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Allegheny Technologies Inc (NYSE:ATI)
Q3 2020 Earnings Call
Oct 29, 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 Third 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. Good morning, and welcome to the Allegheny Technologies Third Quarter 2020 Earnings Call. Today's discussion is being broadcast on our website at atimetals.com. Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Donald Newman, Senior Vice President and Chief Financial Officer. For today's call, we will not display or advance slides as Bob and Don speak. Their comments will focus on highlights and key messages. The slides provide additional color and details on our results and outlook. They are available on our website at atimetals.com. [Operator Instructions] As a reminder, all forward-looking statements are subject to various assumptions and caveats as noted in the earnings release and in the slide presentation.

Now I will turn the call over to Bob.

Robert S. Wetherbee -- President and Chief Executive Officer

Thanks, Scott. Good morning. It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market. Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic. This morning, I'll share my thoughts on three key topics. First, how we're taking control of what we can control, thus accelerating cost savings and strengthening our position. Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth. And third, our view of the markets and our confidence in a stronger future for ATI, thanks to strategic share gains and ATI's unique capabilities. So first, where we are today. We began taking decisive action as soon as our forward-looking demand signals flash red. Our customer connectivity continues to give us the insights to assess market dynamics in the moment. From this, we gain conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations.

We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond. As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance. We accelerated benefits from our cost savings initiatives through aggressive implementation. This included capacity up, gold dark and quiet facility islands reduced our fixed costs, minimized variable costs with execution on our restructuring programs, eliminated costs to align with demand declines, reduced overhead. We've intensely reviewed every administrative and nonproduction related expense continuing only what was critical. Overall, we've significantly variabilized our cost structure. Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs. This will be a lasting impact of the actions we've taken during the crisis. Through it off, our people have been extraordinary. First and foremost, they're keeping each other safe, while efficiently and consistently delivering critical materials and components to our customers. The frequent production adjustments we made in response to demand shifts and end market forecasts have not been easy for them. Growing levels and shift schedules have fluctuated as a result.

I sincerely appreciate the entire team's effort and dedication and personal economic sacrifices. Their continued actions demonstrate a shared commitment to ATI's future success. The deliberate actions we've taken and will continue to take are crucial to our ability to emerge a stronger company as the economy recovers. Looking ahead, we're confident demand will eventually recover. We expect these difficult times to continue for several quarters to come, but we do believe we're reaching the bottom with some signs of upcoming stability. Secondly, let's talk about our balance sheet and the solid position it puts us in. We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule. Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth. We're fueling growth in three ways: first, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021. Next, organically expanding our presence in adjacent high-value markets, where our material science expertise is valued. And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities and capture profitable core market opportunities.

As we accomplish our growth goals, we'll intensify our presence in aerospace and defense, materials and components. We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace like margins in adjacent markets along the way. Looking forward, we're confident that the demand for commercial aerospace products will recover. We see it as growth deferred, not lost. No matter what form you believe the coming economic recovery will take, it could be a leak, could be a U, it could be L-shaped. When you're at the bottom, it's difficult to predict when you'll reach the other side. But we know we'll get there. We're positioning ATI to emerge stronger, leaner and more efficient, no matter how the recovery comes. There are some examples of how I believe we're doing just that. We're expanding our presence in growth markets like defense. We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability. Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term. Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn. Defense remains a notable positive exception. A little more color on our view of what we expect going forward. Let's start with commercial aerospace. Both jet engine and airframe continued to decline significantly versus the prior year. Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with: quarantines, travel restrictions and low 737 MAX production. Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand. Fourth quarter jet engine product sales will remain relatively weak as quarantines began to slowly recover. Specialty materials will likely lag for an additional couple of quarters.

API sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain. In 2021, ATI will benefit from engine market share gains and new airframe business. The positive impact from these wins will increase over time as aerospace industry volumes recover. Our second core market, defense, remains a source of strength. Excluding titanium armor, ATI's diversified defense sales were up more than 20% year-over-year, led by naval nuclear and military aerospace growth. Titanium armor plate sales were down significantly due to timing for both a domestic and an international program. We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect. Near term, we expect continued growth in the fourth quarter and into 2021. Next, let's talk about my thoughts on three important adjacent end markets. Third quarter sales were down significantly in the energy and medical markets and up in electronics. When it comes to energy's oil and gas submarket, we saw a lack of end-customer demand and a resulting inventory glut, reducing exploration and downstream processing activities worldwide. We expect this market to remain weak in the fourth quarter. A bright spot within energy is the specialty energy submarket, including solution control, nuclear and renewables.

