ATI Inc (ATI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Allegheny Technologies earnings conference call. My name is Keisha, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Dan Greenfield, Director, Investor Relations and Corporate Communications. Please proceed.

Thank you, Keisha.

Good afternoon, and welcome to the Allegheny Technologies earnings conference call for the second quarter 2010. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call. Participating in the call today are Pat Hassey, Chairman, President, Chief Executive Officer, and Rich Harshman, Executive Vice President Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI.

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 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 to everybody joining today's call.

Our key global markets are performing well. Our strategy has been to target certain markets that we believe deliver long-term secular growth trends that are greater than GDP. The fundamentals of these markets remain intact, even during a time of general economic uncertainty, primary here in the US and in Europe. We continue to see 2010 as a transition year to the resumption of growth.

Here are some highlights of our second quarter 2010 performance. Sales were up 17% over last quarter to over $1 billion. Earnings improved to $0.36 per share, which includes nearly $9 million of start-up and idle facility costs and an additional $5.5 million LIFO inventory valuation reserve charge. Shipments of most of our products reached the highest levels in six quarters. Order entry for our High Performance Metal segment products from the aerospace and oil and gas markets continued to improve, with lead times extending into the fourth quarter.

ATI is not immune from short-term economic conditions. Caution and uncertainty best describe our stainless business, which is primarily driven by US and global economic conditions. Some additional second quarter highlights, we remain focused on improving our cost structure with over $35 million of gross cost reductions in the second quarter, bringing our year-to-date total to $72 million.

Total titanium shipments, including conversion of our Unity Titanium joint venture, were 9.7 million pounds in the second quarter. This brings 2010 total titanium shipments to nearly 19 million pounds. During the second quarter, titanium shipments increased 17%, or over 1 million pounds, compared to the first quarter of 2010 in our High Performance Metal segment from improved demand in the aerospace market. Flat-rolled products titanium shipments, including Unity joint venture conversion products, were about 2.6 million pounds. Our direct international sales increased over 35% of sales in the second quarter. Today, ATI is more globally focused on markets than ever before.

We continue to introduce innovative new products and achieved several major new product milestones in the second quarter. We announced the first long-term agreement for the use of our new ATI 718 Plus Alloy for jet engine applications. ATI 718 Plus Alloy is the first new nickel-based super alloy introduced to the jet engine market in at least 40 years. We believe this is the first of many applications of this innovative new product. Our game changing high strength titanium, ATI 425 Alloy, was introduced to the aerospace and defense market during the AeroMat Technical Conference and the Eurosatory, the European defense conference. We recently concluded a year-long program to characterize the mechanical properties of ATI 425 Alloy. Results have been approved, and this proprietary alloy is now certified for broad application in the aerospace industry. Customer interest in this new product is strong, particularly for the newly certified sheet product. The aerospace and defense industries now have, for the first time, a high-strength titanium alloy that is available in long length sheet coils. The industry now has, for the first time, a high-strength titanium alloy that is cold rollable and cold formable. These attributes are expected to significantly reduce the full cost of producing parts made of high-strength titanium.

At last week's Farnborough Air Show, our technical and marketing people met with many existing and new customers who are considering this new product. We now have a long list of customers, some new to ATI, who are interested in ATI 425 Alloy. The protocol for introduction to the market goes like this. First, design allowables approved for sheet and plate. This is done. Second, results approved for addition in the Metallic Materials Properties Development and Standardization Handbook #6, a prerequisite for broad application of this alloy in the aerospace industry. This is done. Three, testing by customers for various applications. This is now ongoing with increased interest. And lastly, customer specifies the ATI 425 Alloy for specific end uses. We believe that this is coming, potentially in a big way.

How do we see the impact of ATI 425 Alloy? It has created market pull. Customers want to design with it. ATI 425 Alloy is a replacement for 64 titanium, the most common high-strength titanium alloy. In addition, we believe substitution opportunities exist beyond titanium alloys. We believe ATI 425 Alloy has the potential to generate hundreds of millions of dollars in incremental revenue for ATI.

