ATI Inc (ATI) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Allegheny Technologies 2006 third quarter earnings conference call. My name is Latisha, and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS] At this time, I will now this presentation over to Dan Greenfield, Director of Investor Relations. Please proceed, sir.

Thank you, Latisha. Good afternoon, and welcome to Allegheny Technologies earnings conference call for the third quarter of 2006. This conference call is being broadcast live on our website at alleghenytechnologies.com, and on ccbn.com. Members of the media have been invited to listen to this call.

Participating in this conference call today are Pat Hassey, Chairman, President and Chief Executive Officer, and Rich Harshman, Executive Vice President -- Finance and Chief Financial Officer.

After some initial comments, we will answer questions. Please note that our forward-looking statements made this afternoon are subject to various assumptions and caveats, as noted in the earnings release. Actual results may differ materially.

Here is Pat Hassey.

Thanks, Dan, and thanks everyone for joining us today.

I'm pleased to report on the company's continuing progress. As you can see from total results from the third quarter and year to date, our major markets remain strong, our operating margins continue to improve, our clients are delivering cost reduction effectively and efficiently, and in addition, we recently signed a $2.5 billion long-term agreement to supply the Boeing Corporation via sending our mill products to airplanes, including the 787 Dreamliner. This new Boeing contact is the first to validate our titanium sponge expansion plans, as well as our high performance metal strategic growth capital projects.

During this conference call, I would like to discuss, first of all, some highlights of the third quarter, ATI's strategic growth projects and titanium products and nickel-based alloys, the remarkable transformation and consolidation and resulting growth in our flat-rolled products business, and actions that are underway to further improve our operating performance in our engineered products segments.

To begin, ATI's growth is being driven by long-term strong demand in the aerospace and defense markets, and worldwide increasing demands in markets that are vital to the building and the rebuilding of the global infrastructure.

Some highlights of the strong third quarter performance. Sales increased $50 to $1.29 billion bringing year to date sales to over $3.5 billion, and an annualized rate over $5 billion. Net income increased 83% to nearly $152 million or nearly $1.58 a share. Segment operating profits of all products increased 117% to $290 million, or 22.6% of sales. Operating profit by individual segment in the third quarter was high-performance metal, 38% of sales, flat-rolled products 14.5% of sales. Engineered products, nearly 12% of sales. These results included a LIFO inventory valuation reserve charge of $54 million. Our year to date cost reductions totalled $96 million.

Overall, our financial metrics were solid. Annualized return on capital employed was 35%; annualized return on stockholders' equity at 53%, net debt to total capitalization improved to 10.8%, and our cash on hand increased $93 million over the previous quarter to $406 million.

Here is an update on ATI's strategic growth projects on titanium products and nickel-based alloys. Our Phase I of our Albany, OR titanium sponge facility is now fully operational, with six new furnaces producing at an annualized rate of 8 million pounds.

Just a side note on this - the Albany production is going extremely well, and the sponge quality is outstanding. Albany Phase II is expected to be in full production in the first half of 2007. Albany Phase III is expected to be in production in the second half of 2007, bringing us to 12 million pounds of production capacity for 2007. Our titanium sponge annual production expands to 16 million pounds for 2008.

Engineering and design at our Rowley, UT titanium sponge facility, the new facility, is underway, and we still expect sponge production to begin in late 2008 and grow to an annualized rate of 24 million pounds in 2009. When these current phases are completed, ATI will have internal titanium sponge capacity of about 40 million pounds. In addition, we plan to buy titanium sponge from our outside suppliers. Our new, internally produced titanium sponge is incremental. It enables ATI to significantly grow our titanium milled product shipments.

Concurrently, three of our new titanium melt furnace expansion projects started into operation. This is complementary to the new sponge capacity expansion. We expect all of our titanium melt projects to be in operation by the first quarter of 2007. In addition, four of our new nickel-based alloy and superalloy remelt furnaces are in operation also.

As we've said in the past, it remains our intention to secure long-term agreements to load our new titanium and nickel-based superalloy capacity using our normal 85% contract to 15% spot business ratio. We are in the process of securing these long-term supply agreements to profitably grow ATI's participation in the jet engine, airframe, defense, and medical markets at a rate of return that is very attractive to the ATI shareholders. Our strategic growth initiatives allow us to fully support our jet engine customers, and provide significant growth opportunities for ATI's aerospace titanium and airframe market. For example, the recent announcement of our long-term agreement with the Boeing Company demonstrates how our fully integrated titanium product's capacity enables ATI to grow in the expanding commercial airframe market.

Boeing and ATI will co-host a Boeing Community Awareness event in Pittsburgh during November. This event is about innovation, and the progress of the 787 Dreamliner. Boeing and ATI are working together to build the world's most advanced airplanes. We are pleased that ATI will co-host this event with Boeing in Pittsburgh.

Returning to our flat-rolled products business, we started the journey to transform our flat-rolled products business in 2003, achieving $100 million in operating profit during a single quarter was more of a dream than a goal. Now here we are, discussing the third quarter of 2006, and I'm delighted to report that flat-rolled products expect an operating profit increase to over $105 million, with operating margins at 14.5%. This was accomplished in spite of a $42 million LIFO charge, primarily due to the increasing cost of nickel. Without the LIFO charge, that's $147 million in operating profit in one quarter.

A lot has changed in our Allegheny Ludlum business, and more is happening in this business segment. We've organized and capitalized on our industry consolidation to create a low cost commodity sheet business, a high value sheet business, a high value plate business, a global electrical steel business, and a global precision strip business. We have achieved all cost objectives and goals as we originally outlined in the asset acquisition of J & L Speciality in 2004.

