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Allegheny Technologies Inc (ATI 1.26%)
Q4Â 2019 Earnings Call
Feb 4, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Allegheny Technologies Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead.
Scott Minder -- Vice President, Treasurer and Investor Relations
Thank you, Andrew. Good morning and welcome to the Allegheny Technologies Fourth Quarter and Full Year 2019 Earnings Conference Call. This call is being broadcast on our website at atimetals.com.
Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; segment Executive Vice Presidents, John Sims and Kim Fields; Don Newman, Senior Vice President, Finance and Chief Financial Officer; and Kevin Kramer, Senior Vice President, Chief Commercial and Marketing Officer.
If you connected to this call via the Internet, you should see slides on your screen. For those of you who dialed in, slides are available on our website. After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to two questions. We will attempt to get everyone in the queue within the allotted call time.
Please note that all forward-looking statements are subject to various assumptions and caveats, as noted in the earnings release and shown on this slide.
Now, I would like to turn the call over to Bob.
Robert S. Wetherbee -- President and Chief Executive Officer
Thanks Scott. Good morning and thanks for joining us. Before we get started today, I want to welcome our new CFO, Don Newman, to his first ATI quarterly call, and to thank our retiring CFO, Pat DeCourcy, for a dedicated and distinguished ATI career.
Don brings a wealth of multi-industry financial experience, including from his most recent role as the CFO of Stelco and from nearly seven years as CFO of Headwaters Inc., a leader in the building and construction materials industry. Throughout his career, Don has focused on business growth, effective capital allocation and transformation. We look forward to his contributions to ATI, and you'll hear directly from Don later in the call.
I'm going to start today by reviewing our focus in 2019 and the significant progress we've made on our strategic imperatives, and then move to our expectations to maintain this momentum in 2020.
First and foremost, we continue to be an industry leader in on-time delivery of high-quality materials and components. Our successful aerospace ramp execution has earned us customer commitments that will generate future profitable growth for many years. This linkage to execution was clear as we extended several aerospace and defense related long-term agreements, earning increased market share in most. We continue to leverage our material science capabilities and unique process technologies to expand our business with new and existing customers. We're confident that this will continue in 2020 as we finalize the next set of long-term contract extensions and capitalize on new opportunities.
Flat Rolled Products achieved its third straight year of profitability. This was despite the negative impacts from Section 232 tariffs, as well as elevated retirement benefit expense related to 2018's pension asset declines. While we fell short of our 2019 expectations in this segment, we were profitable. We remain focused on improving our cost structure, continuously improving our operations and driving profit growth in specialty products.
We took significant steps in 2019 to further strengthen our balance sheet. First, we extended and upsized our asset-based lending agreement to ensure ample liquidity through 2024. Second, we reduced gross debt by $150 million in the fourth quarter, which will lower interest expense by roughly $9 million annually starting in 2020, and resulted in a corporate credit rating upgrade. Finally, we further reduced risk associated with our US defined benefit pension plan through a $95 million annuitization of approximately 1,800 retirees in the third quarter and contributed approximately $145 million to our US defined benefit pension plans during the year. Reducing pension liabilities remains a top priority.
We're actively assessing options as part of our capital allocation and liquidity management process, while ensuring that we are well prepared and taking the necessary actions to handle the uncertainty stemming from the 737 MAX production suspension.
2019 was a year of strategic change and progress at ATI. We have a highly skilled and committed leadership team with a mix of ATI veterans and experienced newcomers. And I'm highly confident that our progress will continue in 2020.
Let's move on to Slide 4 and a high level overview of our 2019 results. Starting with the full year, ATI generated solid earnings per share and net income growth. This was aided by the sales of non-core assets. Revenues increased year-over-year in both operating segments despite challenging market conditions. Total segment operating profit declined versus the prior year as an increase in HPMC, driven largely by the performance of our specialty materials businesses, was offset by a decrease in FRP. As previously discussed, this decline was primarily due to higher retirement benefit expenses, weaker standard stainless market conditions and a bumpy start to the year in our Asian Precision Rolled Strip business known as STAL.
In the fourth quarter, excluding special items, ATI increased earnings per share by 20% versus the prior year. This growth was driven by operating profit improvements in both segments, including increased sales volume in the HPMC segment. In the face of commercial aerospace industry uncertainty and despite regulatory challenges, in the fourth quarter, we generated year-over-year growth in earnings per share, free cash flow and revenue. We focused on the things that we could control and we made significant progress on our strategic imperatives.
Going forward, in 2020, we're better positioned for long-term profitable growth and industry-leading execution on multiple aircraft and engine production ramps, including the 737 MAX when it returns to the skies. And let's be clear, the long-term fundamentals driving aerospace demand are still strong.
So enough from me this morning. John, Kim and Don will cover the business and financial results in more detail, starting with John for the HPMC side. John, all yours.
John D. Sims -- Executive Vice President, High Performance Materials and Components Segment
Thanks Bob. Turning to Slide 5, the HPMC segment increased revenues and profits in 2019 versus the prior year despite an environment that was dominated by several key issues: a large jet engine customer's year-end cash management actions, a rapid decline in cobalt prices early in the year, and industry turbulence around the grounding of the 737 MAX. For the full year, profit margins were essentially in line with 2018 levels with year-over-year margin growth accelerating in the second half of 2019, offsetting declines in the first two quarters of the year as we dealt with supply chain shortages.
