Danny L. Greenfield - Allegheny Technologies, Inc. Richard J. Harshman - Allegheny Technologies, Inc. Patrick J. DeCourcy - Allegheny Technologies, Inc. Robert S. Wetherbee - Allegheny Technologies, Inc. John D. Sims - Allegheny Technologies, Inc..

Gautam Khanna - Cowen and Company, LLC Richard T. Safran - The Buckingham Research Group, Inc. Timna Beth Tanners - Bank of America Merrill Lynch Josh Ward Sullivan - Seaport Global Securities LLC Philip N. Gibbs - KeyBanc Capital Markets, Inc..

Good day, and welcome to the Allegheny Technologies First Quarter 2017 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dan Greenfield. Sir, please go ahead..

Thank you, Steve. Good morning, and welcome to the Allegheny Technologies conference call for the first quarter 2017. This conference call is being broadcast on our website at 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 the Chief Executive Officer; and Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer.

Also attending are John Sims, Executive Vice President, ATI High Performance Materials & Components segment; Bob Wetherbee, Executive Vice President, ATI Flat Rolled Products Group; and Kevin Kramer, Senior Vice President, Chief Commercial & Marketing Officer.

All references to net income, net loss, or earnings in this conference call mean net income, net loss or earnings 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, 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. First quarter 2017 sales grew by 14% compared to the same period last year. Net income was $17 million compared to a significant loss in the first quarter 2016.

ATI is realizing the benefits of our growing content on next-generation aircraft and is beginning to benefit from the actions taken to improve our cost structure. First quarter 2017 results represent important progress in achieving our goal to return ATI to sustainable long-term profitable growth.

Looking at our business segments, our High Performance Materials & Components segment, sales to the commercial aerospace market increased 8% compared to the fourth quarter 2016 and 7% overall, and first quarter operating profit was 10% of sales.

Our Flat Rolled Products segment achieved sequential sales growth of 11 % and an operating profit of 5% of sales.

Turning to slide 4, the six-quarter view of our High Performance Materials & Components segment results shows the benefits of growing demand from the aerospace market and the actions we have taken thus far to improve the segment's cost structure.

High Performance Materials & Components segment sales increased 7% to $510 million compared to the fourth quarter 2016. Segment operating profit was approximately $51 million or 10% of sales, including $2 million in start-up costs associated with our new nickel alloys powder facility.

Sales to the aerospace and defense market increased 6% and represented 75% of segment sales; 43% jet engine, 20% airframe and 12% government aero/defense. First quarter 2017 results also included higher sales to the oil and gas, medical, transportation and other industrial markets.

Bakers Powder Operations, our new nickel-based powder alloys facility in North Carolina, began operations in the first quarter 2017.

So, on a sequential quarter basis, what are the reasons for slightly lower operating profit as a percent of sales after taking into account the Bakers' start-up costs given the overall increase in sales? Well, the first quarter 2017 results reflect jet engine supply chain balancing that resulted in a higher mix of legacy mill products in the first quarter of 2017 compared to the fourth quarter of 2016.

Sales of our differentiated alloys were slightly lower in the first quarter than the fourth quarter due largely to strong customer pulls at the end of 2016. However, strong demand continued for our differentiated alloys as shipments in the first quarter of 2017 were the second best quarter for the sales of these products in our history.

As we have previously discussed, ATI's differentiated alloys are used to produce parts and components in the next-generation engine platforms. Our forging customers order a large amount of alloy billet as they tool-up or go through new product introduction process.

Once tooling is completed and the part manufacturing processes is stable, customer demand for these alloys becomes better aligned with the underlying jet engine ramp. As a result of this periodic rebalancing, we expect sales of our differentiated alloys to increase in the second quarter 2017 and throughout the remainder of 2017.

The first quarter saw an increase in demand for our legacy products such as triple melt ATI 718 nickel-based superalloy. This increase can be attributed to some strong demand from aftermarket, combined with an increase in emergent demand from our customers due in part to issues at other suppliers.

