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Edited Transcript of ATI earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 Allegheny Technologies Inc Earnings Call

PITTSBURGH Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Allegheny Technologies Inc earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Sims

Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment

* Kevin B. Kramer

Allegheny Technologies Incorporated - Senior VP and Chief Commercial & Marketing Officer

* Kimberly A. Fields

Allegheny Technologies Incorporated - EVP of Flat Rolled Products Group

* Patrick J. DeCourcy

Allegheny Technologies Incorporated - Senior VP of Finance & CFO

* Robert S. Wetherbee

Allegheny Technologies Incorporated - President, CEO & Director

* Scott A. Minder

Allegheny Technologies Incorporated - VP of IR & Treasurer

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Conference Call Participants

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* Christopher David Olin

Longbow Research LLC - Analyst

* David Egon Strauss

Barclays Bank PLC, Research Division - Research Analyst

* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* Joshua Ward Sullivan

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Matthew James Korn

Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst

* Paretosh Misra

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research

* Richard Tobie Safran

The Buckingham Research Group Incorporated - Research Analyst

* Timna Beth Tanners

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Allegheny Technologies Incorporated Third Quarter 2019 Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

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Scott A. Minder, Allegheny Technologies Incorporated - VP of IR & Treasurer [2]

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Thank you, Nicole. Good morning and welcome to the Allegheny Technologies' Third Quarter 2019 Conference Call. This call is being broadcast on our website at atimetals.com. Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; John Sims, Executive Vice President, High Performance Metals and Components segment; Kim Fields, Executive Vice President, Flat Rolled Products; Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer; and Kevin Kramer, Senior Vice President, Chief Commercial and Marketing Officer.

If you connected to this call via the Internet, you should see slides on your screen. For those of you have dialed in, slides are available on our website. (Operator Instructions)

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 will turn the call over to Bob.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [3]

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Thanks, Scott. Good morning, and thanks for joining us. We generated solid third quarter operating results that were in line with our near-term expectations for both segments. These results reflect continued strong customer-facing execution and ongoing demand growth in our key end markets.

From a total ATI perspective, revenue expanded in both business segments on a year-over-year basis when adjusted for the divestiture of the titanium investment castings and industrial forging businesses. Segment operating profit declined modestly year-over-year primarily due to the FRP segments comparison to a stronger prior year period, which offset the HPMC segment's improvement.

Net income and earnings per share increased significantly versus third quarter 2018 due to previously announced noncore asset sales that closed in the third quarter. When these items are excluded, both earnings measures declined slightly versus the prior year but in line with previously communicated expectations. John, Kim and Pat will cover the financial results in more detail later in the call.

We'll turn to Page 4. And similar to our last earnings call, I want to highlight recent progress on several strategic imperatives. First, we continue to execute on the broad-based production ramp for single- and double-aisle aircraft and engines. We work closely with our customers, leveraging our material science capabilities and unique process technologies to supply the critical materials and components required to produce the world's most advanced jet engines and other highly technical products. As a result, ATI's share of the commercial airframe and jet engine submarkets continue to increase with further accretive growth opportunities for our existing cast products and powder materials as well as for our advanced forgings on the near term horizon.

With regards to the 737 MAX situation, we continue to enjoy a strong order book and backlog for our advanced materials and components, destined for use on the MAX and other Boeing programs. We remain opportunistic for a MAX return-to-service in the near term and subsequent production rate growth in 2020 and 2021. We are in near constant with communication with our customers. As we said before, we produced specific customer orders, not to reported OEM build needs.

The 737 MAX is an important program for ATI, but it's also important to remember that it's one of many airframe and engine programs, including OEM and spare parts that we supply to a very healthy global market.

Second, we continue to make progress with our Flat Rolled Products segments towards sustainable profitability regardless of trade policy or raw material prices. Our focus on high-value flat products is driving improved, more stable financial results while we work with our partners to increase asset utilization in our Hot Rolling and Processing Facility near Pittsburgh.

Third, we continue to make great strides on improving our balance sheet with the conclusion of several events discussed on our second quarter earnings call. As you'll hear from Pat, we received significant cash proceeds from recent business divestitures and asset sales, and we concluded our third pension annuitization exercise in Q3. Coupled with strong operating cash generation, we ended the quarter with over $500 million in cash. We intend to deploy cash over the next several quarters to further meet our strategic growth and balance sheet objectives.

Next, to ensure adequate long-term liquidity, we extended our asset-based lending facility through September 2024, upsizing it by $100 million to reflect our growth since initiating the facility in 2015.

And lastly, we recently announced the expansion and 6.5 years extension of our long-term agreement with BWX Technologies to supply materials for the manufacture of naval components. This contract demonstrates our deep commitment to the global defense industry, is a great example of our substantial competitive moat and illustrates how we're helping to protect sailors, soldiers and aircrew around the world. Congratulations to the ATI Special Alloys and Components team for capturing this accretive growth opportunity.

We continue to work diligently to grow our aerospace and defense market shares and expect to meaningfully extend several significant long-term contracts in the coming months. The ATI leadership team is committed to achieving our strategic imperatives, and we're making tangible progress in all areas. We continue to look for ways to go faster and further to generate increased shareholder value from our current business portfolio. We're being aggressive and taking a broad view as we pursue opportunities to improve performance.

