ATI Inc (ATI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ATI third-quarter conference call. My name is Whitley and I'll be your Operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

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

Thank you Whitley, and good morning and welcome to the Allegheny Technologies earnings conference call for the third quarter 2013. 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 Patrick DeCourcy, interim Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI.

If you have connected to this call via the internet you should see slides on your screen. For those who have dialed in, slides are available on our website, www.atimetals.com. After some initial comments will ask for questions. During the question and answer session, please limit yourself to two questions to be considerate of others on the line. As always, we will make every attempt to reach everyone in the question and answer queue within the allotted conference call time.

Please note that all forward-looking statements this morning are subject to various assumptions and caveats as noted in the earnings release and on this slide. Actual results may differ materially.

Here is Rich Harshman.

Thank you, Dan and thanks to everyone joining today's call.

As we said in July we expected the third quarter to be challenging. We certainly saw this with continued sluggish demand for many of our major end markets. Jet engine destocking at OEMs while beginning to show signs of stabilizing continue to impact shipments of both mill products and forged in machine components in our High Performance Metals segment. Lackluster economic growth in US and Europe resulting in excess supply of natural gas has temporarily softened demand for the oil and gas market.

Global fiscal policy and economic uncertainties and slowing global GDP growth has reduced project related demand for our flat-rolled product segment and industrial titanium and nickel-based and specialty alloy sheet and plate products. Given these scenarios, we are focused on taking the necessary actions to navigate the current challenging global economic conditions while we continue to strengthen ATI's position for future profitable growth. The restructuring actions announced last week represent an important part of this strategy.

While we can't control global macroeconomic conditions or raw material prices or the underlying demand for our products, we can and will continue to focus on taking actions within our control. These actions are designed to improve ATI's financial performance and financial flexibility in the short term and keep ATI well positioned for profitable growth over the long term as economic and market conditions improve. Specifically, we continued to accelerate our cost reduction efforts. In the first nine months of 2013 we have achieved over $123 million in gross cost reductions before the effects of inflation.

We continue to take actions to improve ATI's liquidity and financial flexibility. This includes the previously announced sale of our tungsten materials business for $605 million. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to be completed during the fourth quarter 2013. As a result, we expect to record a significant gain in the fourth quarter 2013 from this transaction. While the near term remains challenging we are even more confident in the long term, particularly in our two largest markets, aerospace and oil and gas/chemical process industry, which together account for over 50% of ATI's sales.

Last week we announced the extension and expansion of our long-term titanium products supply agreement with Boeing. Also last week we began the premium quality titanium qualification process using our Rowley, Utah sponge. In addition, we are currently in active negotiations on other long-term agreements with a number of strategic customers.

Slide 5 shows the graphic display of the impact of falling nickel prices over the last few years. Note the steep price drop in 2013, particularly throughout the second quarter. Over the last 2.5 years we have seen a significant decline in the monthly average LME cash price for nickel, from $12.82 in February of 2011 to $6.30 in October of 2013.

As the chart shows, nickel prices seem to have stabilized since mid-2013. Eventually this stabilization should help reduce some of those wait and see attitude that we have seen from customers in many of our supply chains. If this stabilization continues it should help orders better reflect real underlying market demand for our nickel-bearing products.

The next chart shows the decline in the raw materials index or surcharge for 6-4 titanium bar. Again, customers typically take a wait and see attitude in this environment, especially when lead times for most products are short, which is the current situation. In this illustration we used titanium bar, which is primarily used in aerospace and medical applications. However, the direction of the raw material index for bar products also applies to most titanium products.

During this period of slower GDP growth, economic uncertainty and falling raw material prices we have accelerated our cost reduction actions. As I indicated earlier, we have achieved over $123 million of gross cost reductions during the first nine months of 2013, and we are not finished, as we continue to identify and implement cost reduction initiatives. We are also focused on reducing our managed working capital, specifically in the areas involving lean manufacturing processes and reducing manufacturing cycle times to improve inventory turns. During the third quarter 2013, managed working capital was reduced by $122 million, most of which was in inventory.

