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

Gautam Khanna - Cowen and Company, LLC Jorge M. Beristain - Deutsche Bank Securities, Inc. Richard T. Safran - The Buckingham Research Group, Inc. Timna Beth Tanners - Bank of America Merrill Lynch Stephen E. Levenson - Stifel, Nicolaus & Co., Inc. Tyler Lange Kenyon - KeyBanc Capital Markets, Inc. Philip N. Gibbs - KeyBanc Capital Markets, Inc. Josh W.

Sullivan - Sterne Agee CRT.

Good morning, and welcome to the Allegheny Technologies Incorporated Third Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please go ahead..

Thank you, Emily. Good morning and welcome to the Allegheny Technologies earnings conference call for the third quarter 2015. 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, Finance and Chief Financial Officer. All references to net income, net loss or earnings in this conference call mean net income, net loss or 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, again, 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 considerate 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. Good morning to everyone on the call or listening on the Internet. The third quarter was very challenging. In our Flat Rolled Products segment, business conditions impacting commodity stainless products weakened further during the quarter to levels we have not seen since the global recession of 2009.

In the High Performance Materials and Components segment, demand further weakened from the oil and gas market and demand continued to be weak for our forged products from the construction and mining market.

Total ATI sales to the oil and gas market were down 55% compared to the second quarter 2015, driven largely by shipments of our nickel-based alloy plate for the large pipeline that had boosted the first half 2015 sales, were completed in August.

In addition, downhaul customers continue to reduce their inventories of our High Performance Materials and Components segment oil patch products. Sales to the aerospace market were also down in the third quarter primarily due to seasonal slowness and timing of shipments per customer order profiles.

In addition, we are seeing signs that the supply chain is closely managing their inventory during this period of transition from the legacy models to next-generation airplanes and jet engines. We are confident that demand from the aerospace market will significantly improve in 2016.

Our production schedules from our aerospace customers show demand improvement for our next-generation alloys, forgings and components. Demand from the medical and automotive market remain good and demand from the housing market is improving. We are seeing no improvement in demand for our commodity stainless products.

During the third quarter, the base selling price for a typical stainless grade was near a record low, even as nickel prices were near a decade low level. In the face of these difficult market conditions, we are taking actions to return ATI to profitability, maintain solid liquidity and improve our competitive position.

During the third quarter, we closed on a new Asset Based Lending revolving credit facility that secures our liquidity. We had $198 million of cash on hand as of the end of the third quarter and we also further reduced 2015 expected capital expenditures to $190 million, of which $90 million remains to be spent in 2015.

We recently completed a process to refocus our High Performance Materials and Components segment businesses into a more aligned and integrated business. I'll comment on this in greater detail later. In the Flat Rolled Products segment, the Hot-Rolling and Processing Facility is now back in full operation with repaired Rotary Crop Shear.

The repair was completed on schedule at the end of September and we are already seeing signs of the operating benefits of thinner coils and shorter reduction cycle times for our high-value Flat Rolled Products such as nickel-based alloys. Over the last five weeks, the HRPF has run at the same productivity level as before the work stoppage.

Here's Pat DeCourcy, ATI's Chief Financial Officer, for a more detailed discussion of the 2015 third quarter financial results.

Pat?.

Thanks, Rich. Turning to slide four.

As previously announced in the quarter, we recorded a LIFO inventory valuation benefit of approximately $76 million and an offsetting $76 million pre-tax non-cash charge for a Net Realizable Value or NRV inventory reserves, which are required to offset ATI's consolidated net debit LIFO inventory balance that exceeds current inventory replacement cost.

We're in an unusual inventory accounting situation due to the multi-year commodity and raw material deflation from most of our raw materials. Titanium scrap price deflation began in 2008. An overall decline in nickel prices over the last six years, as indicated by the chart on this slide, in particular, note the trajectory of nickel prices in 2015.

As a result, ATI is in a consolidated net debit LIFO position. This essentially means we cannot offset raw materials' FIFO loses with LIFO benefits, which some of our competitors are able to do.

Operating profit margins will likely be under pressure until end-market demand improves, base prices can begin to be increased and raw material prices stabilize and then begin to inflate. Turning to slide five.

As previously announced in the third quarter 2015, we changed our method of reporting business segment results to better reflect our true cost and performance. Our prior business segment results have been restated to reflect this reporting change.

Segment operating profit is now reporting excluding all LIFO inventory accounting and any related changes in net realizable value inventory reserves, which offset the company's aggregate net debit LIFO valuation balance.

In addition, segment operating profit is now measured including all retirement benefit expense attributable to the business unit for both current and former employees.

