ATI Inc (ATI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Allegheny Technologies Incorporated earnings conference call. My name is Janeda, and I will 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)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Dan Greenfield, Vice President Investor Relations and Corporate Communications. Please proceed.

Thank you, Janeda. Good afternoon, and welcome to the Allegheny Technologies earnings conference call for the third-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. The third quarter was challenging. The global economy weakened further, resulting in continued delays of large global infrastructure projects that use our specialty metals, weak demand and historically low base prices for standard stainless steel products, softening of demand from the jet engine aftermarket, and aggressive inventory management actions throughout the supply chains of most end markets.

In our second-quarter earnings release and conference call this past July, we said that macroeconomic challenges and uncertainties were negatively impacting demand from most of our markets. Since then, continued anemic growth in the US, and further slowing of economic growth in Europe, China, and Japan, coupled with uncertainties created by the US election, resolution of the US fiscal cliff, the upcoming leadership changes of governments in China and Japan, and the lack of real progress on resolving the euro-zone debt crisis have worked to exacerbate short-term economic headwinds, resulting in further softening of short-term demand from most of our global markets.

Since we have no direct control over the outcome and resolution of these macroeconomic and political challenges, we remain focused on actions and strategies that are within our control. For example, during the third quarter, we continued to improve production at our Rowley, Utah titanium sponge facility. Production costs have decreased each quarter of 2012. Third-quarter 2012 production cost per pound is 10% lower than in the fourth quarter of 2011. We have produced over 15 million pounds of sponge cakes during the first nine months of 2012.

We've made good progress in the construction of our game-changing Flat-Rolled Products, Hot-Rolling, and Processing Facility. This important strategic investment is progressing on schedule and on budget. The project is scheduled for completion in late 2013, with commissioning occurring during the first half of 2014. This investment is designed to expand our product-sized [part] to meet the current and future customer needs, to significantly shorten production cycle times, to improve yields, and to meaningfully reduce manufacturing costs for all of our Flat-Rolled Products.

Our discussions with jet engine and airframe OEMs have accelerated on qualifying ATI 718 Plus alloy and ATI 425 alloy for aerospace applications. Sales in 2012 of our patented ATI 718 Plus alloy are expected to be 20% higher than in 2011, which is impressive considering this alloy is in the early stage of adoption by engine OEMs. This alloy creates value for our jet engine customers as an enabling technology to help achieve significantly better fuel and environmental efficiencies, lower manufacturing costs, and increase the life of rotating components. ATI 425 alloy has been qualified for rotary applications such as abrasion blades, and continues to be evaluated for numerous airframe applications including fastener stock, hydraulic tubing, and hot and super plastic formed parts.

During the third quarter, we continued our strategy to diversify our product offerings to the airframe market from the titanium mill products of the last cycle to also include today's demand for near-net shapes, including extruded and rolled products, cast and forged products, and higher value-added products such as fastener stock. We also continued to support GE and its partners on their validation to switch parts to Rene 65 alloy from other alloys. As a reminder, ATI was selected by GE to help develop Rene 65, a GE-proprietary alloy for wrought applications.

We achieved $27 million in gross cost reductions in the third quarter, bringing our nine months year-to-date gross cost reductions to $87 million. This compares favorably to our 2012 full-year target of at least $100 million. Cash on hand increased to $281 million at the end of the third quarter, a $71 million increase compared to the end of the second quarter. Cash provided by operating activities was $168 million in the third quarter, bringing the nine months year-to-date total to just under $246 million.

Similar to the actions being taken by our customers, we are reducing our inventories, which will result in further reduction of working capital in the fourth quarter. Net debt to total capitalization declined to 31.2% at the end of the third quarter. In addition, we expect no required pension contributions to our US Defined Benefit Pension Plan for at least the next several years. Given the current global economic uncertainties, we have reduced our 2012 capital expenditure budget to approximately $410 million, which is $75 million lower than our previous budget.

Looking at the third-quarter market conditions and operating results by business segment. In our High Performance Metals segment, third-quarter sales were $539 million, which is up slightly compared to the third quarter of 2011, in spite of lower raw material surcharges, reduced demand from the jet engine aftermarket, and tight inventory management by many customers, especially for titanium products. Segment operating profit as a percentage of total revenue, which includes raw material surcharges, was $84.5 million or 15.7% of sales.

Shipments of High Performance Metals and nickel-based alloys and superalloys increased 11%, and shipments of our specialty alloys increased 66%, both compared to the third-quarter 2011, primarily due to strong demand from the aerospace, and oil and gas markets. Shipments of our High Performance Metals segment titanium mill products declined 2% compared to the third quarter of 2011, primarily due to reduced demand from the jet engine aftermarket, and from demand from our distribution customers.

Shipments of our zirconium and related alloys decreased 14%, primarily due to decreased demand from the nuclear energy and chemical process industry markets. Although we have taken actions to reduce our cost structure at our zirconium business, third-quarter results were negatively impacted by approximately $6 million due to low production levels associated with lower demand for these products.

In spite of weaker demand from the jet engine aftermarket and industrial equipment market in Europe, ATI Ladish has been accretive to ATI's earnings per share in each of the first three quarters of 2012. ATI Ladish is gaining content on airframes and engines, particularly on new models. This provides significant growth opportunities beginning in the second half of 2013, as these models begin to increase in production. The backlog at ATI Ladish continues to grow, particularly for our titanium investment castings where backlog at the end of the third-quarter 2012 grew over 30% compared to the third quarter of 2011. However, some jet engine OEM demand for forged parts has been pushed out from 2012 to 2013 as a result of lower demand for aftermarket spares and rescheduled new-engine build rates.

In our Flat-Rolled Product segment, business conditions in the third quarter of 2012 were very challenging, even though total shipments improved by 4% compared to the third quarter of 2011. Segment operating profit was $26.2 million or 4.7% of sales, much lower than our normalized expectations. This is due primarily to a lack of high-value product shipments, such as industrial titanium and nickel-based alloys due to project delays.

Titanium Flat-Rolled Product shipments, including Uniti joint venture conversion, were only 2.6 million pounds in the third quarter of 2012. That is a 50% decrease from the third quarter of 2011, and resulted from weak demand due to global economic conditions and continued delays in certain large global industrial desalination projects. In addition, several large oil and gas projects using our Flat-Rolled nickel-based alloys have been delayed. Commodity stainless steel sheet plate (inaudible) prices were at historically low levels due to weak demand and high levels of Asian imports; however, we were successful in realizing price increases on some of the specialty stainless grades.

Concerning our Flat-Rolled grain-oriented electrical steel products, demand remains low. On the trade front, our industry association, SSINA, is examining the spikes in grain or electrical steel imports from Russia, Korea, Japan, and Poland to determine whether trade laws have been violated. A trade case has not been filed at this point. The SSINA is now studying to determine whether or not injury or threat of injury has occurred.

In addition, the US recently prevailed as the WTO Appellate Board upheld the key elements of the WTO's decision regarding grain-oriented electrical steel imports into China. We believe in and support fair and free trades. We intend to take appropriate action to be sure that current trade laws are followed and enforced. The US market cannot be the dumping ground for other nations.

Finally, in our Engineered Products segment, third-quarter 2012 sales decreased nearly 6% compared to the same period last year, while operating profit as a percentage of sales was 7.3%. Demand was lower for most markets for our tungsten-based products. Demand for our steel forgings weakened during the third quarter from the large construction and mining equipment market. Demand remained weak for our iron castings from the wind energy market. In addition, third-quarter results were negatively impacted by approximately $2 million of start-up costs associated with our new fabricated components business.

The current global economic environment creates challenges for near-term visibility of demand, making it more difficult to provide short-term guidance; however, we understand the need for such guidance. As we looked at our markets in July of this year, we had a view that the third quarter of 2012 would be a trough in earnings. Unfortunately, global economic conditions have generally deteriorated since July. Business confidence is weaker today than it was in July. Growth in China, Europe, and the US is weaker than previously expected. Large global infrastructure projects have been delayed. We are closer to the US fiscal cliff with no political resolution in sight, at least not yet. These are the facts.

As we look at the fourth quarter to date, business conditions remain challenging due to headwinds created by the macroeconomic and political unknowns that we have discussed, and that we and our customers live every day. In the short term, we expect continued soft demand and aggressive inventory management by most of our customers to continue. As a result, weak demand and product pricing pressure are expected to result in lower operating results in the fourth-quarter 2012.

Our current expectations for 2012 total annual sales to be in the range of $5 billion to $5.1 billion, and full-year segment operating profit as a percent of total sales to be approximately 10.5%. We are realistic on the short-term headwinds created by the current global economic challenges and uncertainties. I'm confident that as these issues are addressed and resolved, growth in demand for our products will strengthen and base prices will improve.

While some of these challenges and uncertainties are likely to remain as we enter 2013, as we look 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, and continue to make, both in new products and in new and enhanced manufacturing capabilities. These views are fundamental to our continued execution of our strategies to enhance our competitive position by completing our strategic capital investments, introducing and qualifying innovative new products, improving our position with existing customers, and growing our participation at new customers.

Operator, may we have the first question, please?

(Operator Instructions)

Richard Safran, Buckingham Research.

First question on titanium. You made comments before that you expected titanium shipments to accelerate in 2013, so I want to know if we can get an update and maybe if you could maybe parse out mill product shipments from the totality of titanium that you shipped to Boeing.

Well I think, you mean comment on excluding what we sell to Boeing?

Actually both would be fine.

Well I think as you know we're essentially delivering at the minimum take or pay to Boeing as they continue to work through their titanium inventory. I think there's a lot of speculation that has been made about where Boeing is on their titanium inventory. I think in reality only they know, and I do think that they're closer to the point of having the inventory in a manageable position today than they were six months ago, and six months from now they will be closer from that point as well, especially as they continue to ramp up and only take the minimums from their three major mill products suppliers.

So our view is that -- the conservative view is that through 2013, at least the first half of 2013 that we would be delivering at the minimum take or pay requirements, and eventually the opportunity presents itself where there's a growth opportunity for the delivery of titanium mill products to Boeing. As we look at other mill product forms, I think certainly from the industrial market side, given the delays in some of the desal projects which are now beginning to shake loose, we would expect to have a higher level of shipments in 2013 into the industrial market than we have experienced here in 2012.

Looking at the jet engine market demands, we would expect that -- I think we've been dealing here in the second half of the year with inventory corrections certainly on the aftermarket side. And as you know on titanium for jet engines, our primary focus is on the premium rotating quality material, which are those parts that get replaced on an engineered life cycle basis in the jet engine. So when there's an inventory correction or correction on the aftermarket or a reduction in demand on the aftermarket we feel that. And that's certainly what we've been dealing with for the last six months. I think there's varying views of what the aftermarket demand will be in 2013 compared to 2012.

There are views out there that it could be flat, overall '13 compared to '12. There are views that it could grow in the mid 4% to 5% range or even perhaps in the higher single-digit range. I think our sense is that as we exit 2012, the inventory correction if you will in the supply chain for aftermarket will have largely run its course and you'll see more fundamental demand driven requirements in 2013, and on balance from the aftermarket that should be positive for us.

On the OEM, the new engine side, the build rates all go up, at both Boeing and Airbus in 2013 in a pretty significant way, including on the twin owls, which means bigger engines and more titanium consumption, so we would expect titanium on the aerospace, the aero-engine side to grow quite frankly when you add all of that together in 2013 compared to 2012. And that's on the mill product side.

On the parts and component side, I think demand for castings, especially the programs that we're on, and I think it's interesting when you look at our ATI Ladish business and where it is today, there's been some speculation perhaps in terms of what Ladish is doing. Quite frankly, ATI Ladish is going to have a record year for sales and profits in 2012, and that's being driven not only by the forge component side but also by the casting side, the titanium investing casting side and by the machining capabilities.

There are, that's a pretty diversified business. It is involved in the industrial market as well as in the aerospace market and the defense market so there's a lot of uncertainties in terms of where all that will shake out in 2013. But as we look at from an aerospace standpoint, we would expect titanium castings to grow in 2013 compared to 2012, but the real growth opportunity there is as the new platforms come on and the benefit there is in 2014 and beyond.

And to a lesser extent, it's the same on the aero-engine forging side where the bulk of the platforms that we're on are really on the newer engines and there's an aftermarket spare and replacement component to that too that's about 25% of their demand. So when you add it together, I think assuming that all these macroeconomic issues are reasonably dealt with and the production rate ramps are hit, and achieved by the airframe OEMs, I think we'll see growth overall in 2013 and more significant growth in '14 and '15.

Thanks very much, Rich.

Timna Tanners, Banc of America Merill Lynch.

So first question on the CapEx plans going forward, can you give us any glimpse into 2013? And then for 2012 fourth quarter, despite the cut to CapEx, it's going to imply a double into the fourth quarter so just wanted a little more color on that.

Yes, most of that is really associated with the Hot-Rolling and Processing Facility and the timing of the payments as part of the progress that we've made on construction. I don't know, when was the last time you were out to that site, but we're making great progress in constructing the infrastructure in the buildings and some of the equipment is shortly going to be getting to be installed. So obviously as we make progress on that, the timing of the cash flows to the contractors and the equipment manufactures matches with that, so we would expect that kind of a spend rate. We always seem to project more than we ultimately end up spending and there are a lot of reasons for that. It's not because of any slowdown in progress.

It ends up just being because of the timing of the expenditure, but I think our view is that the fourth quarter will be the heaviest capital spend of the year and part of that we expect to finance not only from cash on hand but also from earnings and the reduction in managed working capital.

As we look at 2013, we're in the planning review process now, so we really haven't set a 2013 target. We haven't had our discussions with our Board on that, but clearly, it will be at a rate that is certainly elevated in the same range if not more than where we end up in 2012, primarily because the Hot-Rolling and Processing Facility. That's the big project.

There are a couple other obviously operational necessities that we will do, safety and environmental investments we always make, so but the big bulk of the spend next year we'll be on the Hot-Rolling and Processing Facility. And as you know, construction of that facility is targeted for completion by the end of '13, so that's the big cash flow from a CapEx standpoint.

Okay, thanks, and then a second question if I could? So given the guidance of the fourth quarter of last year and the first quarter of this year, was 10% revenue growth and segment operating profit of 13% to 14%, and it looks line we're going to end up lower than that as you've elaborated on. But how do you think about projections going forward? Are you going to give them, are you going to be wider or more cautious with them or did the year just really deteriorate beyond your expectations? Can you just explain to us what happened from that time frame to now and how you might think about projections going forward?

Yes, sure. I don't think we're any different than most people, when you look at it from an economist standpoint in terms of what everybody was expecting heading into 2012, I don't think anybody was right in terms of what the global GDP would be, what the growth in China would be, what was going to happen in Europe and certainly what's happened here in the US. So what we try to do, I mean the debate is always do you give guidance or not give guidance and we have a history in this Company of doing both. ¶ And part of it is because if we're seeing things differently than what the analysts are seeing in terms of what their expectations are, we think we have an obligation to our shareholders and to the investment community to provide guidance as more in line with what we're seeing in our markets and what we think from a macroeconomic standpoint. And that's exactly what we did heading into 2012, so we told you and quite frankly as you'll remember, our guidance was lower, our expectations was lower than what the street consensus was for 2012. So we felt obligated that we had, it was appropriate to give guidance.

We believed in that guidance. The fundamental demand drivers didn't take the shape the way we and I think most other people thought, and if you're watching earnings guidance this week and I'm sure you are, we're not alone in that. And so going forward, we're always going to give our best most realistic view of what we think the markets are going to do.

Having said that at the end of the day our crystal ball isn't any clearer than yours or anybody else's, so we'll continue to do what we think makes sense to help the shareholders and the investment community understand our business better and understand how we see the markets. And we'll continue to try to be as realistic as we can and not overly optimistic or not overly conservative. That's the balanced approach that we've always taken and sometimes we're right, sometimes we're not.

Yes, that's helpful, thank you.

Sal Tharani, Goldman Sachs & Company.

Rich, this desalination related order you're starting to see, how big is this size once it fully goes through the system? I know you're getting a small piece of it but what would be the size of it, would it be as big as a project as last one?

Yes, we think there are several different projects in it but if they all happen the way we believe that we've been talking about this for most of this year, so I put that caveat on it, right? Until we get the orders and until we're actually producing it, there's always a risk but with the passage of time, the projects are still there. They're real, they're funded at the source and it's when are the triggers pulled in terms of placing the orders with the fabricator that then flows down into the rest of the supply chain including our Uniti joint venture which is really the order, where the order resides and then the split between the two partners in terms of what ATI does and what the VSMPO does.

So I think I'd like to be able to say that all the orders were in hand and if they were, we would. The first one is I think that our view and the input that we have is that the combination of these projects will result in demand that is essentially in line with the big project, the single project that was delivered throughout 2011, which since this is public information, as you'll remember was approximately 6 million pounds of titanium flat-rolled.

6 million pounds for you or for the total project?

That was for Uniti, but essentially a large portion of that was us.

Okay, second thing, your titanium realized price was lower this quarter. Is that just a general function of what is going on in the market or was it a mix issue?

No, it's a little bit of both actually. There was when you have less demand on the aero-engine side for aftermarket spares, that obviously is the highest value product that we or I think anybody makes from a titanium standpoint is rotating quality material, so when that requirement is softer as it was that's an impact on price. The other aspect was the surcharges for titanium scrap. Scrap as a component of the surcharge mechanism, has fallen throughout 2012, so that also is part of the answer.

Thank you very much.

Arun Viswanathan, Longbow Research.

I guess maybe I could ask Tim this question a slightly different way. I was wondering, has the visibility across your different and maybe you can talk about the different products, has it changed in the last month or sorry in the last year in this environment? And if so, do you see it, your visibility going back to a longer time frame in a more normal market or what have you noticed as far as your visibility goes?

Well it's a great question. I think actually with all of the uncertainty that's out there both economic and political, I think I made this comment in my initial comments. It's more difficult to forecast today than it has been since 2008, 2009 quite frankly. We're almost back into that same kind of a time frame, with the uncertainty and the level of difficulty that you have and the very short lead times. When you look at some of the short-cycle business, lead times for stainless steel sheet and plate today are very very short, so you don't have two weeks. So you don't have much visibility beyond that other than continuing to talk to the customers in terms of how they see their end markets and how they see the fundamental drivers of where the demand is coming from at the ultimate end market.

And really the lead times while we have a large part of our High Performance Metals business is based off of long-term supply agreements, they're really essentially requirements contracts that depend upon what the requirements and the needs are of the customers, and there with lead types relatively short as well. I mean the High Performance Metals segment depending upon the alloy system and the product form, lead times are as short as 4 weeks and the longest is probably in the 10 to 12 week time period. And historically that's a very short lead time for those kind of products.

So the visibility into the demand drivers is much more challenging, much more difficult so you have to do a lot more discussion and underlying digging in terms of understanding where the supply chain is, and that puts an additional challenge into the forecasting side.

We have recently been giving forecasts that deal with the full year, not just the next quarter. And I still believe that that's an appropriate way to do because when you focus on just one quarter it's really far more short sighted than we think quite frankly, and far more short sighted than how our market dynamics ultimately end up. So if the decision is made to continue to give guidance, I think it will be along the lines of what we've talked about before with a range and to update that as we see things changing and do the best we can, recognizing that it's not an exact science. Not everybody gives guidance as you know.

Sure.

And I'm not sure whether that helps or hurts.

No, that's helpful. I guess so just wanted to clarify then. Relative to the third quarter when you went through those metrics of the percent on the segment operating income and the revenue, was there, are there any specific projects you can help us out with as far as delays or losses that were planned for '12 that are now in '13 or '14 or where we could expect to see a recovery?

Well, I think certainly on the Flat-Rolled Product side, the desal projects that we were talking about earlier in response to Sal's question are as we entered 2012, that was all supposed to be 2012 business. And at the end of the day, only a small fraction of it will ultimately end up being a 2012 business and that's in the fourth quarter. Most of that shipment will be in 2013.

There are some fairly large oil and gas projects that are nickel alloy flat-rolled plate that have been really expected for the last six months and they've largely been put on hold, not because of an ultimate need or change in the view of the viability of the project. It's really just probably a combination of capacity within the fabrication side, number one, the ultimate demand driver from the standpoint of the criticalness of time and now especially with the economic weakness in Europe, maybe it's not as critical to do sooner rather than later. And then I also think that when you get into a nickel raw material cost environment, the customers look at that and there's a sense that nickel might be overvalued at some point and it will return to closer to a fundamental, and the order isn't going to be placed until the nickel fundamentals are achieved in the eye of the customer.

So there's a lot of issues that ultimately lead into that, so those are projects that were also expected in 2012 that are now really looking like a 2013 project. And then you have the aftermarket, which quite frankly I don't think anybody heading into 2012 expected. The expectations were from high-single digits to low-double digit growth in aftermarket demand from the aero-engine standpoint. Well that was certainly true in the first quarter and about half way into the second quarter and then the world changed, and the economic climate in Europe certainly deteriorated. The growth in the US was less. The growth in China which we've all heard about and read about and feel was less than what was expected. Airlines started to manage their business differently from a crash flow standpoint. And part of that is looking at the whole supply chain they have and how much inventory they have in place. Some of the older aircraft get taken out of service, those are the ones that really drive or a bigger driver in terms of aftermarket.

So all those factors went into place and really accelerated through the third quarter and we expect to remain in place for the fourth quarter. So I think this is a business we have a lot of different end markets, diversification is one of our strategies and also one of our strengths. It's also one of the things that makes the Company maybe a lot more complicated than others.

And just to clarify, so you do have confidence though that many of these things will come through in '13 though, and is there risk they could be pushed out again to '14?

Well there's always a risk. I think that my view is this. I talked enough about the uncertainties that we all are living with that from an economic and a geopolitical standpoint, I think with the passage of time the uncertainties get resolved.

One of the uncertainties is the US election. It's not necessarily whose going to win, or rooting for one candidate over the other. It's just the uncertainty of the election. That's going to resolve itself in two weeks. Everybody will know what the outcome of the election is both from the standpoint of who is the next President and who controls the Congress. So that uncertainty gets removed and actions begin to be taken, confidence begins to be impacted either positively or negatively and clarity becomes on that issue.

I think the same thing happens in China on November 8 with the hand over of the leadership to the next generation of leaders, and the likeliness of stimulus packages that come out of that which make sense from a political standpoint in China. With the passage of time I think the issues in Europe get resolved and will certainly get clear or become past -- kick the can down the road as we've heard talked about in this country.

And then ultimately, I think the bigger concern is we talked to our customers throughout all of these end markets today, and the bigger concern that I have quite frankly is really in the US and it's on the fiscal cliff. And the one thing that I think is safe to say is it won't be resolved before the election in two weeks. So then the question becomes is the resolve in a compromised reach during the lame duck session, and if not then, then it gets resolved at some point in 2013, and I am cautiously optimistic about that because I really don't believe that our leaders will allow that to happen because that going over the fiscal cliff without a resolution is a economic game changer for not just the markets that we serve but the markets that a lot of companies serve. So I don't think that that will happen.

So yes, I mean I wish that these issues weren't things that were dominating the headlines and having a negative impact on our business today. The fact of the matter is they are but with the passage of time they get resolved and then you go back to really fundamental growth drivers that impact our end markets, and I think that 2013 becomes clearer than 2012.

Thanks.

Steve Levenson, Stifel Nicolaus.

Just to go back to the titanium question. One of your customers had a representative at the recent International Titanium Association meetings and basically talked about the glut being cleared up going into 2014. What do you think the lead times are right now? How do you see that impacting things? When do you think that will begin to clear up on the order side for Allegheny?

Yes, hi, Steve. It's a good question. I mean, I think that the honest answer is because titanium is serving many markets including as we've just discussed aero-engine and industrial and oil and gas and medical and airframe, I think the lead times today are at the shortest that they're going to be.

And is that still about 4.5 months plus or minus?

Oh, it's less than that. For some product forms it's four weeks. I mean we've never seen, because remember, capacity has been added over the last five years to service the rate ramps and the big growth drivers on aerospace. And that's been delayed by 3.5 years so the lead times today are really very short, and as the demand starts to come back and starts to improve which I believe happens when these things get resolved as we head into maybe it's within the first quarter of 2013, but it's certainly within the first half of 2013 or just beyond mid year of 2013.

The first thing that happens is lead times start to lessen and the magnitude and the ramification of that in the supply chain for everything else becomes a significant difference maker in terms of the buying behavior and the ordering pattern. So I think today if I'm wrong and lead times stay where they are and the Boeing demand drivers from a growth standpoint kick in for 2014 delivery, so let's just make that assumption based upon your question, and nothing changes, then really the fourth quarter of 2013 is the earliest we would begin to see that, and it may not even be into the first quarter 2014.

If markets begin to recover, albeit gradually, if the aerospace aftermarket begins to recover and we don't have the kind of inventory correction we've been dealing with for the last six months, and as engine OEM push outs and demand drivers start to support the production rate ramp, then lead times become elongated and I think that you have the opportunity from a mill product standpoint certainly at some point in the second half of 2013 to begin to see those orders. So the honest answer to the question is what are the fundamental economic assumptions you're making across all of the markets and the demand drivers for titanium. And how does that impact the timing of the order entry that's required to meet the delivery schedules that the customer, in this case Boeing, asked of the suppliers.

Okay, thanks, on the nickel side, it appears that shipments at least when you measure volumes exclusive of the change in the surcharges have held up pretty well. Is that something you see continuing or is there a change ahead?

Well, I think there's a little change ahead in the fourth quarter which is certainly part of our guidance. I think the fourth quarter is probably going to be softer and remember that's both nickel and specialty alloys, so the specialty alloys as we noted in our earnings release, the volume growth on the specialty alloy side was 66% year over year and that was driven by oil and gas primarily, not exclusively but primarily.

That kind of a growth rate is hard to sustain, especially with the total rig counts either flattening out or retrenching a little bit. And then on the aero-engine side, the aftermarket side there's also an aftermarket for nickel alloys on a jet side, so I think that obviously is what we're seeing here in the fourth quarter. Once we get beyond that and as we head into 2013, I think there's a reasonable growth opportunities for nickel and specialty alloys across these end markets that we've already talked about.

Okay, last one, sorry sneak it in here. When do you see starting the premium qualification for titanium sponge coming from Raleigh?

Yes, I think as we talked about when we had the investor meeting at Raleigh, I think that some time in the first half of 2013 that we lock in the manufacturing processes and we freeze the manufacturing processes and we start the premium grade qualification journey.

Okay, thanks very much.

Gautam Khanna, Cowen.

Maybe a follow-up to Steven's question. Presumably I understand it's multi -- it's a dynamic question on titanium at Boeing, but depending on lead times elsewhere but can you tell us, have they given you a forward schedule for '13? I know you mentioned the first half is likely going to be flat with the minimums, but should we plan on it being flat in '13 and just gradually up in '14 or how should we think about that?

I can't tell you how to build your model. I mean there is a contractual obligation on the part of the customer to give us in accordance with the contract terms to how they want 2013 loaded at the minimum requirements that they are obligated to take, and there is some because we try to be very flexible and provide all of our customers the kind of value service that they expect from us, within reason we have some ability to flex that. We have some ability to move around to different product forms based upon what their needs are, so it's not really locked and loaded, if you will, for the full year in terms of exactly what product forms they're going to take, but we have an idea, as we head into 2013. And we're essentially there.

We know what the minimums are so but there will be some flexibility around that and possibly even some opportunity to provide and meet their needs with more than what the minimums are. And that has certainly been the case historically as well, so we'll just see what they need and what they want, but I don't think that I'm not expecting it to be, I'm expecting it to be any guidance that we were to provide in the first, early in 2013 would be more for that particular end market would be more along the stable and level side.

Okay. And just a follow-up, Rich. You made some very positive comments in Ladish and how they're performing, you mentioned Raleigh is ramping fairly well and the start up costs have dropped. Sequential, you know the implied LIFO benefit in Q4 is whatever, $4 million or something in the High Performance segment, so it's a head wind sequentially. And if you stripped out the $12 million this quarter, you're under 15% margins at High Performance.

So what I'm trying to get a sense for is obviously this quarter is an aberration with the amplified aftermarket destock and the like, but going forward, do you think that the 20% margin you started with this year is where we're going to be next year, just given a normal environment? Or is there something that's structurally changed or fundamentally different where we're going to be tracking well below that early in the year and then maybe hopeful to get it back there.

Yes, I don't think there's anything structurally or fundamentally that's changed in our business. I think it's fundamentally a demand driven business, right? I'm not aware of any business that's demand agnostic, so basically, that's what's going to drive it. I will say to you and I think we've said this that the High Performance Metals segment is really the combination of three major businesses. One is the nickel and titanium and specialty alloy long products business. One is the ATI Ladish which is forgings and castings. And one is the zirconium and related alloys businesses. So those are three really different businesses that service essentially similar markets when you really fundamentally look at it but in different ways.

I mean if you go back and look at when Ladish was a public company, their operating profit as defined was not 20%. Their operating profit ranged on average when you look at it trying to look at it through a cycle, ranged at about between 8% and 10%. And our objective in terms of growing that business and diversifying that business and making that business stronger because of the ability to provide it with their raw materials, which is our long products out of the ATI Alvac operations enhances the opportunity and the ability to improve the level of profitability of forgings and castings as a percentage of sales.

And so I think you've heard you and others have heard me say that as we look at that business over the next three to five years, we expect the forgings and the casting business to grow into a 12% to 15% type of operating profit of sales, which would be above where they historically operated. And I think that we have the ability to do that on a consistent basis, if you go back and look at them as a standalone company, they actually did that in those kind of ranges in 2006 and 2007. Much different market environments but so the capability is there, and then when we achieve 15% we're not going to sit here and pat ourselves on the back and stop and say okay we've reached utopia.

The next target will be how do you get to 18%. So but that segment is a combination of businesses, historically the highest percentage performer has been the long products because of its technology and its focus on the premium side of aero-engine. And when those, when that demand slacks a little bit including having an inventory correction of aftermarket which takes quite a bit of demand out of the equation temporarily, and then it gets replaced by oil and gas business, the opportunity to generate the same kind of operating profit margin in that quarter is not the same.

But nothing has fundamentally changed in terms of our target opportunity of where we believe in a reasonable demand driven markets, where these businesses can be from a profitability standpoint, so I don't know if that really --

That's very helpful.

The other thing that I would, and this is perhaps just a difference of opinion, I don't think that we think -- our inventories are valued on license. One can choose to take the LIFO reserve reversal out because it results in income and say that that wasn't, that isn't quality earnings, but then when it's an expense, it doesn't get pulled out, right? I mean you can't kind of have it both ways.

Right, I agree with you.

The matter is that that's how our inventory is valued and there were other things that really were essentially equal to the LIFO impact that like out-of-faith surcharges and things like that that really essentially offset that, so I think we do it -- it's GAAP income.

I know, I have no problem with the accounting. One last one, on the retirement benefit expense, I know it's early and you'll market December 31, but with discount rates down and probably asset reoccurrence better, do you expect it to drop much? This year was a big year for that being a head wind. I just wondered order of magnitude. Thanks.

Well the discount rate is really the big driver. Dale do you want to comment on that?

Yes, this is Dale so if you look at your discount rates obviously they are down from where they ended 2011, and we give sensitivity as we've talked about in the past our annual report saw a 0.5% change in the discount rate, we're currently using 5% and so if you look at the Moody's AA, that would probably put you somewhere down around 4.5% or thereabouts. That drives about a $11 million increase in our expense from a GAAP standpoint for 2013.

The issue with both the discount rate as well as the return on assets, it's a point in time calculation so it's wherever we end up the calendar year 2012. So we'll see where that ends up. Right now, just looking at the discount rate we probably would be adding $11 million. As Rich mentioned in his earlier discussion and comments, from a cash standpoint though, we don't have any minimum required contributions as far as our US Defined Benefit Pension Plan for 2012 or for the next several years. So it's a GAAP recognition issue for us at the moment and see where the rates end up.

Thank you. I appreciate it. Thank you.

Mark Parr, KeyBanc.

I just had a couple of follow-up and Rich I appreciate all of the color and there's been a lot of information. I may have missed this, but did you talk about the sources of the slowdown in CapEx for 2012?

No, not specific projects. We had some projects in there that are good projects that make a lot of sense over the long term, but given the uncertainty that we're seeing from an economic standpoint, we think it's prudent to not move forward until we have better clarity.

Okay, so this wasn't a cancellation, it was just more of a timing issue, is that fair to say?

Yes, I think it's fair to say although I think it's interesting when the business units and the operations management comes up with projects, they are not short of having great ideas, and so we always go through a prioritization of those projects in terms of what's the best strategic investment for generating shareholder return. And that's how we prioritize them, and it's also for other prioritized use of cash as well because we're committed to self funding these investments over time.

So I hesitate a little bit because I don't, there could be great ideas that come up as part of the 2013 planning process that actually shove some of the ones that we've deferred from 2012 into '13 further down the priority list, so it might be a thing of timing, it might be something that we say we have other better ways to deploy our capital for the benefit of our shareholders, so we are not going to do that at all within the planning hurdle.

Just had another operational question. You talked about Raleigh's sponge costs, about 10% lower than they were in the fourth quarter of last year. Has that been kind of a consistent improvement? And I guess on top of that could you give us some color on what the opportunity is for further cost reduction at Raleigh say over the next two or three quarters?

Yes, I think it has been a consistent improvement, the third quarter was lower than the second which was lower than the first which was lower than the fourth last year, so we're on the right trend line. And we expect the fourth quarter to be lower than the third quite frankly and we know what needs to happen in order to do that. And Mark you didn't have the opportunity to go to Raleigh but as we discussed there, we are not going to stop there. By the end of 2013, our expectation is that the cost of producing a pound of sponge at Raleigh will be lower than it will be at the end of 2012.

So I think the opportunities are still there and it really is as you come down the learning curve, as you get the cake size up, as you get the yield improvement, et cetera, et cetera. And it's a wide variety of activities that are going on from a cost reduction standpoint, and it's really the reason why we have not begun the premium grade qualification program because once you do that you're basically locking in and fixing the manufacturing process. And we don't want to do that until we're satisfied with the cost structure.

Okay, well I appreciate that color. And just lastly if I could, real quickly, is there anything, any color you can give us on the outlook for nickel prices here over the next quarter or so? I mean it's really rolled back over as the QE3 effect has kind of worn off is what it feels like. Is there anything fundamental out there that you're aware of that might help improve the outlook for nickel pricing?

No, I mean Mark I could ask you the same question, what do you think about nickel but I think--

I think it needs China. I think China needs to come back because that's where the biggest consumption is in the world.

I think you're right. I think there is a floor that gets created because of the switching that the Chinese do away from pig nickel into prime, so there's a floor that gets created. And then there's also conversely a ceiling that gets created for exactly the same reason.

I think the big fundamental driver for nickel has always been and will always be for in my view, stainless, and stainless globally is weak. The demand for stainless is weak in Europe, it's weak in the US, it's weak in China, and that's really where the fundamental drivers are.

I agree with you the spike up in the previous couple months was primarily due to liquidity and QE3 et cetera. Today the cash price is about $7.40. I don't know, that between $7 and $7.50 feels kind of in the range that is supportive of the demand drivers right now. That's just our view.

Okay, I appreciate that. Thanks and good luck on the fourth quarter. I hope it's a black one.

It will be black, thanks.

Okay.

John Tumazos, John Tumazos Very Independent Research.

On the grain-oriented steel trade litigation, are you unprofitable in that productline which would support a high level of injury? And is a loss necessary to meet that standard? And secondly, concerning your general guidance of challenging and uncertainty, all that sort of thing I'm concerned that some listeners might not hear what you intend or may hear it differently than another listener. Did any of the businesses suffer irreparable damage? For example, has a major aerospace customer caused you to roll back your gross margin 50% due to market conditions or cut a bad long-term deal?

The latter question, the answer is a definitive no. Absolutely not. It's just there are a lot of dynamics that go into that. The long-term agreements that we have, we don't enter into a long-term agreement with a customer that we're not satisfied with the economics and the fairness of the economics in that are in our shareholders best interest. And we have a pretty sophisticated review process here, the business units can't enter into a long-term supply agreement without the fundamentals and the economics and the profitability and the risk management assessment being reviewed and approved here from a law department standpoint by Elliott Davis, who you've met, John, by Dale Reid, our CFO, and by me. So no there's been no irreparable damage. The dynamics of the market are the dynamics of the market, and we respond and react to that the same way everybody else does.

On the grain-order electrical steel, that's an investigation that's being done by SSINA and through the formal process it is well established. I think you know the answer is that damage is calculated on the basis of a producer has to be able to earn a reasonable return on an after-tax basis to cover cost of capital. So you don't necessarily have to be in a loss position. You just have to -- on a GAAP basis, it just has to be at a level where you're damaged because a product is being dumped or sold illegally, and the calculation is also based on the domestic industry and not just ATI.

Thank you. I just wanted to stress, Rich that sort of the vague or general phrases you use may make people jump to conclusions about a particular product market or customer, and if you're a little more specific as to where problems lie, I just don't want people thinking it's worse than it is. We're suffering enough today.

Well I don't either.

Not sure when to retire.

I try not to be vague and I try to be as specific and open as we can without providing information that I think does competitive harm to ATI.

Thank you.

Dave Martin, Deutsche Bank.

Rich, wanted to come back to capital. I know you stated you see working capital as being a benefit in the fourth quarter. I'm just curious as to whether you think that will offset the CapEx increase. And then secondly, on the dividend do you think your current pay out ratio is kind of the right base dividend in this environment?

Yes, I mean the dividend, we believe and our Board believes that ATI should be a dividend paying stock. We think that's an important component of total shareholder return. Ideally it's share price appreciation which is the bigger aspect of it and that hasn't been happening lately, and so we obviously need to address that and we need markets to cooperate a little bit with us on that. But I think that we look at the dividend pay out ratio not just on a quarterly or an annual basis, it's more of a cumulative basis at least through a business cycle. So there have been times when you go back and look at that where dividend pay out ratio looks low and there are times where it looks high, so we tend to look at the average, it is a use of cash. It's a prioritized use of cash. It's not the only use of cash.

I mean fundamentally we have our obligations to take care of and the rest is how best do you create shareholder value and capital investment has been an important part of our strategy here and I think will continue to be. I think if you look over a longer time period our pay out ratio is just under 30% and sometimes it's higher, sometimes it's lower. But the dividend is important to our shareholders and it's important to our Board, so we will continue to focus on that and work hard to generate the cash that supports all of the uses.

Okay. Secondly Rich if I may I wanted to ask about LTA. I think previously you had suggested you may book another almost $1 billion of LTAs in the second half of the year. Has that type of activity also slowed or where does that stand?

No, I think we're on track to basically hit that. Most of the LTAs unfortunately that we enter into, we have requests from our customers for non-disclosure, for a variety of reasons. And where there is one that is material enough that we believe from a disclosure standpoint we have to disclose then we push back on those customers and we work something out because that is a responsibility and obligation we have from a disclosure standpoint.

I think actually if we look at the ones we're working on today that are likely to turn into something either before the end of this year or in the first half of next year, it's well above a $1 billion quite frankly. Now some of them range in length from 3 to 5 years to 7 to 10 years. It just depends upon the product and it depends on the market and it depends on the customers.

But the concept of LTAs is not going away. It's an important part of being a strategic supplier and in our view there are a lot of benefits of that not the least of which is from capacity planning standpoint, from an investment standpoint, from a focus of R&D initiatives, et cetera. Because those kind of relationships are very deep and have some pretty significant technical and technology exchanges to them as well.

Okay, thank you and good luck.

Douglas [Deppey], DC Capital.

I just have a question. The results are clearly disappointing and I guess I've got the concern the business is too complex or complicated to manage the cost effectively given the changes in the environment. Could you comment on that?

Yes, I don't agree with it. I mean it's not an easy business. We have a good Management team that runs these business operations. It's not all vested in one person. The issue here isn't really necessarily the cost drivers. The issue is demand, and we have facilitized ahead of many of our competitors to meet the expected demand growth from these end markets. And our view is that the demand growth over the next three to five years will happen and our facilities are in existence and are qualified to produce the product that the customers are going to want.

I would much rather be in that position than trying to scramble to get new alloys developed and qualified and new facilities built because you're going to miss the next three to five years.

Yes, but I think that's a false choice, I mean it concerns me that there's so much inventory here. I mean and working capital and the revenues down, the working capital is up and you've brought it down a little bit in this quarter but to me it's just not a good sign from where I sit.

Well, we appreciate your comments.

Are you happy with the level of inventory and the working capital management? Are you doing all you can?

I'm never happy with the level of working capital employed in the business. And yes, we are doing everything that we can do while we still support the customers, because at the end of the day it's really hard to create shareholder value without having customers.

So it's a process that we go through and it's a cycle time issue, there's a lot of different things that go on into the business, but quite frankly if our -- to be perfectly honest with you if our working capital was 30% lower than this, I still wouldn't be happy so that's the honest answer to your question.

Jonathan Sullivan, Citi.

Thank you. A quick one on the High Performance Metal segment. I was wondering in terms of the decline in Q3 operating profit margins, if there were any sort of negative cost impacts that we ought to be thinking about, or was it really just a function of weaker product mix and demand?

I think it was largely that. There were some, there was the $6 million absorption issue if you will of the zirconium business that we highlighted that we wouldn't necessarily expect that to be a permanent continuation going forward because we're working on ways to continue to streamline that business. We're not banking on the nuclear demand to come roaring back here. That would be foolish.

But there are some projections that we're working on on the defense side that would provide a stable volume that would help that issue that appeared in the third quarter. And we've also taken some costs out of that business that we've implemented at the end of the second quarter. And then we had the surcharge mismatch because of the fall in nickel and titanium scrap in the longer cycle of those products where the surcharge doesn't match up. When you add those two items together they were essentially offset by LIFO, so the rest of it is really mix issues and the fact that the aero-engine market from an aftermarket standpoint was weaker.

Got it. Thanks a lot.

At this time we have no further questions. I would now like to turn the call back over to Mr. Rich Harshman with any closing remarks.

Well thank you for joining us on the call today and as always thanks for your continuing interest in ATI.

And thank you, Rich and thanks everyone for joining us today. That concludes our conference call.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.