ATI Inc (ATI) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Allegheny Technologies, Incorporated first-quarter 2016 results conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Dan Greenfield, Vice President Investor Relations and Corporate Communications. Please go ahead.

Thank you, Andrew. Good morning and welcome to the Allegheny Technologies conference call for the first-quarter 2016. This conference call is being broadcast at our website at www.ATIMetals.com. Members of the media have been invited to listen to this call.

Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Pat DeCourcy, Senior Vice President Finance and Chief Financial Officer. All references to net income, net loss or earnings in this conference call mean net income, net loss, or earnings attributable to ATI.

If you have connected to this call via the internet, you should see slides on your screen. For those who have dialed in, slides are available on our website. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions to be considerate of others on the line. As always, we will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call time.

Please note that all forward-looking statements this morning are subject to various assumption and caveats, as noted in the earnings release, and on this slide. Actual results may differ materially.

Here is Rich Harshman.

Thank you, Dan. Good morning to everyone on the call or listening on the internet. The first-quarter 2016 results reflect the current positions of our two business segments. Our High Performance Materials and Components segment is well positioned for profitable growth over the next five years, driven primarily by strong and growing demand from commercial aerospace.

We are committed to making the tough decisions to return our Flat Rolled Products segments to sustain profitability. This requires the business to be repositioned and restructured and to be more focused on differentiated products that have higher technical barriers to entry and serve markets that are global with attractive long-term growth prospects.

The commercial aerospace ramp, for which we have been preparing, is upon us. We saw the beginning of improving sales on operating performance in the first-quarter 2016 results. ATI sales to the aerospace and defense markets grew 12% in the first-quarter 2016 compared to the fourth-quarter 2015.

Breaking that growth rate down by specific end markets: sales to commercial aerospace market grew approximately 20%, with jet engine sales growth of nearly 15% and airframe sales growth nearly 30%. Sales to the defense market were down approximately 17% in the first quarter, due primarily to the timing and shipments of our products for naval nuclear applications.

I believe that ATI has opportunities to grow and diversify our position in serving the defense market. We are taking actions to better focus our technical and product capabilities on these opportunities.

For all of ATI, first quarter sales to the aerospace and defense market reach 52% of total ATI sales compared to 41% of sales for the full-year 2015. Jet engines accounted for 28% of first-quarter sales, airframe represented 16% of first quarter sales, and sales to government aerospace and defense were 8% of sales.

As expected, the oil and gas chemical and hydrocarbon processing industry represented the largest drop in sales, as low demand from these markets continues. Oil and gas sales were good during the first half of 2015, largely due to shipments of nickel alloy plate for a large pipeline project. However, demand from the oil and gas market fell dramatically throughout 2015, and we expect demand to remain low throughout 2016.

There are a few bright spots in oil and gas: aging wells continue to require enhanced oil recovery techniques that use our nickel-based alloy products, and demand is stable from long planned subsea projects that use our materials.

We are optimistic about the opportunities for growth in the chemical processing and the hydrocarbon industry over the next several years. In the US, low prices and consistent availability of natural gas liquids from shale is expected to drive growth in the petrochemical market. Domestic and foreign companies continue to evaluate plans to build CPI plants in the US to diversify their geographical portfolio where secure long-term supplies of affordable feedstock exists. In addition, the global hydrocarbon refining industry is expected to see substantial growth as demand for gasoline continues to grow, particularly in Asia.

Looking at the High Performance Materials and Components segment, sales were up -- sales were $493 million in the first quarter, up approximately 8% compared to the fourth quarter of 2015. 73% of segment sales were to the aerospace and defense market.

Operating profit, while still far below longer-term expectations, increased by nearly 40%, compared to the fourth-quarter 2015. Segment operating profit was 5.9% of sales. On an adjusted basis, segment operating profit in the first quarter of 2016 was 6.9% of sales, excluding return to work costs related to the new USW labor agreement and nonrecurring operating costs of the Albany, Oregon and Lockport, New York facilities during the labor agreement transition.

Product mix improved through increased sales of next-generation jet engine advanced materials. Sales of nickel-based alloys and specialty alloys increased by 8%, and sales of titanium and titanium alloys increased by 17%. Sales of our precision forgings increased 15%, driven almost exclusively by growing demand for jet engine components and airframe forgings.

While strong growth is expected in 2016 and over the next five years, sales of our titanium investment castings were lower than expected in the first quarter, due to challenges and ramping production of new parts.

Turning to slide 5, in our Flat Rolled Product segment, the transition to a smaller, more agile, cohesive, efficient and profitable Flat Rolled Products business requires tough decisions. The pain for our Company and employees is unfortunately necessary to help secure the future of our Flat Rolled Products business.