Previously, ATI excluded defined benefit pension expense and all defined benefit and defined contribution post-retirement medical and life insurance expense from segment operating profit. This change better aligns comparative operating performance following the 2014 U.S.

defined benefit pension freeze for all non-represented employees, which was replaced beginning in 2015 with the company-wide defined contribution retirement plan. Under ATI's previous reported methodology, defined contribution retirement plan expense remained in segment operating results but defined benefit plan costs were excluded.

Operating results for business segments, corporate, and closed company and other expenses now include all applicable retirement benefit plan costs for pension and other post-retirement benefits.

We consider these changes to be a more useful method of measuring business unit financial performance based on changes to the retirement benefit plans and the impact of the company's aggregate net debit LIFO position. Turning to slide six. Looking at the third quarter results from continuing operation, sales were $833 million.

85% of our sales in the third quarter were of high-value products. And international sales represented 44% of our third quarter sales. For our international sales, we have minimal currency risk in our High Performance Materials and Components segment sales since currency used for our sales to the international aerospace market is mostly in U.S.

dollars and most of our costs are incurred and paid in U.S. dollars. However, the relative strengthening of the U.S. dollar versus other currencies can impact our competitiveness for non-contractual business. Net loss was $145 million or $1.35 per share.

Excluding the non-cash charges for NRV inventory reserves and income tax valuation allowances, the net loss was $31 million or $0.29 per share. Turning to slide 7. High Performance Materials and Components segment sales were $474 million, a decrease of 7% compared to the previous quarter and 6.5% lower than third quarter 2014.

Segment operating profit was $18.8 million. As previously discussed, segment operating profit excludes all impacts of LIFO and NRV inventory reserves and includes retirement benefit expense attributable to the segment.

Compared to the second quarter 2015, High Performance Materials and Components segment results were negatively impacted by a 34% reduction in sales to the oil and gas market, very weak demand for our forged products from the construction and mining market, seasonal and quarterly demand from aerospace market and lower prices for nickel which reduced raw material surcharges.

Results also continue to be negatively impacted by lower operating rates at our Rowley titanium sponge facility. Flat Rolled Products segment sales were approximately $358 million, 30% lower than the previous quarter and over 36% lower than the third quarter 2014. Segment operating loss was $92 million.

Segment results exclude all impacts of LIFO and NRV inventory reserves and include retirement benefit expense of $14.7 million attributable to the segment. We maintained a solid liquidity position with $198 million in cash on hand and no borrowings outstanding under our $400 million ABL at the end of the quarter.

The five-year $400 million ABL facility is collateralized by accounts receivable and inventory of ATI's domestic operations. Compared to ATI's previous revolving credit facility, the ABL facility contains no leverage or interest coverage ratios and the borrowing costs are expected to be lower.

There is no impact on ATI's outstanding bonds as a result of replacing the previous facility with the ABL facility. The new ABL facility helps secure our solid liquidity position. We are pleased to have received strong support on the new facility from our banking group.

In addition, we lowered our estimated 2015 capital expenditures to $190 million from our previous estimate of $250 million. We invested $100 million in new CapEx as of the end of the third quarter. Now, I'll return the call back over to Rich..

19% jet engine, 13% airframe, and 7% defense. We continue to expect that the commercial aerospace market will be a significant driver of our profitable growth over the next five years, as production rates ramp for the next-generation engine programs and record backlogs at airframe OEMs are delivered.

With our focus on Creating Value Thru Relentless Innovation, we have secured important strategic positions on next-generation airframes and jet engines as a result of our technology, diversified products and integrated manufacturing capabilities. A leading indicator for growth in forgings and castings is called NPI, or new product introduction.

Our 2015 NPI production efforts result from a large number of new parts we were awarded by our strategic customers in 2014 and earlier this year. With our engineering expertise and advanced modeling technology, we have been successful in producing NPI components that are meeting our customers' delivery expectations as well as quality expectations.

These results help build our customers' confidence in ATI to achieve their forecasted production rate ramps. Our hot-die forging and casting capacities are filling to support good growth beginning in 2016. A significant number of these parts are for legacy and next-generation jet engines for single aisle aircraft.

High-volume single aisle engine parts represent significant growth expectations for ATI over the next five years and beyond. Slide 10 shows the market forecast of commercial aircraft build rates. The black line on this chart represents the number of next-generation airplanes in the build rate forecast.

As we have said, this is a good proxy for ATI's potential aerospace market growth trajectory since we have secured increased positions on many of the next-generation airplanes and the engines that power them. As you can see, significant growth is expected beginning 2016 and through at least 2019.

The arrow on this chart indicates growth expected from new parts on next-generation aircraft and engines. To consider the rate ramp and its effect on ATI, slide 11 demonstrates where we are in the cycle. The beginning of the next-generation rate ramp is a short time away. The grey area shows the number of legacy engines.