Fourth quarter financial results provided the best year-over-year improvement in 2019 with sales, excluding divestitures, increasing by 10%, led by our aerospace and defense market. Segment operating profits grew by more than 20%, demonstrating the asset utilization benefits due to increased production volumes, as well as from our early divestiture of two lower-margin businesses. As a result, segment operating profit margins increased by 270 basis points year-over-year.
Looking ahead to Q1 2020, we expect the 737 MAX production suspension and lower LEAP 1-B engine builds to negatively impact operating profit by $15 million to $20 million. We are confident that we will be able to mitigate a significant portion of this decline in Q1 through a combination of increased jet engine production shipments with other OEMs, including those originally delayed in 2019 due to customer cash management actions, opportunistic volume growth to fill open capacity, and strong cash management and cost discipline. We will continue to monitor this dynamic industry situation and we'll provide updates on subsequent 2020 earnings calls.
As of today, based on the input from our customers, we are assuming that the 737 MAX production will restart in the second quarter in advance of a mid-2020 return to service. We are in near constant contact with Boeing and the engine OEM partners and are coordinating with them to ensure an adequate supply of our critical materials and components in advance of their production needs.
Turning to Slide 6, looking at HPMC revenues by market, full year 2019 segment sales, excluding divestitures, increased 7% versus the prior year. This growth was led by the aerospace and defense markets despite jet engine product sales being relatively flat year-over-year. 2019 commercial airframe product sales grew by more than 20% versus the prior year, including double-digit percentage growth in the fourth quarter when adjusted for divestitures, building on strong prior-year growth. We have been successful in winning emergent business due to our strong operational execution. 2019 provided a significant growth opportunity in this area, and we expect to return to more normalized volume levels due to lower 737 MAX production in 020. We do not expect the announced 787 rate reduction to negatively impact 2020.
Defense market sales saw a robust expansion in 2019, increasing by more than 30% year-over-year on an adjusted basis, including a double-digit percentage increase in the fourth quarter. This growth was balanced across all of ATI's defense sub-markets, led by materials and components for naval nuclear, military jet engine and space applications.
Jet engine product sales modestly decline principally due to a large customer's cash management actions. Of course in 2019, we also announced signing a multi-year contract extension with Rolls-Royce for next generation and legacy jet engine materials and multiple long-term agreements with GE Aviation to supply advanced forgings and materials. Revenues under the GE contracts alone are expected to exceed $2.5 billion over the life of the agreements. These contracts will enable ATI to deepen its relationships with these key customers, as well as continue to increase market share in the high-growth jet engine market space. Don will talk about certain strategic investments we're making to support these organic growth opportunities and commitments under these key contracts.
Sales to our smaller non-aerospace and defense markets were mixed, with medical declining mainly due to an increasingly competitive biomedical implant sector, while our energy market sales increased, primarily due to export sales into Asia.
I will now turn the call over to Kim to talk about our performance in the FRP segment. Kim?
Kimberly A. Fields -- Executive Vice President, Flat Rolled Products Group
Thanks John. Now turning to Slide 7, after a challenging start to 2019 due to a first quarter that fell below our expectations for both the US business and the STAL Precision Rolled Strip joint venture in China, the FRP generated solid profitability for the second, third and fourth quarters, ending the full year 2019 in the black for the third straight year. This positive result was largely due to growth in high-value products, along with benefits from additional HRPF carbon conversion volumes.
As Bob mentioned earlier and as we reported through the course of the year, the FRP teams worked hard to overcome the combination of the ongoing Section 232 tariffs on our A&T Stainless joint venture and carbon conversion volumes, and secondly, increased retirement benefit expenses and softer end market conditions for our standard value stainless products and related cost inefficiencies. Despite these issues, the FRP segment generated solid operating results in the fourth quarter.
As predicted, revenues declined sequentially, mainly due to strong nickel alloy sales in the third quarter just to fulfill a large oil and gas pipeline project. Sales to the aerospace and defense markets continued to expand in the fourth quarter, helping to offset lower market demand for our standard value stainless products.
Fourth quarter operating profits improved year-over-year and outpaced our near-term expectations. The segment benefited from ongoing strong high-value product sales, a favorable raw material surcharge timing mismatch driven by nickel prices, and a narrower operating loss in our A&T Stainless joint venture.
With regards to A&T Stainless joint venture, we recorded an impairment charge due to the negative effects from the ongoing Section 232 tariffs and their impact on the entity's long-term financial outlook. We continue to operate the joint venture focused on minimizing the losses, as we await the outcome of our second tariff exclusion request. Without relief, the Midland, Pennsylvania plant will likely close, impacting hundreds of US jobs, US steel capacity utilization and national security, running counter to the goals established in the 232 report and the President's March 8, 2018 proclamation.
