ATI Inc (ATI) 2006 Q4 法說會逐字稿

Welcome to the fourth quarter 2006 Allegheny Technologies conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to your host for today's conference, Director of Investor Relations, Mr. Dan Greenfield, please proceed, sir.

Thank you, Candice. Good afternoon, and welcome, to the Allegheny Technologies earnings conference call for the fourth quarter and full-year 2006. This conference call is being broadcast live on our website at Allegheny Technologies.com and on CCBN.com. Members of the media have been invited to listen to this call.

Participating in the conference call today are, Pat Hassey, Chairman, President, and Chief Executive Officer, and Rich Harshman, Executive Vice President of Finance and Chief Financial Officer. After some initial comments, we will ask for questions.

Please note, that all forward-looking statements made this afternoon are subject to various assumptions and caveat as noted in the earnings release. Actual results may differ materially.

Here is Pat Hassey.

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

Our strategic goal for 2006 was profitable growth. I'm pleased that we delivered on that goal. 2006 was a great year for ATI, sales reached over $4.9 billion, an improvement of 40% compared to 2005.

Operating profit improved over $1 billion, nearly double last year's results. Earnings per share reached $5.59. These results were achieved even with a LIFO inventory valuation reserve charge of $197 million.

Said in another way, without LIFO, our segment operating profit would be 20% higher. More reflective of future earnings power. To get some perspective on ATI's growth, sales in 2003 were 1.9 billion, in 2004 2.7 billion, and in 2005 3.5 billion. Add another 40% in ATI's 2006 sales of 4.9 billion reached another growth milestone. We believe ATI continues to be well positioned for sustained profitable growth.

In 2006, we generated strong cash flow to support our self-funded growth strategies. Cash on hand at the end of the year was $502 million, an increase of 140 million from the end of 2005. This cash position is after 534 million, invested in managed working capital, 235 million invested in new capital projects, 100 million voluntary contribution to our defined pension plan, 43 million paid in dividends.

Keep in mind, we increased our dividend in each of the past two years. And as a result of our strong earnings in cash flow, ATI's net debt to total capitalization at the end of 2006 is only 3.3%.

Two important financial metrics used to measure our performance were outstanding for 2006. Annual return on capital employed was 34.5%, and annual return on stockholders equity was 50%. And of course, these are both after tax measures.

While 2006 was a record year, we believe we are still in the early stages of growth. We continue to build a foundation for further profitable growth. First of all, our major markets are strong. Secondly, our businesses are delivering on their operating plans. Third, several long-term customer supply agreements are now in place. Fourth, we're growing our presence in sales around the world. Fifth, we plan to spend 4 to 450 million in 2007 for capital investments that support our growth initiatives.

That is new titanium sponge capacity, new titanium and nickel-based alloy melt capacity, new plate capacity, and new forging capacity. These capsule projects are self-funded.

My comments during today's conference call are focussed on two important drivers. First, recently announced capital projects and their accompanying long-term agreements. And secondly, our markets and our products.

First, let's review recently announced capital projects and long-term agreements. In October 2006, we signed a long-term agreement with Boeing. Valued at approximately $2.5 billion over the next 9 years. Under this LTA, we provide titanium products for the Boeing 787 Dreamliner and other Boeing aircrafts. A significant portion of this contract is for the supply of titanium plates.

On January 17th of this year, we announced a $60 million investment to expand our titanium and specialty plate facility in Washington, PA. This investment helps to illustrate the transformation of ATI and the direction in which we're going. The plate business has traditionally been a stainless business with some specialty metals.

Today this is a specialty plate business with high value products, including the titanium driving nearly 75% of total plate sales. These sales are to the chemical process, oil and gas, electrical energy, defense, and now the airframe markets.

The expansion at our plate facility is an enabling strategy. It allows us to continue to grow our existing plate business, plus grow into the airframe market.

On January 22nd, we announced a long-term sourcing agreement with GE aviation, valued at approximately $2 billion over the next 5 years. This agreement calls for the supply of our premium titanium alloys and nickel-based superalloys used for commercial and military jet engines.

ATI has been a preferred supplier to GE aviation if many years. Because of this unprecedented aerospace cycle, we both decided that a longer term agreement is in the best interest of both companies. We value our partnership relationship with GE aviation and expect it to continue to grow in the future.

Yesterday, we announced the further expansion of our premium titanium and nickel-based superalloys melting and forging capabilities. The total cost of this 3-year capital project is approximately $215 million.

This strategic growth project further strengthens ATI's leadership position in the production of technically demanding premium titanium and nickel-based superalloy long products.

This investment at [Inaudible] enhances our ability to meet our customers' current as well as future technical requirements and increases or creates a new and broader platform or capability for further innovation. As you can see, we're staying in front of this aerospace cycle.

In addition, these investments also support further growth in our other key markets. Bottom line, ATI's truly investing and building the world's best specialty metals company.

Now some comments on ATI's markets and products. While most of our focus for the conference call today is on the full-year 2006 and our strategic outlook, I will highlight some of the accomplishments from the fourth quarter 2006.

