Michael Logan - Director, Financial Planning Richard Harshman - Chairman, President and Chief Executive Officer Patrick DeCourcy - Senior Vice President, Finance and Chief Financial Officer.

Julie Yates - Credit Suisse Richard Safran - Buckingham Research Sal Tharani - Goldman Sachs Timna Tanners - Bank of America Merrill Lynch Gautam Khanna - Cowen and Company Chris Olin - Cleveland Research Steve Levenson - Stifel Phil Gibbs - KeyBanc.

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Allegheny Technologies earnings conference call. My name is Janeta, and I will be your operator for today. (Operator Instructions) I would now like to turn the conference over to Mr. Mike Logan, Director of Financial Planning..

Thank you. Good morning, and welcome to the Allegheny Technologies earnings conference call for the 2014 first quarter. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call.

Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Pat DeCourcy, Senior Vice President of Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings from continuing operations attributable to ATI.

If you have connected to this call via the Internet, you should see slides on your screen. For those who have dialed in, slides are available on our website, www.atimetals.com. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions, to be considered of others on the line.

As always, we make every attempt to reach everyone in the question-and-answer queue within the allotted conference time. Please note that all forward-looking statements this morning are subject to various assumptions and caveats as noted in the earnings release and on this slide, actual results may differ materially. Here is Rich Harshman..

Thank you, Mike, and thanks to everyone joining today's call. Mike is filling in today for Dan Greenfield, who is home, recovering from successful surgery. Dan, we know you are listening, and we wish you a speedy recovery.

As we said in January, 2014 began with a continuation of challenging conditions in many of our end-markets, but we noted that global economic conditions appear to be moderately improving, although at lower rates of growth than past recoveries.

We also stated that we are cautiously optimistic that business conditions would gradually improve as we move through 2014. As we progress through the first quarter of 2014, some of the economic headwinds we have been facing over the last several years began to dissipate.

However, the harsh winter weather presented new and different operational challenges at many of our facilities. In spite of these challenges, we began to see meaningful demand recovery and growth from many of our end-markets.

As we enter the second quarter, we are gaining confidence that real fundamental growth drivers are beginning to emerge and we are seeing signs that this improvement is sustainable as we move through 2014. Some specific data points. We ended the first quarter 2014 with $1.8 billion backlog, the highest in two years.

Demand from the jet engine market is improving for both new builds and aftermarket spares. The oil and gas supply chain appears to be in better balance and we are seeing demand improvement and new projects beginning to move forward. Lead times are extending for most of our products.

The long-running headwind of declining raw material prices is being replaced with rising raw material prices and surcharges. Stainless steel sheet base prices, although still near historically low levels, are increasing, with an April 1 base price increase firmly in place in the market and another announced base pricing increase effective May 5.

And long-stalled project business from global markets is beginning to reappear. Before I discuss our major markets in more detail, I'd like Pat DeCourcy, ATI's Chief Financial Officer, to discuss the first quarter financial results.

Pat?.

Thanks, Rich. Turning to Slide 3. Looking at the first quarter results from continuing operations, sales were $987 million for the first quarter 2014 or 7.9% higher than the fourth quarter 2013. Over 78% of our sales in the quarter were high-value products and international sales represented 38% of our Q1 sales.

Segment operating profit was $43.5 million or 4.4% of sales compared to a loss of $10.9 million in the fourth quarter of 2013. Results from continuing operations was a net loss of $18.1 million or $0.17 per share compared to a net loss of $83.8 million or $0.79 per share in the fourth quarter 2013. Turning to Slide 4.

High Performance Materials and Components sales were $484 million, which was 10.9% higher than the fourth quarter 2013. Segment operating profit was $52 million higher than the fourth quarter of 2013 at $69 million or 14.3% of sales. Flat Rolled Product sales were $503 million, which was 5.1% higher than the fourth quarter 2013.

The segment had an operating loss of $25.6 million, which was $2.4 million better than the fourth quarter 2013.

The results of the Flat Rolled Product segment were negatively impacted by an $8.3 inventory valuation charge related to the market-based valuation of industrial-grade titanium products and $2.3 million of startup cost related to the Hot Rolling and Processing Facility.

We expect approximately $5 million in startup cost related to the HRPF in the second quarter of 2014 as we begin the hot-commissioning process. The recent run-up in raw material prices, specifically nickel and nickel-bearing and titanium scrap, most of which did not began until March had little to no impact on operating results for the first quarter.

Now, I will turn the call back over to Rich..

