Danny L. Greenfield – Vice President, Investor Relations and Corporate Communications Richard J. Harshman – Chairman, President and Chief Executive Officer Patrick J. DeCourcy – Senior Vice President, Finance and Chief Financial Officer.

Julie Yates Stewart – Credit Suisse Securities LLC Richard T. Safran – The Buckingham Research Group, Inc. Sal Tharani – Goldman Sachs & Co. Timna B. Tanners – Bank of America Merrill Lynch Michael F. Gambardella – JPMorgan Securities LLC Stephen E. Levenson – Stifel, Nicolaus & Co., Inc. Gautam Khanna – Cowen & Co. LLC Philip R.

Gibbs – Keybanc Capital Markets Inc. John C. Tumazos – Very Independent Research LLC.

Good day, ladies and gentlemen, and welcome to the Q2 2014 ATI Earnings Conference Call. My name is Katherine and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes. And now I would like to turn the conference over to Mr. Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please proceed sir..

Thank you, Katherine. Good morning and welcome to the Allegheny Technologies’ earnings conference call for the second quarter 2014. 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 reference 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. 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 will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call 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, Dan. It’s been five years since ATI’s previous strong growth cycle ended up roughly with the 2008 financial crisis. It now appears that the decline in trough is behind us since most of our markets showed improved demand in the second quarter 2014.

In addition, we are on the verge of a major aerospace up cycle that if not interrupted for a geopolitical crisis or a financial crisis is expected to last at least into the next decade.

We have been preparing for this business cycle improvement through strategic capital investments and acquisitions that have significantly expanded our manufacturing capabilities to meet the current and expected demand growth from ATI’s targeted end markets including aerospace, oil and gas, chemical process industry, electrical energy and medical market.

Most of our capital investments are now qualified to produce next generation alloys parts and components that are expected to grow faster than the aerospace market growth, because we have earned greater content on next generation airplanes and engines compared to legacy models.

ATI’s technical talent has developed new products that have either been fully qualified or nearing qualification for the next-generation of jet engine and airframe applications. These new products include the nickel-based superalloy ATI 718Plus and Rene 65, which are used in the hot section of the next-generation as well as legacy jet engines.

ATI 425 alloy, which is a highest strength titanium alloy they can’t be cold-rolled at long lengths. ATI’s nickel superalloy and titanium alloy powder metals are being used in the next-generation jet engine forgings as well as additive manufacturing applications.

In addition, ATI Flowform Products, business that we acquired earlier this year has significant growth opportunities and several end markets including aerospace and oil and gas and more new products are under development pipeline.

We believe that the investments we’ve made over the last several years are on the precipice of creating value for our stockholders as demand for ATI products grows over the next three years or five years. Some highlights of our second quarter 2014. While we are not satisfied with our results, positive signs and momentum continue to build.

ATI sales increase 13% compared to the first quarter 2014 and nearly 6% compared to the second quarter 2013. Demand from the jet engine market is improving for both new builds and aftermarket spares and it appears that we are at or close to the end of aerospace inventory destocking of the past few years.

The oil and gas supply chain appears to be in better balance and we are seeing demand improvement. We are tracking new projects both oil and gas and chemical process industry that are beginning to move forward. Lean times are extending for most of our products.

Both the April and June 6% cold-rolled stainless price increases are an effect in the market. These price increases have had an immediate impact on non-contract business. We expect to see the full effect of the price increases as we move through 2014 into 2015.

The headwinds created by continued falling raw material prices over the last few years appear to amended. In fact, most raw materials prices are increasing. The trade actions implemented against countries that have been illegally dumping product into the U.S. market have stabilized grain-oriented electrical steel priced in U.S.

This comes after five years of declining prices. Our balance sheet remains solid with cash on hand of $355 million at the end of the second quarter. In June, our $402.5 million convertible notes matured, $5 million of the notes were converted the rest was paid in cash.

There were no borrowings outstanding under our $400 million unsecured domestic credit facility. And we continue to expect 2014 capital expenditures to be approximate $300 million of which $98 million was spent in the first half.

Before I discuss our major end markets and our strategic investments in more detail, I would like Pat DeCourcy, ATI's Chief Financial Officer, to discuss the second quarter financial results. Pat..

Thanks, Rich. Turning to Slide 5. Looking at the second quarter results from continuing operations, sales were $1.1 billion for the second quarter of 2014 or 13.3% higher than the first quarter of 2014. Over 77% of our sales in the first half were of high-value products and international sales represented 38% of our year-to-date sales.

Segment operating profit was $65.2 million or 5.8% of sales in the second quarter compared to $43.5 million in the first quarter of 2014. Results from continuing operations with a net loss of $3.8 million or $0.03 per share compared to a net loss of $18.1 million or $0.17 per share in the first quarter 2014. Turning to Slide 6.