Now, let's turn to our key markets. Sentiment has changed dramatically in the aerospace market since the first quarter of 2010. Both Boeing and Airbus have announced they plan to increase their production schedules. At last week's Farnborough Air Show, optimism was high. A significant number of new orders were added to backlogs that were already at record levels. Boeing 787 Dreamliner flew into the show and was available for tours. All eyes were on that plane when it took off and left the show on Tuesday. Throughout 2009, when the aerospace supply chain was destocking, we had said that we expected the aerospace market to recover in 2010. That scenario is playing out for ATI even better than we had expected as aircraft build rates are increasing. Those who visited the ATI aerospace stand at the air show saw the progress we are making in growing our share in this important market.

For the first time, we displayed jet engine parts made with our new ATI 718 Plus Alloy. Second, our new high-strength titanium, ATI 425 Alloy in samples of continuous cold roll sheets, formed plate, and prototype aerospace fasteners. A display of ATI powder metals products. Remember, we recently acquired this business in late 2009. And lastly, new cutting systems designed to improve the productivity of machining difficult-to-machine materials such as titanium alloys and nickel-based super alloys.

In addition, during an air show event, ATI Allvac was recognized by Rolls Royce and presented with the Chief Procurement Officer Award. According to Rolls Royce, this honor was awarded to ATI Allvac "after successfully reducing overall product costs and contributing toward our environmental responsibilities by limiting the usage of natural resources. The company, ATI Allvac has also made sustained investment in the state-of-the-art facilities that have embedded lean practices."

During the oil and gas market, we continue to make progress in improving our position in this global market. First, first half sales were 70% higher than the first half of 2009, and over 40% of first half sales to this market were international. While current and future production regulation in the Gulf of Mexico is uncertain, global oil rig count is steadily increasing, driven in large part by unconventional gas such as the Marcellus shale here in western Pennsylvania and the Tar Sands in Canada. Demand remains strong for our specialty flat-rolled products, our nickel-based alloys for completion tools, our specialty alloy for drill collars, and our tungsten drill products.

The investments we've made in our Sheffield UK facility to melt and machine-engineer products are now paying off. Demand is strong for our proprietary Datalloy 2 drill collars and our ATI 718 OP nickel-based alloy completion tools and for other ATI nickel-based alloys. Looking ahead, we continue to improve our position in the oil and gas market with innovative new products and new global customers. In addition, several very large oil and gas projects in Asia and the Middle East are moving forward. Orders for our materials are expected to be placed later this year.

In the electrical energy market, demand for our grain-oriented electrical steel products remained relatively flat. Demand from the nuclear electrical energy market continues to improve. The medical market reached over 5% of first half 2010 sales. Biomedical manufacturers continue to purchase at a brisk pace. Demand was strong for our Niobium titanium alloys from the medical equipment market for MRI applications. These are all good signs for ATI products.

Turning to our businesses that are more dependent on the general economy of the United States. Second quarter 2010 shipments of our standard stainless sheet and plate products increased 17% compared to the first quarter of 2010. Industry data reflects service center inventories remain at a seasonally adjusted rate of just 2.8 months, which is still historically low. In addition, customers see no reason to purchase more than they need, even though average base prices are low, because the surcharges are declining.

The benchmark 304 stainless surcharge was $1.27 per pound in June. It is $1.08 per pound in July. It will be $0.96 per pound in August, and it is expected to be approximately $0.94 per pound in September, based upon current moderating raw material prices. That is a $0.34 per pound or 27% drop in the surcharge since the yearly high set in June. In addition, the summer months are normally seasonally slower for our stainless business, so customers are taking a wait-and-see attitude until raw material prices stabilize. And finally, it's important to note that we do not believe end use demand for our stainless products is deteriorating.

