Good morning and welcome to the Allegheny Technologies Incorporated Third Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Minder, Vice President, Investor Relations and Corporate Communications. Please go ahead sir.

Thank you, Rocco. Good morning and welcome to the Allegheny Technologies third quarter 2018 conference call. This call is being broadcast on our website at atimetals.com. Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; Bob Wetherbee, President and CEO Designate and current Executive Vice President, Flat Rolled Products Group; John Sims, Executive Vice President, High Performance Materials & Components segment; Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer; and Kevin Kramer, Senior Vice President, Chief Commercial and Marketing Officer. If you have connected to this call via the internet, you should see slides on your screen. For those of you who have dialed in, slides are available on our website. After our prepared remarks, we will open the line for questions. During the Q&A session, please limit yourself to two questions to allow time for others. We will make every attempt to reach all in the queue within the allotted call time. Please note that all forward-looking statements are subject to various assumptions and caveats as noted in the earnings release and shown on this slide. Now, I would like to turn the call over to Rich Harshman.

Thank you, Scott. Good morning to everyone on the call and to those listening on the Internet. I would like to provide a brief overview of our third quarter results and then turn the call over to Bob Wetherbee. As we announced on August 14th, Bob will become ATI’s next CEO on January 1st, 2019. I will remain as ATI’s Executive Chairman until my retirement in May 2019. Bob is an experienced leader within the Specialty Materials industry with an extensive background in the aerospace and defense and oil and gas markets. Bob is an outstanding choice by our Board to ensure continued progress on the strategic journey currently underway at ATI and to lead the company forward into the next decade. ATI’s third quarter performance was solid. Results were in line with our expectations and the guidance provided on our second quarter earnings call. Third quarter results built on a strong first half 2018. Our 2018 year-to-date financial results provide tangible proof that we are delivering on our strategy to generate sustainable profitable growth and to be the world’s best specialty materials and components company. Year-to-date, sales have increased 15% with solid contributions from both segments while segment operating profits have grown by 67%. The incremental leverage achieved on our top-line growth demonstrates the scalability of our advanced manufacturing capabilities and the effectiveness of our prior business restructuring efforts. Based on the strength of our commercial aerospace business, the ongoing recovery in the oil and gas markets, and the operational performance of our world-class assets, we expect ongoing revenue and operating profit growth in the quarters and years to come. I am pleased with what we have achieved thus far and look forward to the future successes that Bob and the ATI team will no doubt deliver. With that, I would like to turn the call over to Bob to cover the third quarter highlights. I will return at the end of the call to wrap up and take questions. Bob?

Thanks, Rich. First, I want to thank Rich and the members of the ATI Board. I am honored and humbled to be chosen to lead ATI into the future. We are in a great position to continue to meet our profitable growth targets, and to serve our customers’ increasing needs for specialty materials, parts and components. To all of you on the call that I have yet to make meets. I look forward to speaking with you on future calls and in-person meetings so as I travel to visit our customers, operations and shareholders. Overall, third quarter 2018 results were in line with our expectations. ATI’s top-line revenue grew by 17% marking our fifth consecutive quarter with double-digits year-over-year revenue growth. Both business segments were strong contributors to this growth. With the High Performance Materials and Components segments benefiting from the ongoing aerospace production ramp and transition to next-generation products and Flat Rolled Products segment improving due to the ongoing recovery in the oil and gas markets, as well as growth in other important markets. Segment operating profits nearly doubled versus the prior year with margins expanding by 400 basis points. Top-line growth benefits from product mix enhancements in both segments and increased asset utilization at key operating facilities helped drive the third quarter’s robust year-over-year incremental margin growth. As a result of this disciplined and profitable growth and despite a modestly elevated tax rate due to strong earnings at our STAL Precision Rolled Strip joint venture, ATI earned $0.37 per share in the third quarter 2018, compared to an adjusted loss of $0.07 per share in the third quarter 2017. With that as a backdrop, I will hand the call over to John Sims to provide a more detailed review of our performance in the HPMC segments. Following John’s comments, I will return to review FRP segment results. Pat DeCourcy will comment in more detail on our third quarter financial results and Rich will return to give our fourth quarter outlook and to provide concluding comments. We’ll then open the call to your questions. John, over to you.