High Performance Materials and Components segment sales were $514 million, which was 6.1% higher than the first quarter of 2014. Segment operating profit was $16 million higher than the first quarter of 2014 at $85 million or 16.6% of sales.

Segment operating profit benefitted $27 million from the reversal of our remaining LIFO related net realizable value reserves. These reserves were recorded in the fourth quarter of 2013 when the carrying value of our inventory as valued on the LIFO basis exceeded replacement cost.

Segment results continued to be negatively impacted by low operating rates at our Rowley, Utah Titanium Sponge facility and by our strategic decision to use ATI-produced titanium sponge rather than lower cost titanium units to manufacture certain titanium products.

This is expected to continue throughout 2014 until we complete premium qualification or PQ process at Rowley. Flat-Rolled Products sales were $605 million, which was 20.3% higher than the first quarter of 2014. The segment had an operating loss of $19.9 million which was $5.7 million better than the first quarter of 2014.

Results were impacted by $29.9 million LIFO inventory valuation charge and $4 million charge related to the HRPF startup. In addition, the second quarter of 2014 included a major portion of the higher cost related to the Rowley Titanium Sponge facility PQ qualification process.

This includes charges for the market based valuation of industrial titanium products as well as higher raw material costs due to our strategic decision to use ATI-produced titanium sponge rather than lower cost titanium units.

We expect approximately $12 million in start-up costs related to the HRPF in the third quarter 2014, as we accelerate the hot-commissioning process. We continue to expect $30 million to $35 million in HRPF start-up expenses for the full-year of 2014. Slide 7, provides a summary of the 2014 HRPF and Rowley start-up and qualification costs by quarter.

This information shows the impact to segment operating profit and income before taxes, while these two strategic projects are in the start-up and qualification phases.

These costs are expected to continue throughout the HRPF commissioning, which is expected to be completed by the end of 2014 and the Rowley Premium Quality or PQ qualification program, which is expected to be completed in 2015. Once completed, both of these growth capital projects are position to earn their expected returns on capital.

The majority of ATI inventory is valid using the LIFO method. The charges noted here primarily resulted from the rapid rise in nickel and certain other raw materials during the first half of 2014.

Looking back in history, a rapid recovery in raw material costs as usually the result of improved demand and often indicates the end of the thought in the beginning of the new cycle.

A LIFO charges are based upon our current assumptions for the year end prices of raw materials included in our market basket such as nickel, titanium, chromium, et cetera. Now, I’ll turn the call back over to Rich..

Thank you, Pat. Turning to Slide 8, the aerospace and defense market continues to be our largest end market representing 34% of first half 2014 sales. We expect that the commercial aerospace market will be a significant driver of our profitable growth over the next five years.

ATI’s first half 2014 sales into the aerospace and defense market were $717 million. We attended the Farnborough Airshow last week and I would like to share some thoughts with you.

My six years of attending the annual Farnborough or Paris Airshows, as followed the transformation of ATI from a leading mill product supplier to a strategic integrated supplier of mill products forgings, castings and fully machined ready to install components. I believe ATI’s viewed today more as a Tier 2 supplier than ever before.

ATI is a better position to grow content on the next-generation airframes and jet engines due to our new alloys and products, Powder Metals, near-net-shape and net-shape mill products and highly engineered forged investment cast and Flowformed machine parts and components.

With our focus on creating value through relentless innovation, we’re positioned to work directly with the OEMs under development of future generation technologies and products.

Including new alloys, powered metals, isothermal and hot-die forged parts and component, titanium investment cast parts and components, Flowform parts and advanced and additive manufacturing solutions. During the air show, the airframe and jet engine OEMs added to their already record backlogs.

They are forecasting further production rate ramps to become even more meaningful in 2015 and extend to the latter part of this decade and perhaps into the next decade. The OEMs want to be sure that we are ready and we are.

As part of our continued focus on enhancing ATI’s position as an integrated supplier of parts and components in addition to mill products, in June we completed our second strategic acquisition of the year, Hanard Machine, Inc of Salem, Oregon.

This business which performs precision final machining on parts and components made from titanium alloys, nickel-based alloys and superalloy, aluminum, specialty steel and other ferrous and non-ferrous metals now operates as ATI cast products Salem operations.

We are now integrated in the production of titanium investment castings from titanium sponge to a precision machine finished parts.

We have identified significant growth opportunities for ATI’s integrated titanium investment casting business with our goal to at least double the revenue and profitability of ATI cast products within the next five years.

In addition, we are nearing completion of expanding and consolidating into one building our two ATI forged products Connecticut machining centers.

This expansion and enhancement of our machining capabilities and capacities is in response to the OEMs approach of simplifying and streamlining their supply chain with strategic supplier that are fully integrated from raw materials to machine part or component that’s ready to be installed on an airframe or an engine. Turning to Slide 9.