Moving to our strategic capital projects, we have continued to invest in unsurpassed manufacturing. The ramp-up process at our Raleigh, Utah, premium titanium sponge facility is continuing. We plan to continue to ramp production throughout 2010 in a systematic manner. The melt shop consolidation at our Brackenridge, Pennsylvania, melt shop is essentially complete. We reduce our footprint, and we expect considerable cost savings and production efficiencies from this project when it is fully operational. We expect to benefit by up to $30 million of annualized cost reductions associated with this project beginning later this year. The full impact of the project begins in 2011.

On June 21, we announced that ATI has selected Siemens VAI to design, engineer, and supply the hot rolling mill at our Brackenridge, PA, facility. We believe our new hot rolling and processing facility will provide unsurpassed manufacturing capability and versatility in the production of our unique range of mission-critical metallics. The state-of-the-art facility is designed to further transform our Flat-Rolled Product segment's operating performance across all business cycles. We now expect 2010 capital investments to be approximately $325 million.

Before we open the call for questions, a last comment about the third quarter and the second half of 2010. In the second half, we expect our High Performance Metal segment to improve quarter on quarter at about 7% to 8%. We see the aerospace market and this segment's other markets beginning to accelerate throughout 2011 to a robust level in 2012 and beyond. Our Engineered Products business -- segment businesses continue to improve. We expect a lower third quarter due to normal seasonality, particularly the August vacation period in Europe. Growth should resume in the fourth quarter and continue into 2011.

In the third quarter, our Flat-Rolled Product segment is experiencing raw material costs to out-of-phase surcharges from the rapid decline in nickel prices from the second quarter highs. Lower volume from the wait-and-see attitude by service center and end use customers are affecting this unit's performance. These conditions are expected to significantly reduce third quarter flat-rolled products operating profit. However, we expect a rapid rebound in the fourth quarter due to renewed stocking. We do not believe end use demand for our standard stainless products is deteriorating.

By 2011 and beyond, we expect to grow faster than our core global markets because we have improved our market position by [from] improving volume and forward load, new customers, and expanded LTAs, innovative new products, new and technically advanced manufacturing capabilities, and finally, a global focus combined with a solid reputation and internal customer base in key growth markets.

With this opening comment, we would now like to turn the call open for any questions.

(Operator Instructions)

Your first question comes from the line of Luke Folta with Longbow Research. Please proceed.

Afternoon, guys.

Hi, Luke.

A couple of questions. Just firstly on your guidance, if I'm interpreting you correctly, I think you're saying that the impact from the stainless steel raw materials surcharge mismatch will probably outweigh some of the improvements you're seeing in the nickel-based alloys business in the third quarter, but that you're seeing a bounce back in 4Q. And correct me if I'm wrong about the third quarter, but my question is, would you expect the fourth quarter number as you see things today to be that your best quarter of the year, or would that be the second quarter?

I think you've got it right. I think the third quarter will be down. We've talked about these issues before. The worst thing for a stainless steel producer, and I think you've seen this from some of the other reporting companies, is to have a rapidly dropping nickel -- basically nickel surcharge and couple that with lower volumes so you cannot move the metal through your operations at the higher surcharges. There just isn't enough volume to get it out. So, therefore, it lingers on through the quarter and will cost money. That's what the third quarter is going to experience. It's going to be a down quarter.

At the same time that customers are doing that, the shelves are destocking because demand remains fairly stable out there. So, what we think in the fourth quarter is that we will see the demand come back with also restocking on the shelves to meet the business conditions. So, if you're asking me today, I would think the fourth quarter would be the best quarter of the year for flat-rolled.

Okay. Thanks for that. And then just secondly, as a follow-up, when you think about the pickup that we saw in the titanium and nickel-based alloys business. In the press release, you had said it was mostly due to engine and aftermarket. Was that pretty much the sole increase? I'm just trying to get a sense of what the leverage is for you guys to improving engine fundamentals.