I'll now turn the call over to John Sims to discuss the HPMC segment results in more detail, and I'll return at the end of the call to wrap up and take your questions. John?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [4]

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Thanks, Bob. Turning to Slide 5. The HPMC segment posted solid third quarter financial results, aligned with our expectations that include year-over-year operating profit and margin growth as well as revenue growth when adjusted for business divestitures. We achieved these margin improvements despite ongoing aerospace industry uncertainty, customer cash management actions and declines in the segment's smaller end markets.

HPMC revenues grew by 2% versus the prior period, excluding business -- excluding divested businesses primarily due to increase forging volumes in our Irvine and Poland facilities which more than offset lower isothermal forging demand caused by the previously mentioned cash management actions. The segment returned to year-over-year operating margin growth in the third quarter with 130 basis point expansion versus the prior year, in line with our previously communicated expectations. This growth was driven by the additional forging demand noted earlier and was partially offset by weaker product mix both within our forging and operations and our specialty materials portfolio.

Sales and operating profits declined versus the second quarter 2019 as expected primarily due to volume impact from normal customer-driven summer production shutdowns and planned maintenance outages primarily in our Millersburg, Oregon operations. Looking ahead, we expect fourth quarter financial results to improve both year-over-year and sequentially due to volume growth within our forgings and specialty materials pipelines driven by continued aerospace and defense industry growth.

Based on current customer orders, we expect to maintain our jet engine materials and components production above our fourth quarter customer delivery rate as we collectively prepare for increased demand in 2020.

Lastly, and building on Bob's earlier comments, we are actively working to grow our market share and extend our long-term agreements with several significant jet engine and airframe customers. Along with the recent BWX Technologies naval nuclear materials award, these potential contract extensions and new business awards will provide the foundation for ATI's profitable aerospace and defense growth well into the next decade. We look forward to sharing more details on these events in the near future.

Turning to Slide 6. The pie chart and accompanying tables show the HPMC's segments third quarter's sales by market, adjusted for business divestitures, which grew by 2% compared to the prior year. Commercial jet engine revenue declined modestly primarily due to unfavorable product mix within ATI's next-generation specialty materials, largely driven by one customer's aggressive cash management actions.

Commercial airframe revenues grew by 5% year-over-year despite comparison to a strong growth in the prior year period. We continue to support our primary OEM customer through performance and are privileged to be a key supplier for their emergent demand. Sales to the defense market continued their healthy growth pace, increasing by nearly 30% year-over-year, building on a smaller gain in the second quarter 2019.

The third quarter growth was broad-based across all of ATI's defense market subsectors and were led by products for military jet engines, naval nuclear propulsion and rotorcraft. Energy market sales grew by nearly 20% primarily due to increased Asian demand, while medical market sales declined due to soft biomedical demand.

In summary, we continue to see aerospace and defense growth despite near-term industry uncertainty related to the 737 MAX return-to-service. We are confident in our ability to deliver future growth and are taking steps to extend and expand our long-term agreements in the aerospace and defense markets. Our recently announced extension with BWX Technologies is a prime example. These multiyear contracts will provide revenue and earnings growth visibility well into the next decade.

I will now turn the call over to Kim to talk about Flat Rolled Products.

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Kimberly A. Fields, Allegheny Technologies Incorporated - EVP of Flat Rolled Products Group [5]

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Thanks, John. So turning to Slide 7. As expected, that FRP segment continue to expand high-value product volumes particularly in titanium plate used for combat vehicle armor and nickel alloy products used primarily for oil and gas applications. Demand for consumer electronics remained solid at our STAL joint venture in China. As a result, segment revenues were 7% higher versus both prior year and the second quarter of 2019.

Shifting to segment operating profits. Third quarter 2019 results improved by 31% versus the second quarter due to several factors. First, our high-value product sales increased, benefiting overall segment margins; second, our STAL joint venture continues to improve after a sluggish first quarter despite slowdowns in some Chinese markets. Global demand for newly launched consumer electronic models produced in Asia are increasing, and we're seeing the initial benefit from a recent capacity expansion particularly from Asian countries outside of China; and third, while still a work in progress, we narrowed the quarterly loss associated with our A&T Stainless joint venture by nearly $2 million. We continue to work with our partner to achieve cash neutrality in the third -- in the fourth quarter despite the ongoing negative impact from Section 232 import tariffs through continued diligent cost controls.

And lastly, our third quarter carbon conversion volumes grew significantly year-over-year, helping to drive higher utilization rates and improve cost absorption of the HRPF. We expect to announce shortly the extension of our NLMK department carbon conversion agreement soon.

While our third quarter operating results demonstrated significant sequential improvement, they did decline versus the stronger prior year's third quarter. This is primarily due to the increased retirement benefit expenses and the ongoing impact of Section 232 tariffs on the A&T Stainless joint venture.

Briefly shifting to cash flows. The FRP segment reduced its inventory levels due to lean initiatives focused on accelerating process flow through the U.S. businesses. These gains are evident in ATI's overall managed working capital improvement, which Pat will cover in detail momentarily.

Looking ahead to the fourth quarter, we anticipate continued profitability in the U.S. operations and for the segment in total, albeit at lower levels than the third quarter. Revenues are expected to decrease sequentially despite elevated demand for our titanium products in the U.S. and our Precision Rolled Strip products in China. These higher volumes are offset by normal business seasonality, lower nickel sheet production, as we expect to complete a large pipeline project early in the fourth quarter and from traditional year-end standard stainless customer inventory management actions. As a result of the lower fourth quarter seasonal volumes, we consolidated our annual facility maintenance program into the fourth quarter to better align with the end market demand forecast. This will likely result in higher planned maintenance and expense in the fourth quarter as well.