Our strategic renewal process is having major impact. Briefly, we're focusing on our global sales and marketing efforts on what we do well and selling to key growth markets those products that best fit our technology. Continuing on our flat road product segment during for the first nine months of the year, revenues from the chemical process industry, oil and gas market, accounted for 21% of the flat-rolled product sales. Activity throughout the oil and gas market remains high, particularly for ethanol and offshore projects. Revenues from the electrical energy market were over 16% of flat-rolled product sales. Our specialty metals are used in the building and rebuilding of the domestic and global electrical infrastructure. We believe we will benefit from the global electrification for the next several years. Revenues from the aerospace and defense market now are at 6% of flat-rolled product sales. Overall, 43% of our flat-rolled product revenues come from these key growth markets. Our flat-rolled products business has been transformed into a global specialty metals business, and is no longer what might be considered the typical commodity stainless business. With the high price of nickel and raw material units, many customers have been receptive to our alloy substitution effort.

The switch is on. And it's really on.

The switch to lower nickel-bearing stainless and duplex alloys is accelerating rapidly. A few examples: September was the best month in our history for shipments of AL201 high-performance alloy which is the low nickel lean duplex stainless. We expect shipments of this product to increase by approximately 20% in 2006 compared to 2005. One example during the third quarter, a leading food and equipment appliance customer switched everything they could from 304 stainless to 201 high-performance, "effective immediately". Demand from our new proprietary AL2003 lean duplex alloy is "really hot" as the general manager of our specialty sheet business says. With high nickel prices the value proposition for AL2003 increases versus commodity grades such as 316 and 316L. AL2003 lean duplex is being used for applications in the global, oil and gas market, chemical process industry, architectural and mining markets.

Our objective is to make our flat-rolled products business more profitable and less cyclical than in the past. To that end, we're picking and choosing markets and products where we make money and spreading our market risk around the world. We are uniquely positioned in this global market because we can offer capacity-constrained or production-limited products that others don't make.

Some of the highlights in our segment international efforts, international sales increased to 18% of segment sales, or over $340 million for the first nine months of 2006. This is nearly the same dollar amount as the segment sold internationally in all of 2005. We have excellent technically qualified sales and marketing teams in Europe and in Asia. These teams speak the language, know the culture and know the markets. Our Uniti joint venture with VSMPO, or Vsmo for industrial titanium product, basically flat-rolled products is doing very well and is selling every pound of titanium they're allowed by the partners. Our STAL joint venture in China for precision rolled strip is also doing very well; major markets served or electronics and communications equipment. Our growth market for STAL is the new and growing Chinese automotive market. This joint venture began in expansion in the third quarter of 2006, and is expected to more than triple STAL's capacity for the Chinese domestic market. The expansion is expected to be operational in the first quarter of 2009. Precision-rolled strip is a close-tolerance, very thin product that few in the world make, and is not commodity stainless steel.

Now turning to our engineered products segment.

The third quarter 2006 margins from our engineered product segments were at 12% of sales, but we have opportunities to better. High costs for raw material, APT, or ammonium paratungstate, in our tungsten products businesses, have been holding down operating profitability.We began an expansion project to triple capacity at our APT plant in Huntsville, AL late last year, and expect to be fully integrated in this raw material by the end of 2006. What this means is we will no longer be dependent on high and volatile cost of Chinese APT after this year.

In addition, Rome Metals, our precision metals processing company, is also having another growth year. This very unique unit does high end processing on titanium, zirconium and other metals. We are further investing in this business to capitalize on its many growth opportunities and to expand its capacities for the aerospace business.

Here are my take aways from the third quarter results and our market updates.

Our core growth markets are strong. Operating margins have held up, in fact, expanded. Our titanium growth plans were validated by a $2.5 billion long-term agreement from the Boeing Corporation in large part for the 787 Dreamliner. Long-term agreements from other customers are yet to come. We believe the titanium market opportunity for ATI is very large. The flat-rolled products business is demonstrating new earnings potential and is globally positioning itself for less cyclicality.

Overall, ATI is proactively and successfully developing new profitable growth opportunities for 2007 and beyond.

At this point, we will open the call for questions and we would ask the operator now to open the line.

Thank you for that presentation.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of John Hill with Citigroup. Please proceed.

Good afternoon everyone and congratulations on another great result.

Thanks, John. Good afternoon to you.

Yes. Just curious, on the stainless business or flat-rolled pricing was very, very strong, volumes were a little bit light sequentially. Just sort of curious, I know it's a broad product mix, where do you see yourself in terms of capacity utilization and what's the prospects to drive volumes further across the product mix should markets allow in '07?

John, as you know we're driven by profitability, I tried to point out in this conference call, we have two major objectives in this business, one is to continue the profitability and the second is to reduce its cyclicality. We look at this business on a global basis and we look at the markets that we're in based on the product we're telling on a global basis, not just the U.S. market and not just the general distribution market that we had been concentrating on for many, many years. When we look at this business in total, the improvements in this business come from about 23% on pricing, and the other 75% of those improvements are the volume that we've been able to derive from the consolidation as well as the cost reductions that we've taken out of the business. So this is an interesting structural shift in this business. It isn't just pricing, it's really where we've now set ourselves in the business on a global basis, and it's our ability to take the cost out of the business, hold the volumes for the equipment we have.

So this range of running on an annual rate of about 650,000 tons or in that kind of a range when we couple that with the base loads we need from the standard cold-rolled sheet business and we look at our other products that we're making, we're very satisfied that out of this large flat-roll products market on a global basis that the niches that we're carving out are very satisfactory for us in turns of that kind of a volume level and those kind of markets.

Just a quick follow up, if I may. Out of the cost-cutting programs, what percentage do you figure that you're able to drop down to the bottom line from the gross figure?

Well, you know, you're looking at a quarter here that ran if you annualize this quarter and I'm not going to -- I'm not going to take credit for any of the LIFO, that's part of the cost of doing this, but $105 million annualized puts this business at about $420 million. And so now you have a range of a business that is looking at what used to be the top end of the business as the low end, and doubling that for the top end. So I think we have a business that's running 200 to $400 million in the cycle and a very nice, very nice asset for this company.

Very good, thank you.

And your next question comes from the line of Tony Rizzuto with Bear Stearns. Please proceed.

Thank you very much, congratulations and also on a continued strong execution.

Thanks, Tony, welcome.

Can you discuss the sustainability pattern of margins in FRP and HPM? Obviously you guys are doing a lot of internal initiatives but in the past you've spoken, Pat about an 8-12% type of range over the cycle, obviously you've blown through that.