I think there's two issues there, Luke. First one is that we had a pretty good business coming back in the jet engine business, which we had talked about earlier, and we had forecasted, if you recall, that we did not see any decline in build rates. That, in fact, when we looked at the fourth quarter 2009, we thought they would at least be stable. Well, now we have a situation not only with stable but increasing build rates coming, and I think you're seeing the engine makers come back to try to get their inventories in line with what demand that they now see going forward. That's one issue there.

Our air frame business was pretty much at the minimum levels that we have contracted to, so it remains steady. The other growth that we had was in the industrial titanium markets coming back in Asia and in other areas. We even had some business in the defense sector that we hit some wins on. So, when you put all that together, what you find is a pretty robust second quarter for titanium moving up a million pounds. But as you look at the mix of more industrial applications, you saw that the pricing stayed relatively stable. We didn't get the price increase that we wanted overall, but we did get price increases on the aerospace side.

Are you starting to see any benefit at this point from 77 related engine programs like the Trent 1000 and GNX? (inaudible - multiple speakers)

I think that is certainly part of my comments of the engine makers getting ready for the ramp-up of those programs as they look forward, yes.

Thanks, guys.

Your next question comes from the line of Gautam Khanna with Cowen and Company. Please proceed.

Yes, I just wanted to ask a couple of questions, Pat or Rich, on when you talk about robust gains in 2011. Into the later cycle, long-cycle businesses, what is your expectation for titanium shipments next year? In the air frame side of Boeing, are you going to expect to see a big pick-up next year, or is that something more likely to occur in 2012?

I think you have it right, Gautam. I think we're going to see jet engine business move rapidly. I think we're going to see the industrial markets for titanium, especially in some of the oil and gas and desalinization chemical processing, heat exchangers, nuclear markets begin to ramp pretty well. There is some defense business that looks attractive. I think the air frame business will continue along at about the same pace until the excess inventories begin to be worked off, so it depends on how fast that they ramp those businesses. It depends on the extra build rates and how fast they ramp for the single aisles.

They all use titanium, too, and all the engines that are on those programs use the titanium products. So, we expect to see this begin to ramp in 2011, and as the air frame programs come on stream, the nuclear business moves where we think it's going to be, and the programs that we're shooting for in some of the other applications that are out there, especially with the new 425 Alloy in our business gaining share in the overall market, we see 2012 being a very robust year for us.

Okay. And just quickly to follow up on the question about titanium pricing in the quarter, last -- do you think Q2 was the bottom for average selling price? I know it's mix-dependent, but obviously your Q3 surcharges on 64 are up quite a bit.

I would say this, Gautam. I would say the first half is the bottom. We actually got some pricing on different segments in the second quarter. You're absolutely correct in the surcharge mechanism. When we look at what the current conditions are for 64 bulk weldable processed scrap. So, this is scrap that is clean, ready to be applied into a bulk weldable stick. That price has now moved up to $6.75 per pound.

So, when you start back looking at that kind of product in the fourth quarter, that's up $4 a pound. And that's why our surcharge mechanism moved unexpectedly to some customers almost to $2 a pound. So, I would say the first half of the year is the bottom for that, and you're going to see rising surcharges on the titanium side. You're also going to see, as these product lines move forward, depending on the application, depending on the size, shape, or form, better pricing going forward.

Thanks a lot, guys.

Your next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please proceed.

Thanks very much. Hello, good afternoon.

Hi, Mark.

I guess you were talking a little bit, Pat, about the third quarter and clearly, the flat-rolled business is going to be down from the second quarter because of the mismatch. But were you also indicating that you thought that the quarter for the Corporation as a whole might be weaker than the second quarter? Or were you just talking to the flat-rolled business? Can you give us some color and help reconcile some of the new projects, the cost reduction activity, the growth in the High Performance business, and how you'd reconcile that against this short-term, call it a pause, in the standard flat-rolled business?

The key question, Mark. Yes, the business on the High Performance Metal side, we expect to have improved operating profit in the third quarter. The Engineered Products business, although we have improving margins with the cutting tool business, basically losing the vacation period in Europe. And we sell about half of our cutting tools in business are in Europe on many of our items. So, the cutting tool business is split. We're going to see that seasonality in vacation schedules in the US.

