of people kind of taking a wait-and-see approach, a pause, trying to process and determine where the markets are going. Clearly, the outcome of these trade negotiations will have an impact into both domestic with distribution and others, but also international customers and how they think about their supply chains.

And so we're continuing to monitor that. I'd say, though, our defense and aerospace is very, very strong and growing demand. Strong backlog, obviously, with airplane orders, new builds and strong MRO, which we just spent some time talking about, that continues to build. And the engine guys are continuing to try to get on pace with the demand that they're seeing.

So I think across the board, this is -- it's going to be an evolving situation. I do feel comfortable that we're going to be able to mitigate or pass through any of the costs, and then we'll react to the changing demand situation on those industrial markets.

Our next question comes from Scott Deuschle from Deutsche Bank.

Nice results. Don, just to be clear and follow up on that last question, does the reiterated guide include significant contingency for softer sales in other industrial end markets for the second half of the year? Just wanted to double check on that and get a further sense for what specifically is being assumed there.

Yes, I'm glad you asked the question. Just for clarity, when you look at our guide for 2025, we have built in the risk that we see and the trend that we're seeing around those industrial ordering patterns. So yes, it should be included.

Great. And then, Don, you spoke recently about spending a greater share of your growth CapEx on nickel alloys. I just wanted to get maybe a better sense as to what that looks like in terms of any specific product areas that growth CapEx might focus on, how much capacity that might add on a percentage basis and over what period of time that would come online?

And then maybe more for Kim, just generally, curious for how you're thinking about balancing the need for capacity discipline with the growing demand impulse that you're seeing from customers.

So I'm going to take a run at that. I think that was a one question with 10 subparts to it. So there's a high probability, Scott, that I will miss something. But long short, so let me -- just from a history standpoint, let me touch on one thing. With titanium, we saw titanium demand really ramping and 2022 was accelerated by the invasion of Ukraine, and we reacted.

We reacted really accelerating a strategy we already had in place, restarted a plant very cost efficiently, built some additional capacity through brownfield. The outcome of all of that is the titanium business is performing well, even though right now, there's a destocking. And if you look at what we've done with that titanium business between 2022 and 2024, we have doubled the titanium revenues. Back in 2022, they were about $400 million. 2024, they were about $800 million.

You asked about nickel. Why am I talking about titanium? Because the plays that we are running for nickel will look a lot like the plays we ran for titanium. For nickel, the demand for nickel, which is primarily -- I mean, it's many areas of our book, but think jet engine, right? The hot section of the jet engine is where we have our greatest competitive advantages and where we are quite focused, whether it be in melt or it's in isothermal forgings or it can be in powder applications. We are interested in defending our competitive advantage and market positions, which are very, very powerful. We're interested in defending those. Our expenditures are going to reflect running those plays.

So where are we thinking about spending from a capital standpoint? First, as a reminder, we said we're going to spend on average about $200 million a year on CapEx. So the nickel investments we're talking about to meet the current demand and our contract commitments are all encompassed in that guide. And so our prioritization within there is, first, you have to be able to melt. If you can't melt at purity and at scale, you can't unlock the value.

So we have great melt assets. We've invested in debottlenecking in that area. We're getting -- we're reaping the rewards of that. We are investing in new discrete pieces of equipment that will help with that debottlenecking. And we're going beyond just debottlenecking and saying, hey, we can add incremental VIM capacity, for example, and other elements in our end production that could be really well returning investments.

So all of that is being driven by this underlying consistent demand around jet engine materials and components, which our customers -- I would -- it's not an exaggeration, Scott. Every day, we are hearing from the major OEMs. They're communicating to us. We're a critical part of the supply chain.

They want us to be a critical partner and a consistent partner and our discrete investments are all pointed toward helping to meet those needs, but with discipline on our side. So I don't know if I hit one of your subpoints or if I hit half of them. So what other -- what else would you like me to answer in that regard?

No, I think I took up enough the call. I appreciate that, Don. That was a good answer.

I don't think you took up the call. It is me taking up the call.

Our next question comes from Seth Seifman from JPMorgan.

Good results. Maybe to follow up quickly on the last question. When we think about the 15% to 20% growth in jet engine that you're looking for this year, there's some additional CapEx this year, but I assume that that's probably not yet contributing much and that will be in front of us.

First of all, is that sort of correct? And then when we think about that 15% to 20% increase on the jet engine side this year, how much of that comes from maybe additional capacity and capital spending that's been done in recent years? And how much comes from kind of the improved -- maybe some improved productivity versus last year?