We remain in a solid liquidity position with cash on hand at the end of the third quarter of over $535 million. There were no borrowings outstanding under our $400 million domestic borrowing facility and none are contemplated in the fourth quarter 2013. In addition, we expect to significantly increase our liquidity and financial flexibility with the previously announced sale of our tungsten materials business for $605 million, which, as I indicated earlier, is expected to be completed during the fourth quarter of 2013.

Capital expenditures in the first nine months of 2013 were approximately $395 million, including nearly $320 million associated with our hot-rolling and processing facility, or HRPF. We expect 2013 capital expenditures to be approximately $600 million, though we expect capital expenditures to be about $200 million during the fourth quarter. I expect to see a significant reduction in capital spending in 2014.

With the expected closing of the sale of the tungsten materials business in the fourth quarter, we expect to end 2013 with approximately $1.4 billion of cash and available liquidity. We believe we have the liquidity and financial flexibility to bridge the gap between the present challenging market conditions and the expected profitable growth over the next three to five years.

Moving to Slide 9, operating profit in the High Performance Metals segment was 10.3% of sales and was negatively impacted by reduced operating rates and reduced raw material surcharges due to continued falling raw material prices, which were not aligned with the higher raw material costs due to longer manufacturing cycles, especially for many of our high performance products. The segment's operating profit was also reduced by our strategic decision to use ATI produced titanium sponge rather than titanium scrap to manufacture certain titanium products, and pricing pressures on transaction or spot business.

In addition, the segment was impacted by reduced demand from the jet engine aftermarket, aggressive inventory management in the aerospace supply chain, reduced demand for forgings from the construction and mining equipment market, and low demand for zirconium products in the nuclear energy and chemical process industry markets.

Compared to the second quarter 2013, mill products shipments of titanium and titanium alloys were flat. Nickel-based and specialty alloys decreased 9%. Sales of precision forgings and castings decreased 16%, and shipments of zirconium and related alloys decreased 16%.

Moving to the next slide. In September, an aero-engine OEM customer visited our Rowley, Utah titanium sponge facility for an initial walk-through as a precursor to the start of the premium quality, or PQ, qualification of this facility. A key outcome from this visit was confirmation that we could begin the PQ process in October 2013 and we have started the process.

We expect full qualification of all products using Rowley PQ titanium sponge to be completed within 18 to 24 months. As a reminder, it is the process of using Rowley sponge in the melting and production of titanium mill products, and then in the manufacture of jet engine parts that must be qualified. Not just the sponge.

Although we have been operating the Rowley facility below capacity largely due to weak demand from titanium products from industrial markets, we continue to reduce sponge production costs even though the facility is operating at less than ideal capacity utilization. This speaks to the outstanding efforts by our people at the Rowley facility. Until the completion of the PQ process, we will continue to assess the optimal production rates at Rowley based on market demand for standard quality titanium products.

Turning to our Flat-Rolled Products segment on Slide 11. The Flat-Rolled Products segment operating loss for the third quarter of 2013 was $20.4 million, reflecting the challenging market conditions for standard stainless sheet and plate and grain-oriented electrical steel products, pricing pressures on high-value products, including industrial grade titanium products, and the lower overall demand for many of our high-value Flat-Rolled Products due to global economic conditions resulting in a lack of project orders. Demand remains solid from the aerospace market and we continue to improve our Flat-Rolled Products participation in this strategic market.

Demand for our Flat-Rolled Products in the third quarter remained good from the oil and gas market but the mix was less favorable as demand remained good for stainless duplex alloys, but weakened for our nickel-based alloy sheet and plate products due to a lack of global megaprojects. Activity in the electrical energy market continues at low levels of the US and Europe since electricity demand is not growing. On the positive side, we are seeing good demand from the renewable energy and spent nuclear fuel supply chains.

