ATI Inc (ATI) 2016 Q2 法說會逐字稿

Welcome to the Allegheny Technologies Incorporated second-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, VP of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Keith.

Good morning and welcome to the Allegheny Technologies conference call for the second quarter 2016. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call.

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

After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions to be considerate of others of the line. As always, we will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call time.

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

Thank you, Dan. Good morning to everyone on the call or listening on the Internet.

Second-quarter results demonstrate steady improvement towards reaching our 2016 operating profit outlook, which is we expect our High Performance Materials & Components segment operating profit as a percent of sales to return to low double-digit levels in the second half of 2016.

We continue to believe that our Flat Rolled Products segment will return to a modest level profitability in the 2016 fourth quarter. High Performance Materials & Components segment operating profit improved by 33% compared to the first quarter. And reached 8% of segment sales, primarily due to a better mix of next-generation mill products and increased demand for jet engine forged parts.

Our High Performance Materials & Components segment is well-positioned for profitable growth over the next five years, driven primarily by strong and growing demand from commercial aerospace. Flat Rolled Products segment operating loss improved by over 70% compared to the first quarter.

First half segment performance was impacted by nonrecurring costs due to the work stoppage, which ended in mid-March and costs associated with the idling of our commodities stainless facility in Midland, PA, and our grain-oriented electrical steel operations. Flat Rolled Products operating performance improved throughout the second quarter.

By June, operating productivity had reached near-normal levels, and we are seeing continued improvement during July. We've made some tough decisions to return this segment to sustainable profitability and we will continue to do so. Our strategy is to reposition and restructure our Flat Rolled Products business to be a leaner, more cost-efficient business that is more focused on differentiated products that have higher technical barriers to entry and serve markets that are global with attractive, long-term growth prospects.

Finally, our liquidity position improved during the second quarter and Pat DeCourcy will provide some details in a few minutes.

Turning to Slide 4, the commercial aerospace ramp is upon us. For all of ATI first-half 2016 sales to the aerospace and defense market reached 51% of total ATI sales compared to 41% of sales for the full year 2015.

Jet engines accounted for 28% of sales; airframe represented 16% of sales; and sales to government aerospace and defense were 7% of sales. As expected, demand from the oil & gas/chemical and hydrocarbon processing industry markets remained weak.

Turning to Slide 5, looking at the High Performance Materials & Components segment, second-quarter segment results showed sequential improvement with sales of $498 million and operating profit of 8% of sales. Demand from the aerospace and defense market continues to drive high-performance results, accounting for 73% of segment sales.

Sales to the medical market increased 8% and sales to the electrical energy market increased 4%, both compared to the first quarter 2016. Market conditions remain challenging in the oil & gas and construction and mining equipment markets. We recognized an additional $1 million severance charge in the second quarter, which is excluded from segment results, as we continue to streamline our High Performance Materials & Components operations.

While our aerospace specialty materials and forging operations are performing well, the segment faces some challenges. We are making progress improving productivity and streamlining the manufacturing flow path at our titanium investment casting operations. As previously mentioned, demand for investment castings from the aerospace market ramped dramatically earlier this year, just as we were bringing on new capacity.

We have taken actions to improve planning, drive flow, and reduce cycle times and costs, and we expect operations to continue to improve throughout the second half of 2016. In our Forged Products business, we must fill the non-jet engine forging capacity that is underutilized due to weak demand from the construction and mining equipment, and oil & gas markets.

We're making progress and have one additional airframe and jet engine parts and are working on new industrial opportunities. Finally, segment results continue to be negatively impacted by high production costs, totaling $9 million in the second quarter due to low operating rates at our Rowley, Utah, titanium sponge facility. We are evaluating options to reduce this negative impact.

Turning to Slide 6, in our Flat Rolled Products segment, the transition to a smaller, more agile, efficient and profitable Flat Rolled Products business requires tough decisions. As we have said many times, we believe in US manufacturing. However, we know it is difficult for a US manufacturer to compete in global commodity markets, particularly when significant global overcapacity exists in such products as commodity stainless sheet.

In the second quarter 2016, Flat Rolled Products segment sales were $312 million, an 18% increase compared to the first quarter 2016. With the end of a work stoppage in mid-March, the segment operating loss decreased more than 70% to $32 million in the second quarter compared to a loss of $110 million in the first quarter 2016. Improved operating performance and lower nonrecurring costs were the primary drivers of the quarterly results, with higher shipments across all major product categories.