In addition, shipments of ATI's forged parts for next-generation jet engines increased 15% in the first quarter 2017. The important takeaway is that our next-generation production rate ramp continues on track.

We expect to see continued growth in our differentiated mill product shipments and next-generation forged parts sales as we progress through 2017, which is expected to result in improved segment operating profit margins over the balance of the year. An update on our titanium investment castings business, which has been experiencing growth challenges.

While more work remains, our operating team has made significant progress in increasing capacity and improving delivery performance as a result of actions taken throughout the last 12 months. We have made and are continuing to make significant progress on ramping up production to meet the commitments we have made to our customers.

I have strong confidence in John Sims and his team to continue improving the performance of our investment casting operations. Slide 5 also tells a meaningful story. The six-quarter look shows continuing significant improvement in operating results of our Flat Rolled Products business.

We have made many tough decisions to return this segment to sustainable profitability, and we will continue to do so.

Our strategy is to reposition and restructure our Flat Rolled business to be a leaner, more streamlined, efficient and cost-competitive business that is more focused on differentiated products that have higher technical barriers to entry and serve markets that are global with attractive longer-term growth prospects.

This strategy is critical to this business delivering sustainable profitability. The Flat Rolled Products segment achieved improved results in the first quarter of 2017 with 11% higher sales compared to the fourth quarter of 2016 and an operating profit for the first time since the third quarter of 2014.

Sales to the automotive market were 20% higher and sales to the oil and gas market were 9% higher due to project-based demand for chemical and hydrocarbon processing.

Flat Rolled Products segment operating profit improved to $19 million or 5% of segment sales on higher selling prices and a $6 million one-time benefit from change in the ferrochrome surcharge calculation method.

Importantly, Flat Rolled Products segment results are beginning to show benefits of our significant cost reduction and operating improvement initiatives, including the benefits from our HRPF. Here is Pat DeCourcy to comment further on our first quarter results.

Pat?.

Thanks, Rich. Turning to slide 6. At March 31, 2017, cash on hand was $160 million and available additional liquidity under our domestic Asset-Based Lending facility was approximately $230 million, with $60 million borrowed under the revolving credit portion of the ABL.

Managed working capital increased to $11 million in the first quarter of 2017, but decreased as a percentage of annualized sales due to increased business activity. We continue to estimate that 2017 capital expenditures will be $125 million, with $25 million expended in the first quarter.

Beyond 2017, we continue to expect capital expenditures to average no more than $100 million annually for the next several years. We are again at the end of our extraordinary capital expenditure cycle that has transformed and modernized ATI.

We also made a $135 million cash contribution to the ATI pension plan in March 2017, which completes our funding requirements for this year. Cash generation from operations remains a key focus.

We generated positive cash flow from operations in the first quarter of 2017, excluding the ATI pension plan contribution, even with modest growth in managed working capital. We do not expect to pay any U.S.

federal income taxes in 2017 due to net operating loss carry-forwards, and we intend to carefully balance our working capital and other cash needs with the pace of our capital expenditure requirements and financing obligations.

We have support from our agent bank to extend the duration of our $100 million ABL term loan from the current expiration date in November 2017 to September 2020 subject to customary due diligence and other closing activities. We expect to finalize this term loan extension in the second quarter of 2017.

This action is being taken to reduce uncertainty and provide additional flexibility.

As earnings continue to improve in 2017 and beyond, the resulting annual free cash flow after necessary capital expenditures will be used primarily to reduce debt, improve the funded position of the company's defined benefit pension plan and improve overall liquidity.

We are focused on creating long-term shareholder value while returning ATI to sustainable profitability, strengthening our balance sheet and restoring and maintaining financial flexibility and strong liquidity. Now, I'll turn the call back over to Rich..

Okay. Thank you, Pat. Turning to slide 7. For the first quarter 2017, sales to the aerospace and defense market were 48% of total ATI sales. Jet engines accounted for 26% of sales, airframe represented 15% and sales to government aerospace and defense were 7% of sales.