Yes, I was wrong.

I was wondering, you know, should we now view this 14.5% as the upper end of that range and certainly a higher level on the low side? Is there a lot more cluster reduction that is yet to be felt?

There is. We are actively running this business differently. I tried to point out we now look at it under five sub business units.

Let me just review that the markets, maybe it's the best way that I can explain where I think we are. The high temperature or the high-performance metals side of this business is very strong. I don't think we have any question that the margins that we're currently generating may be even better margins are ahead for us in that particular side. The electrical steel business is just a very strong business on a global basis, and this electrification of the economies around the world and rebuilding of the infrastructure in the United States, this looks like a very powerful market segment for us going forward and I think those margins are in very good shape. We look at our plate business, plate is basically sold out. It sold out well into the first quarter of the year. And as we look at some of this aerospace contract business coming at us, that's an expansion opportunity for us in that segment of the business. Our normal precision strip business in our high-performance area there is in solid shape and I think those markets are solid with us and again we're looking at capitalizing on our profitability, not necessarily running out looking for volumes.

So that puts us right back to commodity sheet and the commodity sheet business is a business that, I think, is dependent on the -- basically on the growth of the general economy, and how something the general economy stands. Our niches in that business, though, are pushing us more toward the energy markets where we now look at ethanol as a basic market force, at least for the next couple years, and we're looking at some of this energy kind of business where we're doing more work on the gas desulfurization and piping that we can supplement that business in the two quality market and the heavy gauge sheet markets with the general distribution markets. So we've got better -- a better chance of holding pricing there. And I think the best indication of that market is just simply the very high cost of nickel and the physical demand for nickel units tells me that on a global basis even that commodity market is still very strong going forward. So, you know, I'm not a predictor of the future but I for sure like the four segments very much and am somewhat optimistic that the pricing on the standard products holdings also.

Just -- thank you very much. It's an excellent detail. I want to follow-up, I think you made the comment on HPM that you could see -- you could expect even better margins ahead.

Now, we would have thought as we're looking at our model that as you enter into more long-term contracts, typically what we assume is those contracts, you know, you make up some in volume and you have to give up a little bit on price. Is that not necessarily the way to look at it?

Are you talking flat-rolled or high-performance?

No, high-performance.

On the high-performance side, our objectives, Tony still remain that in the high-performance business. Overall we expect that we will be able to see margins that are north of the 30% level on an overall business segment. And as we said before, obviously, as we come into these big long-term contracts, there is a look at our cost basis as well as the market basis to determine the overall value proposition of those agreements with the end customer and ourselves. And as we look at those, we still see that we have the opportunity through our own cost structure with these new assets, we've been talking about, that those margins that we're able to generate overall for the sector still look solid to us.

Thanks very much.

And your next question comes from the line of Dave Martin with Deutsche Banc. Please proceed.

Yes, thank you.

I wanted to come back to your comments on the sponge facility start up. I think you mentioned the quality was excellent. Could you possibly give us a little more color on customer acceptance and when we might start to see mill product volume as a result whether it be fourth quarter or 2007 for that matter?

Well, we've got three furnaces running now.

What I meant by the quality, of course we had this facility in operation under the old equipment back, I guess, in the early '90s as we come into this new start up of this plant, I think I mentioned before it's not really the exact same plant coming back, it has new furnaces and we've got new techniques and processes that we put in place, controls, burners and all to make sure that the quality levels of this plant with the new control systems are consistent and where we want them. We've been very pleased that the levels of quality that we're currently producing are superior, far superior to what the plant was making when it was in operation in its earlier days. So we're able to use those units then across our system in virtually all of our melting furnace types, which is an important part of utilizing that material straight into our normal production as well as anybody's that we're buying on a global basis from our outside suppliers. Those are all great big pluses to us in terms of the flexibility and the ability to integrate all that material rapidly. As we've put this into production, just in our flow times for this, we will begin to see the output of these furnaces and this sponge production in product during the fourth quarter. And we'll get the full value of that with the balance of the two furnaces coming up in the first quarter of 2007.

Okay. And then secondly, if I could -- I have two follow-ups of first of all, were there any sponge start up costs in the quarter and secondly on the purchase sponge costs, can you update us on how you buy sponge and the magnitude of any cost increases you may experience in 2007?

Just two things. We had our start up costs really which weren't very significant in basically experiencing the second quarter, we've been tuning up and running and any costs we've had in the third quarter I wouldn't say would be any kind of a significant factor to our earnings in the third quarter.

In terms of our ability to purchase on the outside, some of our agreements -- we're in long-term agreements that are in place for particular amounts of material. Some of those agreements have increasing incremental parts of that contract that would then be bought at the current market prices. Current market prices are substantially higher than they were two or three years ago. So there is an increase in the price for sponge on the open market, as people have seen, and in those areas where we're growing and in those areas that we're blending all this together, those costs have to be passed onto our customer base.

Okay, thank you.

And your next question comes from the line of Kuni Chen with Banc of America Securities. Please proceed.

Hi, good afternoon.

Good afternoon. And congrats again. Just a quick question on engineered products.

You know, it appears to be losing this momentum over the last couple quarters. Any softening in any of the main end markets served by that business or any increase in competition there? Just hoping you could comment on that. And also if you could comment on the APT integration and what you think that does for margins next year? Well, let me just take the second half of your question first.

I've been personally disturbed with the amount of volatility and ability to obtain supply on tungsten powder out of China. So we have worked diligently over the last basically two years, with actual implementation beginning 12 months ago, to make sure that we were a fully integrated, self-supplier for tungsten products. That, I'm very excited that that full facility in Huntsville, Alabama comes into product the end of this year. Now, those -- just as I said suspected, we got hurt by this volatility in APT with prices that have run in the, you know, $260 to $300 a ton kind of ranges. That's up like nickel, when we talk about where those prices used to be. So some of our margin compression comes from the -- from buying on the off side, and then not being able to under contractual or market conditions pass all those costs along. So some of that pressure that you're talking about has basically come out of the ability to procure and to pay for the APT units. When you have that kind of a condition, then your business is under some pressure as to some business you will take and some business that you won't take in terms of market pricing based on what the market competition and other people's positions are in the overall cost structures. So I've think we've done well, in total, I think we can do better and we're going to see where this business can take us after we get our own fully integrated supply up after the first of the year.

