ATI Inc (ATI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Allegheny Technologies earnings conference call. I'll be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a Question-and-Answer session. (Operator Instructions) I would now like to hand the conference over to Mr. Dan Greenfield, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you. Good afternoon and welcome to the Allegheny Technologies earnings conference call for the first quarter 2012. 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 Rich Harshman, Chairman, President and Chief Executive Officer, and Dale Reid, 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 Rich Harshman.

Thank you, Dan, and thanks to everyone for joining today's call. First quarter results were consistent with our expectations as strong secular growth continued in our key global markets and demand improved moderately from the domestic GDP sensitive markets for our short cycle products. Total revenues grew 10% compared to the first quarter 2011. Two big revenue growth drivers were increased demand from the aerospace and construction and mining markets.

Looking at each of our key global markets, first quarter 2012 sales to the aerospace and defense markets were $436 million, or 32% of sales, compared to just under 29% for the full year 2011. Sales to the oil and gas chemical processing industry markets were $277 million, or 21% of sales. Sales to the electrical energy market were just under $150 million, or 11% of sales. Sales to the medical market were approximately $60 million, or 4% of sales. In addition, we are seeing strong growth in demand from the construction and mining markets with sales of approximately $105 million in the first quarter, or nearly 8% of sales. Finally, first quarter direct international sales were approximately $510 million, or nearly 38% of sales, compared to 35% for the full year 2011.

As a result of continued strong growth in demand from these key global markets, and the addition of high performance forged and cast components, sales of our high value differentiated products increased to 80% of total ATI sales in the first quarter 2012, compared to 72% in the first quarter of 2011, and 78% for the full year of 2011. Looking at performance by segment, in our High Performance Metals segment first quarter sales increased to $581 million, a 46% increase compared to the first quarter 2011, and 11% higher than the fourth quarter of 2011. Segment operating profit increased to $104 million, or just under 18% of sales. In addition, the addition of ATI Ladish was accretive to the first quarter 2012 earnings per share. I'm pleased with the progress being made so far in achieving the opportunities and synergies from adding the capabilities of ATI Ladish. Comments from our OEM customers regarding ATI's unique integrated supply chain capabilities have been positive. We continue to see significant new opportunities in our key global markets as a result of these integrated capabilities. On a pro forma basis, sales of our high performance forged and cast components increased 26% compared to the first quarter 2011.

First quarter 2012 High Performance Metals Segment operating profit was negatively impacted by approximately $6 million in higher raw material costs, primarily nickel, which did not align with the raw material surcharges due to the length of the production cycle and the rapid decline of nickel prices in the latter half of 2011. We do not expect this issue to have a significant negative impact in the second quarter 2012. Demand for our exotic alloys was weaker than expected as the nuclear energy market balances supply/demand dynamics with the shutdown of reactors in Japan, refueling cycles for operating reactors, and the timing of construction of new reactors being built in several areas of the world. In our Flat-Rolled Products Segment, while first quarter 2012 sales and operating profit declined compared to the first quarter of 2011 due to lower raw material surcharges, lower volumes from most products, and lower based prices for standard stainless products, sales increased 5% and operating profit more than doubled compared to the fourth quarter 2011. This significant operating profit improvement from the fourth quarter 2011 through the first quarter of 2012 was due primarily to a 29% increase in shipments of our standard stainless products as demand and base prices from the US GDP sensitive markets improved moderately. Sales of our flat-rolled high value products continued to benefit from strong demand from the aerospace and oil and gas markets.

Shipments of our nickel-based alloy sheet and plate were strong to the oil and gas market due to large projects. Shipments for many of these projects were completed in the first quarter of 2012, and we expect orders later in the second quarter from follow on projects, with related shipments to benefit volumes and margins in the second half of 2012. We are making progress in improving the performance of our Engineered Products Segment. First quarter 2012 sales increased 15% compared to the first quarter of 2011 and increased 5% compared to the fourth quarter of 2011. First quarter 2012 segment operating profit was, however, impacted by $1.5 million of start up costs related to our new fabricated components business located in Bolingbrook, Illinois.

Capital expenditures were $70 million in the first quarter, primarily related to the construction of our hot-rolling and processing facility, which is progressing on schedule and on budget. This project, which is scheduled for completion in late 2013, with commissioning occurring during the first half of 2014, is expected to significantly improve the cost structure, capabilities, and growth opportunities of our flat-rolled products business. Our Raleigh, Utah, titanium sponge facility achieved an important milestone in March with the completion of the standard grade qualification, or SQ process. Titanium sponge produced at the Raleigh facility can now be applied to many products used for aerospace airframe, medical, and industrial applications. Production volumes are increasing and costs are decreasing. With stable input prices for both titanium tetrachloride, or TiCL4, and magnesium, higher production rates and improved plant efficiencies, we expect to produce more sponge at lower costs in 2012 than in 2011.