As we have said many times, we believe in US manufacturing. We know it is difficult for a US manufacturer to compete in global commodity markets, particularly when significant global over-capacity exists in such products as commodity stainless sheet and grain oriented electrical steel.

During the first-quarter 2016, the markets for most of our Flat Rolled Products were similar to the weak business conditions that existed in the fourth quarter of 2015. To the extent that demand and base prices improved, it was only marginally. The price of nickel was below $4.00 per pound for a large part of the first-quarter, and while it is now slightly above this level, it remains low relative to the last 10 to 15 years. As a result, surcharges did not recover the cost of raw materials in much of the Flat Rolled Products shipped in the first quarter.

As announce last December, we idled our Midland, Pennsylvania commodities stainless steel melt shop and sheet finishing facility in the first quarter due to poor business conditions and the lack of profitability in producing many commodities' stainless sheet products. Also consistent with our December announcement, we ended melting grain-oriented electrical steel products in the first quarter, and just last week began to idle our grain-oriented electrical steel finishing facility.

During the week of March 13, we began a transition as our USW-represented employees return to work. As a result of these actions, manufacturing costs were unusually high and asset utilization was lower throughout the first-quarter in our Flat Rolled Products segment. We recorded a $9 million severance charge in the first quarter of 2016 for the reduction of approximately one-third of Flat Rolled Products' salaried workforce through the elimination of over 250 positions. The actions we have taken, and any additional actions in the future, are designed to return our flat rolled business to profitability and position the business for sustainable, profitable growth in the future.

Some of the inefficiencies in high-cost realized in the first quarter will negatively impact the second-quarter results. However, we expect to see meaningful reduction of operating profit losses in the second quarter and further improvement as we move throughout the second half of 2016. Specifically, we expect to achieve better productivity and asset utilization rates, increase shipments, and lower overhead costs. Also, we expect an improved product mix due to new HRPF-enabled products, and we are focused on eliminating unprofitable products. As a result of these actions, we expect Flat Rolled Products segment to be modestly profitable in the second half of 2016.

In addition, a trade case covering stainless steel sheet and strip was filed this past February. The International Trade Commission has made a preliminary announcement that the domestic case indicates material injury, allegedly due to unfairly traded imports from China. Chinese imports had moderated to be between 5,000 and 8,000 tons a month through February of this year, but imports surged back over 10,000 tons in March.

Turning to slide 6, Flat Rolled Products is being positioned for sustainable long-term profit growth, albeit as a smaller business. The business will focus on differentiated products with significant technical barriers to entry and less on products which have been highly commoditized.

We sell most of our differentiated flat rolled products globally. We are often asked, as ATI Flat Rolled Products focuses on markets and products that require technical and manufacturing leadership, what will the business look like? Our strategic vision is depicted on the bottom of the slide from a market standpoint.

In this table, we compare Flat Rolled Products' top six markets in 2015 to our 2020 strategic forecasts. We expect the oil and gas chemical processing and hydrocarbon processing industry to remain Flat Rolled Products' largest and end market with growth in HPI and CPI complementing improved demand from the oil and gas market over the next five years. The biggest change in the Flat Rolled Products market, as you can see, is aerospace and defense, which moves from number six to number two.

This is due to the expected growth in demand for our flat rolled alloys, our new HRPF capabilities, and our ability to sell more flat rolled products to the same jet engine and airframe customers that are already strategic customers of ATI. We are now capable of providing a broader portfolio of products to these OEMs.

We also see demand growth from the automotive market. We completed the exit strategy for most commodity auto exhaust alloys with the idling of the Midland operations. We continue to provide specialty grades for auto exhaust applications.

Global demand for our engineered strip and precision rolled strip products remains robust, particularly in Asia. Demand for our nickel-based and specialty alloys for automotive applications continues to grow. These products are required for higher heat engine applications, which are growing as a result of the growing use of single and double turbo charged engines.

I would like to turn to Pat DeCourcy, our ATI's Chief Financial Officer for a discussion our cash flow, liquidity and retirement benefits. Pat.

Thanks, Rich. Turning to slide 7. We had cash on hand of $157 million at the end of the first-quarter 2016 and available additional liquidity under our domestic asset-backed credit facility of approximately $200 million. Managed working capital decreased $22 million at the end of March 2016, compared to year-end 2015. And decreased as a percentage of annualized sales, primarily due to inventory reductions in the Flat Rolled Products segment.

Total debt to total capitalization was 45.4% at the end of the first-quarter 2016, compared to 42% at year end 2015, as we utilized our domestic credit facility to support capital expenditure requirements and ongoing operational needs of Flat Rolled Products segment.