ATI sales in the first quarter of 2017 to the oil and gas markets were approximately $93 million or 11% of total ATI sales, an increase of 15% compared to the fourth quarter 2016 sales to this market. While sales to the oil and gas market have improved, demand remains low compared to historic levels.

Importantly, we continue to see signs of improving demand from the oil and gas market, not yet a trend, but indicative of a market that has bottomed and is beginning to show signs of life. Turning to slide 8, at the beginning of the year, we think it's helpful to look at past trends and where we believe some of the key markets are going.

We began with aerospace and defense, our largest market. Our jet engine business has been growing and we expect that trend to continue and to accelerate. We have been awarded significant content on new engine programs, particularly content gains of our differentiated alloys, forgings and titanium investment castings.

There has been some market discussion of an inventory correction in the airframe supply chain. We are not seeing this in the demand for titanium mill products, our major airframe product.

We expect our airframe sales to remain relatively flat at a high level as content gains for titanium in new models offset lower legacy build rates, which should use less titanium. Defense is a target growth market for ATI, and we are beginning to see some early positive results.

We were recently awarded a titanium armor package that is new to ATI and shipments will begin in the third quarter of this year. As previously reported, ATI 425 titanium alloy has been qualified for the leading edge of helicopter blades. Shipments began to grow this year.

Also, we are seeing growing interest in our flow-form products for defense applications and we expect this interest to turn into demand as we move beyond 2017. Turning to slide 9, this slide shows how we view this aerospace cycle. You've seen this slide from us before. The white area shows the number of legacy jet engines.

The green area illustrates the projected number of next-generation jet engines. There is a pronounced difference in the spread between the declining demand for OEM legacy products and growing demand for the next-generation products.

The year 2020 not only shows more jet engines being built in total, but it is also nearly all green, meaning the majority of the engines expected to be built are next-generation platforms. This is a good visual depiction of ATI's growth opportunities in next-generation jet engines.

These growth opportunities are supported by long-term agreements with our customers that run into the next decade. To provide a metric for our growth, last year, we introduced you to four of our differentiated mill product alloys that are being used in a significant way on the next-generation engines.

In 2016, sales of these products, including internal and external, reached record levels and increased by 55% compared to the previous year. Sales of our differentiated products are scheduled to continue to grow in 2017 and through the end of the current decade. As we have said, sales of mill products lead sales of forged parts by as long as one year.

In 2017, we introduce a more comprehensive metric of ATI's next-generation content growth. This metric adds our differentiated mill products, plus our isothermal and hot-die forgings, plus our titanium investment castings that are used on next-generation jet engines listed on this slide.

As of the first quarter of 2017, our products for next-generation jet engines totaled just over one-third of our jet engine sales. Future next-generation growth follows the green area. As 2017 begins, over one-third of our jet engine sales are for next-generation engines.

This percentage of sales is expected to be much higher in 2018, and then again in 2019, and then, again in 2020. ATI's primary value proposition resides in materials science, the science of staying ahead by developing innovative products for the next generation. We will continue to innovate.

We will continue to focus on improving our competitive cost structure. We also know that today's specialties are tomorrow's commodities. So, relentless innovation in everything we do is critical to providing sustainable long-term value for our customers and our shareholders and opportunities for our people.

Turning to slide 10, now let's briefly discuss the trends in our key non-aerospace markets. The three-year significant fall in sales to the oil and gas market stands out. That's a $475 million drop in sales from 2014 to 2016, a significant drop of profitable sales for ATI.

We saw a modest recovery from these markets in the first quarter of 2017 as we have discussed, and we believe this is the beginning of reversing this multi-year downward trend. We see – the demand for our products from these market's gradually improving in 2017, not a big tailwind, but better nonetheless.

Demand from automotive market remains steady in the U.S., Europe and Asia. Automotive is one of Flat Rolled Products' largest markets. You see the drop from 2015 to 2016 that resulted mainly from our reduced exposure to commodity stainless used in exhaust – auto exhaust applications.