From a historical perspective, the Raleigh facility is part of our growth strategy to expand ATI's presence in the aerospace market, both aero engine and airframe, and to grow our medical market business. When the secular trend toward more titanium intensive airplanes powered by innovative new jet engines began to evolve a few years ago, it became apparent that the industry needed an integrated source of diversified advanced titanium products from a geopolitically secure and stable area of the world. The Raleigh titanium facility investment and capabilities is a growth enabler for ATI and an important part of many of our long term agreements in the aerospace and medical markets. In addition to our new titanium sponge facility, since 2004, ATI has added titanium primary melt and remelt capacity. With our two new plasma cold hearth melt furnaces, we now have three qualified PAM furnaces. ATI remains the world's only PAM qualified producer of rotating quality titanium products for jet engines. Nickel based alloy, primary melt, and remelt capacity has also been added. The most recent additions are two new state-of-the-art electro-slag remelt, or ESR, furnaces at our Latrobe, Pennsylvania facility that were completed ahead of schedule, on budget, and began operating in March of this year.

We built and qualified the largest and most powerful press forge and radio forge in our industry. Our upgraded long products continuous rolling mill is the most moderate and most versatile of its kind in the world. We acquired advanced powder capabilities. We acquired ATI Ladish, that has leading advanced capabilities for isothermal and hot die forging. And ATI Ladish also adds advanced titanium investment castings to our long list of capabilities. These investments, capabilities, and needed capacities are available and qualified now and are providing growth opportunities to meet the current and projected strong demand growth from our key global markets over the next several years, especially the aerospace, oil and gas, and energy markets. Our ability to manufacture industry-leading mill products, near net shapes, and forged and cast components made from mission critical metallics, such as titanium and titanium alloys, nickel-based alloys, and super alloys, specialty alloys, and zirconium alloys, positions ATI with a unique supply chain and diversified product portfolio that provides value to our customers and creates value for our shareholders.

As we look to the remainder of 2012 and to the next three to five years, we continue to believe in the strong secular growth trends for our key global markets. ATI is very well positioned to benefit from this growth due to the investments we have made in both new products and new and enhanced manufacturing capabilities. We have identified and targeted nearly $2 billion in potential new annual revenue growth within the next five years from the secular growth expected from our key global markets and from our new manufacturing capabilities and our innovative new products. For example, this morning we announced the long term sourcing agreement with GE Aviation for the supply of Rene 65 alloy, a future generation nickel-based alloy.

This alloy was developed by ATI in collaboration with GE Aviation. The short time involved in the development of Rene 65 is unprecedented. It took four years to develop this cost effective, disc-quality product for use in jet engines that are operating at increasingly higher temperatures. By comparison, it took about seven years for our ATI 718Plus alloy to move from design to qualification to use in a jet engine. The Rene 65 alloy development process illustrates the value that our integrated aerospace supply chain brings to new product development.

The real-time technology exchange among GE Aviation and ATI's mill products and isothermal and closed-die forging technical experts significantly compressed the development time. In addition, the power and capabilities of our new titanium and super alloy forging facility, which has the largest and most powerful press forging and advanced open-die forging equipment in our industry, are critical capabilities required to forge this metallurgically complex alloy. Once in mill product form, Rene 65 alloy can be forged in to engine components by ATI and other forgers in the GE supply chain. The role of advanced alloys and materials in improving fuel efficiency and reducing emissions in aero engines is related in large part to increased efficiencies enabled by higher operating temperature. Auto running engines demand components capable of withstanding the higher operating temperatures without sacrificing performance.

New generations of advanced alloys are replacing incumbent alloys to achieve the necessary performance. New advanced nickel-based super alloys and powder metal alloys are being specified for use in the hot section of jet engines. Through our innovative new alloys such as ATI 718Plus alloy, Rene 65 alloy, and our nickel-based powder metal alloys, ATI is significantly improving our position and content on legacy, next generation, and future generation jet engines. ATI 718Plus alloy permits engine operating temperatures that are hotter than the standard 718 alloy. Rene 65 alloy is stronger and permits operating temperatures that are hotter than 718Plus alloy. And powder metals are the most complex alloys and are used in the hottest sections of jet engines.

ATI 718Plus alloy and Rene 65 alloy are both being specified today, and shipments of both new alloys are growing. In addition to the Rene 65 sourcing agreement, we recently signed long term agreements to continue and extend our position as a major supplier of certain titanium alloy and nickel-based super alloy products to a jet engine OEM. This continuing business grows with the market; LTAs for new alloys provide growth greater than the market as the new alloys are specified for legacy, next generation, and future generation jet engines. In addition, these new alloys do not cannibalize our position in the standard jet engine alloys.

