Good morning and welcome to the Allegheny Technologies Incorporated Second Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded.

I would now like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead..

Thank you, Andrea. Good morning and welcome to the Allegheny Technologies second quarter 2018 conference call. This call is being broadcast on our website at atimetals.com.

Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer; John Sims, Executive Vice President, High Performance Materials & Components segment; Bob Wetherbee, Executive Vice President of Flat Rolled Products Group; and Kevin Kramer, Senior Vice President and Chief Commercial and Marketing Officer.

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, atimetals.com. After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to two questions to allow time for others.

We will make every attempt to reach all in the queue within the allotted call time. Please note that all forward-looking statements are subject to various assumptions and caveats as noted in the earnings release and shown on this slide. Now, I would like to turn the call over to Rich Harshman..

Thank you, Scott. Good morning to everyone on the call and to those listening on the Internet. The second quarter was a good quarter for ATI and built on our solid first quarter financial results.

Both the first and second quarters exceeded our elevated expectations and clearly demonstrate our ability to deliver technically advanced products on time, aiding our customers and meeting their manufacturing schedule commitments.

ATI second quarter revenue grew by 15% versus the prior year, reflecting strong growth in both business segments and exceeding $1 billion for the first time since the second quarter of 2015. It's worth noting that our business has significantly changed over the past three years.

In the second quarter 2018 the High Performance Materials and Component segment delivered nearly 60% of ATI’s total revenue, up from approximately 50% in the second quarter of 2015.

This shift towards the High Performance Materials and Component segment results in more predictable revenue and operating profit growth, as a vast majority of the segments business is covered by long-term customer agreements and technologically differentiated growing global markets, most notably aerospace and defense, which accounts for roughly 75% of total segment sales.

Strong revenue growth across several end markets coupled with benefits from ongoing product mix enhancements and increased asset utilization levels in both operating segments drove year-over-year second quarter segment operating profit improvement of 75% and margin expansion of 420 basis points.

The accretive power of higher volumes of our increasingly complex product and service offerings is apparent in our strong incremental margin gains in the second quarter.

In aggregate, our growth and strong operational performance drove quarterly earnings of $0.52 per share more than five times better than our second quarter 2017 earnings of $0.09 per share.

While we are not satisfied, we are pleased with our financial results thus far in 2018 and we expect to continue generating solid year-over-year improvements as we move forward over the next several years. Taking a quick look at our financial performance, both business segments contributed significantly to our strong second quarter results.

Operating profit in our High Performance segment increased significantly to 16.5% of sales, which represents a 360 basis point improvement versus the prior year. The stronger than expected growth was driven by continued high demand levels for next generation jet engine products and related product mix and asset utilization benefits.

Our Flat Rolled products segment delivered good quarterly results, posting a 6.3% operating profit margin, on revenues they grew by 18% year-over-year. Continued solid customer demand levels across several end markets and favorable raw materials surcharges supported year-over-year and sequential financial improvements.

Despite the uncertainty caused by global trade disputes, we continue to focus on initiatives within our control and the Flat Rolled product segment is well on its way to generating sustainable profitability and achieving our near and mid term financial goals irrespective of trade policy.

I remain confident about the opportunities that lie ahead for ATI. We enable our customer’s success by delivering our innovative technically demanding high quality products on time. This creates value for our customers and for our shareholders.

Having just returned from the 2018 Farnborough Air Show, I am confident that we will be successful in seeking out and capitalizing on growth opportunities that leverage our unique blend of technology development expertise and advanced manufacturing capabilities.

Before I hand the call over to John Sims to discuss performance in the High Performance segment in detail, I'm pleased to report that in early July we acquired Addaero Manufacturing, led by aerospace industry veterans at Addaero’s additive manufacturing expertise and capabilities is a great addition to ATI’s demonstrated expertise in developing and manufacturing metallic powder specialty materials.

We welcome the Addaero team the ATI and look forward to their many future contributions. Following John's comments, Bob Wetherbee will discuss the Flat Rolled product segment and Pat DeCourcy will comment in more detail on our second quarter financial results.

I would turn to comment on our outlook for the second half of 2018, as well as make some concluding comments. We will then open the call to your questions. Here is John..

Thanks, Rich. Turning to Slide 4. HPMC segments second quarter financial performance was better than expected and represented significant year-over-year growth in revenue and operating profit, continuing to improve on a very strong first quarter results.

Compared to the prior year second quarter, segment revenues increased by 12% and operating profits grew by nearly 45%, resulting in operating margin expansion of 360 basis points. Sequentially revenues increased by 6% and operating margins expanded by 130 basis points.

These incremental gains were driven by continued demand growth, product mix improvements, particularly for our forged products and specialty materials and increased asset utilization levels all related to the ongoing aerospace production ramp up, which relies heavily on next generation materials from ATI.

The 2018 second quarter represents our eight consecutive quarter of at least 140 basis point expansion and year-over- year operating margins.

This impressive two year growth trend is a strong testament to the hard work and dedication demonstrated by our employees to develop and produce industry leading materials, parts and components across the aerospace and defense spectrum.

We recognize that we are still in the early phases of a multi-year aerospace production expansion and industry challenges remain across several airframe and engine platforms to produce increasing amounts of finished aircraft.

We remain confident in our ability to support our customer’s long-term growth plans and are acutely focused on operational excellence, superior product quality and on time delivery, all across a wide range of potential industry build rates.

We fully understand that our continued success is dependent on our customer success and we will support their efforts in any way possible.

In addition to our second quarter growth in commercial jet engines and airframes, we performed well in several other end use markets, including construction and mining and electrical energy, which each grew by more than 50% year-over-year, albeit from a relatively low base after a period of modest demand.

I will cover performance across all of our end markets in more detail on the next slide. Finally, I would like to provide an update on the progress at our titanium investment castings business.

We continue to work diligently with our customers and our employees to further develop a sustainably profitable, industry leading supplier of aerospace titanium investment castings. We have made substantial progress year-to-date as evidenced by our improved second quarter operating profit results, which were near breakeven levels.

We continue to believe that we will generate near breakeven financial results in the second half of 2018 and will be profitable in 2019. The ATI cash products team in Oregon is focused on delivering the anticipated improved financial results and I will provide ongoing updates on future quarterly earnings calls. Turning to Slide 5.

