Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Allegheny Technologies Inc (NYSE:ATI)
Q2 2020 Earnings Call
Aug 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 Incorporated Second Quarter 2020 Results 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, sir.

Scott A. Minder -- Vice President, Treasurer and Investor Relations

Thank you, Chad. Good morning and welcome to the Allegheny Technologies second quarter 2020 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, and Don Newman, Senior Vice President and Chief Financial Officer.

If 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 will turn the call over to Bob.

Robert S. Wetherbee -- President and Chief Executive Officer

Thanks, Scott. Good morning. Let's get right to it. The urgency of the situation created by the global pandemic required significant and comprehensive action. You may recall the discussion of our leadership priorities as part of our first quarter earnings call. They continue to focus our actions as we work to maintain a solid foundation to ensure long-term profitability and growth, and emerge from this global crisis a stronger, more focused company.

Keeping our employees safe was and still is our foremost concern. The ATI team has done a great job doing that. Less than 1%, fewer than 50 of our co-workers have tested positive for COVID. Across our global footprint our employees are being personally diligent in monitoring their health. Where necessary, they continue to work collaboratively through quarantines, aggressive cleaning protocols, periods of uncertainty and operational disruption. They've kept themselves as well as their co-workers safe. This has enabled us to stay focused on delivering for our customers. This has been and remains an unprecedented challenge that led to a continuing unprecedented positive response.

Our thanks to the entire team for what we've accomplished together, their actions speak to the strength of our commitment, to our value for safety. Preserving cash and maintaining liquidity is high on the priority list. We entered the quarter in a strong position and took action to make it even better. These efforts, along with our free cash flow generation over time, will ensure that ATI has the ability to invest for profitable top line growth despite the downturn. I'll leave the details of our actions for Don to discuss in his portion of today's review.

The other three priorities focused our actions and have led to the second quarter results we're reporting today, prepared us to weather the storm of even lower aerospace demand in the next two quarters and have positioned us for improved results in 2021. Driven by significant drops in near-term customer order levels, we've been aggressively adjusting crewing levels and work schedules across the system. Many locations have been completely idled with employees furloughed for multiple weeks.

We've reduced salaries and benefits. We've implemented permanent layoffs in operations where we expect a significant period of time before recovery. We've also reduced staffing administrative functions. We've delayed capital investments and are actively managing our maintenance spend. We've proactively curtailed melting operations to accelerate the alignment of our inventories with the new demand expectations. All of these actions were thoughtful, deliberate and necessary.

As we took these immediate actions we did so with full recognition that the commercial aerospace market will recover. Fundamentally, we believe it's growth deferred, not growth lost. It may take a few years to get back to 2019 levels but we're confident we'll get there. As such, it's imperative that we retain an appropriate cadre of skilled operators to respond to the previously announced aerospace market share gains set to begin in 2021. We kept this firmly in mind as future accruing levels were set. We're committed to strong execution in the near term and we will be recovery ready when the market accelerates.

So let's move to Slide 4 and look at our second quarter revenues by market and our forward expectations for our core aerospace and defense markets as well as the differentiated applications we supply. Starting with our view on the jet engine market, several of our major customers gave updates last week and our view is consistent with those, both in terms of market conditions, near-term demand and the continued potential COVID resurgence caveat. You may recall, we saw initial LEAP engine order rate reductions starting in late 2019 triggered by the 737 MAX production stop.

The reductions accelerated through the second quarter as the impact of the pandemic became evident. Subsequently, sales in the quarter were significantly below prior year. Stabilization of the forward order book for engines appears to be on the horizon. We expect the low point in demand to stretch from the second half of 2020 into early 2021 before improving in the second half of 2021. Thus, we're projecting four more quarters to realign the supply chain to real demand levels. At that point, accounting for the order lead time lag between delivery of our product and the delivery of the OEM's engine, we expect our order levels to more closely track increases in underlying engine production.

As mentioned earlier, we've worked proactively to adjust our melt schedules and institute short duration facility idlings to minimize stranded and, or excess inventory in our operations. Regarding demand for materials we provide to the airframe's supply chain, destocking was apparent in our second quarter results but at a slower pace compared to the jet engine market. Airframe destocking is expected to accelerate in 2021. Until the ground at 737 MAX fleet returns to service, it's going to be difficult to predict when order levels in the airframe's supply chains will reflect real demand.

As we approach year end, if and as needed, we will adjust our operations to align with lower 2021 order levels for airframe materials. As a reminder in both the jet engine and airframe markets we have significant new business, share gains and margin enhancement actions that will begin early next year. While the magnitude of the positive benefits from these wins will be muted in 2021 due to the lower industry demand levels, the impact will be magnified as the market recovery gains momentum in 2022.