Second-quarter segment results include approximately $22 million in nonrecurring costs related to higher costs material produced prior to the work stoppage and temporarily higher conversion costs during a return to more normal operating levels. Flat Rolled Products results benefited during the second quarter 2016 from favorable foreign currency adjustments on fair value hedges.

In addition, demand from the automotive market was strong, mostly due to a secular shift that requires nickel-based alloys and specialty alloy products to meet hotter temperature environment and turbocharged engines. Demand from the aerospace markets was solid. We are making progress in signing agreements and qualify new nickel-based alloy and titanium and titanium alloy products that benefit from the capabilities of our Hot-Rolling and Processing Facility. Most of the disruptions and resulting costs from the idling of the Midland facilities and the GOES finishing facility and from the work stoppage are now behind us.

Our Midland, PA, commodity stainless steel melt shop and sheet finishing facility, as well as our GOES operations are now completely idled. Our USW-represented employees returned to work during the last few weeks of the first quarter. Operating efficiencies steadily improved during the second quarter, and by the end of June, our operations were back to near-normal operating efficiencies. The actions we have taken and any additional actions we may take in the future, are designed to return our Flat Rolled Products business to profitability and position the business for sustainable profitable growth.

Finally, on July 12, the Commerce Department made the preliminary determination in the countervailing duty investigation for stainless steel sheet and strip shipments from China. The preliminary margins calculated by the Commerce Department are 57% and 193%. The final CVD determination is expected to be made on or about January 30, 2017. US Customs and Border Protection will now require US importers to post estimated countervailing duties on imports from China, at these preliminary CVD rates.

This should act as a significant deterrent to dumping of Chinese government subsidized imports of stainless steel sheet and strip into the United States. We have reduced our exposure to commodity stainless steel sheet and strip to approximately 100,000 tons of capacity. Our strategy is to have a cost structure that ensures these commodity products are profitable on a fully allocated cost basis and not just a contribution margin basis.

Now I'd like to ask Pat DeCourcy, ATI's Chief Financial Officer to discuss the second quarter. Pat?

Thanks Rich.

Turning to Slide 7, we reported second-quarter 2016 sales of $811 million and a net loss attributable to ATI of $19 million, or $0.18 per share. ATI's second-quarter results reflect an above normal income tax rate benefit of 63%, decreasing ATI's net loss by $11 million, or $0.11 per share compared to a standard US federal 35% tax rate. Results improved substantially from the first quarter 2016.

At June 30, 2016, cash on hand was $322 million and available additional liquidity under our asset-based lending agreement was approximately $325 million. We borrowed $100 million through an 18-month term loan under our ABL Facility during the second quarter.

Cash provided by operating activities was $28 million in the second quarter 2016. Managed working capital increased $12 million in the second quarter, but decreased as a percentage of annualized sales due to increasing business volumes. Cash generation from operations remains a key focus.

During the second quarter 2016, we proactively addressed upcoming pension funding requirements by issuing $288 million of six-year convertible debt. We made an initial $115 million contribution to our US-defined benefit pension plan in July 2016, and we expect to use additional proceeds from this debt issuance to meet 2017 pension funding requirements.

Turning to Slide 8, we have taken several actions to reduce our defined-benefit pension and post-retirement medical expenses. As stated in previous slides, we proactively addressed upcoming pension funding requirements by issuing $288 million of six-year convertible debt, and made a $115 million contribution to our US-defined benefit pension plan in July 2016.

In 2014, we froze all future benefit growth in ATI's defined-benefit pension plan for non-represented employees and changed 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 a 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 FRP USW contract will also receive a cost competitive and cost certain defined contribution plan rather than receiving retiree healthcare benefits.

In addition to our ongoing efforts to limit the growth of retirement benefit liabilities, we are actively evaluating proactive pension liability management strategies. For example, we are evaluating annuity buyouts of smaller balance pension participants, which would help 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 to shift the investment of pension trust assets to more closely match 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 expect 2016 capital expenditures to be less than the $240 million, which was our original budget. We now expect full-year 2015 CapEx to come in at approximately $220 million.

$145 million was invested in the first half of 2016, over half of which was related to the completion of the Hot-Rolling and Processing Facility, or HRPF. The second-largest capital expenditure in the first half was for our new nickel-based superalloy powder facility currently under construction in North Carolina.

Looking at the second-half 2016, we expect approximately $75 million to be spent on capital expenditures, with $19 million of that being related to our STAL joint venture expansion project, which will be funded by cash on hand at the JV. Depreciation and amortization expense for 2016 is forecasted to be approximately $176 million.