At the Farnborough Air Show, we displayed parts that are currently being used in next generation engines. These products are expected to grow significantly over the next five to seven year. Pictured on the slide from left to right are our Rene 65 hot-die forging.

Rene 65 is a unique GE developed nickel-based superalloy that can sustain the higher temperatures and pressures required by the next generation of jet engines. ATI was selected by GE Aviation to develop Rene 65 into a rock [ph] product.

The middle picture is nickel-based superalloy forging made from powders which are then isothermal forged into a part. ATI is one of the few qualified integrated producers of this high growth product.

And the picture on the right is a titanium investment jet, casting jet engine part, demand for fully machine investment castings continues to grow as OEMs require more near-net-shape products. Moving to Slide 10, ATI’s driven by relentless innovation we will never be satisfied with the status quo.

Even though we’ve growing content of new alloys products and components on next-generation and legacy airframes in jet engines, we’re focused on expanding our product portfolio to help our customers meet their ever increasing in demanding needs and to create value for ATI’s stockholders.

For example on display at the airshow, were ATI Flowform products that used in innovative process to reduce buy to fly ratios in the time it takes to make a components that is ready to go directly on the airframer jet engine. On display were Flowform products for jet engine shafts and landing gear components.

Also ATI’s leader in developing wire and powders for additive manufacturing such as 3-D printing, Powder bed systems, direct deposition of powder, and direct deposition of wire.

Some ask if we consider additive manufacturing to be a threat to our business, rather we see innovation by our customers as an opportunity and we believe we’re development leader in these future generation processes.

As depicted on chart on Slide 11, the projected demand increases from the aerospace market are being driven by unprecedented build rates of commercial aircraft. The near parabolic black line shown above represents the next-generation aircraft growth and best depicts ATI’s projected aerospace market growth trajectory.

As one 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. This figure is as of June 30, 2014 and does not include orders taken at the Farnborough Airshow.

ATI enjoy strong positions on most legacy programs and we’re gaining content on future next-generation jet engines. Turning to Slide 13, our second largest end market is oil and gas chemical process industry, which represented over $370 million or 17% of our first half 2014 sales.

ATI’s second quarter sales of the oil and gas market increased over 30% compared to the first quarter 2014 primarily due to demand from small and medium-sized products for both upstream and downstream applications using our nickel-based alloy and duplex alloy products. Orders for similar sized projects continue to be booked.

In addition some major projects are beginning to appear in the oil and gas market. We expect to win significant orders associated with these projects in the second half of 2014, which are expected to result in increased sales in 2015. Also we’re tracking several large petrochemical projects that are nearing the tendering phase for the anticipated U.S.

chemical process industry renaissance that is expected to result from abundant reliable and affordable supply of domestic natural gas. Turning to Slide 14.

Our Flat-Rolled Products segment Hot-Rolling and Processing Facility or HRPF continuous to progress as expected with cold-commissioning in the first quarter of 2014, progressing to hot-commissioning in the start of operational integration in the second quarter of 2014.

As you see on Slide 15 we have successfully hot-rolled trial coils including 200, 300 and 400 stainless grades, as well as grain oriented electrical steel and carbon steel coils. Additionally, we have processed a number of these coils through our finishing plants and the results thus far have been very good.

As we move to the rest of 2014 we will accelerate the commissioning process on all 140 plus ATI Flat-Rolled Products, fine tune the HRPF equipment and complete the training and operational integration process.

While much work remains, we continue to expect to complete the hot-commissioning training and operational integration process in the fourth quarter of 2014.

We continue to view the HRPF as game changing investment designed to significantly enhance ATI’s Flat-Rolled Products’ 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 reduce production and overhead cost.

We believe that the HRPF investment in combination with our continued focus on cost reduction and enhancing our market position for both standard grade and high-value Flat-Rolled Products enables the successful transformation of our Flat-Rolled Products business into a global leader that can sustain profitable growth through business cycles.

Moving to Slide 16. The Premium Quality or PQ qualification program in our Rowley Titanium Sponge facility remains on schedule. We have produce all of sponge required as part of the qualification process and the sponge is now being melted in the mill products for further processing into bar product.

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 be melted using all of our melt technologies, Electron-Beam, Vacuum Arc Remelt and Plasma Arc Melt.

And then produce the output from the melts into defect-free round bar product. We’re well into this qualification program and we remain on track 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 products.

while the industrial titanium market is showing signs of improved demand and pricing, we continue to operate the facility well below capacity resulting in inefficiencies and higher cost titanium units. This is expected to continue throughout 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 reinforce the importance of this strategy.