Our defense business continues to post solid year-over-year growth. This strength is broad based across many sub sectors. It's led by demand expansion for naval nuclear materials and support of our customer, BWXT and ultimately the United States Navy. Additionally, our missile component sales continue to increase as the demand for our titanium armor plate materials used for land-based vehicles. We expect our defense revenues to expand in the second half of the year as the programs we supply remain mostly insulated from negative COVID impacts. We continue to work directly with the Armed Forces' research and development labs and the large defense prime contractors to develop next-generation applications that perform better with ATI material science and advanced process technologies, leading to meaningful ATI growth opportunities in the future.

As for Electronics, primarily served by our China-based precision rolled strip business, known as STAL, second quarter volumes modestly exceeded expectations as domestic demand improved faster than expected. Looking ahead to the second half of the year, we expect this market to experience modest demand growth in support of anticipated year-end holiday sales. To date, China's economic recovery continues but a significant regional or global COVID resurgence has the potential to negatively impact second half demand given the worldwide reliance on China-sourced consumer electronics.

In the energy markets the COVID impact has been significant. Based on the well publicized supply demand imbalance and related price declines, drilling and exploration activities were severely curtailed. Production, both on and offshore was greatly reduced. Our customers are destocking inventories as they focus on repair work. Although, offshore oil and gas applications drive ATI's largest energy submarket, demand from other areas was markedly better, including specialty alloy products for industrial pollution control systems, civilian nuclear refueling and land-based gas turbines, particularly in Asia.

Looking ahead, oil and gas prices have started to improve as producers reduce supply. Demand has slowly begun to recover. We continue to expect overall energy demand to be soft in the second half of the year with potential upside from government sponsored ultra-deepwater projects that require high value nickel alloy materials. These projects are expected to be awarded late this year for shipment in 2021.

Turning to the medical market. Second quarter sales declined after first quarter growth. The anticipated return of elective surgeries and the need for diagnostic MRIs were delayed due to the resurgent pandemic. We expect second half 2020 sales to remain moderately depressed due to lingering concerns about visiting medical facilities for non-critical procedures in this environment.

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

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Thanks, Bob. Turning to Slide 5. Continued delays in 737 MAX production and strong macro headwinds driven by COVID significantly impacted our Q2 results. They are expected to create continued challenges in the near term as well. As a team we remain focused on what we can control, keeping our employees healthy, derisking our business by managing costs and staying in lockstep with current demand and by being recovery ready. Before I cover the results by segment there were a couple of significant non-cash charges at the corporate level. These charges were driven by the current economic environment and were required by generally accepted accounting principles or GAAP rules.

First, we took a $287 million charge for a partial goodwill writedown at our forged products business, which remains profitable and with good long-term growth prospects. The second charge totaling approximately $100 million is related to valuation allowances for our deferred tax assets, including net operating loss carry-forwards or NOLs. The valuation reserve was triggered under GAAP rules largely due to the goodwill impairment charge. The valuation reserve does not impact cash taxes paid. We have substantial tax attributes including NOLs, which we expect to provide a tax shield from U.S. Federal taxes for years to come as we return to profitability.

These charges did not reflect the positive long-term growth and profitability potential we see in the underlying business. We also recognized pre-tax charges for debt extinguishment for the partial redemption of our 2022 convertible notes and for further restructuring and severance actions. In aggregate, these totaled approximately $40 million. Excluding these charges, adjusted EPS was a loss of $0.02 per share. This is better than our prior guidance range for an adjusted EPS loss of $0.07 to $0.17. Our business conditions did deteriorate with revenues down nearly 30% year-over-year. We worked diligently to control our costs and deliver already melted materials from inventory.

Moving on to our segment results. AA&S's second quarter revenues were down 14% versus prior year. Declines in commercial aerospace and energy were partially offset by growth in defense, electronics and HRPF conversion services. From a business unit perspective, sales grew modestly in our specialty alloys & components business, declined somewhat at our STAL's JV and were meaningfully lower in our specialty rolled and standard stainless products businesses. AA&S segment operating profits declined in the second quarter versus prior year as the impact of lower volumes at our SRP and SSSP businesses cost under-absorption challenges.

Lower raw material prices created a negative surcharge timing mismatch and stainless scrap prices declined causing a decrease in related inventory values. Partially offsetting these negatives were lower production and overhead costs, both from our aggressive facility idling efforts and from significant back office cost reductions. We also sustained reduced losses from the A&T Stainless JV.

Shifting to the HPMC segment, revenues declined nearly 45% year-over-year primarily driven by commercial aerospace OEM production decreases at both our specialty materials and forged products businesses. The medical and energy markets declined considerably in response to the COVID pandemic while defense market sales increased due to demand for naval nuclear and missile materials. Segment operating profits decreased due to lower volumes and associated manufacturing cost under absorption. Cost savings efforts largely related to the facility idling schedule and reduced overheads helped to offset the cost inefficiencies and work down inventory levels.