We are at the end of our extraordinary expenditure -- capital expenditure cycle that has transformed and modernized ATI. Beyond 2016, we expect capital expenditures to be less than $100 million annually for the next several years.

Now I will return the call back over to Rich.

Thank you, Pat.

I've attended the Form Barrel or Paris Air Shows over the last eight years. During this timeframe, the show has featured the introduction of new planes and new engines. The Airbus A380, the Boeing 787, the Airbus A350, then the single aisle 737 MAX, and the A320neo and several new engine platforms.

This year their show had a different focus. Our many meetings with customers centered almost exclusively on execution and the need for our operations to support the demand of this unprecedented build rate ramp of new airplanes and new engines. Our customers expect us to be ready to support the significant ramp-up of the next-generation programs without interruption. This is our commitment and our plan.

They continue to seek us out to help with their risk mitigation and diversification of supply base and challenge us regarding the availability of surge capacity. ATI is well-positioned. We have made the investments in new capacity and new capabilities that are qualified to support this forecasted production rate ramp.

ATI is considered a technology leader in the products that we make and while we have a few challenges that we will resolve, we have earned the reputation as a reliable supplier, capable of meeting the emergent demand needs of our strategic customers. The OEMs are also looking to the integrated suppliers for cost reductions, which we believe we can meet through innovation of more downstream, near-net-shape products, and shared cost reductions through the acceptance of new and better alloys or improved streamline manufacturing process changes.

We also look to the future. We have regular technical exchange meetings with our strategic customers and are working together on future generation products, such as new products for hotter and bigger jet engines, nickel-based superalloys and titanium alloy powders for parts and components, including those made through additive manufacturing technologies.

And we are also qualified wider and flatter nickel-based alloy and titanium alloy sheets, strip and plate products that are made possible by our Flat Rolled Products HRPF capabilities. The next-generation rate ramp has begun.

Slide 11 depicts 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 superalloy and ATI 64 titanium alloy. As shown on this slide, beginning in 2016, there is a more pronounced growth in the spread between the declining demand for legacy products to the 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 including forged and cast parts, which few others can make. This slide demonstrates the significant mix shift in our backlog and production schedules. We saw that mix shift again in the first half of 2016, with the growth in demand of next-generation mill products, including powder and new forgings and castings.

To produce these next-generation products, we have a unique set of assets and capabilities. ATI is the largest producer of qualified plasma arc melted titanium alloys used for jet engine rotating parts. Plasma arc melted 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 combination of open die press forge and radial GFM forge in our industry, which enables industry-leading fine grain structure and complex nickel-based superalloy billet and the billetizing of powder alloys. Finally, ATI is one of only two independent and integrated qualified producers of nickel-based superalloy powders and isothermal forged parts.

Turning to Slide 12, now that the ramp to the next-generation jet engines has begun, we can provide another key metric to ATI's differentiation and growth. Here we provide four differentiated mill products that will be used in a significant way on a CFM LEAP and Rolls-Royce Trent XWB jet engines.

The nickel-based alloys listed on this slide are ATI differentiated, since one is an ATI proprietary alloy, one is a legacy alloy; yet, we are the only supplier capable of meeting the required properties in large billets; one is exclusive to ATI under a long-term agreement; and one product is supplied by either ATI or one other supplier.

These mill products are generally forged into parts through either the hot die or isothermal forge process. We use the alloys at our ATI Forge Products business and sell the mill products to other forgers who have technically and qualified manufacturing capabilities to produce the required parts.

As we have said, mill products leave the production ramp by about 12 months. The first growth spurt for these differentiated mill products is evident in the 40% growth rate experienced in the first half of this year compared to the first half of 2015. Total sales from these differentiated mill products, which was over $80 million during the first half of 2016, will grow in line with the next-generation jet engine build rate.

For a perspective, $80 million in sales for the first half of this year would rank as a top-five customer of ATI. We are seeing aerospace growth early because we supply a significant amount of next-generation mill products into the supply chain. In addition, we want a significant number of forgings and castings that are new to ATI for legacy engines and we've also won a significant number of jet engines -- next-generation jet engines forgings and castings.

As we have said, the 300 new parts that we were rewarded are secured through long-term agreements we have in hand that are expected to generate over $1 billion of new business for ATI from now through 2020. Our forging asset utilization used to produce forged products is expected to continue to improve as these parts are produced in longer forging runs. As the demand for jet engine forged parts continues to grow, the loads on or utilization of our hot die and isothermal forging assets increases and efficiencies improve.

