Good morning and welcome to the Allegheny Technologies, Incorporated Third Quarter 2016 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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, Carey. Good morning, and welcome to the Allegheny Technologies conference call for the third 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; Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer; John Sims, Executive Vice President, ATI High Performance Materials & Components; and Bob Wetherbee, Executive Vice President, ATI Flat Rolled Products Group. All references to net income, net loss, 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, again www.atimetals.com. After some initial comments, we will answer the 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 Q&A 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 the 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. We are into the transition to next-generation aircraft and jet engines from legacy models, and ATI is benefiting. Our mix of differentiated jet engine alloys achieved new record levels for both sales and shipments to our own forging operations as well as to other forgers who are our direct customers. Our isothermal and hot-die forge presses operated at or near record levels during the third quarter in support of growing next-generation engine builds. Third quarter results demonstrate steady improvement in operating earnings, but we are far from satisfied. In our High Performance Materials & Components segment, third quarter 2016 operating profit improved 150% compared to the third quarter 2015 and was 20% higher than the second quarter 2016, and we expect continued performance improvement in the fourth quarter 2016 and continuing through 2017. In our Flat Rolled Products segment, we are making progress in our goal to return this business segment to sustainable profitability, but we are not satisfied with the pace of our progress. With the expectation of continuing challenging market conditions in the fourth quarter and some additional restructuring actions to be taken in the fourth quarter, we now believe the Flat Rolled Products segment in on track to return to profitability in 2017. Demand remains soft from many markets served by our Flat Rolled Products business and we anticipate year-end inventory management actions throughout the various supply chains in the fourth quarter, as uncertain economic activity continues. During the third quarter, we took several additional actions to improve ATI's future financial performance. These actions included the indefinite idling of the Rowley, Utah, titanium sponge production facility and consolidating certain titanium manufacturing operations in Albany, Oregon. These actions, which we announced in August,…

Thanks, Rich. Turning to slide eight, we reported third quarter 2016 sales of $771 million and a net loss attributable to ATI before special items of $22.5 million or $0.21 per share. Results for the three months ended September 30, 2016, include $329 million of after-tax restructuring and other charges or $3.07 per share for asset impairments, shutdown, idling and employee benefit costs associated with the Rowley, Utah facility. Results also include a $173 million or $1.61 per share income tax valuation allowance on U.S. Federal deferred tax assets. Turing to slide nine, at September 30, 2016, cash on hand was $188 million and available additional liquidity under our asset-based lending facility was approximately $325 million. Cash used in operating activities was $78 million in the third quarter 2016 and includes a $115 million contribution to our U.S. defined pension plan. Managed working capital decreased $29 million in the third quarter 2016. For the first nine months of the year, managed working capital decreased by $39 million. Cash generation remains a key focus for us at ATI. Moving to slide 10, we expect 2016 capital expenditures to be approximately $215 million. $175 million was invested in the first nine months of the year, of which nearly half related to the completion of the hot-rolling and processing facility. The second largest capital expenditure this year was for our new nickel-based super-alloy powder facility, currently under construction in North Carolina. Looking ahead, we expect capital expenditures in 2017 to be approximately $120 million. This includes carryover from 2016 as well as about $40 million for our STAL JV expansion in China. As we stated previously, the STAL expansion is being completely funded by cash generated from operations at the joint venture. We are at the end of our extraordinary capital expenditure cycle that has transformed and modernized ATI. Beyond 2016, we expect capital expenditures to average less than $100 million annually for the next several years. Now, I will turn the call back over to Rich.