These sales grew year-over-year. And we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects. Our medical market is principally comprised of biomedical implants and MRI materials. Sales versus prior year were lower to customers in both categories, mainly due to the challenges presented by COVID. Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers. Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter their medical facilities, either due to an effective COVID vaccine or disease treatment protocols. Finally, electronic sales moved higher year-over-year. This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales. We anticipate modest growth trends to continue in the fourth quarter.

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

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

Thanks, Bob. I'll spend the next few minutes sharing highlights in three key areas: one, our better-than-expected third quarter financial performance; two, our strong balance sheet and cash position; and three, a look at our Q4 and 2021 expectation. From a performance standpoint, the adjusted EPS loss of $0.38 per share in Q3 is significantly better than our previous guidance of a loss of between $0.62 and $0.72 per share. Our Q3 performance reflects accelerated cost reductions and an improved mix in portions of our business. First and foremost, we are managing decisively. We are making the most of external demand despite market headwinds, and we're controlling what we can, our costs and capital deployment. Consider this, our third quarter revenue dropped by more than 40% versus prior year, including a 60% decline in our high-value commercial aerospace business. The revenue drop was largely due to market factors that were not within our control. When market declines became clear earlier this year, we responded quickly, focusing on cost containment. Benefits of those efforts can be seen in our Q3 results.

Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin in Q3. That's a meaningful improvement from the 28% decremental margins captured in Q2, clear improvement resulting from quick action. Our cost actions are having meaningful impact and they're accelerating. As Bob described it, we have significantly variabilized our cost structure. Costs once considered fixed are now variable. This means we are better prepared to deal with future demand fluctuation. Also keep in mind that structural cost savings will accelerate profitability in the recovery, expanding margins and increasing our cash conversion. Looking beyond the income statement, our efforts to preserve free cash flow are producing results as well. We expect to be free cash flow positive in 2020. This is made possible through capital spending discipline and our ability to convert working capital into cash. I want to take a minute to acknowledge the fantastic efforts of our operating teams. They took quick actions to protect cash in the near term while maintaining our ability to grow and be recovery ready. We ended the quarter with approximately $950 million of total liquidity, including $572 million of cash in the bank. Our debt maturity profile also adds strength to our financial position. Our next meaningful debt maturity does not occur until 2023, three fiscal years away. We are focusing on three key levers to drive cash generation: cost structures, inventory levels and capex. Expect to see continued focus on these three areas in 2021 as we adapt our business to fit dynamic end market demand.

At the same time, we'll continue to protect our strong balance sheet. These actions will enable us to manage through the down cycle and capitalize on opportunities in the coming up-cycle. In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing demand stabilization in commercial aerospace. This starts with jet engine OEMs working to better align production and demand levels. Airframe OEM inventory destocking is expected to persist in the fourth quarter. Beyond aerospace, some industrial markets are seeing modest recovery. Others, namely oil and gas, will likely remain at low levels. As a result, we expect a fourth quarter adjusted EPS loss in the range of $0.36 to $0.44 per share, similar to our third quarter's adjusted EPS. Moving to our free cash flow guidance. Our consistent efforts to generate and preserve cash have produced tangible results. We reduced managed working capital by $115 million in the third quarter in the midst of the steep economic decline. We expect to further reduce inventory in Q4. Just as the team quickly pivoted to cost reductions, we managed our capex spending to better match demand. To that end, we're again lowering our capital spending target for the full year. Our updated capex forecast range is $125 million to $135 million, about 60% of the original 2020 projections. We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contribution. We're able to do this because of the successful achievements in working capital, capex and cost structures, a great accomplishment in the midst of a very challenging environment.

Looking beyond the fourth quarter, we will stay diligent to preserve or even improve on the gains that we made in 2020. First, we believe that working capital represents an opportunity for further cash flow improvement. At the end of the third quarter, managed working capital was approximately 50% of revenue. This compares to 30% at the end of 2019. We understand what it takes to get back to those 2019 levels, and we plan to make further improvements in 2021. Next, we'll continue to keep a close eye on our capital spending. We'll balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels. Finally, we will stay disciplined on costs. We will carefully preserve our structural reductions and minimize additions as volumes return to the business. The way we operate today is fundamentally different than how we used to work. We will strive to maintain the hard-fought gains.