The pie chart and accompanying table shows HPMC second quarter 2018 sales by market and provide a comparison versus the prior year. In total, segment revenues grew by 12% with year-over-year growth in nearly all markets, including continued double-digit percentage growth in the segment largest market, aerospace and defense.

Customer demand growth was widespread across our product lines, led by increased sales of forged products and specialty materials. Looking beyond the aerospace and defense markets, two of HPMC’s smaller markets saw a significant year-over-year sales increases.

Building on prior period gains sales to the construction and mining markets grew by over 50%. Electrical energy market sales increased by nearly 70% versus the prior year due to higher sales of materials used in land based gas turbine production.

Sales to the nuclear energy market and initial demand for materials used in marine pollution scrubber production. ATI’s medical market sales improved modestly, reversing declines in recent quarters as biomedical specialty materials sales grew more than – more, that offset declines in the Magnetic Resonance Imaging or MRI end market.

Sales to the oil and gas market were lower by 3% or less than $1 million in total. Taking a deeper dive into our second quarter aerospace and defense market performance, year-over-year growth was mixed in the major submarkets.

Commercial jet engine revenue expanded by 16%, primarily due to a 39% increase in next generation product sales versus the prior year. Demand growth was led by 21% year-over-year increase in forgings and castings revenue, most notably due to isothermal forging production increases.

Sales of next generation products reached 49% of total jet engine product sales in the second quarter, building on the elevated first quarter 2018 rates.

While we expect the production of these new engine models to steadily increase our next gen - generation products sales over time, the ratio of these sales to legacy products sales will vary by quarter. Year-to-date, we have significantly exceeded our demand expectations for sales of next generation products.

Commercial airframe sales improved in the second quarter by 7% offsetting the decline experienced in first quarter 2018. Sales to our major OEM customers improve year-over-year and sales to distribution customers recovered from the first quarter.

We were successful in integrating a new supply chain system at our largest airframe customer and saw no disruptions in orders or deliveries to that customer in the quarter.

Sales to the government defense market decreased by 8% in the second quarter, primarily due to strong prior year demand for naval nuclear products and our exit from an unprofitable line of business in late 2017. Military aerospace demand increased for our specialty materials, particularly for rotorcraft related products.

In summary, the HPMC segment posted strong financial results exceeding our second quarter expectations and building on our strong first quarter results. Next generation jet engine products sales increased by nearly 40% year-over-year and accounted for almost 50% of our total HPMC segment commercial jet engine sales.

These sales are highly accretive to our operating margins and should continue to expand over prior year levels throughout 2018. I will now turn the call over to Bob Wetherbee to talk about our performance in the Flat Rolled products segment..

Thanks, John. Turning to Slide 6.

Aligned with our prior guidance, the FRP segment generated good second quarter financial results, primarily due to continued solid demand across several end markets and benefits from higher raw materials surcharges related to nickel and ferrochrome [ph] Segment revenues increased 18% versus the prior year and were in line with the first quarter 2018.

2018 was – that first quarter was a period that posted record nickel sheet product shipments to service a major pipeline repair project, which that - did not reoccur in the second quarter.

Despite flat sequential revenues sales to the aerospace and defense and electrical energy markets increased by more than 20% each versus the first quarter, but were offset by the lower oil and gas market sales related to the absence of the previously mentioned pipeline repair project.

On a year-over-year basis, oil and gas product sales were up over 40%. Segment operating profit increased significantly both sequentially and year-over-year.

As compared to the first quarter, operating profit increased by nearly 140% driven by continued increases in asset utilization, the anticipated benefits from higher raw material surcharges and growth at our STAL joint venture.

As a reminder, first quarter 2018 results were negatively impacted by approximately $8 million due to required accounting changes on retirement benefit cost capitalization, as well as the negative effects of lower foreign currency hedging gains.

Looking forward to raw material impacts in the third quarter, we expect modestly higher nickel prices and slightly lower ferrochrome prices. In aggregate, we expect lower raw material benefits in the third quarter results, as compared to the second quarter based on current market conditions.

In summary, the segments second quarter financial results are indicative of our focus on improving our product mix and operational excellence, efforts to increase utilization rates across our asset base and our improved cost structure.

We continue to make progress toward our long-term goal of generating consistently profitable results across the business cycle, regardless of trade policies. Turning to Slide 7. Now, I'd like to provide you with an update on three of the FRP segments important strategic initiative.

While we continue to operate with significant market uncertainty related to steel and product tariffs and acted by various countries around the world, we remain focused on what we can control and are working hard to make continual progress on our goals. Our A&T Stainless joint venture continues to operate, while we await the U.S.

government's decision on our tariff exclusion request. We firmly believe that the facts underlying the joint ventures request for exclusion are compelling and justify an approval by the U.S. Department of Commerce. First and foremost, the present state of the U.S. stainless steel slab production fully satisfies the 232 criteria for tariff exclusion.

Stainless slabs are not sufficiently and reasonably available from a U.S. source. The U.S. stainless melt [ph] and cast - slab casting capacity is currently operating at 95% utilization. In addition to our own analysis, this high operating rate has been recently confirmed by two very credible, independent market analysts and 95% is well above the U.S.

Department of Commerce target of 80% utilization, which is stated as being indicative of a healthy industry. The stainless market is unique in the U.S. One is vastly different than the markets for carbon steel and aluminum. All major stainless producers are vertically integrated from melting to finishing.

This encourages producers to maximize asset utilization rates and ensures that stainless slabs are fully consumed internally. As a result there is no - nor has there ever been a merchant market for stainless slabs in the US.

Prior to forming the joint venture, ATI carefully analyzed its options for re-entry into the 60-inch wide commodity stainless market, including the restart of our Midland Pennsylvania melt shop, which has idled three years ago in 2015 due to the impact of unfairly traded stainless steel imports.

The Midland melt shop cannot be restarted on any reasonable timeframe that makes sense. A restart would take between three to five years. By any definition this is not reasonably available. Let me add some color to the situation.

