Good morning, and welcome to the Allegheny Technologies Incorporated Fourth Quarter and Full Year 2015 Results Conference Call. All participants will be in a listen-only mode. [Operator Instruction] After today’s presentation there will be an opportunity to ask questions. [Operator Instruction] 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, Keith. Good morning and welcome to the Allegheny Technologies earnings conference call for the fourth quarter 2015. 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 loss or earnings from continuing operations 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 considered 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 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. 2015 was an incredibly difficult year, and the fourth quarter was the most challenging of the year. In 2015 average monthly LME nickel prices declined 45% to $3.94 per pound in December of 2015, from $7.22 a pound in December of 2014. The base price for the most common commodity stainless sheet products fell 25% to approximately $0.45 per pound in December 2015, which represents an historic low, from $0.60 a pound for most of 2014. Total 2015 ATI sales to the oil and gas, chemical process industry and the hydrocarbon processing industry markets, were down $100 million or 28% compared to 2014. This more than offsets strong sales in the first half of 2015, led by approximately $145 million of nickel-based alloy flat rolled plate for a large oil and gas pipeline. In our high-performance materials and components segment sales to the oil and gas market fell nearly 50%. In addition to these negative market conditions, ATI’s 2015 operating profit was depressed by – further by $132 million in non-cash net realizable value inventory reserves that offset LIFO reserve benefits resulting from significant raw material cost deflation. Negative headwinds from falling raw material prices should at least stabilize in 2016, since most raw material prices are low compared to the last 10 years to 15 years. In the face of these difficult market conditions, we continued our strategy to focus on key global markets that have attractive long-term growth expectations and require our high value products that have significant technical barriers to entry. We have taken and will continue to take actions to return ATI to profitability, maintain solid liquidity, and improve our competitive position. First, let’s discuss our strategy to grow our specialty…

Thanks Rich. Turning to Slide 6, fourth quarter 2015 charges for asset impairments, restructuring and inventory were $267 million. ATI conducted its annual goodwill impairment analysis in the fourth quarter of 2015 and determined that the fair value of our flat-rolled products business was below its carrying value including goodwill. As a result, fourth quarter 2015 results include a $127 million pre-tax, non-cash charge, to write-off all goodwill in the flat-rolled products business. Restructuring and other charges in the fourth quarter 2015 are as follows: fourth quarter 2015 results include a $54 million pre-tax, non-cash impairment charge, to reduce the carrying values of the Midland, PA and grain-oriented electrical steel or GOES facilities. Fourth quarter results also include approximately $4 million of charges for future idling costs at these facilities. In the fourth quarter 2015 ATI commenced the salaried workforce reduction in both the High Performance Materials & Components segment and ATI’s headquarters. Severance charges of $6 million were recorded in the fourth quarter for this action. We expect $23 million in cost savings in 2016 from this action. Net realizable value inventory reserve charges were $51 million, which are required to offset ATI’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost. In December 2015, based on current market prices for non-PQ titanium sponge, ATI recorded a $25 million non-cash charge to revalue this inventory. This charge includes revised assessments of the non-PQ titanium market conditions and expected utilization of this inventory. Turning to Slide 7. Looking at the fourth quarter results from continuing operations, sales were $739 million, a 7% of our sales in the fourth quarter were of high value products and international sales represented 42% of our fourth quarter sales. For our international sales we have minimal currency risk in our High Performance…

Thank you Pat. Turning to Slide 11, ATI sales in 2015 were $ 3.7 billion. Our largest market was aerospace and defense, which accounted for 41% or $1.5 billion in sales. Sales for the commercial aerospace market increased 8% compared to 2014. The blue arrows on this slide indicate the expected direction of sales mix to our major markets, beginning in 2016, as a result of right sizing actions in our flat-rolled products segment. For example, we expect aerospace space and defense to grow significantly as a percentage of ATI sales, due to expected growth and next-generation of legacy engines, aided by particularly strong growth in our forgings and casting business, as a result of LTA signed in 2014 and 2015. Well I’ll provide additional comments in a few minutes. We significantly reduced our exposure to the electrical energy distribution market as a result of idling our GOES operations. We reduce our exposure to the automotive market as many exhaust products are made from commodity stainless steel. We continue to expect growth in high temperature applications in the automotive market. These applications use our nickel-based alloys and specialty alloys. We also expect to reduce our presence in the food equipment and appliance, and construction and mining markets due to reduced exposure to commodity stainless steel sheet. I comment on the oil and gas market. Looking into 2016, we see little recovery in the oil field services sector based on a continuing imbalance in supply and demand, and continuing low crude oil prices. ATI serves the oil field services market sector with downhole and wellhead applications, primarily from our UK operations. In 2015 we rightsized our UK operations and refocused its assets on growth markets, including aerospace. In the offshore and subsea sector we continue to receive project orders and are…

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Steve Levenson with Stifel.