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

Robert S. Wetherbee -- President and Chief Executive Officer

Thanks, Don. Your points were right on. It's been a real team effort in a very uncertain time and much appreciate the contributions of everyone who's part of ATI, our customers and our suppliers. Our comments today focused on what matters most to our shareholders and to us. These priorities are at the core of how we lead on a daily basis. First, we're managing decisively in times of great market uncertainty. That includes quickly and effectively adjusting our cost structures and inventories to match demand, and we're keeping our people safe. Secondly, we're preserving cash and maintaining liquidity. We're preserving our ability to deploy cash accretively for our shareholders. We'll be recovery ready, capitalizing on industry volume growth as well as our strategic share gains and new business awards. Finally, we're working with our customers, new and long standing, who value our material science capabilities and advanced process technologies. Our goal is to be integral to their success, helping them grow, solving even greater challenges together, in so doing, earning an ever-increasing share of their business. We're taking the actions necessary to emerge from this crisis a stronger, leaner and more focused ATI.

Scott, back to you.

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

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

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Josh Sullivan of the Benchmark Company.

Josh Sullivan -- Benchmark Company -- Analyst

Hey, Good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Morning.

Josh Sullivan -- Benchmark Company -- Analyst

Just you highlighted defense as the key market going forward. Can you just talk about how do you take share there? Or is it on new program growth? Just as we think about defense budgets, looking into '21 and '22, can the strength today carry over into the out years?

Robert S. Wetherbee -- President and Chief Executive Officer

Yes. Great question and Good morning. Yes, I think when you look at what we've been able to do in defense, it's being very program-specific. Clearly, a big part of what we do is supporting what floats. So the nuclear navy and the propulsion systems there, we expect that to be a good strong market for the years to come as much in terms of fuel replenishment as anything. So I think that's a fairly solid growth opportunity for us. The other area we focus on is clearly military propulsion, both helicopter, rotary -- rotorcraft, fixed-wing. So we're on very select programs that are growing, and we continue to see opportunities there. And those programs tend to last forever, and obviously, consume some portion of aftermarket type things that we enjoy as well. And then on ground vehicles, we're on very specific programs that are starting to gain traction internationally or have implications for international growth on the armor side. So we feel very confident. These are markets that value our material science capability. And certainly, things like HRPF and our facilities at SA&C also contributed to that.

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

Josh Sullivan -- Benchmark Company -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

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

Josh Sullivan -- Benchmark Company -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yes. No. That's a question you asked a couple of other times for us. And I think what we've always said is it's harder for us to see exactly where the aftermarket is. It's an important part of our business. Probably, I think we've said publicly 20%, 25% of what we do is in the aftermarket. And so we ask that we track it by basically the -- it's at the forging level, forging business, and we see that, that part specifically come through. But at this stage, we think it's still going to be there for a while. It's not a growth space for us when the engines start to go out of production. I think we're well positioned for that next generation, the -- obviously, the leaps in the geared turbofan. So that's really where the future is going to be for us.

Josh Sullivan -- Benchmark Company -- Analyst

Got it. I'll figure out a different way to ask a question next time. Thank you.

Robert S. Wetherbee -- President and Chief Executive Officer

Alright, well it's OK. It's early in the morning. But we're ready.

Operator

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

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, Good Morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Morning.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

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

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

Yeah. We've made fantastic progress in terms of the cost initiatives that we triggered early on as soon as we saw the changes going on in the market. To give you some perspective, Phil, if you think about it, we captured about $60 million to $65 million of cost reductions in Q3. That was roughly twice the size of the capture that we got in Q2. So as you think about Q4, we feel like we've kind of hit a good pace. I would take some marginal improvement in Q4 relative to Q3, but still in that, probably $65 million range for the quarter. That sets you up for a run rate in the $260 million to probably $275 million range for 2021. And so I think that's why you want to think about run rate. And of course, the other key area of the cost reductions is how much of those cost reductions are we going to keep, what's structural. And for that, I would stick with the guideline that we gave you before, which is we said we were targeting 40% to 50% of our cost reductions to be structural. I would lean toward the 40%, and that, as you do the math, will set you up for about $100 million plus of structural cost reductions. And of course, I don't know have to tell you the math on that, those structural cost benefits are gifts that are going to keep giving through the up-cycle. They're going to be beneficial to expanding our margins and increasing our cash generation. And it should create some really substantial enterprise value for our shareholders. So we're really happy with the outcome that we've had so far on our cost reduction and the quick response that we've had from our team.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

