ATI Inc (ATI) 2018 Q1 法說會逐字稿

Good morning, and welcome to Allegheny Technologies Incorporated First Quarter 2018 Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Scott Minder, Vice President of Investor Relations. Please go ahead.

Thank you, Nicole. Good morning, and welcome to the Allegheny Technologies First Quarter 2018 Conference Call. This call is being broadcast on our website at atimetals.com.

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

If you have connected to this call via the Internet, you should see slides on your screen. For those of you who have dialed in, slides are available on our website, atimetals.com.

After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to 2 questions to allow time for others. We will make every attempt to reach everyone in the queue within the allotted call time.

Please note that all forward-looking statements are subject to various assumptions and caveats, as noted in the earnings release and shown on this slide. Now I'd like to turn the call over to Rich Harshman.

Thank you, Scott. Good morning to everyone on the call and to those listening on the Internet. The first quarter was a good start to 2018 and built upon our positive momentum from 2017.

ATI's first quarter revenue grew by 13% versus the prior year and approached $1 billion in total. This solid top line growth, along with our continued and deliberate product mix enhancements in both segments, drove year-over-year segment operating profit growth of 38% and margin expansion of 170 basis points. We achieved quarterly earnings of $0.42 per share, which includes a $0.10 per share gain related to the formation of the A&T Stainless joint venture. Excluding this onetime gain, ATI earned $0.32 per share in the first quarter. This represents our best quarterly result since mid-2012 and builds on our solid fourth quarter 2017 performance.

Taking a quick look at our operational performance. Both business segments contributed positively to our solid first quarter financial performance. Segment operating profit in our High Performance Materials & Components, or HPMC, segment climbed to 15.2% of sales, representing a 520 basis point improvement versus the prior year first quarter. This improvement was greater than expected and was driven by strong demand for our enhanced next-generation jet engine products, which resulted in a more favorable product mix.

Aligned with our prior guidance, the Flat Rolled Products, or FRP, segment saw a decline in operating profit versus the prior year first quarter and sequentially versus the fourth quarter 2017. This was primarily driven by an unfavorable onetime accounting impact related to retirement benefit expenses and by lower foreign currency hedge gains. The demand environment for ATI's Flat Rolled Products remain strong, particularly in the oil and gas market. I'm pleased to report that the segment is on track to achieve its near and midterm financial goals despite some market uncertainty created by recent global trade actions.

The ATI team continues to focus on achieving sustainable long-term profitable growth and sustainable profitability throughout the business cycle. We strive to consistently create value for our shareholders and customers and opportunities for our employees, and we're making good progress on these objectives.

Now I'm going to turn the call over to John Sims to discuss our performance in the HPMC segment. John will be followed by Bob Wetherbee, who will discuss the FRP segment; and then by Pat DeCourcy, who will comment in more detail on our first quarter financial results. I will then comment on our second quarter and make some concluding remarks before we open the call to your questions. Here's John.

Thanks, Rich. Turning to Slide 4. I'm pleased to report that the HPMC segment's first quarter financial results were better than expected. Year-over-year, segment revenues grew by 10% and earnings grew by nearly 70%, resulting in margin expansion of 520 basis points. These results demonstrate the leverage of additional volume across our asset base and the accretive power of the next-generation jet engine product mix to drive incremental margin growth.

While these results were above our expectations, they continue the strong earnings growth trend and represented the seventh consecutive quarter of year-over-year margin expansion of at least 140 basis points. This pattern of improvement is primarily due to the ongoing production ramp of next-generation jet engines at all of our major engine OEM customers. The industry is currently in the early phases of a multiyear production expansion. And while we expect the pace of margin growth to vary by quarter, expected airplane build growth and our long-term customer agreements provide a solid foundation for achieving HPMC's longer-term financial goals.

We understand that our continued success is dependent on our customer success. To support our customers' long-term growth plans, we are keenly focused on operational excellence, superior product quality, on-time delivery all across a wide range of potential industry build rates.

Looking beyond commercial jet engines, we saw strength in several other end-use markets, including construction and mining, which grew by more than 50% versus the prior year, albeit from a relatively low base after several years of modest end market demand. I will cover performance across all of our end-use markets in more detail on the next slide.

As a result of the elevated aerospace and defense and construction and mining market demand, we experienced strong year-over-year and sequential growth in sales of our forged products. The resulting utilization increases across our isothermal and conventional forging assets generated significant incremental margin growth in the quarter. Including our recently announced fourth isothermal press, we believe that ATI is well positioned, both in capability and capacity, to continue to benefit from these trends well into the future.