Thanks, Bob. Turning to Slide 4. The HPMC segment’s third quarter financial performance was well aligned to our expectations. Year-over-year segment revenue remained solid increasing by 14%. Similar to the first half of 2018, aerospace market demand growth outpaced growth rates in other end-use markets. Segment operating profit increased by 23% versus the prior year driven by favorable product mix and stronger asset utilization rates. We continued to experience robust demand for next-generation jet engine products, particularly our differentiated nickel alloys and complex components. We work diligently to remain an industry leader in product quality and on-time delivery ensuring that our customers can produce more engines and airplanes to satisfy expanding market demand for air travel and airfreights. We expect these macro market trends to continue for the next several years thus supporting long-term demand growth for ATI’s Specialty Materials Parts and Components. Looking at our business sequentially, third quarter revenue and operating profit declined versus the second quarter. This decrease was anticipated by the segment outlook provided on our second quarter earnings call and discussed on our first quarter earnings call as well. The reasons for this sequential decline are both structural and specific to 2018. Each year, our HPMC segment faces recurring third quarter headwinds. First, several large customers, particularly aerospace-related forge operators reside in Europe. Many of these customers take extended summer shutdowns aligned to local business practices. Second, ATI uses this period of lower sales volumes to perform critical annual preventive maintenance on our factories. These proactive, multi-day repair periods occurred at our facilities in North Carolina, Wisconsin and Oregon to serve to reduce the possibility of unplanned facility outages in 2019 and beyond. In addition to the annual events, the first quarter 2018 experienced two specific events that had a negative impact on our operating…

Thanks, John. Let’s turn to Slide 6. The FRP segment generated solid third quarter financial results, improving on our very good second quarter results. The segment continued to experience strong demand for its products across several end-markets and geographies. Segment revenues increased 22% versus the prior year led by a nearly 40% increase in aerospace and defense market sales, mainly for our commercial aerospace products and a 40% increase in automotive market sales driven by our Precision Rolled Strip products. Segment sales increased 4% versus the second quarter 2018. Results were mixed by markets with strong growth in aerospace and defense, partially offset by modest declines in the larger oil and gas markets. Segment operating profit of $30 million or nearly 7% of sales increased both sequentially and year-over-year. Compared to strong second quarter 2018 results, operating profits increased by 13% while reversing a small loss in the third quarter 2017. These gains were driven by a better product mix, as well as by continued asset utilization rate improvements. The year-over-year comparison was favorably impacted by a better matching of raw material costs and surcharges, while the comparison to the second quarter saw minimal raw material impacted results due to relatively stable commodity input prices. Looking ahead to the fourth quarter, we expect significant raw material headwinds in this segment as both ferrochrome and nickel prices are lower versus the third quarter resulting in a surcharge timing mismatch. Despite the headwinds, we anticipate the FRP segment remaining profitable in Q4. In summary, the segment’s third quarter financial results continue to demonstrate the success of our actions to generate improved levels of operating profits. As evidence of this improvement, the FRP segment’s Q3 2018 year-to-date operating profit of $67 million is more than four times to the $15 million earned in…

Thanks, Bob. Turning to Slide 8, I would like to take a few minutes to update you on our third quarter financial performance and on our progress toward annual free cash flow generation goal. I am happy to report that our cash position continues to improve. At the end of the third quarter, we had nearly $155 million of cash on hand and approximately $300 million of borrowing capacity available under our asset-based lending agreement or ABL. Both totals improved versus the second quarter of 2018. Similar to our second quarters, we had no outstanding borrowings on our ABL’s revolving line of credit at the end of the third quarter. We expect this trend to continue and assume that we will have no ABL revolver borrowings at 2018 year-end. Third quarter capital expenditures were $31 million bringing the total to $101 million year-to-date, a pace slightly elevated versus our full year guidance, primarily due to the outflows for two significant projects. Our fourth isothermal press and heat treating expansion located at our Isothermal Forging Center of Excellence in Cudahy, Wisconsin, and the second capacity expansion at the STAL joint venture facilities in China. Looking beyond 2018, we continue to work collaboratively with our commercial aerospace customers to fully understand the needs for and the timing of additional capital expenditures over the next several years to ensure that we can profitably support desired potential industry production rate increases. After growth in the first half of 2018, managed working capital decreased by nearly $30 million in the third quarter, primarily due to reductions in our inventories and accounts receivable balances. Despite significant year-over-year business growth in both segments, managed working capital as a percentage of sales stood at 36.4% at the end of the third quarter reflecting year-over-year decrease of approximately 250…

