Good morning, and welcome to the Allegheny Technologies Incorporated First Quarter 2019 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 that this event is being recorded.

At this time, I would like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead, sir. Scott Minder Thank you, Denise. Good morning and welcome to the Allegheny Technologies first quarter 2019 conference call. This call is being broadcast on our website at atimetals.com.

Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; John Sims, Executive Vice President, High Performance Materials & Components Segment; Kim Fields, Executive Vice President, Flat Rolled; Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer; and Kevin Kramer, Senior Vice President, Chief Commercial and Marketing Officer.

If you’ve connected to this call via the internet, you should see slides on your screen. For those of you who dialed in, slides are available on our website. 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 try to reach everyone, who would like to ask a question. 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 Bob..

Thanks, Scott. Good morning to everyone. Thanks for joining us. Before I lock into the accessing our first quarter results, I want to welcome our new Flat Rolled Products group leader, Kim Fields, to her first quarterly call. Kim joined us on April 1st from the IDEX Corporation where she was mostly recently group president for industry and energy.

Kim has a deep and diverse background in the global metals industry and she's hit ground running leading ATI's dedicated and talented Flat Rolled Products team. You'll hear directly from Kim later in the call. Welcome Kim..

Thanks Bob..

Let's move onto a brief overview of our first quarter results and then I'll turn the call over the team to cover their respective areas in more detail. I'll return at the end of the call to provide an update on our 2019 outlook and my leadership focus 100 days into my role as ATI's President and CEO.

Without question, our first quarter results were below our expectations. At the same time, we firmly believe that the majority of the issues faced in 2019's first three months are temporary in nature and will dissipate as the year progresses. In some cases, Q1 headwinds will become tailwinds in the second half of 2019.

Looking at our first quarter sales performance, overall revenues increased by 3% versus the prior year's first quarter with growth in High Performance Materials & Components or HPMC segments of 7% partially offset by a decline in Flat Rolled Products or FRP segments of 4%.

From a market perspective, ATI's overall revenue growth was driven by solid gains in the aerospace and defense markets in both segments, which were currently offset by declines in the FRP segments specifically lower oil and gas market sales as compared to a very strong first quarter 2018 and lower raw material related surcharges being passed through the customers.

These sales results were generally in line with the outlook provided on our fourth quarter 2018 earnings call. First quarter segment operating profits declined by more than 30% compared to a strong prior year period due primarily to temporary operating costs issues impacting both business segments.

In HPMC, we previously reported in our preannouncement last week, the continuing negative impacts from the ongoing shortage of third-party nickel powder billet supply to our forging operations.

To accelerate our customers' recovery from this ongoing billets shortfall, we are aggressively ramping our own production capabilities to offset this shortage of this material in the latter parts of 2019 and beyond. This first quarter efforts came at an increased cost versus our prior estimates.

Additionally, segment margins were compressed due to the negative impact from the unprecedented rapid decline in raw material input prices, specifically for cobalt, but as a result are not being fully passed through our customers by our index pricing mechanisms in the first half of the year.

John will discuss both of these issues in more detail, along with the longer term opportunity around our increasing market share of the high-value powder billet later in the call.

The FRP segments demand in China was softer than expected for our high-value stalled JV products, in part due to uncertainty created by the current trade tensions between the U.S. and China. The order lead time for these products are relatively short and the full extent of the negative demand shift first became visible in February.

Kim will provide more color on the FRP segment results later in the call. And as predicted, retirement benefit expenses were higher in both business segments principally due to lower than expected returns on pension plan assets as a result of the significant equity market declines in the fourth quarter of 2018.

We expect these elevated retirement benefit expenses to recur in each 2019 quarter in line with our prior guidance. As I started out by saying, I am disappointed with our first quarter financial results.

That said, I also firmly believe that the current third-party supply issue related to the shortage of nickel powder billet represents a meaningfully profitable long-term, sustainable growth opportunities in the back half of 2019. We're committed to seizing this opportunity and are closely managing our costs and cash in the meantime.

In a nutshell, I'd summarize this as short-term paying for long-term gain. With these headlines for the quarter, I'll hand the call over to John to let him provide a more detailed review for the HPMC segment's performance.

John?.

Thanks Bob. Turning to Slide 4. Expanding on Bob's earlier comments, the HPMC segment had a challenging first quarter mainly due to margin compression from rapid declines in Q4 raw material prices and the ongoing shortage of a key input material within the supply chain for a key jet engine OEM.

This contrasts with strong first quarter 2018 operating profit results that were driven by elevated iso-thermal forging volumes. On the supply side, we continue to face a shortage of critical third-party nickel powder billet for use in our iso-thermal forging operations in Cudahy, Wisconsin.

The lack of material creates significant gaps in our operating schedule that will result in lower asset utilization levels and lost revenue and operating profit. As we stated on our fourth quarter 2018 earnings call, we believe that this problem will persist through the second quarter, but improve in the second half of the year.