Cash generation from operations is a key focus. We expect to continue to use a portion of our asset-backed credit facility throughout 2016, as we execute our right-sizing actions in the Flat Rolled Products segment and balance the working capital requirements of a smaller flat rolled products business with increasing business volumes in High Performance Materials and Components segment.

Our new four-year contract with the USW-represented employees in Flat Rolled Products in two high-performance materials and components locations, includes important milestones in our ongoing strategy to manage and reduce our retirement benefit liabilities. In 2014, we froze all future benefit growth in ATI's defined benefit pension plan for non-represented employees and change to a modern retirement benefit structure with a market competitive, defined contribution retirement plan. We also took actions to end all remaining retiree life insurance benefits and retiree medical benefits assumed in the 2011 Ladish acquisition for non-represented employees.

With the new 2016 USW contract, we now have a freeze to new entrants to ATI's defined benefit pension plan for these represented employees, who will have a modern retirement benefit structure with a market competitive defined contribution retirement plan. New hires under the USW contract will also receive a more cost-competitive and cost-certain defined contribution plan, rather than receiving retiree health care benefits.

Turning to slide 8, we will recognize approximately $8 million of lower retirement benefit expense for other post-employment benefits, or OPEB costs, ratably in March through December 2016, as a result of the new USW labor agreement. This benefit change is also expected to favorably impact future years. These changes will be reflected in the Flat Rolled Products segment results.

Based on updated actuarial estimates, minimum funding requirements for the ATI pension plan through March 2017 are currently projected to be a total of $31 million. We also expect to have higher quarterly pension funding requirements in 2017. These funding obligations have been anticipated for some time. We continue to update our pension funding projections as new information becomes available, including potential changes in mortality tables, which revise longevity estimates for funding purposes and the performance of our pension trust assets.

In addition to our ongoing efforts to limit the growth of retirement benefit liabilities, we ar actively evaluating proactive pension liability management strategies. For example, we are evaluating annuity buyouts of smaller balance pension participants, which would help to lower the burden of significantly escalating premium charges from the PBGC. We are also evaluating the benefits of a voluntary pension contribution, as well as the potential shift -- to shift the investment of pension trust assets to more closely match the expected changes in the value of pension liabilities. We remain committed to our long-term strategy of getting out of the defined benefit pension business.

Moving to slide 9. We continue to estimate that 2016 capital expenditures will be less than $240 million, with $70 million paid in the first quarter of 2016, over half of which related to the hot roll and processing facility, or HRPF. The second-largest capital expenditure in the first-quarter was for our new nickel-based super alloy powders facility currently under construction in North Carolina.

Depreciation and amortization expense in 2016 is forecasted to be a total of approximately $180 million. Also we are near the end of our extraordinary capital expenditure cycle that has transformed and modernized ATI.

We have built the foundation for creating long-term value through relentless innovation. We have secured our position to grow faster than the market during this once-in-a-lifetime aerospace market transition from legacy to next-generation airplanes and jet engines.

Now I will turn the call back over to Rich.

Thank you, Pat. The beginning of the next generation rate ramp is upon us, as depicted in our first-quarter results.

Slide 10 shows how we view this aerospace cycle. The white area shows the number of legacy engines. Our products here include such well-known alloys as ATI 718 nickel-based alloy and ATI 64 titanium alloy. As shown on the slide, beginning in 2016, there is a more pronounced growth in the spread between the declining demand for legacy products to growing demand for the next generation products.

The green area shows the number of next generation engines. Our differentiated products here include proprietary and unique alloys, as well as products that few others can make, such as ATI 718+ alloy, Rene 65 alloy, ATI 720 alloy large billets, plasma arc melted titanium alloys, powder metals, titanium aluminides, as well as hot-die forgings, isothermal forgings and titanium investment castings.

For ATI, this slide demonstrates the significant mix shift in our backlog and schedules. We saw that mix shift begin in the first quarter with a better mix of next-generation mill products. To produce these next generation products, we have a unique set of assets and capabilities. ATI is currently the only qualified plasma arc melt producer of titanium alloys used for jet engine rotating parts.

Plasma arc melt, or PAM, is often the preferred process for titanium alloys used in jet engine rotating parts, as well as complex titanium alloys. ATI has the most powerful open die press forge in our industry, which enables industry-leading fine-grained structure in complex nickel-based super alloy billet and the billetizing of powder alloys. ATI is one of only two independent and integrated qualified producers of nickel super alloy powders and isothermal forged parts.