The melt shop no longer has an EPA Title V air emissions permit, a critical requirement to operate a scrap melting facility of this type. The operation of scrap melting furnaces requires increasingly complex and in this case custom designed equipment to appropriately treat the resulting air emissions.

In the case of the Midland facility before the equipment design could be completed the Title V permit emission limits would have to be known.

So for clarity, we expect that the process to allow any restart of the Midland melt shop would take three to five years and cost as much as $75 million or more based on previous conversations with regulatory authorities and technical experts.

As such, stainless slabs from the Midland melt shop as defined by the 232 requirements are not sufficiently and or reasonably available. In the second quarter the joint venture validated its operating model, but found that an exclusion from the current section 232 steel tariffs is required to be financially viable on a go forward basis.

The partners agreed that this joint venture is well positioned to be relevant in the U.S. stainless sheet market for the long- term. Therefore the joint venture continues to produce finished products, while the Department of Commerce considers the joint ventures 232 tariff exclusion requests.

The second issue for this morning - second opportunity to discuss this morning is that I have a - I'm pleased to report that the STAL joint venture produced its first coil in early July at its newly expanded facilities.

Although this milestone occurred a few weeks behind schedule, the new facility is currently ramping up production and we expect this effort to continue for the next several quarters.

Products produced of this new facility are expected to help satisfy growing demand with installs [ph] core Chinese domestic markets, principally consumer electronics, automotive and solar energy. As a reminder, this expansion was fully funded by joint venture cash flows.

Finally, an update on our potential third party Rolling and - Hot Rolling and Processing Facility or HRPF conversion agreements.

We continue to make progress on a handful of deals and believe they were fully satisfying our potential carbon steel partners technical or - technical requirements during extensive product trials, some of which resulted in products that were successfully shipped to end customers for validation.

The HRPF’s demonstrated ability to produce a wide range of products with varying widths and gauges even from a single unit of input material offers an exceptional value proposition for a number of potential partners.

We are actively progressing toward commercial agreements and continue to expect that we will finalize at least one significant conversion agreement in 2018. In summary, we believe that our two joint ventures STAL and A&T Stainless each have significant upside to fill their newly created capacity over time.

Although current trade challenges have slowed progress on signing carbon steel conversion agreements, we remain confident that we will be successful in 2018.

Each of these initiatives will contribute to segment capacity and asset utilization in a very capital efficient manner and will help us to achieve our long-term goal of sustainable segment profitability. Now, I’ll hand the call over to Pat DeCourcy to talk about our second quarter financial performance..

Thanks, Bob. Turning to Slide 8. I would like to take a few minutes to update you on our second quarter financial performance and to provide you with some additional color on our progress on strategic initiatives to generate additional free cash flows and to further reduce balance sheet risk.

At the end of the second quarter, we had over $120 million of cash on hand and approximately $355 million of borrowing capacity available under our asset based lending agreement or ABL. Both of these totals represent improvements versus the first quarter 2018.

At the end of the second quarter, we had no borrowings outstanding on our ABL’s revolving line of credit. We continue to believe that we will have no ABL revolver borrowings at the end of the third quarter and the 2018 year end.

Capital expenditures were $29 million for the second quarter and totaled $71 million year-to-date, reflecting elevated first quarter outflows for two significant projects.

First, our fourth – fourth isothermal press and heat treating expansion located at our isothermal forging center of excellence in Cudahy, Wisconsin, along with the second capacity expansion of the STAL joint venture facilities in China, which as Bob stated is funded by cash flows generated from the joint venture.

As we stated on our first quarter earnings call, we continue to work with our commercial aerospace customers to understand the potential impact of production rate increases on the timing of our capital expenditures over the next several years to ensure that we are able to continue to meet the desired industry production rate.

Manage working capital increase by approximately $65 million in the second quarter, primarily to support business growth in both segments. As a percentage of sales, manage working capital decreased by 50 basis points year-over-year and stood at 37.5% at the end of the second quarter.

We anticipate continued improvement in these manage working capital metrics as the year progresses. In the second quarter, we achieved a significant pension related milestone. I'm pleased to report that the company has now completely closed its US defined benefit pension plan and post retirement health care plans to new entrants.

This significant accomplishment is a result of several years’ efforts to reduce ATI’s exposure to legacy pension and post retirement health care obligations. We will continue to work to control our long-term pension and health care related costs and liabilities and to report on our progress over time.

Finally, I would like to update the free cash flow guidance provided on our first quarter 2018 earnings call. Included - including our recent Addaero acquisition, we believe that we will generate 2018 free cash flows in excess of $150 million, excluding the roughly $40 million in ATI pension plan contributions.

The cash outlay for the Addaero acquisition was not included in our previous guides. We intend to continue to build our cash balance throughout 2018 and along with expected increases in segment operating profits over the next several years, we anticipate ongoing improvements in our financial leverage metrics.

We continue to prioritize efforts to optimize these metrics and to position ourselves over time for a return to investment grade credit ratings. In summary, we’re focused on cash generation and on being good stewards of shareholder capital, including the thoughtful and accretive deployment of our cash.

These objectives are and will remain a key focus areas for ATI. I will now turn the call back over Rich..

Okay. Thanks, Pat, Bob and John. Turning to Slide 9. Our strong second quarter results build on our solid first quarter results and were driven by strong operational execution and the underlying strength in the U.S. and other world economies.

As you heard from John, Bob and Pat, we continue to make progress on our near term and long-term strategic and financial objectives.

In the high performance segment robust customer demand related to the unprecedented aerospace production ramp continues to drive broad improvements in our product mix toward next generation materials and increases in our asset utilization.

These factors combined with our ability to assist our customers in meeting their growing demand requirements, improve the segments finance results at a faster pace than expected.

This better than expected growth included a modest demand pull forward from the third quarter where we expect moderately lower customer order patterns due to normal business seasonality and scheduled maintenance outages at several ATI facilities.

As a result, we anticipate a modest decline in third quarter revenues, as compared to the second quarter and a corresponding modest decrease in segment operating profit margins.

In addition to the customary seasonal slowdown and required maintenance outages, we currently expect our forging operation to be negatively impacted by delivery delays from a customer directed non-ATI source of nickel - nickel powder billet. We continue to work with our customers to minimize the negative supply chain near term impact of these delays.

