Allegheny Technologies Incorporated (NYSE:ATI) Q3 2020 Earnings Conference Call

October 29, 2020 8:30 AM ET

Company Participants

Scott Minder - Vice President, Treasurer and Investor Relations

Robert Wetherbee - President and Chief Executive Officer

Don Newman - Senior Vice President and Chief Financial Officer

Conference Call Participants

Josh Sullivan - The Benchmark Company

Philip Gibbs - KeyBanc Capital Markets

Gautam Khanna - Cowen

Timna Tanners - Bank of America

David Strauss - Barclays

Paretosh Misra - Berenberg

Matthew Fields - Bank of America

Operator

Good morning and welcome to the Allegheny Technologies Incorporated Third Quarter
2020 Result Conference Call. All participants will be in a listen-only mode.
[Operator Instructions] After today’s presentation, there will be an opportunity to
ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Scott Minder, Vice President,
Treasurer and Investor Relations. Please go ahead, sir.

Scott Minder

Thank you. Good morning and welcome to the Allegheny Technologies third quarter
2020 earnings call. Today’s discussion is being broadcast on our website at
atimetals.com.

Participating in the call today are Bob Wetherbee, President and Chief Executive
Officer; and Don Newman, Senior Vice President and Chief Financial Officer. For
today’s call, we will not display or advance slides as Bob and Don speak. Their
comments will focus on highlighting key messages. The slides provide additional
color and details on our results and outlook. They are available on our website at
atimetals.com.

After our prepared remarks, we will open the line for questions. During the Q&A
session, please limit yourself to two questions. As a remainder, all forward-
looking statements are subjects to various assumptions and caveats as noted in the
earnings release and in the slide presentation.

Now, I'll turn the call over to Bob.

Robert Wetherbee
Thanks Scott. Good morning. It’s an understatement to say that 2020 has been a
challenging year for all of us, especially those who served the commercial
aerospace market. Despite these headwinds, the relentless ATI team continues to
rise to the challenge, guided by the leadership priorities we established at the
outset of the pandemic.

This morning, I'll share my thoughts on three key topics. First, how are we taking
control of what we can control? Thus, accelerating cost savings and strengthening
our position. Second, our strong balance sheet puts us in an excellent position to
weather storms ahead, as well as to fuel our growth. And third, our view of the
markets and our confidence in a stronger future for ATI, thanks to strategic share
gains and ATI's unique capabilities.

So, first, where we are today? We began taking decisive action as soon as our
forward-looking demand signals flash red. Our customer connectivity continues to
give us the insight to assess market dynamics in the moment. From this, we gain
conviction to make critical decisions, aligning our cost structures and inventory
levels, with changing demand expectations. We've acted thoughtfully and with
urgency to reshape ATI for 2021 and beyond.

As a result of these proactive efforts, our third quarter financial results

significantly exceeded our previous guidance. We accelerated benefits from our cost
savings initiatives through aggressive implementation. This included capacity at
cold, dark and quiet facility eyelines [ph] reduced our fixed costs. Minimize the
variable costs. With execution on our restructuring programs eliminated costs to
align with demand decline. Reduced overhead. We have intensely reviewed every
administrative and non-production related expense, continuing only what was
critical.

Overall, we've significantly variablized our cost structure. Cost historically

viewed as fixed are now turned on and off and sync with demand, which gives us
tremendous control over our costs. This will be a lasting impact of the actions
we've taken during the crisis.

Through to all, our people have been extraordinary. First and foremost, they're
keeping each other safe, while efficiently and consistently delivering critical
materials and components to our customers. The frequent production adjustments
we've made in response to demand shifts and end market forecast have not been easy
for them. Growing levels and shift schedules have fluctuated as a result.

I sincerely appreciate the entire team's effort and dedication and personal
economic sacrifice. Their continued actions demonstrate a shared commitment to
ATI's future success. The deliberate actions we've taken and will continue to take
are crucial to our ability to emerge a stronger company as the economy recovers.

Looking ahead, we're confident demand will eventually recover. We expect these
difficult times to continue for several quarters to come. Yet we do believe we're
reaching the bottom with some signs of upcoming stability.

Secondly, let's talk about our balance sheet and the solid position it puts us in.
We've worked diligently to ensure ample liquidity levels and a manageable debt
maturity schedule. Our strong balance sheet gives us confidence to manage through
the COVID crisis and fuel our future growth.

We are fueling growth in three ways. First, based on customer commitments, we're
investing capital to enable strategic share gains and new business awards that
we'll start to see in 2021. Next, by organically expanding our presence in adjacent
high value markets where our material science expertise is valued. And finally,
when the time and economics are right, we'll pursue acquisitions to rapidly build
out scale, expand capabilities and capture profitable core market opportunities.

As we accomplish our growth goals, we will intensify our presence in aerospace and
defense materials and components. We will continue leveraging our material science
capabilities and advanced process technologies to generate aerospace like margins
in adjacent markets along the way.

Looking forward, we're confident that the demand for commercial aerospace products
will recover. We see it as growth deferred, not lost. No matter what form you
believe the coming economic recovery will take, it could be a V, it could be a U,
it could be L-shaped when you're at the bottom, it's difficult to predict when
you'll reach the other side. But we know we'll get there. We're positioning ATI to
emerge stronger, leaner and more efficient, no matter how the recovery comes.