Turning to slide 11, for ATI structural changes are occurring in the aerospace industry that we help enable and lead. First, as depicted on this slide, the titanium content of next-generation airframes is growing. Compare the legacy 737 at roughly 4% titanium content to the 737 Max at about 12% titanium content. While these numbers are estimates, they provide a sense of the growing current and future needs for titanium alloys from the airframe market.

Second, as seen in slide 12, the jet engine firm order book set another record in February. The legacy single outback log is declining, while the next-generation single out backlog is growing. Beginning in the first quarter of 2016, we saw improved shipments of forgings, castings, nickel-based alloy and titanium-based alloy milled products, plus an improving mix of next-generation milled products. Milled product shipments for future use in forgings and components lead the cycle.

Think of it this way, our next generation milled product ship to all forges involved including ATI. As an integrated supplier, milled products are forged and machined by ATI and then shipped to the OEM. So you have seen an increase in next-generation milled product shipments to other forgers in the first quarter, and this will be followed by revenue growth in the next generation's forgings made by ATI.

Turning to slide 13. We are seeing aerospace growth because we won significant number of forgings and castings that are new to ATI for legacy engines. We also won significant next -- number of next generation forgings and castings for the future growth of the engine market.

As we have said, the 300 new parts are secured through long-term agreements we have in hand. They are expected to generate over $1 billion of new business for ATI from now through 2020. Our forging asset utilization is expected to continue to improve as these parts are produced in larger forging runs and the loads on our hot die and isothermal forging operations continue to grow.

Beginning in 2016, and continuing into the next decade, as the airframe and engine OEMs build and deliver the record-ordered backlogs, ATI expects to see significant growth in specialty materials milled products, forgings, and castings. In summary, we will continue to focus on the opportunities and challenges within our control and take all necessary actions to return ATI to sustainable profitability as quickly as possible, while we execute our strategy to fix the Flat Rolled Products business and position ATI for sustainable profitable growth.

In our high-performance Metals, Materials and Components segment, the first-quarter 2016 began what we expect to be a multi-year period of sustained profitable growth supported by long-term agreements in place that secure growth for ATI on legacy and next generation airplanes and the jet engines that power them. The volume from these agreements is expected to provide improved capacity utilization, improved product mix in our mill products forgings and titanium investment casting facilities.

We expect to increase the pace throughout our High Performance Materials and Components operations as we progress through 2016, driven primarily by the commercial aerospace market with segment operating profit as a percentage of sales returning to low-double-digit levels in the second half of 2016.

In our Flat Rolled Products segment, our first half 2016 results will reflect the ongoing rightsizing and restructuring activities. We expect shipments of our specialty coil and plate products to grow as we move through 2016, particularly our new 48-inch wide nickel base sheet products, which are enabled by the capabilities of the HRPF. Our objective is for the Flat Rolled Products segment to be modestly profitable in the second half of 2016.

Operator, may we have the first question please?

We will now begin the question and answer session.

(Operator Instructions)

Richard Safran, Buckingham Research.

Hi, good morning.

Morning, Rich, how are you?

Very good, thank you.

Rich, I wanted to talk about commercial aerospace sales for a second. Increased 20%, fine - but I wanted to focus on the good growth you had in airframe. So assuming, like it says in the slides, about a one-year lead time, your growth in airframe appears to be a growth above the growth of build rates I wanted to know if you could comment more specific on what programs were driving that growth? If you could comment on the cadence of the growth for the rest of the year and maybe if you care to offer a comment about 2017?

Rich, I think we have talked before about, historically, on the titanium mill products side, if you go back and look at prior years, there was a heavier shipment level of those products in the first half of the year than in the second half of the year. So you would think that because the rate build has been talked about for a while, that there would be a more uniform demand of mill products throughout the year, but we haven't seen that in the past. We've seen a heavier load in the first half of the year, and a lighter load in the second half of the year.

So we're coming off a fourth quarter that is low, and a first-quarter that is more indicative of the normal demand level. What we are seeing in 2016, as we look at the loads for the full year, is we are not seeing as much of the pronounced emphasis on building inventory and order rate in the first half of the year, we are seeing are more level load throughout 2016. Which quite frankly, I think is good for us.

We would much rather have a delivery rate that is more indicative and supportive of the ultimate demand and from a build rates standpoint. And I think we're seeing that now. So we had a low fourth quarter and a more normal first-quarter, and hopefully we will see a more balance of the mill product shipments throughout 2016 then we have had in the past.

Secondly - so that's a big driver of it - but we are seeing an increase in demand for parts and components on the airframe side. Historically, we have been more focused from an airframe standpoint of delivering milled products. We have been winning parts and components that support the airframe build rate across multiple platforms.

I think -- I know you're seeing some of that in the first quarter, and you will continue to see that as we move through 2016 and beyond.