Thank you, Pat. Turning to Slide 5. In February we announced the acquisition of Dynamic Flowform Corp, which has been renamed ATI Flowform Products. This strategic acquisition adds precision cold-forming process technologies to ATI's unsurpassed capabilities to produce specialty materials and components across multiple alloy systems.

We expect ATI Flowform Products to enhance and expand our market position in the aerospace and defense, oil and gas and chemical process industry markets.

Looking deeper into ATI's two largest end-markets, aerospace and defense, and oil and gas chemical process industry, the aerospace and defense market continues to be our largest end-market representing 35% of our first quarter 2014 sales.

We expect that the commercial aerospace end-market will be a significant driver of our profitable growth over the next five years. ATI's first quarter 2014 sales through the aerospace market were $321 million or 13% higher than the fourth quarter 2013. Turning to Slide 6.

As depicted on the chart, the projected demand increases from aerospace are being driven by unprecedented build rates of commercial aircraft. Boeing has recently announced of a plan to increase the 787 production rate from 10-per month to 12 per month in two years, and again to 14-per month by 2019.

Boeing also has announced plans to increase the single-aisle 737 production from 42-per month to 47-per month by July of 2017 and has determined that there is currently sufficient demand to further ramp the 52-per month by the end of the decade.

Likewise Airbus is anticipating increasing its single-aisle A320 production from 42-per month to 50-per month by the end of the decade. While the production of the much anticipated A350XWB, which is on schedule for the first delivery before the end of 2014 is projected to reach nearly nine per month by 2017.

All of these aircraft and those of other commercial jet airline manufacturers require the materials and components that ATI produces for both the airframe and the jet engines that power the airframe. Turning to Slide 7. As you would expect the increase in airframe build rates results in a corresponding increase in jet engine demand.

There are now over 20,000 large jet engines on firm order with nearly 60% being future generation aircraft.

Why is this significant to ATI? Because while we enjoy strong positions on most of the legacy programs, our continued leadership in alloy and product development and the capital investments and strategic acquisitions we have made over the past several years are enabling ATI to gain content on future generation aircraft and engines.

As Slide 8 depicts, alloys and products such as Rene 65 alloy, ATI 718Plus nickel-based superalloy, ATI 425 titanium alloy, titanium aluminides, nickel-based superalloy powder and isothermal forgings, titanium investment castings, powder metal net shapes, Flowform Products and titanium fastener stock and titanium extrusions, all represent significant growth opportunities for ATI.

In addition, we continue to work with the airframe and engine manufacturers to develop new alloys and components to enable higher operating temperatures for improved fueled efficiency, lighter components, reduced emissions and longer engine component lives.

All of these attributes are important to commercial aerospace industry's efforts to reduce operating cost for airlines and improve the industry's sustainability initiatives. In summary, aerospace OEM backlog and build rates are at record levels.

Demand from the jet engine aftermarket is improving and demand from airframe and jet engines OEMs is now in much better balance with current airframe build rates. In addition, ATI gains content from our new alloys, parts and components that are specified for future generation jet engines.

These are all positive developments and represent long-term growth opportunities for ATI. Moving to Slide 9. Our second largest end-market is oil and gas and chemical process industry, which represented 16% of our first quarter 2014 sales.

Looking specifically at the oil and gas market, ATI's first quarter 2014 revenue was approximately $91 million, which was 12% higher than the fourth quarter 2013. We are seeing a large number of enquiries for international project that depend on specialty alloy products made by ATI.

As we move through 2014, we believe demand for our alloys and products in the oil and gas market will continue to improve as new global mega projects transition into construction. As we look at the next several years, we expect the oil and gas and CPI market to be important growth drivers for ATI.

As global economies recover and grow, demand for new energy and new and upgraded infrastructure grows, these are both growth drivers for ATI. Some analysts are forecasting the drilling of 83,000 new development wells globally this year, of which around 80,000 will be onshore, mainly U.S. shale gas plays, and 3,000 offshore.

However, a forecasted 17% increase in oil and gas demand by 2020, means that annual well completions will need to increase by 35%, resulting in an additional 670,000 new wells being drilled by the end of the current decade. The oil and gas market presents particularly strong growth opportunities for our Flat Rolled Product segment.

In the first quarter 2014, demand remained strong for our duplex and lean duplex family of alloys used in umbilicals and flow lines and in downhaul applications. We have not yet seen significant demand from new mega projects for our flat-rolled nickel-based alloys and industrial titanium products.