Looking ahead to the first quarter, we anticipate significant raw material headwinds compared to the fourth quarter 2019 related to the decline in nickel prices. Market conditions are improving for standard value stainless products, but pricing continues to lag. We continue to aggressively manage our costs, including the full year 2020 benefit from our fourth quarter restructuring actions, to mitigate the impact of these ongoing challenges. We anticipate year-over-year improvements from STAL in Q1 but are keeping close watch on business activity as China deals with the coronavirus outbreak, and our thoughts go out to our employees and our families in the region, dealing with this crisis.
Lastly, we are engaged with the US steelworkers to negotiate a new labor pact to replace the current contract, which expires at the end of February. We're making progress and expect to finalize a mutually beneficial agreement in a timely fashion.
Now, turning to Slide 8, let's take a few minutes to dive deeper into the FRP segment's full year revenue growth. 2019 saw year-over-year sales growth in several key end market. Aerospace and defense continued to expand, growing by 30% for the year. Since 2017, sales to these end markets have grown by nearly 70%, complementing the strong HPMC segment growth and showcasing the success of the One ATI approach.
Energy markets revenue grew significantly, led by increased demand for marine scrubbers and flue gas desulfurization materials. Sales to FRP's largest end market, oil and gas, remained solid but declined somewhat compared to a strong 2018. And lastly, our consumer electronics business continued to expand, primarily in Asia, as we leveraged STAL's most recent capacity expansion. Looking ahead, we have line of sight and expect to capture additional growth opportunities in our key end markets in 2020 that capitalize on our unique production capabilities.
Shifting to revenue by product, we continue to see the success of our value over volume strategy with meaningful growth in high-value products. Nickel alloys and titanium materials increased by double-digit percentages versus the prior year. Sales of our standard value stainless products contracted by 9% due to lower demand in automotive and other consumer-facing markets, but also due to purposeful actions on our part.
Now, I'll hand the call over to Don to talk in more detail about our financial performance and 2020 outlook.
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Thanks Kim. Turning to Slide 9, fourth quarter capped a year of solid progress in cash generation, strengthening our balance sheet and unlocking value through the sale of non-core assets. We ended 2019 with over $490 million of cash on hand, in part due to strong cash generation from operations in the fourth quarter, as well as significant non-core asset sales earlier in the year.
I'm pleased to report that we achieved our managed working capital stretch goal of 30% of sales at year-end, and we'll continue to work for improvement in this key area in 2020. 2019 capital expenditures were $168 million, in line with expectations, as we continued to balance the needs for additional capability and capacity required to meet future profitability and growth expectations, along with other capital allocation priorities.
In the fourth quarter, we made significant progress toward our long-term goal of achieving an investment grade balance sheet by reducing gross debt by $150 million. We successfully launched new $350 million notes at 5.875% and used the proceeds, along with cash on hand, to early redeem our January 2021 5.95% notes. Together, these two actions will save the Company $9 million in annual cash interest expense, starting in 2020. In recognition of ATI's ongoing balance sheet improvements, Moody's upgraded ATI's credit rating in advance of the new debt issuance.
As a result of the early notes redemption, we paid a make-whole premium of $21 million, which was the bulk of the fourth quarter debt extinguishment charge of $22 million, and we accelerated payment of $13 million of interest due to bondholders. In total, we generated nearly $460 million in free cash flow for 2019, a 60% improvement over 2018. Excluding the interest payments on the early redemption of the 2021 notes, which was initially planned for 2020, we largely achieved our 2019 free cash flow target, which we had increased in October.
Now, let's turn to Slide 10 and talk about 2020 expectations. The 737 MAX and related LEAP 1-B impacts make providing certain financial guidance a bit more challenging. Of course, we have a better visibility in the near term, but the second half of 2020 is more fluid and less visible. Despite those challenges, we'll provide some important information that we believe to be helpful in understanding how we see the business performing in 2020, including the key assumptions and a range of earnings per share expectations for the overall business for Q1 and full year 2020.
The 737 MAX production suspension will likely impact each 2020 quarter as the previously forecasted ramp will be delayed and elongated, deferring but not diminishing our growth expectations around this important program over time. We estimate that 737 MAX-related headwinds, both airframe and engine, will reduce ATI's first quarter operating profits by $15 million to $20 million. We continue to work to offset the deferred 737 MAX and LEAP 1-B related production and to control our costs during this industrywide event.
Reflecting the 737 MAX impacts, known raw material-related headwinds and quantifiable production and cost offsets, we expect to generate between $0.12 and $0.16 of earnings per share in the first quarter of 2020, assuming a 23% to 25% book tax rate. This compares to $0.12 in the first quarter of 2019, which utilized a 4.7% effective tax rate. For comparison, on a like-tax basis, first quarter 2019 earnings were $0.09 per share. Using the tax-adjusted 2019 figure, we expect first quarter 2020 earnings per share to increase by at least 30% year-over-year.
For the full year 2020, assuming a second quarter 737 MAX production restart, LEAP 1-B engine production aligned with guidance given during GE's earnings call last week, stable nickel prices and minimal global impact from the current coronavirus epidemic, we expect to earn between $0.75 and $0.90 per share, utilizing a 23% to 25% book tax rate. This range reflects the dynamics related to the 737 MAX situation and its impact on the supply chain. This 2020 range compares to $0.96 per share in 2019 on a like-tax basis.