ATI is benefiting from demand growth for our nickel-based alloy and specialty alloys required to meet hotter engine temperatures and from the growth in the Asian automotive market via our STAL joint venture. For electrical energy, reduced sales from 2015 to 2016 resulted from our exit – from the grain-oriented electrical steel business.

This product had been – is used and have been used and produced by us for the power distribution transformers. In the electrical energy market, demand from renewables and nuclear energy remained steady with demand from commercial nuclear at a relatively low level.

We see improving demand for our specialty materials and forgings used in land-based gas turbines, and we're also beginning to see growth in demand from some of our differentiated Flat Rolled Products, as a result of global sustainability regulations that require emissions scrubbers for ships and pollution control systems for coal-fired plants and industrial plants, mainly in Asia.

Our medical business remains good and continues to be about 6% of ATI's sales. It consists of titanium alloys, nickel-based alloys, specialty alloys and zirconium and niobium alloys, primarily for knees, hips and MRI machines.

On slide 11, we provide key points on the oil and gas and electrical energy market from the perspective of our High Performance Materials & Components segment.

First in oil and gas, we are seeing that recovery in the North American onshore drilling sector has led to improved sales of our specialty alloys and forged products in support of hydraulic fracturing in the oilfield services supply chain.

High Performance segment sales to the oil and gas market increased by nearly 60%, although still at historically low levels. Inquiry activity remains active and we expect 2017 to be better than 2016. As a reminder, demand from this market fell dramatically in the second half of 2015 and remained very low through 2016.

Turning to the electrical energy market, we continue to see improving sales activity from our gas turbine customers for specialty materials and for our forged products. In Japan, the nuclear industry is making gradual progress towards restarting some of their reactors.

During the first quarter, we received our first order from Japan for our zirconium nuclear energy products since 2012. Turning to slide 12, the oil and gas markets are also showing signs of life in our Flat Rolled Products segment. Sales increased by approximately 9% compared to the fourth quarter of 2016.

Low-cost natural gas in the United States is creating demand in downstream markets, such as chemical processing, hydrocarbon processing and liquefied natural gas. Flat Rolled Products segment sales to the electrical energy market increased to over 20% compared to the fourth quarter of 2016.

Pollution control activity increased, as we are seeing more inquiries and orders for marine scrubbers and for pollution control projects in China. Moving to slide 13, the first quarter 2017 results are a good start towards achieving our goal of achieving sustainable, long-term profitable growth, but we are far from satisfied.

We are focused on building a business that has a strong balance sheet and is capable of generating strong cash flow. This requires making decisions and taking actions that place priority on innovation and differentiated products that can create value for our customers and shareholders over the long term.

It requires our businesses to be lean and efficient, while creating great opportunities for our people. The restructuring actions that we have been implementing over the last year, while difficult, are integral to returning ATI to sustainable profitability.

As we have discussed, demand from the commercial aerospace market remains strong and is growing for our differentiated and next-generation products. We are seeing signs of improvement in several of our industrial markets, such as oil and gas, in electrical energy and also in construction and mining for our forged products.

In our High Performance Materials & Components segment, we expect to continue to increase the pace of profitable growth throughout our operations, driven primarily by increasing demands from the commercial aerospace market.

In 2017, we expect High Performance Materials & Components segment revenue to grow about 10% and segment operating profit to be in the low-double digit level as a percentage of sales.

We expect to benefit from our lower-cost sponge mix in the second half of 2017, as the remaining titanium sponge produced at our Rowley operations works its way through inventory. While more work remains, our Flat Rolled Products segment is making progress towards sustainable profitability.

As we continue to reposition this business to a higher-value product mix, we expect shipments of our specialty coil and plate products to improve in 2017, and to continue to benefit from the capabilities of our hot-rolling and processing facility.

We also continue to seek opportunities to leverage the capabilities of our HRPF to advance our long-term profitable growth objectives.

We expect the Flat Rolled Products segment to remain at low-single digit level of a percentage of sales from a profitability standpoint after adjusting for the first quarter's positive impact from the ferrochrome surcharge benchmark change.