Here are some examples of how I believe we're doing just that. We're expanding our
presence in growth markets like defense. We have solid positions in adjacent
markets that are likely to recover faster than commercial aerospace and can
generate aerospace like profitability. Lastly, our efforts to lower costs and
streamline our manufacturing footprint, while deploying growth capital will pay
dividends for the long-term.

Broadly speaking and not surprisingly, our Q3 sales across most markets were
negatively impacted by the ongoing pandemic and resulting economic downturn.
Defense remains a notable positive exception.

A little more color on our view of what we expect going forward. Let's start with
commercial aerospace. Both jet engine and airframe continued to decline
significantly versus the prior year. Aggregate year-over-year sales were down 60%
in the third quarter, driven by factors we're all familiar with, quarantine, travel
restrictions and low 737 MAX production.

Aggressive jet engine customer inventory destocking in the near term will better
align future production levels with demand. Fourth quarter jet engine product sales
will remain relatively weak as forgings began to slowly recover. Specialty
materials will likely lag for an additional couple of quarters.

ATI sales into airframe applications will remain subdued for the balance of 2020
and likely throughout 2021 as the impact of announced future wide-body production
rate reductions work their way through the supply chain. In 2021, ATI will benefit
from engine market share gains and new airframe business. The positive impact from
these wins will increase over time, as aerospace industry volumes recover.

Our second core market, defense remains a source of strength. Excluding titanium
armor, ATI is diversified defense sales were at more than 20% year-over-year led by
naval nuclear and military aerospace growth. Titanium armor plate sales were down
significantly due to timing for both a domestic and an international program.

We're investing resources to accelerate growth in the defense market, leveraging

our material science capabilities and advanced process technologies to develop and
produce materials and components to both power and protect. Near-term, we expect
continued growth in the fourth quarter and into 2021.

I suppose talk about my thoughts on three important adjacent end markets. Third
quarter sales were down significantly in the energy and medical markets and up in
electronics. When it comes to energy's oil and gas submarket, we saw a lack of end
customer demand and the resulting inventories less reducing exploration and
downstream processing activities worldwide. We expect this market to remain weak in
the fourth quarter.

Bright spot within energy is the specialty energy submarket, including pollution
control, nuclear and renewables. These sales grew year-over-year, and we expect the
specialty energy market to continue to outperform the larger hydrocarbon base
markets in the fourth quarter, mainly driven by large international pollution
control projects.

Our medical market is principally comprised of biomedical implants and MRI

materials. Sales versus prior year were lower to customers in both categories,
mainly due to the challenges presented by COVID. Patients postponed elective
surgeries and hospitals limited facility access to equipment suppliers. Looking
ahead, we believe medical sales will accelerate as patients regained confidence to
reenter medical facilities, either due to an effective COVID vaccine or disease
treatment protocols.

Finally, electronic sales move higher year-over-year. This is mainly due to ongoing
consumer goods production and supportive new product launches and year-end holiday
sales. We anticipate modest growth trends to continue in the fourth quarter.

With that, I'll turn the call over to Don to cover our third quarter financial
results and outlook for the balance of the year. I'll be back to offer a few final
thoughts before we open the line for your questions.

Don Newman

Thanks Bob. I'll spend the next few minutes sharing highlights in three key areas.
One, our better than expected third quarter financial performance; two, our strong
balance sheet and cash position; and three, a look at our Q4 and 2021 expectation.

From a performance standpoint, the adjusted EPS loss of $0.38 per share in Q3 is
significantly better than our previous guidance of a loss of between $0.62 and
$0.72 per share. Our Q3 performance reflects accelerated cost reductions and an
improved mix in portions of our business.

First and foremost, we're managing decisively. We're making the most of external
demand despite market headwinds, and we're controlling what we can, our costs and
capital deployment. Consider this, our third quarter revenue drops by more than 40%
versus prior year, including a 60% decline in our high value commercial aerospace
business. The revenue drop was largely due to market factors that were not within
our control.

When market declines became clear earlier this year, we responded quickly focusing
on cost containment. Benefits to those efforts can be seen in our Q3 results.
Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin
in Q3. That's a meaningful improvement from the 28% decremental margins captured in
Q2, clear improvement resulting from quick action.

Our cost actions are having meaningful impact and they're accelerating. As Bob
described it, we have significantly variabilized our cost structure. Costs once
considered fixed are now variable. This means we are better prepared to deal with
future demand fluctuation. Also keep in mind that structural cost savings will
accelerate profitability in the recovery, expanding margins and increasing our cash
conversion.

Looking beyond the income statement, our efforts to reserve free cash flow are
producing results as well. We expect to be free cash flow positive in 2020. This is
a possible through capital spending discipline and our ability to convert working
capital into cash.

I want to take a minute to acknowledge the fantastic efforts of our operating

teams. They took quick actions to protect cash in the near-term, while maintaining
our ability to grow and be recovery ready. We ended the quarter with approximately
$950 million of total liquidity, including $572 million of cash in the bank. Our
debt maturity profile also adds strength to our financial position. Our next
meaningful debt maturity is not occurring until 2023, three fiscal years away.

We're focusing on three key levers to drive cash generation cost structures,
inventory levels, and CapEx. Expect to see continued focus on these three areas in
2021, as we adapt our business to fit dynamic end market demand. At the same time,
we'll continue to protect our strong balance sheet. These actions will enable us to
manage through the down cycle and capitalize on opportunities in the coming up
cycle.