2020 free cash flow is expected to remain positive and fall in the range of $135 million to $165 million, excluding expected US pension trust contributions. To achieve these results, we anticipate aerospace and defense growth outside of the 737 MAX, including ongoing emergent demand fulfillment throughout the year. As we have talked about several times on this call, we finally -- we fully intend to maintain our cost and working capital discipline and will benefit from proactive efforts to improve earnings in 2019, including our fourth quarter restructuring action.
Slide 11 provides a few detailed 2020 financial modeling assumptions to ensure clarity on key line items. We expect our full year 2020 defined benefit pension contributions to be about $130 million. We anticipate total retirement benefit expense to be approximately $60 million, down nearly $30 million versus prior year. Our 2019 actions to lower debt levels will reduce annual cash interest expense in 2020. We expect 2020 net interest expense to be between $86 million and $90 million, down from $99 million in 2019.
Aligned with our recent guidance, we anticipate a normalized reported or book tax rate of between 23% and 25%. We expect the cash tax rate to be between 5% and 7% due to ongoing benefits from our net operating loss carry-forwards. 2020's diluted share count is expected to be relatively consistent with 2019's diluted share count. As a reminder, ATI's diluted share count includes shares associated with our convertible debt due in 2022. When calculating our earnings per share using the diluted share count, you must add back approximately $2.4 million of quarterly interest expense to earnings assumed in the numerator.
We intend to invest approximately $200 million to $210 million back into the business through capital spending. This includes approximately $100 million for added billet and isothermal forging capacity and capabilities in support of the long-term aero engine supply contracts announced in 2019, as well as other share gains earned in contractual agreements. We've committed to have these -- to having these strategic asset -- assets, rather, fully operational in 2021 and 2022. Apart from these strategic investments, capital spending to support ongoing operations is expected to be below current depreciation and amortization levels. We are committed to enhancing cash flows and improving capital allocation, in part through continued improvements in managed working capital, including inventory levels.
With that, I will now turn the call back over to Bob.
Robert S. Wetherbee -- President and Chief Executive Officer
Thanks Don. Lots of good stuff in your update today. It won't be lost on the audience that we've changed our approach to guidance. And in uncertain and turbulent times, I think we all know, clarity is a darn good thing. So I appreciate the detail and the concrete assumptions that you went through today.
So 2019 is now history. It was a year filled with significant challenges and strategic actions, capped with solid financial results in the fourth quarter. We focused on controlling the things we could control; streamlining and unlocking value from our asset portfolio; improving the health of our balance sheet, perfect timing for that given the uncertainty that we see here in the first quarter; generating cash from operations; and concluding contract renewals and expansions in growing markets that will generate considerable profitable growth for the long term.
As I said, although the aerospace industry experiencing significant turbulence, the long-term market fundamentals are still intact. Heading into 2020, we're taking action to counter the negative headwinds from the 737 MAX production suspension. John, Kim and Don talked about them. Today, we've initiated a cost savings program, adjusted our near-term operating capital spend, secured our balance sheet and are working diligently across the organization to capture emergent demand to offset the anticipated order deferrals.
We're creating a robust future with our customers, built on continued strong execution. We're proud of what we accomplished in 2019. But we recognize there is more to be done to generate value for our shareholders, and we're confident we have the team to be successful in 2020.
With that, Scott, let's open the call for questions.
Operator
[Operator Instructions] The first question comes from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.
Philip Gibbs -- Analyst
Hey, good morning.
Robert S. Wetherbee -- President and Chief Executive Officer
Good morning, Phil.
Philip Gibbs -- Analyst
Great work on the balance sheet.
Robert S. Wetherbee -- President and Chief Executive Officer
Thanks. It was a team effort, and timing worked in our favor and decision-making was good. I appreciate that Pat ran to the finish line to finish that up for us and hand down a good balance sheet to start the year with.
Philip Gibbs -- Analyst
Thanks. So welcome, Don, and congratulations, Pat, wherever you are listening to this.
Robert S. Wetherbee -- President and Chief Executive Officer
Yeah. He wouldn't let us go solo for...
Philip Gibbs -- Analyst
Yeah, I wouldn't think so. In terms of the LEAP build rate assumptions for 2020, I know there's ups and downs with the LEAP 1-A and the downs with the 1-B, but how are you thinking about that collectively in terms of the impact?
Robert S. Wetherbee -- President and Chief Executive Officer
Yeah, I think the good news is, we moved our call-back a couple of days, so we could actually let those closer to the end market go first with Boeing, Spirit, GE for sure. And as you do the triangulation on those things, there was a pretty strong alignment between them, and that's really the base assumption for us. What is Boeing saying, what is Spirit saying, and what are GE saying? Those are the leaders. We wanted to be aligned with the GE fleet production outlook they provided last week, and so that's the base assumption for us. I think they were pretty clear on their call what they're headed for. And clearly, we believe that there's top end to our guidance, it's achievable with a few tailwinds, but the opportunity here for us is to stand in sync. As we've said many times, we don't really produce to a build rate. We produced to our orders. It's been a very active six weeks since mid-December when Boeing announced the suspension. But we've had near constant contact with the customers across the supply chain as they look to do what's best for their business, recognizing fully that the engine producers are not going to zero. They're still producing. So we have a little bit of a disconnect between airframe builds and engine builds, which is unique for us. But so far, the order is -- order pattern is very clear for us. And it's obviously that the growth is going to be delayed, and we're seeing the orders deferred but not lost.