On the electrical energy distribution side, while the US housing industry is improving, housing starts, which are a main driver for our grain-oriented electrical steel, in 2013 are still expected to be among the lowest levels in the last 40 years. In addition, pricing for GOES products is very competitive due to weak global demand and excess capacity built in China that has resulted in foreign products being dumped into the US market.

On September 18, 2013, the US producers filed anti-dumping and countervailing duty petitions against seven foreign countries that produce grain-oriented electrical steel products. Unfortunately, the initial meeting with the ITC, the International Trade Commission, staff was postponed during the US government shutdown. The meeting has been rescheduled and at this point we expect a preliminary decision from the ITC before the end of 2013.

Demand continues to be strong for our Precision Rolled Strip products from the automotive market. Finally, while the stainless steel sheet and strip based selling price increases announced for August and October 2013 appear to be holding, the price increase effective August 1 did not have a significant impact on improving the profitability of these products in the third quarter as orders for most shipments were placed before the price increase took effect.

Moving to Slide 15. Last week we announced that we had extended and expanded our long-term titanium products supply agreement with the Boeing Company into the next decade. This is a good outcome for ATI and for Boeing, as we were able to extend our previously existing agreement that was set to run through 2018, and provide a more value added product mix to help Boeing improve their supply chain efficiency and move the mix closer to near net shapes. This was the second extension of the initial 10-year agreement between Boeing and ATI that began in 2006.

The new agreement enhances and solidifies our strategic relationship with Boeing and recognizes the ongoing requirement to provide enabling technology, increase value added titanium products, and supply chain efficiency. With this new agreement, ATI has the opportunity for additional growth with Boeing through our next generation and advanced titanium alloys. We believe the commercial aerospace market presents strong growth opportunities for ATI. We believe the new agreement with Boeing leaves ATI better positioned to create value for Boeing and ATI's stockholders.

The new agreement carries through a time of many growth opportunities, including the full rate ramp of these 787-8 and -9, the development and ramp of the 787-10, the development and entry in the service of the 737 Max, and the expected development of the 777X. Our titanium mill products long-term agreement is one of the ways through which we do business with Boeing and the aero-structure supply chain. In addition to mill products, ATI manufacturers titanium investment castings, titanium extruded shapes, titanium fastener stock, specialty alloy fastener sheet and strip, nickel-based alloys and specialty alloys long products, and Flat-Rolled Products, and nickel-based alloy plate for composite molds.

We can clarify what is meant by value added products for any customer. Slide 16 depicts the integrated supply chain that ATI has built since 2004. It shows the direction of value added production from melt to most mill product forms, powder alloys, and to machined parts and components. Our supply chain applies to titanium, nickel-based alloys and superalloys, and specialty alloys, as well as powder alloys, and includes our broad range of premium and in some cases proprietary alloys. ATI has the technology, manufacturing capability, and product flexibility required to offer unique value added solutions to strategic customers.

So when someone talks about weight or volume, to us that means primary mill product forms like ingots or slabs. As we have said many times over the years, weight and/or pounds shipped are not our sole focus. We have built the capacity and capabilities required to manufacture value added products. More value added volume thus means a more differentiated higher value product and better utilization of our technologies and assets, which will help ATI return to more normal and acceptable operating margins.

Note that our Hot-Rolling and Processing Facility is included in the supply chain diagram. ATI is already among the world's premier titanium and nickel-based alloy and specialty alloy flat-rolled coil producers. The HRPF is designed and engineered to elevate ATI to a new level of quality, efficiency, and productivity for flat-rolled titanium coil and for flat-rolled nickel-based alloy coil and sheet, strip and Precision Rolled Strip products forms. Our next-generation titanium alloy, ATI 425 alloy, is a cold-rolled, high-strength titanium coil with a flow path that will include the HRPF.