We also continue to qualify additional powder alloys through our powder and billet processing assets in North Carolina. These are customers sponsored programs that provide the jet engine supply chain with a viable second source for nickel super alloy powder billet used for isothermally forged parts.

We expect to be fully qualified for all current programs over the next one to two years. In recognition of the excellent work that John Sims and his team have done so far in 2018, we are increasing our 2018 full year high performance materials and components segment revenue and operating profit guidance.

We now expect full year 2018 revenues to increase by 10% to 12% versus the prior year, an increase from our prior guidance estimating a high single digit percentage improvement. Additionally, we estimate 2018 segment operating margins to improve by 300 basis points year-over-year, an increase of 100 basis points from our prior guidance level.

We have set a strong pace of improvement thus far in 2018 and I fully expect the year-over-year growth to continue. Turning to Slide 10.

In the Flat Rolled product segment second quarter 2018 financial results have demonstrated the continued benefits from the actions of Bob Wetherbee and his team have taken over the past several years to return this business to an acceptable level of sustainable profitability.

In fact, second quarter year-to-=date operating profit is equal to the full year 2017 operating profit. We are well on our way to achieving a minimum $100 million of segment operating profit in 2019. In the second quarter, we continued to benefit from solid fundamentals in the U.S.

industrial markets and saw significant raw material benefits related to nickel and ferrochrome. Asset utilization increases across our operational network, particularly at our world class Hot Rolling and Processing facility, helped drive improved segment operating profitability levels.

We continue to push for higher production levels via joint ventures and third party carbon steel conversion agreements to ensure capital efficient production expansion and utilization opportunities. Looking ahead to the third quarter, we anticipate continued strong economic fundamentals and end market demand for our Flat Rolled products.

Revenues are likely to be in line with the second quarter, representing a solid year-over-year improvement. Segment operating profit is anticipated to be slightly lower sequentially, but substantially higher versus the prior year due to lower raw materials surcharge benefits and the impact of our planned facility downtime for annual maintenance.

Looking beyond the U.S., our STAL joint venture continues to benefit from demand across – demand growth across several end markets and will ramp up production on its newly commissioned production capacity.

In recognition of the strong operating results year to date achieved by Bob Wetherbee and his team, we're also increasing full year financial guidance for the Flat Rolled product segment. We now anticipate year-over-year revenue increase of 14% to 16%, an improvement from prior guidance calling for a high single digit percentage increase.

Furthermore, we now believe that full year operating profit margins will improve 150 to 300 basis points versus the prior year on the higher revenue base. As compared to the prior guidance estimating an improvement of 100 to 300 basis points. Finally, as you heard from Pat DeCourcy, ATI continues to anticipate solid free cash flow growth in 2018.

We remain focused on balance sheet repair and will responsibly deploy cash to further reduce financial risk and to continue to lay the foundation for long-term profitable growth, as well as ultimately returning cash to our shareholders.

As we close the book on a strong first half of 2018, we will continue to focus on what has made us successful thus far, delivering high quality innovative parts and solutions on time to our customers.

Operator, may we have the first question please?.

[Operator Instructions] Our first question comes from Drew Lipke of Stephens. Please go ahead..

Good morning, guys. Congrats on a great quarter..

Morning, Drew..

I was wondering, you talked about some of the delivery delays on the directed source powder billet to ATF forging operations. You know, some of the next gen engine ramps have been pretty well documented, particularly as it relates to the LEAP engine. I guess can you talk about you know, CSM they've looked to add second, third sources of supply.

You know, has this allowed you to capture you know, incremental market share and how do we think about, how those positions ATI longer term from these near term bottlenecks that we've seen in the supply chain?.

Yeah. Drew, as we have said and in prior calls you know, first of all this - this rate ramp is significant, when you look across the number of engine platforms that are new, they're all ramping – it’s a pretty much historical build rate levels in a relatively short period of time.

I think the supply chain and the OEM’s have done really an excellent job thus far of keeping a - an increasingly complex global supply chain delivering. There are clearly some areas of strain.

I think the isothermal forging area is one and it's more than just the forging process, it's actually - all goes all the way back to the billet, which it goes all the way back to powder. So I think that some of the challenges that have occurred have represented opportunities for ATI.

I think clearly some of the emerging demand on the forge product side we benefited from and we aim to continue to benefit from. I think on the powder side you know, the qualification process of going from powder into a billet is a lengthy process. We have been qualified for – for that on a number of different grades. There are still a few left.

So we're not qualified, we're dependent upon others to deliver the billet on time. And there have been some issues with that and that obviously has an impact on the customers getting their forgings. But the customers know what the root causes. And I'm confident that customers are working through those issues with their directed source.

So you know while the challenges are there, I tend to view them more as opportunities. And we'll continue to focus on those opportunities, so that the customers get the products when they need it to build the engines to support the build rate by Boeing and Airbus.

But I do think that they create opportunities for ATI and we have realized and been realizing some of those opportunities..

That’s helpful. And then you called out the potential for - or you know, increased capital spending to address you know, potential production rate increases.

What narrow body production ramp do you have capacity for today and then what rate is comp - you know contemplated in sort of $110 million or so in annual CapEx that you talked about over the next several years?.

Yeah, I think that - I think the current announced rate is what we have contemplated in our capital spending that we've commented on.

I think anything above that I'm sure you know that there is some discussion going on in the marketplace by the OEM air framers in terms of on the single production rate, you know, do they increase it even further than what has been announced with that increase, you know, possibly coming online in 2021 or 2022 timeframe.

I think there that would require some additional capital investment on our part, primarily as it pertains to the powder, through powder billet, through iso supply chain and you know we've had those discussions with the customers, we have our arms around what level of investment would be required and when it would have to be known to support the higher build rate.

We view it as something that would certainly be manageable within our total annual depreciation and amortization rate..

Helpful, guys. Thanks. Best of luck..

Thank you..

Our next question comes from Richard Safran of Buckingham Research Group. Please go ahead..

Hey, Rich, Pat, Scott, Bob, John, good morning.

How are you?.

Morning, Rich.

How are you?.

First off I'd like to ask you about your - about Pratt. You know, so a while back you know you signed a deal with them. I believe you were going to produce parts at Pratt is currently producing, please correct me if I'm wrong. It seems given the issues that they've been having. You know, maybe they could use some help sooner rather than later.

So I want to know if you could discuss the progress you've been making with Pratt, how much content do you think you could get if you have an idea of that, when this might impact the P&L? And you know, if you'd care to give it any numbers on shipset content that you're maybe targeting that would be great?.

Yeah, Rich, I am going ask John, John Sims to comment and then I'll add anything if I feel the need to..

Morning, Rich..

Morning..

I would say that we are making progress with Pratt. The impact of that agreement we signed in 2017 is already having an impact on our results. We work very closely with Pratt and really balancing out their production requirements between us and their facility in Columbus, Georgia.

We have been producing forgings for them really for over a year and a half now and that it includes not only forging pre-forms, but also finished forging that we're getting into with them. So I would say at this point the program is proceeding as planned..

Yeah, Rich, just a few other comments on that. That's a long-term LIFO program, a long term agreement. I think when we announced that we defined it, we didn't define it you know for the life of the program, obviously we defined it for the first number of years.

In essence, the ultimate objective of the program over the next couple of years is really for us to be a vertically integrated supplier to Pratt from powder through the billetizing type that powder into an isothermal forge finish machine part, that the - that's what the long-term agreement is there for.

And John's absolutely right, it is contributing now, we're contributing to Pratt’s rate ramp build in a meaningful way and I think that that will do nothing but continue to grow not only in terms of volume and revenue, but in terms of product mix where we move from pre-form into an actual finished machine for each part..

Okay. Thanks for that. Next you know, I wanted to ask you about - I was kind of interested in this 3D printing initiative. So you know, you spoke about Addaero acquisition and that kind of raises I think a few questions.

I'm assuming that with Addaero you're now vertically integrated in 3D, you make the metal and the alloys, you have an effort to convert like titanium tetra chloride into powder, and now you have the printing piece of it, is that correct? And kind of curious then, if you're now vertically integrated when you think this effort is going to have an impact on the P&L? Is this going to be an OE focused activity or does it also have an aftermarket component to it? Are the other - and then finally are there other acquisitions that you're considering here or do you think your portfolio is complete?.

Yeah. No, I don't think our portfolio is complete. I think the Addaero acquisition was a very important acquisition that actually accelerated our knowledge base to the part designed on a 3D print using the metallics that we produce in powder form.

So it's not just having the ability to produce the powder and print the part, it's how do you design that part to meet the customer requirements in a cost to fit - efficient repetitive production volume manufacturing process and Addaero really brings us the latter part of that. So I think you'd you described our strategy very well.

It is a strategy going that - that you know, looks at the raw material if you will, powder and also wire across a wide variety of alloys systems that we sell those products and we'll continue to sell those products.

But we also have a strategy to also just because we do with the mill products to be vertically integrated to actually design with the customer and make the part through an additive process and Addaero plays with that.

I think on the - as we work with our customers, especially on the aerospace and defense side you know, we see this becoming more meaningful and the opportunity growing over the next three, four to five years.

I think there are other markets outside of aerospace and defense where it could be more meaningful on a P&L opportunity basis in a quicker timeframe than that. And I actually think that there are probably some opportunities on defense that might even be before you know commercial aerospace.

So we're looking at - we're looking at that from a wide variety of opportunities, defense space, commercial aerospace, oil and gas, medical you know et cetera. So I think it has to be technology and that's part of ATI’s portfolio as we look at continuing to strategically grow in differentiated global markets..

Thank you..

Thanks, Rich..

Our next question comes from Gautam Khanna of Cowen and Company. Please go ahead..

Thanks. Good morning, guys..

Good morning, Gautam.

How are you doing?.

Well, thanks. One question that came to mind was you know, it looks like in Q2 the mix, you know at high performance ended up you know coming through pretty well. If I recall in the Q1 call you'd mentioned that may not be as strong. I was just curious what sort of changed in, if you can provide any color on thereon, what actually happened....

It's a good observation, I think that you know part of what - you know the first question we had about the supply chain and the ramp of the supply chain and the ramp overall of the new builds, especially on the jet engine side you know, it does create some quarter-to-quarter volatility.

I mean you have to recognize that there is still legacy programs that are meaningful, both in terms of the build rate, as well as in terms of the aftermarket. So you could have a quarter where legacy is a stronger proven than what you expect.

I think some of the disruptions in the supply chain and some of the operational challenges that others are having present opportunities for ATI’s that can emerge in surprise late in the quarter with very strong pools towards the end of the quarter. And that's how - that's what happens.

I mean, it's happened not only in the second quarter of this year, it's happened in prior quarters as well.

It also can result depending upon where the supply chain is at any one point in time and push outs at the end of the quarter, not because engines aren't being built, but because the supply chain is being very actively managed by the OEM’s and the push back through the supply chain has - is as reverberates and vibrates all the way through the supply chain.

So I think where the supply chain and where the market is right now, where you're still in a transition from legacy to next-gen you're going to see some of that volatility. You know, certainly in 2000 - we saw ‘17. We're seeing it in ‘18. I would imagine we're going to see it in ‘19 as well.

But as you get further into the build rate and you have lesser of the legacy aircraft being built except for aftermarket demand, I think that that volatility will even even-out as we progress through the next couple of years..

Got it..

Do you want....

Yeah, sure.

As for follow up was, the other thing I was kind of curious about is when you - when you describe kind of the emergent demand, is there any - can you give us any splitter, you've seen it more on the latish [ph] forging side or is it on the alloy side and miss it on the legacy versus the next-gen, any sort of flavour you can give us to where you're seeing the opportunity for emergent demand? And then relatedly, as you fill these you know, these emergent needs, do you get any sort of guarantee from the customers that it won't just be fleeting that you know, you'll step up and help out so long as there's kind of a longer tale to that mark?.

Any assurance....

Hey, Gautam. This is John. I'll try to fill those two..

Thank you..

So on the emergent demand, as Rich said, at any given point in time we've always got a combination of next generation or new programs and legacy programs going on.

And as he said those reverberations that can move through supply chain can result in short term requirements that can move around between suppliers, and it's not uncommon for us to be the recipient of some of those emergent requirements and they can be new programs, they can be legacy programs.

So we see that on an ongoing basis and that's by no means unusual in any given ramp.

As far as the duration of those emergent requirements, I would say we've seen both instances, we've seen them where there have been some, call them, more permanent shifts within a given contract and we've seen them be very short term in nature, meaning there's a pinch point, we help the customer get over the pinch point and then we move back to normal share levels..

Yeah. I absolutely agree with what John said. The other thing is just from you know from a longer term standpoint, I think when you position - when we position ATI that create value for customers you know, that earns you the right to grow in the future.

And I would suggest to you that you know that - this rate ramp in this particular market isn't any different than what ATI has done for 30 years in the jet engine market and that reputation earns us the right to grow and earns us the right to be selected cast throughout developer of an alloy like Rene 65.

So we look at these opportunities to the extent that we have the capacity and that we can help out our customer and create value to the customer. We will do that. I think as we get further into this rate ramp up and volumes increase the opportunity for us to have that available capacity will become less.

And you know others are going to have - others in the supply chain have to step up and execute their business..

Fair enough. Thank you very much, guys..

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

Good morning. Great quarter here..

Morning, Josh.\.

Just the comments on the minimum $100 million in 2019 for Flat Rolled, does that assume an exemption for Indonesia or can you get there even without the exemption just given the pricing support here?.

Hey. Good morning, Josh. This is Bob Wetherbee. As Rich said, we're committed to achieving our business and financial goals irrespective of trade policy. So we want the joint venture to be successful. We're confident that our case is compelling, but we're committed to achieving the $100 million regardless of the joint venture..

Yeah. I agree with that. We've said that before and I think it's a great question, it’s a fair question.

I would say you know, the JV would be helpful of exceeding that $100 million minimum, because that that's kind of the minimum, but you know we're not going to be satisfied with that segment only making $100 million, given you know the revenue and the asset base that it has, we have to do better than that.

And I think Bob and his team's involvement in really being very creative and value creating for the U.S. market I believe with this JV with the A&T Stainless JV will eventually prove to be – its proven to be valid right now. It's good for the market and it's good for ATI, it's good for ATI’s shareholders and it's good for our customers.

And we're hoping that the facts prevail in the decision making process in Washington and that we are granted the product exclusion because that's what the facts support..

Okay. And then the GE9X engine upcoming opportunity moving more towards maturity.

Can you give us any details on how you're exposed at this point or any discussions at Farmborough maybe that were incremental?.

Josh, this is John. We are still in discussions with the GE and their partners. On the 9X we have secured some agreements on raw material supply of that program and still in active discussion, not only as we continue development, but also as we move into longer range production on both raw materials and forging..

Okay. And then just one, can you expand on the marine pollution materials sales and that you mentioned that you know there have been some reports that global shippers are seeing the arbitrage for scrubbers and it is an advantage.

How does that market play out for ATI?.

Hi, Josh. This is Kevin Kramer. We've seen opportunity both on the scrubber and the marine balance opportunities. There's a fairly defined timeline between the next five and seven years. It's benefiting the flat rolled old products business. We're seeing a lot of the specification in Europe and fabrication in China and really throughout Asia.

So we're coordinating that I think pretty well so far..

Any idea of market size opportunity and way to frame it?.

Yeah, I would say it's between $100 million - and $300 million [ph] in revenue of FRP a year. It's the market, that's the market..

It's a meaningful market, a meaningful opportunity and you know, we you know we have the capability of serving that market. And Bob and his team are focused on it..

That's right. I think you know it's the offshoot from a core market we've been in for a long time, flue gas desulfurization, private peak [ph] in the United States for that market and that’s an 8 to 10 years ago, but we really developed a lot of great products in the grades and the differentiation.

The HRPF is offering some opportunities for us in terms of conventional capabilities. And then as the designs have been put together you know, the ATI application engineering talent has really been critical both in Europe and the United States to developing the application.

So the market is significant, it's probably a 10 year horizon - run for the market. So it's got a pretty good opportunity in front of us. You know, our share of that market if you look at kind of where things have lined up you know, I think 30% to 40% of that market is a stretch target for us and we're aligned to go get that.

And I think you know, we have some unique products that will help us globally compete..

Okay. Thank you..

Our next question comes from David Strauss of Barclays. Please go ahead..

Thanks. Good morning..

Morning, David..

First question, I wanted to ask about, if you look at the second half of the year, your assumptions around the next-gen engine growth.

You know, the margin - the margin guide said at HPM, I think you know year-to-date margins are up over 400 basis points, you're talking about - you know, you've obviously raised the guidance was up 300 basis points for the full year still - still implies you know, much less improvement in the second half than we saw in the first half.

Does that mainly revolve around your assumption for the next-gen engine ramp in the second half of the year?.

Yeah. Dave, this is John Sims. Again, like Harsh said earlier, we're going to see quarter-to-quarter fluctuations. We've got the seasonal impact that impacts our Q3 pretty much every year related to the number of European customers we have, as well as the normal summer shutdowns that we have related to planned maintenance.

So that impacts our guidance consistently. And then we have to see in Q4, again we've seen generally Q4 is generally a lower quarter for us, as we tail into the end of the year. But like in 2017 and a little bit in 2016 we saw stronger pull. So we have to wait and see how those year end pulls you know, reflect in our in our guidance as we get closer..

Is it fair to assume that you're not - in your forecast you are not incorporating the kind of - the kind of growth that you saw in the first half the year and the second half a year on the next-gen side?.

No I think - I think what we're incorporating from me from a year standpoint is consistent. We're just going to see some movement within a year, as we said earlier in our prepared statements, we're seeing stronger than expected demand, particularly from the next generation products early in the year.

And so we'll expect for the full year to be higher in those products for the full year basis than we planned on coming into it. But I think in general for the full year as we said we'll see some margin expansion compared to what we saw coming into the year and from an annual standpoint it's pretty consistent..

Yeah, Dave, this is Rich.

I think we've been very consistent in saying not just this year, but in prior years as well that that when we when we look at the jet engine market you know we look at it on a year-over-year basis, because the order pattern and the production - even on the airframe you could make the same arguments that the pulls on the airframe aren't you know the annual volume divided by four.