Okay. Thanks for that.

Staying on that topic though, just for second, I wanted to talk maybe about production rates. We know Boeing announced lower 777 production rates down to seven a month. Could you give us some sense of an impact if 777 rates were to fall further?

Also, as you know Airbus is talking about lower A380 rates, from 2 to 1.7 per month. Same question there -- just wanted to know if you could give a little sense of how that might impact you?

Yes on the milled products I don't think it will be all that significant, quite frankly. On the parts and components side, the A380 impact has been - that we've seen the issues and prior years of the A380 changing demand. Now there have been some drop in orders, quite frankly, that are going to positively impact demand for parts and components in 2016.

That will be helpful to us. But I don't think going forward, the change -- the recent change Airbus is talking about in terms of lowering the build rate on the A380, I don't think that's going to be a major driver for us one way or another. And on the 777, really the same thing.

I think we look at more the opportunities long-term on the 777x, both from an airframe standpoint with a higher titanium content, and also on the engine side with advanced materials as being a big growth driver over the next several years. Those aren't things that I think are going to be game changers for us in the near term.

Okay. Thanks for that.

Thank you.

Chris Olin from Rosenblatt Securities.

Good morning.

Chris, how are you?

Good, good. I apologize if I missed it, but I heard some reference to a production ramp delay for investment castings? I was just wondering if you could provide a little more detail on that?

Yes.

No, it's not a production ramp delay, it's a production ramp. (laughter) From our perspective, when we have a very full backlog for investment castings over the next five years, and we are taking a business that has been relatively small, to one that's going to be a significant component of ATI's growth.

As we ramp up in and then bring on new capacities that we have made recent capital investments in, we are experiencing some hiccup in our production rate ramp that led to some lower sales in the first quarter than we would have expected. We are focused on that.

We have all the right people and the right leadership team working through those issues. And I am confident that as we progress through 2016, we will recover that. It is not a rate ramp delay from our customer standpoint, it's more our challenges and ramping up our production to meet the demands of the customers.

Okay, got it. Jus second, as a follow-up to the titanium question - I have been hearing about some production delays or disruptions from some of your competitors, I was just wondering if that is in some of the titanium growth numbers, as well? Or -- I guess I will leave it at that.

I think -- this is an interesting time for the aerospace supply chain. Right? As you heard me say before, Chris, its a once in a lifetime market for a lot of reasons. Not only from the standpoint of the record backlog, but from the number of new platforms, especially on the engine side, they're all hitting at the same time.

And a different supply chain -- there are different players in the supply chain, perhaps today, than there have been in the past supply chains. I think the supply chain periodically sees hiccups. Not only -- I just mention one from an investment casting standpoint that we're going through.

So I imagine that there are other things going on in the supply chain from a mill product standpoint where people are having problems or issues and the material is needed so the customers look for - where can they go to get the materials so that they don't interrupt their rate ramp. Have we benefited from that in the past? And even in the first quarter for titanium mill products and nickel super alloys mill products?

Yes, I think we have. I think that speaks volumes to the capability that we have, and the reputation that we have with our customers, that when there are problems in the supply chain, they feel confident that they can come to us, and we do everything in our power to make sure that we alleviate their problem. That has happened.

That is good news, right, from our perspective. What you have to be careful about is, I know not from you, Chris, but from others there's a tendency to want to look at every single quarter and the movement from one quarter to the next, as opposed to looking at it more over a longer time period - like on an annual basis. So I think when you step back and look at this, at the market and the rate ramp on an annual basis, you will see a trend that is more indicative of reality as opposed to being fixated on a quarter to quarter.

I think -- is our understanding that we did benefit in the first quarter from some -- we will call it emergent demand of mill products that, for whatever reason, was above our expectations of what the customer wanted from us in the first quarter. We will always be there to support the customer needs to the extent that we can, and if that emergent demand exists in the future because of problems that may exist in the supply chain, we will be there to support the customer.

Okay. Thanks a lot.

Josh Sullivan, Sterne Agee.

Good morning.

Josh, how are you?

Doing well.

The operating margins and high-performance -- I know you are in a lot of different products, is there any way to quantify where utilization across the board was in Q1 to maybe where it's going to be in Q4? Just so we have an understanding of where margins potentially are going to be by the end of the year?

Yes. I think you have to look at each individual asset base.

I mean, in terms of, we obviously have capacity available, or we wouldn't be able to meet on a short-term basis the emergent needs that we just had a little bit of discussion on.

I think as the demand grows, we will continue to see improved asset utilization across our various manufacturing processes. From melt and re-melt, through the hot working of the mill products, all the way through the manufacturing process through parts and components. As we look at this build rate over the next several years, we have the capacities to support the business that we have won.