Okay, thank you, Bob, John and Pat. Turning to Slide 9, our third quarter results demonstrated the ongoing success of our strategy to generate sustainable profitability and free cash flow. We achieved significant earnings per share growth versus the prior year and have solid year-over-year revenue and operating profit growth in both segments building on our strong first half of 2018 performance and results. In the High Performance Materials and Components segment, third quarter sales increased in all markets versus the prior year led by double-digit percentage growth in both our commercial jet engine and commercial airframe product sales. We are well positioned to continue our growth in the upcoming quarters and years. In the Flat Rolled Products segment, underlying market demand remains solid and raw material pricing was relatively stable in the quarter. The business continues to benefit from improving product mix toward high-value products and increased asset utilization. As Bob mentioned earlier, we recently signed our first significant HRPF enabled carbon steel conversion agreement and we will build on this success moving forward. Looking ahead to the fourth quarter, we expect an increase in High Performance Materials and Components sales versus the third quarter due to a more normal business seasonal patterns with year-over-year revenue growth rates generally in line with the third quarter’s growth rate. Fourth quarter High Performance operating profit margin levels are expected to be better than the third quarter resulting in us achieving our full year 2018 goal of a 300 basis point year-over-year margin expansion. This guidance assumes a partial improvement in the nickel power billet supply issues within the fourth quarter. Modestly lower Flat Rolled Products segment fourth quarter revenue reflecting historically lower customer order patterns due to year-end inventory management actions are also expected in the fourth quarter. A significantly negative…

Absolutely. Today’s first question comes from Gautam Khanna of Cowen and Company. Please go ahead.

Thank you. Congratulations, Rich and Bob.

Thanks, Gautam.

So, hey, I just wanted to get calibrated on mix, because you know in the first half of the year, it looked like High Performance had particularly strong mix. What should we be expecting as we move into 2019? I just want to – you gave us color on Q4, but is there anything about the first half of this year that have – may have been unusually rich relative to what a normal mix, but that might look like at High Performance?

Yes, I think that, maybe in the first quarter there was a stronger shipment of forging to a particular jet engine OEM that recovered some late deliveries that have been the result largely of some continuation of late powder billet deliveries. So, we had a significant catch-up in the first quarter. The second quarter I think is really evidence of the lumpiness, one of my favorite words that does occur in the business. I mean, when you are shifting from the legacy jet engine programs into the next-generation programs that are continuing to increase in rate production, and you have a strong demand from the legacy program in the aftermarket, this is 2018 and to a lesser extent I think 2019 is still a transition year between legacy programs and next-generation programs. I don’t think that you will see maybe the same kind of volatility in 2019. In terms of the mix, I think you’ll see a continued growth in the next-generation mix. As we move from 2018 to 2019, I think this business has historically been a business that is certainly stronger in the first half – I am talking about commercial aerospace, mainly jet engine, stronger in the – and to a lesser extent even on the commercial airframe side. Stronger in the first half of the year than in the second half of the year, primarily due to the third quarter being impacted by seasonality and historically the fourth quarter being impacted by some inventory management issues. What has exacerbated that I think in the last couple years is the supply chain rate ramp, some of the problems within the supply chain of reaching that rate ramp which I think as we move into 2019 will smooth out. They are not going to be ended. You are still going to have some of those challenges I think in the supply chain in 2019 as the rate ramp continues on in the next-generation platforms. But I think you’ll have more predictability if you will in 2019 than in 018 and then as you get into 2020, I would hope that the supply chain is ramping up accordingly to support the backlog. The strong backlogs that exists at both Boeing and Air Bus and then obviously that exists at all the jet engine companies, so – jet engine OEMs. So, I think if you are reading – if you are trying to read something into short-term gyrations on a quarter-to-quarter basis as to whether or not the long-term trend is intact. I think you are reading far too much into that scenario. John, do you want to add anything?

No, Rich. I agree. I think Gautam is, as we take a look at this like – like us, most of the people that are involved in this aerospace supply chain are involved in both the legacy programs and next-generation programs. So as the ramp on the new programs continues, and that rate increases, you are going to see some quarter-over-quarter, as Rich calls it lumpiness, as we move through. So, what we do is we take a look at it more on an annual basis. We kind of smooth it that way, because we are going to see some things where quarter two is probably going to be higher – the highest quarter of the year for us with quarter three being the lower and quarter one and four are going to be somewhere in between. So, that’s how we look at it.

Okay, thank you. And then, just a quick follow-up on your comments around powdered billets. Has that supply constraint abated? Or is this more on the come in terms of what’s implied in Q4 for your HPM segment guidance?

Yes, Gautam, that’s been an ongoing challenge that we have gone on that has – we have abated to some degree to-date. I think the problem we saw in Q3 was some challenges were exacerbated that occurred inside lead times for us to be able to react. We are working very closely with our customer to try to anticipate further requirements on our part to continue to abate those risks and we are actively working that.