As we look ahead to the third quarter of 2014, we expect business conditions to continue to improve. Resolving in improved operating results before taking into account expected HRPF start-up and Rowley qualification costs and the net inventory valuation charges that Pat discussed earlier.

As Pat indicated, HRPF start-up costs in the third quarter is expected to be – is increased to approximately $12 million pre-tax as we accelerate the commissioning process.

We expect the third quarter to be impacted by approximately $6 million of cost associated with the PQ qualification program at Rowley, which is less than the costs identified in both the first and second quarters of 2014.

And in addition, based on the current year end forecast raw material cost, we expect net LIFO net realizable valuation reserve charges of approximately $19 million pre-tax.

Excluding these costs and inventory valuation charges, we expect pre-tax operating results from continuing operations to improve by $15 million to $20 million in the third quarter of 2014 compared to the second quarter of 2014 In closing, the investments we have made over the last several years are on the precipices of the creating value for our stockholders and customers.

We believe this value creation will be realized as the global demand for our products grows we become a more fully integrated supplier of value-added parts and components, our cost structure continues to improve, our major capital spending ends, the strategic growth projects are commissioned and qualified and begin to earn their expected rates of return.

Operator, may we have the first question please..

Thank you. The first question is from the line of Julie Yates from Credit Suisse. Please go ahead Julie. .

Good morning..

Hi, Julie.

In our performance, it looks like titanium shipment were flat sequentially with the first quarter and then modestly down year-on-year.

At what point in the year do you expect to see sequential on year-on-year increases in the titanium volumes and High Performance?.

While I think as you know some of that is product mix related, can be and was impacted by having more value-added products and less ingot, which is actually part of the strategy. So I think we look at it from the stand point of titanium dollar revenues in terms of total titanium product as well as operating margin.

One thing I can say is that the order book as we look out has the longest visibility from the standpoint of back logs and lead time in the titanium product line than we've had in the last three years to four years as we entered the third quarter and actually looking into the fourth quarter.

So lead times are pushing out, capacity utilization is improving, I think it’s mainly driven by the aerospace market.

The industrial market is still challenged quite frankly in terms of lack of demand and the projects that are out there are intensely competitive, although, some of the recent industrial projects have we've realized increases in base prices that are not insignificant.

So I think that that’s positive, but I think that titanium growth profile as we move through the second half of 2014 and into 2015 is pretty much on track with what we believe is happening in aerospace and medical remains a healthy market as well. .

Okay.

And then what we should think about the opportunity for ATI on the other A330neo, which you guys have a nice relationship with Rolls through the Ladish acquisition?.

Yes, I mean I think that that – we do have a strategic relationship with Rolls and that should as well as with GE and Snecma and Pratt, so we don’t – we like all of our relationships with all of the jet-engine manufactures but the Rolls-Royce is the engine for the A330neo and I think that will present some opportunities and not only in the tradition product we make, but also in the powder arena.

So I think that’s a good development, quite frankly it would have been good development for ATI regardless of who would have won the engine program..

Great thank you..

Thanks Julie..

And here the next question is from the line of Richard Safran from Buckingham Research. Please go ahead Richard..

Hi, good morning..

Hi, Rich how are you?.

Good. So I wanted to ask you a couple questions about cost reduction. So first is, you look like generally continuing your run rate looks like you're going to exceed your $100 million cost reduction target.

Just want to know a couple of things, is there anything in the back half that would cause that to slow should we be thinking about sustainably higher run rate for cost reduction here.

And I guess if you could also comment on what earning do you think we again here I mean do you still have meaningful cost to take out here or is the low-hanging fruit kind of gone..

Well, I think – I mean the low-hanging fruit is you know has probably been long picked. We’ve been at this for a long time as you know and I think the big, so the run rate to the first half of 2014, we count each cost reduction project as a cost reduction for 12 consecutive months.

So some to drop off and some new ones add-on because as we indentify cost reduction opportunity we formalized it, we measure it, we agree on how its going to be measured to make sure that it really is a cost reduction or not going out the door.

In strong markets you’re able to you know net of inflation you’re able to realize all that cost reduction that drops to the bottom line.

In some cases and other cases we have far more agreements especially on the aerospace side with some of the aerospace under the aerospace long-term agreements where we have formal cost reduction programs that are because of fixed manufacturing flow path that are negotiated identified with the customer and we share in those cost reduction.

So we would report that as part of our overall growth cost reduction, but half of it for example would go to the customer from a value add proposition there. So I don’t know that you know we’ll continue and realize a $140 million in 2014 I think that’s probably unrealistic.

I think going forward in 2015 quite frankly the big cost reduction driver will be HRPF. There is a big component of cost reduction associated with the HRPF coming online in the old hot strip mill being idle and coming offline as well as another breakdown mill that we have.

