ATI Inc. (ATI) Earnings

Management highlights

### Overall Quarterly Financial Performance - Q2 2026 adjusted EBITDA was $284 million, 37% higher year-over-year, and $19 million above the high end of prior guidance excluding a $10 million asset sale gain. This marks ATI's strongest quarterly EBITDA performance since 2007. - Consolidated adjusted EBITDA margin expanded 440 basis points year-over-year to 22.6%. Total revenue increased 11% year-over-year to $1.3 billion, with an annualized run rate exceeding $5 billion. - Adjusted free cash flow for Q2 was $69 million, bringing first-half 2026 adjusted free cash flow to $143 million, a $193 million improvement over the first half of 2025. Management expects positive free cash flow in every quarter of 2026. - Ending backlog reached a new record of $4.4 billion, up 18% year-over-year and 7% sequentially, with an increasing share tied to long-term strategic agreements that provide multi-year earnings visibility. ### Business Transformation and Strategic Priorities - The AA&S segment has been successfully transformed from a cyclical, lower-margin business into a second durable earnings engine, driven by portfolio optimization (shifting to higher-value aerospace and defense (A&D) applications and exiting lower-value products), leveraging ATI's rare position as one of three Western qualified producers of high-purity hafnium and zirconium, and translating supply scarcity into stronger commercial terms. A&D now accounts for 44% of AA&S revenue, more than double its share five years ago. - HPMC remains ATI's largest long-term growth platform and the foundation of its aerospace strategy. Qualification timing delays at the new Mexico facility and new EB2 titanium furnace shifted some deliveries to future periods, but management's confidence in HPMC's long-term growth trajectory remains intact, with sequential performance improvement expected through the second half of 2026 and additional growth in 2027. ### End Market Performance - **Jet Engines**: Revenue increased 13% year-over-year and 8% sequentially, with strength across both OEM production and the aftermarket. ATI is positioned to benefit from next-generation engine growth, with double the content per aircraft compared to legacy platforms, and is the sole supplier for five of the seven most advanced nickel-based superalloys. Full-year 2026 jet engine revenue growth is projected to be high teens. - **Airframe**: Supply chain inventories have largely normalized, and order patterns now align with OEM build rates. Full-year 2026 airframe revenue growth is projected to be mid to high single digits, weighted toward the second half, with landing gear alloys as the strongest product category. - **Defense**: Revenue increased 36% year-over-year to an all-time high, with broad strength across naval nuclear, missile, and missile defense applications. The recently renewed naval nuclear contract extends through 2030 and doubles annual revenue compared to the prior agreement. Full-year 2026 defense growth guidance has been raised to high teens. - **Specialty Energy**: Revenue declined in Q2 due to intentional prioritization of higher-value defense production, but full-year 2026 growth guidance remains mid-teens, with rebalancing expected in the second half driven by nuclear shipments and durable industrial gas turbine demand. ### Operational Execution and Capacity Investments - ATI's Elevation operating model focuses on increasing productivity of existing assets, making targeted high-return investments in differentiated technology with committed customer demand, and embedding repeatable process improvements across the enterprise. Year-over-year throughput has increased 30% in ultrasonic inspection, 15% in isothermal forgings, and 15% in primary nickel melts. - Key growth capacity investments remain on schedule and on budget: the new Chihuahua, Mexico facility for next-generation aerospace engine testing and inspection; the EB2 premium titanium furnace; and the nickel remelt expansion with a new VIM furnace coming online by the end of 2027. These investments will increase nickel capacity by 15-20% by early 2028 (vs. end-2025) and deliver $315 million in incremental annual revenue by 2028. ### Capital Allocation - Gross capital expenditure guidance for 2026 remains $280 million to $300 million, partially offset by $55 million to $65 million in customer-funded capex. Share repurchases remain the top priority for deploying incremental free cash flow to return capital to shareholders, with $495 million remaining in the current repurchase authorization after a $50 million repurchase in Q2.