As we move into the second quarter, we remain cautious about Flat Rolled Products as prices of raw materials have eroded since the first quarter and our visibility in the second half of 2017 remains limited. Also, while improved, conditions remain challenging in the oil and gas market, which is a very important market for Flat Rolled Products.

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

Okay. Thank you. We will now begin the question-and-answer session. And our first question comes from Gautam Khanna with Cowen and Company. Please go ahead..

Yes. I was wondering if you could talk a little bit more about the supply chain rebalancing you mentioned, and specifically, if that has actually rebounded now in terms of orders as we exited Q1 and as we look forward to Q2 and beyond..

Yeah, Gautam, I think that what really happened was that there was a strong pull at the end of 2016 for some of the new product platforms that as we head into the first quarter of 2017, we would expect that demand to remain at a relatively high level.

And it really isn't until we get into the quarter that we see that the pull was stronger and really a result of just filling some of the supply chain gaps that existed.

And as we work our way through that and get feedback from our customers, we realized that it doesn't change the underlying fundamentals of growth for the demand of that product – those products. We know what – we're pretty confident of what that is because we know how engines are going to be built.

I'd like to say that – that the business – or that our business and our markets operate on a continual progression quarter-to-quarter. Unfortunately, that's not the case. It does tend to be a little lumpy at times. And if you look out over a longer period of time, say, two to four quarters, you get the trend and what the growth is.

And we expect that to – we remain very confident that 2017 demand for the differentiated products and the new products, not only from a mill product standpoint, but also from a forged product standpoint, will be a significant growth in 2017 over 2016..

Okay. And was it more pronounced on the LEAP program versus like the PW 1000 (26:30)? Or can you give us any sort of program specifics where you saw the acceleration in Q4 and the deceleration....

No, I mean, I think it's where the products – you know what products we're talking about, right? We're talking about Rene 65, we're talking about the Alloy 720. And those were pulled very heavy – and powder alloys – those were pulled very heavy into the fourth quarter and weren't pulled as heavy at the end of the first quarter.

And I think over time, that rebalancing fundamentally resets itself into how many engines are being built. We're not seeing any significant change from a customer standpoint in the overall demand of that product – those products year-over-year. It's a timing issue..

Okay. And you – understood. You also, I think, made a comment about maybe one of the competitors falling a little short and that confirms some opportunity.

Could you just expand on where specifically you're seeing that? And maybe if you can quantify either the size of it or how the duration of the orders that you expect to get because of that dynamic?.

Yeah. Well, I mean, I think the specific reference I made was on triple melt 718 and stronger demand in the first quarter than what we would have expected from the standpoint of the contractual requirements that we have.

That periodically happens, right? I mean, it doesn't happen every quarter that – I think we're – I think we're pretty good, matter of fact, very good at making triple melt 718 for rotating quality applications. Quite frankly, I think we're the best. And when there is a hole in the supply chain for whatever reason, we get the call.

And that's a good position for ATI to be in. I think we're also in kind of the same position on the parts standpoint as it pertains to isothermal forgings. And that has happened in the past, it will happen in the future, I think. And that's also a testimony to the people that we have and the capabilities that we have in this company..

Thanks, Rich. One last one for Patrick before I get off. (28:58) still expected to be 10%. And secondly, if there's any plan to reallocate the pension costs that are outside of service cost below the line outside of the segments anytime soon? Thank you..

Yeah. So we expect, as we said in the guidance, that operating margins will improve as we go throughout the balance of the year in High Performance, so above that 10% level that we showed in Q1.

And on the pension question, we are going to adopt in the first quarter of 2018 and we think the overall impact will be an increase to our EBITDA, but it will be based on the conditions that are in place when we adopt that new standard in the first quarter of 2018..

And our next question comes from Richard Safran with Buckingham Research Group. Please go ahead..

Rich, Pat, Dan, good morning..

Good morning, Rich..

Good morning, Rich..