In the high performance metal segment, our strategic capitals projects are beginning now to have an impact. Comparing the fourth quarter 2006 to the third quarter 2006, quarter on quarter shipments of titanium alloys increased 15%. And shipments of nickel-based alloys and superalloys increased 6%.

In the flat roll product segment, our strategy of redirecting the business, the specialty metals is paying off. Our flat roll product segment recorded its second straight quarter of over $100 million in operating profit. This was achieved even with extremely high LIFO inventory valuation reserve charges for both quarters. In our engineered products segment, we had a reasonably good fourth quarter. Segment operating profit continued to be adversely affected by the high cost of raw material, basically APT, which offset increased sales in our tungsten products business.

Our new APT plant is now up and running. And as we said, its cost structure significantly improves operating profit.

On another note, our U.S. qualified defined benefit pension plan is essentially fully funded at the end of 2006. As a result, retirement benefit expense is expected to decline by $50 million in 2007. So 32 million in 2007 verses 82 million in 2006. This is significant because the pensions funded status previously had a significant negative impact on our balance sheet. Hitting our qualified defined pension plan to fully fund its status was a key goal of our 3-year plan to fix this balance sheet.

Now looking forward, we currently have good visibility of demand for our products and for most of our markets. In the high performance metal segment, the aerospace and defense, chemical process, oil and gas, electrical energy, and medical markets all look strong with commercial aero engine and airframe ramping further.

In the flat roll product segment, our grain oriented electrical steel business is essentially booked for the next two years with higher contract prices than we realized in 2006.

The specialty plate business is busy with global activity remaining very brisk. That business unit is focussed on optimizing mix to maximize profitability, schedules remain extended.

The specialty and titanium sheet business is busy with strong demand and growth in the key markets we previously discussed. The precision rolled strip business is positioned to have another solid year.

For the commodity stainless sheet business, the record high cost of nickel and the resulting raw material surcharge is causing some of our domestic service center customers to be conservative with their inventories in the first quarter of this year. In short, based on what we hear from them, some of our service center customers are buying less stainless steel than they are selling. Demand for venues markets does remain good. We expect to offset much of the domestic service center inventory management actions, firstly through market penetration of our low nickel 201 alloy and secondly by selling stainless steel sheet in the stronger global markets.

In the engineered products segment, business conditions in our tungsten products business remain good. And our new APT plan is now producing 100% of our needs.

The forged products business is growing its presence in construction and mining, oil and gas, electrical energy, which should offset an expected decline in demand from class-A trucks.

Opportunities from the market are driving further growth in our castings business and demand for locomotive engine blocks is good. Demand remains robust in our titanium precision metal processing conversion services.

So, before we take questions, summarizing my take-aways from this. Our key growth markets are strong. Operating margins are being sustained or are increasing. The flat rolled products business is demonstrating new earnings potential and it's globally positioning it for less [Inaudible]

I expect the first quarter, without extremely high LIFO influences, to be better than last quarter. Important long-term agreements are now in place. We are investing for our future, creating new and larger platforms for sustained profitable growth. We like what we see in our major markets and believe ATI is positioned and on track for another revenue and earnings growth year in 2007.

Candice, we'll now open the meeting for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question will come from the line of Tony Rizutto of Bear Stearns. Please proceed.

Thank you very much, good afternoon, gentlemen.

Hi, Tony.

Hi, Pat, Hi everybody. Just a couple of questions here actually. First of all on the nickel-based and your specialty steel alloys volume came in a little light bit verses our forecast. Are you seeing any adverse impacts on demand due to the high nickel price in this area?

No, Tony, actually I think there may be some shifting around in shares. But with the agreements that we had in place now, both some of the important ones and other agreements for supply, we're actually on the same track we were last year in 2006 for growth in the overall business, especially on the jet engine side, it takes the nickel base superalloys as well as titanium to make an engine. And we see both of these market segments very robust for ourselves.

Okay. And then on the pricing side, just regarding our model. I mean, you experienced some deterioration sequentially in the average price realization on your titanium mill products. Was there due, perhaps to a shift in mix, maybe related to your production ramp-up or other factors? And can you provide some color on this, Pat?

Absolutely a shift in mix to more ingot for titanium suppliers, especially toward the airframe. Getting the prototypes out. We produced more of an ingot mix and less of some of the other more differentiated products in the last quarter. But basically, if you look at the total return for the segment, you can see that the margins were at 38.8% and that overall growth in that segment continued to ramp and that drops right into earnings per share.

All right that 38.8, you back that to LIFO? In order to get to that number?

Yes.

Do you expect some further, some mix -- how would you describe the mix as we have headed into 2007?

I think very, very similar to where we are. We continue to try to push for more[Inaudible] -- we could see some -- if we accomplish some of the things we would like to do, we could see some movements even higher types of shapes than those kind of things as you get to more near net size. I think it's a developing market for us and a developing market segment in terms of the product mix. But overall, we're with the assets we have in place and the facilities we have we're still -- we're still optimizing the output of the assets we have.

So, if I've been looking at and thinking about the HPM kind of margins, we should not necessarily be looking for any falloff even with these new contracts in '07?