ATI 425 alloy continues to gain acceptance. We know that some of you are impatient and so are we. ATI 425 alloy initially received general aerospace industry airframe design allowables certification in April of 2010. I am pleased to announce that ATI 425 alloy was recently listed in the design manual of an OEM. Three years from industry design allowables to inclusion in the OEM design manual is actually pretty fast for the aerospace industry.

For perspective, it took eight years for our ATI 718 Plus alloy to move from introduction to acceptance by an aero-engine OEM. That time period was condensed to four years for Rene 65 alloy. ATI 425 alloy is increasingly being recognized as a way to enable both the aero-structure and jet engine OEMs and their suppliers to increase efficiency and productivity by helping reduce the cost of making a part versus using the standard 6-4 titanium sheet.

Turning to the oil and gas market. We continue to see a large number of inquiries for international projects needing our specialty alloy products. In our High Performance Metals segment we are seeing some inventory management actions in the supply chain for our nickel and specialty alloy drilling products, temporarily resulting in lower demand for these products, which is likely to continue through the end of 2013. While oilfield service providers continue to reduce their nickel alloy and nonmagnetic inventories, they are projecting a return to more normal consumption levels in 2014.

In our Flat-Rolled Products, segment demand remains strong for our specialty alloys products used in umbilicals and flowlines. However in the near term we are not seeing any significant demand from large or megaprojects for our nickel-based alloy sheet and plate. Demand is beginning to improve from the chemical process industry in the US due primarily to the availability of low-cost natural gas resulting from shale gas production.

Demand for titanium Flat-Rolled Products from industrial markets specifically for desalination and shipbuilding projects has been weak for most of 2013. At this point we are not seeing any significant improvement in global demand due to the lack of megaprojects, although a number of smaller projects are in the pipeline that will benefit 2014.

As we look ahead to the fourth quarter 2013 we are not seeing any significant signs of improvement in market conditions. Also the debate about the US debt ceiling and other fiscal policy issues continues to create uncertainties that negatively impact short-term consumer and business confidence. These issues may negatively impact demand for many of our shorter-cycle end markets at least through the end of 2013 and possibly into 2014.

In the short term, we will remain aggressive with our restructuring, cost reduction and lean manufacturing efforts, and align our cost structure, production levels, and inventory levels to the demands of our customers and end markets. Our goal is to accomplish this while remaining well-positioned to create value for our strategic customers and our stockholders, and realize the expected growth in demand over the next three to five years from many of our key global markets.

ATI's unmatched diversification in specialty metals products, technology leadership, unsurpassed manufacturing capabilities, our customer responsiveness, and our increasingly competitive cost structure are key elements of our growth strategy. We continue to believe that market conditions remain favorable for long-term secular growth from our key global markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical markets.

In summary, we will maintain our focus on the continued execution of our strategies to enhance ATI's competitive position and to create long-term value buck for our stockholders by reducing costs, increasing inventory turns, and improving cash flow from operations. By improving our position with existing customers, by growing our participation at new customers, by positioning our titanium sponge facility in Rowley, Utah for completion of the premium-grade qualification program, by successfully completing our strategic capital investments, most notably the HRPF project, by introducing and qualifying innovative new products, and by continuing our strategy to produce higher value products, parts, and components. Operator, may we have the first question please?

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

Good morning. I think that's me.

Hi, Chris. How are you?

Good. Just want to talk a little bit more about the Boeing contract because it seems to be a topic of discussion out there, especially how it relates to the partnering for success push coming from the OEM. I guess I know you don't focus on volumes but it is conceptually easier for me to understand if I talk it out, and essentially if you think the jet delivery forecasts are going to stay in place, it looks like Boeing would need something in the neighborhood of 15 to 20 million pounds of additional titanium. I guess historically I would take that number and divide it by three and say that each of the suppliers, that's kind of what the volume outlook looks for that. I'm just wondering now if that multiple changes and what do I do? I take the mix of more sheets that you're going to be getting and offset that by the concessions that seemed to be coming out there in terms of cost reductions. Is that how we net out the value of this contract?