On the positive side, raw materials surcharge timing is anticipated to benefit segment operating profits in the fourth quarter due to rising nickel prices. We expect to further reduce the negative impact from A&T Stainless joint venture; maintain our solid STAL joint venture results despite additional downtime related to local holiday; and thirdly, increase the HRPF carbon conversion volumes for NLMK U.S.A.

While segment's financial results remain uneven quarter-to-quarter in 2019, we are solidly profitable for the third year in a row. We've significantly improve the foundation of our business and creating impactful long-term partnerships that will drive key asset utilization levels over time.

While the impact of Section 232 tariffs on our business can't be ignored, we are focusing on improving the items that we can control, like advocating for logic-based change to trade actions and on generating cash from existing assets to help fund ATI's strategic balance sheet improvement actions.

Turning to Slide 8. The FRP segment continues to see strong year-over-year growth in its key end markets driven by fundamental demand increases and market share growth opportunities. This customer demand expansion is driving growth in our high-value nickel alloy and titanium products. Aerospace and defense sales were up 25% in the third quarter and have increased 40% year-to-date. This growth is balanced across several key submarkets primarily titanium armor plating for land vehicle and for commercial jet engine products.

Sales to FRP's largest end market, oil and gas, increased significantly versus a strong prior year that also included nickel alloy production for an offshore pipeline project. In consumer electronics market, sales continue to expand in China as our customers produced new products.

Quickly looking at revenue by product. High-value product sales increased by 13% versus a strong prior year quarter led by sales of our titanium and nickel alloy materials. We anticipate ongoing strength in titanium materials, but expect a fourth quarter slowdown of nickel alloy sales due to the completion of a large pipeline project in the fourth quarter of 2019.

Sales of our standard stainless products decreased by 12% in aggregate as our commodity-driven end markets, broadly, consumer durables and automotive, experienced sluggish demand for the third straight quarter, contributing to modestly lower asset utilization rate in some of our melting and finishing operations.

Overall, the team continued to make progress on a strategic imperative, generating sustainable profitability despite a challenging global trade environment, varied raw material cost input and related customer demand fluctuations.

I'll hand the call over to Pat DeCourcy to talk in more detail about our third quarter financial performance and provide an update and our outlook for the fourth quarter.

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [6]

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Thanks, Kim. Turning to Slide 9. Let me start by talking about an important proactive step to improve our balance sheet and long-term liquidity. In September, we finalize the 5-year extension to our asset-based lending, or ABL agreement, which now extends through September 2024. We upsized the total capacity of the revolving credit portion by $100 million with a new ceiling of $500 million. This provides us with committed liquidity through our 2023 debt obligations and gives us access to a low-cost borrowing option.

Turning to near-term liquidity. We ended the third quarter with $511 million of cash on hand and approximately $460 million of borrowing capacity available under our expanded ABL. Managed working capital continues to be an area of significant progress as the percentage of sales improved by 280 basis points year-over-year, ending the quarter at 33.6%. We expect continued improvements in the fourth quarter and expect to meet our year-end 2019 objective to be at/or below our target of 30% for managed working capital as a percentage of sales.

Third quarter capital expenditures were $47 million, in line with expectations and totaled $98 million year-to-date. We remain on pace to meet our previously communicated 2019 capital expenditures target.

Moving to the pension. We contributed approximately $65 million to our U.S. defined-benefit pension plan in the quarter as part of our full year 2019 expected total contribution of $145 million. We also successfully completed our third pension annuitization action in the third quarter, further reducing planned participation by over 1,800 people. This brings total participant reduction to more than 50% over the past 6 years.

We also finalized the sales of our titanium investment castings business and the second tranche of our oil and gas rights in the third quarter, generating approximately $185 million in cash, bringing our total 2019 business divestitures and asset sales proceeds to approximately $250 million. As a result of these asset sales, adjustments for divested businesses and our updated full year financial outlook, we are increasing full year 2019 free cash flow guidance by $55 million to approximately $475 million, excluding our U.S. pension plan contributions.

Our cash position provides us with the opportunity to further our strategic capital deployment priorities over the next several quarters.

Turning to Slide 10. I will now provide you with an update of our expectations for the fourth quarter financial results. First, focusing on the HPMC segment. We expect revenues to increase by mid-single-digit percentage versus the prior year, primarily driven by increased production levels. As a reminder, fourth quarter 2018 revenue should be reduced by $48 million and third quarter 2019 revenue should be lowered by $8 million to account for divested businesses. Fourth quarter 2019 operating profit margin should improve by approximately 210 basis points year-over-year to about 16%.

Looking into 2020. We anticipate strong engine -- jet engine customer demand, particularly in the first half of the year.

Shifting to the Flat Rolled Products segment, where we expect continued profitability in the fourth quarter despite challenging U.S. industrial markets. We anticipate revenue decline by a mid-single-digit percentage compared to Q3 2019 mainly due to lower nickel alloy product sales as we complete a large pipeline project in the fourth quarter 2019, along with normal customer inventory management actions at year-end. In line with the revenue decline, FRP segment operating profit is expected to decrease by $9 million to $13 million versus the third quarter 2019 due to the reduction of profitable high-value product volumes and the negative cost impacts from lower standard stainless sheet demand. This includes the effect of production outages to facilitate required maintenance projects in the fourth quarter. These unfavorable impacts will more than offset the potential raw material benefits and the anticipated improvement in the A&T Stainless joint venture results.