John, you might want to comment on the qualification programs and the status of them with our powder billet qualification.

Yes, it’s a great point, Rich. The – so, Gautam, those are – the program that I just described you is, one in which we are qualified and contractually a supplier too. We are in the midst of qualification programs for every other material that we consume from a forging basis. So that within the next couple of years, we should be fully qualified and capable of stepping in and should we need to provide a measure of safety in the event there is further volatility in directed sourced billet supply.

Thank you, guys.

Thanks, Gautam.

And our next question today comes from Richard Safran of Buckingham Research Group. Please go ahead.

Thanks. Good morning everyone.

Good morning, Rich.

Good morning, Rich.

And Rich, congrats to you.

Thank you.

Bob, I think I have a first question for you. So, I saw the announcement on the conversion agreement that you spoke of in your – in the opening remarks. So, couple of things on that. Where does that take capacity on the HRPF mill? And could you tell us also the status of the four remaining agreements? Am I correct about that that do you have four agreements that you are working on that are in various stages of negotiation?

Hey, good morning, Rich. We are very pleased to have announced the NLMK agreement. It really is the start of a long-term relationship for us at the HRPF. It should move utilization of the HRPF 10, 12 to 15 points depending on how the ramp up proceeds during the course of 2019. We do see it as a long-term relationship. We’ve invested the last six to nine months with NLMK first, qualifying the product, then getting a effective slab source, specific logistics in place followed by NLMK beginning to sell the product. We actually produced product last week that’s being sold to end-customers already. So, the NLMK relationship is off to a great start and it should accelerate through the first half hitting its runrate in Q2 of next year. In terms of what’s next in the pipeline, we still are working with other producers. I would say, two are closer to the finish line than others. We do see the ability to add another 15% to 20% to the utilization of the HRPF and the combination of our core business plus the JV, the A&T Stainless JV plus NLMK, plus a second conversion partner should put is in that 75% to 80% utilization which has been our long-term target for the HRPF and clearly gives us the benefits we are looking for from a asset utilization base. So, there are two that are very active. Two that would be still in the wings and it’s really a qualification and customer acceptance issue that’s putting them into that prioritization.

Okay, thanks for that. The second question I had was on – I think just maybe for you Pat. You had a lot to say about cash generation. So I thought I’d ask, how you might be thinking about the capital deployment? I fully recognize that the immediate priority is improving the balance sheet, et cetera, but you are starting to generate cash here. And I wanted to know if there is any thought being given to dividends, buybacks, capital deployment in general. So, I just want to know if you could comment maybe here on what you are thinking about it, what you are thinking about it and the timing if possible?

The near-term focus, Rich, is still on improving the balance sheet. So, we’ll focus on pension funding obviously. The CapEx requirements that we have to fund our strategic growth is a high priority and then debt reduction in the near-term. So, we still have $100 million debt issue that’s out there that we can reduce at any time. We do have a focus on debt reduction as well. So, it’s really about balance sheet improvement in the near-term. And I’d say the near-term, the next couple of years on a longer-term basis, as we continue to increase our cash flows and we believe we will significantly improve our free cash flow over the next couple of years. We can turn then to measures to improve return to shareholders beyond that balance sheet improvement question and those who obviously be subject to discussion with Bob and the rest of the Board, here at ATI, but I think there would be a consideration of dividend potentially and then, potentially a buyback with that would be based on whether or not we think the stock is undervalued at the time. So, those would be more longer-term considerations. The near-term is all about balance sheet improvement.

And our next question today comes from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.

Yes. Hey, good morning everyone.

Good morning.

Good morning, Timna.

Good morning. I wanted to just try to a get a little better sense of the guidance and understand what’s being suggested. So starting with the High Performance segment, maybe I misunderstood, but there was a comment in the script about runrate, perhaps being a little bit ahead of demand in terms of sales. So, wanted to just get your thoughts on the runrate so far and is that kind of pace is sustainable going forward? Do you think that there has been inventory build? Or do you think that the runrate for demand is general in that space and in the jet engine side is something that can be sustained going forward?