The short-term challenge creates a long-term market share growth opportunity. We're working aggressively to fully qualify all materials needed to eliminate the supply chain disruption for our jet engine OEM customer. The additional operating costs incurred to prepare for this production expansion were greater than expected in the first quarter.

We are ramping per plan and expect to be fully qualified nearly the end of the second quarter, reaching our full production rate by the end of the third quarter. The importance of this work to our customer and to ATI is not lost on our team.

In addition to the ongoing supply issue, first quarter's results were negatively impacted by three additional factors.

First, the significant decline in raw material prices, namely cobalt, starting in the fourth quarter of 2018 and continuing through the first quarter of 2019, resulted in compressed margins for these alloys primarily for jet engine applications.

The steep drop in prices over a short period of time created a mismatch between raw material costs and inventory and the index pricing mechanism, resulting in a temporary margin compression. This headwind will continue in the second quarter, but the margin impact is expected to be resolved in the second half of the year.

Second, our production facilities in the Pacific Northwest continue to pay a premium for natural gas due to a utility-owned pipeline explosion in the fourth quarter 2018. It now appears that this issue will continue in the second and third quarters as required repairs are more extensive than initially mandated.

These repairs are now expected to be completed or not be completed until fall 2019. And third, as we discussed on our last earnings call, retirement benefit expense increased by 2 million versus prior year.

In aggregate, these issues offset the benefits from higher sales, reducing first quarter segment operating profit results by approximately $25 million. The nickel powder billet shortages and associated higher power production costs accounted for roughly 15 million of the total headwinds.

Looking ahead, we expect second quarter financial results to improve sequentially, but still be negatively impacted by the cost issues discussed earlier albeit to a lesser degree.

On a year-over-year basis, we anticipate solid sales growth related to the ongoing aerospace production ramp, and lower operating profit and margins due to the continued cost headwinds and comparison to a very strong second quarter 2018, which was driven by increased iso-thermal forging volumes produced from a surge in third-party nickel powder billet supply.

Turning to Slide 5. The pie chart and accompanying cable show the HPMC segment's first quarter sales by market compared to Q1 of 2018. In total, segment revenues grew by 7% led by continued growth in our aerospace and defense market sales.

Market demand growth was led by increased sales of our specialty materials and was evident across product lines with the exception of forgings. Looking deeper into our aerospace and defense markets, sales grew by 9% year-over-year in aggregate with mixed performance by major submarket.

Commercial jet engine revenue declined by 2% primarily due to the ongoing negative impact of nickel powder billet shortages on our forging operations. Sales of our next generation products represented 52% of total jet engine product sales.

Commercial airframe sales grew by 25% versus the prior year, led by continued emergent demand growth from our primary OEM customers. The strong first quarter performance builds on 7% year-over-year growth for the full year 2018.

We continue to exceed our contractual share levels as we work to ensure a timely flow of materials to our customers to enable them to meet the ongoing aerospace production ramp.

Sales to the defense market increased by 30% versus the prior year, military jet engine and naval nuclear product sales each increased by more than 30% while sales to the smaller space segment were up more significantly. Rotorcraft product sales increase modestly in the quarter.

Customer demand expanded marginally in aggregate across the other HPMC markets with gains in medical led by growth in MRI product sales, and oil and gas modestly offset by declines in the commercial nuclear and natural gas sub-segments within our electrical energy market sales.

In summary, aerospace and defense market sales continue to drive higher segment sales year-over-year. Although jet engine product sales saw a modest decline in the quarter due to the impact of temporary third-party supply chain constraints on our operations, significant outperformance in the airframe and defense businesses offset these challenges.

While we continue to face many of the same operational headwinds in the second quarter, operating margins will improve sequentially by approximately 150 basis points, as we work diligently to fully offset these negative impacts in the second half of 2019. I will now turn the call over to Kim to talk about Flat Rolled Products.

Kim?.

Thanks, John. Let me start by saying that I'm excited to join ATI and to lead the Flat Rolled Products business.

I'm confident that along with my leadership team, we will continue to make progress on reshaping the Flat Rolled Products portfolio to achieve sustainable and appropriate profit levels and contribute significant cash to fund ATI's strategic capital priorities. Now let's focus on first quarter results. Turning to Slide 6.

Based on my review of the quarter, the FRP segment continues to execute on its long-term strategy by enhancing our product mix to include more high value nickel, titanium and specialty stainless products while maintaining cost discipline, improving key asset utilization and increasing operating cash flows by producing the standard stainless steel base load and increasing carbon steel conversion volumes.

Despite the operating loss in the first quarter, we made progress toward and remain focused on achieving these medium-term objectives. First quarter sales decreased by 4% versus prior year and by 9% versus prior quarter.

Lower raw material surcharges were significant factor and driving reduced sales as key input material costs were lower in the first quarter, compared to fall of 2018 period.

Compared to the fourth quarter 2018, sales declined in the oil and gas and consumer electronics markets as well sales of standards stainless products will primarily to the appliance market. First quarter FRP segment operating profit was negatively impacted by four factors, which were cited as likely headwinds on our fourth quarter 2018 earnings call.