Guidance

- Management has meaningfully raised full-year 2026 guidance across all key financial metrics, driven by stronger-than-expected Q2 performance in AA&S, structural improvements in AA&S earnings, pricing improvements from contracted long-term agreements, and the shift of HPMC deliveries from Q2 to the second half of 2026. - Full-year 2026 adjusted EBITDA guidance is raised to $1.135 billion to $1.185 billion, with a midpoint of $1.16 billion, representing 35% year-over-year growth. - Full-year 2026 adjusted EPS guidance midpoint is $5.04, representing 56% year-over-year growth, with a full range of $4.90 to $5.18. - Full-year 2026 adjusted free cash flow guidance midpoint is raised by $80 million to $575 million, representing 51% year-over-year growth, with a full range of $550 million to $600 million. Second-half 2026 adjusted free cash flow is projected to be $430 million. - Full-year 2026 consolidated adjusted EBITDA margin is projected to be in the low 20% range, with incremental margins raised to 50% (from the prior 40% guidance), driven by stronger AA&S segment performance. - Q3 2026 adjusted EBITDA guidance is $305 million to $315 million, with a midpoint representing 38% year-over-year growth and 9% sequential growth. Q4 2026 is projected to be ATI's strongest quarter of 2026 for both sales and profit, with a midpoint implied EBITDA of $335 million, equal to a $1.35 billion annualized exit run rate. - No formal 2027 guidance has been provided, but management noted that the commercial and operational drivers supporting 2026 performance extend into 2027.

Segment performance

ATI operates two core product segments: 1) HPMC: Revenue increased 5% year-over-year to $637 million, contributing 49% of total Q2 2026 revenue. Segment adjusted EBITDA margin expanded 40 basis points year-over-year to 24.1%. Growth was driven by higher volume and pricing for rotating jet engine nickel products, partially offset by timing shifts of customer qualifications that pushed some deliveries to future periods. Full-year 2026 HPMC EBITDA margin is projected to stay in the mid-20% range, consistent with prior guidance. 2) AA&S: Revenue increased 17% year-over-year to $624 million, contributing 48% of total Q2 2026 revenue. Segment adjusted EBITDA margin expanded 930 basis points year-over-year to an all-time high of 23.7%, driven by improved pricing, favorable product mix, and stronger operational execution. Full-year 2026 AA&S EBITDA margin is projected to be in the low 20% range, an improvement from the upper teens guidance provided last quarter, with management expecting margins to consistently stay above 20% going forward.

Risks & headwinds

No explicit material risks or operational failures were discussed during the call. Qualification timing delays for the new Mexico facility and EB2 titanium furnace were acknowledged as causing temporary delivery shifts to future periods, but management noted these are timing effects only, with deferred demand expected to convert in the second half of 2026. No other unplanned operational issues, market downturns, or material risks were disclosed.

Analyst Q&A

• Q: Why did the full-year adjusted EBITDA guidance increase by $125 million but free cash flow guidance only increase by $80 million, and what should investors expect for cash conversion going forward? /

  A: The guidance increase is based on contracted pricing improvements, committed long-term agreements, already secured customer orders, and structural earnings improvements in AA&S, plus timing shifts for HPMC deliveries. The smaller free cash flow increase is due to two factors: late Q4 shipments will leave some additional revenue in accounts receivable at year-end, and the company plans to build a small amount of incremental inventory to prepare for 2027 shipments. The 2026 guidance midpoint represents 51% year-over-year free cash flow growth with ~80% conversion, and management maintains a long-term target of 90%+ free cash flow conversion for future periods.

• Q: What is the long-term EBITDA margin potential for the transformed AA&S segment, and what A&D mix do you expect going forward? /

  A: Management expects AA&S can sustain mid-20% EBITDA margins going forward, driven by multiple structural changes: multi-year portfolio optimization that exited lower-value products and shifted to higher-value A&D applications, strengthened commercial models and restructured long-term contracts that improved pricing, and accelerating demand for defense and nuclear products. A&D currently makes up 44% of AA&S revenue, up from half that level five years ago, and management expects this share will continue to rise amid ongoing supply tightness for hafnium and zirconium driven by Chinese trade restrictions, supporting structural margin improvements.

• Q: How is ATI evaluating requests for incremental capacity expansions beyond the current projects already announced, given strong growing demand across multiple core end markets? /

  A: ATI’s first priority for meeting additional demand is extracting more productivity from existing assets through its continuous improvement Elevation operating model, which increases throughput, improves yields, and shortens cycle times to expand available capacity without new investment. After capturing these internal efficiency gains, the company evaluates new capacity investments based on long-term visibility from customer contracts, meets an internal 30% return threshold, and often receives customer funding to support the investments and lengthy qualification processes. Current investments, such as the new Mexico downstream facility, are aligned with growing demand for next-generation aerospace programs, and the company will continue to align new capacity with confirmed customer demand.

• Q: Is the implied Q4 2026 EBITDA exit run rate a sustainable base for growth into 2027, and is the new 50% consolidated incremental margin target sustainable? /

  A: Management confirmed that while it is not providing formal 2027 guidance yet, the implied $1.35 billion annualized exit EBITDA run rate from Q4 2026 is directionally a reasonable baseline for 2027 growth. Following the structural business changes ATI has implemented, the company expects it can sustain incremental margins in the 40% to 50% range going forward. Additional guidance for 2027 will be provided at a later date.