Turning to Slide 13, for ATI's structural changes are occurring in the aerospace industry that we help enable and lead. First, as depicted on this slide, the titanium content on next-generation airframes is growing. Compare the legacy Boeing 737 at roughly 4% titanium content to the Boeing 737Max at about 12% titanium content. While these numbers are estimates, they provide a sense of the growing current and future need for titanium alloys from the airframe market.

Second, as seen in Slide 14, both the jet engine and the single aisle jet engine Firm Back Order backlog set new records in May. According to Aero Engine News, the CFM LEAP engines Firm Order Book was 10,108 engines at the end of May. There are now 17,208 single aisle engines on firm order, a new industry high.

While CFM and Pratt & Whitney already have large backlogs, there are still 2,145 single aisle aircraft without engine selections; that equates to 4,290 engines. In a recent update on the LEAP engine last week, GE said that they surpassed 11,000 LEAP engines committed.

GE also said they were forecasting to deliver 110 engines this year, building to 1,900 engines by 2019. No matter the OEM build rate, this jet engine backlog represents a significant growth opportunity for ATI. We see a five-year surge with 2018 being the OEM delivery inflection year.

The OEM 2018 delivery years are 2016 shipment year for mill products forgings and castings in most cases. We also see strong next-generation spare parts demand beginning late this decade and running for the life of the program, which is 20 to 30 years.

Turning to Slide 15. ATI is a leading supplier of specialty materials parts and components, well-positioned to benefit from this unique aerospace cycle. We expect significant profitable growth over the next five years from the new jet engine and airframe programs.

We have differentiated products plus enabling technologies and capabilities. And most importantly, we have made the capital investments needed to support this growth and demand. And, we have won long-term supply agreements with our strategic customers that include significant share gains.

In our High Performance Materials & Components segment, our focus is to execute on the opportunities we have and continue to improve our business processes and cost position. We are focused on profitable growth opportunities to fill the capacity that we have as a result of continuing weak demand from the oil & gas and construction and mining equipment markets.

For our Flat-rolled Products segment, we're focused on executing our rightsizing strategy and returning the segment to sustainable profitability as quickly as possible. We can accomplish this by focusing on differentiated products continuing to reduce our cost structure and streamlining our business processes and limiting our exposure to commodity products, which are profitable.

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, grow our High Performance Materials & Components business, and position ATI for sustainable, profitable growth.

In our High Performance Materials & Components segment, we expect it to increase the pace throughout our operations, driven primarily by commercial aerospace. And we expect segment operating profit as a percentage of sales to achieve low double-digit levels in the second half of the year.

In our Flat-rolled Products segment, our first-half 2016 results reflect the ongoing rightsizing and restructuring activities. The segment and the management teams are making progress towards achieving profitability. While we expect a further reduction in operating losses in the third quarter, compared to the second quarter, the third quarter Flat-Rolled Product results are expected to be impacted by higher maintenance expenses, including planned equipment upgrades in our finishing operations.

We continue to expect the Flat-rolled Products segment to be modestly profitable in the fourth quarter of 2016. Our focus is on sustainable, profitable growth; strengthening our balance sheet; and rebuilding ATI's liquidity and financial flexibility to create long-term shareholder value.

Operator, may we have the first question, please?

We will now begin the question-and-answer session.

(Operator Instructions)

Richard Safran, Buckingham Research.

Rich, Pat, Dan, good morning. First, I have a question on the aftermarket and Rich, your comments about spare parts demand. Despite an increase in the install base of used aircraft, we haven't seen really much of a pick-up in the aerospace aftermarket. A while back, you were talking about destocking; that seems to run its course.

Is the lack of demand due to better diagnostics? Is something else? If you could talk to the best you can about how you're looking at growth in the aerospace aftermarket as well and maybe if you can, how that's going to trend next year?

Rich, yes, I think I've said before that I think that the -- that what's driving the current market and demand growth is really not aftermarket; it's the new builds. I think we see the products that we make are really supporting either the new engine builds or the aftermarket so at times, it's hard for us to differentiate. We will listen to our customer.

And I think the jet engine customers are saying that the growth rate in aftermarket is in the low to mid-single digits. That's, by historical standards, that's probably lower than what it normally has been, but it's point in cycle specific, right? The big driver, obviously in aftermarket demand, is more single aisle than it is double aisle. It's the shorter range; it's the stresses on the engine, the rotating parts, which is the take-offs and the landing, not necessarily flying hours.

So I think that the cycle will take care of itself. The growth in demand will be there. In some cases, depending upon where those airplanes are being flown, I think in some of the parts, they are actually seeing maybe a shorter life of where we are, of what they expected so you're seeing some higher spare growth. But I think, overall, for this year and probably for next year, what's really going to drive the commercial aerospace market is new builds.