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

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

Yes, you're right. We had in excess of $60 million of contributions in the third quarter. We're still targeting $130 million for the full year. That means you've got about $35 million left in Q4. So that sets us up on this glide path for getting our pension plan really fully funded or at least to a de minimis level over the next number of years. And so as you think about, again, 2021, as everybody is trying to wrap their head around those expectations, we've said before that $130 million for 2020. As you look to 2021 to 2023, we should be averaging closer to probably $80 million, with 2021 kind of in the $100 million range. Again, really pleased with the glide path that we're in with our pension. We're heading in the right direction, and it's still a clear priority for us.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

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

Operator

The next question comes from Gautam Khanna of Cowen.

Gautam Khanna -- Cowen -- Analyst

Hey, guys. Good morning. Thank you.

Robert S. Wetherbee -- President and Chief Executive Officer

Hey, good morning.

Gautam Khanna -- Cowen -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. At the tail end there, that's the ultimate question. But thanks for the question. There's a supply chain. And as an understatement, it's an ecosystem, right? It's always evolving in a current dynamic environment. But what we're doing is we really get the benefit of, I'd say, the forging business is kind of our starting point, where you're looking at part-specific activity with specific programs and our relationships with the big OEMs. And we know that they were pretty aggressive in adjusting their inventories quickly, starting Q4 of last year into the first part of 2020. So we think that we're in a pretty good inventory management position. So from -- as we get into the back half of 2021, we should be able to see that inventory burn off. But it's based on day-to-day talking to the customer, to be honest with you. We get a lot of different inputs. We actually listened to some financial analysts who talk about the build rates and talking to the customer, and it's really about their tactical activity.

Gautam Khanna -- Cowen -- Analyst

Right.

Robert S. Wetherbee -- President and Chief Executive Officer

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

As Don said, one of the great opportunities for us is, right now, we're at about 50% working capital to sales kind of ratio. We should be much closer to 30%, if not better than that, over the long term. So that's kind of our own internal indicator of where is the supply chain. As we start to release our trapped materials, I will tell you that they've started to burn off. But the real challenge, I think, is we're still waiting on the MAX return to service. And I think once that happens, you tell me when it's going to happen, but let's assume it happens, and we start to see visibility coming back in January and February. I think that's when we'll get our first true look at what the recovery is going to look like. But it's still looking at inventory levels, talking to key suppliers and certainly investing with our customers at time. There's no lack of conversation going on. It's a matter of -- the biggest wildcard for us is the MAX return to service at this point.

Gautam Khanna -- Cowen -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

I go by lots of different names, Gautam. It's OK.

Gautam Khanna -- Cowen -- Analyst

It's -- I was just curious, the jet engine sales number that you guys revealed in the slide deck, do you think that is a low watermark, if you will? I mean, from here, do you -- I mean maybe Q4 dips a little lower because there's always kind of channel destocking into the calendar year-end. But do you think that marks this quarter -- Q3, Q4 will mark kind of the low point? It is a destocked level, if you will, below underlying consumption of the end user? Or do you think we're going to be hanging out at a level like this or maybe even below that in the first half of next year? Just what's the shape of that kind of -- I'm just trying to understand like what is underlying consumption versus what you guys are actually feeling today?

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. I think I'll give you my comments with one caveat. So I think if you took Q3, it was still a little bit of a transition quarter. Q4, Q1 and Q2, they all kind of have that -- they kind of resemble the same pattern. I think we are bouncing off the bottom. Some of that is, when I look at the news that comes across my desk, I would say, today, it's more up than down. Where for the last 180 days, it's hard to believe it's only been 180 days that we've been in this pandemic, that was mostly down, right, negative type stuff. So I think the mood has shifted quite a bit. So I think Q4 to Q1 to Q2, probably flat for the demand. I think a couple of the tidbits we're working through is that we're going to have some tough comps going forward, right, in Q1, particularly. But I think if you look sequentially, I think you'll get a good track record.

And then not all our friends in the OEM business are as effective at managing their forward demand as others, right? So there's always one of the guys that we kind of have to wait and see, and they tend to do more of their adjustments in Q1. So we could still get some modest inventory corrections from 1 or 2 players. But I think for the core customers that we depend upon in the jet engine space, I think -- we think we're at the bottom and it should flatten here for the next couple of quarters. And certainly, the work we're doing on the decremental margins, it should still be -- still going to be on our mind. So...