I think first of all, I think that Boeing has said this that they are continuing to reduce the buy-to-fly ratio by focusing on more near net shapes than the traditional primary mill product forms of ingot and in some cases plate, et cetera. So the capability that ATI has to produce a wide variety of product forms, both from a mill product standpoint and also our increasing capability to produce more near net shapes is an important part of the strategy.

So the responsiveness in terms of how does ATI position itself to create value for Boeing as part of the partnering for success program, and also at the same time create and enhance stockholder value is the balance that we are looking for, and I think that this contract and this extension certainly does that. It does that in terms of a richer product mix of more value added parts and components. It does that in terms of giving us the opportunity to show Boeing the value proposition that some of our new and proprietary alloys, most notably ATI 425, can give them that would be in addition to the contractual minimums that exist in the contract, and the new extension.

And it obviously extends it beyond 2018. So as we look at it, I think that the balance that we are trying to strike, and obviously that Boeing was trying to strike of giving them what they needed and they were looking for from the standpoint of their objectives of partnering of success, and our objectives of continuing to grow with Boeing as an important strategic supplier across the full breadth of the capabilities that we have, and at the same time extending the existing agreement beyond 2018 into the next decade, we achieved. And Boeing achieved it as well or we wouldn't have an agreement.

So in total, I think Chris, it is hard to specifically answer your question because your question is somewhat focused on volume by year, and we are under an obligation with our customer to not disclose that, but I could tell you that there is growth in the extension not only within the timeframe of the years that were covered initially through 2018, but then also obviously beyond.

The other question I had would be did the new contract change the volume minimum requirements? And also if we assume Boeing is going to need more material starting in 2015, based on what products you're now going to ship, does that determine that you'd be later in the queue or would you be further up before you benefit from the ramp in the delivery schedules?

No, I think first of all, it did, the extension and the new agreement does increase the minimums. Just as a comparison of total volume, right? But importantly, it also increased the percentages of the value added products. So in actuality, I guess there are two ways to focus on volume. One is you can increase the volume by shipping more ingot, which is not really the strategy that we have, or you could accomplish both an increase in the volume and extension of the agreement and an increase in the percentage of value added product forms all at the same time, which is really what our strategy was and what we were successfully able to accomplish. And it also provided the value proposition that Boeing was looking for. All in all, I'm very pleased with the agreement and ATI is pleased to be viewed by Boeing as a strategic supplier.

Great, thanks, Rich.

Thank you.

Your next question comes from the line of Sal Tharani. Please proceed.

Good morning.

Hi, Sal, how are you?

Good, thank you. A quick question first of all, on HRPF facility. Based on your current production volume, how much of that capacity will you be filling up or in future also let's say, once the market gets better? Will you be fully utilizing it or do you have a lot of room in that facility?

Sal, as we've said in the past because of the unique power of the equipment in the facility that was designed and built to handle our full range of alloy systems, it's much like the position we have in our continuous automated bar finishing mill in South Carolina where both of those facilities have to be built powerful enough to handle the wide range of alloy systems that ATI produces, and as a result of that, we won't fill up the available practical capacity of those -- of that equipment.

And we deal with that in one way in Richburg by tolling for one of the stainless long products producers since we don't produce stainless long products. And the fundamental design and functionality of the HRPF has always incorporated the capability of finishing or hot-rolling and handling certain carbon steel alloys that are considered to be advanced steels or advanced carbon steels for primarily the next-generation of automotive sheet as well as oil and gas market products. And this facility has the capability of doing that. And if we can use that capability to do something for a carbon steel producer that makes sense for them and makes sense for us, we will do that.

The investment itself was not justified or supported on that basis. It was more of a thought in the knowledge that given the capability of the mill we are not going to fill it all up, so if there was a way for us to use that capability and capacity in a similar arrangement or in a more formal partnership with a carbon steel producer, that would be a very capital efficient way for them to utilize the capability of the most powerful Hot-Rolling and Processing Facility in the world, we would do that. And that hasn't changed really from the time period that we initiated the construction of the project.