Philip Gibbs -- Analyst
Bob, when you look at the airframe side of things, I think it's a little bit tough from our standpoint to understand really the dynamics, because I know when you go in and you add to these long-term agreements with Boeing or Airbus, respectively, there is often min-max agreements and make-whole agreement, if they go below mins and things of that nature, which doesn't necessarily exist with the engine guys. So how do we think about that? Obviously, MAX is not producing until whenever they do. But there are agreements in place in terms of parachutes which protect in cases like this to some degree. So just wanted to hear your thoughts on that.
Robert S. Wetherbee -- President and Chief Executive Officer
Yeah, I think, a fair question. When you look at the airframe side, we look at our order book and the lead times for the orders, and they're out-built [Phonetic] significantly through the major part of the year, probably into the third quarter. And obviously, they're committed -- our customers are committed to keep their commitments within that lead time once they've committed. There are min-maxes. I think what's going on in the industry is, people who are executing in the market are being rewarded with emergent demand, and we certainly see the benefit of that. In some of our contract renewals, most of our contract renewals, we're seeing share gains. They don't all click in at exactly the same time. So there are changes there that we're dealing with. And certainly, some of the changes in the supply chain around how information is passed is still improving, and we're staying well connected to the end users as more digital technologies get involved in the supply chain process.
And we actually have Kevin Kramer with us here this morning, and he is back from the road, busy signing up contracts in the fourth quarter. Kevin, do you want to add to Phil's question?
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Sure, Bob. Thanks. And Phil, good morning.
Philip Gibbs -- Analyst
Good morning.
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Good morning. As Bob said, some of the contracts min and maxes are clearly confidential, and yet, on the upside, as we stated in our fourth quarter results, we did benefit certainly with Boeing on some emergent opportunities. It's our expectation to continue that in 2020, though clearly, the base purchase volumes will be different versus 2019. With regard to Airbus, as we've shared on previous calls, we continue to be engaged with the contract ConBid negotiations in Toulouse. We stay very connected with Airbus. That decision, we're still estimating, will be at the end of the first quarter. And again, we remain hopeful that there will be an appropriate share that we will earn across all the products on the flat rolled side and the specialty material side.
Philip Gibbs -- Analyst
Kevin, just as a sub-question to that, and I'll hop off. Does your capex for this year, call it, guide to or anticipate that appropriate share with Airbus that you're talking about?
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Yes.
Philip Gibbs -- Analyst
Thank you.
Operator
The next question comes from Gautam Khanna of Cowen and Company. Please go ahead.
Gautam Khanna -- Analyst
Hi, guys. Yeah, and congrats to Pat as well and Don. Thank you for the detail. I was wondering if you could talk about -- so you have the Q1 guidance, you have the annual guidance. And it appears by definition that things accelerate through the year. And so, I was just curious, what are your LEAP expectations Q2, Q3, Q4? Do we expect a ramp from the Q1 rates? And relatedly, are you actually taking production down? Or is it you're building inventory kind of in Q1, so you're going to have better absorption reflected in the numbers, so that we -- but your shipments maybe pick up in Q2 and beyond? Just if you can frame sort of what's going on.
Robert S. Wetherbee -- President and Chief Executive Officer
Okay. Let me start, Gautam, and then I'll hand it off to Don and John to make whatever comments they want to add. So I think at a high level, the one point I'd like to start with is that there's more to our aerospace and defense business than the 737 MAX. So we have a wide variety of customers on every program. So I think one of the things you're going to see that we committed to in the fourth quarter was the particular customer that had a little bit of a cash management issue in 2019 is following through, and we're actually seeing growth at that account and we are seeing Q1 materialize as we expected. So there is actually growth in our business in aerospace and defense beyond the MAX. So I think that's an important thing to understand, particularly evident in Q1.
And I think in terms of the balance of the year, I think the guidance that most of the others in the supply chain have given have been full year guidance. We do -- I don't know if Pat left us the legacy trademark to use the word lumpy, but I do believe there will be ups and downs through the course of the year. And so, our guidance is really for the full year. To predict what's going to happen in every 90-day period, given the critical decision that Boeing needs to make on when they're going to restart -- we're confident in the full year. We do expect things to move around during the -- the quarter-to-quarter would be a little more variable, but full year should be where we want to be.
The last question, and I'll turn it over to Don to add some more color, is your question about are we taking production down? And the answer is, we're smoothing it out. There may be a short-term inventory rise here in Q1, but our target is to be at 30% working capital as a percentage of sales, and we believe we have the team and the systems to do that. We're not pre-producing any significant amounts. We're staying connected with the order pattern. We're also not anticipating any layoffs or massive production reductions. We are committed through the aerospace ramp. We've learned from the aerospace ramp to be ready to go. When Boeing and GE say go, we're ready to go. We're not going to be the bottleneck in the supply chain, and our track record of execution has earned a lot of these opportunities. So I guess that's kind of covers most of the points. Don, any color?