Shipments of titanium flat-rolled products for industrial markets, specifically, desal, CPI and ship building projects remain soft in the first quarter of 2014.

However, order activity has recently been stronger and we are seeing a meaningful increase in project quoting activity that is expected to result in improved demand, beginning in the second quarter, and stronger prospect for demand growth in the second half of this year.

Now, an update on the current status of our two large strategic capital investment projects, our Hot-Rolling and Processing Facility and our Rowley primary titanium sponge facility. Turning to Slide 10, you see some pictures. The two top pictures are new pictures that we're showing for the first time.

The one on the left is a hot plate being removed from the discharge by the discharge machine from furnace number one at the new HRPF. And the picture on the top right is a hot plate rolling on delay tables after reduction through finishing stands.

Our Flat Rolled Product segment's Hot-Rolling and Processing Facility, or HRPF, completed its cold-commissioning phase in the first quarter 2014, and we began the hot commissioning phase on schedule in April. This is a significant milestone and the project continues to progress on time.

As we have previously discussed, the hot-commissioning phase is expected to be completed in October of 2014. By the end of 2014, the HRPF is targeted to be hot-rolling all of ATI's flat rolled products, all stainless, ferritic and austenitic grades, grain-oriented electrical steel grades, nickel-based alloys and super alloys and titanium alloys.

These hot-rolled intermediate products will then be sent to our finishing facilities for further processing into final flat-rolled product forms, plate and continuous-mill plate, coil, sheet, strip and precision-rolled strip.

The HRPF has also been designed to be capable of hot-rolling the next generation of advanced lightweight carbon steels for the automotive sheet market and dual face carbon steels used in oil and gas applications.

This game changing investment is designed significantly to enhance ATI's flat-rolled product capabilities across alloy systems, enhance ATI's flat-rolled products market position, reduce manufacturing cycle times for all of our flat-rolled products and significantly reduced production and overhead cost.

We believe that the HRPF investment enables the successful transformation of our flat-rolled product business into a global leader that can sustain profitable growth through business cycles. Turning to Slide 11. The premium quality or PQ qualification program at our Rowley titanium sponge facility remains on schedule.

We have produced all of the sponge required as part of the qualification process and the sponge is now being melted into mill products for further processing.

As we have said, this qualification program is done in coordination with jet engine OEMs and requires ATI to not only produce a certain volume of titanium sponge specifically for the qualification program, but also requires that the qualification program sponge being melted using all of our melt technologies, Vacuum Arc Remelt, Electron-Beam and Plasma Arc Melt.

And then produce the output from the melts into defect-free round bar product. We remain on track with the qualification and aim to successfully complete the program in 2015 or sooner, if possible. In the meantime, we continue to produce high quality titanium sponge at the facility.

The sponge is being used to produce standard grade titanium mill products. However, primarily to the still relatively low demand from industrial markets, we continue to operate the facility below capacity. This is expected to continue through 2014 until we complete the PQ process.

The Rowley facility and the capability of producing premium quality titanium sponge is an important part of our long-term titanium products growth strategy. The facility is expected to provide ATI with a reliable, safe and secure supply of high-quality competitive titanium sponge. Recent geopolitical events reinforced the importance of this strategy.

In summary, while the first quarter was challenging, business conditions improved as the quarter progressed. As we enter the second quarter, for the first time in several years we're beginning to see early signs of what appears to be sustainable improvement and demand growth from most of our end-markets.

Lead times are beginning to extend from many of our products, modest base price increases are being realized and raw material surcharges are moving in a positive direction. While these are early signs, they support our view that business conditions will continue to improve, as we move through 2014.

As a result of these trends, we expect to achieve at or near breakeven results from continuing operations in the second quarter 2014, excluding HRPF startup cost.

As we look at the short-term, we are continuing our cost reduction actions, aggressively identifying and acting on market opportunities to provide profitable business volume opportunities and implementing actions to reduce managed working capital.

As we look at the next three to five years, we are focused on maximizing the value creation from the investments in new products, strategic capital projects and strategic acquisitions we have made over the past several years. The headwinds that have made business conditions challenging for the last several years appear to be dissipating.

Global market conditions are beginning to show signs of sustainable improvement. We are negotiating a number of new long-term agreements and extensions of existing agreements with strategic customers. These agreements are targeted to enhance and grow ATI's competitive market position, not only in mill products, but also for parts and components.