Finally, I'd like to provide an update on the progress at our titanium investment castings business. We continue to work diligently with our customers and with our employees to further develop as a sustainably profitable, industry-leading supplier of titanium investment castings. We've made substantial progress and while we are not yet satisfied with the results, we continue to believe that we will generate near-breakeven financial results in 2018 and be profitable in 2019. Much progress has been achieved, but more is required.

Turning to Slide 5. The pie chart and table show HPMC's first quarter 2018 sales by market and provide detailed comparison versus the prior year. In total, segment revenues grew by 10%, with more than half of the markets expanding, led by a double-digit increase in aerospace and defense.

As I mentioned earlier, we saw significant growth in construction and mining, led by demand of our forgings. Two of HPMC's smaller markets saw year-over-year sales declines. Continuing a trend from 2017, ATI's medical market sales declined in aggregate, with biomedical specialty materials sales growth more than offset by declines in the magnetic resonance imaging, or MRI, end-use market due to increased competitive activity globally.

Additionally, sales to the oil and gas market were lower by 8% or about $1 million in the first quarter, primarily due to the absence of customer inventory restocking activity that we experienced throughout 2017. Sales to this market represent approximately 3% of HPMC segment's total sales.

Further analyzing our performance in the aerospace and defense market, year-over-year growth was mixed in the major submarkets. Commercial jet engine revenue expanded by 23% in the first quarter, primarily due to a 65% increase in next-generation product sales versus the prior year. Sales of next-generation products reached 48% of total jet engine product sales in the quarter, marking a significant increase versus 2017 levels.

While we expect the production of these new jet engine models to steadily increase our next-generation product sales over time, the ratio of these sales to legacy product sales likely will vary by quarter.

Commercial airframe sales declined in the first quarter by 8%. Sales to our major OEM customers improved year-over-year at a modest rate but were more than offset by declines in sales to our distribution customers. Distribution-related sales are generally not covered by long-term contracts. Overall demand and inventory levels as well as our customers' fluctuating order patterns can cause our airframe submarket sales to vary by quarter.

Sales to the government and defense market increased moderately in the first quarter, primarily due to naval nuclear and military jet engine demand for our specialty materials. In addition, we saw modest sales increases for rotorcraft-related products led by sales of our forgings.

In summary, the High Performance Materials & Components segment posted solid operating results, exceeding our first quarter expectations. Next-generation engine product sales increased by 65% year-over-year and accounted for nearly 50% of our total HPMC segment jet engine sales. These sales are accretive to our operating margins and will likely continue to expand over prior year levels throughout 2018.

I will now turn the call over to Bob Wetherbee to talk about our performance in the Flat Rolled Products segment.

Thanks, John. Turning to Slide 6. The FRP segment generated solid first quarter financial results due to continued strong market demand and despite several headwinds experienced in the quarter. Revenues increased 7% sequentially even as compared to a strong fourth quarter 2017 period.

The segment experienced 20% sequential growth in oil and gas market sales, expanding on 2017's favorable growth trends. This was due in part to the production of a nickel sheet product to supply a previously announced pipeline repair project outside of the United States. This project, along with other nickel product demand, helped set a quarterly sales record for nickel sheet products, building on the previous record set in fourth quarter 2017. We expect a sequential decline in nickel sheet product sales in the second quarter due to completion of the previously mentioned pipeline repair project.

Aligned with our prior guidance, segment operating profit was negatively impacted by approximately $8 million due to the required accounting changes on retirement benefit cost capitalization as well as the negative effect of lower foreign currency hedging gains.

Additionally, our STAL joint venture saw decreased demand in production levels sequentially due to the weeklong Chinese New Year holiday. We previously anticipated a negative impact from lower raw material surcharges due to ferrochrome price declines. However, the lower ferrochrome surcharges were largely offset by a significant increase in March's nickel surcharge level. Looking forward, we see higher ferrochrome prices and anticipate higher nickel price-driven surcharges in the second quarter based on current market conditions.

The segment's first quarter results reflect our greatly improved operations and streamlined cost structure. Despite the negative accounting-related and foreign currency impacts that I previously discussed, the absence of any raw material-related tailwinds and lower STAL results, the segment was profitable in the first quarter. We continue to progress toward our long-term goal of generating consistently profitable results across the business cycle regardless of trade policies.