In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing

demand stabilization in commercial aerospace. This starts with jet engine OEM is
working to better align production and demand levels. Airframe OEM inventory
destocking is expected to persist in the fourth quarter. Beyond aerospace, some
industrial markets are seeing modest recovery. Others, namely oil and gas will
likely remain at low levels. As a result, we expect a fourth quarter adjusted EPS
loss in the range of $0.36 to $0.44 per share similar to our third quarter's
adjusted EPS.

Turning to our free cash flow guidance. Our consistent efforts to generate and
preserve cash have produced tangible results. We reduced managed working capital by
$115 million in the third quarter in the midst of the steep economic decline. We
expect to further reduce inventory in Q4.

Just as a team quickly pivoted to cost reductions, we managed our CapEx spending to
better match demand. To that end, we're again lowering our capital spending target
for the full year. Our updated CapEx forecast range is $125 million to $135
million, about 60% of the original 2020 projection.

We are raising our full year 2020 free cash flow expectations to a range of $135
million to $150 million before pension contribution. We're able to do this because
of the successful achievements in working capital, CapEx and cost structures. A
great accomplishment in the midst of a very challenging environment.

Looking beyond the fourth quarter, we will stay diligent to preserve or even
improve on the gains that we made in 2020. First, we believe that working capital
represents an opportunity for further cash flow improvement. At the end of the
third quarter, managed working capital was approximately 50% of revenue. This
compares to 30% at the end of 2019. We understand what it takes to get back to
those 2019 levels and we plan to make further improvements in 2021.

Next, we'll continue to keep a close eye on our capital spending. We'll balance the
need to fund growth and improve manufacturing efficiency with ongoing lower demand
levels. Finally, we will stay disciplined on costs. We will carefully preserve our
structural reductions and minimize additions as volumes return to the business. The
way we operate today is fundamentally different than how we used to work. We'll
strive to maintain the hard fought game.

With that, I'll turn the call back over to Bob to add some closing comments.

Robert Wetherbee
Thanks, Don. Your points were right on. It's been a real team effort in a very
uncertain time and much appreciate the contributions of everyone, part of ATI our
customers and our suppliers.

Our comments today focused on what matters most to our shareholders and to us.
These priorities are at the core of how we lead on a daily basis. First, we're
managing decisively in times of great market uncertainty. That includes quickly and
effectively adjusting our cost structures and inventories to match demand, and
we're keeping our people safe.

Secondly, we're preserving cash and maintaining liquidity. We're preserving our
ability to deploy cash accretively for our shareholders. We will be recovery ready,
capitalizing on industry volume growth, as well as our strategic share gains and
new business awards.

Finally, we're working with our customers new and longstanding who value our
material science capabilities and advanced process technology. Our goal is to be
integral to their success, helping them grow, solving even greater challenges
together. And so doing, earning an ever increasing share of their business. We're
taking the actions necessary to emerge from this crisis a stronger, leaner and more
focused ATI.

Scott, back to you.

Scott Minder

Thanks Bob. That concludes our prepared remarks. Operator, we are ready for the
first question.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]

And our first question today comes from Josh Sullivan of The Benchmark Company.

Josh Sullivan

Hey. Good morning.

Robert Wetherbee

Good morning.

Josh Sullivan

Bob, you highlighted defense is a key market going forward. Can you just talk about
how do you take share there? Or is it on new program growth? Just as we think about
defense budgets looking into 2021 and 2022, can this strength today carryover into
the out years?

Robert Wetherbee

Yeah. Great question and good morning. Yeah. I think when you look at what we've
been able to do in defense, it's being very program specific. Clearly, a big part
of what we do is supporting what floats, so the nuclear navy and the propulsion
systems there, we expect that to be a good strong market for the years to come as
much in terms of fuel replenishment as anything. So, I think that's a fairly solid
growth opportunity for us.

The other area we focus on is clearly military propulsion, both helicopter, road
craft sticks link 21:35. So when very select programs that are growing and we
continue to see opportunities there. And those programs tend to last forever and
obviously consume some portion of aftermarket type things, that we enjoy as well.
And then on the ground vehicles, we're on very specific programs that are starting
to gain traction internationally, or have implications for international growth on
the armor side. So, we feel very confident. These are markets that value our
material science capability and certainly things like HRPS and our facilities at
SAMC also contribute to that.

And lastly, I think, when you take material science and you look to the future, a
lot of work going on in hypersonic type space applications, and either are very
light gauge rolling capabilities are -- things like. When you think about our
alloyed mix zirconium, conium, hafnium and niobium and tantalum all those kinds of
things, there's a lot of great applications for a high temperature, light gauge
growth which is literally the catalyst for putting our SAMC business together with
our specialty real products business, earlier this year to get that synergy and to
make sure we were doing everything we could to grow. But we see defense continuing
to be strong, basically because of the programs that we're involved with.

Josh Sullivan

Got it. Got it. And then just curious if you had thoughts on -- comments from
Raytheon's announcement to do some more turbine airfoil production. And I know you
guys have a very good relationship with the company. Just curious on your thoughts
on what they might be doing and how you might be involved there. Just what your
thinking is as far as that announcement?