Yes, I don’t think we made a comment about the – our deliveries being ahead of the rate ramp. I mean, if we did, that certainly wasn’t the intention. I think that my comment that I made in response to a question about the first quarter was that, the sales were elevated in the forgings because of the recovery from the late deliveries. But I think that what we are seeing is, actually our customer is asking us for more. They are not asking us for less or to hold off. They are asking us for more and we are being very – where there is emergent demand and we have the capacity to deliver more, we are doing that not only on the airframe side, but also on the engine side, both in terms of materials, mill products, as well as in forgings. So, I think that the challenge going forward for the supply chain is going to continue to be to keep up with the demand. I think somebody might ask the question which is a logical question that, because of some of the challenges that exists at the jet engine OEMs and delivering engines to meet the airframe a rate ramp, are you getting any kind of a pushback of you know – we don’t, because we are behind in some of these engine programs don’t ship the material to us. The answer to that is an absolute no. And I think that makes sense, because if they put a hold on that, they’ll never catch-up, because everybody is in the supply chain from our perspective at least is running very hard and very fast. Capacity, if it does exists there is really being created largely out of learning curve and productivity improvements in the near-term. In the longer-term, I do think that there is going to have to be some capacity added to support the rate ramp as you – in the expectations of not only the engine and airframe production rates as we get into 2021, 2022, 2023 timeframe, but also the elevation at that point in time of spares in aftermarkets on the next-generation platform as those engines on the rotating components need replace them on the spares side. So, I think that t here is going to be continued focus at least on our part, I can’t speak for anybody else, but I am talking with the customers on how are we thinking about capacity additions in the future to meet the expectation of the demand and to the extent that there is a good solid business case there for us to make that investment, we would – we, Bob, would bring that force to the Board and we go from there. But, I don’t think that there is we are not sitting here worrying about these or - do we have too much capacity.

No, I am sorry, that was not the intent and you answered that question great. I am sure we’ll hear more about it at the Investor Day. So, specific to the guidance on Flat Rolled Products, I was confused with the comment that of course you are going to expect to still be profitable, but sequentially be weaker. I understand the sequential weakness, but, why would you have to point out you are going to still be profitable if you have the tooling arrangements? Wouldn’t those always be profitable? I mean, are you guiding to enough of a squeeze on your cost increases not being passed through to offset the – even the tooling arrangements or are you just talking about reduced profitability on that end and then the tooling arrangements one would expect would continue to be incremental contribution now?

Yes, so, good morning. This is Bob. In terms of the tooling agreement, it will really kick in, in the first quarter of 2019. So, the comment that I made around Q4 profitability in the phase of the nickel and ferrochrome headwinds is actually a great news and the progress that we’ve made, refocusing the business. There are people who have questions, how sensitive FRP’s earnings are to stainless. We have actually reduced our exposure significantly to commodity stainless over the last 12 to 18 months as part of our restructuring. But when nickel prices and ferrochrome prices fall, we get lot of questions about the impact. And I think it’s important to recognize that we have made the transition to sustainable profitability, now we still have to grow to our target of 100 million of IBT for 2019 and we believe we are positioned well and the cost structure is in place to do that with the help of the conversion agreements which will be predominantly a cash benefit to us, as well as the utilization benefit across all of our products. But the conversion issue, opportunity will actually come to us in 2019. And so, we just wanted to reiterate that despite the headwinds , our business in FRP has been repositioned to be profitable for the long-term.

Yes, I mean, Bob, great answer and actually we were being proactive in making that, because in the past, we would have had that question and in the past, the answer would be no, I mean, because of those headwinds and the size of those headwinds, we may not be profitable in the Flat Rolled Products U.S. operations. So that, that’s a – Bob hits the nail on the head. That’s a significant improvement and the result of all the work he and his team have been doing over the last two years.

And our next question today comes from Josh Sullivan of Seaport Global. Please go ahead.

Hey, good morning and I echo the congrats.

Good morning, Josh.

Just to follow-up on the carbon conversion question there, so, are you looking at the conversion agreement as additive to the $100 million EBIT guidance for FRP next year? Or was that already kind of factored and you had talked about your expected these - one of these agreements by the end of the year?

Hey, good morning, Josh. It was factored into our $100 million target for 2019. We were confident we could see the progress being made through the qualification step building the efficient logistics, supply chain and obviously the customer, in this case, NLMK has been very excited. Actually, sales teams have been in and they are often running. So it has been added. It was already included in the $100 million.

Okay. And then, just one on the new isothermal forge you guys are working on. Where is that development? And can you talk at all about how backlog has maybe filled up through the year, and just where we are in that?

Yes, Josh, this is John. We expect that new isothermal forge to come online on schedule and it’s currently on schedule, on budget. That forge to be operational in 2020 and at this point in time, that capacity is being utilized as planned based on the contracts we have and opportunities we gained.

So, the new capacity, when it comes online is basically pretty much spoken for already?

Thank you. Our next question comes from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning.

Good morning.

Good morning, Phil.