The first, financial results for stalled JV were weaker than predicted. While we anticipated some market softness around the Lunar New Year holiday period, customer demand was below expectations. This was due to trade tensions between the U.S. and China and lackluster sales of certain consumer electronics.

As a result, we extended our holiday production shutdown to nearly three weeks to adjust for the temporary drop in demand. This cost savings action did not fully offset the lower demand and additional costs associated with our recent facility expansion, causing a short-term margin compression in this business. Second, in the U.S.

flat rolled business standard stainless product demand flow to their distribution customers through down inventories partially due to economic uncertainty created by the ongoing trade tensions and slower U.S. manufacturing output.

While we continue to deliberately shift more high value products over, short-term demand disruptions negatively impact capacity utilization in our dedicated standard stainless smelting and finishing facilities. Third, prior period declines in both nickel and ferrochrome caused the timing mismatch in our raw material surcharges.

And four, retirement benefit expenses were higher by approximately 6 million in the quarter in line with prior guidance. Looking ahead to the second quarter, we anticipate a return to profitability. We expect demand for our high value products to increase in the U.S.

primarily due to the initial phases of a recently announced nickel pipeline project and the ongoing ramp of titanium plate products for use in general dynamics land systems vehicles around the globe.

Demand for our stalled JV products in the second quarter have begun to improve as their consumer electronics customers start to launch new products, and we begin to leverage our newly added capacity to sell materials throughout the broader Asian markets.

As a reminder, we recently commissioned stalled three of 65% expansion of our 20-year joint venture to produce high-value Precision Rolled Strip products.

Additionally, we anticipate raw materials to provide a modest tailwind in the second quarter based on relevant nickel and ferrochrome price increases in the first quarter of 2018 and based pricing remain, pricings remain solid. Turning to side 7.

I'd like to take a few minutes to provide additional color on FRP segments first quarter 2019 sales by major market and products. As I commented earlier, the FRP segment had a strong quarter for aerospace and defense market sales. This was ahead of our expectations increasing by 70% year-over-year and was broad base across all sub segments.

We increase our defense market sales significantly due to higher production of titanium armor plate products used for the Abrams tank in the U.S. and the Stryker vehicle in the UK. Similar to John's earlier comments on HPMC products consumed in airframe applications, we worked diligently to provide additional titanium volumes to a major OEM customer.

Finally, we supplied increased amounts of nickel and cobalt bearing Allah sheet products to our jet engine customers. FRP segment sales to the oil and gas markets were down year-over-year primarily due to a pipeline project we ship last year.

We expect our oil and gas market sales to improve in the second quarter as you begin to produce materials for $45 million Latin American pipeline project announced earlier this year. This demand should continue through the third quarter and we're actively quoting new oil and gas projects to maintain our momentum and these high value markets.

Stainless steel products sales to the appliance in the other markets were lower year-over-year as were our first quarter automotive market sales which grew significantly in the prior year period.

Sales to FRP's other markets increased versus prior year including significant growth in the electrical energy markets, which include products from marine scrubber and fuel gas desulfurization applications, both of which supposed to gains in the quarter driven by compliance increasingly stringent environmental regulations around the world.

Quickly looking at first quarter sales by product versus prior year, in aggregate, high-value products as a percent of sales increased by 120 basis points year-over-year and represented 68% of total sales led by growth in titanium products. This increase was despite record nickel shipments in the first quarter of 2018.

Standard stainless sheet product sales will lower year-over-year in part due to U.S. distributor inventory destocking activity. In summary, the FRP segments had a challenging first quarter primarily due to demand drops in China and for standard stainless products in the U.S. as well as the negative impacts from falling raw material costs.

We are confident that these trends are reversing in the second quarter and that our long-term strategy to generate sustainable profitability and significant operating cash flow by producing more high value products and improving the HRPF asset utilization is on track.

Now, I'll hand the call over to Pat DeCourcy to talk about our first quarter financial performance and the key elements of our 2019 financial outlook.

Pat?.

Thanks, Kim. Turning the Slide 8. I'll take a few minutes to update you on our first quarter financial performance and discuss efforts to improve our balance sheet and generate significant free cash flow.

We ended the first quarter with $217 million of cash on hand and approximately $360 million of borrowing capacity available on our asset based lending facility or ABL. There were no borrowings outstanding under the revolving portions of the ABL at quarter end and we do not expect to borrow under our ABL facility for the balance of the year.

Cash used for operations in the first quarter totaled $130 million including $120 million investment in managed working capital. Despite this increase managed working capital as a percentage of sales decreased by 135 basis points versus a prior year.

We anticipate 2019 managed working capital to be in line with prior levels, despite business growth; and as a result, we expect further improvement in our managed working capital as a percentage of sales at year-end 2019 building on a 650 basis points year-over-year decreased from 2018.