We also recently signed new long term agreements for titanium alloys to continue our position with two of our major customers who make medical equipment and medical devices. Looking at the global oil and gas and chemical process industry markets, while volume growth was realized, revenue from this market was relatively flat in the first quarter 2012 compared to the first quarter 2011, due to significantly lower raw material surcharges and indices due primarily to lower nickel prices and scrap. Our down-hole oil and gas products remain in high demand. The shift in the US from natural gas drilling, due to the low prices of natural gas, to oil drilling has had little impact on activity levels or product demand. We see continuing strong demand for these products and we have a solid order backlog for the remainder of 2012 for our nickel alloy and specialty alloy products for down-hole applications. In the first quarter 2012 we had strong demand from large nickel-based alloy clad flow line projects. Due to project completions, we may see a temporary decrease in demand for these projects in the second quarter. However, we expect major oil and gas project awards for our nickel-based alloys and nickel moly alloys in the second quarter, with delivery in the second half of 2012.

Demand for our duplex alloys for offshore development applications remains robust. Our super duplex and duplex grades were recently qualified by a major oil and gas production company for offshore applications, making ATI one of two global duplex alloy suppliers qualified by this producer. This qualification positions ATI to receive orders later this year for a major offshore project. We continue to extend the ATI brand in the oil and gas market. An ATI oil and gas materials technology seminar was conducted in Houston in April. Over 50 of the top engineers in the down-hole industry, including key material decision makers from the top oil field service companies, attended the seminar.

Turning to titanium demand from the industrial market. We expect second quarter 2012 Flat-Rolled Products segment industrial titanium shipments, including our unity conversion, to remain consistent with the first quarter due primarily to project award delays. These big projects are still out there. We expect to see several projects awarded in the second quarter with shipments beginning in the third quarter. The list of projects includes desalinization projects and projects related to electrical energy and oil and gas markets.

Although macroeconomic challenges and uncertainties remain, we remain cautiously optimistic about 2012 and strongly optimistic about the growth opportunities over the next several years. ATI's diversification, focus on differentiated growing global markets, continued commitments to new product and technology development, and focus on cost reductions and manufacturing efficiencies are important to our growth strategies. While secular growth trends in our key global markets remain intact and leading economic indicators are getting better, short cycle market recoveries remain sluggish as the unemployment rate in the US remains high. The US consumer confidence index remains low, at least from an historical context. US economic policies and regulatory environments remain uncertain, and concerns remain about the impact of the sovereign debt crisis on the Euro zone economies and about the level of GDP growth in both the US and China.

In our High Performance Metals segment we expect to benefit from strong demand, growth in demand from our key global markets, a full year of results and increasing synergies from ATI Ladish, the lower cost structure at our Raleigh titanium sponge facility, additional premium titanium melt capacity, and the growth in demand for our new products. In our Flat-Rolled Products segment we expect the benefits from several upcoming large projects in the oil and gas and chemical processing industry markets, including desal projects, to begin in the third quarter 2012, a delay of about one quarter. For the second quarter, we expect flat-rolled product volume to be good, with a less favorable mix of high value products due to the gap in demand from these major projects. We expect to win a meaningful share of these major titanium and nickel-based alloy projects. And our quality and delivery performance to these customers for previous projects is among the best in the world.

For our standard stainless products, higher volumes provide stable operating schedules and lower conversion costs. However, base prices, while moderately higher than the end of 2011, remain low and are being impacted by low priced imports and low domestic GDP growth. In our Engineered Products segment we see continued growth in demand for our tungsten-based products and our industrial forgings, especially from the oil and gas and construction and mining markets. As we take a balanced view, we continue to expect revenue growth of at least 10% in 2012 compared to 2011, and expect 2012 total segment operating profit in the range of 13% to 14% of total sales. We will now open the lines for questions. May we have the first question please?

(Operator Instructions) Chris Olin; Cleveland Research. Please proceed.

A couple questions here. First, just in terms of the guidance, I know there's been a little bit of a slowdown in stainless from quarter-to-quarter, and there's some other issues that you mentioned. I'm just wondering if we should think about the earnings run rate in terms of second quarter being flat or lower? And then most of the earnings captured in the second half to get you to that full year 2012 earnings outlook? Is that the current thought process?

Well, I think as we talked about this in January, I mean, our view was that we believe that we would see quarter-to-quarter improvement in earnings throughout the year, with the second half being stronger on balance than the first half. And I still think we see that; there are puts and takes. I mean, I think our expectation is that the second quarter would be modestly better than the first. But the second half, we think, is positioned well for a strong second half, assuming that these macroeconomic issues don't change everybody's outlook.