It just doesn't work that way. The supply chain doesn't work that way for whatever reason. So when we've put our, you know our estimates together on a core - on an annual basis, right.

And so we have a pretty good view as to what the build rates are going to be, the build rates on the next generation engines are increasing significantly across the board. And then there is the lead time there in terms of material and part delivery and when that engine actually gets delivered. So all of that goes into our planning process.

The lumpiness if you will or the volatility on a quarter-to-quarter basis is real and you know when we - when we're given you our thought processes of how we see the second half of the year there are a number of factors involved with that. One is the clear seasonality of the third quarter.

The second is the impact from the outages, the planned outages that were taking in the third quarter largely and it doesn't change our viewpoint at all in terms of the build rate increase on a year-over-year basis from ‘17 to ‘18 from ‘18 to ‘19 from ‘19 to ‘20 from ‘20 to ‘21.

It just doesn't and it doesn't mean that that everything is going to be even on a quarter-to-quarter basis. That's just not how this market works..

Okay. Appreciate the color there. Pat, one for you on the free cash flow forecast, you know obviously remains unchanged given $150 million, but you know that can mean a lot of things.

Can you just talk about maybe the moving pieces relative to what you were thinking a quarter ago? Obviously you have a better operating forecast for the year, but maybe what you're thinking, how that impacts things and then you know how you're viewing working capital through the year and then CapEx? Thanks..

Sure. We actually increased our guidance because as you'll see we noted in the script, we included the Addaero acquisition in that comment of $150 million free cash flow, excluding the pension contributions. So we have increased our guidance in the second half.

On the manage working capital side, as we stated we're going to continue to see improvement on a percentage basis, on a percentage of sales for the balance of the year. And for the full year we estimate the total bill to be in the $45 million to $50 million range, which implies will generate some cash out of manage working capital in the second half.

So we'll see good strong cash flow and again we've actually increased our guidance for the full year..

All right. Thanks, guys..

Our next question comes from Jeremy Kliewer of Deutsche Bank. Please go ahead..

Hey. Good morning..

Morning..

You guys have done some good work on the pension, but do you guys have a total I guess funded level that you're trying to obtain or timeframe and what you're trying to reduce your liabilities?.

Sure. So with the closure and the recent negotiations to new entrants entirely, we're on track and on target. Our long-term goal is to get fully funded. We expect sometime in the early part of the next decade that we can achieve that goal. We're around 76% as of prior year end. We anticipate further contribution requirements over the next several years.

But all the work we've done on the liability side and on closing the plan to new entrants we think will help. And obviously we think that there could be some interest rate relief. There is on a period to date basis this year we'll see what happens by year end.

But the long-term trend for interest rates we believe is an upward bias over time which should help on the liability side as well. So we're sticking with our goal early - sometime early in the next decade to be fully funded and out of DP pension plan business.

Obviously we'll have some – some of those who continue to participate and will provide for those as active participants, but we also have other actions that we can take with respect to utilizations and other actions in the next several years toward our end goal..

All right. Do you have any kind of commentary on voluntary contributions other than the mandatories....

Well, what we've provided more update in the queue here and a couple of weeks, but it's in the $80 plus million range for the next several years..

Yeah, Jeremy, this is Rich. I agree with everything that's said. And I also think to the extent that we can achieve those objectives quicker, we would certainly be interested in doing that.

But we would not do that by borrowing or we would not do that by going out with an equity issuance or anything like that, we would do that the old fashion way and in terms of generating the cash from the business through a variety of ways and if that's the best way to deploy that cash to enhance long-term shareholder value creation and I happen to think it's one of the better ways is to get to that issue off of the balance sheet and you know permanently..

Okay. And then switching to the HRPF in your prepared remarks you know, you say a potential partner is there and it's kind of delayed by the exemption status.

So just implying that they would also have to import slab there?.

This is Bob Wetherbee, in terms of the status of negotiations for conversion partner or conversion opportunity or contracted to HRPF the biggest single issue for the carbon industry is that the leaders were negotiating with and that we’re talking to, they've been a little bit consumed by the commercial end of their businesses getting through the tariff from there, their perspective and the end customer.

But at the same time that's going on, you know people are bringing back you know, different slab sources for carbon in the U.S. So the sourcing is a little more jumbled or turbulent than it's been in the past and there is been different conversations about what slab pricing looks like.

So they are very much excited about the product capability the HRPF, when the commercial people are in the room ready to rock and roll, when the technical people are in the room they're signing off and ready to go, it's just more of aligning the supply chain for labs wherever they may come.

Could be a source from the United - sources from the U.S., North America, the world. There is a merchant market for carbon steel and it's just a little turbulent at the moment. But we are seeing continued evaluation, we have not allowed to customers that validating what the HRPF can do.

And you know I do believe we're very close to finalizing our first commercial agreement. But it doesn't necessarily require that slab be imported or produced domestically. A lot of different options that people are looking at just working through the short term turbulence to sort it out..

Okay. Thank you. Thanks. Good luck..

Thank you..

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

Hey, good morning..

Morning, Phil..

Just curious on the Flat Rolled side, a couple of things, was the joint venture accretive in the second quarter.

And if so by how much that you were observing the tariff? And then also I just wanted to confirm that you said that you think you can get Flat Rolled operating profit at a minimum for this year and $100 million for that segment?.

Okay. This is Bob. A couple of things. Number one, I think just for clarity. the $100 million target is 2019 target. We do believe we're making significant progress there through a variety of things.

Certainly our cost structure, number one, we are seeing some price improvement in our core products, number two, and we're spending a lot of time investing in improving our product mix. So the combination of those three things are really helping the core business.

We also talked about the STAL joint venture and the expansion coming online servicing a fairly strong market in the consumer electronics and automotive in Asia. So in terms of the $100 million by 2019, as Rich said we're not going to be satisfied with that. But clearly on a line of sight to get there.

In terms of the joint venture, in Q2 it was accretive to our earnings. We've had to scale back our volume to make sure that everything we do you know, fits and the partners have contributed to making sure it is successful in Q2, but it was accretive.