Thank you, Pat. Turning to slide 11, I'll focus my remarks on our High Performance Materials & Components segment and the commercial aerospace market specifically. Segment operating profit was $47 million in the third quarter of 2016 that's a 20% improvement compared to the second quarter and a 150% improvement compared to the third quarter of 2015. As you can see on this slide, segment operating profit has improved steadily since the third quarter of 2015, which was the bottom of the current cycle. From our perspective, segment sales to the oil and gas market collapsed between the second and third quarters of 2015 and have remained weak throughout 2016, and most other non-aerospace markets continued to be challenging. You can see how powerful the aerospace recovery is for our business, particularly for our differentiated products used in next-generation engines. We believe the High Performance Materials & Components segment is very well positioned for the opportunities we have earned from our jet engine and airframe customers. We are focused on operating our high performance business as efficiently as possible and this also requires making some tough decisions, which we have done. So far, we have taken actions to help achieve sustained and improved profitability throughout our High Performance Materials & Components segment. In the fourth quarter 2015, we took initial actions to align and integrate the segment's administrative functions resulting in annual cost reductions of approximately $20 million. As announced this past August, by the end of 2016, we will complete the idling of our Rowley titanium sponge facility. In addition, certain titanium milled products operations in Oregon will have been consolidated, and by the end of 2016, we are idling a small wire and rod facility in Frackville, Pennsylvania that had been losing money. Turning to slide 12, the…

Sure. We will now begin the question-and-answer session. Our first question comes from Gautam Khanna of Cowen and Company. Please go ahead.

Yes, thanks. Good morning.

Good morning, Gautam. How are you?

Good morning.

Doing well, thanks, Rich. Wanted to just get an update on what the cash requirements of the pension are going forward. And, secondly, you made a comment about Flat Rolled being profitable in 2017. Did you mean for all of 2017 or just at some point you'll get a quarter that's in the black?

That's a fair question. I'll take the last question and I'll have Pat answer the first question. We expect Flat Rolled Products to be profitable for the 2017 year, not at a point in time, not in just the first quarter, but for the whole year.

And on the pension question, Gautam, we have a pension contribution coming up in March of next year of $135 million that's previously announced. And then we expect contributions in the following years. Again, this is all predicated on the same interest rate environment that we have today and the rate of return on assets that we have stated in our plan. So we expect contributions in 2018 and 2019 of a little over $100 million in those years as well. And, again, that's all subject to change based on those assumptions.

Okay. And just could you remind us the cost savings from Rowley being idled is about $50 million, is that right?

It's $50 million on an annualized basis, that's correct, beginning in 2017.

And did you see some of that in Q3?

No. No. We're still operating the facility and will continue to do so through the fourth quarter as we wind it down. So the cost savings really don't show up until next year.

Yeah, Gautam, why don't we have John Sims, who has responsibility for the High Performance Materials & Components segment, just give a brief update on the status of the Rowley wind-down. John?

Yeah. Thanks, Rich. Hi, Gautam.

Hi.

The wind-down, as Pat said, is continuing through fourth quarter. We've ceased the operating runs, and we're basically completing the production of the sponge through the final operations, including certification, which we anticipate to be complete in November. And then we expect by the end of December to be effectively – complete the wind-down and shutdown by the end of December.

Okay. Thanks a lot, guys. I'll get back in the queue.

All right, Gautam. Thanks.

Our next question comes from Richard Safran of Buckingham Research Group. Please go ahead, sir.

Thanks very much. Good morning, everybody.

Good morning, Rich. How are you?

Good morning.

Very good. Rich, I'd like to start off on the comments you were making on ATI 425. I haven't heard you speak much about it until recently. Could you tell us, for those of us who are not necessarily familiar, what the significance is of getting that in the MMPDS approval, what that means for the material, and maybe a bit of an update here also on how it's gaining acceptance in aerospace market? And also, you mentioned opportunities. So I want to know maybe if you could scope out a little bit more what the opportunity set is, specifically. Is there anything coming up in 2017 that could be needle-moving?