So the $150 million to $250 million cost advantage you had mentioned in the past for the new facility does not include if you get a tolling or some kind of joint venture agreement on this facility?

That is correct.

Okay, great, thank you very much. I will get back in the queue.

Okay, Sal, thank you.

The next question comes from the line of Timna Tanners of Bank of America/Merrill Lynch. Please proceed.

Good morning, everyone.

Hi, Timna, how are you?

Good, thanks. A lot of things for us on your business model aren't terribly difficult to quantify, but I thought I'd take a stab at the nickel price direction and how to think about that conceptually. One of the things we are looking at in Flat-Rolled Products in 2012 was for the most part a more stable nickel price, at least in the latter part of year than this year. And so if we think about, as an assumption that next year nickel prices just don't move at all, all year-long, would it be reasonable to assume that you could return to a margin that's more like last year or are there a lot of other moving parts? How do we think about a stable nickel price and the impact on your Flat-Rolled margins or margins overall?

Yes, I think that's one of the factors. I don't think that's the only factor. I think the fundamental -- the underlying fundamentals are important. Especially in stainless. Because I assume, Timna, your question is more focused on the stainless side than it is on the higher nickel alloy side? Is that --

If you want to answer both, that would be great, but yes, I was thinking on stainless, but both have an impact.

I will try to answer both. I think for both the volatility of nickel is a factor. And it can either be a positive or a negative factor. When nickel is running up, it is a positive factor both from the standpoint of demand because if the underlying demand is there then the customers are really trying to get ahead of the higher cost of the product by putting orders in. And then also because of the lagging nature of the metal flow through production not being matched up ideally to how the surcharge or index works, then we get the benefit on the upside as well and we've seen that in past years.

When it goes the other way, which it's been going for the last couple of years, it has the opposite effect. There's the wait and see attitude, there's the not ideal matching scenario, especially where you have a longer manufacturing cycle. Some of the sheet products that we turned inventory six or seven times a year are better aligned. Some of the longer high nickel alloy products that the inventory turns because of the nature of the manufacturing process is much slower, we get out of sync. And that also impacts our Precision-Rolled Strip products as well.

But the real issue I think, so that becomes one of the factors, but the real issue becomes underlying demand. That's the bigger factor, is underlying demand and its impact not only on volume but also on base prices. And the underlying demand factor is also -- supply is also a factor. So when you look at the stainless market, if it is in an oversupplied position and the importance of volume in that business, not only for us but for the other producers as well, given the relatively high fixed cost nature of the assets and the manufacturing process, then volume becomes important and that starts to eat into base price decreases and that's really what we've seen over the last three years, quite frankly. Bottoming out here around mid-2013 is where base prices for the typical grades of stainless that are going into the more short cycle markets have bottomed.

The April and October announced price increases, which together combined are the biggest base price increases that the industry at least in the US has ever seen, remain in place. Hopefully that will remain in place as we continue into 2014, and if it does, and that will be a benefit. The stabilization of nickel will be a benefit.

And then it is really going to be what's the underlying demand? Are volume growth opportunities there? What's GDP doing, not only in the US but in Europe? And you can't ignore the Chinese factor because China has a significant amount of stainless capacity, and when they slow they look for ways in other markets to sell their product into, be that either Europe or the US. So there are a number of factors in it. I really don't see -- and then there's the macroeconomic questions and the confidence level, which certainly can't be ignored, which is why I don't think you are going to see any dramatic changes between now and the end of year. Base prices will be a little bit better, volume isn't going to go anywhere -- any significant increase in my view.

In 2014, I think that there's a chance that the fundamentals can begin to improve. And that 2014 could be a better year than 2013, which wouldn't be a huge stretch to be because 2013 has probably been the most challenging year in the stainless industry ever. And that goes back to also 2009 and 2003. So I think we are bouncing along a bottom that we have been for a while. There are some encouraging signs that would indicate that 2014 will be better. Our visibility is pretty short in that, so we will wait and see and in the meantime we are taking cost out of that business.