We need the exclusion to be successful you know, over the long-term and our employees have done a phenomenal job there to ramp that up and sell you know the product into the marketplace..

Do you want to comment on….

Yes. So in terms of your question around the tariff basically the material arrives in the United States in the port we hold in bonded warehouse until we actually pull it out, so we can actually time the withdrawal of the slab with the consumption and the production and better time the cost to the resulting revenue.

And to your point for the volume that we're bringing in we are paying the tariff. But the real key here is that it's a very limited volume at the moment. We're probably running at about 40% of its total content. Some of the grades that we would like to be importing, but cannot do it with the tariff are the more I call it the metal intense grades.

So you know there are grades Stainless 316 that have much more metallic content then when you add the 25% tariff just makes some impossible to import under the tariff. And that's an increasing percentage of the market.

So the tariffs are really restraining the ability of the joint venture to reach its full potential and that's what our customers are pulling for. We continue to get really good customer pull for the products of the joint venture.

But we've also been fortunate in the short run that metal prices have been rising and that we're getting some of the benefit of buying and delivering in May and shipping in June, July and we don't anticipate that would continue. So it was accretive in Q2. We are paring the tariffs, but it's not sustainable for the long-term without the exclusion..

And then a question for Pat on the pension, you said you completely closed the new entrants and you've got more things to do to reduce the costs.

If all else held constant, you know, stock market maintained where it is now, interest rates kind of looking like where they are now and given these actions would you expect you know LLC [ph] your pension expense to move lower in 2019? Just trying to get a feel for that..

Yeah. Its consistent with kind of what we've seen in the past few years as well..

Thank you..

Thanks, Phill..

Our next question comes from Chris Olin of Longbow Research. Please go ahead..

Hey, good morning..

Hey, Chris.

How are you?.

Good. Just want to talk a little bit about the contract structure that you have in place with the air framers on the titanium side.

As the raw material cost potentially move higher, are you covered in terms of margins or do you have mechanisms that fully pass that through? Is there any risk in terms of some of these multi-year agreements where you'll have to absorb, say, roof tile or sponge or some other raw material?.

We are covered – we’re covered back to back on sponge.

So we have long-term - very long term agreements that actually see the contract periods we have for delivery to our airframe on the sponge side and through master alloy and those kind of things we have mechanisms that allow us to pass through that higher cost in those contracts, so no exposure there..

Got you. You referred to order disruption with one of your larger customers on the frame [ph] side and you were not impacted by that.

I was just curious if that disruption in the channel has gone away or is it still lingering factor?.

The only thing we're aware of is our dealings with that large airframe customer that's all that we can control and that's all we're aware of. And we're proceeding very well with the new program. We met all of our delivery requirements in June. We expect to do the same in Q3 and beyond.

And we're working very well with that new program implementation and - but we're only can speak about ourselves..

Hey, Chris, this is Rich. I know you have - you have some accounts or information on that point and we can't speak to anybody else other than ourselves as Pat said. But the one thing that you should know is that that implementation was not new. I mean, it just didn't happen in the last three months, right.

The supply chain has been aware of that implementation for over a year and we began working with the customer over a year ago including pulling in our IT resources to work directly with them, so that we didn't have a problem and we didn't cause them a problem by not being able to deliver material that they needed to build airplanes.

So you know we can only look at it from our perspective.

I think the ATI team did an outstanding job from the standpoint of the commercial organization, the operational organization, as it really touches both segments, because we're supplying a wide variety of product forms there, including flat product forms and also the IT organization did an outstanding job of working with the customer for over a year to make sure that when they went live there wasn't going to be a problem at least as it pertains to ATI which was the only thing we can control..

Okay, great. Sounds like there were some winners, some losers, it's good to see you on winner side. Just real quick last question, I want to understand the outlook on the next generation engine side and I know you've always talked about the order lumpiness.

But what I'm curious is with some of these OEM’s running four to five weeks behind schedule, does that impact the way they source material or is there a way I should think about your lead times into that channel.

I guess, the reason I ask is with you know, if you look at the LEAP engines they were shipping 400 units in the first half, I think they are talking about 600 in the second half? I would've assumed they would have been more aggressive with you by now..

Chris, this is John. The engine requirements whether you're talking about the LEAP engines, the other engine programs around are well understood. We understand what the build rates are. We have frequent communications with our customers, so there really is no surprise for us there.

As Rich said, you're going to see some, he called that lumpiness, is a very technical term that Rich invented, copyrighted. But we see that from time to time and it depends entirely on how far away from point of assembly the particular product we have is. So obviously forgings and castings are very close to the point of assembly.

So product offset is shorter, we have much clearer visibility there. On the mill product side they can be further away from point of assembly go through other tiers in the supply chain.

And so there can be more turbulence and noise there that can impact quarter-to-quarter rates, but from an overall standpoint the build rates are there, there's really no change from that standpoint. And as we said earlier there can be some disruptions here and there or short term turbulence that's not uncommon in a ramp.

We've seen that in other ramps and we just adjust to it and move on..

Yeah, Chris I can tell you that if what you're asking is the lumpiness that happens or that we're forecasting, which by the way we could be wrong, right. We could see emergent demand in the second half that is just as strong in the first half. We're just telling you what - how we see things today, right.

But none of that has in my opinion based upon the conversations we have with our customers including as recently as at the Air Show, none of that has to do with them not wanting the material on schedule per the delivery schedules that we all have because maybe they're late in delivering the engine to the air framers into the airlines.

None of that is happening. As a matter of fact, the question that we get asked more is how much more can you give us. And that was the essence of every single conversation we had at the Air Show was not, well, we want to delay your shipment to us because you know the engine build rate ramp is going a little bit slow slower than anticipated.

As a matter of fact, all the engine OEM’s are saying no, we're going to get back on schedule, we're going to deliver these engines, the rate ramp will continue to accelerate. We need you to deliver everything that we have on the order book with you on time on schedule and by the way we'd like more from you.

So that's what we're seeing and that's what we're hearing..

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

Okay. Thank you everybody for joining us on the call today and as always thank you for your continuing interest in ATI..

Thank you, Rich and thank you to all the participants and listeners for joining the call today. That concludes our second quarter 2018 conference call..

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