ATI Inc.

Good morning and welcome to the Allegheny Technologies Incorporated third quarter 2019 results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. You ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. 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.

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 Weatherby, President and Chief Executive Officer of John Sims, Executive Vice President, High Performance Materials and Components segment. Kim Fields, Executive Vice President, Flat World Products. Pat DeCourcy, Senior Vice President and Chief Financial Officer. And Kevin Kramer, Senior Vice President, Chief Commercial and Marketing Officer. If you've connected to this call via the internet, you should see slides on your screen. For those of you who 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 try to reach everyone who would like to ask a question. 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. 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 TEM 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 segment's 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 non-core 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 four, 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 rot 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 optimistic for a MAX return to service in the near-term and subsequent production rate growth in 2020 and 2021. We're in near constant communication with our customers, and as we said before, We produce to specific customer orders, not to reported OEM build rates. The 737 MAX is an important program for API, 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 roll product segment 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 at 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 of 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 six-and-a-half-year 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 Allies 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. And I'll 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?

Thanks, Bob. Turning to slide five. The HPMC segment posted solid third quarter financial results aligned with our expectations that included 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 divested businesses, primarily due to increased 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 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 product lines 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 six, the pie chart and accompanying table show the HPMC segment's third quarter 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 of 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 multi-year 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 roll products.

Thanks, John. So turning to slide seven, as expected, the FRP segment continued to expand high-value product volumes, particularly in a 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 stall 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 stall joint venture continues to improve after a sluggish first quarter, despite slowdowns in some Chinese markets. Global demand for newly launched consumer electronics models produced in Asia are increasing, and we're seeing the initial benefits from our 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 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 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 was 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 plan maintenance and expense in the fourth quarter as well. On the positive side, raw material 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 stall joint venture results despite additional downtime related to local holidays, And thirdly, increase the HRPF carbon conversion volumes for NLMK USA. While segment financial results remain uneven quarter to quarter in 2019, we are solidly profitable for the third year in a row. We've significantly improved the foundation of our business and created 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 while advocating for logic-based change to trade actions and on generating cash from existing assets to help fund ATI 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 sub-markets, primarily titanium armor plating for land vehicles 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. And consumer electronics market sales continue to expand in China as our customers produce 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 rates in some of our melting and finishing operations. Overall, the team continues to make progress on a strategic imperative, generating sustainable profitability despite a challenging global trade environment varied raw material cost inputs, 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 on our outlook for the fourth quarter.

Thanks, Kim. Turning to slide nine, let me start by talking about an important proactive step to improve our balance sheet and long-term liquidity. In September, we finalized a five-year extension to our asset-based lending, or ABL, agreement, which now extends through September 2024. We upsize 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 a percentage of sales, it 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 total $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 plan participation by over 1,800 people. This brings total pension participant reduction to more than 50% over the past six 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 margins should improve by approximately 210 basis points year over year to about 16%. Looking into 2020, we anticipate strong jet engine customer demand particularly in the first half of the year. Shifting to the fratware product 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 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 ANTS 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 a benefit of $25 to $35 million due to the release of a portion of our deferred tax valuation allowances. Second, depending on average raw material costs in the quarter, primarily related to nickel, we may incur LIFO expense in excess of our remaining NRV inventory reserve. With a 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 zero to $5 million for the quarter. With that, I will now hand the call back over to Bob.

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 the 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 deliver. But as I have a minute here to close up, I'm going 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 our material science expertise, and they're leveraging our advanced process technologies to really solve problems that our customers bring to us. We've earned 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.

Thank you. We will now begin the question and answer session. In the interest of equal access to all participants, please limit yourself to one question and one follow-up. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the button. To withdraw your question, please press star, then 2. Our first question comes from Richard Safran of Buckingham Research Group. Please go ahead.

Thanks. Good morning, everyone. How are you? Good morning, Richard. Okay. 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, of course, if possible, how you see your top line and cash flow trending next year. Now, Pat, I know you mentioned engines in your opening remarks, but I thought maybe you guys might be willing to expand a bit.

Okay, Richard, this is Bob. We noted your question 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, you know, from an aerospace and defense standpoint, both naval, ground, missiles, aerospace continued strong into 2020. Our order book and our customer contacts are very positive. We recognize 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 should 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 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, do you want to add any color?

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.

Okay, thanks. So a topic I asked about last quarter, assuming Boeing is right on MAX certification, et cetera, I believe for the LEAP you've been shipping at 52. When do you start shipping at 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, you know, that kind of thing?

Okay, Richard, this is Bob again. We'll see if we can get you through the call here. So, you know, 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. You know, I think what we do expect through the 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, in all that, you got a question too. Do you want to answer Richard's question? I do, Bob.

Hi, Rich. The mixed 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 four and improving in the next year. Thank you.