We are not satisfied with our current financial results and we are focused on continuing to take actions to improve our near-term performance, complete our two large strategic capital projects and further enhance our opportunities for sustainable profitable growth, as market conditions continue to improve.

Operator, may we have the first question please..

(Operator Instructions) Your first question comes from the line of Julie Yates with Credit Suisse..

With base prices now moving off the bottom and we've seen several increases.

After the May 5 increase, how far are you off the bottom and where are prices relative to the last few years?.

Well, there is still -- I mean where the bottom was, if you look at the higher volume, three or four grades stainless, it was approaching $0.45, $0.46 a pound. And today, with the April 1 increase, we're about $0.07 to $0.08 a pound above that. But still well below what something that at least is $0.60 a pound or more.

When you look at the industry, at least in the western world, I think it's really hard to earn an attractive and acceptable return on capital employed for that product, with it starting with anything with a 5. So I think we have ways to go, it's early.

Part of the benefit that ATI has is that, we were capable of producing more than just a commodity or standard grade stainless. So a richer product mix can help us achieve a better return on capital employed, than if we were just only making the more standard grade of stainless products.

But it still is a meaningful beginning, coming off the floor and beginning to move up into a more acceptable level, but still a long way to go..

And then, how much of the improvement in demand sequentially in flat rolled has been driven by destocking at distributors due to nickel versus actual end-market recovery?.

That's always the question we try to focus on, when we look through the markets. I still think that while there has been some probably inventory replenishment, which typically happens in the first quarter because of inventory management actions that many people take in the fourth quarter.

I think the encouraging sign is that we're projecting even stronger demand in the second quarter than in the first quarter and lead times continue to extend. So that tells me that it's more than just an inventory restocking. There is a fundamental improvement in end-market demand.

And as we look through the distribution side into the end-market drivers, we're seeing that from a number of data points.

So I think that's what gives us some additional level of confidence, unlike in the past several years, where we had a good first quarter and then demand seem to tail off and in some cases troughed and late summer and in the third quarter. The second quarter demand right now was not showing that, which is certainly a positive..

Your next question comes from the line of Richard Safran with Buckingham Research..

Rich, I just want to ask you maybe a three-part question here on the HRPF.

First is, can you give us an update a bit on the older hot strip mills that you were planning to shutdown, just want to know if those are going on schedule as well? Can you give us -- is it possible for you to give us the expected split for the HRPF in terms of high value and standard products? And lastly, now that the facility is nearing operation, I was just wondering if you can give us any sense of how much output you might see from the facility? Any type of measurable quantity there, anything you could give us would help?.

Well, in terms of the old hot strip mill and we've just begun the hot-commissioning, and as we've discussed before, the process of the hot-commissioning, which is really a six-month effort, because we have 140-plus different grades and products to commission through the new HRPF.

We start with the softer grades and then we move up the hardness levels into the harder, the nickel alloys will be the last thing towards the end of the -- the last alloy systems towards the end of the process. So the plan is that we will continue to run the old hot strip mill until all the projects transition off of that.

And the earliest that our plan, which has been in place for a number of years, the earliest of that can possibly happen is October of this year. But really our plan is that we will continue to run the hot strip mill through 2014, and then decommission it, if you will, in the first quarter of 2015.

So as we enter 2015, we expect all of our products to be produced on the new HRPF. In terms of the split, quite frankly the mill is capable producing anything we wanted to produce.

So while we -- obviously, our goal is to maximize the throughput and utilization of the new HRPF and continue to grow not only the high value products, obviously, as much as the market opportunity is there to do that, but also grow into the standard grade products that we have not been capable of producing because of the limitations of the 65-year old hot strip mill.

So I don't really want to get hung up and we don't think about it that way strategically. I mean we're going to target what we think is the appropriate product mix.

The mill can handle much more than quite frankly what the market opportunity will likely be for us to sell, which is one of the reasons why we've designed it to also hot roll certain high-end carbon steel grades. From an output standpoint, it's really the same question, right.

As we look at these markets going forward, we've made this investment not only for 2015 and 2016, but for a very long time. We're working with a 65-year old hot mill now. So this is investment that's going to last this company 40 to 50 years.

So we will continue to look for global market opportunities and end-markets that we view as attractive and grow the volume on that as much as possible, as long as it generates acceptable returns on capital and acceptable levels of profitability.

The one benefit that the new HRPF brings, obviously, is in our view it further lowers our variable cost structure. So when you think about that, we have more flexibility, if you will, even back to Julie's question of how low, how high have we moved up the bottom.