Turning to Slide 7. I want to take a few minutes to provide updates on some of the segment's most significant strategic initiatives. Despite global trade-related actions recently announced and the ensuing market uncertainty, we continue to make progress on our goals. First, we announced the official formation of the A&T Stainless joint venture on March 1 after receiving all required regulatory approvals. As a reminder, this joint venture was created to produce 60-inch wide stainless sheet products for sale in North America from Indonesian-made semi-finished stainless slabs. The joint venture now owns and operates ATI's previously idled Direct Roll Anneal & Pickle line, or DRAP, located in Midland, Pennsylvania and utilizes conversion services at ATI's Hot-Rolling and Processing Facility, or HRPF, in Brackenridge, Pennsylvania. The joint venture will directly create approximately 100 high-paying jobs in Midland and indirectly create several hundred additional jobs along its U.S. supply chain.

Additionally, conversion of joint venture semi-finished slabs will substantially increase utilization of ATI's world-class HRPF to approximately 50%. This increased volume provides a healthy product baseload to support ATI's entire Flat Rolled Products business, including products critical for U.S. Defense.

I'm particularly proud of the team that has executed a safe and highly effective joint venture start-up commercially, legally, operationally and financially. Their efforts are much appreciated and recognized by their colleagues and the customers they have ramped up to serve.

After the A&T Stainless joint venture formation, U.S. Commerce Department imposed a 25% tariff on all imported steel products, including the stainless steel semi-finished slabs imported from Indonesia. ATI officially filed a Section 232 tariff exclusion request on behalf of the joint venture on March 26. Based on our interactions with a wide range of government constituents and the facts that, first, there's currently, nor has there ever been, a merchant market for stainless slabs in the United States; and second, the joint venture improves the cost efficiencies of ATI's HRPF, which is used to produce Flat Rolled Products for various U.S. Defense applications; and third, the joint venture creates jobs in a Western Pennsylvania community that's been hard-hit by unfairly traded stainless and carbon steel imports.

We're confident that our request presents a strong case for tariff exclusion and is grounded in relevant facts. The review process takes approximately 90 days to complete, and we anticipate receiving a response in the second quarter.

Secondly, an update on STAL. As we discussed on the fourth quarter 2017 conference call, our STAL joint venture currently operates 2 facilities in the Shanghai, China area to produce Precision Rolled Strip products. We're nearly complete with an expansion that will add approximately 50% additional capacity and expect to begin production on the new line in the second quarter, continuing to ramp up during the second half of 2018 and throughout 2019. Chinese domestic end market demand for STAL products remains strong across several markets. This expansion will be fully funded from joint venture's cash flows, demonstrating the long-term strength of the entity.

And finally, an update on our potential third-party HRPF conversion agreements. We continue to run large-scale trials for multiple carbon steel producers who see tremendous value in the mill's expansive product [with] capabilities, its ability to maintain product gauge control throughout the slab conversion process and its flexibility to create multiple end customer products from a single unit of input material.

To date, these extensive trials have successfully demonstrated the mill's capability to our potential conversion partners and in many cases, to their end customers. We continue to expect that we will sign at least one conversion agreement in 2018, but recognize that the recent tariffs levied by the U.S. Commerce Department on all steel imports cast significant uncertainty across the entire carbon steel supply chain, particularly while country and company exclusion requests are temporarily granted or still under consideration.

The A&T Stainless joint venture and the potential for carbon steel conversion agreements represent capital-efficient actions to increase asset utilization and to drive improved financial results. Each of these initiatives will contribute to our long-term goal of sustainable profitability for the FRP segment.

Now I'll hand the call over to Pat DeCourcy to talk about our first quarter financial performance.

Thanks, Bob. Turning to Slide 8. I would like to take a few minutes to update you on our first quarter financial performance and to provide you with initial guidance for our expected 2018 full year free cash flow.

Cash generation and importantly, prudent deployment of our cash resources, remains a key focus area for ATI. At the end of the first quarter, we had $110 million of cash on hand and approximately $305 million of borrowing capacity available on our asset-based lending agreement, or ABL, net of $50 million of outstanding temporary borrowings on our ABL's revolver. These short-term borrowings were largely used to fund our first quarter investment and manage working capital to support business growth previously outlined by John and Bob and to provide funding to the A&T Stainless joint venture during the initial production ramp-up process. We do not expect to have any borrowings under our ABL facility at year-end 2018.

First quarter capital expenditures were $42 million, reflecting the increased outflows for 2 significant projects: First, we made the initial down payments for our fourth isothermal press and heat treat expansion to be located at our isothermal forging center of excellence in Cudahy, Wisconsin.

Second, we had substantial payments due for the capacity expansion of the STAL joint venture facility in China, which we anticipate will begin production in the second quarter 2018. Both of these investments are expected to generate substantial cash flows and return on capital results over the next 5 years and beyond.

Looking ahead, we continue to work with our aerospace and defense customers to understand the potential impact of production rate increases on the timing of our capital expenditures over the next several years to ensure that we are able to meet the desired industry production rates.

As a result of our ongoing operational improvement, disciplined spending and the structural reduction in our debt profile, we expect a significant improvement in free cash flow results for 2018. Excluding roughly $40 million in contributions to the ATI pension plan, we expect to generate over $150 million of free cash flow in 2018. This represents an improvement of approximately 400% or more versus 2017 and reverses a trend of negative free cash flow in the 3 years prior to 2017.

We intend to build cash on our balance sheet throughout 2018. And along with our expected improvement in segment operating profit, we anticipate continued improvement in our financial leverage metrics. This will bolster our case to return to the investment-grade credit ratings over time. We recently took a small step in this direction with the ratings outlook step-up at one of our major credit ratings agencies.

We will continue to refine our cash flow guidance as the year progresses and will update you accordingly. I will now hand the call back over to Rich.

Okay. Thanks, Pat, Bob and John. Turning to Slide 9. Our first quarter results represent a good start to 2018, reflecting the full year view that we laid out on our 2017 year-end earnings call back in January. As you heard from John Sims, the HPMC segment's first quarter results exceeded our expectations and were driven in large part by significant expansion of our next-generation jet engine product sales. In general, we expect this trend to continue as our aerospace and defense customers deliver on their multiyear order backlog for new aircraft and engines. Although the HPMC segment's margin expansion outpaced our expectations for the first quarter, our results support our confidence to achieve our stated HPMC segment goals of a minimum 200 basis points of year-over-year margin as a percentage of sales improvement in 2018 while achieving a year-over-year sales growth rate in the high single digits.

In the Flat Rolled Products segment, Bob Wetherbee detailed our good first quarter results despite the negative impact from a change in accounting and foreign currency fluctuations. These results were based on the foundation of strong market demand that carried over from the fourth quarter 2017. We expect these favorable market conditions to continue in the second quarter. Additionally, we believe that raw material surcharges will be favorable versus the first quarter for both ferrochrome and nickel based on current market conditions.

With regard to our joint ventures. We will continue to support production ramp-up of the A&T Stainless joint venture through our HRPF conversion agreement and expect production volumes to grow ratably across the second quarter and for the balance of 2018. Separately, we anticipate a response on the Section 232 tariff exclusion request sometime in the second quarter.

We anticipate the completion of the STAL expansion in China during the second quarter with initial production starting on the new manufacturing line. We do not anticipate financial benefits from this expansion during the second and third quarter start-up phase. Beginning in the fourth quarter, we anticipate ratable growth across the ensuing 4 to 6 quarters as the additional capacity is used to satisfy anticipated customer demand growth in China.

On a full year basis, we expect results from our FRP segment to improve year-over-year and reiterate our guidance for a high single-digit revenue -- percentage revenue growth and operating margin expansion of 100 to 300 basis points.

Finally, as you heard from Pat, ATI is projecting a significant improvement in 2018 free cash flow, laying the foundation for ongoing growth in this area as we continue to expand our business and remain disciplined on our spending. We will continue to refine this guidance as we progress throughout the year.

As I stated earlier, the first quarter marked a good start to 2018 and reinforces our confidence in achieving our full year 2018 goals as well as our longer-term financial targets.

Operator, may we have the first question, please?

(Operator Instructions) Our first question comes from Richard Safran of Buckingham Research Group.

So first, a bit of a multipart question here on titanium. For some time, we've been talking about Boeing and Airbus derisking from Russia. We've seen recent geopolitical events not only to support that, but maybe cause that trend to accelerate. What I wanted to know is if Boeing or Airbus discussed increasing the amount of titanium they buy from you. On the comments you made about forgings on the -- a few moments ago, has Boeing or Airbus discussed having you make some forgings that the VSMPO is making? Did that impact you in the quarter? And finally, is there any thought to being given potentially to restarting Rowley?

Okay. Yes, that is a multiple-part question. I'll see if I can remember each part here, Rich. I think Boeing and Airbus have, for the last year-plus, done a very good job of assessing the risk from any geopolitical actions as it pertains to Russia or any other parts of the world. So they have actually exercised their supply chain, including ATI, to make sure they understand what options they may have if those risks are encountered. I think, and we've commented on this in the past, that part of our emergent demand on the mill product side was probably a result of those kind of actions. And I think some of the opportunities on some of the forging side that we saw in 2017 and continue to see today was most likely a result of that. So I think in the more recent actions that the U.S. government has taken or threatened on Russia, I think that the supply chain, the OEMs understand what options that they have. They have taken appropriate actions in terms of inventory builds in the last year-plus. And I think the supply chain, and certainly ATI, stands ready to support them in whatever our customers in whatever way they may need us to support them. But I don't think it had any significant impact on Q1 at all.

And any thought on Rowley?

Yes, that includes both mill products and forgings. Regarding Rowley, I think if there was a need for us to deliver more titanium products into the supply chain, either for risk mitigation or for just growth, we don't see any current need for a restart in Rowley for titanium sponge. We have very good, competitive long-term supply agreements in place with multiple suppliers for titanium sponge, including rotating quality or premium-grade sponge, that extend many several years into the future and have the ability to flex up in volume. So I don't see a need for us to restart Rowley at this point in time.

Okay. And next, last year, you were impacted by a bit of an influx in legacy CFM56 work, which was a bit dilutive relative to the work you're doing on the LEAP. Certainly, it doesn't appear to have shown up this quarter, but we're starting to see a pickup in aftermarket demand, and I wanted to ask if that's something that could reoccur given the pickup in the aftermarket. Are you obligated to do the work on the legacy platforms? And basically, what I'm looking for here is if the mix is going to continue to improve.

Yes. I think that 2018 continues to be a transition year from a demand standpoint away from the more legacy-oriented products and not only on the alloy side, but also on the parts and components side into the next-generation demand. But I think as a transition year, it will continue to be a little volatile on the product mix side. And I think as you get into 2019 and 2020, our understanding of the build rates, especially on the engine side, would suggest that a richer product mix begins to take a more consistent, larger portion of our capacity. You're always going to have some legacy demand there -- or not always, but certainly for a number of years because of aftermarket. They're still building CFM56 engines, right? So that demand -- not at the rate that they were being built in 2017, but the demand is there, not only on the alloy or mill products side but also on the parts and components side. So I think 2018 is more of a transition year to a stronger product mix in '19 and beyond.

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

So maybe to expand on some of the things Rich asked and you answered. It seems like the Russian sanction threat sort of intensified in recent weeks subsequent to the quarter end. I just wondered, have you seen -- do you anticipate seeing kind of a desire by Boeing and perhaps anyone else to start to order -- ask for you guys to ship more, to kind of buffer, expand their safety stocks so we could see a pickup in Q2 and Q3 on the airframe side, which sort of lagged in this quarter in Q1?

Yes. I mean, we're -- as you know, on the mill product side, I mean, the order entry rate does tend to look ahead by 1 or 2 quarters. I mean, we're filling up at a rate that is consistent with what our expectation would be on the order entry side for mill products from Boeing, which were much larger with -- than we are with Airbus at this point. So I think that some of that has emergent demand in it, and we're seeing that just as we did in 2017. I think that there were some actions taken in 2017 to build buffer stock in anticipation of potential sanctions -- additional sanctions. So I think that whatever we're seeing is consistent with a prudent approach by the OEMs to make sure that they manage that risk. I think on the forging side, especially the large forgings, where there's some unique capabilities that VSMPO has that we don't have, quite frankly. I mean, we don't have those -- that large 50,000-ton-plus press to make those large forgings. Others in the U.S. do, so they probably are seeing something there. But we wouldn't be seeing that on those very large forgings. Where there were some smaller forgings that fit our capability, we saw some actions taken by our customers in 2007 -- 2017 in awarding those -- some of those parts to us that we're producing today. And we would expect to continue to produce those and perhaps see other opportunities as we move through 2018.

Okay, that's a very helpful answer. Just to follow up on the forgings piece, where you've seen fairly expansive growth. When we think about the LEAP engine ramps, not everyone is -- there are constraints in the supply chain, and I don't think you guys are one of them, which is fantastic. But have you seen emergent demands because of perhaps one of the other suppliers, a second source being unable to produce at the same rate? Are you seeing that outside of the VSMPO dynamic, which is sort of [unrelated] (inaudible)?

Yes. I mean, and we've commented on -- yes. We've commented on this in the past, Gautam. I think that, first of all, we worked very hard to not be the impediment to the production rate ramp. So there's a lot of great work by John and Bob and the teams throughout ATI to do that, and some of it has happened by sheer muscle and others just by continuous improvement efforts. So we will continue to do that. I think that certainly on the forging side, we have seen emergent demand above the contractual share that we have won on certain parts. We saw that in 2017. We're seeing that in 2018. I think we'll continue to see that in 2018 and possibly beyond. And as long as we have the capacity available to help our customers, we will do that. And that's part of the reason for the fourth iso forging press that we announced here a short while ago that will be coming on stream in a couple of years. And that is based on not only the business that we have currently and the rate ramps that are there, but also discussions that are ongoing for other opportunities that our customers are talking to us about.

Okay, and one last one. If you could just level set us on -- because Q1, clearly, was very strong at both segments, but at HPM in particular. Historically, there's been the seasonal pattern, where Q2 tends to be a better -- even the highest-margin period of the year, and then Q3 levels off with seasonal outages and what have you. And then Q4 has the shorter days due to the holidays, the fewer days. I just want to make sure, like, is Q1 sort of the proper mark to -- from which we should think about Q2? I know -- I'm just curious about, is the mix or something going to be something different in Q2 at HPM that may bring it down? And at flat rolled, I think Bob made a comment about one of the nickel sheet pipeline projects not being in the quarter -- already being delivered. So I just want to get a sense so we don't overshoot on Q2. If you could just help calibrate us on what we should be thinking about.

Yes, yes. I mean, I think as we see it, we're early in Q2, obviously. And some of the emergent demand that we typically see interestingly happens in the second half of a quarter. So what we're really going off of -- or what we see in the marketplace and what the order book looks at -- looks like today and what the production schedules look like today. So on the HPMC side, I do think that we're currently expecting the mix to be not as rich in -- with new products in the second quarter as we saw in the first quarter. And I -- that's our current expectation. We'll see how it plays out, but that's what -- it looks like the base of the businesses at this point in time. Looking at the rest of the year, you commented appropriately. The third quarter is a little noisy because a lot of our customers in Europe and there's extensive plant shutdowns and vacations that happen throughout the month of August, if not the whole month of August. So it has a tendency to be a little noisy. However, this is an interesting year, right, because you have a lot of rate ramp happening, especially on the engine programs as we continue to move throughout 2018. So we'll have to see how that plays out in the third and the fourth quarter. I would hesitate to say that history is a good indicator in the second half of the year because of the extent of the rate ramp on new engine programs. As it pertains to flat rolled, where we have a little bit less visibility in the flat rolled business in terms of looking out into the second half of the year, I think one of the things that we're pretty -- we're very confident of as it pertains to flat rolled in the second quarter is we won't have the nonrecurring charge, right? And I don't think that we're going to have the kind of comparative issue on the foreign currency side. And as Bob indicated, we expect to see some favorable movement in the 2 critical raw materials on the surcharge side in terms of ferrochrome and nickel. So I would expect to see an improved performance in the second quarter compared to the first quarter in Flat Rolled Products despite the fact that we won't see the level of nickel sheet or plate deliveries because of the large project in the oil and gas side in the second quarter. As you look at the second half of the year, the one thing we are seeing and do believe is that there are additional projects out there in the oil and gas side for nickel sheet and plate, 4 projects in particular, that we would expect to certainly positively impact the fourth quarter and possibly a little bit in the third quarter.

Our next question comes from Phil Gibbs of KeyBanc.

I had a question on the margin guidance. So the, call it, the 200 basis point growth in flat rolled margins at the midpoint, are you anticipating a tariff impact in those numbers, Rich?

I think at the low end, we're anticipating less of a favorable impact from the JV than we are at the upper end. So when we gave that guidance at the beginning of the year, we weren't aware of -- I mean, we knew that there was a 232 investigation going on, but we didn't know what the end result would be. So it would be disingenuous of me to say that, that was directly related to the 232 case. But I think as it plays out, I think it is. The lower end of that range is less of a value add from the JV. And the upper end is what we would expect the JV to deliver to flat rolled. Bob, would you agree with that?

I would.

So do you need -- I guess, in other words, do you need -- do you think you need an exclusion to be at the high end of that range or above that range?

Yes. I think it depends on all the other markets, right, in the second half of the year. As I said, I don't -- we don't have as clear a visibility longer term because of the more short-term oriented nature of the Flat Rolled Products business compared to the high performance business. So yes, I would say at this point in time, as we look at the markets, that to hit that higher end -- or I mean, ideally, right, our objective is to exceed the higher end. And this is our objective, is to exceed the guidance we gave on high performance. But we're giving you a read in both of those segments in terms of what we see the markets playing out in 2018 and where we are positioned.

Excellent. And Bob, are you seeing price increases on the commodity stainless side start to flow through as that market tightens up a little bit?