Okay, thanks for that and just shifting now to cash flow. I want to see if you -- a multi-part question here. So for next year, could you discuss a bit about how much of a working capital benefit you're expecting? Rich, would you be willing to put some numbers around what you're thinking about for free cash flow for next year, maybe a range?

And also, in cash deployment, I know your near-term priority is paying down debt. Just wanted to know where you think the optimal debt cap ratio is? And also, if you could, maybe discuss how you're thinking about buybacks, dividends, or M&A since you'll be generating cash?

Well, there's a lot of elements to your question there so I'll have Pat add at the end here. I think, obviously, as we look at 2017 and really beyond, we do expect to see earnings growth improvement. We do expect to see so that will generate cash flow.

We do expect to see a significant reduction in CapEx. We expect our CapEx for the next several years to be below annual depreciation so that will generate cash flow. We do -- the managed working capital demands will be driven largely by the volume and the growth in demand of the products and support of the profitable growth.

I think part of what we see on managed working capital is what are the fluctuating costs of raw materials and how does that flow through our manufacturing process? But I think in total, the managed working capital, we expect and we target managed working capital as a percentage of annualized sales on a longer-term basis, not at a quarter point in time, but on a longer-term basis, to start with a 3, not with a 4.

So somewhere in the range of 30% to 35% and I think historically, when you look at our business, we've been able to do that over an extended period of time. So I don't expect managed working capital to be disruptive or a takeaway over a longer time period from the cash that's being generated by improved earnings.

So then you get into the aspect of well, when you're going to generate this free cash flow, how are you going to deploy it, right? And fundamentally, what -- we do have obligations. We have pension funding obligations that are longer than just 2016 and 2017. And we disclose that in our SEC filings so that becomes a very important part of what we're going to have to do going forward.

And we don't have any near-term debt obligations, but we do have the $100 million term loan that was added to the ABL facility that will be paid off; it has to be paid off at some point in mid-2017. So when you put all that together, our strategy, fundamentally, is to improve the strength of the balance sheet, improve the liquidity in the financial flexibility of the Company, and return ATI to an investment grade credit.

I believe that, that's very important for a Company like ATI. We should be an investment grade credit and we believe -- I personally believe that, that is in the long-term best interest of our shareholders for a Company, like ATI, to be an investment grade credit. So all of that will be taken into account in terms of how we deploy cash and how we work with our Board in terms of the smart and appropriate way to deploy the free cash flow that we expect to generate. Pat, you want to add to that?

The only thing I would add to that is in the second half, we expect managed working capital to contribute to cash flow. There will be a reduction in the second half of 2016. As you go into 2017, as Rich said, you have higher nickel values and some other things going on and our business is ramping significantly next year. So we'll have increased sales and increased operating activity so we don't look for a significant contribution for managed working capital, in 2017.

Thanks, gentlemen. I appreciate it.

All right, Rich. Thank you.

Gautam Khanna, Cowen and Company.

Thanks, good morning. I was wondering if you could -- hey guys. I was wondering if you could comment on where things stand on the HRPF partnership talks? And if you have any sense of what form it might ultimately take whether it's an equity investment or a conversion agreement or any color there would be helpful.

Yes, well, I don't think it's really appropriate for us to get into specifics. Needless to say, we are having some discussions. I think that there is -- I know that there is interest in the capabilities of the HRPF. It is doing everything that we designed it to do and it's -- that it set out to do. And the one challenge that we have, obviously, is we're not putting enough volume across that to realize the full capabilities of the size of the investment.

I do -- we are seeing significant and we'll continue to see meaningful contributions of the HRPF, not just in terms of expanding the products profile that it can make, of differentiated products, but there are significant cost savings that we're beginning to realize and see by using that to -- for example, break down and get both titanium and nickel alloy and get a -- break it down on the HRPF as opposed to either going outside or doing things on older assets.

Those are significant annualized cost savings at our reduced volume level because we've idled the grain-oriented and the -- a lot of the commodity stainless. We're obviously seeing productivity gains, the productivity on stainless alloys is that 3 times the level that it was on our hot strip mill.

The quality costs are significantly lower which they should be; that's how the asset was designed. The maintenance expenses are significantly lower because we're dealing with a much newer asset. So all of those advantages that we see, I think others see as well, and that drives part of the discussion.

So how in what shape it takes really is the subject of those discussions, right? What's in the best interest of ATI and what's in the best interest of the other party and I think that our thinking is that we will be flexible and open-minded in terms of the approach that gets taken, and there are different alternatives and when we work through that and when we have something more specific to say, we will say it.