Robert Wetherbee

Yeah. We're still adjusting to the new name for Raytheon. And so, our connection
really -- obviously it was with the Pratt & Whitney family that's there and we feel
we have some good strong relationships to grow in the future. I can't really
comment on what their plans are, but we continue to be very actively engaged with
what they need on a material science basis. And so, we're confident that they still
have a good growth projection profile.

Josh Sullivan

And then just one last one on commercial aftermarket, for engines that are out of
large-scale OEM production or even out of production altogether, is there any
demand poll on the aftermarket side for those engines? Or how does the order flow
look like for those engines that are out of large-scale OEM production at this
point?

Robert Wetherbee

Yeah. No, that's a question you asked a couple other times for us. And I think what
we've always said is it's harder for us to see exactly where the aftermarket is.
It's an important part of our business. Probably -- yeah, I think we've said
publicly 20%, 25% of what we do is in the aftermarket. And so, we have that -- we
track it by basically the -- at the forging level, forging business. Then we see
the parts specifically come through.

But at this stage, we think it's still going to be there for awhile. It's not a
growth space for us when the engine starts to go out of production. We're well-
positioned for that next generation. Obviously, the leaps and the geared turbofan.
So, that's really where the future is going to be for us.

Josh Sullivan

Got it. I'll figure out a different way to ask the question next time. Thanks for
the time.

Robert Wetherbee

All right. Well, it's okay. It's early in the morning. We're ready.

Operator

And our next question will come from Phil Gibbs with KeyBanc Capital Markets.

Philip Gibbs

Hey, good morning.

Robert Wetherbee

Good morning.

Philip Gibbs

So, is -- so as you guys look at your cost reductions and your new targets for
2020, which Don, I think you lifted this morning. What's the implication in terms
of how much incremental cost savings we can get in the fourth quarter relative to
the third?

Don Newman

Yeah. We've made fantastic progress in terms of the cost initiatives that we
triggered early on as soon as we saw the changes going on in the market. To give
you some perspective, Phil, if you think about it, we captured about a $60 million
to $65 million of cost reductions in Q3. That was roughly twice the size of the
capture that we got in Q2.

So, as you think about Q4, we feel like we've kind of hit a good pace. I would take
some marginal improvement in Q4 relative to Q3, but still in that probably $65
million range for the quarter. That sets you up for a run rate in the 260 to
probably 275 range for 2021. And so, I think that's what you want to think about
run rate.

And, of course, the other key area of the cost reductions is how much of those cost
reductions are we going to keep? What's structural? And for that, I would stick
with the guideline that we gave you before, which is, we said we were targeting 40%
to 50% of our cost reductions to be structural. I would lean toward the 40%. And
that says, you do the math, we'll set you up for about a $100 million plus of
structural cost reductions.

And, of course, I don't know if they'll tell you the math on that those structural
cost benefits are gifts that are going to keep giving through the up cycle. They're
going to be beneficial to expanding our margins and increasing our cash generation.
And it should create some really substantial enterprise value for our shareholders.

So, we're really happy with the outcomes that we've had so far on our cost
reduction and the quick response that we've had from our team.

Philip Gibbs

Thanks, Don. What's the -- it looks like you did have a pretty healthy pension
contribution in the third quarter, which I think we may have anticipated was going
to be 4Q weighted. What do we have left on the pension contributions in the fourth
quarter to come?

Don Newman

Yeah. You're right. We had an excess of $60 million of contributions in the core --
in the third quarter. We're still targeting $130 million for the full year. That
means you've got about $35 million left in Q4. So that sets us up on this glide
path for getting our pension plan really fully funded or at least to a diminish --
de minimis level over the next number of years.

And so, as you think about again, 2021 is everybody's trying to wrap their head
around those expectations. We've said before that $130 million for 2020. As you
look to 2021 to 2023, we should be averaging closer to probably $80 million with
2021 kind of in the $100 million range. Again, really pleased with the glide path
that we're in with our pension. We're heading in the right direction, and it's
still a clear priority for us.

Philip Gibbs

Okay. Terrific. I'll hop back in queue. Appreciate it.

Don Newman

You bet.

Operator

The next question comes from Gautam Khanna of Cowen.

Gautam Khanna

Hey, guys. Good morning. Thank you.

Robert Wetherbee

Hey, good morning.

Gautam Khanna

Hey, just wanted to ask about your visibility on the aerospace side right now. And
have you -- I think there was a discussion about a recovery in the second half of
next year. And just if you could frame your confidence around that? What kind of
core visibility do you have in terms of what your expected maybe jet engine or
airframe deliveries are likely to look? Do you have visibility out into the second
half of next year? Or just how dynamic is that situation?

Robert Wetherbee

Yeah. At the tail end there, that's the ultimate question. Gautam, I thank you for
the question. The airframe supply chain and there is an understatement, it's an
ecosystem, right? It's always evolving in a current dynamic environment. But what
we're doing is we really get the benefit of -- I stated the forging business is
kind of our starting point where you're looking at parts specific activity, the
specific programs and our relationships with the big OEM. And we know that they
were pretty aggressive and adjusting their inventories quickly starting Q4 of last
year into the first part of 2020. So, we think that we're in a pretty good
inventory management position.

So, as we get into the back half of 2021, we should be able to see that inventory
toward burn off, but it's based on day-to-day talking to the customer, to be honest
with you. We get a lot of different inputs. We actually listened to some financial
analysts who talk about the build rates and talking to the customers, and it's
really about their tactical activity.