Yeah. Okay. Rich, we have – as you probably remember, a number of years ago, we talked quite a bit about ATI 425. And part of the challenge and reason why it hasn't become more widely adoptive because it is a great product that affords a tremendous amount of savings, in our view, to the customer were two things. Number one, we didn't get it in the MMPDS, right, which is a requirement. And number two, it was hitting right about the time where the designs were being frozen, primarily on the B787. And it missed the window. But we have continued to not only fine-tune the process, but make the production process more robust. We've continued with business development efforts with our customers, not only on the aerospace side, but in other end markets as well. The MMPDS achievement is a significant milestone because it now is in the design book and it's opening up a window of opportunity for really some next-generation platforms because the unique capability of the product is that it's designed really to be a direct replacement for 6-4 titanium sheet, which can only be produced in discrete sheets through a pack-rolling process. ATI 425, because of its properties, can be produced through a conventional flat rolling process, including on our HRPF and finished on some of our finishing assets, and we can produce it in coil form, which enables greater flexibility and cost savings from a manufacturing standpoint by the customers, and we can do that really with comparable or, in some cases, better properties than 6-4. So there has been a continued, over the last several years, development work going on with our customers. I think that the customers realize the benefits and see the benefits there, and it's just taken us longer than we would've liked and hoped for to really get it to that point. But I think we'll begin to see some meaningful initial opportunities in 2017 and then continuing on. But I'd like maybe Bob Wetherbee to just make a few comments about what he sees as the opportunities going forward.

Yeah. Thanks, Rich. Good morning. I think Rich answered that pretty succinctly that we do see an increase in customer activity as a result of getting the ATI 425 into the design allowables handbook. They've been looking for a replacement for 6-4 sheet for a long time. So we're seeing a couple of different opportunities. One is for new designs as well as for in-kind replacement at a much more cost-effective solution. So I think I agree with Rich. The meaningful activity is starting now and we should have meaningful volumes into 2017, and the team at the HRPF are excited about delivering that.

Thanks, Bob.

Okay. Thanks very much for that. Just one more quick one. Rich, I wanted to know if you could go into on the topic of Rowley. After spending $1 billion, I wanted to know if you could go into a little bit about the rationale for shutting the facility after that large investment. Can you go into a bit on the dynamics that changed such that you're now going to buy sponge externally?

Yeah. We did spend a lot of money on Rowley, but thankfully it wasn't $1 billion, it was $500 million, but needless to say that's a big number. So when that investment decision was made, the world was a lot different place, right? The world was short on titanium sponge. The requirements from The Boeing Company to be a supplier of mill products for them as they were advancing the B787 design and build was that they wanted integrated suppliers at that point in time capable of producing titanium sponge in the United States, right, from a risk management standpoint, and using that sponge to produce a wide range of mill product forms, both long and flat. So, that was basically the requirements that were set up at that point in time. That's no longer a requirement, number one. And number two, the world – the capability and the capacity in the world is much greater to produce titanium sponge. You have less demand from a sponge standpoint because of where the industrial markets are today and the demand from the industrial markets, and the combination of the added capacity that has been brought on to produce titanium sponge and the lower demand, even for the high-end aerospace-quality sponge, not just standard grade for airframe applications, but premium quality sponge for jet engine rotating part applications. The supply today is much greater than the demand. And quite frankly, 2016 marked the first year ever, and we've been buying sponge at ATI for a very long time, right, from the beginning, is for the first time in 2016, there was a split in the valuation or the selling price of sponge between PQ and SQ grades where SQ is a lower cost sponge than PQ. And that's never really been the…

Thank you very much.

Thank you, Rich.

Our next question is from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.

Yeah, hey. Good morning, guys.

Good morning, Timna. How are you?

Good morning.

Doing all right, thanks. So for the last several times that you've spoken publicly, you've delineated, like, three specific goals that we were supposed to measure you against, and you met one of them, for sure. It looks like with High Performance Metals' margin surpassing double digits in the second half, so that happened already. But the Flat Rolled Products breakeven, you're pushing out, and I know you gave some reasons, but can you just give us, like, the top two or three reasons why that's needing to be pushed out? And the other goal that you, I guess, missed or pushed out is the CapEx guidance. And I understand what you're saying there, but I just want to hear if you could reiterate your confidence on why we're going to be below $100 million going forward. Thanks.