Our products here include such well-known alloys as ATI 718 nickel-based alloy and ATI 64 [ATI 64-MIL] titanium alloy. Currently in this space, prices are very competitive as all producers are attempting to hold their respective shares in the products they make.

As depicted on the slide, beginning in 2016, there is a more pronounced growth in the spread between the decline in demand for legacy products to the initial growth in demand for the next-generation products.

We believe that as we move toward the end of 2015, this demand shift is resulting in supply chain inventory management actions for legacy materials. The blue area shows the number of next-generation engines.

Our differentiated products here include proprietary and unique alloys as well as products that few others make, such as ATI 718Plus alloy, Rene 65 alloy, ATI 720 alloy, powder metals and titanium aluminides, as well as hot-die forgings, isothermal forgings and large titanium investment castings.

Plus, we have additional potentially significant products under development that use our leading technologies and production assets, and these development programs are being done in coordination with OEMs. For ATI, this slide demonstrates a significant mix shift that is in our backlog and schedules.

For the more differentiated next-generation products, we expect higher prices and better margins, reflecting the investments in technology and manufacturing capabilities that we have made over the last several years.

Slide 12 shows the reported OEM firm order book of the major engine programs, which, as of August 31, 2015, the most recent data available, stands at 21,700 large jet engines. The first five lines show the backlog for engines that power single aisle airplanes.

The firm order book for the next-gen engines for single aisle airplanes is now close to 12,000, another good indicator of ATI's growth potential.

Turning to slide 13, on August 3, 2015, we announced that as a next step in our strategy to reposition ATI as an aligned and integrated specialty materials and components business, John Sims was named the operating leader of ATI's High Performance Materials and Components segment.

I gave John the assignment to accelerate the integration of the separate businesses that comprise the segment into one aligned and focused business.

This effort is a strategic imperative as intense global competition and industry consolidation, combined with rapidly changing customer needs and expectations, are having a profound impact on the specialty materials and components industry. This alignment and integration is designed to create a more streamlined, cohesive and efficient business.

By eliminating administrative redundancy, we become more competitive and better able to more quickly react to our customers' needs, whether to develop a new product or technology, bid a new part or better react to emergent customer demand.

Our improved supply chain effectiveness and standardized continuous improvement processes are designed to help ATI improve efficiencies, reduce cost and accelerate our growth as we face the unprecedented aerospace rate ramp.

And we can better leverage and align all engineering and technical talent from melting and mill products to forgings, castings and machine parts toward our relentless innovation strategy.

As part of this initiative, last week, we implemented a reduction in salaried workforce in both the High Performance Materials and Components segment and at the ATI corporate headquarters. We expect approximately $23 million annually in reduced costs from these workforce reductions beginning in January 2016.

Fourth quarter 2015 results are expected to include approximately $6 million in severance charges as a result of these workforce reductions. As shown on slide 14, we are near the end of our extraordinary capital expenditure cycle that has transformed and modernized ATI.

We have built the foundation for Creating Long-Term Value Thru Relentless Innovation. We have secured our position to grow faster than the market during this once-in-a-lifetime aerospace market transition from legacy to next-generation airplanes and jet engines.

Capital expenditures in 2015, as we have stated, are now expected to be $190 million, down from our previous target of $250 million, due largely to push-outs of final HRPF payments into 2016.

Turning to slide 15 and a market update in the Flat Rolled Products segment, very challenging conditions in many end-markets, including very weak demand and record low prices for most commodity stainless products and temporary operational disruptions resulting from the August 15 lockout of United Steelworkers-represented employees.

These both resulted in 25% lower shipment volume in the third quarter 2015 compared to the second quarter 2015.

Standard stainless steel demand was significantly depressed, mainly due to unusually high domestic inventory levels that resulted from the first half 2015 surge of low-priced imports, primarily from China, and generally weak demand, which is affected by falling raw material surcharges.

The base selling price for a high-volume standard stainless sheet product hit a near-record low during the third quarter, and the price of nickel reached a near decade low. Many of our distribution customers tell us that they are operating with low inventories to minimize their exposure to falling nickel prices.

For the automotive market, we achieved HRPF qualification for our emission control alloys from additional customers. Demand and product mix continues to improve for our high-value Flat Rolled Products due to higher engine operating temperature requirements. 48-inch wide nickel-based sheet is a bright spot in Flat Rolled Products.

Single-stage benefits are being realized now that the HRPF Rotary Crop Shear is repaired. We are now better able to move forward with our new product development programs, particularly for advanced nickel-based and specialty alloys, as well as flat rolled titanium alloys.