So that will be a big driver and opportunity for us in 2015 we have been targeting for the last several years growth cost reductions to the tune of about $100 million and I see no reason to change that I mean that’s kind of the level that I think is appropriate and it requires us to get creative and it requires us to improve yields and improve productivity and be better buyers of our product that we buy some more suppliers, so all of that goes into the equation Rich..

Okay. And just quickly on your target by or guidance for the HRPF $150 million to $250 million.

I wonder if you could just maybe comment, now given far field you are in bringing that facility online and any – can you comment at all, do you think there is maybe upside to that guidance range here now?.

Yes.

I mean, I don’t -- my instinct is yes, specifically how we haven’t yet identified, I think to the extent that I was just out at the facility yesterday for a monthly meeting with the team, with Flat-Rolled Products leadership team and the project team and we’ve been discussing for a long-time that, as we get into 2015 and begin operating this and will better at realizing the true benefits of HRPF at the end of 2015, than we will be at the beginning of 2015.

And consequently we’ll be better in 2016 than we will be in 2015, so there will be a continual period of learning and realizing what the real opportunity set is, because of this is a very unique aspect and a very unique capability that can produce products that the market needs that we cant produce today and produce them in a cost and a cost structure and at a quality level of significantly improved quality that may in fact be above and beyond what we anticipated and estimated in the development of the project itself.

So, is there upsides to that number? I believe so. Not only in the cost reduction side, but also on the market growth side. Will we realize all of that in 2015? We’ll try, but my honest answer would be probably not, because I think we’ll identify new opportunities as we continue to learn and grow with the facility..

Thank you..

Thanks Rich..

Thank you. The next question is from the line of Sal Tharani from Goldman Sachs. Please go ahead..

Good morning, Rich..

Hi, Sal.

How are you?.

Good.

A couple of things on HRPF, you showed some pictures of rolled products including carbon steel, I was just wondering as you close to hot-commissioning or completing hot-commissioning are you in talks for toning on joint venture on the excess capacity you will have over there, it was talked about in the past?.

Yes, we are in discussions. I would say it’s early stages of discussions. I mean the first part is actually running product across the HRPF, which we have begun to do as you saw. Our approach quite frankly is this, I mean you would like to do everything in parallel, but when you are bringing a facility like this online you have to prioritize.

So, our prioritization, our number one prioritization is ATI’s products. Because, we intend to idle the old 65-year old hot mill in early 2015, so that becomes our number one emphasize.

At the same time, we have in our commissioning schedule a variety of HRPF products from more than – I’m sorry carbon steel products from more than one carbon steel producers. So, we will run that and commission that on the mill at the same time and continue to have dialogue.

So, that we can move as quickly as possible into a desired state of a partnership of some sort with a carbon steel supplier producer..

Okay great. And on the destocking as you mentioned in your prepared remarks that you are add after close to the destocking in these aerospace supply chain.

How does the Boeing titanium supply chain to you at the moment, do you think it’s pretty destocked?.

Yeah, I think it looks pretty good, I think there are – it looks to us like there demand is continuing to grow and we are at levels that in shipments and we will be in 2014 that we haven’t seen in a number of years both from the volume, a pure volume standpoint as well as a product mix standpoint so that’s good.

I think the continued rate ramps across the variety of their platforms we will continue to draw down the rest of that inventory. I think maybe, there are maybe certain product forms that they have in the inventory that they have more out then they want.

And other product forms that they need that are more of an emergent demand with a very quick turnaround. So, I think what has we get into 2015, my sense is that as we exist 2014 and move into 2015 that will be very well imbalanced..

Great, thank you very much. Appreciate it..

Thank you. The next question is from the line of Timna Tanners from Bank of America. Please go ahead..

Yeah, hello guys, good morning..

Hi, Timna how are you?.

Good morning..

My first question, I will into look into stainless and electrical a little bit more, so on the stainless side we are hearing that the June price hike was struggling a bit in the market and so if you could comment a bit more on that and help us understand on electrical the timing of the benefit of higher spot prices, I know you sell more contracts, so is that really a 2015 benefit or can we see anything there earlier? Thanks..

Yes, on the electrical I think you are seeing some of it now on the spot market there isn’t a big spot market, because most of it is contract, but to the extent if there is any spot opportunities on-goes other prices are modestly better, but still a long way below where they once were.

On the stainless side, there have been two price increases that were announced and are in the market as I stated in my comments.

There was third one that we led that was announced for August that one I think it’s safe to say is struggling in the market and we will see what happens, but I think for the first two they have been in the market for a while underlying demand in stainless quite frankly has remained pretty strong in 2014.

Lead times for us and I assume for others are well extended beyond what the normal lead times are in a product like stainless sheet and plate. I mean they're out into the late third quarter, if not into the fourth quarter at this stage, so that's a positive sign.

