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Allegheny Technologies Inc (NYSE:ATI)
Q4 2020 Earnings Call
Jan 28, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Allegheny Technologies Incorporated Fourth Quarter 2020 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] At this time, I'd like to turn the conference call over to Scott Minder Vice President, Treasurer and Investor Relations. Sir, please go ahead.

Scott Minder -- Vice President, Treasurer & Investor Relations

Thank you. Good morning and welcome to the Allegheny Technologies Fourth Quarter and Full Year 2020 Earnings Call. Today's discussion is being broadcast on our website at atimetals.com. Participating in today's call are Bob Wetherbee, President and Chief Executive Officer; and Don Newman, Senior Vice President and Chief Financial Officer. Bob and Don will focus on full year and fourth quarter highlights and key messages, but may refer to certain slides within their remarks. These slides are available on our website atimetals.com and provide additional color in detail on our results and outlook.

After our prepared remarks we will open the line for questions. During the Q&A session, please limit yourself to two questions. 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'll turn the call over to Bob.

Robert Wetherbee -- President & Chief Executive Officer

Thanks, Scott. Good morning. No surprise, we're glad 2020 is over. It was a challenging year amplified by a significant uncertainty, yet we made the best of it. Our team persevered and focused on doing the right things quickly and decisively to position ATI to emerge from the crisis stronger, a company focused on aerospace and defense. Fourth quarter results reported this morning exceeded expectations as we safely delivered for our customers, continued strong cost controls and improved working capital efficiency. For the year, our free cash flow generation was positive overall at $168 million pre-pension contributions, free cash flow exceeded our full year guidance by 18%.

In today's call, my remarks will focus on three major things: the leadership priorities that drove our actions and results; our transformation to a more profitable aerospace and defense focused company; and our outlook for our key markets. So, let's start with our leadership priorities. 2020 began with reasonably strong customer demand and without a hint of a looming global pandemic. ATI posted solid first quarter 2020 financial results. We enjoyed the benefit of stable jet engine demand bolstered by increased customer volumes that were delayed from the second half of 2019. While these results were made for a difficult year-over-year comp in the first quarter 2021, it did help to offset the significant headwinds we've faced in the subsequent three quarters of 2020.

When the pandemic took hold late in the first quarter, we responded quickly and decisively. The leadership priorities shown on Slide 4 drove our results and continue to guide our actions today. First and foremost, we focused on keeping our people safe. Safety is a core ATI value. We quickly enacted policies and procedures around the world to ensure a virus-free work environment, mitigating the risk of spread. Our efforts continue to be largely successful. We remain vigilant to ensure our people go home safely each and every day.

Second, we took the necessary actions to preserve cash and maintain liquidity. We ended the year with more than $950 million of total liquidity, including nearly $650 million of cash on hand. We extended our debt maturity profile and now have no significant debt maturities before mid-2023. Don will cover some additional achievements in more detail in a few minutes.

Third, we proactively and aggressively optimize our cost structure. Our close customer relationships enabled us to match capacity with the rapidly declining demand expectations. We did what was necessary to ensure ATI would not only survive the global recession, but emerged stronger in recovery. By quickly reducing our costs, we've minimized detrimental margins limiting the steep demand drops impact on our bottom-line. We eliminated approximately $170 million of costs in 2020. We continue to pursue operational improvements. We expect total cost reductions to grow to at least $270 million over the next few quarters as actions implemented in the second half of 2020 reached their full run rate. Importantly, we expect about $100 million of these cost savings to become structural, continuing to benefit ATI as we return to growth over time. It's worth noting that the additional savings we announced in December as part of our strategic transformation are incremental to these savings.

Fourth, we focused on supporting our customers through continued strong execution and operational excellence. Our customers count on us to deliver the mission critical materials and components to keep their planes flying, vehicles moving, energy flowing and medical equipment and electronics working flawlessly. I'm proud of how the team has led through 2020. Focused on our people's health, our company's financial health and strengthening our customer partnerships. Being recovery ready, our fifth leadership priority positions ATI to serve our customers and become a more sustainably profitable company over the long term. We've been rewarded with more of our customers' business as a result. In 2021, our share of jet engine materials and components on key programs is increasing. We've also won new business on airframes and are well-positioned to win upcoming specialty energy projects. The bottom line here, we've accomplished a lot in 2020.

Our actions created the necessary foundation for the transformation we announced in December. You may recall, we're exiting standard stainless sheet products by year-end 2021 as we redeploy our capital to high return opportunities. These actions are major steps to becoming a more profitable-focused aerospace and defense leader. We're accelerating the creation of significant shareholder value. In eight weeks since the announcement, we've hit the ground running and are executing. On Slide 5, you'll see two of the leading indicators we're using to track our progress toward this transformation: a streamline footprint and an improved product mix. We have a third metric that we'll share in future progress updates. It attracts working capital release to largely self-funded projects' capital expenditures.

So, let me take a moment to review the major actions we're taking. First, we're consolidating our Specialty Rolled Products finishing operations to create a more competitive flow path, focused on increasing production of high-value differentiated materials. This includes closing five plants within the AA&S segment by year-end 2021. In the fourth quarter, we closed two finishing facilities: one in Western Pennsylvania and the other in Connecticut. The three additional closures are expected in the second half of 2021. Second, we're on track to exit 100% of standard value stainless sheet products by year-end 2021. In the fourth quarter, sales of these products represented 17% of AA&S segment revenues down from 22% in full year 2019. And finally as a reminder, on the third action, we intended largely self-fund upgrades to our specialty finishing capabilities in Vandergrift Pennsylvania. This investment of $65 million to $85 million spread over three years will be largely self-funded through working capital releases, triggered by the transformation. We'll make progress on this initiative as we streamline our footprint and we'll report our results as part of our next transformation update later in 2021.