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
What I would add is, we're very disciplined when it comes to managing our inventory levels. But we're also in daily contact with our customers. And we want to be disciplined in what we carry and produce, but at the same time, we also want to be able to pull the trigger and make sure that they have what they need in order to execute the ramp. So it will be a balance. But we have the right tools and the right people in place to manage that quite well.
Gautam Khanna -- Analyst
Okay, thank you. And as a follow-up, you mentioned that 2020 guidance doesn't reflect any down-tick in the 787 production rate. When do you anticipate you'd feel that and where would you feel it? I presume in titanium shipments, but can you give us some quantification on what your -- what do you estimate your 87 revenue per ship set to be today, and so we can maybe frame that out as we move into 2020?
Robert S. Wetherbee -- President and Chief Executive Officer
Yeah, I think it's fair question. I think on the 787, we expect, through what we see for forward lead times, to kind of smooth out the impact. We're not actually seeing it in 2020. We'll have to reevaluate 2021. At this point in time, when it comes to revenue per ship set, it's a very unique time in the industry where the engine production candidly is disconnected from the airframe production. And so, using those kind of metrics in the short term can lead people to the wrong conclusion. So we are in the process of thinking those through. There is data that was relevant to our positions, share positions in 2016, 2017, 2018. Good news is that the team has worked very hard and our share positions are changing. So they are a little bit out of sync in total and by program. So we're not really going back to those in the near term.
Kevin, anything you want to add?
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Yeah, just one additional comment. We're clearly tracking the build rate updates that Boeing have provided from 14 to 12 on the 787, which we do have in our plan, reflecting that in the fourth quarter. In 2021, we'll have to reassess if there is any further decline in the build rate, which Boeing has indicated there could be.
Robert S. Wetherbee -- President and Chief Executive Officer
We haven't seen it yet. And certainly [Phonetic] the emergent demand opportunities have covered any potential short-term issue there.
Gautam Khanna -- Analyst
Thanks guys.
Operator
The next question comes from Matthew Korn of Goldman Sachs. Please go ahead.
Matthew Korn -- Analyst
Hey, good morning, everyone. It's good to hear from you, Don.
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Good morning, Matt.
Matthew Korn -- Analyst
Following up on the MAX, you spoken of demand delayed not destroyed. And what kind of cost savings initiatives are you then taking in the mid-term in the near term? And then, at what point does 2021 become a concern, where the ability of you and others in the chain to fairly quickly ramp up again becomes impaired? Does that happen if clarity is still lacking as of mid-year? Is it sooner? Is it later?
Robert S. Wetherbee -- President and Chief Executive Officer
All right. Several questions in there, Matt. I'll see if I can -- I will cover them and then I'll ask John to jump in. So in terms of being prepared to ramp when the industry needs us to ramp, we've done that a couple of times. I think we're well prepared for that with our people and capacity and capability. In fact, the investments we're making here, the strategic investments we are making actually position us well for '21, '22 and really the growth in '23. So on the cost side, I think we're managing -- we manage our overtime relatively tightly. We take advantage of attrition when it comes. But we're always engaged in the continuous improvement of our processes. I think Kim talked about what's going on in the Flat Rolled side. John, do you want to add some color to how you see it in the HPMC side?
John D. Sims -- Executive Vice President, High Performance Materials and Components Segment
Yeah, sure, Bob. Hi, Matt. Yeah, as Bob said, we have a strong focus on cost reduction and cost containment. So when we're in an environment like this, one, we stay the course with the things we already are doing, which we view as more sustainable cost reductions, not temporary per se, and we balance that against, as Don said earlier, our ability to flex when emergent opportunities present themselves, and especially, as we get toward the back half of the year where we expect to see more activity as we bridge into 2021, which based on the earnings calls over the last week or so, indicate higher production rates on the 1-B. So we're balancing that through primarily focused on maintaining our working capital disciplines. We know that as the supply chain drops in rate, there is going to be an inventory build early that we have to burn off. While we're doing that, we can't affect our ability to react quickly when opportunities present themselves. So we're working our way through there. And then we also have to prepare for the change in shares associated with contracts that we earned and negotiated in '19 that will begin to affect us in 2021.So John, this is Don. I think I would add as well. We announced a restructuring with a modest reserve that we booked at the end of Q4. This is I think another key example. This is a culture of continuous improvement. We continue to look at our cost structures and identify where we have opportunities to improve efficiencies. And that particular example with the $4.5 million cost to execute has a run rate savings of about $8 million a year. This is one of quite a number of initiatives that are under way in the organization in the normal course, not just because of the 737 MAX issue. We see opportunity to become better every day, and we're going to continue to go after those efficiencies as well.
Matthew Korn -- Analyst
I appreciate all that color. Let me switch gears just a bit. A question for Kim then, any effect so far that you're seeing at STAL from the coronavirus outbreak, anything around worker absenteeism, movement along the supply chain? Any color you can give there at all? It sounds like you're fairly confident that that's been a resilient business so far.