My take on this is that the margins for strong for '07 and through '08 and we'll have to look at exactly what happens beyond that as we get more and more pounds into this thing. So we're still ramping and it's very tight and the margins will stay right up there.

Thanks, Pat. I'm going to go back in the queue. Appreciate it.

Thanks very much, Tony.

Our next question will come from the line of John Hill of Citigroup. Please proceed.

Great. And congratulations on the strong result. It's great to see a vision, finally or continuing to translate into the bottom line.

Thanks, John. Finally and continuing two good words.

Excellent. Just wondering if we could get a little bit more clarification on the recent CapEx announcement of 215 million. It seems several announcements in a row. Does this essentially bake the titanium and nickel pie that's already in front of us? Or does it make it bigger? And should we be looking for continued slugs in CapEx, or is this pretty much the picture?

I think that there's two things. One, this is -- this is a business that as we've said all along, we need to continue to ramp with because how we, how we grow in this business with our assets running, if you take our assets from a couple years ago and look where they're running. The assets we're bringing on now, each time we bring up an asset, it goes to full utilization. So we're growing in the overall volume of these businesses. We've taken on these long range agreements to supply large shares to customers. And as I look forward, we need this capacity as we -- the last 215 million. You're talking about the forging and the [Inaudible] forge and finishing expansion for all, I'm assuming that, right?

Yes.

Okay. So once we get in through the 2008 and we're into 2009, our feeling is that we're going to begin to see even further airplane programs come to us as we look at the ramping up of the exbody [Inaudible] , thereby the results of the number of airplanes that are currently flying in the fleet with spare parts and very hopefully a new single aisle aircraft coming onstream in the next three years from that date. So when we look at these kinds of opportunities, when we look at this kind of growth, we need the capacity. Secondly, when you look at the ability to take now, we'll have the most unique, highly advanced, and largest low path for these kind of applications and a 10,000 ton forge press, a 700 millimeter rotary forge and the complimentary finishing facilities. This allow us to expand, not only our capabilities, our technology, but also the platform in total value that we're offering to this market. And we intend to grow this market continually to move on to same rate we're at. You take those projections and move them forward, it's not too difficult to come to the fact that we're going to double our titanium business by 2009. When you do that, you need these assets.

Understood, understood. That growth certainly costs, but can you give us a clearer picture in terms of titanium and nickel volumes over let's just say '07 and '08. I mean there must be a set of business justifications behind this. I know that volumetric inputs are an area that you don't normally like to tread in but could you give us some ideas of what you're looking for from, again, the specialty plate, which was a 60 million and then this 215 spread over the next couple of years?

Well, the specialty plate business is a business that is going to double its output of specialty plates, more than double its output of specialty plates by the end of 2008 as this operation comes online. And it's a situation we're not willing to give up any of our other markets and our other products that are specialty products in order to grow into this airframe business. It's just the doubling of what we're doing. On the -- on the fortune side of the business or the long product side of the business, I'm saying that we're going to take, if you look at our numbers today we're showing 27.4 million pounds of titanium shipped in the high performance metals section. There's about another 4.5 million pounds being made in the flat roll products side. So let's say that's 31 to 32 million pounds. That number, I'm saying you can draw a straight line between now and the end of 2009. To double that capacity shipped, double more products shipped.

Great. Great . And I guess I would just emphasize that as we go forward, do you think it will be valuable to continue to feed volumetric input to the street. I think you as a management team have certainly earned the right to say we've got a plan we can execute. It's going to work, you've certainly earned that right. But the investors have been with the stock since $20 to currently, probably also earned the right to more granularity in terms of how we get from here to there. It's definitely a different stage of the game.

We'll talk all that we can. We have agreements with people and numbers that are confidential in some areas, but I think the growth projections that I gave you are very solid.

Excellent. Thank you.

Our next question will come from the line of David Lipschitz of Merrill Lynch. Please proceed.

Yes, thank you. You talked about your electrical steel and contract prices being high. Can you give us some sort of, you know, some type of percentage, are we talking double digit increasesor anything like that? Can you give us some type of, so we can wrap our arms around the types of increases?

We're talking double digit increases for 2007 and double digit increases again compounded in 2008.

Compounded in 2008. Okay and how many shipments of those do you do a year approximately [Inaudible]?

Somewhere around 115,000 tons.

Okay. Any thought of expanding those businesses?

Not at this time. We're working on our existing capital base and we're getting a lot more out of the capital base than what we had before. So, if we can find incremental volume and incremental capital that would move that business forward, we will do it, but basically we are a player in the grain oriented side. And in that, in that 100 to 120,000 tons, maybe we can push it a little bit more, but it's in that range.

Thank you.

Our next question will come from the line of Sal Tharani of Goldman Sachs. Please proceed.

Thank you. Quick question on these new projects. Can you identify or quantify how many new employees you will be taking in for these new projects?