And I still think imports are a factor in the market, but the industry watches it very closely and yes the domestic market does have the advantage of cycle time over imports, because of the time of the on the water. So two out of three of the price increases this year look good, the third one I would say is at risk..

Okay. That’s helpful. I was also really intrigued by your discussion on the oil and gas progress and chemical processing.

Can you help us kind of quantify or put some metrics to that? Is that maybe not the highest margin product you do, but a higher margin product, what kind of percent increases might we see or how much of your mix could then improve to? Thanks..

Yes.

Its I mean when you think about the – when we talk about the key global markets which is aerospace, which is chemical processing, oil and gas, which is energy, some aspects of electrical energy more from a generation as appose to a distribution in the medical, because of the nature of those application in those end markets the quality in a qualification of the supply basis more intense, because failure really in those end markets for those applications is not an option.

And I would include oil and gas in that even more so today after deepwater horizon than before. So with that you have higher various entry from a technical and a quality standpoint in the competitive landscape is different because the products are harder to make.

So that all-in-all lends itself to more demanding application, more demanding market, fewer qualified and capable producers and therefore a better margin opportunity and oil and gas is certainly within that. I think review the oil and gas market from a global perspective and it truly is. It’s not a regional market, for the products that we have.

We have been under Kevin Kramer who is our Senior VP and Chief Commercial and Marketing Officer and really the first Chief Commercial and Marketing Officer of ATI has ever had, it is focused on coordinating and integrating our whole oil and gas chemical process industry commercial strategy on a global basis.

We’ve added resources to that because we think that there are opportunities that are there for us to realize and grow revenue in that market far faster than GDP growth. And I'm talking high single-digits, low double-digits in terms of our revenue growth and you saw the 30% revenue growth that I commented on.

So, yeah we think that there are great opportunities in oil and gas it’s one of the reasons quite frankly why not the only reason but one of the reasons why we purchase the dynamic Flowform which is now ATI Flowform products. And we have a large part of our technical and commercial organization really focused on opportunities there..

Okay, thanks..

Thank you..

Thank you. The next question is from the line of Michael Gambardella from JP Morgan. Please go ahead..

Yes, good morning Rich..

Hi, Mike, how are you?.

Good. Hey, I want to understand, how – what percentage of your nickel units do you purchase as virgin nickel units as opposed to inform of stainless steel scrap..

We like most it was producers are much heavier scrap users than we are prime. .

Right, I mean it is like 80%, 90% scrap?.

We view that as competition sensitive and has never discussed that. I can't speak for everybody at ATI but I haven’t discussed it..

Okay. Because I'm trying to understand the third quarter guidance net after unusual items of 15 to 20, I actually thought it would have been higher than that. And I'm trying to understand what's going on is it nickel – aluminum nickel is around 40% since the Indonesian bans went into effect at of the beginning of the year.

Are stainless steel scrap prices just increasing on a percentage basis higher than the LME price of nickel?.

Yes, I think it's safe to say Mike that if you compare it to a year ago, the discounts to the LME for scrap is much less today than it was a year ago. So if you think about it that way, an answer to your question, yes, scrap is more expensive on a relative basis than it was a year ago or even three quarters ago..

So, when I was visiting one of your competitors the melt shop not quite a year ago, they were saying that they also buy most of nickel units in the form of stainless steel scarp, they were saying that the nickel unit from scarp they could buy at about a 20% discount to the LME nickel price, and clearly you charge the customer the LME nickel price and capture that margin by being able to purchase scrap, because you are sitting in a big scrap generating region.

So, is that 20% about a year-ago or nine months ago was that kind of what it was ballpark?.

That seems a little high, but it was higher than it is now..

Is it near parity now or?.

No, no, no. I mean very – it can get near parity and it has been near parity as a percent of LME. I mean there are times in the market where it approaches the upper 90% level and there are times when it doesn't and you also have – not all scrap is created equal. Right.

I mean even in an air melt there some scrap that you have – it's less efficient to use really dirty scrap in a melt than it is to use cleaner scrap.

So, if you want to – it all depends on what you are targeting for your melt costs are I mean if you want to get poor yields and have to do more products because you are off chemistry, you can get really cheap dirty scrap.

But we look at it from a standpoint of what’s the actual total real melt cost in the yield and that’s really what drives our blends. And but it scrap on a relative basis, 20% discount LME, no, it wasn’t bad high but it was higher than it is today..

Okay, thanks a lot guys..

Thanks..

Thank you. The next question is from the line Stephen Levenson from Stifel Nicolaus. Please go ahead..

Thanks, good morning everybody..

Hi, Steve, how are you?.

Hi, Steve..

Okay, thank you.

