ATI's Q3 2025 Earnings Call: Contradictions Emerge on Defense Sales, HPMC Margins, Titanium Revenue, and Energy Market Projections

Date of Call: October 28, 2025

Financials Results

• Revenue: >$1.1B, up 7% YOY
• EPS: $0.85 adjusted EPS, $0.10 above the high end of guidance
• Operating Margin: Adjusted EBITDA margin exceeded 20% (19.1% excluding ~$10M asset-sale); full-year consolidated margins ~18.5%

Guidance:

• Adjusted EBITDA FY2025 now $848M–$858M (up $28M at midpoint)
• Adjusted EPS FY2025 $3.15–$3.21
• Adjusted free cash flow FY2025 $330M–$370M (up $40M at midpoint)
• Q4 adjusted EBITDA $221M–$231M (midpoint $226M); Q4 consolidated margins >19%
• CapEx $260M–$280M
• Jet engine: Q4 growth high-single to low-double digits; FY engine growth expected to exceed 20%

Business Commentary:

* Strong A&D Performance: - ATI's aerospace and defense (A&D) revenue rose 21% year-over-year in Q3, representing 70% of total revenue. - Growth was driven by record defense performance, sustained demand in jet engines, and long-term agreements supporting consistent growth through 2026.

• Operational Productivity and Cost Efficiency:
• Adjusted EBITDA reached $225 million, with $215 million excluding oil and gas rights, exceeding the high end of guidance by $5 million.

• Operational productivity improvements led to higher uptime, improved first-pass yields, and expanded manufacturing capabilities, contributing to margin gains.

• Defense Market Growth:

• Defense revenue increased by 51% year-over-year, reflecting strength across naval nuclear, rotary craft, missile, and armored vehicle programs.

• The growth was driven by broad-based strength and increased qualifications for new programs, supported by both U.S. and allied spending.

• Nickel and Titanium Investments:

• ATI has focused on expanding differentiated nickel capacity to meet strong demand in next-generation engine products and defense.
• Investments are supported by long-term customer contracts and co-funding, ensuring supply assurance without unnecessary capacity expansion.

Sentiment Analysis:

Overall Tone: Positive

• Management reported revenue >$1.1B (up 7% YOY), adjusted EPS $0.85, adjusted EBITDA $225M ($215M excl. asset sale), raised FY EBITDA to $848–858M and FCF to $330–370M, and highlighted record A&D strength and margin expansion.

Q&A:

• Question from Richard Safran (Seaport Research Partners): I'm not exactly sure I understand what's changed since 2Q to drive the revised outlook and the guidance increase. Could you discuss what's changed in your outlook and the moving pieces that drove this guidance increase?
  Response: Guidance was raised because of stronger-than-expected aerospace & defense performance—especially defense—plus operational productivity and improved free-cash-generation.

• Question from Richard Safran (Seaport Research Partners): First, what are you doing to manage the melt capacity you discussed? Second, you said ATI is now the #1 source of flat-rolled titanium products to Airbus — what does that mean and how does it translate to the P&L?
  Response: Managing capacity by optimizing productivity and prioritizing high-margin proprietary nickel alloys, using customer co-funded, purpose-built expansions (target IRR>30%); the Airbus position means majority share in flat-rolled supply, expected to roughly double Airbus revenue next year and improve mix and margins.

• Question from Richard Safran (Seaport Research Partners): Just on your melt comment, are you effectively saying you're managing to the high-margin products?
  Response: Yes — prioritizing highest-value mix short-term and investing in purpose-built assets long-term for proprietary alloys.

• Question from Myles Walton (Wolfe Research, LLC): You said MRO is 50% of total engine sales. How much of that is in-production MRO work (in-production engines being MROed) versus out-of-production engines being MROed?
  Response: Majority of MRO work is on next‑generation engines (LEAP, GTF) where ATI has higher content, so MRO is largely on in‑production next‑gen platforms.

• Question from Myles Walton (Wolfe Research, LLC): Many engine OEMs are talking about mid‑teens growth next year. Is that in line with the level of growth you'd expect in your engine end‑market?
  Response: Yes — mid‑teens growth aligns with ATI's expectations and LTAs support ATI's participation and investment planning through the decade.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Excluding the oil and gas rights, you were ahead of the midpoint by about $10M in adjusted EBITDA; should we think about that as roughly half operational and half from stronger defense sales?
  Response: Yes — the outperformance was driven by both operational improvements and stronger defense demand.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Do you expect the defense sales levels to continue in Q4 or was some pulled into Q3?
  Response: Some significant forging shipments were pulled into Q3 and will moderate in Q4, but underlying defense demand remains strong and jet engine shipments will recover in Q4.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): The net working capital improvement — is that mostly inventory or some inventory and payables?
  Response: Improvement was driven primarily by accounts receivable management, including use of a securitization/AR factoring facility, plus improvements in inventory efficiency.

• Question from Gautam Khanna (TD Cowen, Research Division): Any preliminary color on 2026 for other end‑markets like jet engines and on incremental margins at HPMC—parameters we should use for 2026 modeling?
  Response: Expect airframe high-single-digit growth in 2026 and continued strong engine demand; model incremental margins in the 30%–40% range (≈40% HPMC, ≈30% AA&S) though recent YTD incrementals have been higher.