Yes, I'll take a crack at that and just add a little color to what, as you said, Don just talked a little bit about. So we have been spending on capacity. We've talked about some of our downstream debottlenecking, ultrasonic inspection, heat treat. We have a brand-new heat treat facility that's come on with our forged products.

And as you mentioned, additionally, the work we're doing about debottlenecking and reliability upstream in our melt are all coming, and we're seeing good results and momentum from the work that we've been doing. We do have several projects in the pipeline that have been installed, are getting installed and they are coming up to speed. And really, what's driving this is the demand from that jet engine.

And I'll direct everyone to kind of Page 5 in our presentation materials. In that jet engine, we are producing most of the proprietary alloys at a sole source position well into 2030s and in some cases into 2045. And so as our engine customers are growing and their MRO needs are growing, they're really looking for us to keep pace with that so that we can continue to supply those critical alloys for that -- for those applications.

I would say just around the discipline around capital, we are being very disciplined where we see if customers want to put in capital or accelerate capital investment, we're looking for their contribution and participation in that capital cost. And as we've shared on past calls, we are seeing multiple customers that are willing to do that again to have that surety of supply and position.

So that's really what we're thinking about, and that's what's driving that demand. And so it is a combination, as you said, both process and productivity improvements, reliability as well as some of those prior investments in downstream testing and finishing.

Great. Great. And then maybe as a quick follow-up in -- when we think about AA&S and on the titanium side, when you think about the progression on widebodies through the year and the pull from the OEMs, how are you thinking about that with regard to 787, A350 and 777X?

Well, yes, I mean, from the airframe side, obviously, like you said, with the widebody that has up to 5x more titanium than the single aisles. And so that demand is starting to come. We've gotten good news that Boeing is ramping well, and we are seeing some -- we're starting to have conversations around what that demand will be as we're looking in the back half of this year and into next year. Remember, our melt is going to be a very long lead time in advance of those rate step changes.

I would like to share our new investment in titanium that we talked about out in Oregon and our brownfield is online and is melting now, and we are in qualification. So we've got new capacity coming online to support that ramp as they start to pull more need for demand.

And I'd say lastly, I'm very excited to announce that we just signed this week a new 5-year agreement with Airbus that approaches $1 billion in sales over the next 5 years and really puts us in a position as the leading flat-rolled supplier for them. So lots of good things happening there, capacity coming on at the right time along to match the demand that's coming from both Airframers, Airbus and Boeing.

Our next question comes from Phil Gibbs from KeyBanc Capital.

The isothermal forgings business, can you talk about how that business has developed and grown over the last several quarters and what you see moving ahead? And subquestion to that, where your headcount additions specifically related to that business now and looking forward, meaning are you still adding folks to grow that business because I know, it wasn't imperative last year.

Yes. So our forged products business has grown pretty substantially over the last few years. In fact, our lead times right now, we're booking out into 2027. So isothermal demand is very high. And as you said, we have been focused on adding headcount and shifts to, one, get to a 24/7 schedule, but also we've put in, as I mentioned, some new capacity downstream from a finishing standpoint, both testing and heat treating that we're getting up and running.

We have finalized. We finished adding new crews. And so now we're working on training and development. I think I've talked in the past about some of our ultrasonic testers. That's a pretty extensive qualification period up to 6 months. Many -- I think we're about 2/3 of the way through that qualification. And so we've got about another 1/3 of new employees that are coming and they will be qualified as a Level 2 and then hopefully [indiscernible] to Level 3. So but we are -- from a hiring standpoint, we've reached our stable point or our level point. All of our crews are now staffed. We're training, and they're coming up to speed. And you're seeing that benefit. I talked a little bit about some of the productivity.

We are starting to see improvements at productivity output from both of my HPMC businesses, and they're doing a nice job at meeting this demand, but it's continuing to grow. And they are on a path to be over $1 billion here in the next 5 years. And the demand is there. Let me correct that. It will be over $1 billion this year, just to be very specific. And so that's up about 20%, 25% in the last year. And with our lead times and our backlogs, we have more opportunity. And so we're clearly having conversations with customers around how do we continue to expand our capacity.

Perfect. And then I have one question as it relates to titanium. So the new titanium upstream capacity that you talked about just a little bit ago, are you harboring some of those P&L costs given some of the qualifications you're talking about and early-stage production prior to adding stronger volumes, meaning is that a drag on the results right now? And then secondly, the Airbus contract, you talked about the 5 years for $1 billion, was that specifically for titanium?

So for the new facility, I would say, number one, it's certainly a use of cash. In terms of our adjusted earnings, it is not a drag on our earnings at this point. And then in your last question, could you repeat that, Phil?