Just relation to the LIFO, did you gave us for third quarter what do you expect additional LIFO reserves in the fourth quarter or would nickel have to move or scrap prices move much away from the current levels for that to happen?.

No, we remember how we book LIFO or at least what the process is, we project year end FIFO inventory levels and we project year end raw material costs and labor costs and overhead costs to get our indices for the current year.

And then we calculate what the LIFO reserve needs to be or is expected to be at the end of the year and then we book that radiably. So, using that methodology, which most do, by the way, because that is GAAP, you can’t – when you change your estimates either up or down then you have a cumulative catch-up.

So at mid-year you have to be booked 50% of what you think the provision is going to be for the full-year and that’s where we are. And then the rest of the – if all the estimates remain the same whatever the second half as you booked radiably in the third and the fourth quarter.

Now having said all that we update our estimates every quarter actually several times a quarter and will do that as well as we head into the third quarter.

So there is a possibility that the $19 million that we are projecting will be – it could be more than that, it could be less than that all depends upon what the costs are, the raw material costs are really in the fourth quarter because based on our inventory returns that’s the relevant costs that are in our FIFO inventory at the end of the year..

Got it. Thank you for the detail on that.

Then you’ve been mentioning mix in different alloys? Can you talk about sort of standard alloys in the past like 64 titanium and 718 nickel and if those will still represent more than half of your respected titanium and nickel sales or are you moving more toward the more exotic alloys?.

No, no. I still think the big workhorse is in the market and the aerospace market is still 64. Now there are a whole range of more boutique-ish alloys for - that are more highly alloyed for very specific components in a jet-engine or an airframe.

And those are also important products for us, I mean it’s the whole portfolio that we have and its really the same on nickel, on the nickel side and the jet-engine 718 is still the workhorse alloy although there are inroads being made by luminides for example there are inroad is being made ATI 718Plus, which is differentiated product, there is a 720 grade that’s more cobalt, there is the powders which are beginning to make inroads, there is the near powders like Rene 65 et cetera, but the real workhorse remain on the nickel superalloy side 718..

Got it. Thank you very much..

Thanks..

Thank you and the next question comes from the line of Gautam Khanna from Cowen and Company. Please go ahead. .

Hey, good morning guys..

Hi Gautam..

Hey so Rich, I wanted just explore a couple of things, one you made an important comment about how kind of the gross cost reductions are shared in some instances with the customer and I just want to make sure I’m properly calibrated on the HRPF cost improvement we should expect next year.

I mean should we expect the next cost tailwind is maybe below that range we discussed the 150 to 250 and it ramps from there in 2016 and beyond or should we start the year off assuming that’s 150 or how should we calculate?.

Yes. Now, remember how we've talked about in the past of what are the component of the range of 150 to 250, its really its cost reduction and its margin growth, because we can make product that the markets wants and needs with the HRPF that we can’t make today.

So therefore you have sales growth, so there is really if you think about there are three components right, there is the benefit that you get by growing your revenue that hopefully drives and gives you a net contribution margin and a positive pre-tax margin on revenue that we don’t have today, because we can’t make the product, so that’s number one.

Number two, there is an inherence when you do that and you produce, and you have more volume running across not only your primary facilities, but also your finishing facilities, because we are not operating at capacity, your cost absorption is better. So all the products you make benefit from that.

And then there's the third component that’s really unique and an enabler by the HRPF investment that is a pure cost reduction from our method of producing the product today to what the method will be using the new HRPF, more productivity, better yield, less scrap, less quality cost of rework.

And by the way on the quality side even at the early stages of hot commissioning, I mean we are seeing evidence of that even before we’ve turned on the automation for the HRPF.

I mean what we're doing right now is really running it manually and we haven't turned on all the automated sensors in full and we're producing a quality product of the HRPF in the initial runs that is really impressive. So those are the three components that make up the 150 to 250, Pat you grew that..

I am Pat, Rich just about - the last driver you mentioned just the pure cost out if you will, can you size that for us? I mean is that after the 150, I mean just proportionality would be helpful..

I think we’ve said – I think we’ve said in the past that at the lower end it is probably more than 50%, that the higher end is less than 50%..

Got it..

Of the 150 to 250 range..

Okay, thank you. .

Okay..

We seen just a follow-up on pricing, we've seen....

And I would also like just interrupt, but I would also suggest that that the cost reduction will be greater in the second half of 2015 then it will be in the first half of 2015 just from the natural learning curve and learning and fine tuning that will take place throughout 2015 on the HRPF..

Okay, that’s very helpful, thank you. I want to just get quickly if your base prices we’ve seen obviously the move higher and standard stainless.

I was wondering if you could just give us some flavor of how base prices compare at the high performance titanium and nickel alloy product categories relative to where they were maybe a year ago were they up, down so how much..

Compare to a year ago?.

Yes..