• Question from Andre Madrid (BTIG, LLC, Research Division): Status update on the zirconium supply chain vis‑à‑vis China and how things are going?
  Response: Zirconium supply has been stable; ATI has built stockpiles and executed customer‑funded equipment upgrades, leaving the company well positioned versus potential trade disruptions.

• Question from Andre Madrid (BTIG, LLC, Research Division): How long do those stockpiles reflect — a year or two?
  Response: Roughly two years of finished‑product inventory and over one year of raw materials.

• Question from Andre Madrid (BTIG, LLC, Research Division): You said MRO is roughly half of engine — what was that percentage pre‑COVID?
  Response: Pre‑COVID MRO was around 20%–25%; it has accelerated substantially since then.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): You mentioned a contract converted from materials+conversion to conversion‑only — will we see more of that and how does it affect revenue/margin recognition?
  Response: One customer‑requested contract converted to conversion‑only reduced reported revenue by about $10M (affecting sequential revenue), but it doesn't hurt margins; this was an isolated change, not a broader trend.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): Specialty energy has been down recently — timeframe for growth and is it linked to nuclear developments?
  Response: Specialty energy growth should begin next quarter and accelerate into 2026, driven near‑term by gas‑turbine demand (data centers) and longer‑term by nuclear/zirc opportunities and recent capacity upgrades.

Contradiction Point 1

Defense Sales and Growth Expectations

It involves differing statements about the expected growth and momentum in defense sales, which is crucial for understanding the company's financial outlook and strategic focus.

Will defense sales continue into Q4? - Philip Gibbs (KeyBanc Capital Markets Inc., Research Division)

2025Q3: Defense momentum will continue, though some defense shipments peaked in Q3. Jet engine sales are expected to rise in Q4. - Kimberly Fields(CEO)

Can you detail the aftermarket trends and the production ramp's impact? - Richard Tobie Safran (Seaport Research Partners)

2025Q2: We have a strong backlog in defense and aerospace, primarily led by defense, and we expect a number of meaningful opportunities in our second half, particularly in aerospace. - Donald Newman(CFO)

Contradiction Point 2

Incremental Margins for HPMC

It involves changes in financial forecasts, specifically regarding incremental margins for HPMC, which are critical indicators for investors assessing the company's financial performance.

What are your 2026 expectations for jet engines and HPMC's incremental margins? - Gautam Khanna (TD Cowen, Research Division)

2025Q3: Jet engine growth is expected to remain strong, driven by long-term agreements. Incremental margins are strong, around 50% year-to-date. Future margins will continue in the 30-40% range. - Kimberly Fields(CEO)

What are the expected incremental margins for HPMC? - David Egon Strauss (Barclays)

2025Q2: HPMC incrementals are now expected to be north of 40%, indicating strong performance. Future modeling should reflect margins above 24%. - Donald Newman(CFO)

Contradiction Point 3

Titanium Capacity and Revenue Expectations

It involves differing statements about titanium capacity and revenue expectations, which are crucial for understanding the company's production and sales strategy.

Is there an expected titanium revenue ramp in the second half of the year? - Myles Alexander Walton (Wolfe Research)

2025Q3: Titanium revenue is expected to remain flattish overall, with modest growth in certain sectors. - Donald Newman(CFO)

What is the expected revenue contribution from new titanium furnaces next year? - Gautam J. Khanna (TD Cowen)

2025Q2: The increased titanium capacity is expected to contribute $125 million to $135 million in revenue. The investments are part of a strategy to secure contracts and support titanium demand. - Donald Newman(CFO)

Contradiction Point 4

Defense Sales Momentum

It involves differing views on the sustainability and expected duration of strong defense sales performance, which directly impacts revenue projections and investor expectations.

Will defense sales continue into Q4? - Philip Gibbs (KeyBanc Capital Markets Inc., Research Division)

2025Q3: Defense momentum will continue, though some defense shipments peaked in Q3. Jet engine sales are expected to rise in Q4. - Kimberly Fields(CEO)

Can you discuss the $50 million tariff impact and offsets? - Richard Safran (Seaport Research Partners)

2025Q1: Defense is a bit of a challenge there as well. Defense remains a very large portion of our business, and that is still expected to be a bit lumpy. - Donald Newman(CFO)

Contradiction Point 5

Energy Market Trajectory

It involves the energy market trajectory, which is crucial for planning and forecasting energy-related business segments.

What's the outlook for the energy market? - Seth Seifman (JPMorgan Chase & Co, Research Division)

2025Q3: Energy growth is expected to accelerate, driven by gas turbine demand and nuclear upgrades. ATI's unique capabilities in zirconium position us well for long-term growth. - Kimberly Fields(CEO)

Can you discuss your outlook for the rest of the year, especially the significant second-half recovery needed to meet guidance? - David Strauss (Barclays)

2024Q4: We do not expect a significant recovery in energy until mid to late 2025. - Kimberly Fields(CEO)