If we had the HRPF in operations when the base price was bottomed in 2013, we would have had more acceptable financial results, because the cost structure of the new HRPF is better than the old 65-year old hot strip mill.

So that makes us more competitive and makes markets that perhaps in the past we viewed as not as attractive, it makes those markets more attractive for us..

Your next question comes from the line of Sal Tharani with Goldman Sachs..

Can you give us some idea of what was the weather-related impact, quantified it with the quarter was? And if you are seeing continuation in the second quarter or are you all set with the weather now?.

I think -- I hope we're all set with the weather, although if you're in the northeast last week we were 81 day and 10 in the next. I think the worst of the winter is behind us. So I hope it clearly impacts any kind of manufacturing operations, not only in northeast, but also as deep as the Carolinas, where there were some extreme weather.

We haven't called it off, because it is what it is. But I think when you look at the downtime and some of the additional costs that we experienced largely, which impacted the first quarter, I don't think there is a significant carryover at this point in time and to the second quarter.

It was in a range of $4 million to $5 million pre-tax that it hurt us in the first quarter, if compared to what we would view as a more normal winter..

And the new Flat Rolled startup cost $5 million next quarter, is that going to rise over as we go towards third and fourth quarter or do you think that's sort of a run rate we should assume for the next few quarters?.

I think we said -- we gave some guidance in January that we expected $30 million to $35 million worth of startup cost in 2014. Most of that is really associated with hot-commissioning as you think about it.

So with the hot-commissioning really just starting in the second quarter, we had $2 million in change in the first quarter, $5 million in the second quarter. So if you think about the range that we gave of $30 million to $35 million, I think it will be more heavily weighted.

There will be the third quarter will be more than the second quarter, I would expect, and we'll have some residual in the fourth quarter. The peak would be the third quarter..

Your next question comes from the line of Timna Tanners with Bank of America Merrill Lynch..

You've quantified the cost of starting up of course the new hot-rolled mill, but have you been able to quantify the inefficiencies of running the old one, while you're running the new one, so we can get a sense of what that might look like when that tails off?.

I think we've incorporated that in the $30 million to $35 million. So we look at the redundancies and the inefficiencies when you're running two mills, and then also just the commissioning of the product going through.

I mean, it's our intent because of the design and the approach we've taken on design and the care we're taking on the commissioning side that to minimize the startup cost as much as possible by producing salable product as we commission on the HRPF.

So if we're successful in doing that, I think the $30 million to $35 million is still the appropriate range..

The other question I had was really to follow-up on some things that I thought like you kind of touched on, but didn't really specified very much in some of your comments. So you noted that you had been negotiating or renegotiating some agreements.

And one thing we've all been waiting for of course is timing on any announcement on other usage or other third-party tolling uses of the hot-rolled mill or the new one, and then also that the comments about geopolitical strife? I mean can you say anything more specific about those negotiations, specifically to the hot-rolled mill? And then separately can you say anything about how the situation in Russia could be changing the [ph] SMPO and your customer's relationship with them?.

On the HRPF, obviously we are having discussions with potential partners on the HRPF. A big part of that as you would imagine is the success of rolling the carbon steel product through the HRPF.

So we are coordinating that with interested parties and as we're confident that that would be successful, that will further accelerate any discussions that we may have. So I'm not going to put a timeframe on when we think that that would happen.

I mean obviously, we're interested in that happening as soon as it can, whether that's in 2014, towards the end of 2014 or 2015, remains to be seen, but it will -- but the dialogue continues and its pretty much on the pace that we would expect at this point in time as the project is, construction has really just been completed and the commissioning has just begun.

On the geopolitical front, I mean I think that I can't speak for our customers. But the one thing, as you think about the issues that are going on in Russia and the Ukraine, it really comes down to effective risk management decisions that are the responsibility of all companies to do smartly for their shareholders.

I mean we spend a lot of time from the standpoint of our sourcing strategies and looking at making sure that we have the balance sources of supply, because you never know, whether it would be a geopolitical issue, whether it would be a natural disaster or whatever, you don't want to not have a diversified supply base of critical materials and components.

So we do the same thing we assume. Our customers do the same thing. The dialogue that we've had with the customers suggests that they do the same thing. However, I think it's hard when you look at any of these end-markets that are sophisticated and aerospace is certainly that.

That the supply chain is global, and any impact to that supply chain can cause impacts to all participants in the supply chain. So I think we're very attuned and have had discussions.