I mean on the average, I would say they’re relatively flat. I think there is some opportunities as the market type is a little good and the transaction side that the prices are moderately – modestly improving. I think of the LTA side the Long-Term Agreement, the prices are prices right I mean that’s the issue of the long-term agreements.

I think there are some markets, quite frankly that have been more competitive and base prices might be slightly down. so I think when you put all that together I would say, on a general response that at this point in time they are relatively flat. So the improvement initially and this is not news right, I mean this is what happens.

What's the first thing that happens when market conditions begin to improve right? Volume begins to improve, lead time starts to push out, the market becomes tighter and then what follows are base price increases and I think we’re at the very beginning of that process..

Thanks a lot and good luck..

Thank you..

Thank you. The next question is from the line of Phil Gibbs from KeyBanc Capital Markets. Please go ahead..

Rich, my question was largely just on core spread improvement in the Flat-Rolled side of the business, I know you have a lot of contracts running through that business segment.

So we've seen incremental upside in a lot of these stainless base prices, but have you really seen the core improvement or is that really more reserved for 2015?.

Yes, I mean I think we’ve seen some modest improvement, but I think it's more reserved for 2015.

I mean the one thing that – and we’ve seen this on other big – first of all we've never had a capital investment project as big as HRPF, but on other big projects I mean there is a lot of resource requirements across the businesses that inherently creates some inefficiencies.

And I think we are probably seeing that so I think once, there is lot of reasons for us to complete the HRPF, one is to really get a better – some of the guys at ATI Flat-Rolled Products use the term cadence, which I make as a great word to describe that it's important for us to complete the HRPF and being to really get the cadence of how that's going to be operating.

And I think there are very good and strong cost reduction and efficiency opportunities ones that project comes on stream and the facility comes on stream.

So I think your question was, is it more impactful, is the base price is more impactful from a benefit standpoint in 2015 and then in 2014, yeah I would say I agree with that?.

I was just thinking in terms of a piece of your standard stainless business that’s contract you have piece of non-contract.

I’m just thinking about maybe some of that being realized now, but as these contracts get reside you get essentially a list to base pricing in another piece of the business or is that not accurate?.

No, that’s very accurate and that’s very true. So I mean there is the transaction business where you get the immediate list there is that some of that is more on a quarterly basis quite frankly.

So, when you have a May and June effective price increase you really don’t begin to see that until you get into the third quarter and fourth quarter especially with lead times where they are.

So, I think it’s more – it’s more important to get the that the tone of the market there that the demand is tight, our base price is should be going up from our perspective I won’t speak for anybody else, but from our perspective. And you building that higher floor and you realized the advantages on the next contract..

Okay. And if I can just ask one more....

Philip…..

Go ahead..

I just want it one for clarity Dan and it is a titanium costs. Is that all inclusive are you including that the headwinds on the actual business segments outside of the PQ start-up or is there more actual impacts aside from the 11 for that you outlined? Thanks.

No, I mean what that is the impact of operating at 50% or maybe slightly less of capacity. And we’ve taken as much cost out of that business as we can without jeopardizing the PQ process, which would be self proceeding. So, the cost per pound of sponge produce is higher than it will be in operating in a normal state.

And that’s part of that and then the other part is obviously with, because we can’t use that sponge yet on any rotating quality product. And in some cases on medical product where limited in its utilization until we can get into the PQ approval.

So, we are driving the uses of that sponge, so we don’t build this big inventory and where we would be buying lower cost titanium units mainly scrap, we’re using – we have a richer blend of prime that is a higher cost than scrap and that's the other component of the number that we disclosed.

So both of those really go away whenever the PQ is achieved..

Thanks..

All right, thanks Phil..

Thank you the next question is from the line of John Tumazos from Very Independent Research. Please go ahead..

Thank you. The hot-strip mill the startup in the second half, presumably the escalation as usual be rolling titanium and other less valuable, tougher to roll grades.

Are you budgeting for the product that you roll to be scrapped, re-melted and go through the whole process again or are you budgeting for the product to be saleable?.

John the intent is to do the commissioning on production orders but having said that we also acknowledge that we may not have as we’re starting up the facility a 100% success rate of that.

So some of that may in fact, if not the product of a whole a coil, some of the coil may have to be cut and scraped and then re-melted and all of that is factored into our estimate of what the start-up cost will be..

Thank you..

Thanks John..

Thank you I would now like to turn the call over to Mr. Dan Greenfield for closing remarks..

Okay. This is Rich Harshman before I turn it over to Dan. Thank you for joining us on the call today and as always thank you for your continuing interest in ATI..

Thank you Rich and thanks to all of our listeners for joining us today. That concludes our conference call..

Thank you for joining today today's conference. This concludes the presentation. You may now disconnect. Have a very good day..