From an operation standpoint, as we have stated, ATI Flat Rolled Products issued a lockout notice effective August 15, 2015 to more than 2,000 employees at various locations, due to lack of progress in ongoing contract negotiations with the USW. The labor agreements impacting these operations expired on June 30, 2015.

The facilities are currently being operated by ATI's salaried employees and temporary workers. After an initial expected drop in asset utilization due to the work stoppage, production rates have continued to improve, especially over the last five weeks. These facilities are meeting and, in many cases, exceeding output, quality and safety expectations.

Our Brackenridge, Pennsylvania and Latrobe, Pennsylvania melt shops are being operated safely and efficiently at over 90% of pre-work stoppage levels. Our Midland, Pennsylvania standard stainless melt shop has not been scheduled to operate due to weak demand and unacceptably low prices for our standard stainless products.

This approach will continue until the market demand improves. At the end of the third quarter, repairs were successfully completed to the Rotary Crop Shear of the HRPF. And over the last five weeks, the productivity of the HRPF has been the same as prior to the work stoppage.

The majority of our finishing facilities are being operated at or above pre-work stoppage levels. The output, reliability, and quality performance is progressing to pre-work stoppage levels, but this has been a challenge.

Recently, we had a problem at the Vandergrift, PA waste water treatment plant when a storage tank failed, which was unrelated to the work stoppage. The Vandergrift finishing facility is now back in operation. Turning to slide 16, unfortunately, we do not have a lot to report on the progress of labor contract negotiations.

ATI has engaged repeatedly with the federally-assigned mediator to help us make progress. We've met with the mediator by phone or in person several times since July. We continue to use any resources available to us to encourage the USW to reach a fair and a more competitive labor agreement.

To review our last best and final offer that was provided to the USW on August after negotiating with the USW from the spring through the end of the labor agreement on June 30, 2015 until mid-August 2015, first, these are great-paying jobs; among the highest wages in our industry or in any manufacturing industry in the world.

In 2014, ATI Flat Rolled Products spent about 40% more on healthcare than other national companies, and about 20% more than national companies, where the majority is union-represented employees.

For those employees who currently pay no monthly premium, ATI Flat Rolled Products proposed a pre-tax monthly premium for coverage beginning at $125 per month in the first year of the contract and gradually increasing to $215 per month in the fourth year of the agreement.

According to studies by the Kaiser Family Foundation, the current average American pays $402 in monthly premiums. The facts of ATI's Flat Rolled Products offer are available on a website, www.ati2015uswcontract.com if you're interested in seeing the details of our proposals.

Pension benefits for existing employees would not change as of the company's proposal. The company is proposing no changes to the current overtime provisions. And ATI Flat Rolled Products is proposing no changes to the current full-day and full-week wage guarantees.

We believe that these are some of the best jobs in the country from manufacturing positions and will remain so with the proposed contract changes; safe, well paying with benefits including competitive healthcare plans and retirement savings plans. We remain committed to reaching a fair and more competitive labor agreement with the USW.

Our goal is to have the cost structure and enhanced product mix that enables ATI Flat Rolled Products to be a profitable and more competitive business. In summary, these are challenging times. One of our investors recently said, with ATI, it seems that everything that could go wrong in your markets in which your raw materials has gone wrong.

Sometimes it feels that way. But we're not going to make any excuses. Our job is to return ATI to profitability as quickly as possible and execute our strategy for long-term profitable growth.

Our strategy includes being focused on actions to better align and integrate ATI's specialty materials businesses, to enhance ATI's competitive position and to continuously improve the cost structure and operating efficiencies of our businesses to achieve long-term sustainable, profitable growth.

In other words, to create economic value for our shareholders and customers and opportunities for our employees.

Emily, may we have the first question, please?.

Thank you. Our first question is from Gautam Khanna of Cowen & Company. Please go ahead..

Yes. Thanks. Good morning, guys..

Good morning, Gautam..

Hi, Gautam.

How are you?.

Doing all right. Thanks. I just wanted to ask two questions. One on what your expectations are for your ending cash balance at year-end and if you could comment a little bit directionally on CapEx in 2016..

Yeah. I'm going to let Pat answer the question on cash and then I'll respond to the question on CapEx..

Gautam, our cash balance is projected at $150 million at year-end..

And largely down because of the level of CapEx in the fourth quarter. A big part of that is some of the contractual withholds on the HRPF that we do expect to work through and make payment on, not all of them, but some of them. And then, as we look at 2016, we have not yet set our capital budget.

I can tell you that there will be some carryover payments on the HRPF, both in terms of the final acceptance test payment as well as some spares that are critical spares as part of running the HRPF. And then, we have two strategic projects that we'll be completing.