I think on the airframe side, we all recognized that the airframe supply chain was
consuming more than they were needing into 2019, was the situation with the MAX.
They also see lower wide-body production. So, one of the great measures for us is
actually kind of -- what kind of inventory do we have trapped that doesn't
necessarily manage -- match up with current order demand.

As Don said, one of the great opportunities for us is, right now, we're at about a
50% working capital to sales kind of ratio. We should be much closer to 30% if not
better than that over the term. So, that's kind of our own internal indicator of
where is the supply chain. As we start to release our trapped materials that will
tell you that they've started to burn off. But the real challenge, I think, is that
we're still waiting on the MAX return to service. And I think once that happens,
you tell me when it's going to happen, but let's assume it happens, and we start to
see visibility coming back in January and February. I think that's when we'll get
our first true look at what the recovery is going to look like.

But it's still -- looking at inventory levels, talking to key suppliers and
certainly investing with our customers the time. And there's no lack of
conversation going on. It's a matter of -- that's the biggest wild card for us is
the MAX return to surface at this point.

Gautam Khanna

And just maybe as a follow-up, Rich -- I am sorry -- Bob. I apologize.

Robert Wetherbee

I go by lots of different names. Gautam, it's okay.

Gautam Khanna

I was just curious, the jet engine sales that you guys revealed in the slide deck.
Do you think that is a low watermark, if you will? I mean, from here, do you -- I
mean, maybe Q4 just a little lower, because there's always kind of channel
destocking into the calendar year-end. But do you think that marks -- this quarter
Q3, Q4 will mark kind of a low point?

It is a destocked level, if you will, below underlying consumption of the end user,
or what do you think -- we're going to be hanging out at a level like this, or
maybe even below that in the first half of next year? Just what's the shape of that
kind of -- I'm just trying to understand, like, what is underlying consumption
versus what you guys are actually feeling today.

Robert Wetherbee

Yeah. I think, I'll give you my comments with one caveat. So, I think, if you took
Q3 was still a little bit of a transition quarter. Q4, Q1, and Q2, they all kind of
have that kind of resemble the same pattern. I think we are bouncing off the
bottom. Some of that is -- when I looked at the news that comes across my desk, I
would say today, it's more up than down, where for the last 180 days, it's hard to
believe it's only been 180 days. So, we've been in this pandemic that was mostly
down right, right? Negative type stuff.

So, I think the mood has shifted quite a bit. So, I think Q4 to Q1, Q2 probably
flat for the demand. I think it's a couple of tidbits we're working through is that
we're going to have some tough comps going forward, right? And Q1 particularly. But
I think that -- if you look sequentially, I think, you'll get a good track record.
And then not all our friends in the OEM business are as effective at managing their
forward demand as others, right? So, there's always one of the guys that we kind of
have to wait and see, they tend to do more of their adjustments in Q1.

So, we could still get some modest inventory corrections for one or two players.
But I think for the core customers that we depend upon in the jet engine space, I
think -- we think we're at the bottom and it should flatten here for the next
couple of quarters. And certainly, the work we're doing on the decremental margins,
it should still be -- still going to be on our mind. So.

Gautam Khanna

Well, thanks again. I appreciate the answers and the insight. Good luck with
everything.

Robert Wetherbee

Yeah. Thank you.

Operator

The next question will come from Timna Tanners of Bank of America.

Robert Wetherbee

Good morning, Timna.

Timna Tanners

Good morning. Sorry about the delay there. So, thanks for all that detail. You
could elaborate a little bit more on the CapEx and where it was cut, and how low it
can go going forward. And then also there was a comment I caught on this discussion
about possible acquisition system, wanted a little more detail on that also.

Don Newman

Sure. This is Don. Let me take a run at that question. First from a CapEx
standpoint, we reacted really very, very quickly to right-size our CapEx where we
were seeing demand going. When we entered the year, we were expecting to spend an
excess of $200 million. If you look at our Q3 numbers, Timna, what you're going to
see is a run rate of closer to $120 million. So, a very positive.

In terms of where the cuts have happened? It's really been pretty broad-based
across all of the segments. And it's really about prioritizing where we're spending
the CapEx. We're looking at it just like our cost structures. We're dismantling our
capital spending. We're looking at what the highest priorities are from a
maintenance standpoint.
And then when it comes to any growth CapEx whatsoever, we're, of course, interested
in growing, but we can't spend a dime ahead of when it needs to be spent and we
have to be dropped at certain that we're going to get the returns that we believe
we're going to get with these investments. So, what you've seen in 2020, you should
expect to see in 2021, similar discipline, similar flexing based upon what the
customer needs and what the demand of levels are in the end market.

The second part of your question, would you repeat that?

Timna Tanners

Yeah. Sure. Acquisitions.

Don Newman

Acquisitions?

Timna Tanners

Yeah.

Don Newman

That's right. So, the way to think about it is, it really comes down to what's your
priorities with your capital. And our priorities around capital allocation, Timna,
has not changed. Number one, we have to ensure that we have adequate liquidity in
the business to keep it healthy. And we're there. Check that box, $950 million of
liquidity.

Second priority is we made sure that we were taking care of our people, and we make
sure that we're maintaining our assets. Check, we're doing that third. Third, we
are on a glide path to the pension. We're going to continue to make our pension
contributions and see ourselves work down that pension commitment to a de minimis
level over the next several years. Check, we've got that covered.