So, we're going to see the Engineered Products business, even though we're continuing to improve on pricing and penetration, somewhat down. Not a lot, but, yes. And then we get to Flat-Rolled Products. Now, Flat-Rolled Products, as you saw in the first quarter, we had a $42 million operating margin. We're not going to get there. And these other two segments are not going to offset that division when we start talking about metal mismatches coupled with lower volume.

Okay.

So, in the end, we're talking something lower than the second quarter.

Okay. All right, that's helpful. But good luck continuing to penetrate into these markets. I think you guys are doing a great job on the titanium side and certainly the aerospace and energy markets. Foreign markets, you're making a lot of progress there. If I could just ask one other question. The new rolling mill, what's the timetable for that to begin commissioning? That you had talked about in your comments.

This is about a 40-month project, so that puts us out to basically 2013. We have, as you noted in our comments, we have got about a $50 million reduction in our estimated spend this year. So, we're out into 2013 with that start-up.

Okay. Terrific. Thank you very much.

You bet.

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

How are we doing?

Doing good, Chris. How are you?

Good. So, I'm going to bite on the 425 comments because of something that interests me. I've run through the numbers in terms of what I think the market potential is, and I come up with roughly 5 million pounds of visible market share opportunities. And then I assume $20 a pound, and that's where you're getting $100 million from. Have you gone through any kind of analysis on how big or how much market share you could take with this new product?

Let me just give you my opinion, Chris. You were down at our tour of the Carolina facility when we showed you the product and showed you how it forms and showed you that product that basically looks like aluminum sheet coil you can unroll. It's just really a game-changer. So, when we look at this, we basically are getting inquiries across every mill product segment of the titanium market today. We are basically getting inquiries in every product form that we make, from wire all the way through thick plate.

So, I could almost say that we don't know its total potential, but we do know that those markets are basically the entire 64 spectrum of mill products in the titanium business. Now, we know we're not going to replace 64 across the board, but this product is going to take share and it's going to place us in the business where we have never been before.

We came out of the Farnborough Air Show with a list of inquiries and follow-ups that, on a spreadsheet, take up two full pages of people that want to get samples, want us to come talk about it, want us to see what they do, want us to see if we can fit their applications, just coming out of the Farnborough Air Show. So, how fast we go is going to be based on how fast the customer can reengineer to use these products and also how fast we can gear up to get to the volume levels that we're talking about.

Now, when we look at this product, my comment around hundreds of millions of dollars. This is a proprietary product that has a patent on it through around 2017. So, when we look at that, we know that this product is worth hundreds of millions of dollars to this Corporation, and we also know that we're being pleasantly surprised about people contacting us that are not to replace other materials or in other designs to lightweight their applications that are currently using today as steel or aluminum. So, because of its formability and its ability to be cold formed, the total cost, near net size total cost and availability of sizes and lead times brings this product to the forefront of a new application across all of our market segments.

So, I can't tell you what it is, but Chris, you have a good head for numbers and applications. The question is, how fast does it come? And how fast can we get these things into place? We have the characterizations done. We have the Mill Handbook 6 for Aerospace complete. We have people testing it now, so it's a question of how many hits and how fast we can ramp up.

When I look at it from the channel point of view, it seems to be most popular within defense right now. So, I would assume that if you were successful in terms of penetrating the market, you could see some defense contracts maybe on the plate and sheet side coming up over the next year. But it would probably take a couple of years to get on some of these aerospace applications. So, maybe a longer curve after some initial contracts. Is that a good way to look at it?

I think there are certain applications that we are getting inquiries for that would be, since it is a direct replacement for 64, certain applications that could be substituted almost instantaneously and lower cost. So, we'll see some aerospace applications before I think. I would ask you to consider that thought in looking into your studies. I agree with you on the program side. It will be as fast as a new program comes on. There will be this product on a new program someplace, just when does the new program come on?

Okay. And last question I have, just on the nickel alloy market. I hear you on the jet engine strength, but have you seen any kind of near-term hiccups in terms of orders here on the jet engine side? Is there anything in terms of that channel that's just been negative occurring?

There's no hiccup. I would say that the second quarter flattened out in growth. The first quarter was like a catch up, let's just go get everything you can get as fast as you can get it. But right now, what we're seeing is a moderation of that through the second quarter.

As I looked at the second half and we've given you some guidance around the 7% or 8%. But that growth in the first half at 30% a quarter is not going to -- talking about operating profit coming through, is not going to happen the second half. But it's sizable growth when you compare it to anything else in the US markets. We're double, triple GDP growth there, so we're pretty happy with that size, and we're really happy with the new announced single aisle build rates. And we're happy with the ramp-up finally of the 787 and within the next 30 months, of the A350. So, I don't think we would call anything we've seen so far a hiccup. I would call it a flattening of growth.

Okay. Let me throw out one last one. Anything different on the 737 wing redesign? Have you heard something different from your suppliers or your customers?

No, I think I addressed that in my last comments. I have my own personal views of it, but we haven't got any new information to share on that.

Okay, thanks.

Your next question comes from the line of Stephen Levenson with Stifel Nicolaus. Please proceed.

Thank you. Good afternoon, everybody.

Hi, Stephen.

Just in relation to what you're talking about for third quarter. Certainly second quarter had the start-up in idle costs and the LIFO reserve in there. Is the number you're suggesting for second quarter also going to including start-up, idle facility, and LIFO costs, or is that something you think is running off now?

Steve, I think given -- on the startup costs, I think given the systematic approach we're taking in Raleigh, because most of that is really coming out of Raleigh, we will continue to see some start-up costs in the third quarter. It may not be quite at the level of the second quarter, but it won't be all that far away, we don't think, at this time. The LIFO side, as you know, we reevaluate that every quarter based upon where we think raw material costs, primary raw material costs, but it's all of the costs. It's labor and overhead to come up with the current year index. But it's really primarily driven by raw material costs, so we'll reevaluate where we think raw material costs will be at the end of the year. If that reevaluation is consistent with our assumptions that we're making today, the $5.5 million is a catch-up, because we didn't book anything in the first quarter. So, it will be half of that in the third quarter if the assumptions remain consistent.

Okay, thanks. Next item I was going to ask about was with the pull you're getting on titanium for aerospace and the demand related to chemical and desalinization plants. At what time does your melt capacity get squeezed? At what time do you have to make a decision on what you're (inaudible - multiple speakers)?

We've already made a decision to bring on another PAM furnace. That is underway. It's a furnace that we had in our original plans but delayed when the market fell back at the end of 2008. So that's --

I'm sorry. That's the one we saw on the tour last month?

That's the last one that you saw on the tour last month. That furnace will be up and running in the first quarter of next year, and so that furnace gives us all the capacity that we need. We don't feel like our melting will be any kind of a constraint to our growth in the business.

And between availability of scrap and sponge?

Well, I think as we look forward, Steve, we're happy to be a totally integrated sponge producer. I think scrap prices continue to rise. They're up $4 in the first six months of this year, and I think as we look at the restructuring of the industry with a lot more near net size coming in from VSMPO out of Russia into the Boeing Corporation, there's going to be a lot less scrap in the US. So, I don't expect those scrap prices to moderate, so I'm glad to have the sponge production.

Okay, and last, just related to the scrap price. Do you think it will -- would you want to make a guess on what percentage it would get to where it was in 2007?

Well, we've looked at the history. I don't believe we're going to see those prices peak the way we did the last time, but there was people that, when we were talking about scrap prices moving back towards $7 and $7.50, thought we were crazy. So, people were telling us they wouldn't go over $3.50. They're now at $6.75 for bulk weldable process 64 scrap.

Great, thank you very much.

Your next question comes from the line of Timna Tanners with UBS. Please proceed.

Hi, good afternoon.

Hi, Timna.

Just wanted to clarify something again on the stainless side. If I'm correct in my understanding here, we're talking about a margin and a volume hit in the third quarter, and then fourth quarter expecting volumes to recover and also compensate a little bit for the hit in the third quarter? Is that fair? Is there any volume -- margin impact in the fourth quarter that you would anticipate?

I think we're going to see it in the third quarter, and of course we're going to be careful about what we do with metal in the third quarter. If we do our job right and we're careful about what we do with metal, I don't think there will be any margin impact in the fourth quarter. We do expect the fourth quarter leveling out on the nickel side, and if that happens and even drops a little bit, I think we'll be able to deal with it.

Okay, that's helpful. And then you've said in the past that you expect volumes to improve throughout the year. You had a really strong second quarter, especially in High Performance, of course. And so, you're still expecting from those levels to continue to get traction through the year?

Yes.

Okay. These are easy ones, sorry. Last one is, I'm just looking at a filing here regarding a lawsuit between Howard Industries and ATI. Looks like it ruled in your favor. I don't understand the legalese entirely, but -- and extends Electrical Steel's contracts through 2012. And it also talks about volumes reaching a low level recently. What do you think about the Electrical Steel business from here? Are we hitting bottom, or what's your assessment of the market?

Well, we have to see what the residential building does in the end, but I think we're probably at the bottom. Not commenting on any legal matters, but overall, our strategy had been over the last two years to go with our customers to produce longer-term arrangements over multiple-year contracts. And those contracts are holding throughout our customers spectrum, and so we see our business relatively flat.

Okay, thank you.

Your next question comes from the line of Brian Yu with Citi. Please proceed.

Thanks. Good afternoon, everybody.

Brian?

Hi. With the -- I think you mentioned earlier that the aero engine business is improving, and the question is, does this richen your mix in the High Performance metals nickel alloys? And if so, could you comment on the two quarters of price declines we've seen, even though nickel prices have averaged higher over that same period?

Yes Brian, this is Rich. I think yes. The answer -- the simple answer to the question is the aero engine demand is a higher-value product than, for example, oil and gas and -- industrial or rotating quality aero engine, nickel products are obviously higher value than static. So, a lot of it is dependent upon -- when you look at average selling prices. Our average selling prices are nickel and specialty alloys, and the specialty alloys are primarily low nickel bearing grades for industrial applications in oil and gas. So, they have a lower selling price than higher nickel bearing grades do for richer alloy mix or jet engine alloy mix.

So, when you look at our average selling prices for -- that we disclosed, it is heavily mix-sensitive. I think it is fair to say that on the aero engine or high-value market side, that there are two pieces of transaction price. One is surcharges, and with nickel going up, surcharges go up accordingly. And the second is base prices, and we are seeing some improvement in base prices due to the improving demand picture.

Okay. And then just a question on the CapEx. Can you elaborate on the reduction? Is this just timing and spending flowing into 2011 because of some equipment deliveries?

Yes, I think it's timing primarily, almost totally on the hot mill project.

Okay. Thank you.

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please proceed.

Congratulations on the good profits.

Thank you, John.

Concerning the Flat-Rolled guidance, would it be too severe to expect the third quarter total flat-rolled poundage to drop to 200 million to 225 million pounds? And given that the second quarter nickel cost looked like it was at least $0.80 out of the $1.65 standard realization, should we expect that standard realization to drop about a dime in the third quarter?

John, I never know how to answer all your questions.

Well, last year when business was rough, your standard flat-rolled -- your total flat-rolled was 200 --

Yes.

-- million pounds a quarter, so if you're going to have a rough quarter in the third quarter, should we expect 200 million pounds again?

I would think that we're talking something -- if you go to the -- looking at what the average of the second half of 2009 was, our first half was up like 20%. I think we're going to see that down 10% of that. So, we're going to be down 10%, something like that.

Now, in terms of price. If you take a 304 coil with 160 pounds times $10, that's $1,600 a ton or $0.80. The spot was $10.19 in the three month, $10.22 in the second quarter, so that's how much I got my $0.80 a pound. Just $10 a pound on 160 pounds. I'm assuming your standard is something pretty close to a 304 coil?

Right.

So, would it be reasonable to expect the standard product to fall about $0.10 a pound? Or do you think it would fall more than that?

Are you talking transaction price, or are you talking base price?

The price just like that $1.65 in your table for your --

As you know, John, it's dependent upon two things. It's dependent upon the surcharge and it's dependent upon the base price. I think we are seeing -- first of all, it's a combination of volume, which Pat has already addressed. And it's a combination of -- when you look at the kind of volume that -- in both Europe and the US and the impact, I think that our assumption is that base prices are going to be more competitive in the third quarter than they were in the second quarter. Surcharges will be what they are. That's very transparent, and it's dependent upon what all the raw material cost elements are. And those are fairly well known now because of the two-month lag in terms of how the surcharges work.

So, it's primarily volume. Some moderation of base prices and product mix, including the difference between high-value as well as the standard grade. And then finally, the biggest impact in the quarter is what we've already talked about, and that is the surcharge mismatch because of the fairly dramatic fall from the April and May highs of nickel. But also chrome and iron units to what they are today and how they match up against the surcharge. So, all of that is really driving the impact as we see the Flat-Rolled Products in the third quarter.

I apologize for my specificity, but I think down 10% in volume is a lot clearer than the qualitative language in the release because somebody like me might have thought you were down 30%.

Okay.

Thank you.

That's a good question.

Your next question comes from the line of Kuni Chen with Bank of America Merrill Lynch. Please proceed.

Hi. Good day, everybody.

Hello.

Can you just remind us of the startup costs, roughly $9 million in the quarter? How much of that relates to Albany staying idle?

Yes, about $3.5 million to $4 million is Albany.

$3.5 million to $4 million per quarter?

Right. The rest is Raleigh.

Got you, got you. And then just more of an industry question there. Around Farnborough, we've seen announcements on new aluminum lithium alloys being launched here. Just want to get your overall thoughts on this. Do you think this positions aluminum better, or longer-term, to fight back against titanium and carbon fiber? Any longer-term impacts on the market that you can foresee?

I think you have to look at the design that the new planes will have. The design of the twin aisle that came out with the composite and titanium was clearly a titanium win. If you're looking at what could happen with single aisles, I think you might see a competitive alternative, but it's the best chance aluminum has. So, the question is whether you get other redesigns or whether you start to see a twin aisle shrunk to a single aisle type aircraft with the same design. If that's the case, titanium wins.

Alright, okay. Thanks, I'll turn it over.

Your next question comes from the line the Dan Whalen with CapStone Investments. Please proceed.

Great, good afternoon.

Hi, Dan

Hi there. Most my questions have been answered, but can you expand on your prior comments regarding the oil drilling restrictions in the US? Is this just a timing issue as equipment is moved, or is there more to it than this?

Well, we haven't seen much impact in terms of our existing sales and businesses. 40% of what we're doing is now in international sales, so only 60% was in the US. And with the Marcellus gas in West Virginia and Pennsylvania, that was a major increase in drilling and drilling rigs and tools and pipe and all those kind of things.

So, what we can't detect, and what I suspect, is that if we hadn't had the moratorium, the business would have been better. A lot better. But it is better without it, because it is growing so fast with the Marcellus gas and our ability to penetrate these markets on an international basis. So, our business is up in total. I wish it could have been up more. I don't think it's a good thing long-term for the industry to see these rigs move or to have a moratorium on drilling when we're a nation that needs this energy, and we need it domestically.

Okay. Great, thanks.

At this time, there are no further questions in queue. I would now like to turn the call back over to Mr. Pat Hassey for any closing remarks.

Well, thank you, gentlemen and ladies, for joining us today, and thank you for your continuing interest in ATI.

Thank you, Pat and thanks to all the listeners for joining us. That concludes our conference call.

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