One is the expansion of the titanium investment casting facility in Albany, Oregon that will be completed early next year and then some significant spending on the $60 million new facility for powder materials in North Carolina. So – but in terms of other new spending, I expect it will be very low.

If you exclude the carryover on the HRPF, I would expect our capital budget to be in the range of $150 million, with a big part of that being the two strategic projects I had mentioned..

Got it. Thank you. And just one other one on the HRPF, could you talk a little bit about how it's operating? And a couple of years back, you'd talked about $150 million to $250 million of EBIT improvement. That was a different demand environment, pricing environment, et cetera.

But what should we expect on HRPF, given the current conditions in terms of its contribution to profits next year?.

Yeah. Well, it's certainly a different demand environment. The pricing environment has some impact on that, but really not a substantial amount, I think, early on. So, I think the – let me put it to you this way.

Without the HRPF and the ability of us to really produce and hot-roll all of our various alloys from the standard gradient to the high-value side pretty much seamlessly during the work stoppage, we would never been able to do that without the HRPF.

And I think that that demonstrates the automation and the level of automation and the level of sophistication of that asset. And we were doing that mainly until the end of September without the Rotary Crop Shear repaired.

We haven't backed off at all our fundamental belief in terms of the benefits of the HRPF, both from the standpoint of cost reduction, efficiency, quality improvements, and then eventually the ability to produce products that we could not produce before.

At the end of the day, in this market, in terms of looking at products like 60-inch wide commodity stainless sheet, in this market with demand where it is and where base prices where it is, we're not missing a whole heck of a lot by not producing that product.

And that's part of the reason why we haven't restarted the Midland melt shop, which is where we really melt those wire slabs, and we won't until the market conditions improve..

Okay. Thank you. I'll get back on the queue..

Thanks, Gautam..

Thanks, Gautam..

Our next question is from Jorge Beristain of Deutsche Bank. Please go ahead..

Hi. Good morning, guys. I'm just trying to....

Good morning..

Good morning..

Good morning. Maybe another question for Pat, I'm just to trying to bridge your EBITDA for this quarter.

And if you could just explain, of the $113.4 million of charges, are those all non-cash?.

Yeah, the majority of them are non-cash. That's correct; the tax valuation allowance and the NRV..

The majority? Could you be more specific?.

Yeah, virtually all non-cash, basically..

Okay.

And then is it correct to be thinking about the income tax valuation as an operating level add-back or is that something that's really hitting below the operating line?.

Below the....

Below the operating line..

Got it..

And on that issue, it's really dealing – you look at that from a tax jurisdiction standpoint, right? And that's really a U.S.-based issue, and we went through the same thing before back in 2003 at the last kind of deep trough of the cycle, which I – this feels an awful lot like that quite frankly, aside from the aerospace market.

And there are very strict accounting rules in terms of that whole issue. And within two years, that valuation allowance was reversed and we would expect the same thing to happen..

Okay.

And then just in terms of trying to put a normalized number on EBITDA, would you take the 70 – what is it – $72 million or something of your EBIT as your jumping off point and then simply add back the $48 million of depreciation, or is there something else we should also be thinking about in terms of add-backs to bridge back to a normalized EBITDA for the quarter?.

Yeah. Without getting into a lot of detail, the third quarter had a lot of unusual things going on, including the impact on P&L because of us building inventory early in the year in anticipation of a potential work stoppage, mainly a strike, quite frankly, was our thinking. And we built that at a time when nickel costs were much higher.

So, now, when we're selling it, with surcharges based upon nickel at $4.50 or less than $5, that's an impact to our P&L that flows through in the third quarter that you could argue is somewhat unusual.

And then the third quarter also had the impact of shutting down all the Flat Rolled operations, right, with the lockout, taking a week before really the plan began to roll out of how we were going to roll out the safe restarting of all those facilities, which really took, in essence, probably a total of about two to three weeks, and then the inefficiencies that we saw in the first month after that.

So, when you add those numbers together in terms of what we would view as unusual type of events specific to that issue, I think you're probably in the range of about $50 million in total. A big part of that is the raw material surcharge mismatch because of the building of inventory at a higher cost..

Thanks. Yeah, that's the kind of color I'm after. So, of the $50 million, you said the vast majority or the bulk of that is the raw materials. And I was also going to follow up and ask about the impact of the strike, but to put a number, would it be sort of $35 million and $15 million of a split in total....

Yeah. I would say it's probably closer to 50/50..

Got it. Okay. Thank you..

You're welcome..

Our next question is from Josh Sullivan of Sterne CRT. Please go ahead. And, Josh, your line is live. Perhaps it's muted on your end..

Okay, Emily. Josh – he can get back in queue then..