Okay. Rich, I was hoping you could also elaborate on your comments about the Rowley facility and some of the ways you're looking to reduce the cost drag. What specifically are things that you're contemplating? And secondly, if you could just comment on what you think the jet engine sales growth rate will be next year given it's already been quite strong this year. I think it's similar to what you've guided, the mid-teens going to grow. What do you think it will be next year?

Well, I think when you look at the one chart that we showed, you see an even more significant ramp from 2016 to 2017 and then 2017 to 2018, so assuming all those engines get built and looking at the -- on the jet engine side, looking at the at the profile and the content that we have, I think you'll see a more significant growth in 2017 than we're seeing so far in 2016 on the engine side.

As it pertains to Rowley, what we're looking at is several different alternatives that I don't want to get too specific on at this point in time, but really, the fundamental issue is to drive it and how do we get the most cost-effective titanium raw material units, right? Because that's what this is all about, right?

Rowley produces funds which we used to make products out of, so it's a raw material. And our people in that facility have done a great job. Since that facility was completed and went through the journey of achieving PQ quality, I can't say enough about the attitude and the effort in the commitment of the people that we have in that -- at the Rowley facility, along with the leadership of John Simms on the executive side.

But we have to look at what's the right decision for ATI to make in terms of getting the most competitive titanium raw material units as we can get and that's what we're currently evaluating. Do we -- can we adjust the production volume more, either up or down? What's the right decision to make? And we're in that process and I -- when we make that decision which isn't very far off, we will elaborate on it at that point in time.

All right. Thanks a lot. Good luck, guys.

Kevin Cohen, Imperial Capital.

Good morning. Thanks for taking the questions. Helpful commentary. I guess, as it relates to HRPF, another company previously talked about an operating profit delta of between $150 million to $250 million. I'm wondering if that is still the case or if that range has been tightened up at all?

Yes, I think that at -- certainly at the upper end of the range and even at the $150 million, that was driven largely by volume increases of remaining in the commodity stainless steel business and in the GOES business, and obviously, we've idled that. I do think that we would be trending, certainly more towards the lower end of that. And it's a combination of significant cost reduction, significant improvement and manufacturing cycle time, which lessens our -- a negative impact when raw material costs are volatile.

And certainly fluctuate downward that hurts our P&L because the surcharges end up being lower than the cost of the raw material that we melt. So the HRPF is a big accelerator in terms of manufacturing flow path and more importantly, it's products that we can make on the HRPF that we couldn't make on the hot strip mill.

And those are all differentiated products; it's the wide nickel. It's titanium. It some of the higher-end specialty alloys that are serving global markets, including aerospace so I think it's still over time. It's certainly more towards the lower end of that range and it will be a gradual build rate over the next two to five years to achieve that.

And then turning to the Other segment in Flat Rolled, can you give us just a little bit more commentary about how operating profit progressed during the quarter? You did mention it got progressively better. Just wondering what the exit was at the end of the quarter in June, if you can have any additional color on that?

Yes, well, June was certainly better than April. You're talking Flat Rolled, right? You said Flat Rolled or did you mean High Performance?

Just Flat Rolled. The Other segment, Flat Rolled.

Just Flat Rolled. I think that when you look at the segment results there of $32 million, we were getting much closer to a breakeven in that business in the June timeframe than we were in April. So it was more heavily weighted towards the first half of the quarter and we would expect the same thing in the third quarter.

As we flow through some of the higher cost raw materials that are still there, that are still lower, the surcharge is still lower than what the cost it was melted at and we flow through some of the unfavorable variances that, that were capitalized in inventory. So I think as we exit the third quarter, it will be in support of the fourth quarter, achieving modest level profitability in the segment.

And then if I could sneak in just a third one, really quick. Pension, can you remind us the incremental funding, the timing of that as you look out to next year?

We're looking at a contribution in -- around the January timeframe of around $135 million which would complete our total of $250 million, and that should, given all the other assumptions staying the same, should take care of our liability for 2017.

Super helpful. Thanks so much and continued best of luck.

Timna Tanners, Bank of America Merrill Lynch.

Hi, good morning. guys. Okay, I'm going to ask a stereotypical metals and mining person question and then I'm going to ask one on aero from Ron's suggestion. So given higher nickel priced outlook in the stainless trade case but also your lessened exposure to the commodity side, can you remind us how to think about the impact of higher stainless and nickel prices read-through through the products that you still make?