Finally, I want to draw your attention to a couple of items that will likely impact our fourth quarter results. First, we expect the benefit of $25 million to $35 million due to the release of a portion of our deferred tax valuation allowances. Second, depending on average raw material cost in the quarter, primarily related to nickel, we may incur LIFO expense in excess of our remaining NRV inventory reserve. With the significant volatility in these materials, the potential magnitude of the impact of this is difficult to accurately predict. We do believe that the negative impact could be in the range of 0 to $5 million for the quarter.

With that, I will now hand the call back over to Bob.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [7]

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Thanks, Pat. In closing, ATI generated solid third quarter financial results that were in line with our near-term expectations. We continue to execute at a high level on our portion of aerospace production ramp and have consistently helped our customers mitigate their supply chain challenges and maintain their production schedules. We intend to sustain our strong performance, and in some cases expand our market shares, while our customers increase production rates to satisfy their substantial backlogs.

Consistent with our stated objectives, our Board of Directors and our management team are increasingly focused on deploying our expanding capital resources to improve our balance sheet and to fund future profitable growth initiatives.

Scripted conference calls are highly efficient, and we all appreciate the matter-of-fact reporting that we've deliver. But as I have a minute here to close up, I want to jump off the teleprompter and make my team a little nervous.

But I'm energized by ATI's growth trajectory and the team that we have in place across ATI across the world. Today, across the world, our relentless and innovative people are really leveraging on material science expertise, and they're leveraging advanced process technologies to really solve problems that our customers bring to us. We've learned the first call from our customers to respond and grow.

These are exciting times for ATI. We did what we said we were going to do in Q3. And with the team we have at ATI, I'm confident that we're going to do that again in Q4, in line with our expectations. And I do look forward to updating you on our continued progress on future calls.

So with that, Nicole, let's open the call to questions.

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Questions and Answers

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Operator [1]

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

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Richard Tobie Safran, The Buckingham Research Group Incorporated - Research Analyst [2]

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So right off the bat, I'm going to tell you I know you're not issuing a 2020 guide here, but Pat, you and John both made comments about 2020. So I just wanted to know if you'd be willing to comment generally about 2020 trends, maybe how you see some of your end markets trending, what the big drivers would be, and if -- of course, if possible, how you see your top line and cash flow trending next year. Now Pat, I know now you'd mentioned engines in your opening remarks, but I thought maybe you guys might be willing to expand a bit.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [3]

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Okay, Richard. This is Bob. We noted your questions here. There's a lot in this one. But we'll start with the markets and then we'll let Pat and John jump in as they see fit.

But from an aerospace and defense standpoint, both naval, ground missiles, aerospace, continued strong into 2020. We -- our order book and our customer contacts are very positive. We recognized the MAX issue brings a little uncertainty. But overall, fundamental demand is good.

Oil and gas should be good for us in the flat rolled sector. We do see Q4 moving into Q1 for the pipeline business, but strength in the middle part of the year. So be there. The backlog with those projects is good.

On the industrial side, we've actually diminished our participation in some of the more standard stainless-type products, but I think the industrial markets will be relatively flat. Certainly, a little bit of a year-end inventory adjustment here in Q4 probably rebound a little bit in Q1, but for the most part flat. But even there, we have the opportunity to move from more of the volume-based products to more of the higher-value products. So I think from a market perspective, we're well positioned for a stronger 2020.

Pat, you want to add any color?

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [4]

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The only thing I'd add, Bob, is just to comment on free cash flow. We do expect continued free cash flow in 2020, strong free cash flow. Lean initiatives throughout both businesses are continuing to drive improvements in inventory levels. So we expect continued improvement there next year. And then with the profitability -- strong profitability, we do expect strong free cash flow. So we will provide guidance on the January call.

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Richard Tobie Safran, The Buckingham Research Group Incorporated - Research Analyst [5]

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Okay. So a topic I asked about last quarter, assuming Boeing is right on MAX certification, et cetera, I believe on the LEAP, you've been shipping at 52. When do you start shipping to 57? Again, if we assume Boeing is right about the ramp?

And also, in that, John, could you get more specific about the weaker alloy -- the weaker aerospace specialty alloy product mix? Was that -- anything to do with the MAX? Was that some dilutive aftermarket work, that kind of thing?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [6]

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Okay, Richard, this is Bob again. We'll see if we can get you through the call here. So we're actually producing the customer orders that we get, not necessarily to a specific build rate. So we always have to come back and remind on that. I think what we do expect through course of the next few quarters is Boeing has said they want to get back to 57. We expect that we're ready to do that when they're ready to go. We won't be the bottleneck to get to 57. Probably a few inventory adjustments both up and down as people kind of work through the inventory over the last 12 months that may or may not have been built, and then certainly a gradual ramp up to that. We'll let Boeing take the lead in terms of what they're actually producing, but we're ready when they're ready.

So John, and all that, you got a question, too. Do you want to answer Richard's question?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [7]

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I do, Bob. Rich. The mix impact was not related to LEAP. It was related to the cash management actions we've been talking about for a couple quarters now and, I would say, relatively near-term impact of those things. So that's all that is. We see that diminishing somewhat in quarter 4 and then improving in the next year.