Okay. In terms of the bigger picture, I'm just curious when you run through your analysis about the $2 billion in the long term revenue potential, what kind of underlying assumptions do you make for the aerospace cycle? Is there anything I should be thinking about in terms of jet deliveries, or where the 787 will be that you need to get to there?

Our assumption, Chris, is essentially consistent with what the airframers are saying and what their production rate ramps have been articulated publicly. So on the 787, I mean, they are now, they've just moved from 2.5 to 3.5 a month. It's an orderly step rate function increase from 3.5 to 5 and then to seven and then to 10 by the end of 2013. I think there has been some speculation and even some comments from Boeing executives about the potential of their beyond 2013 being a ramp of higher than 10 a month. We quite frankly didn't include that in our outlook, so that would be upside opportunity.

I think on the rest of the models for both Boeing and Airbus, across their model spectrum, our fundamental assumptions is that the rate ramps will happen the way they have been articulated and appear to be supported by the order backlogs, which as you know, are in record numbers and record lengths. And that there would be reasonable economic growth throughout the world that supports the spares business, which in the aerospace at least from an engine standpoint, which is the biggest part of our aerospace business, by the way, is more weighted towards more engine than airframe, about 25% or so of the demand comes from aftermarket spares and replacements. So all of that was factored in as we look at the opportunities from the secular growth, plus the new products, and the increased demand for products because of the richer mix, if you will, of the models being richer on the larger airplanes on the double aisle than on the single aisle.

Okay. Great color. Thanks.

Timna Tanners; Bank of America Merrill Lynch.

I wanted to ask about the new alloy that you talk about in conjunction with GE Aviation. Can you tell us a little bit about how that came about and also provide an update along those lines with the last comment on your conference call about the commercialization of 425 happening this year?

Sure. Well, first of all, GE came to us. We have a long commercial relationship, obviously, with GE, and I think that the reputation of ATI as being an alloy developer and the capabilities that we have from a manufacturing standpoint and the capabilities we have from a technology and a technical standpoint are what gives us opportunities with customers. So that process has been worked on. The alloy development was being worked on before. Obviously, we acquired the capabilities of Ladish. Ladish being now part of ATI, I think, was instrumental in helping to accelerate that development because of the technical capabilities of dealing with both the closed die and isothermal forging technology. Technologies which are now part of ATI. And it helped increase the speed of the technology development. We're very pleased with it. It is a GE alloy, hence the name Rene. Rene is a nomenclature for GE alloys. And we're very pleased. We think it's an excellent growth opportunity for us, and we're proud to be part of the GE team in developing it.

ATI 425 continues across a wide variety of fronts, both on airframe, on fastener stock, and on rotary aircraft in terms of looking at it for various applications. Some of them are at different stages and are looking at replacing different alloy systems, including 64 alloy and some other more boutique-ish titanium alloys because of some of the unique properties. So I think on the aerospace side, four years with Rene 65 is unique. Generally speaking, the development and application of a new alloy in either airframe or aero engine is a painstakingly long process. And we think that's right because of the risk profile that the applications have. So we continue to work with the OEMs across the board on that, including on the rotary side. I think we're making good progress.

The area where we initially saw opportunities probably quicker for ATI 425 was on the armor plate side and armor. With the uncertainty of the defense budget, while we are working mainly outside the US, quite frankly, with application development, because of the unique properties of ATI 425 alloy, I think in the US market, while we're still having development work going on, it's really at a standstill until everybody sees where the defense budget shakes out and where the opportunities may lie. I continue to believe that there'll be opportunities on the armor side. Maybe not for new programs because of the lack of funding that will probably exist, but on retrofit, because the alloy still brings with it -- while more expensive than high hard steel alloys, it still brings a weight reduction opportunity. And that is one of the important operational considerations that the DOD looks for.

Okay, if I could on the second question, I just wanted to get your perspective on the comments that you have on the titanium price slipping. Obviously, you said TiCL4 had been stable, and that was good to hear. But what do you make of the recent reports of lower titanium prices, given the strong end markets that you've been talking about?

Well, I think some of it has to do with a reduction in scrap prices, quite frankly, and the impact on surcharges. So that's part of the transactional price reduction. I think that as the aerospace -- we're still working through the inventory situation on the airframe side, and we'll probably continue to work through that for the balance of this year. New capacities have come on stream. I think lead times are shorter, so that has a tendency to put some pressure on pricing. But, I quite frankly, continue to view that as a temporary issue. That will rectify itself as Boeing and Airbus ramp up their production of these airplanes, especially the 787, and the inventory gets worked through. You'll see an increased demand on the airframe side.

Okay. Thanks.

Richard Safran; Buckingham Research.

You covered a lot on aerospace. Let me ask you a question on electrical energy and industrial gas turbines here. Last quarter, you kind of noted that you thought natural gas would drive new orders for IGTs in the US. And we've been seeing a pickup in IGT orders lately. But really to me it's been coming from international customers, South Korea for example. Does your guidance factor in international growth? And could this be, the increase in international growth, be potential source of upside here to your guidance?

Well, I agree with your comment by the way, that most of the increase in demand that we saw for our products going into the IGT market, at least on the nickel super alloy side, came from the increase in demand internationally, not only in Korea but also in Japan, certainly post-Fukushima. And the fact that, as we speak, I think there are only two or three reactors still operating in Japan. And by the end of April, they are scheduled to be taken down for inspection and retrofitting. So most of the replacement has been through IGT. So we saw that in the beginning in the fourth quarter and maybe continue to see it a little bit.

I think the growth in the US, you're absolutely right. I think the US still, because of the slow recovery of the economy, even with natural gas prices, at $2 or in the spot market, less, IGTs represent a very cost efficient way to generate electricity. The issue is we don't need as much electricity as we did in 2007 and 2008. So it's really an issue of timing. I still think the US is a growth market for IGT as the economy continues to recover and grow and especially industrial production increases. With the low cost of natural gas, it's going to be a good demand driver longer term.

The near term issue, we factored that growth opportunity internationally as we saw it into our 2012 guidance. And we factored into the longer term guidance over the next three to five years a recovery in that market, not only internationally, and growth in that market, but also domestically.

Okay, thanks for that. And on my second question, on your Raleigh facility. One thing that several of us have been trying to get a handle on here is how we should think about the incremental benefit from the capital investment you made. Does the Raleigh facility enable other parts of your business? Is there a way for you to express how you view the return that you're going to get on this and the incremental benefit?

Yes. I would view it this way. The name plate capacity, conservatively speaking, is 24 million pounds of sponge. And it's premium grade, which means if it's premium grade, it can be used for essentially any end market, from aero engine rotating quality, to static components, to airframe, to medical, to industrial. And if you want to use a typical mill product yield, which is a little bit probably erroneous, because some of that will be destined into forgings and castings, but we'll keep it simple and say that the generally speaking an average yield from that sponge from melt to putting into a form that we sell would be 65%. So take 65% of $24 million, that represents the volume of titanium products that in our view, it would have been unlikely we could have achieved, because you can't buy sponge from somebody else to produce that kind of quantity of material. And that's using it as an all prime heat, and generally speaking very few of our heats are all prime. So we have a balance of sponge and scrap in there.

That's a conservative outlook that capacity from a growth enabler standpoint, we would be growth limited because you can't cost effectively -- or in some cases, you can't flat out just buy the sponge because of allocations. And is the primary reason why we made that investment, built that facility. A number of the LTAs we have on the airframe and the aero engine side, quite frankly, we wouldn't have had we not had that capability, because it is an important consideration on the part of our customers to have that kind of stable source of supply.

Thanks, very, very much.

Kuni Chen; CRT Capital Group.

I guess just first off on the titanium side on the high performance -- in the high performance segment -- I think in the past, you said you're targeting high single digit growth for the year. But you were behind that in the first quarter. So should we expect to see a sequential ramp from here? Is that still the right range? And then, can you also talk about the mix going forward in that business?

Yes. I think the primary issue in the first quarter, in terms of the lower growth, was on the exotic material side, number one. And number two, slightly lower surcharge revenue, which in theory is designed to be kind of margin neutral. I'm not as concerned about that side as I am about the impact from some of the lower demand on the exotic alloy side. So I think the view that we had in January hasn't changed on that segment. It's very consistent. Ladish actually is running ahead of our expectations going in, so that made up for some of the sluggishness on the exotic alloy side.

As a matter of fact, even if you go back and look at history since Ladish was a standalone company, the first quarter was their best quarter ever, both from a revenue and a profitability standpoint. We're very pleased with that. Some of that is because of the synergies and the integration capability we now have; some of it is because of opportunities in new markets that we viewed as part of the synergy that we brought to Ladish. Quite frankly, we're in the early stages. We're just coming up on the one year anniversary of that acquisition. We have a lot of runway ahead of us on both the forging and casting side. We're not backing off how we view the year on high performance metals.

Okay, and then as a follow-up, if you take your full year guidance range, and the CapEx spend of $45 million, I think that still puts you in somewhat of a negative free cash flow position. Do you feel comfortable with the cash cushion declining a bit from here? Or might you look to pull some other levers by either delaying CapEx or drawing off your revolver?

No. I don't think we see any need to draw off the revolver. I think that the investment in managed working capital in the first quarter was very high. We see that turning around here the rest of the year and managed working capital being a source of cash. So you asked me a question if I am comfortable with the cash cushion. I mean I'd be comfortable if I had Apple's cash cushions. But I think we like to have a couple hundred million dollars of cash on the balance sheet, give or take, at any point in time. We think that gives us flexibility. We like the fact that we have essentially a $400 million, a little bit used, for letters of credit support. But we have that on tap. Dale Reid did a good job of renewing that, and lowering the cost of that facility, and extending it so that it now runs for a full five years again.

We like where we're positioned from the standpoint of a cash standpoint. We don't see any need to draw on the revolver. We are managing CapEx now, quite frankly. I mean, there are prioritizations that get made because of the importance of the hot-rolling and processing facility investment, that we manage the timing of that now, and we'll continue to do that to keep cash investment in CapEx at a reasonable and manageable level.

Thanks.

Steve Levenson; Stifel Nicolaus.

In relation to the Rene 65, can you tell us if you've got exclusive manufacturing rights for that? Will it be available in billet and powder form? And do you have something behind it for your other jet engine customers?

Well, the answer to the latter is that since this is a GE alloy, I think it's safe to say that the other jet engine customers have similar approaches. So this is not destined to be a powder product. This is what you might call near powder. It's somewhere in between the traditional rock product, which is what the 718 and 718Plus alloy systems would be, and a powder product. So it fills, for GE and the other engine manufactures who have similar approaches, it fills a niche for certain applications. It is exclusive for a period of time, and then after that it is not exclusive, but we have the largest position.

So in other words, is this going to replace something on existing engines? And if it's -- the manufacturer will be instructed to use it, I take it?

Yes. That's right. And what it replaces is traditional, is more of a powder product it replaces. So, while we may have a little bit of that, it's not 100%, which is what we have here for a number of years.

Okay. Thanks. And second item is, you talked about stability and pricing on titanium tetrachloride magnesium. Can you talk about how long you expect that to last and what the availability is?

Well, magnesium is long. I mean, it's into the next decade. And TiCL4 is several more years. And the availability of magnesium -- there's only one source available in the US. The bulk of the investments and capabilities have been in China. There is magnesium, obviously, available from both Russia and Israel in the Dead Sea. And we use both of the Israeli material as well as US mag is our primary source. The TiCL4, we have two suppliers of TiCL4.

Okay. And is there enough if you restart the Oregon sponge facility?

Yes. We think so. We believe that there is enough. The Oregon facility is something that we look at, quite frankly, several times a year. That is there. As we've said before on these calls, we have kept that facility warm, if you will. And when the market conditions are right, we have the ability and opportunity to restart that. That would be in a good position to be in.

Great. Thank you very much.

Sal Tharani; Goldman Sachs.

You mentioned strength in construction and mining division, and I was wondering in the end market if you can break it down between construction and mining? Particularly, we would be interested in hearing what you are seeing in the construction side and what kind of construction activity you are seeing?

I think it's more heavy construction equipment. So if you think about companies like Caterpillar, that's --- when we say construction, that's what we're really talking about. So it's some of that equipment is heavy duty construction; a lot of it is mining, quite frankly. Some of that equipment is being used with the shale gas drilling that supports individual drill rigs on the shale side. It is a wide cross section. It's also maintenance and rebuilds of those large pieces of equipment not only in the US, but quite frankly, throughout the world. Some of the mining is just that its more drilling related, so that would be our tungsten carbide based cutting tools and drill bits and things like that. So when we talk construction and mining, the real growth is more in the heavy equipment side.

Okay. And the next question is on Raleigh. You have already gotten a qualification there. What is the next step? Do you need more qualifications over there for further moving up the value chain on the sponge side?

Yes. Great question. Yes, we do. The first step was the SQ qualification, which we've completed -- we completed about three weeks ahead of schedule in early March. What we're now doing is going through first an internal review, because of the knowledge and capabilities we have throughout ATI of what it takes to produce premium grade sponge for rotating quality applications.

We're now going through the facility and looking at where are the areas of concentration that we need to address, if any, before we begin the PQ qualification process, which is in coordination with jet engine OEMs. And that process is more of an external customer qualification lead effort. And it's going to take a while. Our target is that we hopefully complete that qualification sometime in the first half of 2014. But it is a lengthy process that you have to produce a certain quantity of bar material from that sponge using a variety of melt methods and go through the qualification.

Were you ever qualified for SQ in the past, or is it the first time you've qualified?

Well, our Albany facility was qualified for certain SQ, and quite frankly, certain PQ applications in Albany. So we know what it takes. But what we don't want to do is -- we want to start that process when we're ready and we've got the fine tuning manufacturing processes in place. Because once you begin the PQ qualification, you really have your processes frozen. If you make a significant change to your process, you kind of have to start the process all over again. So we don't want to do that, obviously.

Great. Thank you, very much.

Gautam Khanna; Cowen and Company.

I was wondering if we could just explore your high performance comments a little bit more. You mentioned for the year you're comfortable, but I thought I heard you say the nickel piece of it this quarter was a little bit stronger than you anticipated. What do you expect kind of nickel volumes to do in 2012?

I think they'll be up considerably. I mean both nickel and titanium. Nickel and specialty alloys, we combine those, as you know. And what's driving that is really aerospace, aero engine, airframe, oil and gas, medical, and even nuclear is a growth in some of those alloys. So I think that as we look quarter-to-quarter, I think the more muted view, more modest improvement in the second quarter that we think is going to happen is not because of the High Performance Metal segment. It's because of the Flat-Rolled Products segment, because of the completion of some of the high value products in the first quarter and the lower shipments of those that we expect in the second quarter because of the time delay in some of the big projects. But our view of the second quarter in high performance is that we will continue to build and gain momentum as we go through the year in that segment because of the growth of the end markets that we serve.

Okay. And to that second point you made, we're all following the big desal project out of Saudi Arabia. Could you actually deliver -- if you get the orders soon and begin deliveries in Q3, does it inevitably take a year to deliver the material, or could you actually pre-position such that you deliver in six months so that it all hits this year. How do you think that actually plays out?

Yes. Obviously, it would depend upon what the customer wants. But I think that if the customer wants us to try to deliver as much or all of that requirement in the second half of the year, that we would do our best to do that. I think that what probably will happen is that there'll be some spillover into the first quarter of next year on the deliveries. But a large portion of it will certainly be in the second half of the year. And I think we have the capacity from a melt and a finishing standpoint that if the customer wants to accelerate it and do it all in the last six months of the year, our folks would do everything humanly possible to make that happen.

Okay. And lastly, on the high performance business, do you think the 25% operating margin target, when do you think we might see a quarter with that? Is it a 2012 event? Or is that more likely a 2013 event in your opinion?

Yes. I think the honest answer from my perspective is whatever it is, it's not soon enough. But I think that realistically, it's probably more 2013.

Okay. Thanks a lot.

That doesn't mean that it's not possible in 2012. I'll put it that way.

Fair enough. Thank you, guys.

Thank you.

John Tumazos; John Tumazos Very Independent Research.

Boeing was good to hear this morning with revenues up 30% and orders more than twice sales, backlog building. And I guess there's scenarios that could be good, such as an outbreak of harmony in the Mid East, such that the oil market isn't nervous at 130, or maybe the winning political party embraces gas cars, crude oils $50, and airline traffic goes up 10% because the tickets are all cheap on jet fuel, or whatever. But if the aerospace business took another strong leg forward in the commercial side, where would you make your next expansions? Would it be Raleigh 2 for 24 million pounds? Would it be PAMs four and five? And you know how these things go to extremes, if all of a sudden they couldn't be booking revenue up 30% without chewing up some metal.

Yes. I agree with that, and I think that the honest answer is that we would objectively look at how, not only in the aerospace market, but how any of these markets are evolving, and how can we generate the best return over the intermediate and the long term for the shareholders. And we like the PAM melting technology. We think that it is the best technology for rotating quality titanium material. We just started late last year.

We have 4 PAM furnaces. But really, 3 are really the ones that are really focused on the primary premium melting technology for jet engines. And to the extent that we see that filling up, I mean -- and quite frankly, within a five year time horizon, we do. And so we already start thinking about where do you expand and what do we do with PAM melting. Is there an opportunity for additional demand from the EB melted process. In Raleigh, as you know, John, we have made the investment already on the infrastructure side to expand that facility from 24 million pounds to 42 million pounds. And we could do that in phases with additional furnace sets. So the infrastructure and everything is already there. That investment has been made.

We do have Albany standing in the wings that we could bring on stream. Probably not for the premium side, but it would give us the critical raw material that we would need for where the standard grade requirements if you will. Those are all the things that we look at and kind of strategize as part of our five year strategic outlook of where could the next bottleneck be, and what signs are we looking for, and what is the lead time to bring that capacity on. I really think that we're not looking at investments the size of Raleigh, or the size of the hot-rolling and processing facility. I mean, we're looking at more manageable investments that have a much shorter lead time frame to bring online, which is a good thing. So it's a great question. And it's one that we focus on all the time in terms of keeping our finger on the pulse of where these markets are, and what do we need to do to continue to grow profitably.

Rich, if I could follow-up, how much does one PAM cost or that next 18 million pounds at Raleigh or an Albany restart, rough numbers?

The Albany restart is very modest. From a CapEx standpoint it's less than $5 million. The Raleigh one, is the furnace sets themself and the tooling is probably in the range of $3 million to $4 million a furnace set, somewhere in there. We don't have to put them all in at once.

How many sets would that be?

To bring it up to 42, I think we would add 18 more sets, in that range.

So it would be under $100 million?

Right. The PAM furnace, I mean it depends on do you have to build a building. And can you fit another PAM in the existing building, and the furnace itself -- there you're looking at less than $20 million.

So my wish list is $100 million.

Yes.

If it were bad, $125 million.

Yes. It's not multiple hundreds of millions of dollars, you're right.

Sounds like return on assets are going to be sweet some day.

Well, we have to get those up. I mean return on capital employ is an important value creator for the shareholders. And we're not where we need to be largely because the investments we've made in Raleigh are just starting to generate returns. And at the hot-rolling and processing facility, we have got to finish it first. And then, it'll generate returns. So those are important metrics.

Thank you.

Thanks, John.

Mark Parr; KeyBanc.

I don't know if you spent much time on Ladish, but it sounds like they had a really good quarter. Maybe it would be helpful if you could give us a little more color on the source of the growth and how much the combination of the two companies, how much of an impact that's having at this early stage, and perhaps how much further you think Ladish can go before it's going to need significant capital injections?

Yes. I mean there are capital investments that we're making now that in total are modest, maybe a little bit above the annual depreciation run rate there. But I think that we are not really going to break out Ladish because it's been integrated and being integrated, and it's all part in parcel to the High Performance Metals segment. They did have a good first quarter. We have tremendous opportunities left in that business, quite frankly. The growth is coming from aero engine. It's coming from airframe, in both forgings as well as investment castings. It's coming from construction and mining. There is a significant part of Ladish that has historically been involved in producing forgings for the construction and mining market, and there's strong growth there. The facility in Poland is both an aerospace as well as a construction and mining forging facility that is very competitive. We've got significant opportunities there.

You've heard us say before that when we bought or acquired Ladish it was about $400 million, or a little bit above $450 million company. Our goal is to make that company, and we think we can, an $850 million to a $1 billion dollar business and we can do that without making major investments. We aren't talking about individual pieces of equipment that are hundreds of millions of dollars. But so, we like where that business is positioned. It's pretty diversified. I don't think we get credit for the kind of diversification that they have both in terms of hammer forgings and isothermal forgings and smaller diameter rotating quality closed-die hydraulic press forgings and titanium investment castings and machining. You shouldn't leave out machining because the customers want a machine to part now. They don't want a rough forging. And we have the machining capabilities that we're also investing in. So we like that acquisition. We think the ability to be integrated vertically is very important going forward. We see that from a supply chain standpoint to be a very important part of the strategy.

Rich, if I could just follow-up. I know there were people and there were certain investors were concerned that there may be some customer turnover as a result of that acquisition. I don't know if you can, it certainly sounds like it's been a positive road so far, so do you see any risk of that here unfolding in the next 12 to 18 months?

No. I don't. I think that mainly quite frankly that was the wish of our competitors. I don't think that was ever the wish or the desire of the customers.

Okay. I appreciate the color and good luck on the second quarter. Thanks.

Dave Martin; Deutsche Bank.

I had a couple remaining questions. The first, Rich, given your comments about weaker titanium shipments in the flat-rolled business in the first half. Does that mean that your overall titanium shipments across the company will be flattish year-over-year or do you still see them increasing modestly?

Yes. I think that a lot depends, Dave, on whether or not the projects that we do see coming home to roost here can be delivered and the customer wants them delivered at the same volume in the second half. I mean if that happens, then I think we'll hit our expectations for overall volume growth in titanium. And if it doesn't and it pushes a little bit over into the first quarter of next year, we might be a little south of that growth that we commented on in January.

And then secondly, coming back to guidance, I take your comments, Rich, on the high performance to mean that you continue to be comfortable with 20% plus revenue growth and margins north of 20% in that business. Has anything moved at all with the other segments and what you said back in January?

I think the Engineered Products segment might be a little bit better. We still have work to do in that segment, but I'm pleased with the progress we're making. I think that the Flat-Rolled Products segment, the volume through the first half of the year on the standard stainless products might end up being pretty good, and a little bit better than we thought heading into the year. Base pricing I think is still challenged because of the available capacity and imports into the market that we're watching very closely from a standpoint of is that product being dumped, which it looks like it may. So we'll be vigilant on that as we always are. I think the key to that segment is really going to be the projects, and the timing of the projects. Our view is still that it's not a question of if those projects will happen, it's a question of when. From a market view and commercial intelligence view, we still think it's a question of when, not if.

Thanks for the comments.

There are no further questions in queue at this time. I would now like to hand the conference back over to Mr. Rich Harshman for any closing remarks.

Thank you very much for joining us on the call today. And as always, thank you for your continuing interest in ATI.

Thank you, Rich. Thanks to all of our listeners today. That concludes our conference call.

Thank you for your participation in today's conference. This concludes the presentation. Good day.