Let's turn to Slide 6 for a look at current liquidity, cash flows and our capital structure. As a leadership team we spent considerable time working to ensure that ATI has the best possible capital structure and ample liquidity to weather any storm and even thrive on opportunities to create value where presented. In the second quarter, we continue to take decisive and prudent actions to maximize liquidity levels and preserve our ability to strategically invest and grow our business over time.

In the quarter, we took the opportunity to further manage debt maturities, including a small over allotment in July. We issued $291 million of new convertible notes, redeeming 230 -- $203 million or more than 70% of our 2022 convertible notes. The new convertible notes carry a lower cash interest rate 3.5 % versus 4.75%, have a higher conversion price $19.76 per share versus $14.45 per share, provide for more flexible cash settlement options and are callable after three years. In addition, we exercised a low interest rate $100 million term-loan option under our ABL facility that would have expired at the end of the second quarter. These steps all add favorable in capex to our liquidity profile and are part of our continuing efforts to opportunistically improve our debt maturity schedule.

Today, our next significant debt maturity is now three years away, April 2023. We ended the second quarter with approximately $1 billion of total liquidity, including approximately $540 million of cash on hand with $460 million of available capacity on our undrawn ABL revolver. Further, we see opportunities to add incremental liquidity by optimizing existing collateral to support the ABL borrowing base, even as we convert inventory and receivables into cash through our initiatives.

From a managed working capital standpoint. We made great progress in the second quarter. To that end, we reduced inventory levels by $78 million in the quarter. While in some cases, that meant lower cost absorption due to selling from inventory rather than producing, it was a healthy trade-off for cash generation. We also maintained our discipline of producing to customer orders to avoid creating stranded inventory. While we made good progress reducing inventory in Q2, we expect this favorable managed working capital trend to actually accelerate in the second half of the year. Now, let's turn to Slide 7 and talk about Q3 and full-year 2020 expectations along with some initial thoughts on 2021 and beyond.

Similar to my comments on the first quarter call the uncertainty around end market demand, particularly for commercial aerospace and the pace of recovery makes it very difficult to predict ATI's revenues beyond the next quarter with any level of precision. Therefore, we are still unable to accurately estimate full-year 2020 EPS. We can however, better predict near-term demand and earnings as we have better visibility into firm customer orders and understand the timing and impact from our cost savings plans. The assumptions laid out in our initial 2020 guidance and updated in May are still a relevant guidepost today.

Our current view on these items have evolved over the past three months. First, 737 MAX production did restart at a low rate in the second quarter as predicted. Given the ongoing recertification process,and as reported by Boeing last week, the planes production rate will remain low for the balance of 2022. Second, while nickel prices improved in the second quarter, they're still below our original range of $6 to $6.50 per pound and over the past few weeks, average prices have been above $6 with a likely third quarter 2020 average prices higher than second quarter but below prior year levels.

Finally, with regards to the impact from COVID, we've seen significant and continued deterioration in the business conditions as a result of this pandemic. The current U.S. resurgence and continued worldwide spread has had and will likely continue to have a pronounced negative impact on the end markets we serve. We continue to pursue reductions as we adjust our cost structures to the new demand expectations while maintaining critical capabilities and remaining recovery rate.

On our Q1 earnings call, we announced 2020 cost reductions of between $115 million and $135 million. It was a decisive response through a rapid change in demand focused on what we could control. Those efforts continued in Q2 and we have increased our 2020 cost savings targets by $25 million or 20%. This brings our range to between $140 million and $160 million for calendar 2020.

Additional plants idlings, employee furloughs and severances, and tighter cost controls all aligned our lower -- with our lower production requirements drove the increase in the range. Across both segments, we expect our initial cost savings to ramp up to the full-annualized run rate in the third quarter. The second quarter's additional savings amount of $25 million will reach run rate in the fourth quarter. These will help to mitigate the deteriorating market conditions expected in the back half of 2020. All of these cost reductions improved decremental margins in the downturn but the structural savings also expand margins in the up cycle.

To that end, we expect 40% to 50% of these cost reductions to become permanent. As a result of these poor market conditions, we expect to lose between $0.62 and $0.72 per share on an adjusted basis in the third quarter. This estimate assumes marginally higher decremental margins than experienced in Q2 due in part to accelerating jet engine revenue decline rates, lower production levels and unfavorable product mix. We assume a 0% tax rate in the quarter.

Due to our significant efforts to reserve cash, we are maintaining our 2020 full year free cash flow guide to generate between $110 million and $140 million. This excludes U.S. defined benefit pension contributions. Looking beyond the third quarter, we expect some modest improvement in the fourth quarter, primarily outside of commercial aerospace. We also anticipate meaningful improvement in 2021, particularly the back half of the year. This is due to the end of destocking at our jet engine customers, corners better aligned to increasing LEAP engine production, the full impact of our cost savings initiatives and improvements from our cost share gains -- from our share gains, new business and margin enhancement actions.