Kimberly A. Fields -- Executive Vice President, Flat Rolled Products Group
Yeah, I think the government has put in some guidelines to try to reduce the movement of folks, and they have asked businesses to cut back on production and extend the New Year. So that has had a small impact on some of our production. But from a customer and order standpoint, it's been strong. And again, we're seeing a strong first quarter versus kind of year-over-year. So we anticipate, as they get this under control and businesses start back around, I think, February 10...
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Yeah, February 10.
Kimberly A. Fields -- Executive Vice President, Flat Rolled Products Group
So they're going to be coming back on 10th, that we'll see kind of a resumption of the demand that we had before.
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
And again, this is Kevin. Again, the historical basis for the STAL business around Lunar New Year and within the first quarter, it is a slower time of the year for us, in fact, our slowest quarter. So as Kim said, we are following the guidelines. We're most certainly caring about our employees. It's about 550 people. And then we also have offices ATI Shanghai and Beijing as well. And so, we are following the mandate of the government. And again, we expect to come up on the 10th, pending any other change. And we should get back on plan through the balance of the year.
Matthew Korn -- Analyst
All right, thanks folks. Good luck to you.
Robert S. Wetherbee -- President and Chief Executive Officer
Thanks Matt.
Operator
The next question comes from David Strauss of Barclays. Please go ahead.
Kate Copouls -- Analyst
Hi, guys. This is actually the Kate Copouls on for David. I wanted to just circle back on pension. It's still kind of weighing on your free cash flow. And so, wondering like when we could start to see substantially lower contributions. You guys have talked about kind of potential annuity transactions. And I know you did some kind of pension reform this year. You guys also highlighted that kind of $500 million cash balance. So, just any color you can provide there would be great.
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Sure, this is Don. As you pointed out, we did a meaningful annuitization related to 1,800 of the participants, a $95 million investment through that exercise, also contributed about $145 million in 2019 and will contribute at least $130 million in 2020. We're continuing to look at strategic opportunities to work down that obligation. And first and foremost, we're going to make sure that we have ample liquidity in the business to manage through the 737 situation in 2020. Of course, we have a lot of liquidity on the balance sheet. We have a rock solid balance sheet, which is quite fortunate. And through 2020, we will look at other opportunities to make headway with that pension.
Kate Copouls -- Analyst
Okay, great. Thanks. I'll keep it to one.
Operator
The next question comes from Josh Sullivan of The Benchmark Company. Please go ahead.
Josh Sullivan -- Analyst
Good morning. I'll echo the comments for Pat, and then welcome, Don. Just on the new contracts with GE and others, can you give us a sense of timing when the new terms will start to contribute? I think you said '21. Will that be for the full year? And then, are these tied to any specific build rate assumption?
Robert S. Wetherbee -- President and Chief Executive Officer
Okay. So, Josh, you're a little bit hard to hear. So we heard you ask, I think, about the -- when does the contract kick in. And John will kind of cover that topic for us. And then, is it tied to any specific build rate assumptions? I think as we've said before, we're producing to specific customer orders. So we're prepared to grow with the MAX and the LEAP specifically. And so, the capability that we're investing in will position us well for '21 and '22. So it's not tied to any specific build rate assumptions. But we do believe that the share increases will be meaningful and starting to -- certainly in early 2021, and so we'll actually start to see some of the manufacturing benefit of that in the fourth quarter as we move materials into the supply chain.
As the industry goes today, we still see kind of six months from the time we ship to the time it gets onto an engine or a planned for basically the specialty materials and forgings, and certainly, the longer-term issues for mill products is still in the 12 month range. So that is a factor for us as we think about when the share increases occur and when the build rates occur, and we certainly leverage that.
So John, do you want to talk more about the contract and what you see coming?
John D. Sims -- Executive Vice President, High Performance Materials and Components Segment
Yeah, Bob. Hi, Josh. I think Bob said it correctly. These contracts kick in in 2021, beginning of 2021, and they're not tied to specific build rates, as he said. They're more share-based contracts. And so, as we look ahead into 2021, based on the guidance we've been given so far, we anticipate an increase certainly in engine builds in '21 over '20 on the 1-B. As we said earlier, we have -- we participate in multiple engine and frame programs. So all of those together mean that part of the capital investment -- the strategic capital we identified is necessary. Even though the build estimates might be a little lower on the 1-B in '21 than originally thought, we still need that additional capacity. So we're preparing for that. And as Bob said, we anticipate seeing the impact of those in the fourth quarter.
Josh Sullivan -- Analyst
Great. Appreciate that. And then just one for Kim on the 232 issues. I think in the prepared remarks, you mentioned the potential there to address the Midland assets. What are the gating factors there? When do you think you would have to make a decision on those assets? And then, what does the current loss look like at that facility?
Kimberly A. Fields -- Executive Vice President, Flat Rolled Products Group
We have our second exclusion request in, and so we're awaiting a reply. We've had quite a bit of interaction, providing information and so forth. So we hope to hear an answer. But as we stated in some of our publications, we're prepared to idle that facility. And we've been paying tariffs now for 23 months, something close to $40 million. And so, we are getting close to the time where we're going to have to make a decision. And if this is going to persist, we may take a different course.