As that materializes, we will continue to improve our asset utilization, lower our costs and improve the productivity. It is a trend. If it were something that we could go to a wall and flip the switch and say - okay we are there now, we would do that, but that's not the nature of the beast.

We are at utilization rates in the first quarter that were better than the second half of 2015. I think the utilization rates will be improved in the second half of 2016, over the first half of 2016, and 2017 will be better than 2016, and 2018 will be better, and that's just the nature of our asset base and the nature of the aerospace rate ramp. Having said that, I think there is one challenge that we have where -- that is negatively impacting our margins and we have talked about before, and that is the utilization rates that are titanium sponge operations in Raleigh, Utah.

There, because of the comparative cost advantages that exist by either buying titanium sponge or buying scrap and using scrap, we have been operating our Raleigh facility at about 50% of capacity. We pay a penalty for that. We pay a P&L penalty and we pay a cash flow penalty for that.

We will continue to evaluate that facility in terms of how it should be run to minimize the earnings drag and the cash flow negative impact on ATI and we do that continuously. We're in the process of looking at it again in terms of how we want to run Raleigh. That is really the only one that, from a capacity standpoint, that we have a challenge that we might have to think more creatively on, as opposed to just having the natural demand growth continue to increase our asset utilization and lower our costs.

Okay.

And then just switching gears, if we look at the expectations to be modestly profitable in FRP in the second half, what factors maybe get us there sooner? What obstacles do you see to achieving that timeline?

Yes.

It's a great question, right? What we're in the process of doing is transitioning a business into a different mode than it has really ever been in.

It has historically been a business that has thought of itself more as a commodity producer. And when you're a commodity producer, you think of volume. The importance of that next coil or the importance of that next pound.

The transaction prices for those commodity products are at a level that you cannot think that way. Because the next pound actually doesn't make a contribution margin, it's a negative. So we're changing the mindset of that business, and we have the right leadership team there to do that.

Part of it has been -- we knew that we had to do something in terms of a more competitive labor agreement that began to bend the cost curve on a longer-term basis for that business. That was a painful process. It was an unfortunate process and it was a painful process that took us through a work stoppage and everything.

That's behind us, so now we have to move forward in terms of rightsizing that business. Focusing on the products that we can make money in, taking the costs out of the business, including that overhead cost structure, simplifying it. Some of the reasons for saying, for example, that grain or electrical steel decision is an interesting decision, because its a product that we were losing a lot of money on, but it was also negatively impacting the efficiency of the rest of our operations. So you get -- when you make a decision on, under the current business circumstances, to not produce that product, you get a double advantage.

Number one, you take the costs out that are associated with producing a product that is losing money, and secondly, you simplify the business and you take a lot of other costs out that are infecting the rest of the products that you make, including the differentiated products. There are a number of activities that are going on that are fundamentally best summed up to say, we are doing a strategic renewal, evaluation of what are the products and what are the markets that we can be profitable in, in flat rolled, structuring the business around that size, and then moving forward in areas of growth opportunity that we know are there, that historically maybe we have not been focused on as much as we should have.

And that's getting more intimate and deeper with the ultimate end customer, as opposed to going through a supply chain that you have less than direct access to the end customer. That's the strategy. Is it easy?

No. Is it something you can do in one quarter? No. We're doing it over the second half of 2015, and the first half of 2016. And if the market's conditions remain similar to what they are, I am confident that we can return to modest profitability in the second half of 2016.

And then the next question is, where you go from there? Because modest - being modestly profitable in a $1.2 billion business, is not acceptable. To me, or to anybody else here. Then it's a question of - how do we continue to grow that business, continue to focus on taking costs out of it, becoming more efficient, reducing the manufacturing lead time and the cycle time, which helps us on the whole material cost recovery, et cetera, et cetera. And that is really how we see things beyond 2016.

Gautam Khanna, Cowen and Company

Yes, I just wanted to ask about the comments on pension. Because in the K, its suggested that over the next one to three years, the cash contribution would be something like $496 million. I just wanted to understand, is there any potential reprieve on that? Or is in fact going to rise to about $165 million per year, offsetting the benefit of the reduction in CapEx?

There are a couple of factors in that calculation. First would be, we are making an assumption about the update to the IRS mortality tables, which we're indicating would be effective for January 1, 2017. That has been postponed a couple times. There's a potential for that to occur again. If that were to be pushed out, then the numbers would go down in those near-term years.

Also, it's also dependent upon our return on assets, and that's a normalized return on asset projection based on the current market conditions, so it's also dependent upon what happens within the equity markets and other investment markets that we participate in with our pension assets. So there is potential that those numbers could go down depending on those assumptions.