But I think what it does is that it reinforces to us one of the major themes and reasons that we built Rowley, was to ensure that we're not completely reliant on others for titanium raw materials, and titanium is a very important part of ATI's business and it's one of the fundamental reasons why we built Rowley.

And I think that our customers are certainly sensitive to the geopolitical risks and they are looking hard at their supply chains to make sure that they're effectively managing that risk relative to the things that are outside of their control..

Your next question comes from the line of Gautam Khanna with Cowen and Company..

Couple of questions. One, Rich, on the HRPF economics, you guys have described the 150 to 250 of cost structure improvement and that was made in the context of kind of base prices, I believe, were lower and volume levels that may have been lower.

So I just wondered, post the May price increase, how do you think about where the new facility will track relative to that range?.

I still got my table. The 150 to 250 range was the combination of not only cost reductions, but also margin growth because of the ability of us to produce product and service the market that we can't do today with 65-year old hot strip mill. So it was a combination of both.

When we look at that and did that calculation, just as we don't -- I mean we never try to justify a capital project, off of prices and margins at the peak of the market. We also don't try to under estimate benefits at the trough of the market.

So what we do is we look at what we think is a reasonable expectation through the market cycle of the product that are running through those assets.

And I think arguably, when you look at the Flat Rolled Products segment compared for example to ATI's High Performance Materials and Component segment, given the nature of the markets that we serve, the business cycle, if you will, when you look at it on a weighted average basis, it's probably somewhere in the four to five-year range as opposed to a five to seven-year range on the higher value or the High Performance segment.

So we looked at that and came up with an estimate that we felt was appropriate for the benefits. And I can tell you that that it wasn't off of the low point of the prices and it wasn't off of the high point. So we'll see what happens.

I think to the extent that markets continue to improve and grow, and base prices move up, which is natural, when that happens, when you get a better supply and demand equation, could that put some upward pressure on that 150 to 250, I mean that's kind of why we used 150 to 250..

And just if you could elaborate a little bit more on what you're seeing in the jet engine supply chain? You mentioned a little bit better demand. And last year I think the sales were down over $100 million from 2012.

I mean do you expect that were back on that 2012 pace exiting this year or how should we think about the pace of recovery in the jet engine market?.

I think it really depends on what program you're on and whether or not it's a mill product or whether or not it's a part, and which OEM you're talking about. I think there are different -- and that's really driven by what fundamental engine programs the OEMs are on.

So I think that the short answer is that there in the supply chains even where there was some dramatic inventory management actions that took place in 2013 on the parts side, there is less dramatic impact happening in '14.

And then on the mill product side, I think the mill product side for the most part is in much better balance today on the engine side than it has been probably in the last couple of years. Obviously, the rate ramps from the airframers are there. They need engines.

Some of the new programs are beginning to take hold, programs like LEAP, that's really more of a '15, '16 growth factor than it is of '14.

So I think '14 is getting the supply chain back into much better balance than it has been in a last couple of years, but I still believe that the overall strength in the jet engine business, at least from ATI's perspective, I mean that's the only way we can talk about it, is '14 is better than '13, but the real growth drivers are in '15, '16 and '17, when the new engines and the new technology engines start to take-off..

I wanted to know, on the parts side where you mentioned things are maybe still not as balanced as they are in the mill product side.

Do you ever sense for kind of when they might be just based on consumption rates? How we look at it?.

Yes, I do. I mean my sense is that the second half of '14 is probably better than the first half, assuming these airplanes get built. I mean at some point, the inventory corrections are over, and production it has to get in balance with one of the airframes are being built.

And I think there has been extensive inventory corrections on the part of some OEMs, not all on the jet engine side, and that was dramatic in 2013. And quite frankly, you could attribute most of that $100 million decrease in aerospace revenue to that issue in 2013. So I don't think we're going to see that kind of dramatic impact continuing in '14.

I think it will be better, but the real growth side is probably more weighted on the parts side into the second half of the year and '15 and '16. And Gautam, so when we gave our comments in January about how we were viewing 2014, all of that was really factored in.

So we're not seeing any more negative changes from that view, if anything -- if there are any changes, it's more on the positive upside than on the downside..

Your next question comes from the line of Chris Olin with Cleveland Research..

I just want to touch a little bit on the frame side, and I guess, one of the things I have been watching has been the upward movement in titanium scrap prices, but it doesn't seem like the ingot market has followed.

And I guess, I just wanted your thoughts on how you see titanium playing out this year? Is this competitive issue kind of going to be a factor here in terms of not getting higher ingot pricing?.