Gautam Khanna -- Cowen -- Analyst

Well thanks again. I appreciate the answers and insight. Goodluck with everything.

Robert S. Wetherbee -- President and Chief Executive Officer

Yup. Thank you.

Operator

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

Timna Tanners -- Bank of America -- Analyst

Good morning. Sorry about that -- the way there. So -- If you could elaborate a little bit more on the capex and where it was cut and how low it can go going forward. And then also, there was a comment I caught on the discussion about possible acquisitions. Just wanted a little more detail on that also.

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

Sure. This is Don. Let me take a run at that question. First, from a capex standpoint, we reacted very, very quickly to right size our capex where we were seeing demand going. When we entered the year, we were expecting to spend in excess of $200 million. If you look at our Q3 numbers, Timna, what you're going to see is a run rate closer to $120 million. So very positive. In terms of where the cuts have happened, it's really been pretty broad-based across all of the segments. And it's really about prioritizing where we're spending the capex. We're looking at it just like our cost structures. We're dismantling our capital spending. We're looking at what the highest priorities are from a maintenance standpoint. And then when it comes to any growth capex whatsoever, we're, of course, interested in growing, but we can't spend a dime ahead of when it needs to be spent. And we have to be dropped dead certain that we're going to get the returns that we believe we're going to get with these investments. So what you've seen in 2020, you should expect to see in 2021. Similar discipline, similar flexing based upon what the customer needs and what the demand levels are in the end market. The second part of your question, would you repeat that?

Timna Tanners -- Bank of America -- Analyst

Yes. Sure.

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

Acquisitions. Acquisition, that's right.

Timna Tanners -- Bank of America -- Analyst

Yes. M&A.

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

Okay. So the way to think about it is it really comes down to what's your priorities with your capital. And our priorities around capital allocation, Timna, has not changed. Number one, we have to ensure that we have adequate liquidity in the business to keep it healthy. And we're there, check that box, $950 million of liquidity. Second priority is we make sure that we're taking care of our people and we make sure that we're maintaining our assets. Check, we're doing that. Third, we are on a glide path to the pension. We're going to continue to make our pension contributions and see ourselves work down that pension commitment to a de minimis level over the next several years. Check, we've got that covered. At that point, our priorities really are focused on where we deploy capital to do kind of effectively 2 things, prudently grow, and the second is really take care of our maturing debt facilities. So let's focus on the growth. It's organic or inorganic, and we do measure the differences.

We understand that organic growth will only get us so far in terms of our business. Inorganic growth may be an enhancer. How do we look at that inorganic growth and are we open to inorganic growth is what you're asking us, Timna. And the reality is, we are. We have put ourselves very intentionally in a position to have choices, but it's also choices that are going to be executed based upon the discipline you've seen over these last few quarters. And as we look at M&A, it's also important to understand our priorities there. Our priority is aerospace and defense growth. That's our core. That's where we make our highest margins. That's where we've experienced the healthiest growth. And so as we deploy capital to growth, whether it's internal or external, it has the priority toward -- a preference toward aerospace and defense. And we'll be opportunistic. We see opportunities really often and we're pretty discerning and pretty careful as we make those decisions. But we do see it as a possibility.

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. I think that's right, Don. I think it's about expanding into material science capabilities that can go into components, right? We understand our material science capabilities, but almost everything we sell, something else happens to it before it gets on the end use. So we see some really unique opportunities coming in defense for high-temperature structures. Powder metallurgy plays into that game. The form. There are times, Timna, you might accuse us of being in the lumberyard business in some aspects of our business. And we think going up the value chain to be nearer to the end state is actually where there's an opportunity for further differentiation, leveraging our advanced processes and certainly our material science. So hopefully, that helps with the color you were looking for.

Timna Tanners -- Bank of America -- Analyst

Okay. Thanks for that. Yes, I'm just trying to understand like if you're going to finish some of the isothermal forge press capex or where that stands relative to thinking about M&A and how those priorities would be going forward, but I can follow-up offline. I would also -- go ahead.