Partially offsetting these improvements is the likely continued destocking in the airframe supply chain. We are aligned with our customers on the longer-term industry view, echoing their belief that commercial aerospace production rates will take three to four years to recover to 2019 levels with narrow bodies returning more rapidly than wide-body aircraft.

However, it is likely that ATI's other end markets will improve more quickly and in the case of defense, continue to grow. That, coupled with the ATI specific benefits that I outlined a moment ago will help our company to mitigate lingering commercial aerospace softness.

I'll now turn the call back over to Bob to add some closing comments.

Robert S. Wetherbee -- President and Chief Executive Officer

Thanks, Don. Thanks for the update. Pretty active last 120 days, if I say so. We'll end today's call where we started. These leadership priorities underpin everything we're doing at ATI and lead us to find straightforward solutions to challenging problems and market conditions.

We first focus on the people who create and drive our success, from our R&D scientists to production workers and all the supporting team members in between, their relentless innovation and commitment sets us apart. We do our best to delight and serve our customers, partnering with them to solve their toughest challenges. This is what leads to long-term profitability for ATI and returns for our shareholders. And we achieved financial security and preserve the fuel for growth, no matter how choppy the waters we're swimming in. By investing our time and efforts on these things, we believe that we're on the path to being wildly successful in the inevitable recovery. This is more than a slide for us, it's how we lead every day.

So our goal for today was pretty simple. We want to provide a complete picture of our current demand environment and our most up-to-date forward-looking views. We want to provide a comprehensive look at our actions to adjust to these dynamic conditions and share our expectations for third quarter earnings per share and full-year cash flows. We know that our investors are making important decisions with less-than-perfect data. We strive to give you the best possible information on ATI's current state and forward outlook.

Now I can't tell you exactly when the COVID crisis will end or when the 737 MAX will be certified to fly globally or when demand levels will ultimately get back to 2019 levels in each of our core or differentiated markets. But what I can assure you is this, ATI will be a stronger, more focused and profitable growth company as a result of the actions we're taking during this crisis. We remain focused on creating long-term shareholder value through the combination of material science, advanced process technologies and with our relentless innovative people.

So Scott, back to you.

Scott A. Minder -- Vice President, Treasurer and Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] And the first question today will come from Phil Gibbs with KeyBanc. Please go ahead.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you. Good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Good morning, Phil.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Question I had was just on the incremental cost cuts that you announced this morning. And Don, I think you said 40% to 50%of those cost reductions will be structural in nature. With all the actions that you've done up until this point, what does that amount to in terms of an exit rate for 2020.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Sure, I'll take that question. So in terms of our cost reductions we're -- our target range at $140 million to $160 million as you're thinking about the kind of hitting the run rate, which I think is kind of the core of what you're asking, Phil. There's -- what you want to do is think about it in two pieces. One is our original guidance was $115 million to $135 million and we expect to hit run rate on that tranche of cost savings by the end of Q3. And I would say, probably early Q3 our capture rate to give you an idea, in Q2, was probably in the $30 million range. The second piece is the incremental $25 million that we're adding out of this Q2 discussion. The run rate on that piece is going to be in the range of Q4, and I would think earlier Q4 rather than later Q4. We should have full run rate by the end of this year.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

So does that suggest that the all else equal the cost savings on an annualized basis are closer to $250 million to $300 million?

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah. Yes, exactly, that's the way you want to think about it. As you lay out the build toward that run rate, we'd expect to have annualized cost reductions in probably $250 million to $275 million range in 2021. And then importantly is how much of that is structural and going to stay with us, and as I noted, we're expecting between 40% and 50% of those cost reductions to stay with us as permanent reductions.

One thing that I also want to stress as we talk about the cost reductions, the team pivoted to this very, very quickly and I think has done a -- but an incredible job delivering a meaningful change in terms of our cost structure, obviously pointed toward focusing our cost structures to the new demand. But one thing I want make really clear in this, Phil, is that we are in this business for the long run.

We're also aggressively pursuing these cost savings but we're not doing it and managing our -- for mortgaging our future, we're going to have a goal in mind to firmly maintain our materials science leadership and capabilities and to maintain our skilled workforce. So as you're thinking about these cost reductions just keep in mind, we are focused on the recovery and being recovery ready. So even with delivering these savings, we have the long term in mind.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks for that. And you provided guidance for the third quarter at this point. Certainly a big piece of that's going to be due to revenue stepping down but you do have more cost reductions coming through and it sounds like the China business is better. How much of that step down in implied EBITDA sequentially is just due to the fact that you're blowing through all this networking capital, and that obviously has a margin impact. So that part of it's probably a bit temporary as you believe through that inventory in the back half. So trying to understand just how much of this drop in profits is due to the fact that you're just under-absorbed on your assets.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah, it's a great question. You're right. As we are focused on managing down our inventory levels, that means we're making decisions to not produce and that creates under-absorption. We haven't talked a great deal about the financial magnitudes of under-absorption, I mean I would -- just as a placeholder, I would think in terms of, probably something in the $20 million-ish range maybe impacting Q3, but it's obviously a dynamic number based upon a whole lot of assumptions.