Yeah, why don't I let Pat first handle the second question and then also give you some overview, high-level comments about the Flat Rolled Products' profitability question, and then I'll have Bob give his view and I'll wrap up.

Great.

Okay, so, Timna, on the question with respect to Flat Rolled Products, when you look at the performance in Q4 – Q3 and then into Q4, the market conditions are such that our volumes are below our expectations that we had when we established that guidance earlier in the year. So when you look forward, the market conditions are dictating the fact that our volumes are down. The pricing environment is pretty much where we expected it to be at this point in time, but it's still a competitive market. While we have the trade release, we do see imports surging from some of the other countries and we've noted that as well on the call earlier. So we don't see significant benefit coming from that yet as well. And that's why we're looking at more 2017. We also have some restructuring actions that we're taking, which will again benefit us in 2017 and beyond. So, that's the reason for the change in the guidance on Flat Rolled Products.

Capital.

Okay. CapEx?

On the capital side, we are in line with our guidance. So when we started the year, we had $245 million total estimated CapEx. As you can see, we brought that down all the way to $215 million. Part of that is a push into next year. So we're still well within our guidance that we'll average below $100 million for the next several years. We just have a carryover from 2016 into 2017.

Okay. So otherwise on track. Yeah.

Yeah. Bob, do you want to comment?

Yeah. I think to Pat's conversation or his comments on where we are in Q3 from a demand standpoint going into Q4, there were three major issues for us. One is oil and gas, and the oil and gas market. We're confident that we're maintaining our share of that market, but we're seeing less demand in things like umbilicals and those kind of things, Q3, Q4. We're also seeing the, what has been called, destocking in our distribution community as they head into year-end. Nickel prices have been relatively stable here over the last few months, but they're into their year-end inventory reduction. The third thing we saw was push-out on some major capital projects. Now that said, in the last few weeks heading into Q1, we're seeing an uptick in quoting activity, lead time activity, lots of questions from customers as they prepare for what they see as a stronger first half in capital projects in oil and gas.

Yeah. So, Timna, we're not changing our guidance on capital. The $20 million is essentially carryover, is being pushed out from 2016 into 2017. We don't have any significant capital investments being considered for 2017. The biggest strategic project we have is the completion of the nickel superalloy powder facility, the new greenfield facility down in North Carolina, and that, by the way, is progressing very, very well and is on schedule and will be started up here in 2017. So capital remains on track. I think in addition to the comments that Pat and Bob made on Flat Rolled Products, the market situations are the market situations. I mean, we don't control those. We do have strong views and take a lot of input, and we did think that the fourth quarter was going to be a stronger demand and a stronger operating rate in the fourth quarter, especially for some of the differentiated products that touch on some of the big global projects that Bob touched on. And they have been – we thought that some of those awards were going to be made here in the third quarter and we'd be producing in the fourth quarter, and it looks like it's slipping by about a quarter. So, that hurts us. And, quite frankly, we have to do better. I mean, some of it was within our control, and Bob and his team know that and acknowledge that. And we know what the – we see the pathway, right? We know what has to be done in order to achieve what we said. We don't take lightly what we said, right? That is our commitment first to ourselves and then to our shareholders. So we will continue to focus on pulling all the levers and taking all the actions within our control on turning around Flat Rolled, and we do think that we will begin to see some benefit from the market, which is always critical in these businesses which have relatively high fixed costs. Over a long period of time, there is no such thing as a fixed cost. Over a shorter period of time, there is and absorption does matter. So no excuses. We have to do better.

Okay. And if I could on High Performance Metals, it seems that your competitors – or some of them at least – some of the other metals suppliers to the aerospace industry have been talking down that market or talking about some challenges and growing pains and whatnot. Some of that may have been their own execution. So I was just wondering if you can provide any reasons that you think you've had a little better fortunes perhaps, if I understood your release correctly. And then on 2017, I know you haven't given any guidance, but we really don't have much to go on. Can you give us any initial thoughts on what to think about regarding margins in 2017?

