Good morning and welcome to the Allegheny Technologies Incorporated First Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, Andrew. Good morning and welcome to the Allegheny Technologies conference call for the first quarter 2016. This conference call is being broadcast 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 of Finance and Chief Financial Officer. All references to net income, net loss or earnings in this conference call mean net income, net loss or earnings attributable to ATI. If you have connected to this call via the Internet, you should see slides on your screen. For those who have dialed in, slides are available on our website. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions, to be considerate of others on the line. As always, we will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call time. Please note that all forward-looking statements this morning are subject to various 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. The first-quarter 2016 results reflect the current positions of our two business segments. Our High Performance Materials and Components segment is well positioned for profitable growth over the next five years, driven primarily by strong and growing demand from commercial aerospace. We are committed to making the tough decisions to return our flat rolled products segment to sustain profitability. This requires the business to be repositioned and restructured and to be more focused on differentiated products that have higher technical barriers to entry and serve markets that are global with attractive long-term growth prospects. The commercial aerospace ramp for which we have been preparing is upon us. We saw the beginning of improving sales and operating performance in the first quarter 2016 results. ATI sales to the aerospace and defense markets grew 12% in the first quarter of 2016, compared to the fourth quarter 2015. Breaking that growth rate down by specific end markets, sales to commercial aerospace market grew approximately 20%, with jet engine sales growth of nearly 15% and airframe sales growth of nearly 30%. Sales to the defense market were down approximately 17% in the first quarter due primarily to the timing and shipments of our products for naval nuclear applications. I believe that ATI has opportunities to grow and diversify our position in serving the defense market. We are taking actions to better focus our technical and product capabilities on these opportunities. For all of ATI, first quarter sales to the aerospace and defense market reached 52% of total ATI sales, compared to 41% of sales for the full-year 2015. Jet engines accounted for 28% of first-quarter sales, airframe represented 16% of first quarter sales and sales to government Aerospace and…

Thanks Rich. Turning to Slide 7. We had cash on hand of $157 million at the end of the first-quarter 2016 and available additional liquidity under our domestic asset backed credit facility of approximately $200 million. Manage working capital decreased $22 million at the end of March 2016, compared to year-end 2015 and decreased as a percentage of annualized sales, primarily due to inventory reductions in the flat rolled products segment. Total debt to total capitalization was 45.4% at the end of the first-quarter 2016, compared to 42% at year end 2015 as we utilize our domestic credit facility to support capital expenditure requirements and ongoing operational needs at flat rolled products segments. Cash generation from operations is a key focus. We expect to continue to use a portion of our asset that credit facility throughout 2016 as we execute our rightsizing actions in the flat rolled products segments and balance the working capital requirements of a smaller flat rolled products business with increasing business volumes and High Performance Materials and Components segment. Our new four-year contract with the USW representative employees and flat rolled products and two, high-performance material locations includes important milestones in our ongoing strategy to manage and reduce our retirement benefit liabilities. In 2014, we froze all future benefit growth in ATI’s defined benefit pension plan for non-representative employees and change to a modern retirement benefit structure with a market competitive defined contribution retirement plan. We also took actions to end all remaining retiree life insurance benefits and retiree medical benefits assumed in the 2011 Ladish acquisition for non-representative employees. With the new 2016 USW contract, we now have a freeze to new entrants to ATI’s defined benefit pension plan for these representative employees, who will have a modern retirement benefit structure with a market competitive…