Okay.

But as of right now, you are planning for a big uptick in cash contributions? Can you give us a framework for CapEx again next year?

Yes, CapEx next year will be down, at or below $100 million. And that's for the next several years. Really for the balance of the decade.

We anticipate be below $100 million each year. And again, our maintenance CapEx, with all of the improvements that we've made, has been reduced substantially. Our maintenance CapEx is around $45 million to $50 million a year. Those are the required expenditures.

Above that it would all be opportunistic. We anticipate being at a much lower level for the balance of this decade, well below $100 million on average per year.

Okay. And then could you give some color on the cadence of free cash flow, Q2 to Q4 of this year?

Sure.

We will continue to have cash use in Q2. Then we will turn positive in the second half of this year.

In both Q3 and Q4?

Correct.

And how negative could Q2 be?

It will be certainly less negative than Q1, as when you look at Flat Rolled Products performance, it will improve markedly in Q2. So the burn will drop in Q2.

And CapEx, will that be --

CapEx, again, we are projecting below our forecasted, earlier forecasted level. For the full year we had estimated $240 million, we're now tracking to at least $15 million below that number for the full year.

Okay. That's good.

One other thing, I was wondering, on the Leap Ramp, or the 737 MAX, $1.1 million per aircraft comparing to $550 million previously on the prior model, does anything change in pricing over time? Or should we model it in at roughly a $550,000 per plane content gained over the next five years? (multiple speakers)

When you talk about pricing - there's no real change in pricing. The prices are fixed for the length of those agreements, which run at least five years, in some cases seven years. And in some cases, longer than that. The prices are determined at this point. They are already fixed.

There is a significant mix shift from the sales on the legacy model to the sales of the new model. As we have mentioned before, our next-generation materials have higher selling prices, and have much higher margins than those legacy products. Our operations and our operating profit will improve significantly, as that mix shift occurs starting this year.

Kevin Cohen, Imperial Capital.

Good morning, and thank you for taking the questions. First, expanding on the prior question as it relates to flat rolled products becoming profitable? Can you give us a little bit more of a bridge analysis looking at 2H versus 1H?

I'm thinking about the incremental labor cost savings in excess of $30 million in the absence of some labor and efficiency, but wasn't quite sure that got us there? Is there some assumption on price? Or a volume uptick? Or some combination?

No.

Kevin, the big impact, quite frankly, is when you look at the -- you have to remember in the first half of the year, the first quarter P&L to an extent - a large part of the products that we shipped in the first quarter were produced from the first part of the first quarter or the second part of the fourth quarter. Yes, you have a higher cost flow-through because, quite frankly, the inefficiencies of a temporary workforce. And operating at a lower asset utilization rate, right?

And that temporary workforce actually continued through the second week in March, and then we basically shut down all of the operations, all of the temporary workforce left, we started to bring back the United Steelworker-represented employees after the contract ratification in the week of March 13, 2016. They were brought back in a wave and then we had to start everything back up again. All of those inefficiencies, in terms of starting and stopping, are really associated with product that will ship in the second quarter.

So you have those inefficiencies that are in the first half of the year that won't be replicated in the second half of the year. Quite frankly, we will be much more efficient with the full-time workers coming in and welcoming them back in the second half of the year. So that's a big impact, a positive impact on profitability.

The other thing that we will see in the second half of the year, assuming nickel remains relatively stable, is there is a significant negative impact in the first quarter and in the second quarter with higher nickel costs in inventory that are higher than the surcharges that recover that in the transaction price, because of what nickel did throughout the first part of the first quarter and then only recently has been stabilizing. There are a number of factors that are really driving that, much more than -- that are much bigger influences, quite frankly, than the labor savings associated with the salaried headcount reduction.

And also there are opportunities now that we have everybody doing the jobs that they were intended to do that we expect to see growth in our differentiated products in the second half of the year, compared to the first half of the year.

That's helpful.

And then for my second question, which has a little bit of a hyphen, just thinking about the free cash flow goal for the year? Over the next three quarters it looks like circa $155 million of CapEx, about $100 million of cash interest paid? I'm thinking about the company being free cash flow positive, is there an assumption on working capital? What should we think about in terms the prior-year objective on being free cash flow positive?

Yes, we're going to continue to draw our working capital down, especially the inventory balances will come down. We will see a little bit of growth in the high-performance segment because sales will ramp, but that will be more than offset by the reductions we will have on the flat rolled products business. It will be a source of cash for us this year.

John Tumazos of John Tumazos' Very Independent Research LLC.