So let's cut to the chase here. With these actions, we're on our way to a leaner, more competitive aerospace and defense focused powerhouse, poised to substantially increased margins in the AA&S segment and generate a significantly higher return on capital for ATI. Success is largely within our control. We know we have more work to do and we're doing it. With the demand recovery that we know will come, we're confident we'll meet our longer term objectives.

Before Don provides detail about the fourth quarter financial results, let me share my thoughts about our recent experience in key end markets and provided near to mid-term outlook for each. Let's start with commercial aerospace, our largest end market. As predicted in our last update, demand for jet engine forgings increased modestly in the fourth quarter. Demand for engine-related specialty materials principally ingot and billet continue to soften as customers destock to align inventories with near-term demand expectations.

Looking ahead, we expect jet engine product sales to recover slowly in the first half of 2021 with the pace increasing in the second half of the year. We expect continued weakness in airframe sales throughout 2021 due to excess supply chain inventories. This is consistent with the guidance we provided last quarter, which already accounted for decreasing widebody production rates. Next up, defense sales. In the fourth quarter we returned the year-over-year double-digit percentage growth. Each of ATI's defense market verticals expanded. Naval nuclear products in support of the U.S. Navy's increased long-term demand for new ships grew by nearly 50%. Military aerospace and ground vehicle armor each grew at a strong double-digit rate versus the prior year. We expect continued defense growth in 2021 albeit at a slower pace due to uneven demand levels across major platforms supplied by ATI.

Let me give a couple of examples to illustrate what I mean by uneven demand across platforms. In naval nuclear, we expect continued demand growth. In ground vehicle armor, we expect a temporary contraction due to a one-year pause in demand on the customer's major program. Longer term, we expect ATI's advanced materials to be integral to the success of future government defense initiatives such as hypersonics. We're also pursuing increased participation and defense applications in other parts of the world.

Shifting to our energy markets. Sales continue to decline in the fourth quarter compared to prior year, but at a slower pace than in the third quarter. Our fourth quarter oil and gas and chemical processing submarket sales dropped by more than 35%. Sales to our specialty energy markets were more resilient declining only 6% versus the prior year. Growth continued in our civilian nuclear and pollution control product sales while demand for electrical energy generation products remained weak.

We expect fourth quarter trends to hold in the coming quarters as demand for oil and gas remain soft, especially energy demand will improve due to ongoing nuclear refueling requirements and strength in Asia from land-based gas turbines, solar and applications to reduce fossil fuel emissions. Robust demand for our consumer electronics products was driven by two factors: first, customer product launches in China; and second, the increased need for our specialty alloy powders to support the growth of next-generation consumer products globally.

We expect increased demand levels to continue in 2021 with first quarter sales falling sequentially mainly due to the impact of Lunar New Year shutdowns with our precision rolled strip operation in China. Our medical markets continued to decline, both for MRIs and implant materials, primarily due to the effects of the pandemic. Fewer elective surgeries and restricted hospital access to install new equipment have reduced end customer demand and created excess supply chain inventory. We expect these negative trends to continue until vaccination programs reach critical mass.

With that, I'll turn the call over to Don to cover our fourth quarter financial results and our first quarter and full year 2021 financial outlook. I'll be back with a few final thoughts before we open the line for your questions.

Don Newman -- Senior Vice President & Chief Financial Officer

Thanks, Bob. Over the next few minutes, I will focus on highlights from two key areas: first, our Q4 financial performance; and second, our expectations for 2021. 2020 was a difficult year for all of us. For ATI, it started with 737 MAX challenges that carried over from 2019. Of course, those challenges grew exponentially with the global pandemic. Its impact on our key end markets including commercial aerospace, energy, and medical was profound. Even with those challenges, we took the strategic and tactical steps necessary to improve our business and position it for a healthy future.

Now, let's discuss Q4 performance. For the third quarter in a row, our results exceeded expectations. In the Q3 earnings call, we noted seeing signs of stabilization in the number of our key end markets by commercial aerospace. At that time, we said we expected our Q4 performance to be similar to Q3. In fact, Q4 revenue increased 10% to $658 million versus Q3 levels. We see this as a further indication of stabilization in our key end markets and a sign that the worst of the lingering aerospace downturn is behind us.

Our adjusted EBITDA increased 39% to $23 million in Q4 from Q3 levels. Adjusted EPS was a loss of $0.33 per share in Q4. This was better than the optimistic end of our EPS guidance range, which was a loss of between $0.36 and $0.44 per share. Our improved performance was largely due to stronger cost reduction actions and a higher-than-expected sales. Speaking of cost reductions, in our early 2020 we announced targets to cut costs by between $110 million and $135 million for the year. We increased those targets multiple times in 2020 as we built momentum. In the last earnings call, we shared a target of $160 million to $170 million of 2020 savings. The final tally, reductions near the high-end of our guidance and nearly $170 million in 2020. That means a run rate of $270 million to $180 million of cost reductions that will benefit full year 2021. Those cost reductions, continue to contribute to favorable detrimental margins, which are below 30% for the third consecutive quarter.