At that point, our priorities really are focused on where we deploy capital to do
kind of effectively two things, prudently grow and the second is really take care
of our maturing debt facilities. So, let's focus on the growth. It's organic or
inorganic, and we do measure the differences. We understand that organic growth
will get us so far in terms of our business, inorganic growth maybe an enhancer.

How do we look at that are inorganic growth and are we open to inorganic growth is
what you're asking us, Timna. And the reality is we are. We have put ourselves very
intentionally in a position to have choices, but it's also choices that are going
to be executed based upon the discipline you've seen over these last few quarters.

And as we look at M&A, it's also important to understand our priorities there. Our
priority is aerospace and defense growth. That's our core. That's where we make our
highest margins. That's where we've experienced the healthiest growth. And so as we
deploy capital to growth, whether it's internal or external, it has the priority
toward a preference to aerospace and defense. And we'll be opportunistic. We see
opportunities that really often and we're pretty discerning and pretty careful as
we make those decisions, but we do see it as possibility.

Robert Wetherbee

Yeah. I think that's right, Don. I think it's about expanding into material science
capabilities that we can go into components, right? We have -- we understand our
material science capabilities, but almost everything we sell, something else
happens to it before it gets on the end use. We see some really unique appetites
coming in defense for high temperature structures, powder metallurgy plays into
that game.

The form -- there are times, Timna, you might accuse us of being in the lumberyard
business and some aspects of our business. And we think going up the value chain to
be near to the end state is actually where there's an opportunity for further
differentiation, leveraging our advanced processes and certainly our material
science.

So, hopefully that helps with the color you were looking for.

Timna Tanners

Okay. Thanks for that. Yeah. Just try to understand like, if you're going to finish
some of the isothermal forge press CapEx or where that stands relative to thinking
about M&A and how those priorities would be going forward. But I can follow-up
offline. I would ask -- go ahead.

Don Newman

Timna, I can actually answer that question for you. The answer is yes in due time.
But it's really going to be dependent upon what the demand in the market is. And
when we would need those assets to be in place to meet the demand for --that our
customers put in front of us. We're not going to rush to spend the money. They're
still good investments at the right time.

Timna Tanners

That makes sense. So, my other question was just to put you on the spot, if we
could, obviously election day in a couple of days. And I was just wondering if you
could comment at all, if you have any insights as to the impact one way or another
specifically on trade. For example, if it's not too late to revive, the -- some of
the -- slightly roll and opportunities at the rolling mill or with regard to
defense spending, and any thoughts there.

Robert Wetherbee

Yeah. I think I star with the defense spending. I think in the near-term -- near to
medium term, I think defense spending will continue. I think that the opportunities
for the programs that we're on specifically feel relatively strong for a long
period of time, not necessarily driven by politics, but by global threats and
defense needs. So, we spend a lot of time. We have a dedicated team in DC who is
spending a lot of time with the Pentagon and various folks. And so, I think on
defense, we feel relatively strong.

In terms of assets that we might idle, they're always idle such that they could be
returned to service, but we continue to deemphasize our position in stainless. And,
I think we're interested in using the HRPF that we have in Pennsylvania for cash
generation. We think there's still a lot of opportunities. We still get inquiries
about using that capability. As we all remember, it was built for a capability and
it came with a capacity, and we still get inquiries to do that. The markets have
been up and down over the last 180 to 200 days. So, a little harder to tell where
that might go.

But I think our focus is clearly on aerospace and defense. That's where we want to
go. We also have our adjacent markets in electronics, medical space. And they tend
to have -- the places we're going to invest actually are in the aerospace, like
profitability ranges. There are good opportunities there in those markets. And
we've been known to sell assets from time-to-time. So, if somebody comes along and
says, Hey, we'd really like to take a risk in that lower value space. We're open to
that.

Timna Tanners

Okay. Thanks, guys. Best of luck.

Robert Wetherbee

Thanks, Timna.

Operator

The next question comes from David Strauss of Barclays.

David Strauss

Thanks. Good morning.

Robert Wetherbee

Good morning, David.

David Strauss

Apologies, if any of these have been asked. I joined late from another call. Free
cash flow, as we think about 2021 and the moving pieces there between -- I heard
the comments on CapEx, but CapEx, working capital, cash, taxes, and I guess both
including and excluding pension contribution, would you expect it to grow in 2021
versus 2020?

Don Newman

Hey, David. This is Don. We haven't given guidance yet for 2021, but let me give
you some color. Of course, in 2020, we're expecting to generate somewhere between
$135 million and $150 million of free cash flow in a pre-challenging environment.
How do we get there? Well, there's three levers that we're managing. It's about our
cost structure, it's about our CapEx, and it's about our working capital.

The way to think about 2021 is you're going to see, number one, the same discipline
around the same leverage. As we look at our cost structures, we're going to work
very hard to continue to capture cost savings and maintain the gains that we've
already captured in 2020. I've already talked about the structural savings being
the range of a $100 million even in the recovery. So, I feel very positive about
that. When it comes to our CapEx, the same discipline that you see in 2020 where we
took our CapEx spend, really shaped it to the new demand, took it from $200 million
down to a run rate and after Q3 at about $120 million. I expect to see that very,
very same discount applied as we look at what the market demand is in 2021.

And then the last lever and which is I think really key to understand how we're
viewing 2021. And this will likely be reflected when we give our guidance for free
cash flow is, how we're thinking about our managed working capital levels.