To answer the questions, we are. We are seeing the increases. I think the market is somewhat unsettled in terms of supply and that people are making the decisions they need to make now to fill their supply chains through the balance of Q2. So the price increases that we've announced, I guess, I'd say, are sticking. And we're certainly invoicing collecting. So as I had talked to various customers, they're not seeing the serious spikes in stainless that they've seen in other commodities like aluminum or carbon, but they are trying to keep their demand close -- or their purchases close to the demand levels not to get overstocked, especially with the price issues that are going on in those segments. But for stainless, we are getting the increases.

Our next question comes from David Strauss of Barclays.

Following up on that line of questioning. I guess just to confirm, if you don't get the 232 exclusion, the plan is still to go forward with the JV. And then following on that, so you -- I think you've talked about that it would contribute $25 million to $35 million in operating income on your side. If you don't get the 232 exclusion, what do you think that number looks like?

This is Bob. I think we are confident that we have the case to get the exclusion, so we continue to drive for that result. I think if we don't get the exclusion, what we expect to see is a pretty tight standard stainless market in the United States. We would most likely see additional price increases coming to offset any of the short-term operating costs related to the JV. We are definitely invested in the JV for the long term. We see Section 232 as a short-term issue that we're going to have to work through. And that our original estimates of the $20 million to $35 million through the JV are still very realistic. If they don't occur in 2019, it's probably a 6-, 9-, 12-month slide based on the extent of Section 232. I can say that the customer base has responded very favorably to the reintroduction of the 60-inch wide stainless sheet from Midland from a quality and service perspective, and all my interactions with customers remain positive. Again, they see 232 as a short-term issue that we're going to work through.

Okay. Appreciate that. Pat, the free cash flow forecast this year, can you talk about assumptions around working capital within that? And then also, your bullet on Slide 8 around analyzing the impact of potential aerospace rate increases on capital spending, could you give a little bit more color on that? What you're thinking about there? What that might mean for the capital spending plan beyond '18?

Sure. For the full year, we anticipate, I'll call it, a modest working capital investment, not as significant as we've obviously seen in the first half related to several different things. You've got the initial ramp in sales in both segments plus the investment for the A&TS joint venture. In addition to that, we have some -- probably some inventory related to the pipeline projects that would be cleared normally as they ship, and then we collect the receivables on those sales. So we do anticipate for the full year, I'd say, the modest based on our full year guidance and revenue increases in probably the $40 million to $45 million range growth. So that would be the full year commitment. And then the second question, can you repeat the second question?

Yes. It was just around the capital spending plan beyond '19 given potential rate increases -- or beyond '18 given potential rate increases.

So we're continuously evaluating our CapEx commitments over the next several years, and we would adjust if there are significant changes in those build rate schedules. So as those build rate schedules are adjusted, they're real. We have to take a look at the timing of our capital expenditures. So we have a full 5-year outlook of what we anticipate. And then if the rate increases are real, the ramp changes a little bit, we might have to pull forward some of those commitments. So we're continuously evaluating that. You saw the announcement in the last quarter with the new isothermal press and the heat treat expansion project. That was a reaction to anticipated build rate increases within this next 3- to 5-year period.

Yes. David, this is Rich. I think that there's obviously a lot of dialogue going on with some of our strategic customers in terms of their -- on the aerospace side in terms of their demand profile going forward and how they would like ATI to participate in that rate ramp and in that growth. And so as we get into the next couple years, we start bouncing up against some capacity constraints that would limit the potential upside of ATI's participation and long-term growth, which, obviously, is not in the long-term best interest of our shareholders. So to the extent that we have that demand that is there, it's strong, it's contractual that supports a prudent manageable investment and capital and has a strong business case, we would look at that. So we don't want to limit our upside longer-term growth opportunities by being foolish in terms of ignoring potential investments, especially in producing products that are absolutely differentiated that have significant technical barriers to entry that ATI is a recognized leader in. So we will always look for those kind of opportunities. That's why generating strong earnings and strong cash flow growth going forward is critically important so that we have the balance sheet and the cash flow to support those kind of investments that are in the best interest of our shareholders.

Our next question comes from Timna Tanners of Bank of America Merrill Lynch.

Just on the last question. I think it's a really important point, and I appreciate the discipline in the balancing act there. But just reading between the lines, you're saying that should the demand require, ATI has the capability, et cetera. Under what contractual terms do you try to make the decisions to whether or not to add new capacity? Can you give us a little bit more color about how those agreements would have to play out just to understand how your thought process works?