Thank you, Pat. The beginning of the next generation rate ramp is upon us as depicted on our first-quarter results. Slide 10 shows how we view this aerospace cycle. The white area shows the number of legacy engines. Our products here include such well-known alloys as ATI 718 nickel-based alloys and ATI 64 titanium alloy. As shown on the slide, beginning in 2016 there is a more pronounced growth in the spread between the declining demand for legacy products to growing demand for the next generation products. The green area shows the number of next generation engines. Our differentiated products here include proprietary and unique alloys, as well as products that few others can make such as ATI 718+ alloy, Rene 65 alloy, ATI 720 alloy large billets, plasma arc melted titanium alloys, powder metals, titanium aluminized as well as hot die forgings, isothermal forgings, and titanium investment castings. For ATI, this slide demonstrates the significant mix shift in our backlog and schedules. We saw that mix shift begin in the first quarter with a better mix of next-generation mil products. To produce these next generation products we have a unique set of assets and capabilities. ATI is currently the only qualified plasma arc melted producer of titanium alloys used for jet engine rotating parts. Plasma Arc Melt or PAM is often the preferred process for titanium alloys used in jet engine rotating parts as well as complex titanium alloys. ATI has the most powerful open-die press forge in our industry, which enables industry-leading fine-grained structure in complex nickel-based super alloy billet and the billetizing of powder alloys. ATI is one of only two independent and integrated qualified producers of nickel super alloy powders, and isothermal forged parts. Turning to Slide 11, for ATI structural changes are occurring in the…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Richard Safran of Buckingham Research. Please go ahead.

Hi, good morning.

Good morning, Rich. How are you?

Good morning.

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

Yeah, Rich, I think that we’ve talked before about, historically, on the titanium mill products side, if you go back and look at prior years, there was a heavier shipment level of those products in the first half of the year than in the second half of the year. So you would think that because the rate build has been talked about for a while now that there would be a more uniform demand of mill products throughout the year, but we haven't seen that in the past. We've seen a heavier load in the first half of the year and a lighter load in the second half of the year. So we're coming off a fourth quarter that’s low, and a first quarter that’s more indicative of the normal demand level. What we are seeing in 2016 as we look at the loads for the full year, is we are not seeing as much of the pronounced emphasis on building inventory and order rate in the first half of the year, we are seeing a more level load throughout 2016, which quite frankly I think is good for us. We would much rather have a delivery rate that’s more indicative and supportive of the ultimate demand from a build rates standpoint. And I think we're seeing that now. So we had a low fourth quarter and a more normal first quarter and hopefully we will see a more balance of the mill product shipments throughout 2016 than we’ve had in the past. Secondly - so that's a big driver of it, but we are seeing an increase in demand for parts and components on the airframe side. I mean, historically, we have been more focused from an airframe standpoint of delivering mill products. So we have been winning parts and components that support the airframe build rate across multiple platforms. And I think - I know you're seeing some of that in the first quarter and you continue to see that as we move through 2016 and beyond.

Okay. Thanks for that. Staying on that topic though, just for second, I want to talk maybe about production rates. So we know that Boeing announced lower 777 production rates down to seven a month. Could you give us some sense of an impact if 777 rates were to fall further? Also as you know Airbus is talking about lower A380 rates from 2 to 1.7 a month, same question there. Just want to know if you could give a little sense of how that might impact you?

Yes, on the mill products side, I don't think it will be all that significant quite frankly. On the parts and components side, the A380 impact has been - we've seen the issues in prior years of the A380 changing demand. Now there have been some drop in orders, quite frankly, that are going to positively impact demand for parts and components in 2016. That will be helpful to us. But I don't think going forward, the change - the recent change that Airbus is talking about in terms of lowering the build rate on the A380, I don't think that's going to be a major driver for us one way or another. And on the 777, really the same thing, I think we look at more the opportunities long-term on the 777X both from an airframe standpoint with a higher titanium content and also on the engine side with advanced materials as being a big growth driver over the next several years. Those are things that I think are going to be game changers for us in the near term.

Okay. Thanks for that.

Think you.

The next question comes from Chris Olin of Rosenblatt Securities. Please go ahead.

Hi, good morning.

Chris, how are you?

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

Yes, no, it's not a production ramp delay, it's a production ramp. And from our perspective, we have a very full backlog for investment castings over the next five years, and we’re taking a business that has been relatively small to one that is going to be a significant component of ATI’s growth. And as we ramp up and bring on new capacities that we’ve made recent capital investments in, we’re experiencing some hiccup in our production rate ramp that led to some lower sales in the first quarter than we would have expected. We're focused on at. We have all the right people and the right leadership team of working through those issues and I am confident as we progress through 2016, we will recover that. So, it is not a rate ramp delay from our customer standpoint, it's more our challenges and ramping up our production to meet the demands of the customers.

Got it. Just a second, as maybe a little bit of a follow-up to the titanium question, I have been hearing about some production delays or disruptions from some of your competitors, and I was just wondering if that is in some of the titanium growth numbers as well or I guess I will [leave it] at that.