I asked was the $1 billion that you mentioned for the 5-year contract with Airbus, was that specifically for titanium?

Yes, it would largely be titanium.

Our next question comes from David Strauss from Barclays.

This is Josh Korn on for David. So I wanted to ask, you mentioned the potential for AA&S, some of the industrial markets to see declines in the rest of the year. In that scenario, how do you expect margins?

So let me take a shot at that. I think I included in my prepared remarks some color around what we expect for margins. The bottom line with AA&S is we're in the mid-teens right now, even with the headwinds that we can foresee with the industrials and potential pullback on sales demand there. We would still expect that business to be generating EBITDA margins in those mid-teens.

So 15% to 16%, I think, is what I shared for the second half of the year. That segment includes the industrial, but there's other good businesses in there. We've got what we call Aero-Like, specialty energy and our electronics business as well as medical. They generate very, very nice margins. And we would expect that, that would continue throughout this year, which will help to buoy the AA&S margins for the balance.

Great. And then just wanted to ask about any financial impact on the new labor contract.

Yes, I can let Don take that. I would say just generally that it was in line with what we expected, and it's built into our guidance. And we're very pleased that we came to a fair contract for the employees and for the business so that we can continue to support these aerospace customers that have come to rely on us in this new contract so that we can support their ramp. But Don, if you have any specifics?

I can't add a single word. You hit it all.

Our next question comes from Gautam Khanna from TD Cowen.

I had two questions. I was curious on the Airbus contract, which is very promising. Any sense -- can you size how much of an increase the contract represents relative to what you have been doing kind of over the last 5 years? Is it 30% more, 50% more? Do you have a sense that you can give us?

Yes. I mean I can give you a sense of that. Don can share more color if he'd like. I just want to -- if I step back and we go back to 2020, we had no share at that time with Airbus. I think we had just announced winning the ConBid and winning a position in that contract. And through the last 5 years, we've really accelerated our support of them, especially with the conflict in Ukraine. And I'd say as we look at this contract, it will double our participation next year with Airbus.

That's great. And then I enjoyed that slide you mentioned -- you showed where the -- you have a number of sole-source alloys on the nickel side. I'm curious, what is the duration of the contracts there? Do you -- is there any risk that in the next 5 years, you'll see a second source come in on any of those alloys? And are any of them much more meaningful that we should be paying closer attention to in terms of contribution to the business today?

Yes. No, I appreciate you asking. There's been a lot of conversation about some of these alloys. So I would say the duration, I won't share any specifics about a specific customer or contract, but all of these alloys are contracted into the middle of the next decade, and many of them go into the middle of 2040. Primarily because being a sole-source provider of these critical alloys, these customers want to make sure they have the surety of the supply and they make sure they're aligning to us because this is critical, they don't have other alternatives.

As I look at these alloys here, the ones that we think about around the Rolls-Royce or I'm sorry, the RR1000 is an integrated supply chain. We do both the forgings and the powder supply for that. And so that is one that we are continuing to optimize the work that we're doing there, and it hits both the Specialty Materials as well as the Forged Products business. And so that's one that we spend a lot of time with them.

We helped co-develop their new next-generation alloy, and we're continuing to work together for -- to expand that participation. And I just want to mention these alloys, as I mentioned, are critical to our customers. There is no substitution for these alloys. There isn't another alloy or another supplier that they can go to. So again, making sure that they have the capacity, the quality, the consistency to continue to support. And as -- since they go into the hot section of the jet engine predominantly in the disks, that is a very, very high frequency MRO part. And that's where you're seeing that increase of 35% on jet engine growth.

May I just follow up? Is it one of the things where there's not a second supplier because exclusivity with ATI through the next decade? Or is it -- there's still the potential for a second supplier. They just haven't qualified yet?

No. With these contracts, they are 100% share or most of them are 100% share. But I think more importantly to remember is the barriers to entry are pretty high. These are difficult alloys to produce. They take a lot of focus and discipline around controlling both the melt and the forging process, heating times, forming times.

They are -- again, they're very, very difficult, primarily because of the composition that they put in there to be able to withstand the temperatures as well as the stresses on them in that hot section of the engine. So our contracts have long, sole-source 100% share positions, and they've taken years to develop and perfect the process.

Our next question comes from Timna Tanners from Wolfe Research.

I wanted to probe a little bit more on the industrial side, not taking away from all the strength, obviously, in A&D. But given that, that is one area that you called out, how easy or desirable would it be to try to pivot some of that business to some of the stronger areas?