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

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

Timna Tanners -- Bank of America -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. I think I'll start with the defense spending. I think in the near term -- near to medium term, I think the defense spending will continue. I think that the opportunities for the programs that we're on specifically feel relatively strong for a long period of time, not necessarily driven by politics, but by global threats and defense needs. So we spend a lot of time. We have a dedicated team in D.C., who's spending a lot of time with the Pentagon and various folks. And so I think on defense, we feel relatively strong. In terms of assets that we might have idled, they're always idled such that they could be returned to service, but we continue to deemphasize our position in stainless. And I think we're interested in using the HRPF that we have in Pennsylvania for cash generation. We think there's still a lot of opportunities. We still get inquiries about using that capability. As we all remember, it was built for a capability and it came with a capacity, and we still get inquiries to do that. The markets have been up and down over the last 180 to 200 days. So it's a little harder to tell where that might go.

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

Timna Tanners -- Bank of America -- Analyst

Okay. Thanks guys. Best of luck.

Operator

The next question comes from David Strauss of Barclays.

David Strauss -- Barclays -- Analyst

Thanks, good morning.

Robert S. Wetherbee -- President and Chief Executive Officer

Good morning, David.

David Strauss -- Barclays -- Analyst

Apologies if any of these have been asked. I joined late from another call. Free cash flow, as we think about '21 and the moving pieces there between -- I heard the comments on capex. But capex, working capital, cash taxes and I guess, both including and excluding pension contribution, would you expect it to grow in '21 versus '20?

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

Hey, David, this is Don. We haven't given guidance yet for 2021, but let me give you some color. Of course, in 2020, we're expecting to generate somewhere between $135 million and $150 million of free cash flow in a pretty challenging environment. How do we get there? Well, there's 3 levers that we're managing: it's about our cost structures, it's about our capex and it's about our working capital. The way to think about 2021 is you're going to see, number one, the same discipline around the same levers. As we look at our cost structures, we're going to work very hard to continue to capture cost savings and maintain the gains that we've already captured in 2020. I've already talked about the structural savings in the range of $100 million even in the recovery. So I feel very positive about that. When it comes to our capex, the same discipline that you see in 2020, where we took our capex spend, really shaped it to the new demand, took it from $200 million down to a run rate after Q3 at about $120 million. I expect to see that very, very same discipline applied as we look at what the market demand is in 2021.

And then the last lever and what's, I think, really key to understand how we're viewing 2021, and this will likely be reflected when we give our guidance for free cash flow, is how we're thinking about our managed working capital levels. So Bob already touched on this, but I want to drive home how important this is. We ended Q3 with a managed working capital as a percent of revenue at about 50%. And you know, David, that we ended in 2019, that metric was managed working capital at 30% of revenue. That 20% delta, we see as a massive opportunity, and we are going after it aggressively today. And it's really going to unfold in 2021 as we released the captured inventory that we have and really apply some pretty solid methodologies to make sure that we're not creating any new stranded inventories. And that should be a significant source of cash generation for us.

David Strauss -- Barclays -- Analyst

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

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

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

David Strauss -- Barclays -- Analyst

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

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

Yeah. I'm glad you asked the question. You're right. We made some really good progress around our decremental margins. Last quarter 2, we were at 28%. We worked that down to 25%. So how should we think about decremental margins going forward? Really, I think as you're modeling it, you want to think about our decrementals in the 25% to 30% range. Remember the fact that as we look at what's created those really favorable decremental margins, it's really about our cost initiatives. There's 2 baskets to that. One basket is what I'd call variable related. We're variablizing our cost structures, which is going to enable us to continue to flex as the end markets are moving up and down. So we're in good shape there. The other key thing and it will continue to benefit our decremental margins as you go through 2021 and even the up-cycle are those structural changes. I know I've mentioned it several times, but it is quite important. As you guys are thinking about 2021 and beyond, as we keep that $100 million of incremental savings as structural, that's a gift that keeps giving. And it's going to contribute not just to beneficial decremental margins and incremental margins, but also our cash flow.

David Strauss -- Barclays -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yes. We've been very aggressive, David, on making sure we're running to the right facilities. We actually -- I checked this morning, we have 6 facilities that are actually on an indefinite idle today. They were our higher-cost facilities. And so the challenge there is we use the term cold, dark and quiet, candidly, that you have to take those facilities off-line and eliminate the cost to the maximum. Now for those facilities to come back online, obviously, they have to be justified, justified to reinvest the working capital and justified to add the capacity. And in the meantime, making structural changes in those facilities that they'd be viable when they did come back. So I think what's different this time is primarily driven by the magnitude and probably the duration of the economic situation, and we were able to take more structural change than we ever had before. And so that's been a huge contributor to that. Don, did you want to add some more color to Dave's question?