So, Bob already touched on this, but I want to drive home how important this is. We
ended Q3 with a managed working capital as a percent of revenue at about 50%. And
David, you know that we ended in 2019, that metrics -- metric was managed working
capital at 30% of revenue. That 20% delta we see as a massive opportunity, and we
are going after it aggressively today. And it's really going to unfold in 2021, as
we release the captured inventory that we have and really applies a pretty solid
methodology to make sure that we're not creating any new stranded inventories. And
that should be a significant source of cash generation for us.

David Strauss

Great. That's helpful. So, you think the biggest lever to get back down towards
that 30% range is on the inventory side, more so than anything still to be done in
terms of receivables and payables.

Don Newman

Yeah. Receivables, we're doing a good job around that. We're not seeing any issues,
no delays. The receivables are working with their way down in the normal course.
Payables, the way to think about payables, no step change in the DPOs. We have
picked up a couple of days in our favor around payables, but I'm not expecting a
step change there. The real opportunity here, and what we're focused on is really
inventory. And it's a -- in our mind, it's a really big opportunity.

David Strauss

Okay. And then thinking about the trajectory on aero and when you're talking about
in the second half of the year and next year things maybe starting to get a bit
better. Between here and there, should we expect that you're -- I mean, you've done
a great job on decremental margins thus far. Should we expect that the level of
decremental margins would continue to shrink from here? Or you think kind of 25%
decrementals which is, I think, what was you doing the quarter? Is that the right
way to think about? What those will look like over the next couple of quarters?

Robert Wetherbee

Yeah. I'm glad you asked the question. You're right. We made some really good
progress around our decremental margins. Last quarter 2, we were at 28%. We worked
that down to 25%. So, how should we think about decremental going forward? Really,
I think, as you're modeling it, you want to think about our decrementals in the 25%
to 30% range.

Remember the fact that as we look at what's created those really favorable
decremental margins, it's really about our cost initiatives. There's two baskets to
that. One basket is, is what I call variable related or variablized our cost
structures, which is going to enable us to continue to flex as the end markets are
moving up and down. So, we're in good shape there.

The other key thing, and it will continue to benefit our decremental margins as you
go through 2021 and even the up cycle are those structural changes. I know I've
mentioned it several times, but it is quite important that you guys are thinking
about 2021 and beyond. As we keep that $100 million of incremental savings as
structural, that's a gift that keeps giving and it's going to contribute not just
to beneficial decremental margins and incremental margins, but also our cash flow.

David Strauss

Okay. I guess, then, in following up on that, I mean, Bob, what -- I mean with this
kind of business in the past we've gotten used to 40%, 50% kind of decremental. I
mean, what is -- how has the approach been different this time to allow you to be
able to hold at much lower levels in terms of decrementals we are seeing?
Robert Wetherbee

Yeah. We've been very aggressive, David, on making sure we're running the right
facilities. We actually -- I checked this morning, we have six facilities that are
actually on an indefinite idle today. They were our higher cost facilities. And so
the challenge there is we use the term cold, dark and quiet candidly that you have
to take those floating offline and eliminate the costs to the maximum. Now, for
those facilities to come back online, obviously that has to be justified, justified
to reinvest the working capital and justified to add the capacity. And in the
meantime, making structural changes in those facilities that they'd be viable when
they did come back.

So, I think what's different this time is primarily driven by the magnitude and
probably the duration of the economic situation. We were able to take more
structural change than we ever have before. And so that's been a huge contributor
to that.

Don, do you want to add some more color to David's question?

Don Newman

Yeah. I think, certainly, we're facing unprecedented times and one of our key
models internally is don't waste a good crisis. And so really the dramatic changes
in the end markets driven by COVID have opened up new opportunities for us to make
fundamental changes that maybe in the past for a more difficult -- to more
difficult thing to do. So for us and for our teammates in the operations
everything's on the table. And so that opens up new opportunities that maybe others
hadn't seen in the past. And it's not bad. It's actually a really good outcome of a
really tough situation with crisis.

Robert Wetherbee

Yeah. I think that crisis gets us to recovery ready, right? We recognize that being
recovery ready is important for our key customers. It's not a generic term or a
blank check, actually it's really driven by what specific actions would we take in
the supply chain. And what's the lead time to take those. And candidly on a weekly
basis, we're looking at our customers forward look and candidly, the reports you've
put out and some of the other analysts, as we look out to try to gather where do we
need to be and when do we need to be there, but we've taken a more conservative
view, I think, of what demand is going to be in the near-term to be positioned on a
cost basis to achieve that.

David Strauss

Okay. Thanks very much for the color. Appreciated.

Robert Wetherbee

Yeah. Thanks, David.

Operator

Our next question comes from Paretosh Misra of Berenberg.

Paretosh Misra

Thank you. Good morning. Question about next year 2021 regarding your jet engine
and airframe business. Are you expecting any contribution from price increase also
to your top line because maybe some new contracts are starting with the new
calendar year? Or it's mainly a volume story as we look -- as we look into next
year volumes stabilizing and gradually recovering.