Rich, I had a question on Flat Rolled into the fourth quarter. Can we add all size up in order of magnitude this impact from the mismatch in Q4? And then, what’s the LIFO headwinds that we are talking about in this LIFO headwind in that segment as well?

Yes, Bob will take on the non-LIFO question. Pat will take on the LIFO question.

Good morning, Phil.

Good morning.

When you look at the change in nickel and ferrochrome, I think nickel is down about $0.75 a pound, ferrochrome about $0.10 or so, Q3 to Q4. We would estimate based on the inventory effect and the lag from the surcharge to be in the $10 million to $12 million range from Q3 to Q4. Pat, do you want to handle the LIFO piece?

Sure. So, as we currently project raw material prices and we still have a couple of months to go here, but it looks like we would exceed the NRV reserve balance by about $4 million in the fourth quarter. And that’s a current projection. So, it still could move around a little bit.

Okay. That’s helpful. And then in High Performance Metals, third quarter versus the second quarter maybe we could isolate the mix changes a little bit better if we could understand what perhaps were the maintenance items of your own in terms of step-up? And how much was the powder billet issue in the third quarter versus the second? Maybe that could help us in terms of the mix change.

So, you are looking for us to quantify those? At this point in time, we are not prepared to do that, Phil. We would not disclose them at this time.

Yes, Phil, I think the best way to think about the fourth quarter is, we see the – we are confident of hitting the guidance of 300 basis point improvement and segment profitability year-over-year. Mathematically, that would put the year of 2018 at a segment operating profit of about 15%. And you can pretty much do the math of what you have to do in the fourth quarter to achieve that. You have to be right at or maybe a little bit above 15%. And the reason for that recovery is the lack of hopefully no more hurricanes, not only for our benefit, but for the benefit of all the people in the U.S. that have been impacted by that and elsewhere as well. But also because of the expectation of stronger revenue in the fourth quarter because you don’t have the third quarter effect of the European shutdowns and we will have some maintenance done in the fourth quarter as we typically do. But it most likely won’t be to the extent that it was in the third quarter. And I don’t think that the third quarter from a material standpoint, I mean, there was unintended consequences of 1.5 day outage, but that wasn’t a big driver in the quarter. The big driver in the quarter was mainly lower revenue, slightly lower than the second quarter. A softer mix primarily because of the billet, the nickel billet delays coming out of the directed source from us which we expect to be somewhat alleviated in the fourth quarter, not completely eliminated, but somewhat alleviated. So the fourth quarter will have – is expected to have a recovery in revenue to be hopefully one of the higher quarters of the year at the king of operating profit that we demonstrated to be on average of the first three quarters.

Thanks, Rich.

Okay.

And our next question today comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning everyone.

Good morning, David.

Good morning, David.

I think this is sort of to Pat, the CapEx for this year running at above the prior top-end of the range. What is that attributable to?

Just some accelerated spending as we said earlier on a couple of our key projects. We are trying to get those done in an expedited manner. So, we can hit our requirements on the contract ramp. Just merely more of a pull forward, if you will.

Okay. And then on pension, can you talk about progress to potentially offload some of your liabilities as well as how we should think about pension? Pension expense next year given what’s going on with rates and maybe where your return is year-to-date?

I won’t comment on the return year-to-date, but I will give you some guidance on some of our actions planned. We do intend to have additional actions within the pension profile planned in the fourth quarter and we will talk about them more on the first quarter call, but we do intend to have additional actions executed within Q4 to work the liabilities side. Pension returns are in line with market returns and our benchmarks overall to give you that type of guidance where we are. We will see where we end up the year. I think that’s it at this point.

Thank you. Our next question…

That will – Pat will give guidance as we always do in January in terms of at least primary guidance in terms of where we ended up with the year on asset levels and what the expectation is for pension and other retiree expense for 2019.

Thank you. Our next question comes from Jeremy Kliewer of Deutsche Bank. Please go ahead.

Hey, good morning.

Morning.

Couple clarification questions on the HRPF utilization rates and stuff. Is there really any JV volumes going through there right now? And is there really has been any stainless slabs imported to you guys for a couple months now?

Right. Good morning, Jeremy. This is Bob. The joint venture, A&T Stainless is still operating. It’s operating at 35% to 40% of our target. I remember our target is to be at about 300,000 tons. We are importing slab and we are paying the tariffs. In Q3, the operation was actually neutral and we include the utilization benefits of the HRPF. So, we are still running.

All right. And then, follow-up to that, you said, kind of the mating season or contractual season is coming up here mid-November. So are you guys willing to offer any contracts without the exemption? Or would you prefer to kind of you shut down those volumes in 2019?