Robert S. Wetherbee -- President and Chief Executive Officer
I think that's fair, Kim. I think our situation warrants an exclusion. National defense and the security of the business that we run fits into that category, as well as domestic availability. If you can't make money buying domestic, it's not going to last. And that's kind of -- we pursued that option. We obviously believe the long-term health of the business is our primary concern. And we believe, candidly, the tariffs had an unintended consequence. They are a pretty big blunt instrument. But I think to Kim's point, we still see strong pull from our customers to do this, but there is a limit.
You asked, are we still losing money in the joint venture, and the answer is, yes. And how much longer are we willing to go? Candidly, I think we deserve a decision from the government. And the process is well defined. I think the processes within the Commerce Department are geared to give an answer. And we're ready and we think we deserve one. So we're making our case more clear to those that control that process and -- but patience is limited. We're to the point where the business strategy that we're on needs us to move forward. But candidly, we're not going to make it easy for the government. They're going to have to decide, and we believe that time is near.
Josh Sullivan -- Analyst
Okay, thank you.
Operator
The next question comes from Matthew Fields of Bank of America Merrill Lynch. Please go ahead.
Matthew Fields -- Analyst
Hey, guys. Just wanted some clarity on free cash flow. You said $135 million to $165 million. That's before pension contribution, right?
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
That's right.
Matthew Fields -- Analyst
So after that, it would be $5 million to $35 million?
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Yeah, you're right. $135 million to $165 million is ex pension contributions, and pension contributions would be $130 million.
Matthew Fields -- Analyst
Okay. And then, are there any other asset sales you envision in 2020? I know you sort of had a lot in '19. Are we done for a while? Or is that going to be a part of the 2020 cash flow story?
Robert S. Wetherbee -- President and Chief Executive Officer
No, we don't have any that are in that plan. To be clear and candid, we evaluate our portfolio on a regular basis, looking at the different options. Clearly, we just talked about what might happen with our Midland joint venture. We could certainly see that eventuality. I think other locations and processes, we're always looking at those. The core essence of our company is really EVA, economic value add type things. So cost of capital is key to us. We understand that, and that factors into it. But we're focused on maximizing the value of our portfolio. You hear us talk about share gains, top line growth, mix enrichment, cost reduction, cost synergies, looking for opportunities across the organization to accelerate new product and new product growth. So I think there's still a lot of room for that. But the quick answer to your question is, nope. But there's a lot more color and context that goes with that.
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
One thing I would add -- this is Don. One thing I would add, as you think about our free cash flow, as I noted, the capex range, $200 million to $210 million, that includes $100 million investment in capital that's tied to contract extensions, meaningful share increases, very meaningful growth opportunities in the business. So as you think about year-over-year free cash flow generation, I just want you to keep that investment in mind, as it will produce some nice benefits past 2020.
Matthew Fields -- Analyst
Understood. Thanks very much for the clarity.
Operator
And we have a follow-up from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.
Philip Gibbs -- Analyst
Hey, good morning. Just curious in terms of what the nickel impact is in Q1 versus the fourth quarter? Obviously, a pretty substantial reset. Not a lot of that is going to be sustained, given it's kind of a mark-down against higher inventory levels. What's the magnitude of that impact in Q1 sequentially?
Robert S. Wetherbee -- President and Chief Executive Officer
Good question. We actually factored that into our guidance. We hadn't really broken it out separately for this call, but we can check with Scott and follow up. But we do see it declining. I think nickel prices today are in the $5.75 range, probably down from the 6s in the December time frame. So it's probably a $0.50 decline, about 10%. But we did factor that into our guidance.
Philip Gibbs -- Analyst
Thank you. And then, Don, on the pension, the $28 million year-over-year swing, is that all going to be below the operating income line -- in that line item?
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Yes it is. Yeah.
Philip Gibbs -- Analyst
So no change in service cost, then. Okay.
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
No change.
Philip Gibbs -- Analyst
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Bob Wetherbee for any closing remarks.
Robert S. Wetherbee -- President and Chief Executive Officer
I'll be quick with limited closing remarks. So, thanks for joining us on the call today and thanks for your continued interest in ATI.
Scott Minder -- Vice President, Treasurer and Investor Relations
Thank you, Bob, and thank you to all participants and listeners for joining us today. That concludes our fourth quarter and full year 2019 conference call.
Operator
[Operator Closing Remarks]
Questions and Answers:
Duration: 58 minutes
Call participants:
Scott Minder -- Vice President, Treasurer and Investor Relations
Robert S. Wetherbee -- President and Chief Executive Officer
John D. Sims -- Executive Vice President, High Performance Materials and Components Segment
Kimberly A. Fields -- Executive Vice President, Flat Rolled Products Group
Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer
Kevin B. Kramer -- Senior Vice President, Chief Commercial and Marketing Officer
Philip Gibbs -- KeyBanc Capital Markets -- Analyst
Gautam Khanna -- Cowen and Company, LLC. -- Analyst
Matthew Korn -- Goldman Sachs -- Analyst
Kate Copouls -- Barclays Capital, Inc. -- Analyst
Josh Sullivan -- The Benchmark Company, LLC -- Analyst
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