Well, so the strategy of continuing to attack our product mix is something we work on a regular basis. It's one of the reasons why we've been able to really accelerate our focus on aerospace and defense. So as far as the industrial, we're going to continue to look for opportunities to maximize where the demand is as it aligns to our capabilities and especially our core capabilities. And so if there's room there for us to create value and it makes sense to the core, of course, we would do that.

And I would just add that was a big portion of the transformation. Timna, I was just going to add, that was really where our focus on the transformation was to move into those higher-margin aerospace and defense alloys. And it's been very successful. You've seen the AA&S margins come up over the last 3 or 4 years. And with this announcement, we are now producing almost -- we're reaching parity for both of the large airframers. So I think it's been very successful. We'll continue to drive in that direction and go after more opportunities to leverage the strength of that business.

No, of course, I know -- but you've also mentioned that because of the strength in A&D, you were able to have some leverage with some of the stronger components outside of A&D. So I was just wondering if that was still the case and wondering if there was opportunity to do further pivoting or if it would require further investment.

I would say we wouldn't expect something like that to take any significant investment. But most certainly, we're looking at opportunities that will more fully utilize our assets. And if there's an opportunity to expand business with customers and leverage our other capabilities, we're keen to do that.

One other thing to remember, now in the -- clearly, right now, we're seeing where the industrial demand is kind of pausing as the distributors, for example, try to evaluate where all this stuff is going to settle in the macro. Just like that pauses quickly, it can spring back very quickly.

Now we haven't baked into our guidance, Timna, the assumption that industrial will come back screaming in the third quarter. We've kind of assumed flatness in terms of that demand, but that truly can happen. And so we're looking to maximize the cash generation and bottom line in -- across all of this.

But keeping some spare capacity for that potential recovery is part of your strategy, it sounds like.

Yes, I would say. And whatever capacity we have, we certainly want to maximize it. We're also continuing to develop new products that open up new opportunities for us. One example would be we built a titanium alloy sheet facility in South Carolina in 2024. That facility is in service. That's something we're bringing to the market that, again, is a product offering that opens up not just capabilities to sell that product, but can open up opportunities to sell other products, including some that you might classify as industrial, for example.

Our next question comes from Josh Sullivan from The Benchmark Company.

What does the buck stop with pass-throughs as they relate to tariffs? Most of the supply chain outlining passing through tariff costs. And then this morning, another large historically very vocal European airline talking about canceling orders if tariffs materially affect the price of aircraft. How does this evolve? Does this mean there's a greater leaning on MRO? Is this figured out? Or are there just only so many options for lift and that demand will move elsewhere? Maybe it's just too early to know, but curious on your thoughts.

Yes. I think it is early. It's going to evolve. And I've seen certain airlines either choose to not take delivery or I think I even heard yesterday an airline taking delivery in an Asian country to avoid tariffs here in the U.S. and having them just do long-haul flights. So yes, it is very early.

We'll have to see how this develops. But ultimately, demand for air travel, we've seen the ages of the aircraft that are in the industry. That's not going to reverse without new airplanes and there's 2 airframers in the world that are developing and building planes. And so I do think that possibly in the short term, in the near term, you could see people slow down on taking delivery of planes.

I haven't heard and I'll let Airbus and Boeing talk about their business specifically, but I haven't heard anything that says that they're seeing any cancellations or huge pushouts or anything that would say in the near term that there's concern. Now long term, I do think it will depend on how the trade deals continue to evolve and develop. And if that treaty back from 1979 gets put back in place, which the aerospace industry being -- is very global.

And I think many would say successful because of that treaty that, that would help resume deliveries. But right now, as I mentioned in my prepared remarks, we've seen no pushouts. We've seen no cancellations. Everybody is continuing, frankly, to try to catch up with the demand. And as they start to ramp the widebody, that's going to put even more demand into the system.

Got it. And then maybe just on that widebody comment, as we look at the airframe inventory drawdowns currently and then just as you look at that skyline expectation, what inning do you think we're in the destock right now?

I think early. I do think that they've had some good early success with their ramp, and that's good news for the whole industry. As I look at it, we've seen some small emergent demand in orders, but I think that's more offsetting where they might not have demand. But overall, they're working that inventory level down and rightsizing it.

So as I look at opportunities, the faster they ramp, what I would say is that pulls and puts opportunity for 2026. And that's where we would start to see those orders coming in and that demand start to ramp much quicker than maybe that our outlook has today.

We currently have no further questions. So I'll hand back to David for closing remarks.

Thank you. We just want to thank everyone for their time today. We're very pleased with our first quarter results. Please reach out to Clay and myself and the Investor Relations team if you have any further questions. Have a great day.

This concludes today's call. Thank you for joining. You may now disconnect.