But we're going to continue to stay the course when it comes to rightsizing our production levels, staying focused on net working capital reduction and then the cost savings, which in Q3, you're right, is going to be a contributor in terms of our ability to hit the $0.62 to $0.72 per share. And we've kind of already talked about the run rate around those cost savings.

So it will be meaningful but the key thought in terms of Q3 guidance is, you're seeing the effect of the anticipated decline in the jet engine and aerospace parts of the business hitting in Q3 and we're thinking, Q3 and Q4 could be our trough. The good news is that we do see green shoots of recovery in 2021 and conditions should improve.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

And then lastly if I could, your liquidity improved here sequentially by roughly $100 million. Based on your current free cash flow guidance for the full year, I think that implies more free cash in the back half but how that how that mends itself or intermingles with the ABL, unclear. You would know that more than I...

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

But where is the plan to exit the year on liquidity, all else equal with this free cash flow guidance. Thanks.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah, so let me kind of answer that question in layers. So as you look at Q3 and Q4, to answer one of your questions, what does it look like from a cash generation standpoint. We would expect to be cash generator in Q3 and Q4. Of course, that excludes the impact of contributions to the pension plan. But we are expecting the pace of inventory relief, a release rather to pick up in the second half.

And then as you think about the interplay between the conversion of inventory into cash and availability under the revolver what you can expect is, we started an initiative in the last 90 days that was really all about taking great -- the greatest advantage of our undrawn revolver. It's a $500 million instrument and as we're converting inventory to cash, we're taking those inventory balances down, how do we replenish the inventory in a cash efficient way. Well, one way to do that, Phil, is we have pockets of inventory and accounts receivable that is historically not been included in the ABL borrowing base. We are working with our banking group to get those added. And so I would expect we've got some internal targets into the magnitude of what we can do there. But I think it could be meaningful and what's meaningful. My target is adding upward of something in the range of $100 million to our ABL borrowing base as a result of doing that.

So you add up our Q3 and Q4 cash generation, what we're doing around the ABL collateral base, it's -- my spot is right now that we could be heading toward the end of 2020 and finding ourselves in a similar position from a liquidity standpoint as we were at the end of Q2, which of course was about $1 billion of liquidity. So we're managing all the levers and I think we're headed in the right direction. Again, looking at 2021 is a bit out there but I think we're going to enter in a very healthy position.

Operator

Thank you. And our next question will come from Josh Sullivan with The Benchmark Company. Please go ahead.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey, Good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Good morning, Josh.

Josh Sullivan -- The Benchmark Company -- Analyst

Just following up on the inventory question here, how comfortable are you, how lean are you comfortable taking inventory to just looking at that growth and then lead time somewhat they might be in '21 and '22? Are the OEMs involved in those conversations and they're concerned about where lead times might go if you completely clean out the inventory. And then how much of your contract is in take-or-pay structures at this point?

Robert S. Wetherbee -- President and Chief Executive Officer

So good morning, Josh. In terms of the inventory situation, the first part of your question, as demand has come down our flow times have actually come down as well. So we actually have a pretty good ability to respond to emergent demand or near-term changes, upticks in demand. So I think from a how nervous would our customers be, I'd say, not very. I think we are staying in good touch with them, daily in most cases, if not weekly for the other cases.

I think the other issue is that we're managing our melt very aggressively and as such we're not getting our melt way ahead of what we're working on and looking at those value streams and how they flow we're able to be ready to go and as Don said, maintain recovery readiness. So I think how lean can we go? We can get very lean in terms of our inventory levels and our ability to respond should be as good as it's ever been. As we said earlier, we've made a specific decision to hang on to as many of our highly trained people as we could and some of the continuous improvement activities in our melting areas and downstream continue. So hopefully that helps.

Josh Sullivan -- The Benchmark Company -- Analyst

And then, on just take-or-pay structures, is that a meaningful portion or how do -- how those look?

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah, this is Don. I'll take that. So I wouldn't say that take-or-pays are a meaningful element. We do have some but they're certainly not a material driver in our contract structures.

Josh Sullivan -- The Benchmark Company -- Analyst

And then just moving over to the strength in the defense portfolio, can you dig into that a little bit? What does the visibility look like in the aviation and maritime platforms? Can that growth carry you through 2021 as well?