Thanks. Good morning everybody.

Good morning, Steve.

Good morning, Steve.

It’s going to be sort of a complicated question, I’m sorry. But am I correct that in not too long 50% of total ATI revenue will be related to aerospace? And if you can give us an idea of the year past and the year coming, what percentage of that revenue is derived from metal? And what was from castings and forging? How will that be different looking forward? And I know you don’t like to disclose particular margins, but can you give us an approximation of what the delta would be between selling metal and selling castings and forgings?

Well, I mean, really it depends on the alloy system, it depends on the product, it depends on whether or not it’s a rotating component or a rotating alloy or a structural. So see there are so many differences that drive that I can basically just answer it maybe in general high-level terms. I think that as you know our strategy for a long time has really been to focus on those differentiated markets that are global that have high barriers to entry that use our technical capabilities and reward them. And so, obviously the aerospace market is really at the top of – of that pyramid because of the critical importance of really all the parts, and components and materials that go into a – both an airframe and or jet engine or a rotating part. I think your 50% number is reasonable. I think over time, especially if our near-term or intermediate-term view of the commodity flat-rolled market holds that the aerospace and defense market, I’ll put both of those together will continue to grow in importance and significance for ATI. I think the growth that we see is purposefully driven not only by the parts and components side, but also by the mill products side. So we don’t necessarily differentiate, when you have an integrated strategy that goes from an alloy innovation into the critical quality aspect of the melting and the hot working for the grain structures that are required and the performance characteristics that are required to make the parts and components, the forgings and the castings. It is all integrated together. So we view that as an integrated supply chain. And I think most of our strategic customers do as well. So we’re not necessarily just focused on making parts and components, we look…

That’s good, thanks. I appreciate the detail. One other one that’s not really business related, but as the change of the nature of the company switches towards aerospace, is there way to reclassify yourself the way some of your competitors are classified as aerospace companies and extricate yourself from the metals and Mining ETFs that create a lot of volatility?

Yes it does. I mean, that’s a true statement. It’s interesting ATI as it exists today, as you know, Steve, it’s really a result of some significant merger and acquisition activities going back to the Teledyne Allegheny Ludlum transaction and then following on with – our acquisition of Ladish. But when you look at this business on a pro forma basis, going all the way back in time, the largest end market has always been aerospace and defense. It wasn’t that case for Allegheny Ludlum, but it certainly was a case for Teledyne and Ladish and when you put them all together, aerospace and defense has been the largest end market and I believe we’ll continue to be large and we’ll continue to grow.

Got it, thank you very much.

Thank you.

Thank you. And our next question comes from Gautam Khanna with Cowen and Company.

Hey, guys. I have a couple…

Good morning, Gautam.

Good morning. I had a couple of questions. The first one just on cash flow expectations in 2016, you mentioned the depreciation of $180 million and the CapEx of $240 million, could you walk through some of the other puts and takes? And do you anticipate being free cash flow positive this year and if so what point in the year?

Yes I’ll let Pat will answer that.

Yes we got and we do expect to be cash free flow positive but largely driven in the back half due to all the actions we had to take in the first half with the idling of the GOES in commodity stainless facility. So we will generate free cash flow for the year though and be positive for the full year, largely driven in the back half though.

Okay. If there are any desire – I mean, I imagine you’re going to reduce some inventory as well as you exit back half [indiscernible]?

Yes we have targets to reduce inventory, we have turned improvement goals we intend to achieve. And we’re also getting rid of the balance of the CPP related inventory that we had associated with the work stoppage. A little bit of that will ship in Q1. Also exiting those two commodity businesses will draw the inventory down in the flat-rolled products business. So there will be some significant cash generated out of inventory this year.

Yes Gaut [ph] on the commodity business, the commodity stainless business had pretty good inventory turns, but there is a large inventory balance associated obviously with being in that business. The grain or electrical steel, because of the fact that we melted it in Breckenridge, so we had to campaign those melds and it also required us to do wash sheets and then after that campaign and that created inventories that took a while to flush the through the system including producing the finished product. So there are significant efficiencies, I should say, that accrue to flat-rolled products by simplifying the business. It’s not something that we wanted to do quite frankly, but the market conditions are such that the products we make have to be profitable. And if they are not, then we’re not going to make them.