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

Hi. Good morning, everybody..

Good morning, Rich.

How are you?.

Good morning..

Very good. Thanks. Rich, I think this is a question for you, and it's a bit of a two-parter here. Listening to your comments on the stainless outlook, you noted challenging conditions. It just doesn't appear that you think the market is going to improve any time soon or in 2016, demand, imports, industry capacity, et cetera.

So, first question is, based on your experience, do you think that's a correct read of the situation? The second part is this, and it's kind of dependent on your first answer, your strategy in stainless. You've been pretty clear the HRPF is your enabler of your stainless strategy. You have maintained your intent to remain in the stainless business.

But given the market outlook and what's transpired, continued pressure for inputs and stuff, is now the time to start looking at maybe separating your stainless business from the aerospace part of the business?.

Okay. Well, first on the stainless market side, I don't have the view that the depth of the challenges in 2015 that are impacting stainless are necessarily going to continue into 2016.

I think the magnitude of the surge of China imports that really were, to some extent, largely directed to Europe, and then the Europeans brought a trade case and that flow of material was destined for an export market. They couldn't bring it in the – this is our view, right? They couldn't bring it in to Europe and then it found its way into the U.S.

really at a time where underlying demand was not great. It was okay, it was not great. But that was enough of a volume that really wrecked havoc on base prices and drove it to the level it is today.

And I would argue that the level of material that was brought in was so significant that some of it still remains in the supply chain, right? So, that's putting a lid on what I think are more normalized pricing even in a more moderate demand environment.

I do not believe, and I think history would suggest and support this, that the levels of pricing that exist in the market today are sustainable, because I don't really think anybody can either be profitable or if they are profitable, they're only marginally profitable. And that's not an acceptable way to run a business in any business.

So that was magnified by the precipitous drop in nickel that happened as the commodities were getting destroyed from an investment standpoint and nickel – even the nickel fundamentals, some of what you saw in the route on commodities was also due to fund flows coming out of the LME, not only in nickel but in other things.

And we're at a place now on nickel LME prices, where, for the vast majority of the production, the LME is below the cash cost for most producers. So, you're seeing producers making moves there that will gradually reach equilibrium.

I'm not predicting that nickel rebounds up to $6 a pound or something like that, but it pretty much bounced off of a $4.45, $4.50 floor because it's really not sustainable at that level. So, I think that 2016 demand profile, assuming the economy continues at a very kind of slow, moderate pace, I think 2016, from a demand standpoint, will be better.

The global supply/demand imbalance is still an issue, right? There is no doubt about that. And that's where cost reduction, that's where efficiencies, that's where a new collective bargaining agreement that is fair and more competitive, all that stuff comes into play, because this is not really a temporary situation.

So, that's my comments on the stainless market. From a strategy standpoint, your question, Rich, was geared more towards what's your strategy for stainless. And I would suggest that it really has to be asking the question of it's not just stainless, it's Flat Rolled, because you can't really separate stainless from all of the Flat Rolled business.

It's an integrated business. It brings economies of scale to melt shops and hot-rolling and finishing and everything like that.

So, the question – if you're asking the question more in terms of the strategy for Flat Rolled, I think that we've been very consistent in our strategy for Flat Rolled is it needs to be fixed, right? Our Flat Rolled Products business needs to be fixed. It needs to be more competitive. It needs to have a lower cost structure.

We need to continue to drive our strategy to more differentiated, higher value products, which the HRPF and our technology are enablers of, which the rest of ATI, in terms of the markets that the High Performance Materials and Components segment are focused on, there's tremendous market and customer synergies for the ATI portfolio products from High Performance and Flat Rolled.

So, it all works together, but we have to fix the Flat Rolled Products segment, and that is the strategy. Now, at the end of the day, right, my responsibility and our management team's responsibility and our board's responsibility is to do everything in our power to create sustainable, long-term economic value for our shareholders.

Everything we do is focused on that. And we will look at the business and make decisions that are based upon the best approach for us to achieve that goal..

Okay. You know what? I'll stick to that one two-parter. Thanks, Rich..

Thank you..

Our next question is from Timna Tanners of Bank of America Merrill Lynch. Please go ahead..

Yeah. Hi. Good morning..

Good morning, Timna..

Good morning, Timna..

Hey, Timna. You're cutting. We can't....

Can you hear me now?.

Yeah. We can hear you..

Yeah. Thanks. So, yeah, wanted to explore a little bit more the commentary on demand, and you noted that your inventory was high in the third quarter because you were caught with the surprise on the weaker demand environment as I understood it.

So, if you could talk a little bit about what it was in the quarter that caught you off guard? And then your opinion on the oil and gas sector, in particular, if we're near bottom or what the outlook is there?.