Aligned with our prior guidance, we contributed to $25 million to the U.S. defined benefit pension plan in the quarter and expect to contribute a total of $145 million for the full year.

As we previously stated, we are committed to reducing and ultimately eliminating our pension funding gap and expect to make further progress on this goal in 2019 by limiting exposure to future equity market volatility and potentially reducing the number of plan participants through additional amortization actions.

First quarter capital expenditures were 24 million in line with our seasonally adjusted expectations and on pace to meet our previously communicated capital needs to adequately supply the ongoing and significant aerospace production ramp.

Looking ahead, we expect profitability and free cash flow to improve over the balance of 2019 with an emphasis in the back half of the year. Where we see increased customer demand. In part due to market share gains discussed earlier by John.

We will carefully balance our working capital needs, capital expenditures and other financial obligations with our pace of financial performance across 2019. We will use excess free cash flow to improve our balance sheet by decreasing our pension obligations, reducing debt and increasing overall liquidity.

We are committed to a disciplined capital deployment in all economic environments and we'll stay focused on our objectives. I will now hand the call back over Bob..

Thanks Pat. Let's turn to Slide 9, the last slide in our presentation this morning. Looking ahead to the second quarter, we anticipate continued revenue growth in our HPMC segment and a return for revenue growth in the FRP segment. We expect improve profitability in both segments and anticipate generating positive cash flow from operations.

Looking at the HPMC segment in more detail as John described, we expect second quarter 2019 revenues to increase by a high single digit percentage year-over-year in line with full year guidance as our aerospace and defense market sales continue to expand in support to the ongoing production ramp.

Second quarter segment operating profits will increase significantly versus first quarter results, but will be below the exceptionally strong Q2 2018 levels.

We continue to be negatively impacted by the shortage of the third-party nickel powder billet, higher operating costs associated with the elevated energy costs in the Pacific Northwest, the recent steep raw material price declines and elevated retirement benefit expenses.

For the full year, HPMC segment operating profit dollars will increase appreciably versus the prior year, as we improved market share on high value products and operational costs headwinds abate in the second half of the year.

Due to the lower than expected financial results in the first half of the year, we now expect full year operating margins to be in line with prior year as first half of 2019 year-over-year declines are expected to be offset by stronger second half results.

We anticipate operating margins to fully recover by the fourth quarter and expect to exit 2019 in line with our prior expectations. This outlook assumes that we will maintain current production schedules for the 737 MAX and the CFM LEAP-1B programs in line with our public comments earlier this month.

Turning to the FRP segment, we expect solid revenue growth sequentially and a return to profitability with low single digit margins. In the second quarter as we begin to produce the initial quantities of the high value product for a large Latin American pipeline project and demand for our consumer electronics, products in China began to accelerate.

Additionally, nickel and ferrochrome prices using our raw material surcharge calculations are expected to be higher, creating a modest tailwind to second quarter results. For the full year, we expect to generate between $42 million and $46 million in FRP segment operating profit.

This is below our prior guidance provided on our fourth quarter 2018 earnings call in part due to our weaker than expected first quarter financial results. In addition, we've lowered our price assumptions for key raw materials to our accurately reflect the current market expectations as well as updated our demand models in the U.S.

and abroad better account for the volatile economic environment caused by global trade tension. As a result of the lowered operating profit estimates for both business segments, we're reducing our expectations for free cash flow. We now expect to generate about $250 million for the full year excluding the required pension contribution.

Let me continue to be clear on one point. No one at ATI is satisfied with either business segments, full year operating profit outlook or for our 2019 cash generation projection.

We're working diligently to offset demand weaknesses and input shortfalls and control our costs as well as make prudent capital decisions to satisfy future production needs while maintaining the discipline required to ensure a clear linkage between our investments and our economic outlook.

Before we get to the Q&A portion of the call, I think it's important to share my near-term leadership focus. Now I'm a little more than 100 days into my new role as CEO. As I said in January, we're building on the strategy that's in place to accelerate value creation through our shareholders.

Let's start with a laser focus on 2019's top priorities and there are three. First, flawlessly execute the aerospace production ramp. It's critical to our customers and it's critical to us. We've earned the right to serve our customers and we're committed to meeting their increasing requirements.

Second, achieve sustainable profitability in the FRP segment. Our transformation to deliver value over volume is key to meeting this commitment and we continue to make good progress. And third, as Pat described, continue to strengthen our balance sheet. We're committed to allocating capital in a disciplined manner.

This includes investing in products that enhance our long-term profitable growth potential and generate the highest returns. In addition to these specific 29 focus areas, we constantly evaluate our portfolio and are committed to managing it prudently, responsibly in a manner that creates value for shareholders across market cycles.

I'm confidence that we're taking decisive actions to improve ATI's current financial strength and increase shareholder returns over the long-term. At the same time, as a new CEO, it's a great opportunity to ask questions and challenge the status quo.

We're at our best when our unique process technologies intersect with our specialized material science knowledge, resulting in ATI's unique blend of expertise and capability. That's when we deliver the most value for our customers and our shareholders.