Yes, I think, when you talk about the exclusion, whether we get the exclusion or not, I would say, we are very confident in the facts of our case that it does – our exclusion does meet the criteria established by the U.S. Department of Commerce. So, we are focusing on those things that we can control. We can’t control what goes on in Washington with the trade policy. But we have reconfigured the JV business to be breakeven during this period of time. The team that’s part of the JV has done an outstanding job of looking at every dollar and every opportunity and we have reconfigured the business to be neutral during this period of the tariffs. Historically, the tariffs of this type don’t last that long, 15 to 18 months has been typical for a 232 tariff. Now, I think we all recognize we are in uncharted waters in terms of how the tariffs will play out. But, we are committed to the joint venture for the long-term. Our customers have been tremendously supportive and when the tariffs are behind us, we will be ready to ramp up. And the team understands that and it’s focused on operating at a lower level where we are today will it be the 30% to 35% level, it could be 25%, it could be 45% depending on where the market is at the time. But, we continue to operate and have confidence in the JV for the long-term.

Yes, and Bob, in addition, I mean, remember, this is 50-50 joint venture, right. So, the decision-making process is a collaborative process between us and our partner. I think both parties went into it with a commitment that this was going to be a long-term venture that we believe in the quality of the products. We believe, not only the slab coming in from Indonesia, but also the quality of the product that we are producing through the HRPF and the JV’s DRAP finishing line. That belief has been supported by the reactions of the customer in the marketplace which views it as very high-quality material and that’s being delivered on time, which is kind of the ideal combination. And so, we approach it from the standpoint that we are not – the JV was never designed to be unprofitable or lose money. That’s not the intention of the JV. The tariff is not helping in that matter. If there are ways that the parties can agree to work together to ensure that at a minimum, the JV is breakeven, and we can continue to supply the market with the high-quality products if the customer wants, even if the tariffs remain in place. That would be ATI’s intention of doing that and hopefully, that would be the intention and the support of our partner as well. But, we are in a little bit of a holding pattern until the government makes this decision. If the U.S. government doesn’t make its decision soon, the partners will continue to have dialogue to see what can be done to continue to sustain operating the JV at a lower than planned and ideal rate.

And our next question today comes from Chris Olin of Longbow Research. Please go ahead.

Hey, good morning.

Good morning, Chris.

Most of my questions are asked. I just had two basic ones. I guess, the first was, how should we think about the vanadium cost impact for the HPM segment? Or maybe even some of the other master alloys, titanium scrap for that matter? It looks like, now there could be a potential shortage in 2019 given what the steel industry is doing in China and I guess now we have that added tariff risk and then, maybe on top of that, is there any concern on zirconium feedstocks?

John?

Yes, Chris this is John. I don’t have any concerns on either of those in 2019 and what price volatility we have in the marketplace, we have mechanisms within the contracts we have to pass those through.

Okay. And then, any update on the GE9X engine contract? Have you been awarded that or any kind of break out yet?

Hasn’t been awarded yet. In discussions. Expect that to be completed by – before mid-year next year.

Okay. That’s all I have. Thanks.

All right. Thanks, Chris.

And our next question today comes from Matthew Korn of Goldman Sachs.Please go ahead.

Hey, good morning everybody. Again, congratulations.

Good morning, Matthew. How are you?

Good morning, Matt.

I am well. Hope you all had a good week. Couple quick questions from me. First, what progress in the profit levels for ATI cash products? Did you breakeven this quarter? And do we still expect that to go to a small profitability into 2019?

Yes, Matt. This is John Sims. I think our guidance for this year was near breakeven and we achieved that in quarter three. We expect improvement in quarter four and profitability in 2019 is in line of sight which is also per our guidance.

Excellent. So everything has been coming through as we expected there.

Yes, Matt, if I could just add to that, I think John is being appropriately humble. He and his team have really done a great job. We are not where we want to be yet. We are not where we need to be to support the customers fully. But the effort that they have done and have been undertaken really for the last couple years has been nothing short of heroic. And John spends a lot of his time there and we’ve augmented that business with a lot of very bright people from across ATI and people who worked in that business five years ago wouldn’t recognize it today. It’s actually a disciplined manufacturing process or as disciplined as you can have making an investment casting of some of these parts which are very complex and tough to make. But we are committed to giving the customer what they want, what they need on a timely basis and rewarding the shareholders with that business being profitable.