First off on the – a bit of a multi-part question here. I think you may have answered some of it, but I want to try again. On the aerospace mix, again a multi-part question, I wanted to know how we should think about the aerospace mix now and how that's going to impact the cadence of margin improvement throughout the year.

So you mentioned the richer mix for Q2, do you have any comment on the rest of the year? We are seeing a fivefold increase in the LEAP in build rates.

How does the mix of shipments trend this year as we get the ramp-up of the LEAP and the ramp-down of the CFM56? And is the mix going to be impacted by the aftermarket here?.

Yeah, I think that the – it can be impacted by the aftermarket because of the demand from those engine platforms. And I think that probably had something to do with the stronger demand from some of the legacy products.

I mean, look, we call them legacy products, but they are good products, right? I mean, we're the leader in those in that rotating quality material and we'll take all we can get, right, of that.

I think the overall mix – and the mix is the right way to think about it in the first quarter, the overall mix was not as rich in terms of differentiated and new products as we would've expected. That was due to a richer mix because of earlier pulls in the fourth quarter than what traditionally would've expected to take place in the first quarter.

That's the rebalancing that happens. I think that as we look at the rest of the year and we see what the engine build schedules are, I think that you'll see a richer mix in the – from the second through the fourth quarter of those products.

Will we see a stronger-than-expected demand from some of the legacy products because of a stronger aftermarket demand? Yeah, we could. We could. I mean, I think that one of the engine OEMs indicated that they were seeing a 25% growth in aftermarket in their earnings call last week.

So I think that speaks to a part of what we saw in the stronger – the stronger demand for some of the legacy products in the first quarter.

So time will tell, but I think fundamentally, the richer mix growth of the products that are differentiated that we have very strong positions in, including basically the position in Rene 65 and very strong positions in the iso-forgings and in powder, I think that will continue to be favorable to us into – the rest of 2017, as well as beyond..

Okay. Thanks for that. Now I'd just like to shift quickly to government and defense. As you know, we've been looking at increases in defense spending. Wanted to know what the major programs are that drive government and defense business.

I mean, is it pretty much driven by just the F-35? And if F-35 build rates are continuing to rise, does defense start to become a much bigger part of sales, and that is, is that comparable margins? You also know international demand and defense demand is growing and could you talk bit more about that, what products and what areas?.

Yeah. I think that historically – when you look at the High Performance Materials & Components business, historically, the demand was on materials for engines, fighter jet engines, as well as on naval nuclear, right? So – and then on the Flat Rolled Products, historically, it was in armor.

And a growing opportunity for us – a consistent opportunity, but growing going forward, I think it's especially in some of the flow-form applications, it's in munitions and it's in artillery, and it's in missiles and components. So I think as we – we take a holistic look at the defense market.

I think you've heard me say before that ATI, given our product mix and our technology capabilities, we have been under-serving the defense market. I still believe that.

We've taken actions in order to address that by making it a specific, strategic focus market for us and by being better connected with the DoD, in Washington as well as with the legislative process. So, we have resources in place that we've never had in place before. And that is leading to – growing your presence in defense is a journey.

It's not something that happens overnight. You have to be plugged into the programs, you have to know what the technology challenges are and how do we map ourselves and to be a solutions provider into that market, and that's what we're doing.

So, I think as you look at the defense market and the defense budget going forward, I think the opportunities for ATI continue to be on jet engine platforms, it continues to be – we're not on the F-35 from the standpoint of titanium mill products today.

That opportunity is out there beyond 2020, but it's not something that's going to be there within the next couple of years based off of the contractual arrangements that are in place. I think that missiles and components and armaments and the naval shipbuilding program are significant opportunities for ATI.

Those will evolve and emerge over the next 12 to 18 to 24 months, and we're focused on how do we bring our capabilities and our technologies to be an outstanding supplier in the defense market, just as we are in the aerospace market..

Well, I appreciate that. Thanks very much..

Thank you..

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

Yeah. Hey, good morning, guys..

Hi, Timna.

How are you?.