We're minimizing our commodity product portfolio, maximizing the best value add opportunities, and ensuring that ATI is well positioned to increase value in our strategic markets. We're solving challenging problems through material science every day, relentlessly innovating to extend ATI's competitive advantage.

With that, let's open the call the questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Richard Safran of Buckingham Research Group. Please go ahead..

So I wanted to ask you about this the MAX. I know you issued a release on this subject, you've been discussing it. But I wanted to ask you more about the narrow body rate change to 42 a month and you've made it crystal clear that you were not being impacted by that rate change.

And I wanted to know, if you could go into a bit more detail about why you aren't impacted? And in your answer, if you could tell us, is there some kind of time constraints for how long you might not be impacted? For example, if the grounding lasts more than 6 months, might you then be affected that sort of thing..

Thanks for the question. Rich, you can imagine that we've been invested in this topic with our customers for the last couple of weeks. And let me give a little context and then I'll turn it over to John to dig more into the specifics here. But for context, this is an issue with one specific plane and one engine.

And ATI has content on every commercial jet engine program. And the issue with the MAX is not related in any way to an underlying change in demand. So that gives us a perspective and context and it also reminds us that the 737 is not a titanium intensive airframe.

So within that, as we look to talk to our customers about what they're doing, they've been very clear about continuing on. And John, you've had probably the most recent conversations.

Do you want to add some color to the Rich's questions?.

Sure, Bob. Good morning, Rich. We've done some extensive contingency planning here at ATI obviously evaluating different scenarios ranging from I would say the highest probability scenario, which is what's been publicly released. And in that case, there is no impact to ATI. And reasons why? Number one, it's not a titanium intensive airplane.

And number two, the impact on the engine schedules is such that, if anything, it allows us to catch up and build a buffer in preparation for the higher build rates that Boeing has announced later in the year. As we looked at the lower probability higher severity scenarios, and I think your question is.

When might we see some impact, if those lower probability scenarios were to happen? I would say under no scenario, do we see any impact in 2019. And even the most severe scenario we evaluated, we don't see any impact until at the earliest mid-2020. So again, as Bob mentioned, we're staying very close with our customers.

We have received direct communications from our engine customers as well as our airframe customer to stay the course. And that's exactly what we're doing..

I guess, John, while you're on, when discussing the nickel power billet issue, yet, you seem to be pretty emphatic about an improvement in the back half of the year. And so I wanted to know, if you could comment on why you have that confidence? I mean, you already have visibility the things are improving.

And if you can discuss maybe, if there's any risk to your outlook and if these issues could spill over into 3Q and beyond?.

Okay. Well, first of all, why am I confident that we'll be in far better position second half '19 and first half 19? Well, the first part of that is, as we ended 2018, we had an expectation for what our production was going to be of this key billet material based on the share we had in program, in feeding this product at the Cudahy.

That changed in late 2018, as we were communicated by our customer, that there was a need for us to ramp to achieve in essence a 100% supply position in 2019. There are three major qualifications required. For this program, we have already achieved two of them and well on track to achieve the third by the end of the second quarter.

And that is not impacting our ability to ship that product now because we have a pre release capability. As far as the production schedule goes, we're on track. We'll begin producing and again you understand these powder billet materials are long cycle materials beginning with atomization moving through the billetizing process.

We have no issues from a capability or capacity standpoint to meet that on the billetizing of timing side. And from atomizing, we're already beginning that ramp and expect to be in essence at that higher rate a little later in the second quarter. So from our perspective, Rich, we're very confident.

We already have the schedules from affording standpoint. They match up with our guidance. So, we're confident..

The next question will be from David Strauss of Barclays. Please go ahead..

I want to follow up on Rich's question on the MAX. So I get it that you're staying at 52 and I know this will allow you to catch up in the rest of the engine supply chain to kind of catch up. But I think the expectation was that most of the supply chain was supposed to be going up to 57 at some point this year, somewhere in the middle of the year.

So help me understand, how staying at 52 versus that you were supposed to go to 57, how that isn't incremental headwind?.

Yes, David, again, as we talked about as we were answering Rich's question. This is John, by the way, not a titanium intensive airplane. So from a titanium mill product demand scenario, we see no change in demand. As matter of fact, our backlogs of booking rate are unchanged after the announcement.

On the engine side, again this relates to -- while there was a move to the 50 to build rates of supply chain, we're still ramping to that level. And frankly, not at a 57 rate yet, you've talked about, the published kind of delays on the engine side.

So, there was a pent up demand there to not only get caught up with the current race, but also build ahead and preparation for the 57 build rate.

All of that, in conjunction with a very complicated supply chain and some of these materials that are difficult to produce has led our customers that are involved in an engine program to communicate with us very directly and succinctly to say, stay the course. So, that's exactly what we've heard.

And from a demand standpoint, we've seen no change in that demand and it's progressing as we expected to see it in 2019..