Excellent. Let me then follow-up this way. On STAL, you brought up the expansion patch to life and since then the market got more concern in the pace of slowdown in Chinese industrial production, auto sales, other indicators. Was the JV largely serving auto, electronics markets, how has that had the pace of sales there been versus early year projections? Are there any areas concern or any other cracks that you are seeing there? Thanks.

Yes, Matt. I am going to have Kevin Kramer respond to that.

Matthew, good morning. We are pretty confident through the first three quarters and what we look into 2019 with regard to STAL. The key end-markets are consumer electronics and while the vast majority of that product is manufactured in China. It truly is a global market. Second largest market is automotive, which is more indigenous to China. Our STAL 3 investment continues to give new opportunities with its capabilities. We continue to be very bullish. It’s a 22 year profitable joint venture in China which I think in and of itself is unique and the investments we have made, I think position us very well going forward.

And our next question today comes from Matthew Fields of Bank of America. Please go ahead.

Hey everyone. I want to echo my congratulations, as well. Sort of just in bigger picture, I know, guys have sort of said multiple times that your sort of ultimate goal is to get back to investment-grade credit rating. Would you say that, Bob, as you come in, and again, as you Bob, do you share that same vision of getting back to investment-grade rating?

Good morning. The simple answer is, I do. And as I come into the role, clearly, the priorities are to execute the commercial aerospace ramp in support of the customer commitments that have been made to us and us to them. John certainly has talked about that. We talked this morning about the $100 million FRP, IBT target for 2019. Those generate – both of those generate the cash to get this to number three, which is an investment-grade balance sheet. The fourth priority for me is continuing to build a world-class talent pool or talent organization to execute and continue into the future. So, the strategy that ATI develops with Rich at the helm, I was part of, John Sims was part of, Kevin Kramer, Pat DeCourcy, Beth Powers and Elliot Davis, the executive leadership team of the company and we and I are still committed to that path.

Okay, thanks. That’s helpful and maybe just one more. With all the priorities, one and two that you talked about and the comments obviously very positive that you made early in the call about, not struggles, but challenges to meet increasing customer demand. Should we anticipate kind of a ramp up in CapEx next year and potentially into 2020 as well?

I’ll speak to that and then, Pat can add any color he wants to add. For 2019, our target is to have CapEx at or below our depreciation and we have – at this time of the year, we have actually started our 2019 planning and we are in sync with that commitment. Pat, do you want to add anything?

Yes, the only thing I’d add to that, Bob is, we are continuously involved with our customers, looking at the ramp and looking at the requirements and we are adjusting our CapEx related to that so that we can meet their targets and their build rate ramp. So, but we will stay within our depreciation and amortization in total.

Thank you. Our next question is a follow-up from Gautam Khanna of Cowen and Company. Please go ahead.

Yes. Thank you guys. I was wondering about this the airframe product sales being up considerably in Q3. And just, how is – what you’ve done so far, kind of compared to the annual minimums with Boeing and does this become a potential headwind next year, just given some of the other Boeing titanium suppliers may have had some friction related to the ERP transition? And I just wonder if they catch-up at some point on a relative basis. Any view on that?

Yes, Gautam. This is John. I would say that what we’ve seen this year is really indicative of what we are seeing for the past several years. We have our contract minimum. We have achieved those and inevitably every year, we see emergent demand that’s out there that really it’s whoever can respond within the lead time required to get that business and we’ve been successful doing that for many years. And I don’t see that changing. So, I would say, there is always a percentage of our overall sales in any given year is emergent. And I don’t believe that’s going to change and we are not anticipating that to be dramatically different in overall volume than we’ve seen in the last several years is just know it, it’s something we can count on if we can perform. So we focus on that.

And our next question is a follow-up from Phil Gibbs of Keybanc Capital Markets. Please go ahead.

Okay, thank you. I know that the tariff impacts seemingly are reasonably obvious for the joint venture with Tsingshan. But are there any other notable tariff impacts one way or the other for the rest of the business that you are seeing right now?

Good morning, Phil again. This is Bob. In terms of the tariffs in other areas, I would say they are balanced. What we are seeing is people who are in the automotive industry, who may have had a global supply configuration by product have moved to more regional supply and that gives us a change to deal with, but not overall increases or decreases in demand. So, more of a supply chain reconfiguration. I think people are cautious. I don’t think they are buying ahead. They are buying for their needs. Those are probably the two comments that I could make related to the tariffs. John, do you want to add anything on the tariff front?

No, we are good from the High Performance standpoint.

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

Thank you, Rich and thank you to all the participants and listeners for joining us today. That concludes our third quarter 2018 conference call.

And thank you everyone. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.