Yeah. I think every one of our competitors is different. They have different product mix profiles. I mean we make some things that some of our competitors don't make, and they make things that we don't make. So it's really hard to compare. I think from a macro basis, as I kind of look through some of the comments that were being made, especially as it pertains to an alloy system that we don't make, which is aluminum, I think there are some comparables between what two of the aluminum – the flat-rolled aluminum producers have said about inventory correction that I'm sure has an impact on their operations that doesn't impact us. I mean, I think on the titanium inventory correction side, which we do make as it services the airframe market, as you'll remember, Timna, we went through that for a prolonged period of time a couple of years ago, right?

Yeah.

And so I think that's in better situation and a better condition. But I think the biggest issue is really on the differentiated products. I mean, I spent a lot of time going through in my prepared comments, the meaning of that not only from a mill product form standpoint, but also as it is produced in the forgings, primarily forgings at this point in time, because we're not yet delivering what we need to deliver on the titanium investment castings side, but we will. But on the forgings side both the hot-die and the isothermal, I mean, we're really very good at making those parts, quite frankly. If I could tout and recognize the job that John Sims and his team does; we're good at it and our customers know that and where others might be stumbling a little bit as they maybe start to ramp up, we're there to support the customer and we've seen some of those. The other side is the legacy demand on the jet engine side is still very strong, and some of the LTAs, long-term agreements, that we were awarded in 2015 give us parts that we never produced before, quite frankly, especially on the forged products side, and we're seeing that. I think, quite frankly, you would see even more of a dynamic level than proven of profitability in High Performance if some of those other end markets were hitting on some better demand side. I mean, the oil and gas market, which is an important market for High Performance, is not in good shape, right? The electrical energy, the large combined cycle industrial gas turbines outside of the maybe demand from China, not in good shape; and the chemical processing industry is important. So I think that there are similarities between companies we compete with, there are differences. What we're seeing is what I said in my comments. Oh, and in 2017, yeah, I mean I think we've already commented on Flat Rolled Products. We expect the segment to be profitable. I don't think it's going to be heroic because we are not looking at underlying real strong demand in some of those end markets, so I think it will be more by brute force, right, at this point in time, as we position that business well, so I think it will be low-single digits type of thing, and I think the High Performance will be into the teens, the low teens at this point as the market, primarily aerospace, we're not banking on oil and gas being a strong demand driver in 2017 or any of the other end markets that are kind of languishing right now, we don't think that that will change dramatically in 2017. When they do come back, when the demand does come back, those are kind of different capacities that produce some of those products, but they will be significant profit drivers that will build on the momentum that we have in aerospace. Okay?

It looks like we have time for one last question and our last question will come from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. How are you?

Good morning, Phil. Good, how are you?

Doing well. Just have a question on the High Performance Metals segment. Was there any deferrals in any of that aerospace business in the third quarter into the fourth quarter because I know you are talking about a little bit of a pickup in your margin sequentially?

Yeah, no. John, do you want to comment?

Yeah. Hi, Phil. No, we saw no deferrals from Q3 to Q4.

Did you get that, Phil?

Okay. I did. So, what's the pickup in margin predicated on? Is that just more cost take-out or mix improvement?

It's really three things, Phil, and I think Rich has touched on several of these. First of all, it's the long-term agreements that we've won that are a combination of legacy programs that we had not either been on before or parts that we had lost in earlier negotiations. Second, it's the next-generation platforms, particularly the single-aisle programs. And third, the combination of the differentiated products associated with them that really represent for us a fully integrated solution for our customers beginning in our mill products businesses pulling through, through our forging and castings businesses. The net combination of all that meant we've got growing volume through our facilities, and that growing volume is really helping with cost absorption and once we hit a good absorption profile with that mix, we get a higher incremental margin and I think you're beginning to see that.

Okay. So you're essentially pointing us to better revenues and mix in that segment in the fourth quarter versus the third quarter to get there.

Right. A combination of mix and volume.

Okay.

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

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

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