Just a follow-on, it seems you continue to have a growing high cash problem, any new thoughts on your cash deployment strategy, is there more investment in the business at this point or do you consider your pipeline of projects to be full at least through '08? Actually just a couple more, and the acquisitions that you would consider, and, you know, what's new on where you stand as far as share repurchases or dividends. Are you more inclined to follow the lead of some of the other metals companies and really mean fully step up on dividends or share buybacks? Thanks.

It's a great problem to have, isn't it?

And I guess where I would say we are is when you look at our growth from 2003 going from basically $2 billion to 2.7 to 3.5 this year, you'll see us somewhere in that $5 billion range. Our cash is being -- some of our cash, heavy amount of our cash is being consumed in our own working capital and receivables. Basically, I think we've got close to $500 million in further investment this year.

In addition, we have an underfunded pension that I think we've mentioned that we're looking at continuing to improve that position so that we have a secure pension fund and are certainly in compliance and don't have any mandatory payments under the new pension regulations. I think we are, as usual, every quarter, we look at where the dividend is and when we look at our ability to pay it, I think that is certainly an area that we look at hard now and consider at least every year where we are. If you look at our total return for our shareholders in turns of products at least in this quarter making a 23% return on sales, and if we can grow this business to continue to capitalize and grow revenue with over 20% margins in this metals business, we're going to continue to grow this company as long as it's profitable and as long as we have the complementary capacity to meet the market demands in those segments that give us these kind of returns.

Returns in the high-performance metals average 38%, so returns today in the mid-30s there, mid teens on flat-roll products, and as I pointed out, our plate operations today are very profitable and moving more toward aerospace operations. We have opportunities there. We're always looking for those kind of complementary companies that would make this a better company and where we find synergisms for us and for our customers. And so we have lots of opportunities to decide where this positive cash generation goes.

And I can tell you we're working hard at the strategies and making sure that we do the right thing for the shareholders of the company.

All right, thanks.

Just one last quick one, just a quick follow-up.

You mentioned you looked at complementary companies, you know, as far as the synergies go, potentially is that more about getting access to new customers and markets or more about cost synergies?

It's actually we like both those things.

If there's cost synergies where we very similar to the J&L asset acquisition, which really was a cost structure change and a consolidation, I think those are very meaningful in today's global market. If we're looking for maybe some product lines that are complementary to a full offering of products or technology into a particular segment that or sector of the market that we're growing in, such as the aerospace business, we're very interested there also.

Thanks, good luck.

Thank you.

Your next question comes from the line of Chris Olin with Cleveland Research. Please proceed.

Good afternoon.

Hi, Chris.

The titanium price realization number came in a little bit higher than I expected. I'm wondering if you're starting to see the benefits of stronger spot prices moving through the backlog or is there something in there within the mix.

We have some of our internal sponge going into this mix, we are taking some advantage of that with this current rate. I think we also had just some really excellent performance out of our [indiscernible] division, which the -- what we all the ATIBS program, or the ATI business system. We're getting more and more out of what we currently have.

When we look at how we sell under a supply-constrained market, the more of the mix that we can move toward fabricated products or semifabricated products out of the ingot category into billet or bar, rectangles, you know, tube wire, flat-rolled, all these things then add more fabrication margins and that's what we're doing.

Okay. Just my second question, can you review for me what your contracts set up in the titanium structure would be? And I've also started to hear some early indications from our contacts that annual contracts looking up maybe 20% next year. Any thoughts on that?

I'm not understanding the first half of your question.

But I think annual contracts that I set would be up next year and I don't know exactly where everybody's numbers are and I don't really want to discuss exactly what our competitive position is in that. Like I said, we have contracts that carry over for certain quantities into next year and any incremental pounds that we're buying of course would be under new market conditions. But we're feeling very confident about next year.

I guess in terms of the first part of my question, just wondering how much of your contracts would be multiyear versus one --

Okay. We now have a situation where most of our contracts will be more than one year. A high percentage.

Okay, thanks. Last question, too.

It seems like there's two big titanium platforms out there that could add some incremental tonnage. Do you have a lot of excess capacity it take on new business? Any kind of thoughts on the joint strike fighter needs and if you guys could satisfy that?

We're looking at all of these, the Lockheed program is a new big program. We just announced the Boeing program. There's certainly lots of work in the defense markets and in the armament markets. There's lots of growth in just the marine markets, the oil and gas markets.

This is a structural shift in this global economy that I think is one that most companies that are in this business have to decide exactly where they're going to wind up and what kind of products and customers they're going to have.

I think there's choices.

Thanks a lot.

Thank you.

And your next question comes from the line of Dave Lipschitz with Merrill Lynch. Please proceed.

Hi guys, I have Ron Epstein here with me, he'll ask a question right after me.

Hi guys.

On the oil and gas side, if oil were to fall, are you worried about the end markets there or won't affect it that much?

I don't think we're going to see much effect. What you say fall today, falling, I guess, is $50. I guess that's a fall, or $55. And I think there's a real driver here is in this price range is simply the increasing demand on a global basis. I don't think the markets in Asia are going to slow in demand and I think if the pricing gets into that range I think the -- just the overall growth is certainly going to be a major factor in keeping these oil and gas market sectors strong for us.

Okay.

Good morning, guys.

Good morning, Ron.

I just have a question with a quick follow-on.

When we look out beyond 787 in the aerospace market, what opportunities do you see out there? I guess my follow-on to that would be how big an opportunity is 747-8 on the intercontinental for you guys being that they're going to have more composites on that airline than historical would indicate?

We like airplanes that are overweight; when we're overweight, that means more of our materials are going to be used to bring these air frames into weight ,and as Ron, you know so well, as any of us who have been in the aerospace business for years, these airplanes gain weight as they continue in their life cycles. And then there's the next model and the next model. So I'm always an optimistic guy.

Once we get a base program into a particular design like the 787, and I'm assuming that under the 432 airplanes that are currently sold in options that we have and the investment that Boeing's making in this platform, assuming it's as successful as we all anticipate it going to be, then I'm optimistic that the next generation of aircraft follows along in this same kind of design. And so we're setting this company up to make sure that we have the possibilities to expand in phases with this market as it grows for titanium products.

Is 747-8 an opportunity for you guys?

I think all the Boeing programs are now an opportunity for us, both on the commercial side and on the military side.

Great, thank you.

Thanks very much.

And your next question comes from the line of Robert LaGaipa with CIBC World Markets. Please proceed.

Hi, good afternoon.

Hi, Bob, how are you?

Pretty good, yourself, Pat?

Doing good.

Great.

Obviously I'm impressed with performance, a lot of the questions have been focussed more on the next several years, I was just interested in kind of what you're seeing now as we close out the year and both the flat-rolled and high-performance metal segments. If we think about flat-rolled for example, obviously the performance you mentioned this during the last quarterly call, you didn't expect any seasonally in the third quarter, which obviously benefit the results in addition to mix.

I was just curious as to the as we move into the fourth quarter, do you expect any seasonality, obviously across a number of steel-related products there's been higher levels of inventories. I know the specialty nature of your product line might be a bit different different, maybe we can talk about the inventory levels you're seeing in the channel and the demand as we finish out the year?

I think the inventory levels on the general distribution side, they're standing at about 4.0 months, that's not a bad level for us in the stainless market. Our own schedules are past the fourth quarter now so we're going to have a good solid fourth quarter very similar to the third quarter, and we're going to have to see exactly what happens as we move out.

But nickel prices at $15 today and the surcharge levels where they are, we don't see anybody anxious to build any inventory beyond these levels and so what's been ordered and what's coming in seems to be being consumed by the overall market. The only question, you know, Bob, being in this business as I have, whether it's in the metals business in total, you always get to the end of the year and wonder if there's some interesting business reasons why a customer may delay shipments from the 31st of the year to the 3rd of the next year and date-wise. So we always have the year-end question marks as exactly what's the final pounds they're going to get out the door. If they don't get out the door do the last week, they'll get out the door the first week of the next month. I think overall the market still remains strong, the demand remains strong, we're all waiting to see exactly, everybody feels out every 30 days exactly where these nickel prices are going to be.

Right, of course.

Follow-up to that is just on the, again, on the flat-roll business in terms of mix, obviously mix helped out quite a bit. Can you maybe talk about the mix within the quarter relative to last quarter and should we think about a change in mix, are you better or worse for the fourth quarter and moving into next year?

I think what I was talking about in some of the sectors like the plate mill and the precision strip and our high-performance metals and electrical steel, we're running basically everything that we could run. The only variability that we have is on the standard cold-rolled sheet and I think part of that is that we continue to prune the lowest value products and we're certainly interested in some of this project work that comes along. We're concentrating on the oil and gas and on the ethanol business. Those kind of markets that give us project work that fits some of our paths really really well. So depending on exactly where we stack up there versus our good general distribution customers, I don't think we're going to see much of a mixed shift in any of our businesses for the fourth quarter.

Terrific.

Last question, if I could, just on the high-performance metals business, obviously with the start up of some of the metal furnaces on the titanium side, you mentioned the start up of the nickel based alloy and special alloy furnaces. Could you talk about the incremental volume that you're expecting in the fourth quarter relative to the third?

And then, you know, what we should expect from a longer term basis just in terms of these expansions that you have underway, obviously everything seems to be on track, if anything ahead of schedule. What your longer term targets are in terms of the volume levels?

Well, you know, part of this is -- talking flat-rolled or high-performance?

high-performance metals, yes.

What we've said is we hope -- we hope that as we go forward with these expansions, and let's just take a unit for unit expansion we're talking about by 2009 being 40 million pounds of our own internal-generated titanium units, I would hope that he is all incremental to our current business.

Okay.

We're not looking to replace any of our outside suppliers. We're looking to grow into this business. When I say that we believe that the titanium global market opportunity is very large, that's exactly what we mean. It is very large with the opportunities in several different market segments. So it's a question of how we position ourselves and where we are.

On our super alloys and nickel-based alloys, what we've been able to do is to bring our lead times in on those products because we had more capacity. So our lead time have come in a little bit and which is, I think, really good in the sense that we're better able to serve the demand in this market and whatever we're able to do in that, I don't have the numbers sitting right in front of me, it's going to be some incremental improvement.

But I don't really think in terms of estimating what our company's overall benefits are going to do that it's a big change from the third quarter. It will hopefully be a little bit better.

So third quarter to fourth quarter, you mentioned the long term, how about third quarter to fourth quarter? Because obviously you have the production schedules, I'm sure, probably in front of you.

What I'm just thinking is obviously with the new new melt furnace, not only for titanium but for the nickel based alloys that there could be incremental volumes from third to fourth quarter, I'm just trying to put in perspective, the nick based alloy side considering it was down sequentially, what kind of uptick we might get in terms of those businesses.

I think where we are it's going to be marginally better, but we've got holiday season to go through, part of these whole quarter to quarter things number of work days that you have in the quarter. And as we at the time into the end of the year, we've got -- we will take our normal holiday shutdowns around the Christmas holidays and over Thanksgiving. Everybody needs to have some life. We've been running our facilities very full and I expect we're going to run them very full throughout the end -- to the end of the year and as we look at that, I think fourth quarter is similar to the third quarter, maybe a little better.

Terrific. Thanks again.

And your next question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Most of my questions have been asked just a couple of quick things.

The LIFO charge in 3Q -- was that a catch-up in there that you are taking less charges in the beginning? Has your price perspective changed and what are your thoughts for the fourth quarter?

Hi, Sal, this is Rich Harshman.

This is a catch-up. As you know, we try to project a lot of elements, what they're going to be on average in the fourth quarter, we do that throughout the year. Every quarter we revise those estimates in terms of quantities and inventory as well as individual raw material, element unit costs. Obviously, we did not, in the second quarter, we did not nor do I think anybody expected nickel to run up as much in the third quarter or where it is today. So part of that was a catch-up on the nickel LME and the impact opposite our inventories and on our current-year index.

At this point, you know, the numbers would suggest because we're booked at about $107 million of the LIFO charge for the full nine months across the company, that that would suggest about a $35 million LIFO charge in the fourth quarter, which is about $20 million less than the third quarter. However, the same issues potentially exist in the fourth quarter and we have a comment in the earnings release that with the volatility of certain raw materials, especially nickel, there's a possibility that the LIFO charge in the fourth quarter could be the same as in the third quarter.

All right. That was very helpful. Thank you.

Also, what is your typical mix on your titanium between sponge and scrap? How much sponge to scrap you use when you go to the furnace?

It's not a number that we normally disclose but one of the things that is -- one of the cost benefits of the technology of this company is the ability to use more scrap than what people normally use in this business. Many of our competitors are using a very large percentage of sponge to scrap and we have the ability use more scrap and, therefore, expand our overall capacity. As we look at these market and we look at the availability of scrap and the kind of scrap that available in the overall marketplace, then we make decisions basically on a week-to-week basis as to what is the best fit in our overall efficiencies in using our own internal sponge versus buying in the open market. A lot of it's got to do not just with our ability to use more scrap but today at the price of that scrap in the open market.

So as you start to produce more and more in-house sponge when probably you have a better cost than the -- than what you're buying or what your contracts are holding over, you probably will be shifting more towards sponge, you think?

We have an opportunity to have a better cost and as long as we are production constrained anyplace, then of course we would do that. But we would expect that overall if, in fact, we have an opportunity to generate more milled products then we'll be buying -- we'll go ahead and pay the price and buy the scrap. So it's a call as to the product mix we have, the furnaces that are open as they come from a normal production schedule on a day-to-day, week-to-week and month-to-month basis and how our contracts and reverts metal is coming back into the system. So one of the things that I think is a real technology of ATI is the ability it manage these things. Several balls in the air like a great juggler.

And lastly, actually two more.

On electrical steel, how are your contracts, do they roll over yearly or staggered across the year?

We've been able to generate a good portion, now, the highest portion of our contracts are now a year or longer.

And when do they generally roll over?

I didn't catch that.

When are they rolling over?

They've been rolling over and basically they're all at current market prices or moving up.

Okay. So you're getting the full benefit of the price increases --

We'll continue to increasingly get the full benefit of the current market conditions as the contracts roll over, we'll continue to get the benefits. We'll have more benefits next year than this year and more benefits the following year.

And lastly, when you guys put out your press release for the first phase expansion, in that press release you mentioned that 7.5 million pounds, produce about $400 million of additional revenue. If I use 50 or 40 or 50% ratio, that comes to about $17 to $19, sort of a price for titanium which sort of looked like your long-term pricing estimate at that point. Has this thing -- has this moved up yet with all the escalation we have seen since then?

Well, we're very conservative, but I'll let Rich Harshman answer that for you.

Yes, Sal, the time we put that release out, that was basically the average price of the milled product mix that we had at that time. Obviously it a lot different today and to your question earlier, the ultimate determination of what your milled product shipment is out of that 8 million pounds of sponge depends upon what your blend is in scrap and sponge and what your yield is from melt down to the final product form. And our preference is for that to be billet or bar. So you've got to take all those factor into account but clearly the price today of titanium products is much higher than it was when we put that number out announcing Phase I.

Thank you very much.

And your next question comes from the line of Brett Levy with Jefferies & Company. Please proceed.

Hi guys.

The only question I have left really it relates to volume, can you sort of break down by product group kind of where the volumes kind of had a shortfall, why the shortfall occurred relative to previous quarters, and when that's going to reverse. I mean, I'm guessing that has something to do with raw material shortages or something like that, but just sort of talk about the volume situation?

We at no time really see any volume shortfall.

Part of what -- if you're talking about engineered products part of that is simply the third quarter is not the strongest quarter that we have and there's some decisions that we make about what product we're going to sell and not sell. On the flat-rolled product side and high-performance side, the only issue that we had of any place at all would be what our operations put out. We're not -- we had our normal maintenance periods as most companies have. We planned for those, we work though those. I'm pleased to say the operations did a marvelous job and we continue to upgrade the mix to the higher end products wherever we can. We're not really looking at the businesses in terms of exactly targeting pounds, we're targeting dollars.

And you think the volume situation is going to reverse itself in the fourth quarter?

I don't think the volume situation is a problem for us.

I got you. Thanks very much, guys.

Thank you.

And your next question comes from the line of Scott Blumenthal with Emerald Advisors.

Good afternoon, gentlemen.

Hi, Scott.

Congratulations on the quarter.

Thank you.

I thought I was going to be the first one to get a question into Rich, but Sal beat me.

Pat you mentioned that you're continuously trying to prune out the lowest value product and put higher value ones in front of them. And I looked at the average prices for the flat-rolled product. And if you look at a total blended flat-rolled products average to the quarter, it looks like prices were up about 17% but they were also up 17% in just the high value. And so it would appear to me that there's very, very little commodity going through there. Is that a good assumption?

No, we're actually -- we're producing very well through cold rolled sheet two quality products. But when we're getting down to particular businesses, we're getting into the plate business and some of the others, we have been selectively moving toward the higher value products across the board.

So the other thing I think you have to look at, Scott, in total is that we did produce I think more tons continued to be produced on the commodity path and it's been a very good sub business for us with the current pricing.

Okay.

You've probably mentioned this on one of the previous calls or maybe even earlier, but could you remind us how much of the total titanium volume you're going to reprice in the current year?

Al well, we have about 85% normally under contract, and I think we've booked most of those contracts, I think we have about 30% that we're still moving on. So we probably have another repricing of maybe 30-40% for 2007.

Okay. Great. That's really helpful of one more, if I may.

One of your competitors recently announced an expansion of electrical steel production and I know that you just mentioned that you're kind of running full out there. Do you have any opportunities to expand that or are you so inclined?

I think it's a great question. I think we need to take it apart and look at it.

Okay. Great, thank you.

Well, thank you.

And your next question comes from the line of Dan Wademan with Bear Stearns. Please proceed.

Good afternoon everyone.

Good afternoon, Dan.

Just a quick question from more of a strategy perspective. Within your high-performance metal segment and its aerospace exposure do you see more of a balanced mix between the air frames and engines versus a mix which is more geared towards engines right now? And then secondly, do you also see more of a balanced mix between your exposure to Boeing and Airbus, two to three years out time frame?

Great questions. Obviously our core businesses up till this major change in hour airplanes are being made, have been the jet engine business. We intend to maintain our shares of that market or grow those shares of those markets where we are today. And all these new air frames and new airplanes need new engines and the airplanes are bigger and the engines are bigger. And the more people are flying and those are spare parts and that takes more cyclicality out of that business. We love the jet engine business and we're going to continue to be exactly what we've always been to the jet engine suppliers. The opportunity then comes in the new air frame.

Air frames take more material. They take more tonnage. And I think the mix then shifts over as you participate both on what I'll call the air frame side of the business and then the jet engine side of the business, certainly the overall titanium business is going to be much larger and there is actually more pounds of material involved in the air frame where the air frame could, from a overall tonnage standpoint, become a larger portion, but the product mix in the jet engine side is a more upstream as you go into the long products. So you have a higher priced items.

So they're both important to us, both will be core and I don't discount our ability to participate in the other segments of this business, in medical and in aerospace defense, and military projects are also another pillar of this thing. So there is a great expansion platform from jet engines to commercial air frames to military program, to defense and armaments, to medical, to heat exchanges, to infrastructure builds, to oil and gas and it's just a question as to how big do you want to get and what fits your asset base. Boeing and Airbus are both great customers of ours. Obviously now with the latest Boeing contract, Boeing is a bigger customer to us than Airbus is, but we continue to supply both major air framers, we would intend to be a supplier to both of them.

Okay. Great. And congratulations on the quarter.

Thank you.

And your next question comes from the line of David MacGregor with Longbow Research. Please proceed.

Thanks for taking my call. Congratulations on a great quarter.

Thanks, David. How are you?

I'm well, thank you.

I wanted to just get some impression from you on sort of your thoughts over the long term price trends, the titanium conference in San Diego a couple weeks back, you had the chief procurement officer from Boeing stand up and say that if the industry doesn't get pricing down and volatility down within the next year or so, he was going to begin designing titanium out of the commercial air frame franchise or business.

My sense is there's a little bit of saber rattling there as opposed to a real threat but I'd be interested in your thoughts on that, and just how does the titanium industry get pricing down to where your customers are satisfied you guys can live sort of together and applications can grow on a product that's more easy to design into products?

Well, of course I wouldn't speak for the air frame executive, but as we have just announced, the major contract with the Boeing Corporation is a long-term contract, that contract runs from 2008 through -- 2007 through 2015. So obviously with the amount of pounds involved in that, I think the airplane's going to be using titanium. So I think the issue of whether it's going to use titanium or something else is certainly not a question. That contract wasn't signed, I don't think, until after that particular conference.

Going forward, we intend to continue to make the kind of investments in this business and generate the kind of recoveries and values for our customer base where titanium is the preferred material.

You're probably aware of the numbers that were presented at that conference.

There's a very substantial build in sponge capacity worldwide over the next three years and so that would, in any other basic materials industry, precipitate price declines, scrap markets are rolling over, spot sponge rolling over a little bit, I'm wondering, all this with Boeing leaning on the market at least verbally, what the outlook over the next 12 months, do you foresee some sort of a correction back to a more normalized mid cycle type of pricing?

Dave, I can see where there's a -- lots of this is a market where there's lots of different people trying to evaluate exactly where it is.

When you look at this market and you look at the ferro- titanium business, that's tied to the carbon steel business, to the automotive business and the usage continues to grow higher as more and more cars you made, and I'm not just talking U.S. market, let's talk the global market, the Chinese come into this business and globally cars are being sold and made in record numbers around the globe.

Secondly, as we look at the usages of titanium and the infrastructure build, there is absolutely no question that this is the material of choice and it needs to be made available. With particular scrap markets that you're talking about really are the markets that are related to ferro-titanium kinds of things. When you're looking at solid scrap or scrap used for markets like we're talking about in medical, aerospace, oil and gas, defense, those market prices for scrap have not come down at all. In fact, they're still at $18, $19, $20 a pound for good solid scrap. We have to look at what kind of scrap are you really talking about, what's the end use that it's going to? That's the second point.

The third point is that the overall market for titanium may be way underestimated by many people today.

Have you thought or have you done any studies on elasticity in terms of if pricing were to come down by a certain increment what the growth in demand might be?

No, we haven't had time to look at prices coming down. We've been running hard to meet the contracts and to grow into the segment. The thing that I do like about our company today is that we're offering good value, we're offering reasonable prices for the value, and we're and to obtain long-term arrangements that have price guarantees in them.

Good. Thanks venture and you guys continue to do a great job.

Thank you.

467 and your next question comes from the line of John Tumazos of Prudential. Please proceed.

I want to congratulate you on the huge volumes of commodity stainless or commodity flat-rolled, excuse me.

Yes, John, thank you.

Near a million ton rate.

Yes.

In the last two quarter, and total flat-rolled looking like it's going to be 1.4 million tons. Could you walk us through the -- how much of that's being melted at Natrona of Allegheny and how much at the old Midland, formerly J & L, and if any of that was sold from inventory and what you think the theoretical maximum is?

John, you're a tough guy.

I -- it looks like you discovered a new melt shop in the second and third quarter of.

Well, Natrona is not contributing a whole lot other than that we do melt our electrical steel in one melt shop. We've been able now to optimize the two melt shops in between Midland and our Brackenridge plant. We have a very talented guy running that business and we have a guy that's been able to help us balance these loads out, we have very, very strong melting managers, I've been impressed also with what these guys have been able to do in delivering costs and recoveries and yields and great products. Our hot mill is running at 18 shifts a week and our automated finishing line in Midland is really pumping an excellent product out with our 13 guys a shift.

So you're -- are you rolling this all in the one hot strip mill, the 48 wide hot strip mill, the traditional hot strip mill of Allegheny?

We're rolling all of the commodity products there, yes, absolutely.

And the high value, where is that rolled?

Well, the high value could be rolled on our stuckle mill in Houston, if it's a titanium product. It can be rolled on the hot strip mill that's in Brackenridge, where most of it is. It's rolled opposite our plate mill in Washington out of slab that's produced in other parts of our system out in Washington and Oregon, and down in -- up in New York in -- and out of Latrobe. So we have a system that is running pretty well at the moment, and very excellent performance being paced out of these mills, out of our coal mills, out of our automated finishing line and excellent job out of the melt shops. And the bottom line is that all this turn around and all this consolidation, about one-third of it's price and about two-thirds of it is cost reductions and excellent performance.

What was your biggest month for production and your biggest month for sales -- trying to get an idea as to whether you discovered two new steel mills or three?

John, I don't know how to answer your question, but it's, you know, we're producing about 1.4 million pounds, and these --

You mean tons.

No, no, pounds, we mean pounds, we're still at about 700,000 tons. Pounds. No.

In the surge in volumes in the second and third quarters, what were the best months for production?

The best months of production throughout the third quarter, I would guess, would be the August month and the September month.

Thank you.

Okay.

And your next question comes from the line of Sanil Daptardar with Sentinel Asset Management. Please proceed.

Hi.

I just wanted to know your thoughts on how long the price increase will continue and price appreciation will continue in terms of the product? Where do you think that there would be an inflection point at that point where the prices would not go further up?

Well, you know, that's always a question that is on everyone's mind. I think in our high-performance metals we're very satisfied with the current pricing levels. I think as we talked about in some of the longer term contracts that there will be some moderation but overall the prices will be in the ranges that you see today or close to those ranges. I think the current pricing in the flat-rolled products business in terms of commodities is certainly stable today. I'm not sure it's at the high point but it's certain not looking hike we're looking at price increases in the short term. high-performance metals in flat-rolled side have some more room in them, I think, in terms of what the overall demand would be. Prices in electrical steel continue to be solid and are moving up. So we might have some additional margins someplace but pricing is very good where it sits today.

Okay. In terms of your stainless steel products business, is it possible to separate the two between how much of the price increase is from surcharge increase and how much is actually related to demand?

The prices that we're talking about are all base price increases. The total prices are up substantially when you add all the surcharges into them, they're up in a dramatic way. Again, most of the the overall end customer price increases that have been experienced in the marketplaces are due to material escalations.

OK

There was a question also whether you were worried about whether oil or gas prices would go down, what would happen to your demand picture, but looking at what the companies are doing, some of the companies are starting to announce drilling cutdowns in '07 budgets, if that happens, then there might be an excess of capacity of rigs stainless steel going into '08. Do you think that's going to materially affect your business in the oil and gas sector?

I think the oil and gas sector today for us is being driven by the projects that you're talking about. There's new offshore drilling, there's drilling around the world in various difficult areas that use our products. And there's also this requirement on the ethanol side in the U.S. market that's trying these ethanol plants that will certainly continue through 2007 and into 2008. As we move from portions of the sector back and forth, I don't see any real influence on our particular business, at least through next year.

Okay. And one more last question on the chemical process industries -- how long do you think the demand strength will continue in that industry?

I think the chemical process industry is absolutely linked to the infrastructure build and the GDP of the global economies. As long as the Asian economies stay, the Indian economy continues to move, the U.S. economy, Middle Eastern projects, including desalinization and other growth projects in South America and around the world, I don't see any change in that for the next several years.

Okay. Thanks a lot.

Thank you.

And your next question comes from the line, as a follow-up, Tony Rizzuto with Bear Stearns. Please proceed.

Thanks, Pat, thank you very much. There's more of a strategic question.

That would be, there's a move obviously internationally by a lot of the metals and mining companies to become more diversified. You guys already have a fair amount of diversification in specialty metals and materials, but I'm just wondering for the longer range, do you feel the need to be in other types of materials as you see some of the shifts taking place within some of our end markets, specifically arrow, moving more partly cloudy skies composites and titanium. But is there any need -- and I say that, you know, given your background at Alcoa for a long time, and the move that that company made towards diversification. How do you feel about that in general?

Well, Tony, I -- I'm kind of a guy that says we kind of stick to what we know best. And I would have to be convinced that there's been a structural shift someplace that requires this company to move into advanced materials outside of specialty metals. What we know is specialty metals and it's a very large segment of this growth around the world.

Right now we're sticking to the knitting of what we know well, our investments and the money that we have to invest is best being spent in the basic business that we have and there's other opportunities, I think maybe within the same industries that -- to expand what maybe our product offerings are moreso than into composites or those kind of other materials.

I'm very happy to hear you say that. I have one more question. And the question is regarding your labor situation. Are there any labor expiries that are coming up in '07 or '08?

We have our normal steelworker contracts coming up in the middle of 2007- for the flat-roll products businesses and of course today we will pursue those with the did I intelligence we always do. We have a good relationship with the steel workers, we have a lot of respect for their positions and what they've done. And I think we'll do just fine in terms of working together to find a reasonable and good solution to both sides of that.

That would include at the Ludlum side of course and the deployment with the J & L operations, you're all set there, I believe; is that correct?

We're all together, that is one contract.

All right. So all of that's coming due.

All of that's coming due at the end of June.

All right. Thank you very much.

Thank you.

Ladies and gentlemen, it now conclude the question-and-answer session. At this time, I would turn the call over to Mr. Greenfield for closing remarks.

Thank you. This is Pat Hassey.

Thank you all for joining us today, I think it was an interesting discussion. We appreciate you being here. We appreciate your continuing interest in ATI.

And that concludes our conference call today. Thank you.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day.