Yeah. No, I don't think I said that, Timna, about inventory and being caught off guard if that's how you interpret it, maybe I....

No, I found it in the release. Yeah..

No. No. That's okay. The comment on inventory is we built inventory under a customer protection plan in Flat Rolled Products in the first six months of the year in anticipation of a potential work stoppage because of the challenge of the upcoming contract negotiation.

And largely, what we were expecting was the possibility of a strike, quite frankly, because that had been threatened before in the previous negotiation and we would've been unprepared for that. So, I was not going to be unprepared in that scenario. So, we went about targeting an inventory build.

And then Flat Rolled, it represented about an $85 million inventory build in the first six months of the year. Now, that inventory build sustained us in terms of helping us meet the customer demands in the third quarter.

And arguably, it will continue to some smaller degree in the fourth quarter, because we did end up having a work stoppage, right? Not a strike, but a lockout.

But what we didn't anticipate and I don't think what anybody anticipated was that instead of dealing with $5.75 or $6 nickel, which is what it was when we melted it, we'd be dealing with the surcharge that was based on something less than $5. So, that was our comment on inventory..

Okay.

Can you address the question about the oil and gas market then, please?.

Oh, yeah. Well, it's a tough market and it has continued. I think maybe you're referring to a conversation we had in the second quarter earnings release about the depth and the breadth of the inventory correction in the oil and gas market was a surprise.

It was a surprise to us and, quite frankly, it was a surprise to most of our customers and I think that the underlying demand in oil and gas, while there are some areas that are okay, for the most part, it is very, very weak.

And we don't expect that to be changing based upon our assessment of the market or our conversations with our customers, which are wide and varied across different aspects of the oil and gas market. We don't believe that that's likely to change in the first half of 2016.

I think there are some views that there will begin to be some moderate demand improvement in the second half of 2016. That would be great..

Okay. And then I have one from Ron, who wanted me to ask a little bit on the aerospace supply side..

Yeah..

He referred some comments lately from Alcoa, talking about greater competitiveness, also greater opportunity, but also increased competitiveness among suppliers.

And he wanted to know, in addition, with PCP being privatized or taken more private, what do you think that means in terms of their competitiveness or how they'll operate as a competitor?.

Yeah. Well, I mean, look, PCC is a big company that has very important strategic positions with virtually all of the OEMs in both the engine and airframe side. I don't see that changing. I think that the OEMs like a diversified supply base. They don't like to be overly reliant on one supplier. I think that creates opportunities.

But you have to have a good product, you have to have good technology, and you have to be competitive. And that has been the case, quite frankly, for the last three or four years, if not longer. I think that will continue to be the case and we don't intend to shrink from that..

Okay. Thanks..

Thank you..

Our next question is from Steve Levenson of Stifel Nicolaus. Please go ahead..

Thanks. Good morning, everybody..

Hi, Steve..

Hi, Steve..

Has anything come up that would give you any reason to think there is a change in demand for jet engine parts in 2016 and 2017, particularly for the LEAP engine? For example, anything that would interrupt the schedule..

No. As a matter of fact, it's probably the reverse.

Its more inquiries about can you ramp higher and faster?.

And is that limited to LEAP or is that other engines like Trent XWB, for example?.

Well, I think most of it is really limited to the LEAP. I think that there are some – obviously, the XWB family and the large order on the A380 is having an impact on increased demand from Rolls that was unanticipated before that order.

And I think that the demand for powder and isothermal forgings as it pertains to the wide-body, next-generation engines from two of the OEMs is very significant. And is quite frankly an aggressive rate ramp in 2016 and 2017 and 2018. And we think we're well positioned for that.

But to answer your question of do – if we've seen any signs maybe of anybody backing off that, the answer is absolutely not..

Okay. Thanks.

And second, can you tell us what's going on between operations at Rowley and purchased PQ sponge?.

Yeah. As we said in the second quarter call, we are operating Rowley at what we – and we will continue to operate Rowley at what we consider to be the minimum level of efficiency, which means, in total, we'll probably producing between 13 million and 14 million pounds of sponge at Rowley in 2016.

The largest percentage of that will obviously be PQ, premium quality sponge, although as part of the normal manufacturing process you also produce some SQ sponge with that as well.

We have our external purchases or the vast majority of our external purchases secured through 2018 with pricing and supply arrangements that we believe are good and competitive..

Got it. Thank you very much..

Thank you..

Our next question is from Phil Gibbs of KeyBanc. Please go ahead..

Hey, good morning. Tyler Kenyon in for Phil Gibbs..

Hi, Tyler.

How are you?.

Good morning, Tyler..

Good, good. Just a question on the inventory.

In an environment where you see, call it, $4.5 billion, $5 billion in sales, what kind of level of inventory do you see as being appropriate for that type of an environment?.

Well, I'll tell you – I'll answer the question this way. Our inventories are too high. And that's more from an operational efficiency and a continuous – and a lean manufacturing concept than anything else.

When I look at our inventories on a consolidated basis, I think at this point in time we should have inventory turns that are, at a minimum, four times. We are not at that level. We're closer to three.

Now, there are pieces of our business, for example – setting aside the CPP inventory in Flat Rolled, our inventory turns on the commodity sheet product are very good. We turn that inventory seven or eight times a year, if not more. We do have more elongated manufacturing cycle times that have inventory turns that are much lower than that.

But from our planning standpoint and our strategic plan and our 2016 planning and our execution, our goal is to achieve and sustain inventory turns on a consolidated basis of four times.

Pat, do you want to add?.

No, I think that's it. We target our managed working capital as a percent of sales at 30% or lower. So, we will get back to those historic levels as we move in through 2016 and the CPP is fully utilized..

Thanks. I appreciate it. This is Phil now jumping back on..

Hi, Phil..

I had a question – hey. Good morning. I had a question, too, on Brackenridge. In your slide deck you had said that it got to 70%.

And so, I was just curious what that 70% meant in terms of utilization or how you're thinking about that number, what it's related to?.

Yeah. I think that probably means 70% of where we were during a more normal demand market in the second quarter. So, we're probably mixing up there the level of production from a volume standpoint versus productivity.

When I look at the productivity on a machine hours basis, a machine per pound, right, which is how you really run the HRPF, if you look at the five weeks prior to the work stoppage compared to the last five weeks, we are at the same level of productivity in the last five weeks as we were at the five weeks prior to the work stoppage at HRPF..

That's extremely helpful. And I just have a higher level philosophical question, Rich.

On the dividend, I know that you are in a low point in both of your businesses because of commodity prices and destocking, but how do you look at setting that dividend over the course of the cycle? Is it based on a targeted payout ratio? Is it based on cash flow generation? What are we thinking, that that's free cash? How do you view setting that dividend policy?.

Yeah. I think both of those metrics are important metrics through a cycle. Obviously, if you look at our dividend payout here over the last several years based upon a percentage of earnings, or lack thereof, the dividend has been higher than what one would normally target for.

But I believe and our board believes that the dividend is an important component of total shareholder return. I think a stock like ATI needs to do everything in its power to make sure that it can pay and sustain a dividend. It fundamentally is – you have to earn it over the long-term and you have to generate the free cash flow to do that.

We have been able to navigate the last several years in maintaining our dividend. And my preference would be for us to continue to do that and to figure out how to do that. And I think we have the capability to do that. And ultimately, it's a board decision, but the board would look to me and our recommendation in terms of what we think.

But the dividend is an important part of our strategy of creating value for shareholders..

Our next question is from Josh Sullivan of Sterne CRT. Go ahead..

Good morning..

Good morning, Josh..

Josh, good to hear you..

The High Performance business, assuming oil and gas next year, (56:33) what kind of margins were you looking for in 2016, just including some of this restructuring, the higher utilization on the aerospace assets and, again, just trying to understand the High Performance segment right now..

Yeah. I think – we're in the process right now of finalizing our 2016 and our next five-year strategic plan. I think we'll be – the easy thing for me to say and the obvious thing is better than – higher than 2015, right? But from where we are in the fourth quarter, that's not heroic.

So, what we have said from a long-term standpoint, that's a business, that's a segment that the segment operating profit should start with a 2, and be double-digit, right? And is that possible in 2016, where we think some of the end-markets are? Well, maybe not. But we're going to do the best we can.

And I still think that that segment, when you look at where we're positioned, not only in aerospace, but in other important markets, we didn't talk a lot about – the oil and gas market right now is tough and challenging, but there's a tremendous amount of technology development and activity we have going on with major oil and gas customers that will begin to be realized when the demand recovers and the market returns.

So, nobody is sitting there saying, oh, woe is us, what can we do? Nobody really wants to buy anything.

There's a lot of activity going on from a product development and a technology development that will pay dividends in the future, so – and a large part of that is not only within High Performance Materials and Components, but it's also within Flat Rolled Products.

So, I think we'll be better equipped with more facts as opposed to views and opinions when we talk about the fourth quarter and we have fully completed our 2016 plan..

Okay. Thank you..

Thank you..

Thanks, Josh..

This concludes our question-and-answer session. I'd like to turn the conference back over to Rich Harshman for any closing remarks..

Okay. Emily, thank you, and thank you for joining us in the call today. And as always, thank you for your continuing interest in ATI..

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..