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. Simple answer is yes. So when we look at our defense business, it really breaks down quite simply into things that flow, things that fly and things that roll. That's the easiest way to kind of break it down. So the things that flow are principally long visibility areas, the Navy nuclear programs, pretty strong forward-look there. So that should carry us into 2021 pretty well.

On the the stuff that's flying, again, we haven't seen any decline in demand there. So I'd say our order visibility is good. And on the stuff that rolls, I think we continue to see good demand. So I would say, into 2021, we do see growth. I think it's got to get a little nervous but it's probably in the double-digit range as we go through into 2021.

In the strong products, the titanium alloys in particular but certainly the Navy nuclear program is a contract we signed with BWXT few quarters ago. So all those are progressing and we still have a portfolio of new applications that are probably beyond 2021. Harder to predict how those will actually come to bear but we feel pretty strong for 2021 and defense.

Josh Sullivan -- The Benchmark Company -- Analyst

Thank you for the time.

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah, thanks Josh.

Operator

The next question will come from Gautam Khanna with Cowen. Please go ahead.

Gautam Khanna -- Cowen and Company, LLC. -- Analyst

Hi, thanks guys. Good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Hey, good morning.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Good morning, Gautam

Gautam Khanna -- Cowen and Company, LLC. -- Analyst

I was wondering if you could give us some color on, you guys have the Indian contract with Boeing and earlier in the year, I think you were contracted for the minimums in that side. Has that -- have you adjusted down to kind of below the contractual minimums. I was just curious how that's played out or is there another kind of, leg to follow as we look in compares for 2021 on that program in particular.

Robert S. Wetherbee -- President and Chief Executive Officer

Yes, if we take a step back and say where is our airframe demand, couple of things going on, Gautam. One is we've been close to the contractual targets in 2020. As you look forward, we are not confident that those numbers will be sustained and that destocking will start. We've seen a little bit of destocking starting in Q2, we expect that kind of those levels the balance of the year where 2021 would be lower and then we expect it to level on and be sustained for quite a -- the next two or three years, probably on the airframe side.

That said, I think we announced last quarter that we are expanding our participation in the airframe business, so we'll pick up some share and some position with other airframe manufacturers and that should help offset some of that, probably a half to a third of the problem that we could see coming out of out of the Boeing contract. That's --- that will start in 2021 and really kick in in 2022.

Gautam Khanna -- Cowen and Company, LLC. -- Analyst

That's helpful. I appreciate it, Bob. And then, also just as a follow-up, I'm curious in terms of destocking or just clear demand segments on the engine channel, do you think folks are now -- all your various customers are well aligned to the full production rates, A. And B, I mean, are you still see -- like how much longer should we see some destocking to amplify the declines your business may see relative to the underlying production rates.

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah, yeah, that's the question we ask our customers. Engage with them every week, every day. I would say, we -- I do believe our engine customers are for the most part aligned with the near-term demand, so 2020, 2021 is probably where they are today and we expect destocking in the engine space to really be taking place through the balance of this year into the first half, probably the first two quarters of 2021 and then by the time we get to about mid-year, we should see pretty good alignment with true demand correlating with our orders.

So there's always a little bit of a lag that we've talked about with you for ever and ever but I think it's going to take another couple of quarters because there was a fairly significant decline in the end market and certainly their issues with engines running departures as -- well, GE spoke to us last week, I think we expect them to be in line by mid-year. Our inventories and their inventories by mid-year next year.

Operator

Thank you. Our next question will come from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Hey, Timna.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Hello, good morning. Just a high-level question I wanted to just ask, how any of your comments might change or not if there were a vaccine end of year, early next year?

Robert S. Wetherbee -- President and Chief Executive Officer

Well, you'd hear us cheering, number one if there is a vaccine. I think it would give a lot of impetus to clearly increased air travel, which would lead to improvement in the spare side and I think for us, we feel well positioned for the new builds and I think one of the things we've seen in the aerospace industry is that the airlines are retiring the old stuff and that positions us well for a, I would call it a faster recovery with the vaccine. So we feel with our next generation products, on the next generation engines that would be a plus. So acceleration of spares, followed by acceleration of demand for the new stuff, so we'd be more bullish, once we see a vaccine.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

No, clearly, that would be positive in a lot of ways, I'm just wondering in terms of timings. So for considering that there is the destocking that's going to continue...

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

I guess for the next four quarters or so in jet engines and then airframes destocking. And then, I'm trying to reconcile all the different end markets in terms of where we are with regard to actual demand and destocking.

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

So automotive, obviously, more likely to recover more quickly kind of, confused by the construction mining, although I know it's small. So just wondering if you can go through and tell us how quickly some of these could pivot if things were to recover?