Well, I mean first of all scrap has moved. I think it has moved pretty meaningfully over the last six months for the first time in four years. I mean that's important.

And actually when you get into some of the bulk scraps, which are important to us in some of our melt technologies, the bulk scraps have moved even more than as a percentage than as a solid that moved even more than some of the turnings and chips, et cetera. I don't think you're seeing that yet on the ingot side.

I think when you look at ingot as the lowest value-add product form, there are probably more players on the ingot side than there are as you move up to the technology chain and to more value-added mill products for jet engine, rotating applications et cetera.

I also think that the ingot side is still one that is impacted by the inventory management actions on the airframe side because the ingot is much more flexible in terms of product form.

Having said that, I think another impact overall on the titanium side is the still relative weak demand from the industrial market, because the industrial market is an important market for most titanium mill products companies, not only here in the U.S., but outside the U.S.

And when that market is weak, and you have the capacity to service all of the markets for titanium from industrial to aerospace to medical, that obviously creates a surplus capacity that won't be consumed until you really get the big growth drivers coming out of the aerospace market primarily and you have a more reasonable demand profile from the industrial market.

So I think those are the things that are probably putting still some pressure on the ingot pricing, but as we've said many times, I mean we sell into the ingot market on a transaction basis. We do have ingot as part of our LTAs that are more not transaction-oriented pricing, but it's not really the focus.

I mean we use the ingot market as a balancing for our manufacturing facilities. We're much more interested in selling higher value-added product forms, including parts and components..

Just one follow-up.

Any thoughts or visibility on when the framework, could be balanced in terms of inventory?.

Are you talking about plate frame heat exchangers?.

I'm talking about airframe?.

Well, I think it's better today than it was three months ago or six months. And I'm not going to answer for Boeing, but I think that's been something that the industry has been dealing with and has been a challenge really for the last three or four years. And I think we're much closer to equilibrium today than ever before.

And I think as we move through 2014 it will continue to improve..

Your next question comes from the line of Steve Levenson with Stifel..

Could you tell us a little bit just in relation to Rowley about the timing of the premium qualification and what sort of contracts are up for grabs right now and if that will keep you from bidding on certain products or parts or if you can substitute your material once the premium qualification has reached?.

The Rowley qualification process will not stop us from quoting or bidding or participating or winning any contract business or any transaction business for that matter.

We have multiple sources of titanium raw material units, not only scrap, but also a long-term agreement in place with another sponge supplier that we view as an important part of our titanium raw material strategy going forward, even after Rowley is qualified on a PQ basis.

The timing of it, it's more than just -- I mean, I'll put it this way, the sponge from Rowley can be qualified as PQ sponge and will be before the product that you have to make out of that sponge are qualified.

So I mean at some point here, when we're successful, you'll hear the nomenclature that where Rowley has been qualified as a premium quality producer of titanium sponge, which is great. That's the first threshold.

Then the second threshold is, well, can you -- are you able to use that sponge to produce rotating quality material that is turned into a part. So then that's the second phase. And that's really the part that why it takes so long, right.

If all you were really aiming for was the qualification of the facility as being a PQ sponge producer that will happen sooner rather than later.

It's then you have to make these into products, you have to use the sponge in all of your mill technologies and produce products -- mill products, and then the mill products conceivably may have to be produce into a final product, but that is not always the case. So that second phase is really what takes us in all likelihood into 2015..

Second, just a follow-up on the geopolitical situations.

Can you talk a little bit on the Indonesian nickel or situation and what you think the impacts might be, hurtful or helpful?.

I think it's probably one of the factors that are impacting the run up in the price of nickel on the LME, it's clearly the band -- from what we're hearing in the marketplace is certainly there, it's real, and there's no leakage coming out of that at this point in time.

I think it does -- it removes an important part of the supply chain for nickel units and therefore puts more pressure on other sources, including scrap. The scrap market is probably the first thing that gets tighter.

But I think that at some point there is a ceiling on it, because a lot of the mining capacity of primary nickel had been taken out of production. I think with prices where they are now and really anything above 750 a pound is something that many of the mining companies would view as an acceptable price and bring supply back on. So we'll see.

Nickel has a way of, as most commodities that trade on the LME to be driven by factors, in the short-term anyway, factors other than just supply and demand equations, but I think that the Indonesian issue is one of the reasons that nickel has probably run here recently..

Your next question comes from the line of Phil Gibbs with KeyBanc..