I think too, John, the color you could add was around the spares and the lease pool that the desire of the engine folks is to get not only caught up but ahead, not easier to store engines candidly than airframes as the number one issue. The second thing is we're actually seeing continued emergent demand on the product side.

We have Kevin Kramer here with us today.

Kevin, do you want any add any color on the emergent demand in the transactional pricing that we're seeing in that space?.

Sure, Bob. Yes, I think to John's point into Bob. It is steady as we go from the feedback from the customer. But on the emergent demand we have been successful and picking up some incremental volume and incremental share. I think the expectation from our customers is that we'll continue to the balance of '19..

I want to follow up on the FRP side. So, I was hoping you could help reconcile the EBIT guidance change. So, I think you were talking about 75 million to 80 million previously now 42 million to 46 million. And it looks like Q1 was maybe 10 million, 12 million light with nickel prices helping through the rest of the year. Just help us reconcile that.

And can you also comment on where you are with NLMK as well as any additional potential conversion agreements?.

Sure, we can do that. And from just a contest, remember, the focus was about product mix improvement, HRPF utilization and getting our pensions wildly converted over to more of a fixed premium. So when you look at, where we are. So far this year, we have the raw material timing mismatch which you identified.

Certainly, overall raw material price levels do have an impact because of the margins on the scrap conversion. So, we've adjusted our view of 2019 for more normalized or current expectations for raw materials. We certainly have the Asian trade situation we are working through, and we've got to work through that.

The stainless side in terms of -- we're seeing more impact actually more negative impact on our 48 wide stainless for not having the full 60 wide offering with the A&T Stainless activity. So, that's part of it. We are seeing somewhat weaker standard stainless demand in the U.S.

And certainly lastly, even though we saw Q1 being week in Asia, we do see them getting back on track. So, I think that'll be helpful.

So, Pat, given that context, what other color would you like to add to help David with that question?.

The only thing I would add David is, we still faced that pension headwind that we mentioned on the first quarter call. If you reconcile with that, I think the comments that Bob just made that will get you to that number in that mid-40s range for the full year..

There were two questions in there. The second question was NLMK actually. And Kim Fields early few weeks with us. She's being knee deep in that activity.

Kim, do you want to share your perspectives on where we are with NLMK in the progress being made?.

Sure Bob. So as Bob said, that continued to progress is going well. We've had discussions with them. We're working through understanding, the short-term logistics and the ramp up that we need to have in place to prepare for higher volumes in the second half.

So right now, where things moving very smoothly and I anticipate to see, see that ramp up starting here in the second quarter and then as we go in the second half..

The next question will be from Josh Sullivan of Seaport Global. Please go ahead..

I know you're talking about short-term pain here for long-term gain, but looking at your long-term guidance for high performance. It was the powder supply you're internalizing here incremental to that long-term guidance or maybe another way to ask it.

Was the increase share in powder contemplated in your most recent long-term guidance?.

Hi, Josh, this is John. That was not contemplated in our long-term guidance. Again, this was a development that occurred late in 2018. Not something we had even built into our production schedules for 2019. So, we have been working hard to get ramped up for that..

And the only think I would add to that is, Josh that. We're going to see increased quantities in the second half, but we need to get to that run rate. We'll get there by the second half and exiting the year, but it bodes very well for 2020 and beyond as well as we increased our share.

So, you can see an incremental benefit to that starting in the second half and much more significant in '20 and '21..

And then it just came across a headline just came across that UTX is seeing casting and forging as the bottleneck for engine production.

Can you just say whether the powder billet supply is more of an issue for the MAX or the GTF?.

That's a great question, Josh. Obviously, we deal with those engine customers on both of those programs. I would say that from my perspective, and again this is just an ATI perspective here, that they're both probably equally challenging on those programs.

Because again, while the supply chain has many participants in it, when you get to some of these very differentiated forging and casting opportunities, there are a fairly small number of players who do that. So from our perspective, I would say that the challenges are relatively equal between us..

So, we would take the opportunity to just say that any disruptions or challenges in the supply chain are not related to our performance. I think the HPMC team continues to be very in tune with customer demand. It does shift, it does change, it is dynamic, but they have been very aggressive at staying current.

It's credit to John and the team in a challenging dynamic world. So couldn't pass that one up..

The next question will be from Phil Gibbs of KeyBanc. Please go ahead..

So just maybe getting in line with some of the questioning here with the engine supply chain, it looks like per your release, engine sales were down year-over-year and down I think a decent bit sequentially. So, I mean, there is an implied slowdown or a direct slowdown in your business in the short run just in the numbers.

How are you looking for that to progress over the course of the year? And then secondarily, I mean, you're saying that, to Josh's point here, the forgings -- he said the forgings are a bottleneck and you're saying, I mean, you're not the issue but your forging sales, it looks like here were more down year-on-year I think a small bit.

So just trying to put the pieces together because it sounds like the engine supply chain is slowing down..

Yes, Phil, this is John.