Yes and to that point, Rich, clearly GOES and closing Midland and Bagdad probably are idling them. I imagine with whatever 25% of sales but it will be a much higher percentage of the unit volume that runs through flat-rolled because it is a lower value mix today. I was wondering if you could comment on how did you think about the baseload dynamic that you guys have discussed in prior years having any contribution margin on a lot of volume absorbs a lot of fixed overhead. I just wondered at this point given we’re going to have a substantially reduced volume running through HRPF. How did you think about the profitability of that aspect as we move forward?

Yes…

You’ve talked about…

I think the important part – the important thing to think about as we’re taking out a whole melt shop right? So when we idle that melt shop, I mean, it’s not a warm idling, it’s a cold idling. So the incremental costs on an annual basis of basically just keeping the plan secure and things like that is just that it is minimal. So all of those costs are coming out. So you’re actually lowering your costs based from the standpoint of meeting that volume. And we simplify the Breckenridge melt shop we have – we won’t be operating at the same level of capacity there, but you schedule to melt shop differently, right? And the HRPF is an interesting animal, because it’s not really a people-intensive business. So it’s a very efficient business, I mean obviously what you’d like to do is have business conditions that you could fully load the HRPF. But that requires demand and prices for the product that you can make money on, if not, at least the contribution margins. So the problem with the commodity business as it exists today, that the transaction prices are at a level that the contribution margin just isn’t there. So you have to take the actions and view the fact that at the end of the day, right there is no such thing as a fixed cost. So you have to get rid of those fixed costs, and we do that really by idling Midland and idling the draft, and becoming much more efficient and lower cost and Breckenridge on the whole Breckenridge campus. The Breckenridge melt will probably be 15 – 19 terms. We certainly believe we can be efficient, and competitive and profitable at that level. The HRPF is going to run as much as it’s needed to run. The finishing assets will really be pretty efficiently filled because most of the commodity products that we finish at least on the larger coil sides were all done in Midland. And that operation won’t be operating until business conditions can improve.

Okay. And for modeling purposes, what should we anticipate the run rate CapEx to be in 2017 and beyond? And then I just want to frame our inventory reduction in our models for this year? I mean, could it be as high as $100 million? Or how should we think about that?

Yes, inventory $100 million is a good number to use for the inventory reduction and the CapEx 17, 18, 19 will be around a $100 million total. And then when you look at our maintenance CapEx with the revised footprint we drop down to be about $55 million to $60 million in total maintenance CapEx per year. So we are estimating a $100 million per year. We’ve been running well over $200 million. So significant step down in CapEx

Thanks a lot guys.

Thank you Gautam.

Thank you. And the next question comes from Josh Sullivan of Sterne Agee CRT.

Good morning.

Good morning Josh.

Good morning Josh.

Can you just take stand on the utilization aspect of the high performance segment? How should we be thinking about that in 2016 or over 2016 and into 2017? And then maybe where is utilization now and where do you think its going to go?

Yes. Well, I mean it all depends on what facility you are talking about. But I think the overall utilization, overall will probably be up 10% across the operations in the high performance segment. I will give you an example of the refocusing that we did in the UK operations. The UK operations consisted and consist of a melt shop and GFM rotary forge and some finishing assets. And a significant and market of that has historically been oil and gas. But also there has been aerospace there, especially on the shaft side. So what we’re doing is as we grow, especially the vacuum melted nickel alloys and super alloys, we have an asset in the UK that can, from a melt shop standpoint can be more fully utilized, especially with oil and gas where it is. And so we are offloading and from a capital efficiency standpoint, we are offloading some of the standard grade nickel alloys VIM melted products into the UK, where we also have the GFM. And then we can redeployed that capacity that’s in our North Carolina operations for the growth into the higher value aerospace market, the triple melt 718 et cetera, et cetera. So I think that when we look in the increase is the utilization of the UK, that obviously increases the utilization of Monroe through growth, and we’re really seeing the same thing on the forging side. The one thing on our Forge product side, we’re going to be heavily utilized for some of our small, smaller part hot-die forging operations in Southern California. In the Wisconsin facility, that is a very versatile facility that serves as not only the aerospace market, but other industrial markets like construction and mining market. The construction and mining market, we are not anticipating to be very good in 2016. But certainly the aerospace market growth through the isothermal forge presses and all the ancillary equipment will increase the utilization and improve the absorption of the forging side. And then on the casting side, once we can complete here in the first quarter, the new capital expansion on the casting side. As we look out here over the next three to four years with the LTAs we have in hand, where we will be at capacity in our casting business over the next three to four years.

Okay, so then…

Overall I think operating volumes will increase about 10% overall.

So that gets us to kind of the double-digit operating margin for 2016?

Yes that’s a big, well I mean, it is a combination of the improved efficiency and absorption. But it’s really the additional revenue volume and growth that we’ll see throughout 2016, resulting in a return to double digits during the second half.

Okay. Right, and then I just wanted we saw the 747 rate come down the other day the A330 comes down at some point. Can you talk a little bit about what impact the decline in legacy in aircraft such as these versus the ramp on the next-generation aircraft is going to look like as we progress through 2016?

Yes, I mean, I don’t think its going to have a significant impact quite frankly. I think those adjustments to some of those lines are really temporary adjustments in transition to the next-generation platforms. So I don’t think it’s going to be a major impact to the supply chain. I think it’s more overwhelmed by the growth on the narrow-body side and the growth and increase in production on the XWB. You know the 777Xs and the 787, I mean, our participation in the Neo and the MAX, our participation in content on those platforms is higher than we’ve ever had before quite frankly on any platform. I think as you look at the transition on the single-aisle, the CFM56 engine, for example a legacy engine, we’ve actually increased our participation in that engine while its still in production it will be gradually over the next seven years decreasing in production with the next-generation engines taking over. But quite frankly we’ve got in some cases on some parts from a 20% share to 100% share on those parts. So we see the legacy side, especially on the parts and components side to be the growth for us over the next several years, despite the fact that they will be less being produced. But I don’t think that the adjustments that have been announced thus far are really significant drivers at this point to our business.

Okay, thank you.

Thank you.

Thanks.

Thank you. And the next question comes from Richard Safran of Buckingham Research.

Thank you. Good morning.

Good morning Rich. How are you?

I’m doing very well, thank you. Gentlemen, and Rich, in reference to your, just to your recent comments here on aerospace sales up 8% and the comments you have been making right now. I’m trying to get a sense of how we should be looking at the performances topline growth and maybe long-term. Not just 2016 but beyond. Is this now a situation where we should be looking a high-performance growth in terms of the build rate increases for new technology aircraft? Do some of these share gains cause you to do better than build rate growth that sort of thing, any comment you could help there would be great.

Yes, I think the build rate growth – I mean it’s interesting. When you look at the raw numbers the build rate growth might not be all that eye-opening over the next five years. But it’s the mix that’s more significant to ATI, I think. I think when you look really across the platforms we see the growth and participation, not only in the mill product side, because some of the differentiated alloys that I mentioned in my comments, but also really on the parts and components side. And that’s been part of the strategy here, right. Once we acquired Ladish there was a strategic focus there that we intended to fulfill over a number of years, I mean it was really dependent obviously on the market and how the market was moving. But we saw what was on the drawing board, we saw both the engine in the platform side. So I think that we’ve commented that we see in the high-performance side a $1 billion in growth over the next five years. So you are looking into a segment that we expect to go from $2 billion to $3 billion and that’s driven largely by aerospace. And I think that’s really kind of a conservative view in my opinion because we’re not banking on any significant growth in other end markets which may occur like oil and gas isn’t going to be where it is forever, right. And that’s an important market for us. Construction and mining isn’t going to be where it is forever. And that had been very important and significant market for us on the forging side. So I think that the asset capability, and the technology and the products that we have on the high-performance side are really positioned largely driven by aerospace, but also by being more focused on us increasing our participation in the defense market that I believe we’re under serving and we’re focused on that, the normal growth in the medical market that we’ve seen consistently over the past 10 years to 15 years and some semblance of a return in the oil and gas and the electrical energy generation market I quite frankly would be disappointed if all that segment was $3 billion in 2020.

Okay. And finally here, you always have a bit of an interesting take on the aerospace aftermarket. It looks like in 2015, there was continued demand for refurbished parts, sort of displacing demand for new parts. I was wondering if you have any comment on that? And also, if you have any comment on how the aerospace aftermarket did for you in 2015, and how it looks for 2016?

Yes I mean I think it was, 2015 was certainly better than 2014 and 2013 on the aftermarket side. I think that we expect some of the same type of demand profile in 2016 as we saw in 2015. So I think the comments are, from GE the comments are, that they think the aftermarket demand will increase. I think it really depends on the parts and components side. On the material on the mill product side, traditionally, over a very long time period, our demand was 25% to a third driven by aftermarket. I think that that’s probably consistent today. On the parts and components side, it really depends on what platform you were on, right? So the old Ladish Company was more rolls focused and less GE and Snecma focus, so therefore their historic opportunity was not, from a growth strand point, was not as it would be if they were more single aisle or narrowbody focused, I should say. So because that’s really where the big driver of the aftermarket is more on the cycles on the engine, which happened more on the short routes, which lend their case to be more of a single aisle. So I think our refocusing of that business to be more diversified gives us an opportunity, especially as we look at some of the parts and components we won on the legacy generation aircraft. Those aircraft are going to be flying for a long time and there will be a demand profile there. So I think as we look at 2016, I see it relatively consistent with 2015. I think as you get further out in 2017 and 2018, those older airplanes will still be flying. They will be the drivers of the aftermarket. And I think we have opportunities for growth on the parts and components side, with stability on the mill product side.