Robert Wetherbee

Yeah. I would say -- good morning, Paretosh. Three components to that. Some of the
contract renewals we had -- did have, we call it margin enhancement and it came
from one of two sources. It could be unit price, but also could be product mix. So,
we continue to drive as we get more share in the jet engine space and even in some
of our airframe spaces, we've been able to get a better product mix that plays more
favorable to the alloys and/or dimension products that we make. So, I'd say there
are some that is going to be driven by that, but the majority of it would be
increasing in volume.

Paretosh Misra

Got it. And with regard to the inventory of your product that your customers carry
on the jet engine side and the airframe side, is that around three to six months
typically, or give or take, or higher?

Robert Wetherbee

Yeah. I don't know exactly how much inventory they carry per se, but I would say
from a lead time perspective, historically, we've seen the lead time from shipping
a forging per se, to being bolted on a plan can be six months. Now, that's a nice
average. And on an uptick, it tends to get a little tighter, can be as short as
four months maybe in the best cases.

So, if that's what you're asking, how long from build, engine or delivery of an
engine to a part supplied by us as a forging, that can be four to six months. When
you get into other products like pillars and plate, they can extend closer to 12 to
15 months depending on the product and the difficult -- or the challenge of the
supply chain.

Paretosh Misra

Got it. And if I could just ask one quick follow-up on your last -- on the last
question about decremental margin. I apologize if I didn't understand it correctly.
But I think you're saying that you could keep a decremental close to 25% because of
that the structural cost saving, right? Like that's the -- that's a target, I guess
it's closer to 25%. Did I understand it correctly?

Don Newman

Yeah. Partially. What I was saying was as you think about our decremental margins
going forward, consider them in the 25% to 30% range. And that would be consistent
as you go through 2021, and think about how the change in revenue is affect the
bottom line. Where I raised the comment about structural changes is really around
how to think once we're in the recovery, how to think about the benefits of the
cost actions that we've taken. We, overall, have delivered a significant amount of
cost reductions in themselves in the range of 260 to 275 of annualized savings.

But what's key to me is what happens beyond the down cycle. How much of that can
you keep? And there it's the structural changes, and those are those gifts that
keep giving and that's in a magnitude of about $100 million plus. And so that's
what I was referring to.
As I said, as you think about decremental margins off in the future, especially
past 2021 once -- we're deep into the recovery, it's important to know that those
decrementals and our incremental margins going forward are going to be pretty
robust.

Paretosh Misra

Understood. I appreciate that. Thanks guys.

Operator

And our next question will come from Matthew Fields of Bank of America.

Robert Wetherbee

Hi, Matthew.

Matthew Fields

Hey, guys. Hi. Just want to ask about liquidity. You've obviously done a fantastic
job of kind of managing the working capital. But I noticed that the ABL
availability dropped this quarter presumably because your borrowing base shrunk in
accordance with that. How do you think about the trade-off between kind of
squeezing out cash flow and kind of managing that ABL available?

Robert Wetherbee

I'm really glad you asked that question. So, when you think about what's going on
with availability, right, usually, there is a trade-off between the release of
working capital, get it into your cash, but hey, you're losing some of your
availability on your ABL. We, of course, are very aware of those mechanics.

So, here's what we're doing. We actually have a very healthy set of initiatives
that we're targeting, and we're capturing that are looking at our existing
collateral baskets. There are some of those collateral baskets that have
historically not been included in our borrowing base, things like international
receivables. There's some inventory categories that may exist with third parties.
What we're doing is we're working with our banking group to get those baskets of
collateral included in our ABL borrowing base, going forward.

What's the benefit of that? Of course, it is that even though you're converting
some of your base borrowing -- borrowing base into cash, you're replenishing the
collateral and it's really kind of free collateral if you think about it that way,
Matt. And so, it can be very, very beneficial to us. Our goal is -- we're in great
shape right now with $950 million of liquidity. We're going to continue to drive
increasing our cash balances. It's the right thing to do. And we're going to look
to maintain our overall liquidity, even in a challenging environment by continuing
to add baskets that have been under utilized in the past. So, we're doing the right
things to put us in -- to keep us in a healthy position.

Matthew Fields

That's great. That's very helpful. And obviously, you've built up kind of a war
chest of liquidity for a downturn. But now that we're another 90 days into this,
how do you feel about your maturity window, obviously your first maturity of size
isn't until 2023. Do you think that that's still plenty of time, or do you think
about wanting a longer runway or you comfortable with that the downturn won't be as
deep as you initially feared? Any thoughts on that kind of -- maturity schedule and
policy?

Robert Wetherbee

Yeah. We're in great shape around our debt maturities. And the reality is with the
kind of cash and liquidity that we have right now ultimately our choice -- or
excuse me -- our objectives were to give ourselves some choices around things like
you're just describing. How do you manage these debt maturities? I think we've got
a lot of runway around our debt maturities. We're in great shape.

In terms of when we maybe refinance the bonds that are going to be maturing in
2023, I'll call that a game time decision. There's a lot of -- a lot dynamics are
going to manage your capital structure and funding your business, the growth
opportunities that Timna brought up. So, right now, we're in a fantastic spot to be
able to make those choices. And the markets have been healthy and supportive as
well, which is also, of course, helpful.

Operator

And this concludes our question-and-answer session. I would like to turn the
conference back over to Scott Minder for any closing remarks.

Scott Minder

Thanks, Laura. Thank you to all the participants and listeners for joining us
today. That concludes our third quarter 2020 conference call.

Operator

The conference is now concluded. Thank you for attending today's presentation. You
may now disconnect.