So I think the important thing to remember when we're talking about particularly a year-over-year analysis, Q1 2018 to Q1 2019 is Q1 2018 and frankly Q2 2018 benefited from exceptionally high isothermal forging shipments that frankly were related to some of the same third-party billet challenges we're talking about now that affected us in 2017.

So we had a surge of those third-party billet shipments that occurred late in 2017 and what we were doing in early 2018, which is frankly getting the customer caught back up based on that. So you saw this abnormally high rate of shipments in first half of '18 compared to what was in our backlog. So that explains year-over-year.

From a sequential standpoint, this is nothing more than frankly us bottoming out related to this third-party billet issue, which is going to have the most impact for us in Q1 2019 and we'll be climbing our way out of that in Q2 and then achieving more of that full run rate in the second half of 2019.

So that's the issue on the powder billet side and those comparisons. The analysis you talked about, about lower forging sales, those were related to a particular engine program that is not one of the single aisle programs that we've been talking about.

Our single aisle programs both with the LEAP programs and the Geared Turbofan programs, that demand is ramping as we expected it to do. We've seen no slowdown whatsoever in any of those programs whether it be mill products going into them, forgings or castings, frankly..

John, just thanks for the color on that. And then just a follow-up if I could, because I just want to contextualize this. So you said year-on-year you had about a $15 million headwind in the powder supply chain effectively and you'll have a little bit more of those headwinds carry into Q2 and the comp is going to be really hard.

Should we think about, as we move through the second half and into next year that you'll effectively recover that $15 million and then you get the incremental revenue growth on top of that.

So the flip is not only getting back to the baseline that you were at on average in the first half of 2018, but getting well above that as you tack-on the contract here because I think that's a point I feel like people need to hear. Thanks..

Yes, Phil, that's exactly how you should look at it..

And the next question will be from Timna Tanners of Bank of America Merrill Lynch. Please go ahead..

Wanted to -- I guess, just remaining outstanding question that wasn't asked that I heard at least was regarding Tsingshan and how you're looking at that joint venture.

Given the challenges that you outlined in stainless, given structural global challenges largely because of Tsingshan, is there a point at which you'd rethink how you structured that joint venture or how you approached it and can also provide us kind of your latest thinking on the near-term outlook?.

Yes, so I think the -- fair question. It's a question we discuss not only with the commerce department, but also with our partner on an ongoing basis. It's a continuing dialog certainly. And from that perspective, with commerce, the merits of our case are still strong and we're pushing all the buttons for a decision.

And we believe after close to 12 months we deserve a decision on our application. Now, that said, I think our target is to get the JV as close to cash neutral as we can. Our partner is certainly committed to that.

We believe that to be successful in a commodity product, you need to be a low-cost, highly competitive quality producer and the joint venture still provides that opportunity for us. And so we're still committed. We believe that our customers want a 48 and a 60wide product for the portfolio. They act that way. They buy that way.

And we're committed to having that for them. So in terms of what does the market need and what kind of a cost structure do we have to have, the joint venture still provides that.

As we've said before, if not all of our competitors, but the majority of our competitors like to read our transcript, so we don't like to tip our hand in terms of what we're actually going to do either way.

But as I've said publicly in other forums, we are committed to having a 48 and 60wide cost competitive offering to provide that base load of utilization through the HRPF. And if we need to modify the activity of the joint venture to do that, we and our partner are committed to doing that to have a long-term presence in the US market..

Okay. I recognize that it's probably sensitive and you make a good point about your competitors reading the transcript.

But just to follow-up, any -- and I know it's been frustrating and you've been waiting over 12 months, but anything new on, from your sources in the government about timing of a ruling on slab rerolling of stainless? And anything -- any other color you could provide on how you would think about reworking the agreement if you don't get that approval?.

Yes. I think in fairness to that question, it's determining or betting on when the government is going to make a decision today is a low-odds bet. It's kind of like betting on future nickel prices, but we believe that the fact-finding is over and that they have gotten all the information they need.

Now it's just a deliberative decision-making process that they're going through. So we believe that this is the quarter for a decision. I know that's risky, but I know I'll get a chance if it doesn't happen to talk to you again next quarter, but we believe the decision is near.

We've seen signals in other areas that they are making decisions on other exclusion requests. There have been approvals for requests even when there were objections. So I think they are working through the facts and I think in the slab case, as we have said before, there is no market, no merchant market for stainless slabs, never has been.

And so I think if you want to categorize the objections as disingenuous, I would. So I think they will make the right decision here shortly..

The next question will be from Gautam Khanna of Cowen and Company. Please go ahead..

Hey, good morning. This is Jeff Molinari on for Gautam. And you've answered a lot of my questions already and we talked a bunch about nickel powder billet opportunity already. I just wanted to just have one more there.

Can you quantify kind of what are like the opportunity size as for that opportunity? Like, can you just put some sort of dollar or just quantify that anyway how -- once you get this ramped up, what sort of benefit this could be to you guys?.