Yes, I mean, I think that this is an interesting time for the aerospace supply chain. Right? I mean as you’ve heard me say before, Chris, I mean it is a once in a lifetime market for a lot of reasons. Not only from the standpoint of the record backlog, but from the number of new platforms, especially on the engine side, they're all kind of hitting at the same time. And a more - a different supply chain. I mean there are different players in the supply chain perhaps today than there have been in the past supply chains. So, I think the supply chain periodically sees hiccups. Not only - I just mentioned one from an investment casting standpoint that we're going through. So, I imagine there are other things going on in the supply chain from a mill product standpoint where people are having problems or issues and the material is needed, so the customers look for where they can go to get the materials so that they don't interrupt their rate ramp. And have we benefitted from that? In the past? And even in the first quarter for titanium mill products and nickel super alloy mill products, yeah I think we have. And I think that speaks volumes to the capability that we have and the reputation that we have with our customers that when there are problems in the supply chain they feel confident that they can come to us and we do everything in our power to make sure that we alleviate their problem. And that has happened. So that is good news, right from our perspective. What you have to be careful about is, I know not from you, Chris, but from others there's a tendency to want to look at every single quarter and the movement from one quarter to a next as opposed to looking at it more over a longer time period like on an annual basis. So, I think when you step back and look at this at the market and it rate ramp on an annual basis, you will see a trend that is more indicative of reality as opposed to being fixated on a quarter to quarter, right? So, I think, I mean it is our understanding, we did benefit in the first quarter from, we will call it emergent demand of mill products that for whatever reason was above our expectations of what the customer wanted from us in the first quarter. We will always be there to support the customer needs to the extent that we can, and if that emergent demand exists in the future because of problems that may exist in the supply chain, we will be there to support the customer.

Okay. Thanks a lot.

The next question comes from Josh Sullivan of Sterne Agee. Please go ahead.

Josh, how are you?

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

Yes. I think you have to look at each individual asset base, right. I mean, in terms of, we obviously have capacity available or we wouldn’t be able to meet on a short-term basis the emergent needs that we just had a little bit of discussion on. So, I think as the demand grows, we will continue to see improved asset utilization across our various manufacturing processes from melt and re-melt through the hot working of the mill products, all the way through the manufacturing process through parts and components. So, as we look at this, build rate here over the next several years, we have the capacities to support the business that we have one. So, as that materializes, we will continue to improve our asset utilization lower our costs and improve the productivity. So, it is a trend. I mean, if it were something that we could go to a wall and flip the switch and say okay we are there now, we would do that, but that's not the nature of the business. So, we are at utilization rates in the first quarter that were better than the second half of 2015. I think the utilization rates will be improved in the second half of 2016 over the first half of 2016 and 2017 will be better than 2016 and 2018 will be better than - and that's just the nature of our asset base and the nature of the aerospace rate ramp. Having said that, I think there is one challenge that we have where that is negatively impacting our margins that we’ve talked about before, and that is the utilization rates that are titanium sponge operations in Rowley, Utah. I mean there because of the comparative cost advantages, that exist by either buying titanium sponge or buying scrap and using scrap, we have been operating our Rowley facility at about 50% of capacity. We pay a penalty for that. We play a P&L penalty and we pay a cash flow penalty for that. And we will continue to evaluate that facility in terms of how it should be run to minimize the earnings drag and the cash flow negative impact on ATI and we do that continuously. We’re in the process of looking at it again in terms of how we want to run Rowley, and that’s really the only one that from a capacity standpoint I think that we have a challenge that we might have to think more creatively on as opposed to just having the natural demand growth continue to increase our asset utilization and lower our costs.

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

Yes. I mean, it’s a great question, right? I mean, what we’re in the process of doing is really transitioning a business into a different mode than it has really ever been in. I mean, it’s historically been a business that’s been thought of itself more as a commodity producer. And when you are a commodity producer, you think of volume. And the importance of that next coil [ph] or the importance of that next pound. And the transaction prices for those commodity products are at a level that you can’t think that way because the next pound actually doesn't make a contribution margin, it's a negative. So, we're changing the mindset of that business and we have the right leadership team there to do that. Part of it has been, we knew that we had to do something in terms of a more competitive labor agreement that began to bend the cost curve on a longer-term basis for that business and that was a painful process. I mean it was an unfortunate process and it was a painless process that took us through a work stoppage and everything, but that’s behind us. So now we have to move forward in terms of rightsizing that business focusing on the products that we can make money and taking the cost out of the business, including the overhead cost structure, simplifying it. Some of the reasons for saying, for example, that, I mean, the grain-oriented electrical steel decision, it’s an interesting decision because it’s a product that we were losing a lot of money on, but it was also negatively impacting the efficiency of the rest of our operation. So when you make a decision under the current business circumstances to not product that product, you get a double advantage right. Number…

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

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

There are a couple of factors in that calculation. The first would be we are making an assumption about the update to the IRS mortality tables, which we’re indicating would be effective for 1/1/2017, that has been postponed a couple times. There is the potential for that to occur again. If that were to be pushed out then the numbers would go down in those near-term years. Also, it's also dependent upon our return on assets and that's a normalized return on assets projection based on the current market conditions. So it's also dependent upon what happens within the equity markets and other investment markets that we participate in with our pension assets. So, there is potential that those numbers could go down depending on those assumptions.

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

Yeah, CapEx next year will be down at or below $100 million. And that's for the next several years, really for the balance of the decade. We anticipate being below $100 million each year and our – again, maintenance CapEx with all the improvements that we've made has been reduced substantially. Our maintenance CapEx is around $45 million to $50 million a year. So, those are the required expenditures, above that, it would all be opportunistic. So, we anticipate being at a much lower level for the balance of this decade, well, below $100 million on average per year.

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

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

Okay. In both Q3 and Q4?

Correct.

Okay. And how negative could Q2 be?

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

And CapEx, will that be --?

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

Okay. That’s good. One other thing, I was wondering, on the LEAP ramp, you guys have talked about 737 Max, $1.1 million per aircraft comparing to 530,000 previously on the prior model. Does anything change in pricing over time or should we model it in that roughly a 550,000 per plane content gain over the next five years?

When we talk about pricing, no, there's no real change in pricing. The prices are fixed with the length of those agreements, which run at least five years in some cases, seven years, and in some cases, longer than that. So, the prices are determined at this point. They are already fixed, but there is a significant mix shift from the sales on the legacy model to the sales of the new model. As we’ve mentioned before, our next-generation materials have higher selling prices and have much higher margins than those legacy products. So our operations and our operating profit will improve significantly as that mix shift occurs starting this year.

The next question comes from Kevin Cohen of Imperial Capital. Please go ahead.

Good morning and thanks for taking the questions. I guess, first, expanding on the prior question as it relates to Flat Rolled Products becoming profitable. Can you give us a little bit more of a bridge analysis kind of looking at 2H versus 1H, I’m just talking about the incremental labor cost savings in excess of $30 million in the absence of some labor efficiency, but I wasn't quite sure if that got us there, is there some assumption on price or volume uptick or some combination of --?

No. Kevin, the big impact quite frankly is when you look at the – you have to remember that in the first half of the year, right, the first quarter P&L to an extent, a large part of the products that we shipped in the first quarter were produced from the first part of the first quarter or the second part of the fourth quarter. So, the higher cost flowing through because of that quite frankly the inefficiencies of a temporary workforce and operating at a lower asset utilization rate, right? That temporary workforce actually continued through the second week in March. And then, we basically shutdown all of the operations, all of the temporary workforce left, we started to bring back the United Steelworkers represented employees after the contract ratification in the week of March 13. They were brought back in a wave and then we had to start everything back up again. So, all of those inefficiencies in terms of starting and stopping are really associated with product that will ship in the second quarter. So you have those inefficiencies that are the first half of the year that won’t be replicated in the second half of the year. Quite frankly, we will be much more efficient with the full-time workers coming in and welcoming them back in the second half of the year. So that's a big impact, a positive impact on profitability. The other thing that we'll see in the second half of the year, assuming nickel remains relatively stable, is there is a significant negative impact in the first quarter and in the second quarter with higher nickel costs in inventory that are higher than the surcharges that recover that in the transaction price because of what nickel did throughout the first part of the first quarter and then only recently has been stabilizing. So, there are a number of factors that are really driving that much more than - that are much bigger influences quite frankly than the labor savings associated with the salaried headcount reduction. And also there are opportunities now that we have everybody doing the jobs that they were intended to do that we expect to see growth in our differentiated products in the second half of the year compared to the first half of the year.

That's helpful. And then for my second question, which has a little bit of a hyphen, just kind of thinking about the free cash flow goal for the year, I guess for the next three quarters it looks like maybe circa $155 million of CapEx, about $100 millions of cash interest paid, I’m just kind of thinking about the company being free cash flow positive, is there an assumption on working capital? Or what should we be thinking about in terms the prior-year objective on being free cash flow positive?

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

The next question comes from John Tumazos of John Tumazos Very Independent Research LLC. Please go ahead.

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

Yeah, well, I can tell you on the HRPF, it doesn’t run enough. I mean if you think about the capability of that facility, and what the refocus business is, we are basically running three days a week, right?

3 eight-hour shifts a week?

No, no.

No, no. Three full day.

Three, three turns, right? So nine turns. Think of it that way.

Right.

But that’s nowhere near what the capability is. I mean the good thing is that it's a very efficient operation with not a lot of headcount associated with it. So what becomes really the biggest challenge in managing the cost is, and I should say that an important part of the new collective bargaining agreement was scheduling flexibility in the Flat Rolled Products business, which obviously benefits that kind of an operation on the HRPF. So there is not a significant penalty there. But the biggest challenge is how do we manage the cost of the combustions? How are we managing the consumption of power and natural gas in terms of the furnaces and the preheat furnaces, et cetera. And that's a big area of focus of ours to minimize that and improve the efficiency. But John, I'm not sure - could you repeat your question on the --?

Sure. When you said that 52% of sales was aerospace and 10% was, I think, oil and gas, and 7% three ph of your other markets, so it’s was 83% to value-added.

Yeah.

And the reminder of the sales, a slug of it is the discontinued Midland and Baghdad GOES working down.

Yeah.

And then another slug of it is other stuff that’s continuing, so I was just wondering what the other 17% of the sales was?

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

Zircon [ph].

Yeah, zirc [ph], and - well, that’s in nuclear, but it includes things like AL-6XN, which is going into scrubber systems, et cetera. The energy is about 10%. Construction and mining as broadly defined which is mainly mining equipment , mechanical power transmission, et cetera, is about 4% and transportation is 2% and electronics and communications is 3%. So it becomes a mix bag after that.

Thank you very much.

You are welcome. That will be in our queue by the way, John.

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

Thank you. Good morning.

Hi, Phil.

Hi, Phil.

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

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

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

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

Yeah, it was 40% in the first quarter, right.

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

Yeah, I mean, it’s - we’ve had that question before and we’ve - obviously we haven’t done a good job answering it because people keep asking the question. But when you look at our 40% international business, the largest percent by far is aerospace, right? And the aerospace is transacted in dollars, right, in the whole supply chain. And virtually all of our aerospace sales is under long-term supply agreements, right. I mean there is very little transactional business that’s going outside the U.S. So the impact of the dollar, once you have a long-term agreement in place, you have a long-term agreement in place. So what happens to the dollar is really kind of irrelevant to us and to any U.S. supplier. So really where we would have been impacted more by that is more on the commodity side, right, where we have - we do sell precision rolled strip into Europe , and that's somewhat becomes somewhat problematic when you have an unfavorable currency shift there because there are competitors in Europe that have the capability of making some of those alloy systems. And where we also export the product outside the U.S., it's mainly the high-value product, it's mainly the differentiated product where there aren't a lot of people in the world that can make these things. As a matter fact, we're exporting a pretty significant amount of our product both in terms of high-performance mill products as well as in flat rolled into China. And the impact of the dollar there really isn't impacting the dollar because the reason why we are exporting it into China is because the need is there and there isn't the capability in China to make that product because if there were the capability in China to make that product, they wouldn't be buying it from us.

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

Okay, Andrew, thank you very much and thanks to everybody for joining us in the call today. And as always thank you for your continuing interest in ATI.

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

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