Good morning..

Hello.

So wanted to ask a couple of things on the present Trump Section 232 discussions related to steel and national security, does that affect electrical steel or stainless steel? Does that have any bearing on you or your defense position?.

Maybe. I think that when you look at Section 232, which, I'm sure you know, has been a – on the book since 1962, right? So it's not new. It's really only been used twice before. However, on the specialty metal side, the specialty metal side, there's been a Specialty Metals Amendment on the books going back to World War II.

And ATI – it's essentially the same focus, right? It is focused on the critical nature of the technology and the capabilities of the U.S.

to have the capabilities of having a nickel superalloy capability, a titanium alloy and a specialty materials capability because all of those products and technologies are necessary to having a modern, efficient, capable military. And so that's the tie into national security.

So I think that it remains to be seen where the administration's focus is going to be on Section 232. I think taken at the words that are being spoken, I think some people are framing it in too narrow of a focus in my opinion.

They're focusing on the comment that – on carbon steel, for example, while there is no big demand as a percentage of total carbon steel production in the U. S. from the DoD. That's a far too narrow framework to take it in.

The fundamental issue is that in order – from a national security standpoint, to your point on GOES, you need to have an electric grid from the capability of defending your nation and having security; you need to be able to move materials around.

So, you need buildings and you need bridges and you need the underlying capability that all these materials are being used for.

And any country in the world that has a capable functioning military has the capabilities of making carbon steel and stainless steel and specialty metals and titanium, et cetera, because they need it for their national security. So that's I think the purpose of the Section 232 initiative of the Trump administration. And we'll see what happens..

Okay. So to summarize, it's a small percent, like you said, of carbon steel. It's actually pretty important for specialty steel.

It's unclear whether or not specialty steels are encompassed in the investigation or the review as it stands, but if it were to be encompassed, it could be interesting now (39:19)?.

No, I think that – yeah, I didn't say it's unclear. I mean, I think that we know that SSINA, which is the Specialty Steel Trade Association, SSINA has been contacted by the administration for information and data to support the Department of Commerce's investigation.

So I think that the administration is focused on the specialty metals and the specialty materials part of our economy..

Interesting. Okay. Thank you for that. I wanted to ask about your comments about leveraging the HRPF and still investigating that.

What exactly do you mean by that now? What kind of alternatives are you considering there?.

Well, it's premature to talk about what we're considering other than we continue to have some conversations, not only from a tolling (40:17) standpoint, but broader than that. And the capabilities of the HRPF are significant as we have talked for many years about.

And others are interested in that and when we have something more tangible to talk about, we will, but there are ongoing active conversations.

Bob, do you want to comment further?.

Yeah, I think to echo there, Rich, on the operating side, when we look at the HRPF, we're definitely leveraging to get more mill balance using our reversing mill or breakdown mill to accelerate the productivity, throughput, flow time, our grinding capabilities, our thermal capabilities.

So we are seeing a lot of productivity benefits by – in the plate side.

And then the second area is really new grades, the cobalt grades, the wider nickel alloy where we're starting to see significant penetrations on the tactical side, and actually opening up some capacity to support the aerospace growth and plate that we expect in titanium over the next few years.

So tactically, we're seeing tremendous cost-savings through the HRPF..

Yeah, so Timna, there is both internal initiatives as well as external conversations going on..

Okay. Helpful. Thank you..

Our next question comes from Josh Sullivan with Seaport Global. Please go ahead..

Good morning..

Hi, Josh..

Good morning, Josh..

Just one on the investment casting recovery, do you have a timeline for when you think you will back at full rate, or maybe when it becomes a positive contributor?.

Yeah. I mean, I think from a – I think we would expect that to be a positive contributor from a profitability standpoint by the end of the year. And I think the progress we're making and have made really over the past 12 months has been dramatic. It's really basically building a robust manufacturing process in a business that really didn't have one.

And so progress has been very good, it's been steady; it's never as fast as we would like it to be, quite frankly. But I think as we move into 2018, we'll be hitting the drumbeat that's in support of what our commitments are to our customers across a wide variety of programs.