Our next question comes from Josh Sullivan of Seaport Global. Please go ahead.

Good morning. Good morning, Josh. Just on the contracts you mentioned you have coming up for renewal here, can you give us any timeframe, you know, 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.

Good morning, Josh. I'll take a stab at the first part of that question. Break the contracts into three 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 and in terms of longevity. The other two buckets 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 manufacturer who's going through a consolidated bid program. And we expect those probably in Q1 to be an announcement. I think the BWXT was great. The jet engine contracts are coming to a conclusion here. We believe, you know, a great Christmas gift for all of us. And then early next year, we should see the con bid. Don, you want to add any color to the second part of Josh's question?

Yeah, Bob. So, Josh, we're working – The number was eight contracts we have been working. One we just announced with VWX Technologies. Seven remaining. I think five of those we anticipate being completed by year end. Two will 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% or even not.

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

I appreciate that, Cullick. And then just on the 787 production cut in late 2020, you know, when might we see that, you know, impact you guys? And then secondly, you know, does that have any impact next year on that customer which implemented some cash management outlook, you know, the cash management outlook this year? Are those two related or just trying to get an idea of how the 787 might impact you guys?

Yeah, good question, Josh. You know, for the 787, I would say minimal impact. You know, 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, have earned the opportunity to actually offset that by the emergent demand that we've seen, you know, at Boeing and expect to continue to be able to supply that. 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.

Great. Appreciate it. Thank you.

Our next question comes from Phil Gibbs of KeyBank Capital Markets. Please go ahead.

Hey, good morning. Hey, good morning, Phil. I 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.

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.

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. Yep.

Sequentially, that's correct.

Okay.

And you're over here at 210, I think.

Okay. Just wanted to clarify that. And then, you know, 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. But just want to frame, kind of would like you to frame up in terms of what we should expect here moving forward with the cash building and then, you know, obviously with the with the pension being a priority. So just would like some further thoughts around that. Thanks.

So the priorities remain the same. We're going to take a look at our overall debt levels. So we are obviously considering reducing 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.

Thank you.

Our next question comes from Gotham Khanna of Cowan. Please go ahead.

Yes, thank you, guys. Good morning. 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 know, you guys have quantified 1.1 million, the ship set on the MAX. Is there any way you can discern exactly what rate you're at or what blended rate you're at?

There's a couple questions in there. I'd start with, are we seeing any discernible slowdown or shift? The answer is no, we're not. I think the supply chain is confident that the MAX is going to come back to 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 were in different shapes and parts than we had anticipated at the beginning of the year, but it's still been healthy for us. So we haven't really seen anything, you know, decline.

Kevin, do you want to add any color to what we're seeing in the market for Gottem? 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. 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, is still very positive.

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

Okay. And you guys have talked about, you know, your titanium growth at high performance has been pretty strong all year. I 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 explains the emergent demand you're seeing on the airframe tie side?

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-based 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 number one issue. You know, in the defense side, we're certainly 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?

The 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.

Yeah, absolutely. And then just if we could revisit that 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 potential to close this year or – What's your expectation?

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

Okay. Last one, Pat, cash pension contributions next year.

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 in January on that number. All right. Thank you very much, guys.

Thank you.

Our next question comes from David Strauss of Barclays. Please go ahead. David, your line is open. And we will move on. Our next question comes from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.

Hey, good morning. I was wondering if you could please provide us A bit more of an update on the competitive landscape, your ramp-up of 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. Thanks.

Yeah. Good morning. Yeah, 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've reversed the chicken and the egg and said 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 that customers see that value well into the future. But, John, you want to update where we are with the isothermal forgings and the growth there?

Yeah, Bob, so Tim, 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 in market, demand, but also in some cases share growth. So we're tracking that 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, we may move those projects up based on those commitments.

Okay, great. And I'm 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 this thing's on JV. I know you said you were 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. Thanks.

Yeah, so a couple questions, and Kim Fields is here with me. I'll let her jump in. So let's see, there was the HRPF conversion question, what's 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 do 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. You know, so that'll continue. And that's actually working pretty well for us. The JV side, you know, our target is to, you know, 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 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've got to work on our costs. We've 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. Do you want to add any color to where we are for Timna's benefit?

Yeah, I mean, on the conversion, as Bob said, I think the team's worked, you know, worked well and aggressively. We've ramped up that relationship with NLMK. And, you know, 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, already seeing those benefits. You're seeing some of them in our results today. And as Bob mentioned, you know, we're at the kind of final stages of both NMLK and us and ourselves are very happy with the relationship, so we're planning on renewing and hopefully we'll have an announcement shortly on that.

Yeah, I think NLMK could provide the full utilization for the HRPS that we're looking for. I think there's still, well, we know there's still one or two other opportunities that are still floating around out there that are still on the table, so we're continuing to work those options, but NLMK can really take the utilization up to the target level for us.

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

Okay, super. Thank you very much.

Our next question comes from Matthew Korn of Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions, too. Yep, good morning. So among all the moving pieces you have, the MAX, inventory management, if I look at your expected TAGR for next-gen jet engine growth that you've laid out here on 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?

Yeah, we're looking at slide six 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. that growth will decline for sure.

Kevin or John, do you want to add anything? Yeah, the only other thing, Matt, I might add is, as John said, all the contracts that we're working through 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.

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

Yeah. Yeah. I think that's a good way to go.

And then just to clarify, you know, for me one last time, just on the uneven order patterns you're mentioning on the engine side, you know, can you confirm, is this effectively the one particular customer that you've been highlighting these last couple of quarters or Are there any other orders 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?

Yeah, Matt, this is John. It's an artificial demand reduction, not an underlying demand reduction. It 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, you know, one, what they're trying to do, how we need to position ourselves to help them do that, and to understand that impact on us as we head into 2020. And we're collectively evaluating upside-downside risks in 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 of that in Q4. and reduced burgers we had in 2020.

Reduced impact from that, right? Yeah, I think John's right. I think the use of the term artificial, unnatural demand, 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.

Got it. So it is still, you know, it's an important customer, but you're not seeing a broadening, you know, of this behavior, you know, bleeding into any of the other customers. No, we are not. All right. Thanks, guys. Good luck to you. Yep, thank you.

Our next question comes from Paritosh Misra of Barenburg. Please go ahead.

Great. Thanks, Ash. Just going back to the BWX Technologies contract, so the sales from that, will that be high performance or flat roll or a mix?

Yep, that contract. Good morning. This is Bob. Yeah, that contract is actually in our specialty alloys and components business, which is part of high performance materials and components.

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

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. They're produced in our Millersburg, Oregon facility, but zirconium and hafnium.

Interesting. And then you have your you're gaining market share and you plan to gain more. Do you have enough capacity? 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?

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 could 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 tens 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've made the steps necessary. We've taken the steps necessary. And as the 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 on the finishing end to make that happen. John or Kim, you want to add anything to the color?

No, I think you 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.

Yeah, 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 was part of an answer we gave to Tim earlier, is while we may have in the 5- and 10-year outlook, from an organic growth standpoint, we may have things on the drawing board out there. The timing of them will move around based on what's going on in the market and the supply chain and our position within the supply chain. And I think if you've noticed, probably the last four years, we have accelerated the investment, particularly for the jet engine market, as a response to our growing position in that supply chain. in somewhat response to our ability to perform in a demanding environment, our ability to ramp for emergent requirements, and then contracts we've negotiated.

Thank you. I appreciate the incremental color. Good luck with everything, guys.

Yep, thank you.

Our next question comes from David Strauss of Barclays. Please go ahead.

Can you hear me?

All right.

Sorry about that before. Good morning. 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?

Go ahead, John.

Hi, David. We're deciding who's going to answer that. I lost. No, I would say quarter three was probably the bottom. We'll start climbing out of that, meaning reduced impact of those actions in quarter four, and then probably some resumption to normal ordering patterns, we believe, in quarter one.

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

We are fully ramped and performing at basically the rate we expected, I think, when we first talked to you about this late, about 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 administrative negotiation of the agreement, we're in essence performing per the agreement.

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

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. We're trying to balance that ourselves. That's not the only powder program we're participating in, so we're trying to balance that out with other customers as well.

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

Sure. You know, we have the opportunity, we think, to get back towards those levels over the next couple years that, you know, 275 to 300 level that we were at, you know, a year ago. This year we're down slightly, but there are some sort of extenuating circumstances, including some inventory actions where 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, more in line with that, you know, 250 and above number.

Okay, and I may miss this. Did you say how much would you expect your cash balance to be at the end of the year?

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

Okay. All right. Thanks guys. Thanks.

Our next question comes from Chris Olin of Longbow research. Please go ahead.

Hey, good morning.

Hey, good morning, Chris.

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 two to $3 million per aircraft. production rates are coming down two per month. So wouldn't that be essentially a $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 emerging demand next year? Do the comps get difficult on the titanium side?

Yeah, I think we can add a lot of color on that one with John here with me. But I would say, you know, 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've gotten 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, the order book gets smoothed out. I think Boeing's best interest is to keep it 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 there'll be on the other programs, there'll be plenty of activity there to make up for anything that happens. I think we're also seeing growth on the defense side. When you look at total titanium demand for ATI, you have to thank 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, the time of a customer who wants to smooth out a supply chain to make sure it's working, I don't think we'll see that pure mathematical model that you described.

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

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.

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

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