I don't think that's been decided yet, but we're all of this will move with whatever we have in our new labor agreements. You know, we have much more flexibility today and we are operating with more productive -- more productive workforce and a more flexible workforce than we did as say a base year of three years ago or prior to the 2004 contracts. So whatever we do, it will be right in line with the productivity that we have today. We're not talking about hiring a lot of people. We're talking about incremental workforce increases with the latest state of the art equipment that we can install.

Okay. And have you, given the base price increase you saw quarter -- year-over-year in the stainless steel?

I'm not understanding --

You gave us the price increase including the surcharge, but what are the base price increase year-over-year? On the stainless steel flat product?

Yes, well, if you, this is Rich Harshman, if you look at the end of 2005 compared to the end of 2006, you're talking somewhere between 25 and 30% increase in base prices. All those number of base prices were announced throughout 2006.

Great. That's all I have, thank you very much.

Thank you.

Our next question will come from the line of Kuni Chen of Bank of America Securities, please proceed.

All right. Good afternoon, everyone.

Good afternoon.

Just a quick question. If you could just give a little bit more granularity on the capacity announcement at bakers. You know, what's the melt capacity there now? And where does that go by the end of '08? You know, that's 50% increase or if you could just either characterize that in millions of pounds or percentage increase?

Well, let me just give some clarity around that. This is basically a major increase, more than doubling our forging capacity and rotary forge capacity. We've announced also a fourth generation a fourth plasma arc melting furnace. We're bringing on our third plasma arc melting furnace now. Those three furnaces will run in concert until we bring up the fourth furnace then we will take the oldest furnace out of service for a rebuild and so by the time that the forge capacity comes up in 2009, we will then have the full four -- full capacity of four plasma arc melting furnaces in operation, but it won't be until 2009 when this thing really ramps. I think it's safe to say that when you look at coming from two furnaces, which we run today, plus the complementary vacuum arc furnaces and then add two more furnaces in 2009 and the capacity for finishing rotary forge and forging, we're doubling the capacity of that plant in 2009.

Okay. Great. That helps. And on the stainless side of the equation, I know in June of this year, you have a renewal coming up with the [Inaudible] workers, if you could give give us some color on kind of, you know, what your plans are as you begin that process. You know, when the two sides start to talk?

Well we're under -- we're in early negotiations with the steel workers now and that's the only comment I'll make on that. It's currently underway.

All right. And then just one last question. Any color you can give us on the kind of outlook for nickel and what you guys are looking for this year?

I was hoping you could tell me. You know, it's very hard to imagine that nickel had moved to $16. It's even harder to believe where it is today. So, we don't believe, if we were to forecast that now, I don't believe that we would see anywhere close to the same LIFO kind of impact that we had of $200 million in 2006. I think it's going to be a fraction of that.

Okay. Great. Good luck in the quarter.

Thanks very much.

Our next question comes from the line of Scott Blumenthal of Emerald Advisers. Please proceed.

Good afternoon, Pat, Rich, Dan.

Hi, Scott.

This was the first time in a while that you haven't at this time of the year talked about kind of ATI business system improvements and cost reductions. And I was wondering, you know, what do you have planned for the year, in that part, you know, with that piece? And also if you can talk about, you know, what $50 barrel energy cost is doing to your operations as compared to where you were, kind of , you know, this time last year.

Well, two things, Scott. First of all, thanks for reminding us on the cost side. We've never stopped, the cost reduction programs are still in full force. In fact we've added resources into all of our businesses over the last three years. The results are, if you could take a look at the track record of moving from about 100 to 126 to141,000 in cost savings this year, -- a million, I'm sorry. I guess it matters here. 141 million that we're making more progress as we continue to put these efforts in place. We're now moving into a lot of the areas where we'll call predictive maintenance and getting a lot of benefits out of better utilization and more efficiency out of the equipment. So all those programs are in place. I'm sure that when we look at our 2-7 plan we will very much stay with our $100 million range as an estimate for cost savings. I hope we far exceed that.

Okay. And can you talk about the kind of the energy question what's that doing for your operations right now? And how do you look at that compared to the way that energy cost, the energy cost we we're seeing last year.

Well, there's a portion of our operation that is on flexible energy costs that are moving around and there's another larger portion that's been negotiated under longer term arrangements. So I don't think we're going to see a significant savings or shift in energy prices for us.

Okay. And one last one, if I may. Commercial construction as an end market, obviously, you know, we see drastic year-over-year increase in commodity stainless. A lot of that, I know gets consumed by commercial, commercial has been pretty strong. And if you can speak to that as an end market and what you're seeing there.

Well, there is markets, of course in that you're talking building and construction appliance and street remodeling. We still see those markets as pretty good. What's really been driving an unusual and great reward for us is the oil and gas chemical industry and also the ethanol project that continues to run and probably will run very strongly through 2008. So we continue to get good benefits from the capital side and the capital investments in these markets as well as the general distribution or appliance type markets. Basically, the automotive market for us is not a huge market, but the parts that we have on it we like in terms of turbo chargers, or couplings, or bolt clamps and we have less business in the emissions controls or exhaust business than what we used to take. And so basically, that market looks relatively good to us too. So where we are is we're getting a lot of interest and a lot of growth in the 201 high performance alloy that's been developed by Allegheny over the last several years that is around for a long time. When you talk about savings and being able to change and reengineer a product from 204, which is the 818 basic product to a 201 high performance product, the savings now are around 60 cents a pound. And so the substitution part of our business continues to grow exponentially. 2006 over 2005, 2005 over 2004. And I'm expecting to see that accelerate with these kind of prices even further in 2007.

Great. Thank you.

Thank you.

Our next question comes from the line of John Tumazos of Prudential Equity Group. Please proceed.

Congratulations on everything. Yesterday a competitor made a pricing and profit guidance for the first quarter, and the competitor has a very complex mix, maybe not as complex as yours, but almost with maybe 8 product groups. And I estimated in order to get their price and profit forecast given that the carbon steel business is down, their silicon pricing for '07 would rise 69%. I know that earlier, Mr. Lipschitz, asked if you had double digit price hikes for silicon. I wanted to ask that question over again, are the price hikes over 50%? And my back of the envelope is maybe your silicon EBIT goes from 40 million to 150 this year.

That's too high for us, John. I don't know what base that --

Different people have different contracts, that come out at different times.

Basically our, I would characterize our prices overall somewhere over the next two years as moving up 30%. So let's say 15 and 15.

Would 2 to $3,000 be the general range depending on when you shook hands and set the price? 2 to $3,000 a ton?

I think it's a little -- you're talking average of 2500 then?

The average of the silicon, it depends on when you cut the deal. If you cut the deal too early the prices would be lower? If you're the preferred supplier and everybody came to you first your prices could be lower.

I think we're going to average about 3,000.

Thank you.

Our next question will come from the line of Robert Lagaipa of CIBC World Markets. Please proceed.

Hi, good afternoon.

Good afternoon.

Just had a couple questions. I guess, one, can you just remind us, Pat, how much of your business is under contract for the company both in flat rolled and then in high performance metals? And how much of that actually rolled over, in other words had to be repriced for 2007? And does that also, on an average basis, fall in line with your kind of double digit price increases that you're looking for?

Well, I think when we look at the high performance metals, we had built into some of these important contracts [Inaudible] that move from year-to-year. And as we moved into 2006, I think we had about 80 to 85% of our mix somewhere between a 1-year and greater or a longer contract. And only were doing about 15% [Inaudible] business. I think with our increased capacity, those contracts will be more in the 70 to 75% now as we move into, especially the second half of this year. Let's say it's 75% and about 25% is business we will take on the open market or in a one year or less field.

Okay. And how about from a pricing perspective? I mean, you know, if we think about, you know, the availability, I think that's going to be that 25% verses, you know, the 15% prior. How much of a price increase are we talking about moving into '07?

I think what we said before we'll just leave it here is that we expect the margins that we're currently generating to remain solid for 2007, maybe increase a little bit in 2008.

Okay. Terrific. And the last question is, you know, obviously you've had some success, some significant success in signing up some larger customers through these long-term agreements. You know, obviously Boeing and GE. But you know, you also were a preferred supplier previously. And if I was to think about the pricing, the margin, et cetera, you know for a preferred supplier verses you know, now locked into a deal. Is there a difference in the margins, you know, between preferred verses a locked up supplier? How should I think about that?

I think the mix in general has a lot to do with what we're talking about. We talk about high performance metals, we're talking about everything from the zirconium business to the hafnium business to combinations of those alloys to the mix between nickel and titanium. So, it's very difficult to simply say that margins are, you know, generally in any just on an average moving up. We've got mix, we've got the amount of exotic materials we're selling, which is increasing, we've added 25% capacity to our [Inaudible] operations. And the mix between the titanium and the nickel or the superalloys. Generally speaking, I would say that prices are in that total scheme of things, all things considered will be consistent.

Consistent you said?

Yes.

Okay. Terrific. Thanks very much.

Thank you.

Our next question will come from the line of Chris Olin of Cleveland Research. Please proceed.

How you doing? Can you just tell me a little bit about what you're seeing on the commercially pure titanium CP titanium market right now?

Commercially pure market is a market that's wide open. Of course, we have the unity joint venture with the SMPO and so it's a question of how much capacity, Chris, is allocated into that particular market segment. I think today it's still a market that on a global basis,every opportunity that we would put more capacity toward that market is sold.

Okay. My second question is, I was wondering if you had any thoughts on the recent, Thyssen Krupp comment about their potentially entering the nickel base alloy titanium markets.

Well, they have the BDM operations over in Europe today. And they have a small amount of titanium today. So I would look at that and say if somebody's going to increase their capacity or increase their participation or move into that market, it's going to be a while. So maybe we ought to save that question for a little more clarity around that issue.

Fair enough. And last question I had was just on the joint strike fighter in terms of what you see happening here. Do you think you'll participate in that? Thanks a lot.

We intend to participate in that program.

Any thoughts on timing?

Well, the major part of that production is out into the 2000's, where we really look at ramping up. It's really ramping up from 2010 and gets to the full benefit of the program some place in 2012 to 2015 time frame where you have some sizable quantities. Now, in order to participate in that, you've got to -- you've got to get qualified, you've got to be on the program, you've got to be a part of it in the prototypes and the ramp-ups and the qualifications. So, those things are probably 2008 kind of deliveries.

Would it be more -- would your supply be more upstream related or fully integrated type of supply?

Our supply would be our normal mill products, semifabricated mill products, could be light, could be long product, could be bar, short, whatever. For a forging type application or it could be a shape.

Great. Thanks a lot.

Thank you.

Our next question will come from the line of David Macgregor of Longbow Research. Please proceed.

Good afternoon, everyone.

Hi, David.

Hi. I just wanted to just quickly go over this $141 million cost savings, or gross cost savings you talk about in your press release. How much of that is fixed and how much of that is variable?

I'm going to let Rich take this question.

Hi, David. Most of it is actually related to variable costs. It has to do with procurement savings. It has to do not only on raw materials, but also on operating supplies. It has to do with our creative ability across our businesses to use lower cost scrap in our melts, which I think we do very well. That's a, that's a large part of the savings, quite frankly. It has to do with productivity savings, quality cost improvements, the smallest piece of it, quite frankly is dealing with what I would call the fixed cost side if you want to characterize fixed costs from the standpoint of productivity improvements on the salaried side, that's certainly in there. Back on the product cost side, yield improvements is a significant component of those amounts. And targeted efforts to an earlier question for Pat in terms of our energy costs. Targeted efforts to reduce energy consumptions across our manufacturing operations is a component of it, as well. So from what I described, the vast majority of it is variable cost related.

Okay. And did you, if you did, I missed it and I apologize. But did you offer up your '07 goal? I mean, where does this 141 go to in '07?

Yes, we've targeted $100 million as part of our annual planning process and it's our intention to beat that. I think we've beat that for the last three years.

Okay. Good. And then on the titanium. I just want to be really clear about this. You are producing a little more ingot this quarter, so you see the mix deteriorate a little bit. As you're ramping this capacity going forward, should we anticipate that ingot will be a bigger part of the mix? And if so, you know, what's the impact on profitability?

I think with the airframe, becomes a bigger part of the mix, so does plate. So it takes a little bit of longer term, long products side of it, which we've been -- which we've had more expensive products are in the long products. Basically billet and bar, bar and shape. So it doesn't say that the, that the profitability in total is less. It just says that the pricing is less.

Yes.

So, I'll go back to the same comment that we expect the margins that we're currently achieving to hold and improve in 2008.

Okay. Good. Are you seeing any easing in ingot prices at all?

With the map that we have under contract and committed, no.

Okay. Keep up the good work, you guys are doing a great job.

Thank you, David.

Our next question will come from the line of Dave Martin of Deutsche Banc. Please proceed.

Thank you. Just a couple things. First of all, going back to David's question about the cost improvement target for '07, does that or does that not include the, this is a retirement benefit expense savings of $50 million?

That would not include that.

So additive. And then, secondly, wanted to come back to your comments about the stainless and the flat-rolled business particularly in the first quarter and sorry if I missed maybe these comments. Are you seeing any base price weakness in your service center -- in the service center market, I guess first of all? What types of commodity stainless volumes should we expect in the first quarter? And then based on your text in your release, are you basically pointing to kind of flattish or slightly down EBIT in the flat rolled segment with value added offsetting the weakness in the commodity.

What we're saying is if you look at quarter to quarter, we think the first quarter will be a more profitable quarter for us than the fourth quarter basically due to not having the amount of LIFO, the influence of the amount of LIFO we've had. Now, when we look at the, again the different segments that were in, in this business, just a fast review of that and I'll end with commodities. I just said the electrical steel business is up 15 and 15 in pricing. The plate business is extended schedules and basically sold out. We have contracts, increasing priced contracts for our precision rolled strip business. The titanium and specialty sheet business is basically full out. We have two more, our furnace is operating to expand that business this year. We expect more tonnage and higher prices there. So now we get to the flat roll products business. We are seeing tremendous growth in 201HP, which is the manganese based strength alloy that uses less nickel, saves the customer 60 cents a pound. That's becoming a larger and larger percent of our business of our full rolled sheet business. Those margins are good, there's certainly no pricing pressure at all there. In terms of the tonnage, I would expect this inventory adjustment in terms of what we see as probably 10,000 tons, down from the fourth quarter shipments in total. For us and I would guess that our pricing is going to be very uniform as to the fourth quarter.

Okay. Thank you.

Our next question will come from the line of Brett Levy of Jefferies and Company. Please proceed.

Hey, guys. Two questions. First off, can you guys talk about backlog such as it exists and give a little detail around that growth and that sort of thing? What are the key drivers in terms of product? And then, secondly, you talked a lot about expansion in the last sort of several initiatives. Are you guys acquisitive at this point, I mean generating a lot of cash, there's got to be areas that sort of make sense from the tuck-in standpoint? Can you talk a little bit about what your priorities might be on that front?

We'll start with your latter question while Rich looks up some of the other kinds of things that we might want to disclose. I'm not a big discloser about what our backlogs are [Inaudible]. I don't think that's something we want to discuss publicly too much. But basically on the, on the acquisition side, you have to look at what could tuck in and what could fit well in our engineered products group. Certainly we're always looking at that business. I think some of the other things that we've looked at and considered came right around to putting it back into organic growth. We're spending a lot of money in new capital when you look at our titanium expansion and nickel-based alloy's expansion. The plate assets we're putting in will be quite unique to what we need for the aerospace and high performance metals markets. The titanium facility will be quite a unique operation in North America based on its adjacent position to U.S. Mag and our exclusive arrangements for supply to those. Our expansion in Albany is well underway now, we're at 8 furnaces now moving to 9 by the end of next month and we'll have the12 furnaces up by the end of the third quarter this year. So what I am trying to describe, we have basically concentrated on organic growth because of the unique assets that we need and the capabilities and proximity to our existing plants. We don't, we don't want to have a hundred footprints to deal with here. So that's worked well. But if there's a -- if there's something that looks attractive to us and it would fit tuck in, work well, reposition the company differently, we're never -- we're never at adverse to that, but I think what we've done is the right strategy the for the time. Rich, I don't know if you want to comment on the backlogs or whatever.

Yes, just in general. The two segments where backlog is significant, high performance metals, the various -- the noncommodity businesses there, backlog is significant because they're contract, and as Pat talked about we're sold out, essentially in [Inaudible] steel. And at prices higher than they were in 2006, our plate business is essentially sold out, either through contracts or contractual arrangements. Precision rolled strip has a higher backlog as we enter 2007 than we did as we entered 2006. Not only on the volume side, but also on the price side. And then you have the commodity, the commodity business, which is more of a near term business and is not a backlog oriented business. So that's the flat rolled products segment. High performance metals. We ended the year with a record backlog of just under $730 million. And to put that in context, the end of the third quarter that's $100 million more than what it was in the third quarter of '06 and $120 million more than it was at the end of '05. But one qualification is that is only our firm price business. That does not include all of the contractual take or pay arrangements we have that are not firm priced because they are indexed price for raw material costs. So the reason why we don't talk a lot about backlog is that it's really a can be a misleading number because it's always low. Now from the standpoint of what our true capacity book out is. And when you look in the high performance metals segment, I think it's very safe to say that our exotic materials capacity even with additional capacity coming onstream is essentially booked out in 2007 and as we're bringing on new capacity in nickel and titanium, we're able to meet the growing demands of the markets and our customers for that. So that's the best way to try to describe that.

All right. Thanks, guys.

Thank you.

Our next question will come from the line of Mark Parr of KeyBanc Capital Markets. Please proceed.

Thank you very much.

Mark.

Good afternoon. Congratulations on the great numbers. I had a couple of just fill in questions. First if you could give us any color on your managed working capital assumptions for '07. What are you looking at right now?

We're running about 29% today and we try to stay in that 30% kind of a range. So we don't see a lot of a lot of money building in there other than the fact that we've been growing this business at about 30 to 40% every year. If we continue to grow the business at 40% a year, you can take that number at about 30% for working capital.

Okay. That's helpful. Another question if I could. On corporate expense on profit sharing. Could you give us any help on what the profit sharing number was for '06 verses '05?

You're talking about the annual incentive, the cash incentive not the equity based incentive? Is that your question?

Yes.

Yes. I think that it was, you know, about $5 million more, $5 or 6 million more than it was in 2005. In total.

Okay. Assuming you have another solid year, I mean how would we model that cash number, that P&L number for '07?

I don't think it would be greater than '06.

I think -- I think we're going to continue to generate good cash flow from the operations. We certainly, we certainly don't have based on the forecast we have what we would forecast of our of the volumes we're going to see and the pricing levels and the contract. I think we have a very robust cash flow and plan to deal with our capital as well as the other issues that we've talked about today.

Mark, if I could just, if I could just add a comment on the incentive compensation question in terms of '07 verses '06. The reason why I don't, I don't -- we don't think it'll be more in '07 than it is in '06 because is because those targets get rackets up higher, right?

Okay.

So the targets are significantly increased in terms of us achieving that incentive compensation and that's what we're going to shoot for, right is to certainly meet if not beat that. But at the end, I don't, I don't think it would be more than what it was in '06.

Okay. Terrific. And congratulations, again on all the great results. Keep it up. Look forward to talking with you next quarter.

Okay. Thanks, Mark.

Our next question will come from the line of [Dan Whalen] of Bear Stearns. Please proceed.

Hi, everyone.

Hi, Dan.

In the last call you kind of alluded to breaking up the FRP business into 5 subcategories. And I was wondering if you could give us any sense of what percent of that would be more commodity products verse on a revenue or EBIT basis?

Well, in terms of the EBIT, I think our latest calculations are that about 25% of our -- of our EBIT in that particular segment is coming from what we would consider sheet products and out of not specialty like titanium or superalloy or nickel based alloy, but sheet products and some of those are rather specialty products like the 201, for example, or some particular products that might go into the -- into -- ultimately rolled into the tubing markets. So when we look at that, I think that when we look at from an EBIT standpoint we're probably around 14 to 18% of our business is commodity, general distribution type sheet.

Okay. Okay. When you say the FRP business specifically?

That's the flat rolled products business.

That's a total.

Oh, sorry, sorry. That is a total number. And the flat roll products business is probably more like --

about 30%.

Okay.

That makes sense, yes.

Great. And just one follow up to the previous question on acquisitions, have you seen multiples coming in at all in terms of the people you guys talked with throughout the industry?

Not at all.

Not at all.

Not at all. I think Dan has to say something to you here.

As a matter of fact it's the other way. Dan, you know how we like to keep things personal, so we just want to publicly congratulate you on becoming a father a couple of weeks ago.

Thank you.

Now everybody knows.

Thank you very much.

Okay.

Our next question will come from the line of Tony Rizzuto of Bear Stearns. Please proceed.

Well, I didn't even know that. Listen, I just wanted do follow up. Can you guys give us an idea of a LIFO that you guys are assuming for '07?

Tony, I -- it's a great question. And I can tell you that the real driver is going to be way we think the average for nickel will be in the months of September, October, and November of this year. And the reason why it's those months, the September LME drives what we pay for nickel that we purchase in October. And the LIFO index is calculated on the basis of October, November, December cost standpoint basically compared year-over-year in order to get your material index. So if you have any insights into what you think nickel's going to be in September, October, and November, I'd love to hear it. I'll tell you offline. I do think we would be very surprised if it's where it is today. Right so, if you reflect upon where the fourth quarter '06 average nickel costs were, on the September, October, November LME basis, those three months averaged $14.40, give or take a few pennies.

I've got to think that with some adjustment going on in the stainless side and we keep on hearing about low grade material, obviously we've got the potential for a strike, if it's a strike at the end of this month, at [Inaudible] then obviously then we could nickel could arguably go up a little bit higher from here. But I would think, there's likely to be some pressure in that we are hopefully going to see lower prices. I don't think this is healthy, and I don't think it's sustainable. I would have told you that I didn't foresee this type of nickel price.

And I would have too. And that's really the challenge we have in forecasting what our 2007 LIFO provision or income will be because obviously if nickel is lower than -- lower than 14.50 in the fourth quarter of this year, and everything else being equal, that means that not only will you not have a LIFO charge in '07, you'll have LIFO income depending on where it ends up. As we assess and project as we're looking at the first quarter, remember how we do that, we project what we think the year end costs and inventory levels are going to be across our various LIFO pools, come up with a LIFO number for each one of those pools and then we book that throughout the year. I think the one thing is safe to say is that there is no way that LIFO will be $91 million in the first quarter. It will -- if it's anything, it will be much, much smaller than that and a fraction of that.

That was more or less a catchup in terms of the fourth quarter?

Yes. First of all, nickel --

Basically.

and nickel continued to ramp up. If you look at where we were at the end of the third quarter and if that would have come true, surpassed all of our assumption, we have booked $35 million of LIFO. We didn't, we booked 91 million. So when you do the real math, the catchup in the quarter was about $50 million when you do the real math. And it won't be that in the first quarter. I can tell you that. It will be something that -- if it's anything, it'll be something in the range of $10 to 20 million in the quarter from where we sit today and what we think about as we look in our crystal ball and try to figure out what's going to happen to nickel at the end of the year.

So from a first quarter standpoint, you know, about 30 to 40 million lower in terms of the LIFO?

Oh, no. We booked -- we booked 91 million, 90.6 million in the fourth quarter. I don't think it'll be anymore than 10 or 20 million in total.

70 million lower.

70 million lower.

70 million lower. Is kind of what you're assuming right now. 10 to 20 million in terms of the LIFO.

In the quarter. Which if you use the bigger number, would give you an $80 million charge for the year verses 197 million.

Okay.

And last year in '06. So obviously we refine that. The real driver is nickel and the volatility in the nickel market. It's not what nickel LME is in January or February or March or April. It's what it's going to be in September, October, November.

Okay.

Projection [Inaudible] applied.

All right. And just kind of a related question, I notice that in Japan is ramping up capacity to produce nickel-free steel. And using chrome and I don't know what other alloys, I don't know what the exact chemistry is, but are you guys also involved there?

No, we're just staying with our 201H high performance has been well -- well accepted and growing. Obviously this is an alternative to that. And I'm sure that they'll have some impact some place.

I would imagine too, and that's again, another thing that could push down nickel a little bit.

Yep.

Okay, guys, thanks very much, and again, congrats on the performance.

And thanks for being with us.

Welcome.

Gentlemen and ladies, I think this wraps up our session for today. We'd like to thank you for joining us. And as usual, thank you for your continuing interest in ATI.

Thank you, Pat, and thanks to all of our listeners, for joining us this afternoon. As always, news releases may be obtained by e-mail and are available on our website. Also, a rebroadcast of this conference call is available on our website. That concludes our conference call.

Thank you for your participation, ladies and gentlemen, you may disconnect. Have a wonderful day.