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Operator [8]

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Our next question comes from Josh Sullivan of Seaport Global.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [9]

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Just on the contracts, you mentioned you have coming up for renewal here. Can you give us any time frame when we might see those publicly? And then if you could just maybe comment on what percentage of your overall EBIT those contracts cover right now?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [10]

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All right. Josh, I'll take a stab at the first part of the question. So kind of break the contracts into 3 pieces. Obviously, we're happy with the naval nuclear products contract with BWX Technologies, that's a pretty major contract for us both in terms of growth, in terms of longevity. The other 2 buckets is that you're probably most interested in are the jet engine side. And we actually expect to wrap up the next round of LTAs by the end of the year and should be able to make an announcement close to the end of the year in terms of the jet engine side.

On the airframe side, I think there's some well-known activity with another major European-based airframe manufacturers who's going through a consolidated bid program. And we expect those probably in Q1 to be an announcement. So I think BWX was great. Jet engine contracts are coming to conclusion here. We believe, a great Christmas gift for all of us. And the early next year we should see the [convent].

John, you want to add any color to the second part of Josh's question?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [11]

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Yes, Bob. So Josh, we're working -- the number was 8 contracts we had been working. One, we just announced with BWX Technologies. 7, remaining. I think 5 of those anticipate being completed by year-end. 2, we'll probably complete into early Q1 and then maybe later in the year, we'll update you as those go along. As far as your question about what percent of our EBITDA do these contracts represent, they're probably worth about 50% of our EBITDA.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [12]

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I think the other part, John, that goes with that is that it's really setting us up, as you said in your remarks. The foundation well into the middle part of the next decade. So that's pretty transformational for us and set the stage.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [13]

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Appreciate that color. And then just on the 787 production cut in late 2020. When might we see that impact you guys?

And then secondly, does that have any impact next year on that customer which implemented some cash management outlook -- the cash management outlook this year? Are those 2 related? Or just trying to get an idea of how the 787 might impact you guys.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [14]

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Yes. Good question, Josh. For the 787, I would say minimal impact. We've -- the lead time they've given the supply chain, pretty good visibility as to what their intentions on the 787 are. And we have the opportunity -- earned the opportunity to actually offset that by the emergent demand that we've seen at Boeing and expect to continue to be able to supply that.

And in terms of your second part of the question, we don't see much of an impact through the course of 2020. And don't really see much of an impact on the supplier or the customer you referenced in your question.

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Operator [15]

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Our next question comes from Phil Gibbs of KeyBanc Capital Markets.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research [16]

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Had a question about just the guidance for High Performance Metals for the fourth quarter. Pat, I know that there's some -- just some things here with the divestitures. And I just want to make sure that we've got the right expectations in terms of the way that you want to communicate them for both sales and margins.

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [17]

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Okay. So on the margin side, we're going to end the year at 16%, which is in line with our guidance for the year. So that's a substantial improvement over 200 basis points over the prior quarter, prior year. So significant improvement on the margin side. On the revenue side, we said mid-single digits, okay? So a little bit maybe slightly lower than our original expectations, but very strong for the quarter and consistent with our previous guidance here.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research [18]

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So I should think about the 16% relative to the 14.3% that you just did? So that's what you're communicating? So 170 basis points sequentially?

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [19]

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Yes. Sequentially, that's correct. Year-over-year, 210, I think.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research [20]

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Okay. Just wanted to clarify that. And then I think there's a lot of interesting things that you're doing on the balance sheet. You talked about strategic capital deployment priorities. You did a third pension annuitization. I just want to frame kind of -- would like you to frame up in terms of what we should expect here moving forward, the cash building and then obviously with the pension being a priority. So just would like some further thoughts around that.

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [21]

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So the priorities remain the same. We're going to take a look at our overall debt levels. So we are obviously reducing considering those levels in the near term with some of this cash on the balance sheet. Also in addition to that, we're still focused on the pension. The funding level for next year looks consistent with the current year. At this point in time, we'll obviously update the valuation at year-end and see what impact that has on that number, but we're committed to continuing to work the pension and the liability side of that pension through additional funding. So the priorities remain the same. And then along with that, strategic capital deployment, largely related to growth projects for ATI. So no change in our overall balance sheet initiatives.

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Operator [22]

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Our next question comes from Gautam Khanna of Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [23]

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I just want to be clear, are you guys seeing any destocking on the MAX? And if so, it doesn't appear to be on the airframe side. So I'm just curious, can you discern whether you're actually shipping -- you guys have quantified 1.1 million, the shipset on the MAX. Is there any way you can discern exactly what rate you're at or what blended rate you're at?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [24]

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No. No -- I got them. Yes. So there's a couple questions in there. I'd start with, are we seeing any discernible slowdown or shift, the answer is no. But I think supply chain is confident that the MAX is going to come back, return to service. And the underlying market demand is still incredibly strong. And we've been able to perform during this period and captured some emergent demand. I think the other thing that's going on, obviously, airplanes are still flying and spares are still being consumed, some of which are in different shapes and parts than we had anticipated at the beginning of the year. But it's still been healthy for us. So I haven't really seen anything of a decline.

Kevin, do want to add any color to what we're seeing in the market for Gautam?