Yes. We -- the -- our thought process is probably best summed up by a reference to a movie, right? We're not big believers in the line, "If you build it, they will come," right? We're believers in the line that if we have a contractual commitment that supports the utilization of that investment and generates a good return on capital employed for our shareholders, we will make that investment. So -- and that's the dialogue that we have ongoing with our customers right now, right? We're not -- it wouldn't be a speculative investment. And it's also not something -- I don't want everybody to get all worried and scared. I mean, we're not talking about a $500 million project or something like that. These are potential projects that range from $50 million to $150 million of spend over 2 -- a 2- or 3-year period. So it would be roughly within the kind of guidance that Pat has given in the past, but would add a marginal amount to that additional capital investment every year. So -- but it's something that the business case has to be there to support it. The contractual arrangement has to be there to support it in terms of it being a long-term agreement. Not something that's 2 or 3 years, but something that's 7 to 10 years or longer. And when that's there and that supports the business case, then it looks like a good project to us.

Okay, that's helpful context. My only other question was on the energy and the comments on the construction and mining demand. If you could just characterize that a little bit more. Do you think that's sustainable? Energy, is it offshore, onshore? And is it rebuilding inventory? Or is this underlying demand?

Yes. I'll talk about the energy side, and John can comment on the construction and mining side. I think the energy side, energy is a broad market. We're not seeing any significant demand at all in the large-frame gas turbines, right, for energy generation. And that's pretty much consistent with what companies like GE have said, right? We are seeing some demand in some of the smaller gas turbines, industrial gas turbines that utilize maybe lower grades of some of the specialty materials that we make but also have forging opportunities, right? So we're seeing that. We think that, that demand is real. We think it's supportive not only by the U.S. demand but also the global demand. So we would expect that to have a nice growth rate here over the next 2 to 3 years. Some of the other energy markets that are strong that kind of fall within the energy category, at least in our lexicon, is marine scrubbers, right? You've probably read and heard with the passage of some new global -- the Paris Accord, I guess, is the source of this, is a lot of the diesel fuel and fueled ships are installing scrubber systems in their -- on the ships themselves, like cargo ships, large structural ships. And that market is a very strong market, especially in Asia. And that takes in some of our Flat Rolled Product alloy systems that Bob produces, and we're selling that product today. And we see strong demand not only in 2018, but really over the next 2- to 3-plus years. And so that energy market is a strong market. And then even on the nuclear side, I mean, there are opportunities on the nuclear side, not that there's a nuclear renaissance going on but more of a refueling. When you look at the refueling cycles for the commercial nuclear reactors that are in the U.S., there's good demand that is supportive of our specialty alloys and components business in the high performance segment. John, do you want to comment on the construction and mining?

Sure, Rich. On the construction and mining side, these are largely large forgings for heavy mining vehicles for mining activity outside the United States. And so the leveling of increase we've seen beginning probably second half 2017 and into 2018, we project strong for '18 and looks good into '19. They're not at the levels that we saw back at the peak of 2012, but they're certainly higher than anything we've seen in the last 5 years.

Our next question comes from Chris Olin of Longbow Research.

Rich, you spoke about emergent demand on the jet engine side, and you talked a little bit about long-term contracts tied to any investment decision. I guess I was just wondering about the formal decision on the forged press. There was no contract announced with that, and I was just curious if you have won new business to actually justify that. And maybe is there any type of update in terms of the GE9X contract? Has that been awarded yet? That's all I had.

Yes. Well, we actually did -- we -- part of the support for the fourth isoforged presses is the long-term agreement that we announced with UTC Pratt & Whitney that involves not only iso forgings but also powder production. So it's the full integrated supply chain [firm] producing their powder into using our TSAF assets in the Carolinas to forge it into a billet, and then produce the iso forging from that process for them. So when you combine that, plus the demand from the rate ramp for the other engine programs that we're on, that supports -- in the time frame of window that forging ramp for Pratt would work in, that supports the timing of that announcement and when that isoforge press will come onstream. I think as you look further, are there opportunities for us on other new programs as well as growing our share on the existing platforms? The answer to that is yes. That would look at continue to utilize our precious capacity on the 10,000-ton open-value press forge in North Carolina that is the asset that is critical to producing the billet from powder. So that becomes a precious capacity issue that we're very much focused on and then how that flows into iso capacity demands going forward, really beyond 2020 into 2021, 2022, 2023. So those kind of become -- including despite the fact that we have the fourth iso coming on stream in the next couple of years, those 2 assets become really critical capacity constraint points for us in looking at emergent demand and what the customers are asking us to do.

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

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

Thank you, Rich, and thank you for all the listeners for joining us today. That concludes our First Quarter 2018 Conference Call.

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