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

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

Robert S. Wetherbee -- President and Chief Executive Officer

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

David Strauss -- Barclays -- Analyst

Okay. Thanks very much for the color. Appreciate it.

Robert S. Wetherbee -- President and Chief Executive Officer

Yup. Thanks, David.

Operator

Our next question comes from Paretosh Misra of Berenberg.

Paretosh Misra -- Berenberg -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. I would say -- Good Morning, Paretosh -- 3 components to that. Some of the contract renewals we had -- did have, we call it, margin enhancement, and it came from 1 of 2 sources. It could be unit price, but it also could be product mix. So we continue to drive as we get more share in the jet engine space. And even in some of our airframe spaces, we've been able to get a better product mix that plays more favorably to either the alloys and/or dimensions of products that we make. So I'd say there's some that is going to be driven by that, but the majority of it would be increasing in volume.

Paretosh Misra -- Berenberg -- Analyst

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

Robert S. Wetherbee -- President and Chief Executive Officer

Yeah. I don't know exactly how much inventory they carry per se. But I would say from a lead time perspective, historically, we've seen the lead time from shipping of forging per se to being bolted on a plane can be six months. Now that's a nice average. And on an uptick, it tends to get a little tighter. It can be as short as four months may be in the best cases. So if that's what you're asking, how long from build of -- -- delivery of an engine to a part supplied by us that's forging, that can be four to six months. When you get into other products like billets and plate, it can extend closer to 12 to 15 months, depending on the product and the difficult -- the challenge of the supply chain.

Paretosh Misra -- Berenberg -- Analyst

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

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

Yeah, partially. What I was saying was, as you think about our decremental margins going forward, consider them in the 25% to 30% range. And that would be consistent as you go through 2021 and think about how the change in revenue would affect the bottom line. Where I raised the comment about structural changes is really around how to think -- once we're in the recovery, how to think about the benefits of the cost actions that we've taken. We overall have delivered a significant amount of cost reductions in themselves in the range of $260 million to $275 million of annualized savings. But what's key to me is what happens beyond the down cycle? How much of that can you keep? And there, it's the structural changes, and those are those gifts that keep giving. And that's in the magnitude of about $100 million plus. And so that's what I was referring to. As I said, as you think about decremental margins off into the future, especially past 2021, once we're deep into the recovery, it's important to know that those decrementals and our incremental margins going forward are going to be pretty robust.

Paretosh Misra -- Berenberg -- Analyst

Understood. Appreciate that. Thanks, guys.

Operator

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

Matthew Fields -- Bank of America -- Analyst

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

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

Yeah. I'm really glad you asked that question. So when you think about what's going on with availability, you're right. Usually, there is a trade-off between the release of working capital, get it into your cash, but hey, you're losing some of your availability on your ABL. We, of course, are very aware of those mechanics. So here's what we're doing. We actually have a very healthy set of initiatives that we're targeting and we're capturing that are looking at our existing collateral baskets. There are some of those collateral baskets that have historically not been included in our borrowing base, things like international receivables. There are some inventory categories that may exist with third parties. What we're doing is we're working with our banking group to get those baskets of collateral included in our ABL borrowing base going forward.

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

Matthew Fields -- Bank of America -- Analyst

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

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

Yeah. We're in great shape around our debt maturities. And the reality is with the kind of cash and liquidity that we have right now, ultimately, our choice -- or excuse me, our objectives were to give ourselves some choices around things like you're just describing, how do you manage these debt maturities? I think we've got a lot of runway around our debt maturities. We're in great shape. In terms of when we may be refinance the bonds that are going to be maturing in 2023, I'll call that a game-time decision. There's a lot of dynamics that go in to managing capital structure and funding your business, the growth opportunities that Timna brought up. So right now, we're in a fantastic spot be able to make those choices. And the markets have been healthy and supportive as well, which is also, of course, helpful.

Operator

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

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

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

Operator

[Operator Closing Remarks]

Duration: 60 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

Josh Sullivan -- Benchmark Company -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Gautam Khanna -- Cowen -- Analyst

Timna Tanners -- Bank of America -- Analyst

David Strauss -- Barclays -- Analyst

Paretosh Misra -- Berenberg -- Analyst

Matthew Fields -- Bank of America -- Analyst

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