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Kevin B. Kramer, Allegheny Technologies Incorporated - Senior VP and Chief Commercial & Marketing Officer [25]

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No. I think Bob's comments are spot on. The only small things that we've seen is maybe some shift at Tier 2 and Tier 3 customers that we have, either directed agreements with or we sell direct ourselves. And quite frankly, that's a very short-term shift of volume. And again, as Bob said, the underlying megatrends and the need going forward is still -- in our view, still very positive.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [26]

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You can never quite avoid the year-and financial engineering the customers go through with inventory adjustments. But in terms of the order load into 2020, it's very strong.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [27]

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Okay. And you guys have talked about the -- your titanium growth at High Performance has been pretty strong all year. I actually haven't gone through it for the quarter, I don't know how much it was up this quarter, but what explains it? Is it the other suppliers to Boeing are not producing as well? What does it -- what explains the emergent demand you're seeing on the airframe tie side?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [28]

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I would say, never to speak ill of our competitors on a conference call. But I do think our performance has given us, and our customer base, confidence that we can supply and in the lead times that they need. Lead times have extended, and we do get asked from time to time to respond heroically to some near-term demand. So I think that's probably the #1 issue. In the defense side, we're secretly seeing it, as Kim talked about on the armor systems.

And John, you want to add color to the HPMC side on the titanium side?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [29]

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Only thing I would say, Bob, is we are up about 5% on top of a very strong increase last year as well. So we continue to grow.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [30]

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Yes. Absolutely. And then just -- if we could revisit, at one point, we were hoping for a powdered nickel billet contract with Rolls-Royce. And just wondering, is that still on -- does that still have a potential to close this year? Or what's your expectation?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [31]

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It is, Gautam. We're still working our way through that and performing as though we have it. So we're just working through the paperwork.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [32]

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Okay. Last one, Pat. Cash contributions next year. What do you anticipate?

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [33]

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So right now, we're sticking with about a number similar to what we did this year. But we will be updating the valuation at year-end, and we'll update you on January on that number.

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Operator [34]

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Our next question comes from David Strauss of Barclays.

And we will move on. Our next question comes from Timna Tanners of Bank of America Merrill Lynch.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [35]

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I was wondering if you could please provide us a bit more of an update on the competitive landscape, your ramp up on the new isothermal forges, how that may or may not help you win business specifically when you talk about contracts, how much of those are extensions and how much of those could be an opportunity to actually grow?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [36]

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Yes. Timna. I have a couple of thoughts and then John can jump in and add his color, I think. First of all, most of our -- majority of our significant capital expenditures are driven by the customer commitments to start with. So it's kind of a -- I'd reverse the chicken and the egg and say the reason we're putting in the isothermal capacity is that our customers have committed to us for the long term. And we're excited about that, and I think the customers see that value well into the future.

But John, do you want to update where we are with the isothermal forgings and the growth there?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [37]

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Yes, Bob. So Timna, both the major projects we had going on in our Wisconsin operations, the installation of the isothermal press, plus the expansion of capability and capacity of our heat treatment facility there, both of those are on track, on budget, expected to be running next year in time for the expected growth, not only end-market demand, but also in some cases, share growth. So we're tracking that the well. I think longer term, we continue to evaluate other investments. The timing of them, as Bob said, is when customers come to us and we discuss where they want us to be from a supply chain standpoint. And we may move those projects up based on those commitments.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [38]

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Okay, great. And then also looking for an update on other HRPF JV opportunities and anything else you can say about the -- and I think I ask you about this every quarter, but the STAL JV. I think you said you're going to narrow the losses, but I still am curious, given the political environment, if you're feeling like there's any potential change on the horizon for how that might play out.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [39]

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Yes. So couple of questions, and Kim Fields is here with me, I'll let her jump in. So let's see, there was the FRP conversion. Was going on with NLMK. And I think through the course of 2019, Kim's team built a very efficient supply chain. I know there were questions in the market, how will slabs get in there? How you convert them? What capabilities will you have? And I would say they've mastered that, working with NLMK. And now it's just a matter of continuing to grow in the marketplace. And we will have a contract extension here shortly. So that will continue. And that's actually working pretty well for us.

On the JV side, our target is to get to a cash-neutral position here in Q4, a lot of different pieces and parts working to that level and feel like we're on track to minimize that. The reason we did the JV hasn't changed. The 60-inch wide stainless market is looking for the quality supply that our cold rolling and hot rolling supply chain can meet. Are we excited about the tariff position in the United States on imported slabs? No, we're not. But we believe long term in this joint venture. And really, if we can get to a cash-neutral position, we got to work on our cost, we got to work on the cost of incoming slab, we have a chance to get to that point and then preserve the opportunity for the long term, which we believe is in the best interest of the market and the customer.

So Kim, I answered more than I probably would have answered on that question. You want to add any color to where we are for Timna's benefit?

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Kimberly A. Fields, Allegheny Technologies Incorporated - EVP of Flat Rolled Products Group [40]

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Yes. I mean on the conversion, as Bob said, I think the team's worked well and aggressively. We ramped up that relationship with NLMK. And when I look at conversion through HRPF kind of on a year-over-year basis, we're about 2x where we were from a volume standpoint. So again, we're seeing -- are seeing these benefits you're seeing, some of them in our results today. And as Bob mentioned, we're at those kind of final stages, both on NLMK and ourselves are very happy with the relationships, so we're planning on renewing. And hopefully, we'll have an announcement shortly on that.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [41]

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I think NLMK could provide the full utilization for the HRPF that we're looking for. I think there's still -- we know there's still 1 or 2 other opportunities that are still floating around out there that are still on the table. So we're continuing to work those options. But then NLMK can really take the utilization up to the target level for us. So...

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Kimberly A. Fields, Allegheny Technologies Incorporated - EVP of Flat Rolled Products Group [42]

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Yes, yes. I think they've worked through some of the challenges we've had over last year or so around slabs and management in and out of the facility. On the joint venture, as Bob said, I mean we are focused and targeting that cash flow breakeven. From an ATI standpoint, I think we've got a good plan, we've got a good slab sourcing strategy that's been executed. And we're just working with customers to make sure we can continue to support their needs.

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Operator [43]

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Our next question comes from Matthew Korn of Goldman Sachs.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [44]

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So among all the moving pieces you have, the MAX, inventory management, if I look at your expected CAGR for next-gen jet engine growth that you've laid out here in Slide 6, is there any change whatsoever versus what you were projecting over, say, 2Q at the end of last year? And if so, why would that be?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [45]

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Yes. We're looking at Slide 6 ourselves and thinking through your question. I don't think there's any change from what we were expecting. Maybe just a slight shift to the right with the MAX uncertainty, but it's more growth deferred than a growth decline for sure.

Kevin or John, do you want to add anything?

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Kevin B. Kramer, Allegheny Technologies Incorporated - Senior VP and Chief Commercial & Marketing Officer [46]

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Yes, the only other thing I might add is, as John said, all of the contracts that we're working through the end of the year and early in 2020 may provide some incremental share gain. Certainly, that's our focus as long as it meets the requirements of the customer and hits our profitable growth objectives. So that would be the other thing I would suggest that may change that CAGR.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [47]

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All right. So sounds like a little bit of a shift to the right but also some upside risk for you in particular, if I'm hearing you right.

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Kevin B. Kramer, Allegheny Technologies Incorporated - Senior VP and Chief Commercial & Marketing Officer [48]

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Yes. I think that's a good way to...

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [49]

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Yes. On the upside opportunity, yes.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [50]

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And then just to clarify, for me one last time. Just on the uneven order patterns you mentioned on the engine side, can you confirm, is this effectively the one particular customer that you've been highlighting these last couple quarters? Are there any others that have gotten more lumpy through this past year? And then what's underlying your confidence that this truly is something that's near term? Are they telling you, "Look, we'll be back to our previous rate, just be ready?"

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [51]

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Matt, this is John. It's an artificial demand reduction, not an underlying demand reduction. And again, has nothing to do with the engine demand. It has to do with internal inventory actions to generate a cash flow objective for other reasons. And I won't go any further into it than that. We are working very closely with the customer to understand, one, what they're trying to do, how we need to position ourselves to help them do that and to understand the impact on us as we head into 2020. And we're collectively evaluating upside/downside risk to that. And I would say on the upside, we have to be careful because as Kevin said, as we complete the negotiation of these contracts, they may have some share impact differences that we have to be sure we have the capacity protected to handle that. And so we're working our way through that, but it's something we'll see -- as I said, we'll see reduced impact to that in Q4 and reduced further as we head into 2020.

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [52]

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Reduced impact from that, right? Yes. I think John's right. I think the use of the term artificial, unnatural demand pose more financial engineering than it is fundamentals. But we also have the order book to look at going into 2020 that confirm what we're seeing. We may see a little bit of an uptick in inventory on our side towards the end of the year because we want to level the production for maximum output and efficiency. But I think the orders will be there for -- well, they are there for 2020.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [53]

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Got it. So it is still -- it's an important customer, but you're not seeing a broadening of this behavior bleeding into any of the other customers?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [54]

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No, we are not.

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Operator [55]

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Our next question comes from Paretosh Misra of Berenberg.

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Paretosh Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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Just going back to the BWX Technologies contract. So the sales from that, will that be High Performance or Flat Rolled or a mix?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [57]

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Yes. That contract -- this is Bob. Yes, that contract is actually in our specialty alloys and components business, which is part of High Performance Materials and Components.

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Paretosh Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [58]

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And can you comment if it's more titanium or nickel alloy? Or what kind of material would that be?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [59]

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Yes. This is John. These are primarily zirconium and hafnium products. And it's a little bit of an odd situation. These are flat products, meaning it's plate products primarily, but they're produced -- currently today are produced in our Millersburg, Oregon facility. The zirconium and hafnium.

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Paretosh Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [60]

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Interesting. And then you have -- you're gaining market share and you plan to gain more. Do you have enough capacity? And I realize that you're making some investments right now, but would that be enough? Or you might need to invest more and build more capacity?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [61]

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Yes. So this is Bob. So we are obviously working with our customers on a daily basis. So we believe we've taken the actions necessary to have the capacity in place when they need it. Most of our capital expenditures for new capacity or new capability are driven by customer contracts, so we stay in sync. I think as you go into 2020, we obviously are wrapping up some new contract extensions that have share opportunities that would require us to invest a little bit more in 2020.

We're not talking hundreds of millions, we're talking 10s of millions and it tends to be more finishing capacity and downstream-type assets that have shorter lead times to procure and install. And based on the current lead times, I think for some of the titanium products, we can add downstream and finishing capacity within the window to do that.

So I would say on the HPMC side, we made the steps necessary and taking the steps necessary. And as isothermal forge press comes on next year, we'll be in good shape. And then the rest of it seems simple but there's a lot of projects that are taking place down the finishing end to make that happen. John or Kim, do you want to add anything to the color?

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Kimberly A. Fields, Allegheny Technologies Incorporated - EVP of Flat Rolled Products Group [62]

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No, I think you've covered it. I mean obviously, we're investing in the finishing to support the titanium demand that we see coming. And as you said, we're well positioned for that to come online to support our revenues for next year.

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [63]

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Yes, we do very little speculative investment particularly in the aerospace and defense side. It's pretty much lined up from a contract standpoint. And we're having ongoing dialogue with our customers. So this isn't really a surprise to either one of us. I think the difference is, and I think this is part of an answer we gave to Timna earlier is, while we may have it in the 5- or 10-year outlook from an organic growth standpoint, we may have things on the drawing board out there. The timing of that will move around based on what's going on in the market, the supply chain and our position within a supply chain. And I think if you've noticed, probably the last 4 years, we have accelerated the investment particularly for the jet engine market as a response to our growing position in that supply chain and somewhat response to our ability to perform in a demanding environment, our ability to ramp for emergent requirements and then contracts we've negotiated.

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Operator [64]

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Our next question comes from David Strauss of Barclays.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [65]

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Sorry about that before. So these customer cash management efforts you've talked about, are those getting incrementally -- I guess, relative to last quarter, are those incrementally worse or better?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [66]

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Go ahead, John. This is a good --- yes. David. We're deciding who's going to answer that. I lost. No. I would say quarter 3 was probably the bottom. We'll start climbing out of that, meaning reduced impact of those actions in quarter 4 and then probably some resumption to normal ordering patterns, we believe, in quarter 1.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [67]

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Okay. And then I guess sticking with you, John. The nickel powder ramp, where exactly are you in that? And when do you expect to be fully ramped?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [68]

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We are fully ramped and performing at basically the rate we expected, I think, when first talked to you about this late -- by a year ago, I guess. And we expect a ramp up in production in 2020. And we are performing at that rate today. So we're well prepared for the increased rate. And as I answered Gautam earlier, while we're finishing the, call it, the administrative negotiation of the agreement, we are, in essence, performing per the agreement.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [69]

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Okay. And while you're fully ramped, have you -- I guess the share potential capture, how far along are you in that?

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John D. Sims, Allegheny Technologies Incorporated - EVP of High Performance Material & Components Segment [70]

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Well, we're essentially performing at almost a sole source-type share level for 2019. We anticipate very close to that in 2020, and then we're discussing beyond that with the customer where we want to be. And we're trying to balance that ourselves between -- that's not the only powder program we're participating in. So we're trying to balance that out with other customers as well.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [71]

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Okay. Got it. And then free cash flow. So I think the prior guidance back at the Investor Day, Pat, was this over -- average over $300 million, '19 through '21, ex pension. And I guess this year, it looks like you're going to come in around $225 million on that basis. Can you update us on how we should be thinking about cash, free cash flow longer term?

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [72]

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Sure. We have the opportunity, we think, to get back towards those levels over the next couple of years, that $275 million to $300 million level that we were at a year ago. And this year, we're down slightly but there are some sort of extenuating circumstances including some inventory actions where we we're going to produce some inventory for sale in the first part of next year. So as those abate, we expect to resume strong free cash flow next year. We're in line with that $250 million and above number.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [73]

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Okay. And I might have missed this. Did you say how much you expect your cash balance to be at the end of the year?

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Patrick J. DeCourcy, Allegheny Technologies Incorporated - Senior VP of Finance & CFO [74]

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So we're at $500 million now, so we expect improvement. Our previous guidance was $550 million for year-end. So we'll be at or above that level.

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Operator [75]

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Our next question comes from Chris Olin of Longbow Research.

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Christopher David Olin, Longbow Research LLC - Analyst [76]

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I want to make sure I understand the guidance or the comments about the 787. I was always under the assumption that you guys did somewhere between $2 million to $3 million per aircraft. Production rates are coming down 2 per month. So wouldn't that be essentially up $50 million impact on your sales outlook? And then second to that, given how titanium intensive that jet is, wouldn't that reduce the need for emergent demand next year? Did the cost get difficult on the titanium side?

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [77]

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Yes, I think we can add a lot of color on that one with John here with me. But I would say, we have been able to take on some emergent opportunities. So when you say, "Well, what's that done to your share?" The obvious result is we're getting a bigger share of that pie.

I would also say that given the lead times that are out in the market today, that the market is tight, that we've been able -- yes, the order book get smoothed out. So I think Boeing's best interest is to keep that smooth and steady and not disrupt the supply chain. And then because of the emergent demand, we don't expect to see that much on the titanium side. I think they'll be on the other programs. There'll be plenty of activity there to make up for anything that happens.

So I think we're also seeing growth on the defense side. So when you look at total titanium demand for ATI, you have to the think aerospace and defense, frame and engine, and we also have some other contractual bidding going on that we expect to wrap up in Q1. So I think from a share gain perspective, lead time of a customer who wants to smooth out the supply chain to make sure it's working, I think -- I don't think we'll see that pure mathematical model that you described.

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Operator [78]

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

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Robert S. Wetherbee, Allegheny Technologies Incorporated - President, CEO & Director [79]

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All right. I'm going to stick to the teleprompter here and say thank you for joining us on the call today and thanks for your continuing interest in ATI.

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Scott A. Minder, Allegheny Technologies Incorporated - VP of IR & Treasurer [80]

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Thank you, Bob, and thank you to all the participants and listeners for joining us today. That concludes our third quarter 2019 conference call.

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Operator [81]

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