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah, so you mentioned automotive and construction there, they're smaller parts of our business today as we've de-emphasized our role in stainless. But I think we are seeing a decent recovery. I think Don referred to some green shoots I think, in defense -- automotive and consumer electronics [Phonetic] as we get into early 2021, we should feel pretty good about it as -- some of it's a capital spending cycle, others consumer confidence, but it appears that the automotive side is recovering relatively quickly.

We see that in the U.S. and we see it in Asia, actually through the precision rolled strip business we have in China. So yeah, I don't -- I think the aerospace, the jet engine side will probably be the four quarters but I think everything else should -- we should feel pretty good about recovering in early 2021 in the other markets.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Okay, that's it from me. Thank you very much.

Robert S. Wetherbee -- President and Chief Executive Officer

Thanks, Timna. Yeah.

Operator

The next question is from Paretosh Misra with Berenberg Capital Markets. Please go ahead.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Thank you. Good morning, Bob and Don. So first question on your long-term aerospace revenue potential, I guess. So when aeroplane production rates, when they do come back to the 2019 run rates, whether it's in three years or four years, is it fair to say that your sales in the high performance business should be higher than 2019 just given the progress in the last 12 months. The market share gains, new contracts, repricing opportunities you've had and just also the higher penetration of the next generation engines?

Robert S. Wetherbee -- President and Chief Executive Officer

Simple answer is yes, we do expect the longer term to benefit from the share gains and the margin enhancements and the new business, the new positions that we've won. I think the other thing is it couples with the defense growth that we talked about earlier. We see continued long-term growth in defense. Some great programs coming down the pipe, obviously, have to be funded but we're bullish on our core being aerospace and defense, the materials and components that's really where the strengths of ATI play the best. So you couple that with the structural cost savings and obviously then the financial performance of the company reaches a much better point.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

And how sensitive are you to the wide-body versus narrow-body make? I guess is that -- would that change anything?

Robert S. Wetherbee -- President and Chief Executive Officer

So in a nutshell, wide bodies tend to have more metallic content per unit. But when you look at the narrow bodies, obviously the quantity tends to be equally important. So I think what I would tell you, based on our product performance between wide body and narrow body, we're happy with every airplane that gets built anywhere in the world and we're going to be on those engines and on those frames. So we're excited. I'd say less concerned about what gets built just that they are getting built.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Got it. And if I could just ask one quick one, if you look at your sales to jet engines to airframe, the typically it's a 2 to 1 ratio, but it was pretty -- much lower than that in Q1. So how should we think of that in the near term and would it revert back to 2 to 1 the next year, second half of next year.

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah, I think by the second half of next year I think the jet engine destocking's going to make those historical numbers a little funky in the first half or balance of the year just as we work through that. But yeah, I would think long term, especially with the -- yeah, I think with the share positions it's going to take a little longer I think to destock the airframe supply chain, just because of where we sit in that supply chain. But I think over time, you're right. I think it will return probably to 2022 timeframe we'd be back to historical comps.

Operator

Thank you. Our next question will come from David Strauss with Barclays. Please go ahead.

David Strauss -- Barclays Capital, Inc. -- Analyst

Thanks, good morning.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Hey, good morning.

David Strauss -- Barclays Capital, Inc. -- Analyst

I know we've been over this but the difference between the engine side and airframe side in terms of destocking but Bob, can you tell us, may be dumb it down for me, what the explanation in terms of the difference in the timing around destocking engine versus airframe or you think airframe's going to extend all the way through '21?

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. So I think from a destocking standpoint, I think the real issue is the engine group has gotten going first. So they have gotten out ahead. We saw the disruption that occurred in late Q4 with the announcements on the MAX and what was going on, I think the engine guys reacted pretty quick. And so we saw a major shift and a desire to get in line much fast -- very quickly. I'll just say, very quickly.

I think on the airframe side, because of the length of that supply chain, it's taken them longer to understand when is the MAX coming back, what are the implications of COVID on long-term airplane deliveries and they've been working through that and I think, what we saw starting to happen in Q4 of 2019 on the engine side, I think is happening in Q3 and Q4 of 2020 on the airframe side.

So I think they've just got a late start and as a result we'll see the pop up in engines in the second half of 2021 because we'll be back to more demand. I think airline travel will be up, the spares will be up whereas the airframe is would be kind of, leveling out. We've said I think in previous conversations that one good thing about the airframe builders is over time they tend to smooth things out. And the history would say just take of them a little longer to get there. And so that's what we're seeing, so it would be a quicker down and a quicker up for engines, a slower down and a slower up on the frames. That helps?

David Strauss -- Barclays Capital, Inc. -- Analyst

Okay. Yeah, that's helpful. And then as you think about Q3 in the the EPS number we're looking at, can you help us out at all in terms of what that bakes in for a revenue decline on the aerospace side, I think this quarter between engine and airframe on a -- adjusted for the divestiture, you were down on the low 40% range. How much are you baking in that you're down in aerospace in Q3 in that EPS number?