Yes. Well, we're still targeting about 100,000 tons of annually of commodity stainless sheet. So that's basically about a third of what we used to be, right? And the majority of that is austenitic rather than phoretic so it will -- that, we expect that at 100,000 tons, that's about $200 million in revenue.

Obviously, nickel moving upward and you understand how that works in the surcharge mechanism and everything. That's better than nickel moving downwards, both in terms of timing of the surcharge as well as in the component of the surcharge. It also has -- will have -- we've announced significant price increases on a differentiated product, precision rolled strip, which you won't see much of a benefit in 2016 because most of that business is on contract.

But the price increases are out there in terms of supporting the contract renewal and negotiation in support of 2017. So I think we've always said that on balance, we would prefer nickel being more stable than volatile. I do think that because of how the surcharge mechanism works that, that nickel -- when nickel is below $6 a pound, it's still not as attractive as it would be from a pricing in a margin standpoint on the commodity products when it's above $6 a pound.

And then the -- there is a tightening of the scrap market as well. I think scrap as a -- the discounts to the LME of scrap today is less than it has been and probably a couple of years. So that's kind of a governing impact on the margin opportunity on stainless. But as I said, we look at that stainless business, that 100,000 tons, we're looking at it from a standpoint of what's the level of profitability on a pre-tax basis, with all appropriate costs allocated.

And not just on a contribution margin basis and we're also looking at a cost structure that, with a base price of $0.50 a pound, we still haven't been deviated from that, right? At a base price of $0.50 pound, we have to make pre-tax profit on commodity products with a base price of $0.50 pound. So I think the momentum on the stainless side is favorable; it's certainly probably the best that it's been in quite a while.

As we head into the second half of 2016, the third quarter, Timna, as you know, is always traditionally, if there is a seasonal quarter in the business, it's the third quarter. But I think the other positive aspects of what's going on with nickel, with base prices being better now than they were certainly at any point in the second half of 2015, and really better than they were at the beginning of 2016. Those are all positive and are factored into the comments that we make about the profitable improvement of Flat Rolled.

Okay, cool. Before I ask the aerospace question on the auto side, I was intrigued by your comment about a secular shift there to more nickel based and specialty demand if we do think that auto is nearing a peak volume-wise. Are you saying that you could continue to see stable to growing contribution as it's going to be very material or just incremental?

No. I think it's -- I do think we will see a continued increase even -- I agree with you that the auto -- the total auto build rate probably is at a peak. But I think this is a material substitution change, if you will, going into some of these higher nickel alloys because much for the same reasons on the jet engine side, right?

Operating at higher temperatures, you need alloy systems that are more capable of operating in that kind of an environment and they're being spec'd in. So I think that it is -- we view it as a differentiated product. We do view it as a growth driver going forward, even with the possibility of cars -- less cars being made.

The other thing that's happening is you're seeing the same secular shift going on with -- in Europe, right, with the build rate on autos in Europe and also in China, right? So we have our STAL joint venture in China and that expansion will be underway here as we work through the government approval process to expand the STAL facility and one of the market that the expansion is designed to support is the growth in these materials in the automotive build rate in China.

Okay. If I could then on the aero space side. The concern that Ron voiced is that some of the suppliers are saying that Boeing is not paying on a timely basis and it's been a bit delinquent. We know that they're being a bit challenged in terms of profitability, or at least that's his view. I'm just wondering if you could give us any updated thoughts on about the Boeing situation, about your ability to get paid on a timely basis?

Yes, well, we had this question at the air show. And we have no problems and no concerns with being paid from Boeing. As a matter fact, when I look at -- we spend a lot of time looking at the risk profile, obviously of customers and collections because at the end of the day, a sale really isn't a sale until you get paid.

And I can tell you with a high degree of confidence, not only today but for all my career, the one end market that you worry the least amount about is aerospace. And Boeing is paying within their terms, as they always have.

Okay, great. Thanks.

Jorge Beristain, Deutsche Bank.

Good morning, guys. I was just trying to get a sense of what your normal run rates are going to be going forward for your standard grade Flat Rolled Product? I mean, we did see quite a sequential jump there. I'm just trying to understand is that -- you mentioned in your press release, there was some impact from the employees returning back to work, but were you clearing out inventories or could we expect a slightly higher run rate going forward in the standard product?

Yes. I think as I said earlier, I think when we look at the standard product, which is more commodity stainless sheet at this point, the standard which is more commodity stainless sheet, at this point, we think there's a market opportunity there for about 100,000 tons for us, so if you think about what that means from the standpoint of the total volume of Flat Rolled Product sales, it's around 30% so the rest of the product would be more differentiated.