And thank you.

Thank you.

Thank you. And the next question comes from Kevin Cohen with Imperial Capital.

Good morning and thank you for taking the questions. I guess, going back to the free cash flow topic. If the Company were not to source $100 million from inventory, would the Company still be free cash flow positive in 2016?

It’s a significant driver of our free cash flow, but we do of a bit of a margin there. So if we weren’t as successful as $100 million, even if we got say greater than $50 million, $60 million, we could still be positive for the full year.

That is very helpful. And then the second question, just kind of looking at EBITDA in the fourth quarter, are there any one-time items or noise in numbers, as it relates to COGS and SG&A, just thinking about the clean starting point, if you will, as you head into 2016 at all [ph]?

I think we’ve highlighted everything in the release and in the previous comments. But there are some also work stoppage related costs that, obviously once this is settled that those would decline significantly going into 2016. So there are some we will call a trailing work stoppage related costs that we talked about. Some of the inventory that was produced earlier in the year and shift with a higher nickel number in it, those types of things. So there would be some drivers there.

And can you remind us, I might have missed it, what that work stoppage cost, or opportunity cost, if you will, was in the fourth quarter?

We did not quote that number.

Yes. I mean its – its starts to get blended in and mixed with some of the decisions we’ve made of backing away from taking orders that didn’t have a positive contribution margin. So I think the first quarter in flat-rolled will still be challenging. I don’t think it will be as challenging as the fourth quarter. But it will be better, and I think as we move forward and eliminate some of the significant cost drivers that are still there as we exit and pull back on the commodity and the GOES markets, those will become less significant in the second quarter by a magnitude and be gone as we enter the second half.

That is very helpful. And then just the last question. Stainless steel prices were reportedly down about 2% in the first half of January, I guess. Have you seen prices stabilize since then, or what are you broadly seeing out there on stainless prices?

Yes I think the commodity stainless prices were up, the base prices were up a little bit because all the producers announced about a two percentage point increase. So you are talking a couple of pennies a pound but it still – it’s gone from maybe $0.44 to $0.46 a pound, right. But still at historic lows. I think my long-term view has been that over a reasonable time period you don’t see base prices stay below $0.50 a pound very long because really hardly anybody – nobody is profitable on a pretax basis, and some are not profitable on a contribution margin basis. But I still think the problem that exists in that market is one that you have such a large excess capacity in the world and you have slower growth in China, you have a slower growing economy in Europe, and you have the U.S. where you really see some inconsistent growth, especially on the manufacturing sector side. And so the demand growth for flat-rolled stainless is not very attractive at this point in time. And that’s going to keep pressure on pricing for a while.

I appreciate all the commentary and good luck.

Thank you very much.

Thank you. And the next question comes from Michael Gambardella with J.P. Morgan.

Yes, good morning.

Good morning, Mike.

Mike.

I have a couple of questions. One, in terms of the high-performance business, you have mentioned that all of your contracts, or most of your contracts in aerospace are denominated in U.S. dollars. But I am assuming that there are a number of contracts that expire on an ongoing basis. How do you face ongoing competitive pressures of a high dollar against a non-dollar-based cost competitor, say in Europe?

Yes, well I don’t, first of all, I don’t think your first assumption is correct. I mean, I think most of the contracts that we have are multiyear contracts that have been renegotiated here over the last couple of years, and are going out anywhere from five to seven years. So I don’t really see any significant renewals coming up here in the short term, number one. Number two, to the extent that were true, the competitive landscape coming out of Europe for the products that we make is not significant.

So you really don’t have any of your contracts coming up for renewal over the next two years?

No.

Not significant, no.

Okay. Can you then in broad terms, explain over the past year, from say a fourth-quarter 2014 to the fourth-quarter 2015, this very high value-added, high-performance segment had margins drop 1,000 basis points?

Yes, well I mean there’s a lot of factors that went into that including oil and gas, and construction and mining, all of the things that we’ve been talking about, Mike. And all the things we’ve been talking about for now a year and a half. So I don’t really have anything to add.

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

Thank you.

Thank you, Rich. Thanks all of listeners for joining us today. That concludes our conference call.