Thank you very much. First question, could you describe the 17% of revenues, other than the 52% to aerospace and 31% to value-added markets? And second question, could you tell us how many hours a week the Brackenridge flat rolled strip mill runs?

Yes, I can tell you on that HRPF, it does not run enough. (laughter) I mean if you think about the capability of that facility, and what the refocused business is, we are basically running three days a week.

Three eight hour shifts a week?

No. Three full days. Three, three turns, so nine turns, think of it that way. That's nowhere near what the capability is.

The good thing is, that it's a very efficient operation with not a lot of headcount associated with it. What becomes, really, the biggest challenge in managing the costs is -- and I should say an important part of the new collective bargaining agreement was scheduling flexibility in the flat rolled products business, which obviously benefits that kind of an operation on the HRPF. There's not a significant penalty there.

But the biggest challenge is, how do we manage the cost of the combustions? How are we managing the consumption of power and natural gas in terms of the furnaces, the preheat furnaces, et cetera. That's a big area of focus of ours to minimize that and improve the efficiencies. John, I'm not sure -- could you repeat your question?

What you said, that 52% of sales was aerospace and 10% was, I think oil and gas, and 7% H3 rather markets, so was 83% the value-added. And in the remainder of the sales, a slog of it is the discontinued Midland and Baghdad GOES working down. An then another slog of it is other stuff that is continuing. I was just wondering, what the other 17% of the sales was?

I got you. When you look at what we would call consumer durables, that's primarily stainless. Now some of that is going down, to your point. That's appliances, that's automotive. In the first quarter, that was about 10% of total sales. Then you have energy, which is total energy, so that's the commercial nuclear. That's electrical energy, which includes GOES, but also includes industrial gas turbines, et cetera --

Zircon.

Yes, Zircon -- well, that's in the nuclear, but it includes AL-6XN, which is going into scrubber systems, et cetera. The energy is about 10%. Transportation -- construction and mining as broadly defined, which is mainly mining equipment, mechanical power transmission, et cetera, is about 4% and transportation is 2% and electronics communications is 3%. It becomes a mixed bag after that.

Thank you very much.

That will be in our Q, by the way, John.

And due to time constraints, the final question will come from Phil Gibbs of KeyBanc.

Thank you, good morning.

Hi, Phil.

Just curious why you chose to draw the revolver this quarter? Any reason?

Yes, it was working capital requirements and other operational requirements because of the loss we incurred on the flat rolled products business during the work stoppage.

It's also where we have we have cash. We have cash outside the US in foreign locations, which is not as easily and readily accessible. So you have to look at where the cash is located, and what the need for cash is on a temporary basis. And that's why the revolver was drawn.

Okay. And last one, in terms of the international sales exposure right now, I think you've always said somewhere around 35% to 45%, or 30% to 45%, of it is --

It was 40% in the first quarter.

So pretty high. And in terms of the impact of the US dollar, the US dollar has been strong, but coming off more recently, have you seen any change to that or is this really more of the fact that the dollar has become a bit more ingrained in the minds of the international buyers as something being strong and impacting at least competitiveness in the near term? How we think about that?

We have had that question before and we've -- obviously we haven't done a good job answering it, because people keep asking the question. (laughter) When you look at our 40% international business, the largest percent by far is aerospace. The aerospace is transacted in dollars. In the whole supply chain.

And virtually all of our aerospace sales is under long-term supply agreements. There is very little transactional business that is going outside the US. So the impact of the dollar, once you have a long-term agreement in place, you have a long-term agreement in place.

What happens to the dollar is really kind of irrelevant to us. And to any US supplier. Now -- so really where we would have been impacted more by that, is more on the commodity side.

Right where we have -- we do sell precision rolled strip into Europe, and that's somewhat -- that becomes somewhat problematic when you have an unfavorable currency shift there, because there are competitors in Europe that have the capability of making some of those alloy systems. And where we also export the product outside the US, it's mainly the high-value product, it's mainly the differentiated product where there aren't a lot of people in the world that can make these things. As a matter fact, we're exporting a pretty significant amount of our product, both in terms of high-performance mill products, as well as in flat rolled into China.

And the impact of the dollar there really isn't impacting the dollar, because the reason why we are exporting it into China is because the need is there and there isn't the capability in China to make that product. Because if there were the capability in China to make that product, they wouldn't be buying it from us.

This concludes our question and answer session. I would like to turn the conference back over to Rich Harshman, Chairman, President and Chief Executive Officer for any closing remarks.

Thank you, Andrew. Thank you to everybody for joining us on the call today. And as always, thank you for your continuing interest in ATI.

Take you, Rich, and thank you to all the listeners for joining us today. That concludes our conference call.

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