And, John, do you want to add anything?.

Yeah, Rich. Hi, Josh. Yeah, the objective this year is to be on drumbeat for all major programs. Today, I would say most of those are on track. We have a few we're still working on and throughout 2017 and really into 2018 is to clear any backlog that we have so that we're prepped and ready to go.

We've done the long-term look at capacity versus demand and we feel good about that 2018 and beyond. 2017 for us is really the rebalancing and transition year.

And as Rich said, that we've made a significant progress in bringing our capacity and capability in line with that demand, and we should see the impact of that on the bottom line second half of the year, more in Q4..

Great. Thanks.

And then just switching over, how should we think of the start-up costs for Bakers through the rest of the year? And then maybe what kind of contribution we should be thinking about from that facility going forward?.

Sure, Josh. So second quarter, similar levels of start-up costs. The qualifications we don't think will be complete until you get through the third quarter of this year and into the end of the year here. So we'll continue to experience some level of start-up costs throughout 2017.

Essentially, the same level in Q2 and Q3, and then we would expect them to decline in the fourth quarter and into 2018..

Okay. Thank you..

Thank you..

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

Hi. Good morning..

Hi, Phil.

How are you?.

Doing well.

How are you?.

Good..

The question is on the guidance for High Performance Materials.

And with some decent momentum I think near term in energy and some defense wins that you had and apparently no change to the aerospace outlook, why not take that revenue guidance up a little bit if your original thought process didn't really have energy recovery within it?.

Phil, we actually, had some energy recovery in our expectations for this year. What we said was at very modest levels. So we were impacting – and expecting some bounce off of the bottom, if you will. And that's what we're seeing here in Q1, but nothing very significant yet, and we expect continued improvement maybe into 2018.

But we had modest expectations and that's what we're seeing at this point..

Okay.

And, Rich, on this Section 232 and the national security issue, I know it's been talked a little about so far, but I was always under the impression that most of the defense-related businesses that you serve and others serve for the most part were serviced with domestic material anyways because of national security issues in terms of melting here and casting here, et cetera.

Is that along the right lines? Or are there some loopholes that we should be aware of?.

No, I think that's fairly consistent, Phil. I mean, The Berry Amendment, the Specialty Metals Amendment goes back a number of years and it really deals with primarily titanium and nickel alloys, specialty alloys that have to be melted either in the U.S. or within a NATO country, right? Not necessarily just the U.S.

So arguably, a Section 232 approach would expand that beyond the current requirements of the Specialty Metals Amendment. So it's broader – Section 232 is broader. But I think that – I think that and I know that every year, right, there are efforts within Congress to kill the Specialty Metals Amendment.

And – because we know because we're involved with making sure that that doesn't happen and because we think it would be a bad policy. So I think that probably the benefits of the broader Section 232 effort are obviously much broader beyond ATI's alloy system focus.

We're not a carbon steel company, and I think that's one of the major emphases of what the Section 232 is about, but I also think that they're focused on – and I think rightly so, they are focused on the broader capabilities within the U.S. from a defense perspective..

That makes sense particularly with the agenda on the spending side. And the last question for Pat, real solid job in the first quarter on net working capital management. What's the outlook for the balance of the years in terms of what you expect in terms of use or source or any momentum commentary you could provide? Thanks very much..

Sure. I think we'll have a modest use as we see sales ramp over the second and third quarters.

But we do have some internal initiatives to improve flow and increase inventory turns, which should be help balance and somewhat offset that, and we could see similar performance that we have in the first quarter where we were able to overcome some of the sales growth through some of those initiatives on inventory turns..

Thank you..

Thanks, Phil..

Our next question comes from Peter Gannon with Tenant Capital (49:02). Please go ahead..

My questions have been answered. Thanks, guys..

And this concludes our question-and-answer session. I will now like to turn the conference back to Rich Harshman for any closing remarks..

Okay, thank you very much, and thanks to everybody 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 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..