We expect approximately $100 million of those reductions to be structural. Those take outs should continue to benefit earnings in the up cycle, increasing incremental margins in the future. Working capital actions initiated in Q2 and Q3 gain momentum in Q4. Our free cash flow was $168 million for full year 2020, well in excess of the top end of our guidance range of $135 million to $150 million. We're extremely pleased that we closed 2020, with nearly $650 million in cash and more than $950 million of total liquidity. That's a great outcome and one that we can build on in the future. We ended Q4 with managed working capital at 41% of revenue, down 1,000 basis points from the end of Q3, great progress. Our goal is to reduce managed working capital for less than 30% of revenue over time. I can assure you this will remain a key focus in 2021 and beyond. In addition to a strong cash and liquidity position, we continue to maintain a manageable debt maturity profile. Our nearest significant debt maturity does not occur until Q3 of 2023.

Another area of success in 2020 was CapEx management as we adjusted capital spending to fit the new demand levels. We started 2020 with a CapEx forecast $200 million to $210 million. Actual CapEx spend in 2020 totaled $1.37 million, 33% below the initial forecast. We manage that reduction by carefully analyzing future demand requirements, including recent share gains and adjusting timing on large growth-related projects. We also ensured that our facilities were not over maintained in the current period of low demand. We understand the importance of being recovery ready and we are prepared to handle our customer's desired pace of recovery.

Now, let's move to pensions. Despite the broader demand challenges, we also made meaningful strides managing our pension glide path. Our goal is to reduce our net pension obligations each year. We ended 2020 with a net pension liability of $674 million that's nearly $60 million lower than the opening 2020 level. Strong pension asset performance and Company contributions in 2020 more than offset an 80 basis point decrease in discount rates. This drove the drop in net liability. The lower net pension level at the end of 2020 brings multiple earnings and cash flow benefits in 2021 and the coming years. I will detail that when I share the 2021 outlook.

2020 will be a year remembered for severe economic challenges and personal hardships for many. As a company, we have worked through this crisis to improve the business and prepare for the upcoming recovery. The team's work on strategic positioning, liquidity and cost structure's should benefit our shareholders into the future. With that, let's look ahead to 2021. While we are seeing stabilization there is still uncertainty in terms of end market recovery timing as the COVID vaccines are in the early stages of distribution. With that uncertainty we are going to continue the guidance structure that we started in Q2 2020. We will provide EPS guidance for the upcoming quarter, as well as certain elements of our full year cash flows that we believe we can reasonably estimate. We'll also provide insights into what we're seeing as key trends and indicators in our business.

Bob shared his thoughts regarding our key end markets. Let me recap our forward demand views and the pace of recovery within our business. We expect jet engine product sales to recover slowly in the first half of 2020 with the pace increasing in the second half. Weakness in airframe materials will continue throughout 2021 consistent with our prior estimates. Our defense sales will likely grow it at a more modest pace, compared to 2020 rates. Recovery in our other significant markets, namely, energy, and medical is dependent on the global pace of containing the pandemic. Finally, our electronic sales should continue to expand. We expect adjusted earnings to improve in Q1 of 2021 relative to Q4 2020 due to a modest demand pickup in segments, continued cost management and lower pension expense. We expect to Q1 2021 adjusted EPS loss of between $0.23 and $0.30 per share.

Let's talk about free cash flow. We expect to generate between $20 million and $60 million of free cash flow in 2021 prior to our required US defined benefit pension contributions. Although we get there using the same disciplined applied in 2020 by managing our cost, being disciplined with capital investments and reducing manage working capital and pursuit of our working capital targets.

Now CapEx; we plan to spend between $150 million and $170 million on capital investments in 2021. We adjusted our 2020 capital spending to reflect the new demand levels. In 2021 we will maintain that discipline but plan to increase spending marginally in anticipation of coming market recovery. As announced in December, we will also invest modestly to enhance specialty finishing capabilities within our specialty rolled products operations. I have good news on our expected 2021 pension plan contributions. As you know contributions to the US pension plans in 2020 were $130 million. Due in part to strong 2020 pension asset returns required contributions to the US plans are anticipated to be $87 million in 2021, a reduction of more than $40 million year-over-year. 2021 pension expense will also decrease dropping $17 million year-over-year. Pension expense will be $23 million in 2021, down from $40 million of recurring pension expense in 2020.

In regard to working capital, we expect to continue improving our levels in 2021. We will pursue our goal of returning working capital levels to 30% of sales as our key end markets recover. Working capital reductions related to our transformational project, but will also support the significant improvement. Overall we expect working capital to be a modest source of cash in 2021 even after contributing significantly to our cash balances in 2020. Finally, in terms of income taxes we do not expect to be a cash taxpayer in the US for years to come. That said, we do anticipate paying taxes in certain foreign jurisdictions. We are not able to provide an estimated annual tax rate for 2021 due to uncertainty of the rates and low earnings. However we can say that we expect to pay between $10 million and $15 million in cash taxes during the year.

We are proud of what our team has achieved in 2020 and look forward to continuing to build on our efforts to make ATI a leaner and more profitable company. We are well positioned to benefit from the coming aerospace recovery. This will be even stronger for us, thanks to ATI specific share gains, and new business wins.

With that, I'll turn the call back over to Bob.