It would be plate, specialty plate, higher alloy and differentiated sheet product, including nickel and titanium, Precision Rolled Strip product, and more Engineered Strip Product, et cetera. So I think in the second quarter, you saw a significant improvement in volume as our represented employees came back and we got the finishing facilities ramping back up. The materials started to flow better.

We built on that as we were exiting the second quarter. We continued to build on it here in September, in terms of getting product out and whether you'll see the same total volume of shipment in the third quarter as the second quarter is somewhat dependent upon market demand because as I said, the third quarter traditionally is a weaker quarter on a seasonal basis. But I think the progress that you saw in the second quarter, we would continue to build on in the second half of 2016.

Maybe if I could just clarify, we just talk about tons. You just said that your guidance for that type of product is about 100,000 tons per year. You did 30,000 tons in first quarter, jumping up to 77,000 tons -- sorry, 47,000 tons in the second quarter so the first half is 77,000 tons. Your full-year guidance is 100,000 tons. So I'm just trying to understand, is there other product that is co-mingled in there or should we think --

Yes, there is. When I talk 100,000 tons, I'm talking the standard stainless commodity sheet; the other thing that's in that number that you quote is strip and some other products, so yes. There's -- and if you have any more specific questions, just give Dan a call and he will work with you on the breakdown.

Okay, thank you.

Thank you. Chris Olin, Rosenblatt Securities.

Thanks for taking my call. Sorry. Could you provide us with an idea on what your titanium mill lead times look like? I guess how far are you booking into 2017? I guess to add onto that, right now, how would you characterize titanium inventories within the frame channel? I know historically, there's been a lot of excess material in the channel, which has caused these like lumpy order trends and I'm wondering if that's changed at all?

Yes. First of all, on the -- most of our titanium business is the contracted first under long-term supply agreement. So typically what happens is as we get into the late third quarter and early fourth quarter, the customers tell us what their load is going to be for 2017 and -- but each of the contracts, I mean, there are -- in some cases, there are minimums. In other cases, there are share percentages so all of that really gets settled out as before the end of 2016.

Needless to say, the capacity is there, obviously, to support what the intent was under the long-term supply agreement. I think the bigger issue is more the transactional oriented business, right, which is what you're -- I think is more relevant to your question. That's a much smaller piece of our titanium business and we're booking in some case, depending on the product form, we're booking into the fourth quarter from a lead time standpoint.

In other cases, we're still booking into the third quarter. I don't think on the transaction business, anybody at this point in time would really be looking at 2017 at this point. That's just not how -- that's not where the leadtimes are anywhere and that's not how the process works. I think that our view on the titanium side is that inventories are being managed very tightly by the -- on the transaction business side, which is more service center oriented, right?

I don't think that anybody -- I think that -- I think it's safe to say that, that they're being conservative in terms of what they order primarily because the leadtimes are still supportive of the conservative ordering approach by them if leadtimes were elongated, then they would probably be quicker to get in line. Part of the reason why leadtimes are still relatively short is that you have very weak demand from the industrial markets, right?

So everybody that really participates from a mill products standpoint in titanium is not fully dedicated to just aerospace. I mean there are other end markets, including medical and industrial that supports that and the industrial demand is very weak. And so as we look at that and we don't really expect that to improve in any meaningful way over the next 12 to 18 months, we look at that and say where is our capacity utilization?

And where do we have some higher-cost titanium assets and do we want to run those assets or do we want to look at them in a different way? And we're in the process of doing that.

Just as a quick follow-on, I thought I saw Unity volumes were pretty strong for the quarter and I was just wondering if there was anything behind that given what you're thinking on the industrial side of the markets?

No, I think some of it's project-related, right, so it's always lumpy. I think that a large part of that demand is really -- a significant part is really coming from the US market, right, as opposed to the more traditional international markets. I think pricing is still extremely competitive on any project because the utilization, the asset utilization not only by the US suppliers but also the international suppliers, be it from Japan or Korea.

The US obviously, when I say USA, I mean the Uniti assets where it's really a combination of VSMPO and ATI. So I think the capacity availability is there which keeps a lid on pricing. At the lower end, pricing is really pretty nasty and quite frankly, Uniti doesn't participate in at those levels, right?

So I think Uniti is being very selective in terms of which projects and how we participate and we'll continue to do that because we're focused on not from a volume standpoint but from a profitability standpoint.

Okay. Thank you, Rich.

All right. Thank you very much for joining us on the call today. And again, as always, thank you for your continuing interest in ATI.

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

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