Yes. This is John. We're not going to quantify that at this time. We'll provide guidance as we get closer to that point. I would say that from our perspective what you're going to see is obviously a performance impact as we begin shipping at those higher rates on our results..

Positive performance impact..

Yes. However, for 2019, though, we expect this to be a net negative. I don't think we're going to fully offset the impact of that through the balance of 2019. We'll see more of that in 2020 when we have a full year running at that rate..

Okay, that makes sense. I understand. Maybe one more for Kim, if I may. For FRP, you mentioned kind of economic uncertainty has driven some inventory draw down and weak demand both in US and China. Just curious if that behavior has changed at all or -- as we are into this quarter? Just any color there would be helpful. Thank you..

I'd say, yes, just in the last couple of weeks, we have seen an improvement in order rates coming in for our standard stainless products. And so we are starting to see, I think, some additional activity. And then I know over in China, on the Asian side we're seeing -- we've already seen quite an improvement.

I can let Kevin give a little bit more detail on that..

Sure. So we are seeing a rebound from the first quarter performance. March, April bookings are quite strong in the key end markets that drive both volume and mix and that's consumer electronics, solar panel, and automotive. Specifically, in consumer electronics, a number of our key customers have a product refresh strategy.

So there's a lot of new product development that STAL is involved in and we're quite confident we'll start to see the results and the benefits of the new product at the end of the second quarter through the balance of the year..

That's helpful. And just one more on STAL since you mentioned that. You said you had -- you kind of -- you had some production downtime given the weak demand in this quarter.

Do you have any plans to have that approach going forward or is demand strong enough not to warrant that action?.

No, we in fact see we are going to be back at kind of a full run rate. It was really a combination of a number of customers having a product reset within the first quarter.

The automotive build in China was down 14% on a year-over-year basis, but during the Lunar New Year, which is typically a two-week period, we extended that almost to three weeks, which we have not done previously. We're back at the full crew, we are running full out going forward for all three facilities..

I think the other thing that you mentioned in the past Kevin is that the STAL 3 investment gives a great capability at the lighter end of the gauge range of Precision Rolled Strip to serve as the emerging new product opportunities in both consumer electronics and solar.

So, there is customer demand for not only the capacity, but the capability which is equally important not only in China, but over Asia overall..

That's a great point, Bob. And again it isn't just capacity. It is capability. All the new products that we are focusing on are enabled by STAL 3. And again to Bob's point, the export opportunities within Asia in both automotive and consumer electronics are also taking advantage of those unique capabilities in STAL 3..

And the next question will come from Chris Olin of Longbow. Please go ahead..

So a few of my questions were already asked and that leaves me with a question that I'm pretty sure Mr. Sims will not like. So apologies upfront, but I wanted to ask you about titanium sponge and this whole Section 232 investigation.

And I realized that that case was originally turned down I think back in 2007 or so, but I guess no one really knows how to think about the Trump administration's policy.

So I guess my question to you is, do you see any risk for import tariffs to be placed on your sponge purchases coming from Japan? And if so, are there protections in your contracts where you could pass that through?.

Yes, Chris, I appreciate you asking me more raw material questions. It's become a theme I think. I would say, on the 232 -- you brought up a good point, the trade case from a year ago and that was unanimously rejected by the ITC. And we have prepared our response to the 232 filing by TIMET.

We believe we have a strong case from the feedback we have heard from customers. They support that case. But I think, as you said, it will depend on somewhat on politics and somewhat on the merits of the case. Related to your question about can we pass-through a potential increase, I'd say, generally, yes.

Our pricing mechanisms are set to do that, but it's not something we want to see. We know our customers don't want to see that nor do we view the underlying premise for the filing is valid..

I think that's right, John. I think the other thing we've talked about is that the current sponge producer in the United States has sufficient output to meet the demands of the defense and national security interest of the United States.

And I think our view is that that particular producer should invest in modernizing their suburban Las Vegas facilities and not artificially manipulate the price through trade action for their exclusive benefit. So I think the case will certainly be judged on its merits..

And, ladies and gentlemen, this will conclude the question-and-answer session. We do apologize to anyone who had questions that we were not able to answer at this time. At this time, I would like to turn the conference back over to Bob Wetherbee for any closing remarks..

Thanks, Denise. Let me summarize quickly. ATI is a combination of differentiated process technologies, material science capabilities and truly the relentless passion of our people, wins in the markets that push the boundaries for corrosion-resistant, lightweight, strength at high-temperature.

We've earned our customers' trust through the relentless innovation, product quality, reliable service and delivery.

We've taken action to address the headwinds that created the first quarter's disappointment and we're confident that our long-term strategy to generate sustainable profitability and growth will lead to the improved performance that we projected in the second half of 2019.

Thanks for joining us on the call today and thanks for your continuing interest in ATI..

Thank you, Bob, and thank you to all the participants and listeners for joining us today. That concludes our first quarter 2019 conference call..

Thank you, Mr. Minder. The conference has now concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines..