ATI Inc (ATI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Allegheny Technologies earnings conference call. My name is Brandie, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a Question and Answer Session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Greenfield, Director of Investor Relations and Corporate Communications. Please proceed, sir.

Thank you, Brandie. Good afternoon, and welcome to Allegheny Technologies's earnings conference call for the second quarter 2007. 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 the conference call today are Pat Hassey, Chairman, President and Chief Executive Officer; and Richard Harshman, Executive Vice President Finance and Chief Financial Officer. After some initial comments, we will ask for questions. During the question and answer session, please limit yourself to two questions to be considerate of others on the line. Please note that all 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. ATI's diversified global markets, broad product offerings and operational execution delivered another quarter of profitable growth in sales and earnings. Sales increased nearly 22% compared to the second quarter of 2006 and net income increased 43% to $2 a share. Segment operating profit was over 24% of sales. We remain focused on our performance and execution, resulting in a first half gross cost reduction of $54 million. That puts us on track to meet or exceed our one-year 2007 gross cost reduction target of $100 million.

Financial metrics were again solid. Return on capital was 36%, return on stockholders equity was 49%, and net debt to total capitalization is now under 1%. Cash flow from operations during the first half was $187 million even with further investments of $319 million in managed working capital. In addition, year-to-date capital expenditures totaled $152 million. Cash on hand was $530 million at the end of the second quarter. We plan to invest about $450 million in 2007 for capital projects that support our growth objectives and reduce our costs. These investments include new titanium sponge capacity, new titanium and nickel-based alloy melt capacity, new plate capacity, and improved rolling capabilities in our flat-rolled products. These capital projects all are self-funded.

To further strengthen our balance sheet, we're in the process of replacing our existing $325 million secured domestic revolving credit facility with a new $400 million unsecured domestic revolving credit facility. We're pleased that this new credit facility has been extremely well received by our bank group and the new facility should be in place by the end of July. This new credit facility provides ATI with reduced letter of credit and borrowing rates and removes an impediment to ATI regaining an investment grade corporate credit rating.

Now turning to our markets, ATI's key growth markets remain strong. Over 63% of year-to-date sales were generated by the aerospace and defense, chemical process industry, oil and gas, and electrical energy markets. Over 25% of ATI's year-to-date sales were either exports from our U.S. operations or produced by our non-U.S. facilities. We believe this number would at least double if it included export sales of products made by our U.S. customers containing ATI specialty metals. In other words, we think global markets now drive nearly one half of ATI's sales. For example, the current robust commercial aerospace demand is non-U.S. centric. In addition, U.S. fabricators that use our specialty metals are selling to international infrastructure markets. ATI is becoming more global. We have spread our market risk so we're not as dependent on the U.S. economy as we have been in the past.

Now here is more detail on our largest aerospace and defense market. We think we have good visibility into the demand from the aerospace market, and we believe ATI is very well positioned to benefit from exciting growth prospects in the aerospace and defense markets for many years. Two events occurred recently that have reinforced this outlook. ATI had a very busy Paris Airshow and got a lot of business done. We had people from our domestic and international operations at the Airshow selling our titanium products, our nickel-based alloys and super alloys, our flat-rolled products and our cutting tools. We came away with additional orders and are excited about the robust build rate announcements from our air frame and jet engine customers. Secondly, on July 8, Tom Williams -- the President of ATI Allvac -- and I attended the debut of Boeing's 787 Dreamliner.

One encounter is worth sharing. Tom and I were standing next to the first 787 Dreamliner talking to one of the key executives of the Dreamliner program. Of course we were talking about titanium. The Boeing executive said to me, Pat, would you like me to point out where we use titanium on the 787? I said absolutely. He then used his arms in a grand-sweeping motion and said all over, it is all over the airplane. We're optimistic about this aerospace cycle, this industry and particularly ATI and our potential growth in air frame and jet engines.

While on the subject of aerospace growth, ATI's capital projects remain on track and are expected to contribute to significant profitable growth. Twelve titanium sponge reduction furnaces are now operating at our Albany Oregon facility. This brings our current annual aerospace quality titanium sponge production to approximately 16 million pounds. The next phase of the Albany sponge expansion is on schedule, and we expect to achieve a 22 million-pound annual rate of capacity by the first half of 2008. We remain on schedule to begin producing premium grade titanium sponge at our Rowley, Utah, facility by the end of 2008.

Our titanium melt expansion is also on schedule. Our third plasma arc melting furnace is in the qualifications phase. We expect this furnace to be qualified and in commercial operation this quarter. We expect four additional VAR -- or vacuum arc remelt furnaces -- to be qualified and in commercial production by the end of this year and early into 2008. On the mill products finishing side, the expansion of our titanium and specialty plate finishing facility located in Washington, PA, is progressing on schedule. The completion of this project is expected in June of 2008.

We saw the benefits of our strategic growth initiatives as total shipments of ATI titanium products were 8.8 million pounds in the second quarter, nearly 14% higher than the second quarter of 2006 and 2% higher than the first quarter of 2007. This includes titanium product shipments both by our high performance metals and our flat-rolled products segments. In addition, shipments from our Unity titanium joint venture were strong during the second quarter. Unity supplies the global industrial market, specifically excluding aerospace and defense and medical. As a reminder, ATI converts semifinished titanium products into titanium mill products for Unity. Shipments of conversion titanium are not included in our reported shipment numbers. ATI converted well over 1 million pounds of titanium mill products for Unity in the second quarter of 2007. Altogether ATI shipped 10 million pounds of titanium mill products in the second quarter of this year.

Now turning to our individual segment performance, first of all, high performance. Sales were $558 million and operating profit was over 32% of sales. Segment operating profit of $180 million was near our record level of $182 million. Segment operating profit as a percentage of sales was down a few basis points from the previous quarter primarily due to product mix which contained more of our nickel-based alloys and specialty alloys. Sales of our premium titanium alloys and nickel-based super alloys remained strong to the jet engine customers for both OEM and spare parts. The aftermarket spare parts business at our jet engine customers is growing due to replacement of jet engine rotating parts made from premium titanium alloys and nickel-based alloys. This results in the total -- this results from the total number of airplanes in the sky and the high utilization of the aircraft. On the airframe side, sales of our titanium alloys to airframe customers continue to grow, with second quarter shipment volumes 43% higher than the first quarter of 2007. Our exotic alloys business grew by nearly 40% compared with last year's quarter with increasing demand from the chemical process industry and the nuclear energy markets.

During each quarter's conference call, I would like to emphasize a particular area of the business. Today I will highlight the success for our flat-rolled product segment. Our flat-rolled product segment has been transformed into highly profitable and diversified specialty metals business. Second quarter 2000 (sic - see Press Release) sales were approximately $805 million when operating profit reached a record $166 million or nearly 21% of sales even while total shipments were comparably low. Reflect on that. For those who have covered this company for several years, ask yourself this question. How much would the flat-rolled products business have made in such an environment four years ago?

Here are some points to consider about the transformation of our flat-rolled products segment. Productivity has improved by over 40% since 2004. Gross cost reductions have totaled nearly $300 million during the same time period. New capital investments are paying off with improved yields and reduced costs. We've decoupled pricing from our base stainless steel sheets and are more focused on key global growth markets -- specifically chemical process, oil and gas, electrical energy, aerospace and defense, which together accounted for nearly 50% of year-to-date segment sales. As a result, sales of our specialty and titanium sheet and strip, specialty plate and grain-oriented silicon electrical steel account for about two-thirds of this segment's profitability.

In addition, substitution to lower nickel bearing alloys continue to accelerate in the second quarter. Many customers in a variety of consumer durable capital goods of nonresidential construction markets recognized the benefits of our AL201 high performance and our duplex alloys, particularly 2003 lean duplex alloy. Interest in alloy substitution to lower nickel-bearing alloys remains high, and we continue to pursue numerous opportunities with existing and new customers who are considering the switch due to high and volatile material costs.

Raw material prices, particularly nickel, have indeed been volatile. As the second quarter ended, nickel prices on the LME began what we think is a long overdue correction. As we have been saying since the run of the nickel began last year, there has never been a shortage of nickel units. We believe the price of nickel is correcting more as a result of LME trading dynamics and is less influenced by any pullback on consumption of stainless steel. At today's LME cash price of $14.50, nickel still remains high by any historical comparison. This is indicative of a market still demanding high levels of usage. Many direct customers and distributors have been waiting for nickel to stabilize. Thus they purchase only what is necessary. Some customers have pushed out but not canceled projects. Inventory levels at our direct customers and inventory levels at service center customers are low and should be getting tighter in the next few months. Importantly, according to published information, most global steel stainless steel producers seem to be demonstrating self discipline by reducing production and not building inventories. So we expect key growth markets in our flat-rolled products segment to remain strong in 2007, and we also expect orders and shipments of stainless to improve once the price of nickel stabilizes.

Now moving to our engineered products segment, operating performance continues to be lower than the level we expect from this group. Results in the tungsten business were lower than expected because of the slower than planned ramp up in utilization of ore, thus forcing more scrap to be consumed during the quarter which drove scrap material costs higher than we expected. This inventory value will carry into the third quarter. We're now self sufficient for our APT needs and have the capability of producing APT from ore or scrap. We expect to be back to target performance in the fourth quarter of this year. The forged products business saw strong demand soften as anticipated from the transportation market, namely class 8 trucks. And the wind energy market is driving further profitable growth in our castings business for the foreseeable future. Also demand remains robust in our titanium precision metal processing conversion services.

Now concluding, the first half of 2007 has been the best in our history. First half 2007 earnings were $3.93 a share. That is 60% higher than the first half of 2006. As we look ahead, we expect ATI's overall performance in the second half of 2007 to be at least as good as that achieved in the first half of 2007 with the fourth quarter earnings stronger than the third quarter. We expect ATI's third quarter earnings to reflect higher costs of approximately $0.07 to $0.09 a share associated with our scheduled normal maintenance in the summer months, and the recently adopted new accounting standard for these costs to be fully absorbed in the quarter in which they occur. The second half outlook could be impacted by the continued volatility in raw material costs. Specifically, nickel needs to stabilize.

In summary, here are some takeaways. Our key growth markets remain strong, and we are well positioned to benefit from these strong markets. Our strategic capital projects are meeting their targeted schedules and are providing opportunities for further profitable growth across all ATI companies. Titanium and nickel alloy shipments under long-term agreements have grown and are expected to continue to grow with robust aerospace build rates. We expect revenue and operating profit growth in the high performance metal segment throughout the remainder of 2007 with this unit accelerating these profits into 2008. We also expect the key growth and profit drivers in our flat-rolled products business segment to remain strong, and we expect orders and shipments for stainless to improve once the price of nickel stabilizes. I think with these comments, we're ready to take our first question.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Dave Martin with Deutsche Bank. Please proceed, sir.

Thank you and congratulations on the results. I wanted to I guess first focus on the flat-rolled business. Can you give us a sense of what your shipments in the quarter would have been to the service center industry. And I guess secondly, whether you've seen any improvement in just order activity or business activity noting the fact that you said you're kind of waiting for nickel prices to stabilize and maybe we have seen a bit of that in recent weeks?

Dave, I think we probably had one of the lousiest quarters in shipments to distribution customer base than what we've ever had -- very low, and as you saw we shipped about 133,000 tons, 277 million pounds. And as I said earlier, over two-thirds of our profits are now coming from product lines either direct or through contracts that are are outside of our normal spot business into the general marketplace. So it hasn't been a good market and it hasn't been a good market for a couple reasons. One is basically that nickel prices are on the rise and people are wondering when this is going to stop. Now the nickel prices have been coming down and of course the next question with the surcharges -- with the largest drop in surcharges over the next 60 days than what we've ever seen at close to $0.70 a pound, no one is buying one more pound than what they need to sell the next day. We're in that situation that we look at that at market, and we know that in the general distribution market that the inventory turns have moved down to four. Okay?

So four means a three-month supply. When you look at a three-month supply, the question now is the end markets. If the end markets are as we heard from several of the conference calls from large distributors quote pretty good. Meaning these markets are growing with the 2.5 to 3% growth rate in the U.S. economy. They're pretty good, meaning that you have to supply them. Meaning that even if you want to delay shipments, say 30 to 45 days, you're going to start pulling metal into that marketplace because you're simply going to have the shelf empty. The customer is not buying any more than he needs. The distributor is not buying more than he needs, and I think we've seen some announcements today -- even this week even out of the Chinese that they're cutting back 30 to 50% for August, and that's understandable in the imports because you can't afford to use imported metal when you have a 65 to 90 day lead time and you haven't seen the stabilization in the price of nickel. So it is domestic production. It is going to be domestic supply, and I think we're fairly confident that we're going to see those markets start to ramp toward the end of the third quarter throughout the fourth quarter.

Okay. That's helpful. Secondly, if I could, just on the outlook and trying to understand your comments and what it means for the third quarter and the flat-rolled business, given the dynamics with the service center. Absent the outage costs in the third quarter, why would the result in that segment be any worse than what you reported in the second quarter?

I think the issue that we got that we're really dealing with there is forecasting what happens with raw material prices. As we do the accounting up or down with the raw materials, I don't think the quarter -- making your point, Dave, is going to be much different. I think it could be even a little stronger maybe in commodities, but the question is what happens with the price of our basic raw material called nickel. If that price stays where it is and stabilizes, I think we're going to have a good quarter.

Okay. Thank you much.

Your next question comes from the line of Tony Rizzuto with Bear Stearns. PLease proceed.

Thanks very much. Hi, everybody and good results.

Hi, Tony.

I have a couple questions -- just to focus on titanium, and I wanted to pursue the decline in your average selling prices for titanium and titanium alloys of 7% according to the news release. And accordingly it relates to the reduced index pricing associated with lower raw material costs. My question to you, Pat, is this. As you build out your internal sponge and melting capabilities which conceivably should reduce your raw material costs, is it fair to think that you could achieve gross margin expansion, particularly as we get maybe some of those factors in the marketplace such as the medical inventory overhang and the A-380 issues and start to get the demand from the build rate from the new airliners kicking in?

I think you're right on, Tony. I think what you said is right where my thinking is. What we've seen in the second quarter, we had some overhang in the commercial bar inventories, especially at distributors, which I believe now got pretty much straightened out and into the second quarter. So we see some product mix changing -- as you see from our notes also that we sold 43% more airframe titanium in the quarter than we sold in the previous quarter. So as you move into that market and you also have an increase along with that same line in our jet engine business for nickel-based alloys. Nickel-based alloys don't carry the same margin, so of course all of those things blend in together. We came out of this thing a couple percentage points down at about 32 something, 32.5, 32, 3, something like that. My own opinion is I am where you are. I think where you asked a question -- do I think that we'll have margin expansion beginning as early as the third quarter and on -- and I think the answer in my view is yes.

Appreciate that, Pat. I do have a follow-up, too, and I think maybe in the last quarter there was mention of titanium mill product shipments growing 25% year-on-year in '07. Are you comfortable with this assumption?

Well, when we look at where we are and we look at the comparison of the first half of 2006 to the first half of 2007, we're up 15 to 20%, and if we look at what happened in the last half of 2006 in comparison to the first half of 2006, and we look at our fixed contracts, and what we now know as projected pull rates, we're very comfortable with our 25% growth.

All right. That's great. I will let other folks have questions. Thank you.

Thanks very much.

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

Good afternoon.

Hi.

Just want to circle back on titanium, as far as what you've seen in the spot market maybe over the past month. Can you give us a bit of color there? Do you see spot prices starting to bottom out here and what are your expectations in the second half?

I think spot prices have come down. You're basically talking about from using a scrap standpoint solid process scrap down to about $14.50. Of course that then will affect the overall price of ingot and the margins that you get for that based on the $14.50 are still the same, but as you use your inventory that's washing through the system, remember we shipped basically at time of effect. We priced at time of effective shipment, so we're looking at lower prices there. There is some squeeze there that washes out of the system. I think my comment earlier that the margin expansion is there to come back, and as I look at the ramping in this aerospace side of the business, I also think that there has been some supply channel changes with the Boeing contracts throughout the industry at some of the distribution side of the market that is now shaken out that those inventories will then be adjusted and come back in the line that I am pretty confident that if we've had a bottom we probably -- it is close to it or we're in it.

Okay. Great. Just on the -- as far as new contracts go or potential contracts, I have been hearing some noise out of the oil and gas sector, perhaps or maybe some big pieces of business to come there. Just wanted to see if you can help flush out any details, things you're hearing on that front?

I think there's great opportunities there, and I was impressed the other day that the U.S. just launched its first energy platform for natural gas in 8,000 foot seas. The technology is great, but more importantly for companies like ours, that's a long way to the floor, and that's a long way offshore at 123 miles, and that's where the resources are going to be. So we view that oil and gas business the ability for us to have qualifications for off-shore type applications. The duplex alloys that we're offering in place of other alloys at lower prices to be tremendous opportunity for us, and not just in the short-term but in the next several years.

Okay. Just my last question and I will turn it over. In the past we talked about M&A and that you're looking for strategic and accretive acquisitions. I guess can you help us understand what your strategic parties are -- whether that is melting, forging, fabrications or some other area? And give us a sense as to what type of synergies you would look for in an acquisition? Is that more cost-based or growth-based?

There's two important parts to any acquisition. First of all, it has to fit the strategy of the company, and our expertise is in specialty metals and in the aerospace oil and gas chemical processing businesses. Our current strategy has been to make sure we're an integrated supplier, but we're very cognizant of where the market is. We're very cognizant of the participants in the market, so we like market growth that allows us to -- would allow us to position ourselves in markets that would be accretive to the Company and fit our strategies. And we're currently engaged in a lot of organic growth parts, but that doesn't mean that we aren't talking about those things that would be important for the Company over time.

Okay. Thanks. Good luck.

Your next question comes from the line of John Hill with Citi Investment Research. Please proceed.

Thanks, everyone, and thanks for very informative call and congrats on a strong result.

Thanks, John. How are you?

Just going back to the stainless side of things, very impressive margin performance here, 20.7% hanging above 20% for the second quarter in a row, and this on quite modest volumes relative to capacity relative to last quarter, and I think it does really underscore the transformation you were talking about. Can you just help us wade through basically what happened between essentially the second half of last year and the first half of this year to allow those margins to reset so much higher in a business that was traditionally described as extremely sensitive to baseload volume?

We've been transforming that business since 2004 basically, and we have changed the organization to emphasize the markets that we want to go after, and I would say in changing the organization, we've changed the direct P&L responsibilities to business sectors or subsectors if you will within our flat-rolled products group, putting some very, very qualified great people under Terry Dunlap in those positions. We refocused our international operations in Asia and Europe to emphasize those products that we think we have good opportunities to do. We completed our strategic renewal analysis on where we make money, where we don't make money. We pruned and expanded our commodity product customers. I mean that -- pruned and expanded some. We've taken a great deal of cost out of our precision roll strip. We've grown the capacity of our electrical steel business. We renegotiated long-term contracts for many of our product lines and entered the titanium market in flat-rolled both in sheet and plates in a much larger way, so we basically changed the mix. We've continued to have a capital program rolling through that business that that has given us upgrades on our rolling equipment, upgrades in our melting shops, refocused the market, productivity that we're talking about at 40% improvement is a formula that I am talking about. It is not an easy number. It is a formula that said let's adjust this business and give ourselves credit for the change in mix, but give us no credit for pricing and no credit for any of our raw pounds per hour. So when we look at that we truly have a 40% gain. So we've taken a lot of cost out that far business. You take that cost out of the business, you refocus the organization, you concentrate on international markets, you use the strength of the international selling because of the dollar, focus on the products that you do well with, partner with the right customers, and you see $166 million quarter.

Great perspective. Great perspective. Switching gears a little bit, just wonder if you can talk about the nuclear opportunity. We talk so much about chemical process and aerospace, Westinghouse out today with some announcements about the number of new reactor builds. How should we think about the opportunity for ATI in nuclear and is it possible to distill it down to some kind of volumetric numbers we can work with?

Great question. We're working on the same question. I can tell you some general opinions. I think the potential on the nuclear side is every bit as big as the potential that we first saw on the titanium side three years ago. How well that we can address that and move our operations and our capacities to achieve where we would like to be will be the question. I think the market opportunities are tremendous. I think our technology is the best in the world, and it is going to be a question of in that build of nuclear facilities of who can supply the materials to meet those demands.

Fair enough. On that subject, I guess, and in terms of meeting demands and nuclear, we had the exotics last quarter missing some shipments. How are we doing on that?

We're trying to run the facilities we have at 100% utilizations. We've had some issues doing that. It isn't a matter of opportunities in the market. It is a matter of our ability to execute and to move the shipments. We actually did better in the second quarter. In fact, the question you're asking me, I will be better prepared to talk about in the third quarter because we have a summit meeting on the topic that you're talking about with all the right people in our company in the next two weeks.

Sounds great. Thanks again, guys.

Thank you.

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

Good afternoon.

Hi, Chris.

Pat, I saw Boeing announced a long-term titanium supply agreement with a Chinese producer I guess earlier this year. Do you think this says anything about the quality of sponge that's now coming out of Asia and are you now looking at this as a potential major supply threat going forward? Just appreciate your thoughts there?

I don't think we see it as a potential major supply threat. I think the Chinese will participate at some level with the producers that have been qualified producers in this industry for a long time. There's two or three in China that have a small percentage of the total capacity that is capable of doing that. The build in China of the major capacities that have been announced are more on the industrial side of the business. Some many small companies trying to move things up -- but I think over time, you're going to see some Chinese production in this total business, and of course the question is again sponge, and where is the world going to get enough aerospace sponge to meet the demands especially as more of these programs come online, the 380 starting the end of this year. Of course Boeing ramping up, taking weight out of some other existing programs with possible further usages of titanium, the X body 350 coming on stream in 2012 and later, and I think you're going to see still a need for more sponge.

Great. Then just on the titanium demand side, I was interested in the amount of shipments going to the airframe customers. Does this suggest that the 787's beginning to order more material for that platform or is that going somewhere else right now?

We never can tell exactly what Boeing is doing with it because of course the material that we're supplying is in a semifinished [note] form, and it goes into all of their programs and all of their first tier suppliers they can use it for, but I don't think there is any question that we're going to see the acceleration and ramp on the 787 program late this year beginning first quarter of next year.

Just quickly, do you have any exposure to this broker issue that one of your competitors is discussing today?

The answer to that is thank God no. Okay. Great.

We don't use that individual.

Your next question comes from the line of David MacGregor of Longbow. Please proceed.

Yes, good afternoon, gentlemen.

Hi, David.

I was a little late getting on the call, but I think you made reference to roughly two-thirds of your shipments or subject to escalators in the agreements. Is that what I heard?

No, I don't think -- no. I think we said that there is two-thirds of our flat-rolled products profits are coming from our key growth markets and that we have entered into agreements into that business that support those key growth markets.

Okay. Is there any way you can shed more light on the whole notion of escalation agreements within your contract sales? I realize you can't get into definitive terms, but is there some way you can help us understand maybe in the aggregate just the sensitivities and what are the key drivers behind those?

I think we have some very unique clauses and unique protections that we put into long-term agreements. I will let Rich Harshman give you a few of the details on those.

Hi, David. Each contract is different. There isn't a set framework from the standpoint of what the customers are asking us for. And I will say that for the most part we structure agreements to protect ourselves from the volatility of raw material costs. And you do that either through indices or surcharges or in the case of some of the long-term supply agreements for titanium like with Boeing, and that's the importance of being fully integrated back into making your own sponge. So that you have a high level of confidence in terms of what the cost of that sponge is going to be, which becomes an important factor in the assumptions you make in terms of how you cost and therefore price that particular contract. On the conversion cost side, virtually all of our contracts have some sort of inflation protection pricing mechanism in it dealing with things like energy costs and labor rates and supply costs and so on and so forth. So when we look at LTAs across the Company, all of the significant LTAs that are material to each one of our operating companies have to come in here for Pat and my review. And we stress test them and look at different scenarios to make sure we're very comfortable from a risk management standpoint. And many of them after periods of time, if it is a long-term supply agreement that runs seven or ten years, they have reopener clauses in that are designed to protect against inflation.

So that's a helpful answer. Thanks, Rich. But I'm trying to just also understand the lag with respect to time that some of this escalation might actually play through to your benefit or -- and I mean to the extent that we would get a move in say an energy market, a labor market, a raw material market. How much time would transpire before you would start to realize the benefit? Would it be marked up the next quarter or the following year?

Once again, it depends on the contract. In some cases it is on a quarterly basis and in other cases it is on an annual basis. But they're all really designed to afford us a great deal of protection in an extreme inflationary situation.

Would it be fair to say there is a greater majority of quarterly than annual?

No. I think we probably have gone as far as we want to go to in terms of discussing the intimate nature of our long-term supply agreement.

I appreciate that. Thanks, guys.

Your next question comes from the line of Robert LaGaipa with CIBC. Please proceed.

Thank you. Good afternoon.

Hi, Bob.

Hi, Pat. Just a few questions. One, just to circle back with the titanium business. You mentioned the airframe demand obviously picking up dramatically here in the second quarter. I imagine it hurt the margins a bit to your point earlier. Can you maybe quantify how much that hurt your margins versus how much the titanium sponge expanding has helped your margins?

Don't really want to get into the details of that, Bob, but I think for people looking at what do they think is going to happen in the next six months, I really feel like that drop down to the 32% that we're going to see those margins recover somewhere -- let's say from that 32 to 35% this year.

And what's that going to be driven by, just the mix getting a little bit better to your point earlier on some of the destocking that took place and then sponge?

It is going to be a little bit better mix, a little stronger coming out of the jet engine makers as they match up with the airframe side, and I think the overhang on the medical bar side of this thing is going to correct itself, so some of those it is simply a mix change. Some of it is simply a catching up with the lag factor on this -- on the scrap prices and some of it is just simply the balance between the airframe and the long products business. I can tell you, though, that as I look at the business, the most important part of that segment is going to be overall top line and bottom line growth in revenues and profitability going forward.

Absolutely.

Go ahead.

I am sorry. The flat-rolled products business -- obviously nickel pricing didn't start falling off really until June. Can you maybe talk about what the volumes looked like in April and May and what the volumes were like in June?

I think the volumes were fairly consistent with people looking to the mills to give them the opportunity to run as close to their demand levels as possible without holding the risk on the nickel because of the changing nature or the suspected changing nature from day-to-day. So most of the mills put in ready coil or close to ready coil and that particular situation won't last forever. But it is a fact today that the mills are the people that are sitting with and supporting their distribution guides as closely as they can. But over a period of time, what we need to see is 60 to 90 days of some fair stability in this nickel pricing market and you'll see a changed market for volumes and stainless steel sheet.

Last question if I could, just related to the capital structure. Now, obviously what a difference a few years makes. With the dividend rate being cut several years ago, obviously the dividend now is much lower than it was kind of in the late 90s, early 2000s. You're in much better shape from a cash perspective. You mentioned the net debt to cap being less than 1%, and in lieu of acquisitions, how do you think about the dividend, the current dividend rate in addition to potential share repurchases? Because it sounds like all the CapEx that you plan on doing obviously is being taken care of with the cash flow.

It is self-funded. We have raised our dividend the last two years to where it is today, and if those increases were I think 60% and 50% from what the bottom was, so that part is coming back. I think we have a growth opportunity. I just mentioned earlier we're going to be looking at some of the nuclear business items. But one of the things that you're seeing from ATI in total is if you look and just run the top line growth of this company, if you take the current year from last year -- just annualize where we are to date moving forward, you will see that this company is growing again on a top line basis over 20%. And if we can find that kind of growth in products that offer us what we consider good returns and profitable growth, that's where the money is going to go.

Thank you very much.

Your next question comes from the line of [Dan Whalen] with Bear Stearns. Please proceed.

Hi, everyone.

Hi, Dan.

Most of my questions have been answered, but just a quick one here on substitution. We've been hearing for several quarters about substitution to lower nickel-bearing alloys. Is this close to leveling off here or how much more room do we have for additional market share gains?

That's a great question, Dan, and it is one that I've asked, and the answer and the fact of the matter that I get is that -- I don't know where we're getting that. We didn't talk about the percent of our shipments in the second quarter that were 200 series versus 300 series for specific reasons. But this thing hasn't backed off at all, and it is a question that even with nickel prices that are leveling off let's say at $14 to $15, there is still significant savings for people, and the interesting part of course is those people that moved out of necessity possibly earlier on over the last eighteen months now are using 200 series alloys and products that are competing against people that are not, and those people that are not using them are taking a very hard look at using them.

Great. Thanks a lot.

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

Good afternoon, gentlemen. Congratulations.

Hi, Scott.

I have a question for Rich. Rich, can you talk a little bit about the terrific leverage that we saw in the SG&A line and maybe some of the places that you've been getting some of those improvements, sequentially it was very nice.

Yes. Hi, Scott. We spend a lot of time focused on fixed costs as you know, and part of our -- what we accomplished over the past four years is to take -- going back to 2003, 2004, is to take a lot of the fixed costs including SG&A out of the equation. Where you do see going back and looking over the past couple years an increase in SG&A from a pure dollar amount, you have always seen it much lower as a percent of sales, down to 4.9%, and so we treat except for the incentive compensation based upon performance. That we treat that as a cost that has significant opportunities to leverage off of as you grow. When we grow sales by -- as Pat mentioned -- 20% a year, our objective from a management standpoint is to maintain the kind of headcount that we have across these companies as we had when we were 20% less in sales. So the leverage there is not only on the SG&A side but quite frankly it is also on the cost of goods sold side, because a significant part of manufacturing costs is also fixed. I think that we spend a lot of time on that and to the extent that we continue to target profitable growth at the top line, we're continuing to target holding our line on SG&A.

I understand that as you ramp the top line there, Rich, you get a lot of leverage. But that number, that absolute number is I think lower this quarter than it has been for the last six. So I was wondering if you might have had some special initiative you were able to tackle or if there was some specific thing in there that you could pull out and say that's where you got that from this quarter.

Not really. I think it is a combination when you actually look at the natural expense account it is a combination of a lot of things, not only at the corporate level but the operating companies as well. The business unit presidents are part of really their incentive compensation is built basically in the same criteria as the corporate officers. So they're incentivized to maintain and focus on cost reduction opportunities at the SG&A and the fixed cost level as well. So there isn't any one thing to point to other than something we will continue to focus on and make sure we're very efficient.

Okay. We appreciate that. Thanks. If I may, one for Pat also. Pat, you talked about the $450 million of growth investments in the current fiscal year, and you went on to mention three or four things, one of which was additional rolling capacity. And I think when you and I met a few years ago one of the first things you told me was that we're not going to price the percentage of our costs, but we're going to price the value and I think that we really saw that come from the flat-rolled segment this quarter. So we've seen a tremendous jump in revenue from flat-rolled year-over-year even with like a 40% drop in pounds coming through there. So can you talk about the additional rolling capacity and if that's going to be replacing current capacity -- or if you see down the road things are so good with nuclear opportunities and the things that are going on in the aerospace industry that you're going to need that much more capacity in addition to what you have now.

I think there is two words here, Scott. One is we have capacity but question is capabilities. And so we've invested money in our large [Zengiber] mills to make them state of the art in control systems and speeds -- in profile, all the things that would give us an absolutely great product that can compete with any mill in the world. So we have the most modern [Zengiber] mills -- two big large mills in our Vandergriff plant, both modern with the latest controls on each mill. We're modernizing another mill in our Louisville plant which is now a plant dedicated to titanium sheet. We also upgraded other mills across the precision rolled strip system, so we're looking at that. We're also looking at these global markets with an eye to where we can increase our capabilities and increase our uniqueness on a global basis as to the kind of products that we can make which would include alloys and widths and gauges, and the type of control systems we put in the type of equipment that we have is going to be the question going forward. We're also not ignoring (inaudible) and Krups' move into the United States and by 2011. And we also understand where those markets are, and we also understand the kind of products and how we want to niche our position within the global market stream. So we're looking at what I am talking about rolling assets, the money we've spent thus far has been for current assets to move our quality levels, reduce our costs, increase our capabilities. And I would think that that strategy of reducing our costs and improving our capabilities and improving our product offering is what we're looking for when I talk about rolling modernization.

Great. That's really good information. Thank you.

Thanks.

Your next question comes from the line of Sanil Daptardar with Sentinel. Please proceed.

Hi.

Hi, Sanil.

On your high performance metal side, the titanium side, your price per pound continues to decline. How should we think about it going forward? Is it that the ramp of the airframes is going to put a pressure on them despite no change in the margin labels?

I think you should continue to view that as we grow forward, we're going to grow the top line and the total number of dollars, and that our margins overall will be north of 30%. But as I said earlier, I think in the shorter term we're looking at margins that would be increasing from the current level of the second quarter between 30 -- the current level and 35%.

Okay. So it would be more driven by volume in that case, your top line would be?

Yes, absolutely.

On the inventory situation, you did mention that inventory is low, quite tight and probably might be restocking beginning. Is it the same that there is a function of the end demand? The end demand might be weakening somewhere or soft physically? That's why your customers are trying to maintain low inventories and they are not altering? Or is it that you mention about that they had to wait until the process stabilized but maybe the end demand may not be improving at all, probably. Is that the way we should be looking at it, or?

I think the end market demand is still -- as most people are describing it, as pretty good. It is being masked or camouflaged by the effect of the change in nickel prices between now and September moving down $0.70 a pound, so no one -- everybody is using the inventories they have on hand to get through a period where they can buy lower cost metal because of the price of nickel. That will only work for the number of days that you have inventory available, and as I said, we know that in the U.S. the latest at the end of the second quarter that the U.S. service centers were about at a four turnover a year or three-month supply. So that going forward, and from the comments that we hear, the metal that we're selling and the metal that's going out the door may have some further inventory reductions to what is possible. But we're almost at the end of that where we're going to see the real demand in my view in the next 30 to 45 days.

If I might just chip in one last follow-up question on this, if you think the things are going to reaccelerate somewhere the end of third quarter, is it not logical to think that nickel prices may start to pick up again?

I think that nickel today is seems to be stabilizing in that $14 to $15 range. We look at the three months forward price. We see that same kind of thing, and I think that this adjustment was more the dynamics in changes on the LME than in the demand from the marketplace, and those changes are now in effect and have influenced the correction that we're seeing. So I think the demand maybe is pretty well set at the current prices, but I am not -- I am not forecasting the future of nickel.

Okay. Thanks a lot.

Ladies and gentlemen your final question is from the line of David Campbell with Owl Creek. Please proceed.

Hello.

Hello?

Mr. Campbell, your line is open, you may proceed with your question.

Here we go. I wanted to talk about nuclear a little bit more. You mentioned along the way that you see it now as an opportunity as great as you saw titanium when you invested in that business. Would you say that you see -- and I know this is far in the future, but do you think nuclear is as great an opportunity as you see titanium being now?

What I think we have is certainly a resurgence on a global basis of understanding nuclear power. The technology has certainly improved. The public's attitude towards nuclear power is now one of the green attitude with it being clean power. When we look at the overall needs of the United States and announced needs of power generation, there is something in the range of 48, 48 nuclear -- possible nuclear power plants to be built in the United States. The number I think in the next 30 years in China is something like 300. There's rebuilds to do on the existing nuclear facilities that have been in service for 35 years, so this is a whole new opportunity. There is only about three or four major suppliers in the world of these kinds of products. And so it is going to be a question of how fast does this industry ramp up, when does it begin, and what kind of capacities are necessary to meet the growing demand rates. And we're in the process of making those same analysis that you're asking me. So I would say the opportunity appears to be as great as the titanium opportunity when we first began exploring it some three years ago.

Are there any barriers to entry that are material?

There is tremendous technology and barriers to entry, very similar to the titanium business.

If this may be kind of too far in the future for public investors time horizons -- so I wanted to ask you the question directly and on a public call as to whether you've been contacted by either private equity or by interested potential strategic acquirers?

No. We have not been contacted by anyone.

Thank you, guys, and congratulations.

Thank you. I think this concludes our questions for today, and I want to thank everyone for joining us. We appreciate your support. We appreciate your interest in our company, and we appreciate the discussions that we've had during this call.

Thank you, Pat, and thanks to all of our listeners for joining us today. 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 and that concludes our conference call.

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect.