ATI Inc (ATI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 Allegheny Technologies, Inc. earnings conference call. My name is Stacy and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

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

Thank you, Stacy. Good afternoon and welcome to the Allegheny Technologies earnings conference call for the fourth quarter and full year 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 of 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 fourth quarter was challenging. Our businesses continued to be negatively impacted by headwinds resulting from uncertain global economic conditions. We saw continued conservative inventory management throughout the supply chains of most of our major end markets. While these headwinds are creating challenging short-term conditions, we remain optimistic about ATI's long-term growth opportunities in many of our global markets.

Our financial position and liquidity remained solid with cash on hand at the end of 2012 of $305 million. Cash provided by operating activities was a strong $428 million in 2012. Our net debt to total capitalization was 32% and there have been no borrowings under our $400 million unsecured domestic borrowing facility.

In 2012, we remained focused on improving our cost structure. Gross cost reductions before the effects of inflation were $114 million. We took steps to size our zirconium primary operations to improve its cost structure in the post-Fukushima global nuclear electrical energy market.

We consolidated operations in our Engineered Products segment resulting in the closure of our iron casting facility in Alpena Michigan. This facility was purchased in 2007 and we converted it from an automotive industry casting business to a facility designed to produce and machine large iron castings for markets like wind energy.

The wind energy market and other markets for large iron castings have been challenging for several years both due to reduced demand and excess global capacity including significant capacity added in China. At this point in time, we have no plans to produce iron castings at this facility.

We are also consolidating certain of our Flat-Rolled Products service centers into one service center location to improve operational efficiencies and reduce costs.

As we enter 2013, while short-term global economic conditions and fiscal and regulatory policy uncertainties remain, we are beginning to see early signs of improvement from many of our markets. This gives us some confidence that global market conditions in 2013 will be better than 2012 so we remain cautious particularly for the first half of the year since both business confidence and consumer confidence remain low.

While uncertainty remains in the short term, we are very optimistic about the long-term secular growth opportunities in many of our global markets. To maximize these opportunities we plan to continue to enhance our competitive position by improving our cost structure, enhancing our capabilities and growing our relationships with our customers.

Looking at our High Performance Metals segment, in 2013, we expect to benefit from four main factors -- growing demand from certain key global markets, increasing demand for our new products especially from the aerospace market, lower costs at our titanium sponge facility, and favorable impact from our cost reduction initiatives. These benefits are expected to more than offset continued weakness in demand from the nuclear energy market and lower expected demand in the first half of 2013 from the oil and gas and certain medical markets due to inventory management actions and from lower demand from industrial markets for forged parts.

Aerospace build rates are increasing and OEM backlogs remain at record levels. Jet engine OEMs are expecting after market spare parts demand to moderately improve in 2013 especially when compared to the second half of 2012.

Boeing has announced plans for further increased production rates of its 737 and 787. The 777 has already increased to the 8.3 per month rate in 2013, up from 7 a month in 2012. Deliveries of the 787 are currently at five per month with a forecasted growth of 10 per month by the end of 2013.

We have not seen any demand impact for our products due to the current operating issues of the 787 Dreamliner.

Last week Airbus confirmed that it plans to maintain the 42 per month build rate of the A320 and importantly said that it expects first flight of the A350 extra wide body by mid-2013 with entry into service in 2014. The A350 extra wide body represents an important growth opportunity for ATI as we have considerable content on the Rolls-Royce Trent XWB engine which is the only engine presently certified for the A350.

Inventories in the aerospace market, both airframe and jet engine, continue to be worked to balance availability to demand. We believe supply chain inventories are closer to being in balance as long as announced production rate increased schedules are achieved. Once supply chain inventories are in balance, we believe that ATI is positioned for a multi-year period of strong demand growth for our aerospace products.

We have a multi-year view of the aerospace market and are developing the enabling specialty metals technologies for the next generation and future generation airframe and jet engines. As a result of our product and process innovation, we expect to have even greater content on the new models than on the old. Our unique innovative and vertically integrated technology and product capabilities including ATI's 718Plus nickel-based super alloy, (inaudible) 65 alloy, powder metals, ATI 425 titanium alloy, titanium aluminized high-performance isothermal and closed I forgings, titanium investment castings, diversified fastener stock capabilities, and PAM only and PAM preferred titanium alloys are either qualified and specified or are in the process of being qualified for new platforms as well as for legacy platforms.

We have significant strategic agreements and long-term agreements for these products in hand and more that are being negotiated. These innovative technologies and products represent growth opportunity for ATI shareholders and create value for our aerospace customers.

ATI Ladish achieved record annual revenue in 2012. This was achieved in spite of weaker demand during the second half of 2012 from the jet engine after market and from the industrial markets. ATI Ladish is gaining content on airframes and engines particularly on new models. This provides significant growth opportunities as these models increase in production.

Backlogs for our high-performance forgings and titanium castings at the end of 2012 were at record levels. Synergy opportunities between ATI Ladish and other ATI business units continue to expand and gain momentum. We are internally sourcing more titanium alloy and nickel-based superalloy mill products and are achieving other cost reductions and technology improvements.

It is clear that ATI's vertically integrated capabilities in nickel, titanium, and specialty alloys provide opportunities to create value for our customers and for our shareholders.

Our High Performance Metals segment supplies a variety of products to the oil and gas market including proprietary alloys for nonmagnetic drill collars for horizontal and directional drilling and nickel alloys for completions. We are seeing some short-term inventory corrections in the drilling supply chain but we expect these actions to diminish as we move through the first half of 2013.

Moving to our Flat-Rolled Products segment, we see improved demand in 2013 compared to 2012 for our high-value products. The oil and gas chemical products industry is this segment's largest market representing 26% of 2012 sales. Global oil and gas exploration and production forecast projects spending to set a new record and new subsea and topside projects continue to be announced.

In addition, upstream capital spending is growing. We are beginning to rebuild our backlog of high-value products for large global infrastructure projects. Last week our Uniti joint venture received the balance of the Yanbu 3 desalination project order. Uniti received a sizable share of the titanium strip required for this project. A portion of the order was shipped in the fourth quarter of 2012 but the majority is expected to be delivered in 2013. Uniti also received a significant order for a power plant project last week.

As we enter 2013, we have nearly 4 million pounds a titanium strip in our backlog from these projects. Shipments are planned to occur between March and October of this year. In 2012, our flat-rolled titanium shipments and Uniti conversion were down 38% compared to 2011 primarily because of delays in large global projects. These new titanium orders are a good beginning to a better year for our industrial titanium markets.

In addition, we expect our flat-rolled titanium shipments to the aerospace industry to continue to grow. We also received orders for several nickel-based alloy projects for the oil and gas market including sheet for flexible flow lines and plate for the first phase of a large pipeline project.

Demand for our duplex and lean duplex alloys is expected to be good for flexible flow lines in 2013. We have long-term agreements in place that have ATI well-positioned in this market.

ATI 2003 lean duplex stainless is the preferred material for a large offshore platform under development. We expect to receive an order for this project in the first half of 2013.

Based on orders already received, our high-value Flat-Rolled Products segment product mix should improve in 2013 compared to 2012.

We are also seeing modest signs of improvement in demand for our standard stainless sheet and plate products. Order entry has improved compared to the fourth quarter of 2012 and base prices are slightly higher than the record low base prices seen in the fourth quarter of 2012. We remain cautious in the near term since visibility is limited, lead times are very short and uncertainty of the sustainable US economic recovery remains.

Some facts. Our service center customers tell us that they are restocking their inventory although caution remains. Automotive sales and build rates remain good and our order entry reflects that. The housing market is getting a little better but has a long way to go. We are also receiving more orders for our pipe and tube products from the various capital goods markets for global infrastructure projects.

Our Flat-Rolled Products segment, hot rolling and processing facility or HRPF project is on schedule and on budget. Construction is expected to be completed with assets ready for service by the end of this year. Formal commissioning is expected to occur during the first half of 2014. The HRPF is designed to significantly enhance our Flat-Rolled Products segment capabilities, reduce manufacturing cycle times and lower cost. The HRPF will receive slabs from our stainless, specialty alloy, nickel-based alloy, grain-oriented electrical steel and titanium melt facilities.

Bands produced on the HRPF will be made ready for customers at our finishing centers of excellence throughout our Flat-Rolled Products operations. The HRPF is a game-changing technology that provides ATI with unsurpassed manufacturing flow paths for all of our specialty metals Flat-Rolled Products. For our high-value products, the HRPF extends our leading position by giving ATI the capability to offer our customers a wider and longer coil than we currently produce.

Larger coils help our customers better meet their product design needs and improves the productivity of their operations.

For our standard grade products, the HRPF enhances our product offerings by providing the capability to make wider and longer coils. It also enhances our capabilities to produce a wide range of ferritic or 400 Series stainless alloys.

Due to less raw material cost volatility, many traditional 300 Series stainless applications have moved to 400 series that is non-nickel bearing alloys, over the last several years. The HRPF coupled with our direct roll, anneal and pickle facility which is a continuous automated finishing line creates one of the world's most efficient flow paths for standard stainless coiled sheet products. We believe that this flow path provides ATI with a cost structure that generates positive income before tax for our standard stainless products even at the historically low base prices seen in 2012.

The cycle time of the continuous automated finishing line is approximately 30 minutes from hot rolled coil to finished coil. This compares to a cycle time of approximately two weeks at most conventional stainless finishing facilities in the world.

In our Engineered Products segment, we expect to see continued solid demand for our tungsten-based products. After a very strong demand for our industrial steel forgings in the first half of 2012, demand softened in the second half due to slowing global growth in the construction and mining markets. We expect these conditions to continue in the first half of 2013.

In addition, this segment should benefit from the consolidation of operations and closure of our Alpena, Michigan iron casting facility.

So as we look ahead to 2013 and put 2012 behind us, we expect 2013 pretax retirement benefit expense to be about $130 million or approximately $8 million higher than 2012. We expect essentially all of the 2013 pension expense to be non-cash. We believe that the uncertain global economy should result in relatively stable raw material costs in 2013 compared to current levels. We will continue to focus on improving our cost structure and we have targeted a minimum of $100 million in new gross cost reductions for 2013.

We currently expect 2013 capital expenditures to be approximately $550 million which includes approximately $450 million relating to the HRPF. Our objective is to fund this investment through cash on hand and cash flow and if needed using a portion of our existing fully available credit facility.

We expect 2013 to be our peak year for capital expenditures. Depreciation expense in 2013 is expected to be approximately $195 million.

Short-term business conditions remained challenging due to the headwinds created by the macroeconomic and political unknowns that we have discussed and that we and our customers live every day. As a result, we expect most short cycle GDP sensitive markets will continue to be challenged in the first quarter of 2013 and perhaps the first half of 2013.

We recognize the issues creating short-term headwinds. I am confident that as these issues are addressed and resolved growth in demand for our products will strengthen and base prices will improve. Based on these views we expect moderate growth in revenue and improvement in segment operating profit in 2013 compared to 2012 with the first half of 2013 providing greater uncertainties and the second half providing improved fundamentals.

As we look beyond 2013 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 these trends. We believe demand from the aerospace, oil and gas, and medical markets and certain chemical processing industry markets will improve for our products as we move through 2013. These key global markets represented 67% of ATI's 2012 sales.

ATI is very well positioned to benefit from this growth due to the investments we have made both in new products and in new and enhanced manufacturing capabilities.

We will maintain our focus on the continued execution of our strategies to enhance our competitive position and to create long-term value for our shareholders by completing our strategic capital investments, introducing and qualifying innovative new products, continuing our strategy to produce higher value-added products and components, improving our position within existing customers, and growing our participation at new customers.

Stacy, may we have the first question please?

(Operator Instructions) Richard Safran.

Good afternoon. Rich, I just wanted to first take a stab here at your guidance where you say you expect moderate revenue growth and improvement in segment operating margins. I wanted to know maybe if you could quantify that maybe a bit further for us. For example, do you think you could do mid-single digit growth in 2013?

I think the operative term being used is moderate so we are not specifically giving quantitative guidance. I think as you look backwards to the last three years beginning really in 2010, I think we entered each of the years of 2010, 2011 and 2012 with a view of improving global macroeconomic conditions. That is how our plans -- that is what our plans assumed and really through the first quarter we were tracking very well to our plans and quite frankly, our view entering each one of those years was really no different than most economists' views or I think most views across the industries that we operate in.

And then in each of the last three years for all of the issues that we have talked a lot about over the last two or three quarters, mainly the macroeconomic issues, the end markets began to weaken really beginning in the second quarter of each of the last three years.

As we enter 2013, I think that there is more general caution and concern because of the issues that remain unresolved throughout the world that are mainly fiscal and economic related. So the caution that we are taking is just that and I think it is prudent, I think it is warranted, it is how we are managing our business so we are not doing anything differently internally than what we are communicating on this call.

So I think the term moderate means probably the same thing to most people I think. It is growth. It is not zero. It is not down but it is certainly in the single-digit range.

Okay. And then just on the aerospace aftermarket and your comment about demand. I guess starting with investor day, you have been pretty cautious. You noted that like for example the supply chain was managing tightly. We have seen GE spares demand leveling off and Pratt's 4Q orders also appear to be encouraging.

So I wanted to know if this now represents a change in view for you for the better? And assuming you think demand is improving I just wanted to know if maybe you could tell us how long you would expect to see -- how long before you see the pull through before you see an increase in demand?

Typically what we see in that supply chain is some leading indicators of demand improvement from the distribution channel mainly and we are seeing a little bit of that in the first quarter but not enough to really make a trend. I think as we try to connect the dots and we listen to our customers and we look at the supply chain and we look at the fundamentals that really drive the spares market, I think that the latest projections are that the expectation that the global airlines collectively will -- the profitability will grow up to the level of about $8 billion in 2013 which is an increase compared to 2012.

I think that the supply chain has done an excellent job of managing the inventory and lowering the inventory and we have lived that really through the second half of 2012. I don't think that there is any what I would call robust signs that would indicate we are going to see a dramatic improvement in Q1 but I think as we look at things and hear things and make the connections, there is a possibility of that in the second quarter and more likely in the second half of 2013.

Great. Thank you.

Chris Olin.

Good afternoon. I just want to get some clarity on I think going back to your comments regarding titanium and I guess you kind of referenced the supply chain getting better. And I just wanted to see if your views had changed in terms of Boeings inventory levels and those windows could be cleared out. I think previously you started thinking about 2014 in terms of a balanced market. Anything out there that would suggest it could it be earlier or later?

No, I still think that only Boeing really knows what their situation is and I -- they haven't really changed much the comments that some of their executives made publicly earlier in 2012 and then over the summer of 2012. And I think most of that would lead to the conclusion that the likely timing is more along the lines of 2014.

Hopefully there is no disruption or change in the rate ramp from some of the issues that they are dealing with on the batteries and if that is the case, I think that the logical conclusion is as we are sitting here in the first quarter of 2013, we are closer to being in balance on the Boeing inventory than we were six months earlier.

Okay, that is good. Just shifting gears a little bit, just curious on the electrical steel market. I know you referenced a flat outlook. I was just curious in terms of some of those silicon steel businesses if you had seen any positive impact from the residential growth but more importantly the hurricane rebuild and if that had helped in terms of the volumes?

I think to the extent we have it might be at the margin level. As we look at the housing, the new housing construction and the improvement that has been evidenced in the US housing start market certainly over the latter part of 2012, it is really our view and our understanding that most of that is really in developed plots or developed projects where the infrastructure has already been built and put in place and had been sitting idle as the economy works through a very bad housing crisis and excess supply.

So I don't think that we have really seen any dramatic improvement in demand from that side. When you have a natural disaster like the tragedy of the hurricane, you see some improvement there but it really collectively is not significant enough to drive a big sustainable change in the market.

Okay, thanks.

Tim Hayes, Davenport & Co.

Good afternoon. Two questions if I could. In Q4, there seemed to be an outside gain from the LIFO. Was there any year-end true ups? I kind of look at Q4 that maybe I would want to take a little bit out of the LIFO for Q4 and obviously with the benefit of hindsight recognizing that LIFO assumptions are always tough during the year, I would take some of that benefit and throw it back in the first three quarters. Was that how I should maybe be looking at the quarterly pattern in 2012?

There is always the ultimate true up in the fourth quarter because we are projecting not only inventory levels throughout the year but also the individual cost elements. And obviously what you want to do is use the best data available but you don't want to be overly aggressive. And then the volatility of the raw material costs continue to move not so much nickel although nickel did soften in Q4 compared to the rest of the year. It is really a lot of the other elements that we use to make the nickel alloys and the stainless and the titanium alloys that made some pretty significant -- and zirconium raw material feedstock to make those alloys that moved pretty dramatically over the last three or four months of the year.

And as you calculate those indices and you lock in the calculation and you know what the layers are doing in each pool and everything that is really what drives any kind of assessment. I mean in hindsight, if you knew all of the facts in advance, LIFO would be booked ratably throughout the year, but nobody has the benefit of hindsight until the year ends.

Right, right. Turning to the hot mill at Brackenridge is that supposed to be adding incremental capacity, just a very little bit of increase in capacity on the hot mill side? How much capacity might that add in coal mill capacity throughout your system?

And what is more important in terms of how should we look at it from an industry standpoint? Is hot roll capacity more important or cold roll capacity more important?

First of all, in terms of the hot mill it doesn't do anything to add to our cold rolling capacity. Remember, our cold rolling capacity is what it is. However, there are some efficiencies that we gain because of the gauge control that we will have on a new, modern, state-of-the-art mill that we don't have on a 60-year-old mill that enables us to target the gauge off of the end of the hot mill to make our finishing facilities much more efficient and lower cost.

But it doesn't do anything to capacity from the standpoint of bringing on additional capacity of the finished product. In the stainless business unlike in the carbon steel business perhaps, there isn't a real big market for hot band or hot rolled products. The market is for cold rolled and finish products. That is the targeted gauge and it is the targeted coiled length and targeted width, an alloy system that the customers and that the market needs.

We have never viewed the hot mill as bringing on additional capacity of our finished product. What we view as the HRPF replaces a 60-year-old mill that has done great work for 60 plus years but makes it harder for us to compete as the markets believe it or not have changed over the last 60 plus years.

So what it does do for us is it enables us to more fully participate in the market opportunities for the wider product, the larger coils as well as makes it -- us more efficient in producing some of the ferritic grades, the 400 Series grades that quite frankly we have a difficult time doing on our existing 60 plus year-old hot mill.

So we have always looked at that investment as an enabler of us fully participating and creating value for our customers across a wide range of alloy flat rolled products that the market wants adding much lower cost and a much leaner flow path and cycle time.

Thank you for all of that color.

Steve Levenson, Stifel Nicolaus.

Thanks. Good afternoon, Rich. Could you talk a little bit about how the acquisition of one of your titanium peers might reshuffle the market, how you guys see it looking forward this year and next year?

I think it is consistent with what you are seeing in the supply chain of the continued vertical integration. That has obviously been evolving here over the past not quite 10 years but certainly the last eight years. I personally don't view that as a surprise. There has been a lot of signals that have been sent by PCP over the years that they would be looking at integrating backwards into titanium.

TIMET is a very fine company and was certainly a worthy competitor we had a lot of respect for and that doesn't change anything with PCP because we view them the same way. They are a good customer and a very worthy competitor and we think that there is enough opportunities in the world's markets for both of us.

Do you see a reshuffling supply and demand with Precision pulling some of that material in internally and then other people having a tighter market?

Maybe -- I mean at the margin. I think that you know that in the aero engine market or the jet engine market as well as in the airframe market as it has evolved over the past five or six years and jet engines has been longer than that. The directed source agreements that exist from the OEMs directly with the mills that require the forgers to buy their mill products from certain mills is a big driver in terms of the supply and demand equation in the supply chain. That is not going to change quite frankly. That is what it is.

The OEMs have evolved to that being led quite frankly by GE way back in the mid '90s and now all the engines OEMs pretty much do the same thing and the airframers are doing the same thing. So I think that if anything what the vertical integration does is it creates leaner cycle times and a more streamlined operating and supply chain that the OEMs see a benefit in and I think that is fundamentally why you have seen the supply chain consolidation happening. It was a big driver quite frankly behind our acquisition of Ladish and I think that those kind of moves will continue.

OK, thanks. Second one is something we are seeing a lot in the news these days is additive manufacturing and your need for powder metal to do it. Could you talk about how that might impact your powder metal business and what sort of capacity you have? I know it wasn't operating at a very high level when you first bought it but some time has passed and things have changed.

It is a great question. I do think that it employs and provides an opportunity for powder metals. It is one of the reasons why quite frankly we bought that business back at the end of 2009. And not only is it being driven by the powder metal forged products that are taking hold in some of the jet engine applications but on the additive manufacturing side and the near net -- I would broaden the definition to be more along the lines of near net parts or near net shapes because that is really where the additive manufacturing is going to come from and help create value on the customer side.

So you are seeing a lot of the OEMs investing in it. I do think it creates an opportunity for our powder business. Additive manufacturing is a technology that we are following very closely. I think it is like a lot of new and emerging technologies especially ones that are geared to the aerospace market, it takes a long time. And so I think it will begin to gradually gain a foothold but it is going to take quite a while for that to replace more of the traditional rot parts that are made into forgings or castings.

Thank you very much.

Gautam Khanna, Cowen.

Thank you. Good afternoon. So just a follow-up on that last question I think about PCP and them acquiring TIMET. I just wonder, do you feel more inclined or do you feel more compelled to get bigger downstream in the forgings based to build on the Ladish platform to get some more economies of scale? Or how does it inform your corporate strategy going forward?

I think that we all learned a long time ago that you have you -- you develop hopefully a deep understanding of markets and opportunities and where you can create value for your customers and what their needs not only are today but what they are likely to be in the future and that is quite frankly a benefit of this kind of the deep strategic relationships that we have with many of our customers.

So I don't think when you are driven by what others do, you can make bad decisions. So I don't think as I said earlier, we are not surprised by that move. I think it has been signaled for a very long time. I would be surprised if people were surprised.

So I think that it isn't going to change our strategy. I think we have communicated to the investment community that our view of getting closer to the customers not only in the aerospace supply chain but in other major markets as well, that integrating forward into value-added parts and products and components and providing the capability and technologies and benefits for the customers of near net shapes is the strategy that we identified several years ago. And sometimes it takes a while for those strategies to unfold especially when they involve making an acquisition.

So it isn't going to compel us to do anything differently than kind of the strategic roadmap that we have already laid out for ourselves.

Okay. Just one quick follow-up, Rich. Can you maybe give us a sense for some of the share opportunities that might be present because of the consolidation? Maybe there is some blow back against TIMET as they are now in competition with some of their customers?

And perhaps on the other side, could you give us a sense for how much nondirected material ATI today supplies or last year supplied to Precision Castparts that could go away and how you look at those opportunities and potential risk?

Well I can tell you, the answer to the latter question I mean how much nondirected do we supply? The answer is not much because most of it is geared towards the aerospace market. And as I said, most of that is through directed source agreements. So there is not much of the latter.

I think of the former, I think I have read and seen a lot of conjecture and some comments written by other companies who aren't fully integrated that when you become fully integrated, it presents opportunities because etc., etc. and I think at the end of the day the customers that we are dealing with are very sophisticated. They are risk averse, they value technology. They obviously want their products at a lower price than what they are paying for it but they also realize that there is a value proposition there especially when you have the capabilities to innovate and create new alloys and create new products. And we don't wait for our customers to tell us that we need to become more efficient. We know that we need to become more efficient every day. That is the lifeblood of how you are going to continue to grow and survive.

So I don't think that -- on the fringe might there be some isolated pockets of opportunity? Sure. Is it something that is going to dramatically change the landscape of the supply chain? No.

Thank you very much.

John Tumazos, Very Independent Research.

Thank you. Prime Minister Abe in Japan made some optimistic statements after his election about restarting the nuclear industry and not having the 40-year phase out to try to restart Japan from recession. If demand comes back for the zircon alloys, have you downsized the facility in such a way that you could call the people back and bring the capacity back is the first question?

Second, there is some research in China, India and Pakistan for thorium-based electricity reactors. Do you receive orders for materials for those type of reactors?

John, the first question is yes, we do have the capability -- we are following -- we followed that election very closely. I think it is positive in many respects but certainly positive from the Japanese perspective in terms of nuclear energy. I think that the next real important political event in our view will be the lower house elections in July I believe that if they support the new prime minister's views not only on nuclear but on the whole economic policy front in Japan, then that would be a very positive development for the restart of many of the reactors in Japan.

So that would be a very positive or that would certainly be a positive development for the nuclear industry, one that we are following very closely and we do have the capability of ramping up very quickly if need be.

On the thorium-based reactor side, I will be honest I mean I have followed that. I know that some of that is going on. I don't think that -- I haven't heard that it is an important driver yet within ATI for demand for our products. But as you indicated, it is early so those kind of reactors will obviously require some specialty metals. And as we continue to follow and gain understanding of whether there are opportunities there to the extent that it becomes meaningful, we will certainly comment on that to the investors.

Thank you, Rich.

Thank you, John.

Mark Parr, KeyBank.

Thanks very much. Good afternoon. I had a couple of questions. First, I am curious. You have a lot of end markets you are participating in. Could you just identify for us maybe two or three areas where you have the least amount of visibility right now?

It is probably the one that we have the least amount of visibility is always the distribution market for shorts that service the short cycles. And when I say that, that is generally the standard stainless products. So we work very hard to try to look through at what the end market drivers are and clearly there while we don't sell all of our products into those end markets through distribution in some cases the markets have evolved that the quantities are big enough that you are going directly to the customer.

Appliance is one of those but that is probably the most difficult one. The lead times are the shortest. They are more GDP driven. It is more a fundamental view -- and impacted more by confidence than anything else.

I think as you get into some of the longer cycle markets like aerospace and oil and gas, those markets have because the construction and the production time of the product is so long and the backlogs are so deep and rich, not necessarily from our perspective but from the OEM or the major fabricator perspective, you have a longer viewpoint into that and that becomes somewhat easier.

The other challenge is not directionally. It is more of the timing of some of the large infrastructure projects. I mean because the gestation period of those projects can be years in terms of how they evolve from concept into bill of material ordering and while the project doesn't go away, sometimes it gets delayed because of shorter-term economic issues and we certainly experience that for example in the desalination projects that I think the industry was waiting for those to be awarded quite frankly in November of 2011. And they are just getting for the most part -- the first order came in December or late in 2012 with the follow-on additional parts of the order coming here in the first quarter.

So those kind of project businesses are notoriously lumpy to use a technical term and become very difficult to project.

Okay, but if you look at both of those areas that you talked about in terms of large project and the short cycle distribution business, it would seem that in your matrix of pricing by growth on the access -- on the [axis], they are not the ones in the lower left-hand quadrant. Are they more toward the middle right now or are they -- is that fair to say?

You mean the project business?

Project business and the standard stainless business.

The standard stainless is certainly the lower price than lower margin opportunity. The project has a tendency to be more demanding applications, differentiated alloys. Not everybody can make it and so the prices are higher and the margin opportunities are greater.

Where I was coming from was just the percentage change on price against the percentage change on volume recovery. It sounds from your comments like standard stainless wouldn't be the weakest piece of your business right now.

Stainless is the weaker harder business right now because the visibility we have is so short.

Okay, all right. That is fair.

And the demand for the product is more driven by confidence and when there is a lot of uncertainty, you get uncertain uneven and low demand.

Okay. One other question if I could real quick. What is more important for you in 2013 -- pick up in China or stabilization and maybe some late year-end pick up in Europe?

They are both important. But I think -- I am not sure quite frankly that you necessarily get the stabilization in China without some stabilization and minor pickup -- modest pick up in Europe. I mean -- and in the US. 25% of China's GDP is driven by exports and to the extent that that demand isn't there and they are managing their economy and their growth in a delicate balance between political stability and employment and inflation, they have got a lot of capacity so what happens is that they quite frankly dump their product. And they dump it especially the more commodity products or standard products, they dump it in Europe and in the US and that creates problems.

So if I was forced to pick one, I would say that for us a return to a reasonable and stable and let's just say -- I don't know if it is 6.5% to 7.5% but if China is growing at 6.5% to 7.5% consistently with the size of that economy, that is a very -- it is important not only from a demand standpoint for some of the projects and the higher value products that we make that they can't make at this point in time which is a market for us. And that demand sucks up some of their capacity that then they don't look at dumping elsewhere in the world.

So if I was forced to pick which one was more important, I would like to say they are both important but I think the stability and the good growth in China is very important.

Okay, terrific. Thanks for all of the color and good luck in the first half.

Kuni Chen, CRT Capital Group.

I guess just to start off, I just want to talk on the High Performance side. When you look at some of the margin drivers for this year, you mentioned lower titanium sponge facility costs. Can you help quantify that for us?

Not really. I mean other than it will be lower. We are not going to get into that kind of a fine breakdown of our operations. I mean I think that the fundamental driver in that particular segment is we have taken -- we will have less of a drag because of startup issues in the Rowley sponge plant. We will have less of a drag because of lower volume on the zirconium side because we have taken costs out and kind of sized that business where it needs to be right now.

And hopefully with some more stable raw material costs and even net of LIFO in a market where raw material costs continue to fall because of the manufacturing cycle time of those products, we get out of phase with the raw material surcharges and it hits P&L negatively even after any kind of a LIFO benefit.

So those factors combined with improving volumes -- I mean we are not quite frankly banking on any significant move in base prices at this point in time. I do believe that that is an opportunity especially in the second half of the year if the demand improves and the global economic condition improves and you see a lengthening of lead times and a tightening of the supply, that that certainly is a possibility in the second half of the year.

So I think it is a variety of factors that will help us achieve moderate improvement in earnings and the High Performance Metals segment in 2013.

Okay, that is helpful. And I guess my second question on the CapEx side of the equation, you guys have always sought to be self funding and self fund your growth projects but that doesn't seem to be the case this year.

Does that reflect any different thoughts on CapEx and growth or would you look at this year as just more of an aberration since you are finishing the hot mill project?

I think it is an aberration. Look, our desire is to self fund it. That is our primary focus. When you spend $550 million on CapEx and you have a moderate expectation on growth in the end markets and you have those factors all combined and you have the view that business will improve and will require some investment in managed working capital although I think we are going to work hard to minimize that because we have opportunities to do a better job quite frankly in managing our working capital especially on the inventory side.

That is the reason for the view that we might have to at least on a temporary basis from a timing standpoint of some of the expenditures utilize our credit facility. But the ultimate goal is to not do that.

I think that as you look at and reflect upon the guidance we are giving on capital expenditures, $450 million of that is the HRPF. At the end of 2012, so that is a 1 point -- we will use round numbers -- $1.1 billion investment. And at the end of 2012, we have invested in that project so far just under $500 million. So let's just say we have about $600 million to go. $450 million of that occurs in 2013 mainly because our goal is to complete the construction in 2013.

The rest of the cash outlay moves to 2014 mainly because the contractual requirements are that there is a contractual withhold until we get through the commissioning process. And then the investment is none.

So as we look at 2014 at this point in time, our capital requirements are going to be significantly lower than they are in 2013. So 2013 is the peak and is the pinnacle in terms of what we are spending on CapEx.

Maybe I can sneak one more in?

Sure.

Just can you give us the overall titanium volumes across both segments for the year?

For 2012?

Right.

Dale will look that up here. I don't have it right off the top. I think it is 38, 37, 38.

Kuni, this is Dale. For 2012, our total titanium shipment volume was 37.623 so 37 million pounds.

Thank you.

Michael Gambardella, JPMorgan.

Good afternoon. I have two questions. First, just a follow-up on the LIFO question earlier. When I look back on the numbers, you had a LIFO credit of $7 million in the second quarter, $22.1 million credit in the third and then you had $47.6 million credit in the fourth quarter you just reported. You had almost a $48 million LIFO credit in the fourth quarter compared to the $33 million in EBIT that you put up.

I mean some of that in the fourth quarter to that credit must be associated with previous quarters.

It all depends on what you do with inventory levels. You saw how much inventory and managed working capital we drove down in the fourth quarter. So as inventories move down depending upon where you are in the pool and whether it is an increment or a decrement, it is a meaningful impact on what LIFO, the LIFO answer is. So quite frankly as we look through the year, we all get a lot smarter in November and December than we were in January and February in terms of what the drivers of LIFO are.

So just moving sequentially into the first quarter, what would you expect your LIFO position to be? I know you can't tell for sure but roughly versus that $48 million credit in the fourth?

I think that if our view which I said in my comments and in the press release is that we think that raw material costs will be relatively stable in 2013 at the current levels, then given that assumption and if we continue to have that view as we approach the end of the first quarter, I would say that LIFO is not a factor in Q1.

So you would take out the $48 million credit from the fourth going into the first?

You can do whatever you want. We wouldn't have any LIFO in the first quarter so however you want to build your model you will build your model.

I'm just saying if you didn't have any LIFO in the fourth quarter you would have had a loss on a EBIT basis.

Yes, but we did and since most of our inventory is valued on LIFO and that is GAAP, it is really an irrelevant question.

I just thought there was some catch up there.

But also, Mike, this is Dale. As Rich talked about, there is a mismatch between what the surcharges and what our inventory-able costs are. So granted we would not have a LIFO benefit in the fourth quarter but we also wouldn't have had the mismatch that we had in the fourth quarter also.

If you look at what happened with nickel here obviously the price of nickel fell to $7.39 at the end of November and that is meaningful to us because the way that we buy nickel in the month of December is based upon the November price.

So the fact that nickel was down 10% and it basically fell from $7.82 to $7.39 in one month had a favorable LIFO impact for us but it also is going to create some issues here as we roll through the first quarter of 2013. So we will see what happens.

Okay. Second question just on the tax side, I think your normal tax rate is 35% but you had a 16% rate in the fourth quarter. What was the difference there in tax benefit?

Sure. As we talked about in the release, it is not unusual for us like any other public company basically, we operate in multiple tax jurisdictions both here in the United States and the various states as well as overseas. And as we close out tax years, we will book gains or losses depends on how those tax years close out.

The tax rate as you know is basically a function of what the tax provision is versus what our IBT is and given our low level of IBT, it had a dramatic impact on the rate. As we look at what the rate will be in 2013, that rate should get back to the more normalized basis of around 35% because we are primarily a US manufacturer.

Okay. Thanks a lot, Dale.

Dave Martin, Deutsche Bank.

Thank you and good afternoon. Rich, I think it is a bit of a follow-up on your outlook for High Performance earnings this year. I would conclude that lower costs are going to be a main driver of better earnings in that segment.

I am just curious if first, if you can give us some color on where your backlogs or order books are in that segment versus maybe a year ago? And then secondly, I was hopeful that you could give us an update on Rowley cost progress and operating rates and your current plans to pursue PQ certification?

I know you said in the release sometime in 2013 but I recall at one point you saying that wasn't likely to begin in the early part of the year?

I think the backlogs if we look at them in total for the segment today are pretty consistent with where they were about a year ago and we obviously don't ship exclusively out of backlog. We get orders quite frankly every month and certainly from the more transaction oriented businesses with lead times being what they are which are relatively short even in the High Performance Metals side both for titanium and nickel alloys and mill products. We will get orders today that will ship in the first quarter.

But from an indicative and a trend standpoint, I think that the backlogs are pretty similar. Where there is good strength and growth in backlog is on the forging side, the forging and the casting side with ATI Ladish.

As we look at the full year, revenue is always kind of an interesting indicator because remember, we have raw material surcharges in those products both on the mill product side as well as on the forging side. So we are assuming that in 2013 on average, raw material costs will be lower than they were on average in 2012 and yet we expect to have moderate growth in that segment in the year so in actuality that means volume growth as well.

So that really is our view at this point in time in that segment.

On the Rowley progress, we continue to make good progress in getting the costs down. As I have explained before, we really do not want to start the PQ or premium grade qualification process until we have our cost and yields at an acceptable level because we have to freeze the method of manufacturing process at that point and use that throughout the production of a significant quantity of sponge that has to be then turned into mill products in order to obtain the jet engine qualification for rotating quality material on PQ.

So the timing of that is really dependent upon when we are satisfied that we have a process and a yield and a cake size that is acceptable to give us an acceptable cost structure going forward because we do not want to start and stop the PQ side.

I am hopeful that that is going to be sometime if not in midyear then early in the second half of 2013. But quite frankly given being fact that we have standard grade qualification approval which means that we can use that sponge on everything that we make other than rotating quality product for jet engine and some limited medical standard and specifications that we have other outlets for the sponge.

So I am really not driven by the sense of need and urgency to start the PQ process before it is time. I am really more driven by the fact that I want the process to be locked in and to be a very cost efficient process so that we only do it once. And the goal is to begin that in 2013. If that happens, great. If it doesn't, it is not the end of the world quite frankly.

One more if I may, Rich. I know in your press release you said the pension was 77% funded. Could you give us what the asset and obligation balances were at year end?

Yes, so we are 77% funded. I don't have those exact figures off the top of my head. I can get those for you. But if you look at it from an ERISA standpoint, we are about 97% funded. They haven't finalized the rates and the calculation to do the valuation yet but from -- that is why from a funding standpoint we don't have an expectation that we would have a required cash contribution here in 2013 given the fact that we have a credit balance coming out of 2012 there.

The assets are roughly like $2.2 billion and the liability is about $700 million higher than that so it was like $2.9 billion.

Mainly, and Dave, you understand the liability is driven -- growth is driven exclusively through the use of the lowest discount rate we have ever had to use.

So this year we are going to use a discount rate or at the end of 2012 of 4.25%. Last year we used 5% and it basically is driving about a $200 million increase in the obligation there.

Also given the forecast by the analysts who do this kind of thing, the expectation as far as return on assets whether it be equities or whether it be fixed income given the fact that the risk-free rate has basically been at a very low level and is anticipated to be at a very low level for an extended period of time, we are lowering our expected return on assets by 25 basis points also so that costs us about $5.5 million on an annual basis.

Okay. Thank you very much.

Thanks, Dave.

Arun Viswanathan, Longbow Research.

Thanks for taking my question. I guess the first question was just a little bit high level. Back when you were looking at third quarter, that was kind of thought to be nearing a bottom third quarter of 2012 and then unfortunately, it looks like the destocking accelerated in the fourth quarter. Sequentially looking into the first quarter, do you think that has fully run its course and are you a little bit more confident -- just trying to understand the comments of growth for full year. Does that mean that you won't see that growth until the rest of the year? I mean, the back half of the year? What gives you the confidence that the whole year will be up?

Based upon what our customers are telling us and how we see the opportunities in the end markets that we serve.

So that was going to be the next follow-on was maybe you can just help quantify maybe your end lead times across different end markets, is that something that you can speak to?

Lead times are relatively short by any historical metric pretty much across many of the end markets that we serve. That is very sensitive. Lead times can and do move out very quickly especially on the aerospace side and the big impact quite frankly in the second half of last year from the aerospace market was on the aftermarket side. And I think if you reflect upon and listen to what all of the engine OEMs are saying and quite frankly, we were the first Company that commented back in April of last year on some softening in demand on the aftermarket side on jet engines and that is because we kind of see it first because of the nature of the products that we make and we have a pretty high concentration of our aerospace market that is focused on jet engine and we focus on the premium market applications for rotating components on both nickel superalloys as well as premium titanium alloys.

So as we see it, we saw significant inventory corrections throughout the second half of the year. The engine build rate -- I mean GE has already publicly said on new engine builds a growth of about 6%. Rolls-Royce and Pratt are seeing growth. So the real big impact is quite frankly on the aftermarket side.

And when you look at all the fundamental drivers in terms of revenue passenger miles and fleet utilization and profitability of the airlines and where the inventories are, those are all the factors plus what our customers are telling us. Those are all of the factors that go into us putting our plans together and doing the best job we can of communicating what our expectation is to the investment community and that is what we have done.

Another kind of follow-on of that is can you quantify your backlog or the book to bill in the fourth quarter on a quarter versus quarter basis or year versus year basis?

We will certainly do that in our 10-K.

Okay. So I guess what I'm trying to understand is that since then, have you seen an improvement that would mean that this thing will accelerate as 2013 goes forward?

We have seen enough evidence and information from the supply chain and our customers that support the comments that we have made.

Okay, thanks.

Jonathan Sullivan, Citibank.

Thanks a lot. Good afternoon. I just had two quick questions. One, I believe before you mentioned in response to a question about the growth in 2013 that you would expect to see single-digit growth. Was that referring to revenue or segment operating profit?

That was referring to our view of how you define moderate and the use of the word moderate applied to both revenue and segment operating profit.

Great, thank you. And then the last question, in 2014, I wonder if you could talk a little bit about the cost benefit you expect to see from Brackenridge and how that might flow through I guess in 2014 and 2015 taking into account the commissioning process in the first half of 2014?

Yes, I think most of the benefit quite frankly will be in 2015. 2014 is the commissioning process we go through. We have to commission the mill for rolling every single alloy and product that we make which are in the hundreds. It is not the same kind of a commissioning and qualification process that we have to go through when we bring on a new asset that is involved in producing a rotating part for a jet engine mind you. But it is still a commissioning process to make sure that the product is consistent with the specification both the internal and the customer specification and that process will begin early in 2014, probably on some of our higher volume products and then we will continue really through the first half of the year on all the other products.

We will be producing product. Once something is commissioned our goal is to hot roll that and sell that as a finished product once it is commissioned through the mill. So that will be happening throughout 2014.

And then in 2015, that is where really the old hot mill -- the existing hot mill will be shut down and all of the cost advantages will roll through the operations.

And that is a fairly significant number that we have not commented on publicly other than to say that the reason for the investment is it allows us to participate in the 40% to 50% of the market for flat-rolled stainless that we cannot participate in today because we don't have the capability of producing the product. It will be a lower cost flow path and it will be a leaner flow path with less inventory investment required not only on our part but on our customer's part.

So those are all the driving factors and the benefits behind the investment.

Excellent. Thanks a lot.

Thank you. Thank you for joining us on the call today and thank you for your continuing interest in ATI.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.