Robert Wetherbee -- President & Chief Executive Officer

Thanks, Don. Well, there you have it some pretty good outcomes and we're proud of it, we accomplished a lot in 2020. Even still great to be starting 2021 was a clear plan and were boosted by the first signs of favorable multi market trends we've seen in over a year. As Don described, we ended the year with a strong performance in a challenging market environment. Our progress in 2020 was a total team effort that delivered results. We worked diligently to control what we could and responded nimbly to where we couldn't. Our entire organization remains relentlessly focused on cash generation. I'm proud of how we're living our values, guiding us every step of the way.

Today, in 2021 we still battle a fair amount of uncertainty but there is already a lot less turbulence than we saw last year. We're gaining velocity aligned and accelerating in a clear direction as we move ahead. We're well positioned to emerging this downturn leaner more profitable ATI. A fierce competitor not waiting for markets to recover as we gain momentum.

Scott, back to you.

Scott Minder -- Vice President, Treasurer & Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Richard Safran from Seaport Global. Please go ahead with your question.

Richard Safran -- Seaport Global -- Analyst

Bob, John, Scott. Good morning. So two questions, both related to what a recovery looks like. First, with respect to jet engine products I wanted to know if you could talk a bit about how jet engine products recover with higher volume. Now Bob, I think you mentioned forgings in your opening remarks, I think materials lag, but I was curious about how different types of forgings castings and outline manufacturing what that looks like in a recovery?

Robert Wetherbee -- President & Chief Executive Officer

Okay, great. So let me take the first part on the shape of the recovery from the market aspect. And then I'll let Don talk about the kind of the shape of the recovery from the ATI perspective in light of the transformation that we're going through. So that's why will help get to that answer. I think when it comes to the jet engine materials, you're right. Our isothermal forgings really kind of the leader of the pack for us in terms of the jet engine business. We started to see I guess during the downturn, our jet engine customers were pretty aggressive at adjusting their supply chain inventories and the demand pretty quickly. And so we don't see a tremendous amount of inventory in the pipeline. We have a little bit of stranded inventory ourselves that we're working through. But you're right, the isothermal forgings will go, we'll kind of pace with increases in demand pretty quickly.

Lead times being what they are. We're starting to see real demand coming back, I think it will accelerate through mid-year and be stronger in the back half that's some share gains that we have coming into 2021 as well. So I think the isothermal forgings will be our leader of the pack. We have some smaller aerospace forgings that will go along with that. We're not in the castings business anymore, so we don't have quite as much visibility there. But I would expect they'll follow a similar trend. When it comes to billet bar and get we're starting to see what I'd call emerging demand. One of the things that happened in the downturn was that every company, I hate to say every man for himself. But every company was doing what they thought they needed to do to manage their cash, so not everyone in the supply chain that we suppliers as well positioned for an uptick, so we'll see it a little lumpy, there should be some good emergent demand and we think we're well positioned to respond to that.

And you didn't ask specifically about airframe, but I think by mid-year. I think the billet and get bar [Phonetic] will be moving in the right direction for us, we'll start to see it tracking with engines, but I think the airframe side plate in particular titanium point could be flow for most of 2021 before it starts to kind of work its way and then 2022 we should start to see some increase there. So hopefully that helps on the jet engine side. But I think the worst of it for us was Q4 and Q1 is still a little bit of stabilization. We're not seeing the ups and downs that we saw in the order book before. So Don, maybe I'll turn it over to you and you can talk little bit about the transformation.

Don Newman -- Senior Vice President & Chief Financial Officer

Sure. There is a few different information elements that we're talking about in the overall business. But on turn specifically of the jet engine and how we're managing our inventory be recovery ready. I think one point to reinforce is we've done, I think a very good job in managing down or inventory levels, but it's always been with the mindset of being recovery ready. So as the market does turn and the demand signals are sent, we're in a good position that we can meet those demand, but there is a broader effort around transformation that we've been doing in the business that are going to benefit us beyond just the jet engine, jet engine space that you're talking about. And I think it's an important thing to think about as you consider what this business looks like in the recovery.

And so let me kind of walk you through and give you some perspective, we've got a number of initiatives that we've got in place that we've talked about throughout 2020. Those initiatives include a lot of cost take-outs that were delivered in 2020 that are going to have a wraparound effect in 2021 and we've got a transformational project that we announced in December, that's going to materially change our specialty rolled products business. A fair question to ask Rich, if this is kind of what you're pointing toward is? When you add up all this transformation, what is the new business look like at normalized level? And so as you think about that in 2019, which is call it a normalized period for us, we generated $440 million of EBITDA and we have generated about 11% EBITDA margins off of that.

With the cost take-outs that we have captured through 2020 as well as the transformational project that we spoke to in December between those two efforts the result is upward of $200 million of run rate EBITDA added to what we delivered in 2019. And so, the effect of that is pretty profound that 11% 2019 EBITDA margin and with the pro forma reflection of what we've captured on cost reductions and what we are capturing and highly confident in that capture with the transformation in the SRP business really makes us a 17 plus percent EBITDA margin at 2019 volume level. And so that's a 600 basis point expansion in EBITDA margin. So, as you're talking about transformation, as you're talking about how the business is evolving for 2021 and beyond. That's really how we think about the business and the benefits of these actions that would carry.

Richard Safran -- Seaport Global -- Analyst

Thanks for that. And just quickly as a follow-up. Those specialty energy projects that were referenced in your opening remarks, could you just discuss a bit about how much they're worth and when do you see those decisions being made?

Robert Wetherbee -- President & Chief Executive Officer

So those are a lot of those decisions of actually being made in terms of other two types of things we're talking about, I think there's the pollution control activity which is and the nickel alloy type materials that are going into Asia. Lot of those decisions have been made and that will actually happen in 2021. I think they orders if they're not in hand there. Here the commitments have been made. We're also seeing continued strength in the solar space, certainly we're starting to see signs of land-based gas turbines kind of coming back and then the last piece of that is really prior year referring to is the client pipes and a lot of those are being let like right now. So, I think is a pretty good quarter stack up over the next two, three years of some fairly major projects. We won't win them all but we're going to be competitive on all of them. And so I think we'll start to see that probably hitting in Q2 from a shipment standpoint that's our expectation. Does that help Rich?

Richard Safran -- Seaport Global -- Analyst

It really does. Thanks for the color, guys, I appreciate it.

Operator

And our next question comes from Gautam Khanna from Cowen. Please go ahead with your question.

Gautam Khanna -- Cowen -- Analyst

Hey guys, good morning. Just wanted to ask, maybe two questions is, first on the quarter itself, the high-performance EBIT margin stripping out DNA and everything was negative 5.4%. I was wondering if there was anything, it doesn't look like mix was materially different. Sequentially, was it just working days or something of that nature that brought it down sequentially? And then I have a follow-up.

Robert Wetherbee -- President & Chief Executive Officer

Okay. So I'll take the first one Gautam. I think what you saw in Q4 in addition to a slightly weaker mix, a little more transactional business that wasn't in the aerospace category so that contributed to dosing [Phonetic] that was going on in Q4, we actually had some proactive inventory management. So, we wrote off some inventory that obviously affected the margins in Q4, but there is not going to be an ongoing concern.

Gautam Khanna -- Cowen -- Analyst

Okay. And just to be clear, as a follow up, you're quite convinced -- it sounds like that engine destocking has sort of peaked at this point. So on a sequential basis, Q1, Q2, it should get better than what we saw in Q3 and Q4? And obviously, then pick up with rates on Q3 2020 and the like in the second half of the year? I just want to make sure I understood that. And secondly as related, airframe titanium, despite all the Boeing 787 developments since the third quarter where they haven't been delivering aircraft, that does not change what you previously were expecting on airframe tie in 2021?

Robert Wetherbee -- President & Chief Executive Officer

Okay, so let's see. So the first answer to your question and I'll add to a cover [Phonetic] is, yes, we're confident in the jet engine side probably because of the day-to-day pulse with those customers, I would say. There's always going to be adjustments to schedules, but I think what we're seeing is more clarity and we were fairly confident that a lot of the adjustment that came to us really, and jet engine started in late 2019 related to issues related to the Max. So, I think most of those supply chains got adjusted quickly and then I think the wide body issues where we've had probably three quarters since a lot of that activity started to become known. So, I think the jet engine side, there's always going to be exceptions, but I think generally, the answer to your question is yes, we're confident that we should see improvement in really throughout the year. But accelerating and in the first half and then looking much better in the second half as we get ready. The pipeline gets ready for 2022. I guess that jet engine question.

And I think going back to your other question about tite plate. Yes, we believe 2021 will be the low watermark. I think we're following and tracking with Boeing's announcement of where they're going on a build. And I think we are picking up share in the airframe business globally. So that will help us in the back half of 2021. But, I think it'll be for tite plates, specifically what you asked about, I think 2021 will be the low watermark for us there.

Gautam Khanna -- Cowen -- Analyst

Thanks a lot, guys.

Operator

Our next question comes from Phil Gibbs from KeyBanc Capital Markets. Please go ahead with your question.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Robert Wetherbee -- President & Chief Executive Officer

Hey, good morning, Phil.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

My first question is just on the free cash flow bridge. I think you pointed to being $40 million positive at the midpoint excluding pension. When I think, Don, about cash contributions, I've got about $100 million of interest, $160 million of CapEx and cash taxes, and then you've got some offset from networking capital. So, I'm ranging somewhere between $225 million and $250 million of cash needs for you all this year. Should we kind of take that as a decent range in terms of what you're trying to communicate and then add free cash flow to that to back into an EBITDA view? In terms of what you all view as the potential for the year?

Don Newman -- Senior Vice President & Chief Financial Officer

Yes, I think your logic is sound. What I would say is I wouldn't expect that kind of cash burn. But you think about where we're at from a cash generation standpoint, we've done a pretty good job pulling the right levers to manage cash through 2020 and ended at a really, really good spot. I do expect net to be a cash burner in 2021. I mean, not to the degree that you're thinking. But one thing that was a great benefit for us in 2020, that will be less of a benefit for us in 2021 as working capital releases. And why is that? Well, with the decline that we had in the first half of 2020, we had pretty significant releases around our accounts receivable and then later in the year we were picking up momentum on our inventory releases. As you think about 2021, as we see 2021, second half, we would expect to see some growth in the business, which would then be a requirement for putting working capital on the ground. But we still think net [Phonetic], that working capital is going to provide a source of cash for us. So that may be missing a bit from your calculation. That plus, we are pretty disciplined when it comes to managing our levers. What we did in 2020, we adjust our CapEx pretty significantly to reflect the new demand. Expect that we're going to do the same things in 2021 and we will adjust our CapEx and we will adjust our inventory to really respond to the market signals. So that could be again a bit of a positive relative to the burn number that you were talking about. All that said...

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Don, I wasn't talking about a burn. I was talking about the Slide 9. From what I gathered, you had free cash flow -- positive free cash flow of $20 million to $60 million unless I'm looking at that wrong?

Don Newman -- Senior Vice President & Chief Financial Officer

Yes, the positive -- that is pre-pension contribution. So that's right. I think that's the key takeaway when you think about our cash flow for 2021 is I would expect based upon what we know today, to be a cash user. But I think it'll be a modest use and we're going to exit 2021 with still a very, very healthy level of liquidity and it will adjust to the end market signals from a demand standpoint accordingly. Whether that means we need to add more working capital in the form of inventory or whether we need to pull levers to reduce to reduce CapEx.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Okay. And then just in terms of a follow up. I know clearly there were absorption issues for you on the second half. I think, Bob, you had just mentioned you had written down some inventory. Any way to calibrate in terms of how much the under absorption plus some of this inventory write downs impacted your P&L in the in the second half of the year? Could it have been $20 million a quarter? That type of thing. And when do you expect some of these things to desist in terms of the magnitude of impact? Thank you.

Don Newman -- Senior Vice President & Chief Financial Officer

Yes, I think your back of the envelope is not that far off, though. As you look at it, there are some adjustments we took in terms of carrying value around inventories and there's the effect of the under absorption. So to think in terms of $10 million to $20 million a quarter as a combination for those two through 2020, that I think you're not that far off. I think about it for 2021, again, it really depends upon the production level in the demand signals we get in the first half if we expect first half to look similar to the second half of 2020, then you can think in similar effects to under absorption. And I think from an inventory carrying value standpoint, I would like to think that any net realizable value reserves that we had to book, would have already been taken. So, we shouldn't see significant effects there. But under absorption would still be a potential for us, especially in the first half. The second half, it's a little bit different and that really depends upon the pace of growth. And so it's a little bit harder for us to speak to that.

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you. Appreciate it.

Operator

Our next question comes from Josh Sullivan from The Benchmark Company. Please go ahead with your question.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey, good morning, and congratulations on the quarter here.

Robert Wetherbee -- President & Chief Executive Officer

Thank you.

Josh Sullivan -- The Benchmark Company -- Analyst

Just following up on those cash burn comments for 2021. Is there a scenario in 2022 where demand is going to potentially be picking up a little stronger? Where we would continue to see it working capital build than a cash burn? Or do you think you'll be set up exiting 2021, where 2022 shouldn't see a burn even in a very strong demand environment?

Don Newman -- Senior Vice President & Chief Financial Officer

The short answer is if there's strong demand, I would expect that we'll be adding working capital in 2022. It really depends on the pace of the recovery. It also depends upon -- we've talked a lot in 2020 about our focus on improving our working capital efficiency. And we did a phenomenal job of that in Q4. I mentioned in the prepared remarks that we reduced our percentage of working capital from 50%, at the end of Q3 down to 40%. And in Q4, our internal goal is we want to get back to the 30% level and lower. Well, the pace for our being able to achieve that goal is going to be an offset to what we need to add to our working capital because of an uptick. So if we're really fortunate, we can do a good job offsetting the requirement for investing in working capital with becoming more efficient with working capital. But generally, I think you should think of 2022 as a year of investing for additional working capital to fund the growth that we're seeing in 2022, which is obviously -- that's a good thing. We don't mind investing for growth.

Josh Sullivan -- The Benchmark Company -- Analyst

Right. Thanks, Don. And then just switching over to the strength in the stall venture in China. Can you just provide us some color on the strength in those markets sequentially? Well, we had Apple deliver its largest number of iPhones by pre-summit and it's ever [Phonetic] -- that strength forestall more broad base in consumer electronics? Or is that really the focus market for you guys?

Robert Wetherbee -- President & Chief Executive Officer

It's a great question. So I'll start off with congratulating the team that runs our Precision Rolled Strip business in China. The fourth quarter was a record performance for them. And it's based on investments we made there probably a year and-a-half to two years ago. So they were well-positioned and they took advantage of it. Now, in terms of the broad base, I think you start with consumer electronics at the core. We're starting to see the initial opportunities and solar that we've been kind of waiting for, to be candid for a year or two, but we think there's growth there. There are things in our Precision Rolled Strip businesses there that go into medical applications. You can see some things you know, hypodermic needles, various other things that PRS, Precision Rolled Strip goes into, and in automotive. It's still an automotive play for us in Asia. We're making especially stainless that is the thickness of a human hair. So there's a lot of applications and more sophisticated automotive applications that are there. So, I think it is broader than just consumer electronics. We feel good about -- other than the Lunar New Year, which we can't do much about in Q1 seasonally, we expect that trend to continue based on the strength of the underlying markets.

Josh Sullivan -- The Benchmark Company -- Analyst

Thank you.

Operator

Our next question comes from Timna Tanners from Bank of America. Please go ahead with your question.

Timna Tanners -- Bank of America -- Analyst

Yes, hey, good morning.

Robert Wetherbee -- President & Chief Executive Officer

Good morning, Timna.

Timna Tanners -- Bank of America -- Analyst

Good morning. I just wanted to ask two things. One is if we could kind of continue the discussion about cash uses, but talk a little bit instead of working capital, maybe about CapEx needs going forward because I caught on to your comments about putting out some projects and just wondering what that looks like when you catch up and how you're thinking about that. And then I have a high-level question.

Don Newman -- Senior Vice President & Chief Financial Officer

Sure. Timna, I'll take a run at answering that. As you think about 2020, we went into 2020, with the intent that we were going to invest somewhere between $200 million to $210 million in CapEx. And of course when the pandemic hit, we hit the brakes. We did it in a very thoughtful way, but we really peeled back on that investment, took it down to the mid-130s. You know, ultimately, or 2020. When you look at 2021, our guidance is $150 million to $170 million, the increase year over year is a modest increase with the idea that we do expect to see some end market recovery, that is going to create some demand pull for investment in certain assets. It's in support of specific customers. This is not a buildup, and they will come kind of approach. That's how we do our CapEx.

So I think if the 2021 plays out, like we expect it will be, we're going to be in net $150 million to $170 million range. Then the thing, if you're thinking past that, OK, what's the right way to think about capital investment, post 2021, the $200 million to $210 million investment level that we were thinking for 2019, which was part of a normalize, coming off of a normalized 2019 getting ready for organic growth that we saw in the business. I can see where that number could come back to like in 2022 CapEx, as we're preparing them for that delayed growth, that was put on pause with a pandemic. And of course, I wouldn't expect that that's going to be an ongoing run rate for CapEx. But that's one way to think about 2021 and 2022.

Timna Tanners -- Bank of America -- Analyst

Okay, great. That's exactly what I was looking for. Thanks for that. And then, I guess I know, asking you to kind of speculate here a little bit, but and some of these things are still evolving. But in light of the Biden Administration's kind of announced interest in shifting away from fossil fuels and kind of seems a bit aggressively toward alternative energy. Can you remind us of the API suite of products and opportunities, and where you might get hit, because you used to supply some of those other areas, but also the opportunities? I know, you've been in the past big in nuclear and maybe other green energy focus?

Robert Wetherbee -- President & Chief Executive Officer

Yes. Good questions. I think when you start with, you started with nuclear, and we're still big in the nuclear space. So I think that's an upside opportunity for us out of our Oregon operations. I think we're starting to see opportunities in solar which, although they tend to have a stainless base, they tend to be on the specialty end really light gauge type tolerance types of things, kind of following the same issues with consumer electronics from a product standpoint. And you add into that emission control systems. I think the flue gas desulfurization is what we used to call it, but it's really about what's going on with emissions, globally, it's not really a US issue, it's more of a global issue. And then I think the other thing you'll see more of is a resurgence of land based gas turbines. There's still a shift from coal and oil to various things. I think when you look at our product mix in the energy space, you know, it's going to be the bigger chunk for us in the future, it's going to probably be 60% to 70% of what we do versus historically, the oil and gas. We spent in the old API, the not the old to old API, but the prior product mix had a lot of oil and gas. The consumer, or I'm sorry, chemical processing, hydrocarbon processing, I think you'll see us play less there; they tend to be more standard stainless type pipes and infrastructure and types of things.

So I think we're going to be where corrosion strength at high temperature, unique issues are and I think for the especially energy sector, corrosion is going to be a big material science issue that people are going to have to work through. So I think we're well positioned in some parts of the world, it's a matter of which parts of the world go first. And I think, electric vehicles, battery storage, hydrogen, as fuel hydrogen, as in producing hydrogen, there's opportunities there for more specialty materials. So I think nickel and titanium will play probably more on the nickel side in most of these applications. So does that help with the answer you were looking forward to?

Timna Tanners -- Bank of America -- Analyst

Yes, it does. I just don't know how much of what you'd be losing that used to be hydrocarbon focused is, you know, versus what you'd be gaining with regard to the green energy is, is there a mix that's higher value add or is it an offset or just rough numbers what you think about incremental?

Robert Wetherbee -- President & Chief Executive Officer

Okay, so two parts to that. So our decision to exit the standard stainless sheet is obviously a lower margin stuff. And the stuff we're moving into is definitely on the higher margin nickel alloy type products. They're harder to make different dimensions and specifications. So we think it's a positive from a product mix standpoint. And it's a positive from fit with our material science technology. And it's part of the fundamentals of why exiting stainless was the right thing for us to do. So it's a positive margin shift for us.

Timna Tanners -- Bank of America -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Paretosh Misra from Berenberg. Please go ahead with your question.

Paretosh Misra -- Berenberg -- Analyst

Thanks and good money, guys. I was hoping if you could just elaborate a little bit about your isothermal forging business a little bit. So first of all, just to confirm that is that 13%, 14% of your total sales and then how much of that is direct sales to OEMs versus selling powder or feedstock to those customers, so that they can forge it at their own facility?

Robert Wetherbee -- President & Chief Executive Officer

Okay, there's a lot of questions in there, Paretosh; I'm going to have to quibble about [Phonetic]. So they're kind of at the end. So isothermal forging is obviously what we do in our forge products business primarily kind of a Wisconsin. I don't know if we've actually ever said what percentage of our businesses is isothermal? You asked the secondary question, which was, are you selling [indecipherable] to other foragers?

I would say today, depends on the grade, depends on the hour. I mean, our long term goal was to make sure that our forging operation was 100% supplied by our own feedstock. Some customers provide the feedstock to forging so over time, I would say, today, probably 40%, is what we consume and 60% would be sold to other people. But it's someone that said directed by situation. And then back to your first question. You know, when you look at our forgings business in general, it's in the HPMC segment, obviously, but you know it's about 30%, of HPMC business is the actual forging business. And that would include the forging itself, plus the value out of the raw material that we pull through. But that's 2020. And obviously, that's depressed in the current environment. And as we look forward, that team's done a great job of positioning the business for share increases, and kind of focusing on jet engine and still has a non-jet engine business is less important. So let's go back to that kind of cover the ground you were looking for an answer in?

Paretosh Misra -- Berenberg -- Analyst

Yes, very much appreciate all the details here. And then maybe as a follow up on your free cash flow guidance. So just a quick one, is that also the free cash flow guidance after any dividends paid to non-controlling interest which I'm guessing primarily your JV in China? Because seems like you paid $7 million in 2020, but a bigger amount of a $15 million dividend in it, sorry, $7 million in 2020 and $15 million 2019. So is that guidance after that?

Robert Wetherbee -- President & Chief Executive Officer

Yes, that would be excluding, because the dividends that are paid to the minority owner are actually in the finance section. So they're not part of the pre cash flow definition or calculation. And the numbers that you mentioned are kind of in that red area, I expect them to be kind of in the $7 plus million range.

Operator

And our next question comes from Matthew Fields from Bank of America. Please go ahead with your question.

Matthew Fields -- Bank of America -- Analyst

Hey, everybody, I just wanted to sort of touch on liquidity and sort of uses of cash and I just, find it interesting that you ended the year basically with the exactly the same amount $956 million of liquidity that you ended, 2019 just a weird quirk there.

Robert Wetherbee -- President & Chief Executive Officer

A weird quirk, it's hard work to get to that number.

Matthew Fields -- Bank of America -- Analyst

And maybe that's not that's a coincidence. But you kind of said heading into the pandemic, that you wanted to sort of boost liquidity and you wanted to get your hands around kind of how deep the whole was going to be in for how long the whole was going to be before you kind of made any other moves. You know, I just wanted, if you see kind of demands, picking up in the second half of '21, what when do you feel like you're going to be at a point where you can kind of deploy some of this potential excess liquidity on maybe debt reduction or other things?

Don Newman -- Senior Vice President & Chief Financial Officer

This is Don, let me let me take a run at that. The outcome for 2020 was an outstanding outcome. As you can imagine, when you look at what was happening in the business and the declining to the top line, you know, being able to maintain flat liquidity in that kind of environment was an outstation. You have the choice is when you're going to start pulling the lever. And that's going to be driven by how we're seeing our end markets. What we see as a trajectory for the end market recovery, nine months before that demand really hits us, we're not going to deploy the capital any sooner than we need to. And, so, you know, it's hard for me to give you a definitive answer other than to tell you.

Matthew Fields -- Bank of America -- Analyst

If demand comes back, it seems like you're trying to signal that there'll be a use of working capital, CapEx could kind of ramp back up to that $200 million number, it seems like '22 will be sort of the more demanding cash year. Can you talk about kind of when we get further down the road this year in '21, as you see '22, coming more into focus. What the choice might be between organic investment and debt reduction, and kind of where you ultimately want to end up on that debt reduction lever and ends with a how we get there?

Don Newman -- Senior Vice President & Chief Financial Officer

Sure, you know, the temptations around cash is to look at one element of it and try to extrapolate and understand, you know, the reality is we get to 2022, we're going to have a few different impacts to our cash flow. First and foremost is profitability. So you know, it's easy for as we're talking about cash to see the downside of needing to invest in working capital, it's really is, that means we're generating more cash through activities, through sales, which is a good guide for us. We're still going to have the same levers available to us to manage our capital, to manage our liquidity in 2022, as we do today, and that'll be our working capital. Again, we've been, I think, pretty successful in becoming more efficient with working capital. And we intend to continue to become more efficient as we continue to make progress toward our longer term goals.

Same thing with CapEx, we'll be making decisions around CapEx that will be driven by the opportunities that exist at that time. And so I wouldn't read too much into 2022. At this point, other than to say, if you're in the up cycle, and you're seeing robust growth in the core business, guys actually make money; that's why we print cash. And so if I need to dedicate some more of that to working capital, specifically inventory receivables on the shelf, it's not a bad environment to do that. We're happy in a high growth environment. We'll manage that very, very well. Does that kind of answer your question?

Matthew Fields -- Bank of America -- Analyst

Yes, that's those are all fair points. Thanks a lot and good luck in '21.

Robert Wetherbee -- President & Chief Executive Officer

Okay. Well, thank you to all the participants and listeners for joining us today. That concludes our third [Phonetic] quarter 2020 conference call.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Scott Minder -- Vice President, Treasurer & Investor Relations

Robert Wetherbee -- President & Chief Executive Officer

Don Newman -- Senior Vice President & Chief Financial Officer

Richard Safran -- Seaport Global -- Analyst

Gautam Khanna -- Cowen -- Analyst

Philip Gibbs -- KeyBanc Capital Markets -- Analyst

Josh Sullivan -- The Benchmark Company -- Analyst

Timna Tanners -- Bank of America -- Analyst

Paretosh Misra -- Berenberg -- Analyst

Matthew Fields -- Bank of America -- Analyst

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