I just had a question on the titanium pricing. Rich, it was down 10% quarter-on-quarter.

Just trying to think about how we should view that in light of maybe a richer mix of business with Boeing this year and whether or not that maybe a trough, at least in the high performance business?.

Yes, I mean I think it maybe for a couple of reasons. One is that it is somewhat mix-sensitive. So I mean you could have a quarter that on the LTA side not, on the transaction side, based upon what I indicated to Gautam earlier on that there is a heavier mix of ingot or lower value mill product than the higher value product.

So mix is always going to be very impactful in terms of the average titanium price. The second thing is quite frankly, remember the raw material indices are on a quarter lag. So you really saw the scrap prices bottom-out and you're really seeing that in the first quarter average.

And I think it's for the first time in four years that our index for titanium, driven by the higher scrap prices is forecasted to rise in the second quarter and that's the first increase on a quarter-to-quarter basis in probably four years. And so I do think it probably is a trough at this point, because of those two factors, so we'll see.

The more important or equally important thing as opposed to price is also volume. So I think as the volumes continue to grow and the lead times expand, you'll probably begin to see not only raw material indices move, but also base prices move on transactional business, especially as lead times begin to expand and they are beginning to extend..

And just on the exotic alloy business, do you sense any change in sentiment with the Japanese nuclear restarts or at least some talk about it? And I know that there has been some upside this year in uranium, which may speak more to supply, but I know the longer-term fundamentals, they are better.

Just trying to think about how that may impact your business moving forward?.

I think that the new political leadership and the economic reality is setting in Japan that while they may not restart all of those reactors that were idle post-Fukushima. They're no longer talking about not restarting any of them, which is a big change in sentiment.

I think that that from a supply standpoint, my understanding is, they still have very robust inventory supplies in Japan, especially if they're going to operate fewer reactors. So I don't really consider that to be a short-term driver. I do think longer-term it's a positive development from the standpoint of nuclear industry.

Certainly on the commercial nuclear side, you still have the challenging business environment, where there is most of the building is going on in China and some in the Middle-East, I think there are clearly opportunities.

As you look at some of the existing reactors being extended beyond their expected useful life of 40 years, then you get into a different refueling cycle. And most of those reactors are now being looked at to extend and apply to the Nuclear Regulatory Commission for another 20-year life, which carries in the 60 years.

I think that that will longer-term be positive on the nuclear side for our products. Many of the U.S.

plants are either looking at or in the process of moving, especially spent fuel rods that have been in wet storage for a long period of time into dry storage, and that's the nuclear storage cast business, which is important for company like ATI, because it requires specialty materials to build those casts, and including products like borated stainless steel, which we have the capability of producing.

So I think longer-term, over the next three to five years, that's a market opportunities that I believe will be there. The government nuclear business this year in 2014 is reasonably good. Longer-term that depends upon what -- aside from the refueling that depends on how many surface and subs the U.S. Navy, for the most part the U.S. Navy operate.

So that will depend around that. But I think for the next couple of years that's a fairly stable business..

And I just had one more, if I could sneak on just more on the housekeeping side. You mentioned that you had sort of a yearend cash target of $400 million and I know that you had some upside here in working capital to start the year and you also made the acquisition of Flowform.

Just curious as to can you update us on that?.

I mean, I think $400 million is a nice number. $300 million is an okay number. So it really depends on what the other uses are. I mean if it requires building and replenishing managed working capital that we get quick turnaround on, because business conditions are favorable and profitability improves, that's a great use of cash, right.

But that doesn't mean that we don't have more work to do in terms of lean manufacturing and cycle time, primarily on the inventory management side, because we do. The reason why we like to have that range of cash on hand is to take advantage of things and opportunities that come into play very, very quickly that are not predictable, like Flowform.

So when we see something like that, that is an outstanding bolt-on acquisition that meets all of our strategic criteria from the standpoint, the kind of businesses that we think help create value for our shareholders through business cycles.

And it's an efficient use of capital and it's a reasonable valuation and we're going to move out on that in a balanced way to do, also everything possible to retain our investment grade credit rating. So those are all the things that we look at.

$300 million to $400 million, $400 million will be better, but if it's a $300 million or close to that, that would be okay..

This is all the time we have for questions. I would now like to turn the call back over to Rich Harshman for any closing remarks..

Thank you very much for joining us on the call today, and as always thank you for your continuing interest in ATI..

Thank you, Rich. Thanks all of listeners for joining us today. That concludes our conference call..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..