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

But we haven't given revenue guidance, right. So I am reticent to do the math here, but what I can tell you is, you can do the math -- I don't mean to be cheeky about it. We just don't want to be out putting additional guidance out there. Clearly, one piece of information I think would be helpful to you in doing your math, decremental margins. So if you think about our decremental margins in Q2, we were sitting at about 32% decremental margins year-over-year excluding 2019 to divestiture impacts.

As you look forward in Q3 and Q4, you should expect decremental margins in the 30% to 35% range. A little bit wider, the Q2 because with the jet engine declines that Bob was talking about and some mix. I expect a widening out but it's going to blow out. So think in terms of maybe 35%, if you take our earnings guidance and you can do some modeling that will back into -- to get you a view on revenue. And you will find with certainty that our expectations are certainly going to be lower. I just hate to quantify it publicly.

David Strauss -- Barclays Capital, Inc. -- Analyst

Okay. Yeah, that piece on the decremental margins side is helpful.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah.

David Strauss -- Barclays Capital, Inc. -- Analyst

And Don, I guess last one on pension, any updated thoughts on what you might look like from an expense standpoint and a cash contribution standpoint in '21 at this point.

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah, it's -- I said, yeah. I mean the answer is kind of. So 2021, we -- I would expect that our expense will be down some. We should have about $60 million of expense in 2020 and I would expect that to drop down modestly based upon what I know right now. In terms of contributions in 2021, the guidance that we've given is that, between 2021 and 2023, we expect it to average about $85 million of contributions, a little bit higher in the first couple of years and then dropping down in the third year but averaging about $85 million.

The reality is, we won't know with certainty what those numbers look like until we run our actuarial valuations at the end of the calendar year. So -- but right now, I would assume that those figures I just gave you will hold and be kind of in the neighborhood for 2021, should that help.

Operator

Our next question will come from Matthew Fields with Bank of America. Please go ahead.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Just a modeling question from me that the $130 million of pension contribution to this year, is that expected to take place in 3Q or 4Q?

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

So, as you look at the $130 million, so that's for the benefit of everyone on the phone. That's the estimated deposits into the defined benefit plan in 2020. So the way to think about that from a cash standpoint, we've contributed about $45 million of the $130 million between Q1 and Q2. I would expect in Q3, we're going to contribute, probably in the neighborhood of $18 million to $20 million, probably in the lower end of that range. And then, the balance will be contributed -- balance of the $130 million will be contributed in Q4.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

All right. That's helpful. And then, on the liquidity side, you've done a good job of boosting liquidity so far and I appreciate the comment that you expect to end the year at about $1 billion of total liquidity as well. Is that billion dollar level kind of adequate and comfortable for you heading into another year or two of kind of down results in aerospace or do you think that there is a couple of extra moves you need to make to boost that even further?

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Yeah. I mean, first of all, I feel like we're in a really good -- really, really good spot from a liquidity standpoint and then of course, our next nearest term maturity isn't until 2023. So we're lined up to continue to be in a very healthy position. And of course, we'll continue to watch the demand and we'll pull levers around cost structures, capital expenditures and working capital initiatives to continue to shape our business to the demand. But I feel very, very good about our liquidity position. We did the financing, placed a new convert in June, that also was a healthy good guide for our liquidity profile as you look out past 2021.

In terms of other moves really, we're opportunistic. I think, what you're bringing up is we've got some 2023 maturities and we will manage those in due course. But generally, cash needs in the business are -- we should be able to meet those quite easily. We -- and to give you a kind of a book end on the cash needs, we typically need anywhere from $50 million to $100 million of cash in the business. So to sit with $1 billion of liquidity and in a very healthy position that we're in is a good spot to be. I feel very, very fortunate to be in the position that we are with our balance sheet and our liquidity.

Operator

Ladies and gentlemen, 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

Thank you for joining us on the call today. Clearly, we talked about the commercial aerospace industry's reset as it relates to COVID but also heard us talk about our strong liquidity position, the significance -- significant actions we've taken to adjust our cost structures to the new demand reality and certainly, our strong product positioning for recovery. And we remain recovery ready and believe ATI will outpace the industry as that occurs. So thank you for your continued interest in ATI.

Scott A. Minder -- Vice President, Treasurer and Investor Relations

Thank you, Bob. [Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Scott A. Minder -- Vice President, Treasurer and Investor Relations

Robert S. Wetherbee -- President and Chief Executive Officer

Don P. Newman -- Senior Vice President, Finance and Chief Financial Officer

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Josh Sullivan -- The Benchmark Company -- Analyst

Gautam Khanna -- Cowen and Company, LLC. -- Analyst

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Paretosh Misra -- Berenberg Capital Markets -- Analyst

David Strauss -- Barclays Capital, Inc. -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

More ATI analysis

All earnings call transcripts

AlphaStreet Logo