We are -- the HRPF is an important part of the strategy because that also significant -- you describe it I think as self-help. I think that's a very good description for that project. That's basically how we view it as well. It is not only self-help but it is also a growth opportunity, especially in some of the products that we can't make that are stainless as well as some of the products that we can't make in areas like nickel alloy plate and sheet, which service a wide variety of end markets including high-value markets like aerospace.

I fully appreciate the stainless challenges and I think that was a great overview. I guess what I was trying to figure out is let's just assume all else equal, total over simplification, I completely understand that. But all else equal if we have a flat nickel price instead of a declining nickel price, how can we think about the incremental benefit? As you said there would be some benefit, assuming stainless stays oversupplied, assuming all the rest, how can we think about the incremental benefit?

I think flat is better than falling.

Okay. All right, thank you.

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

Good morning, Rich and Dan.

Hi, Gautam, how are you?

Good, I was wondering a couple questions. One, if you can just comment on what you are seeing in terms of the competitive dynamics in titanium given all we hear about PCP and Timet out there. Is that becoming an incremental force or do you think it is just kind of general oversupply conditions that are pressuring some of the transactional business?

I have to say we hear a lot of things, Gautam, because we are in a lot of markets and we have a lot of customers and it is a global marketplace. I can honestly say that we are not only hearing PCC and Timet. There are other significant competitors in the industry. There are a wide variety of end markets. We are focused on all of them. We participate in all of them. We have significant positions in most of the end markets for titanium products. Not only mill products but also forgings and investment castings.

We tend to focus on where we think the opportunities are in the markets and with the customers, and quite frankly worry less about what our competitors may or may not be doing because we can't control that. I think it is a real over simplification to just focus on one. Are they an important factor in the market? Yes, of course. Both from a size and a capabilities standpoint and it is a good company and we respect them. But we know what we have to do. We know where our opportunities are and those are the things that we are focused on.

Just as a follow-up to that, do you believe that at some point we will see spot titanium prices move up again? And if so, when and what do you think the catalyst for that would be?

Yes, I do think we will. I think we will see them quite frankly first in the spot market in aerospace before we will see it in the spot market in industrial. And I will answer that this way. The capabilities and the qualification in the aerospace market as well as in some of the other higher end markets are much more -- much tougher than they are in some of the industrial markets. So I think -- and it will be led by the aerospace rate ramp and is that -- and as you look at the supply chain, what's been going on really for over a year in aero-engine from an inventory correction and a management standpoint, and obviously it differs by OEM. Some OEMs have been more aggressive in their supply chain management than others.

But on the aero-engine side, I think we are nearing the end of the aggressive inventory corrections that have been going on. First led by aftermarket and then led by just the matching up, if you will, of the supply chain for aero-engine for new airplane delivery, to what the airframe OEM rate ramps are ending up to be. And I think that that is something that I don't think we're going to see any dramatic changes over the rest of this calendar year simply because the fourth quarter tends to be a time period where not many customers tend to get very aggressive.

But as we get into 2014 will it be the first quarter, will it be the second quarter, will it be the second half in terms of improving fundamentals on jet engine, the jet engine market? I would tend to view that more conservatively and say that it is probably more likely to be the second half, than it is the first half. But I could be wrong.

On the airframe side, I think our focus is more Boeing centric and we know what those requirements are. I think that there will be growth opportunities in 2014 and 2015. But the real growth opportunities I think are in 2016 and beyond on that side as Boeing continues to work through their inventory, and they adjust the requirements to the lower buy-to-fly ratios in their inventories and focus on the kind of product forms that they need.

On the industrial market side there are more players in that market, that's certainly a global market depending upon where the big projects are. You have not only the traditional US players such as ourselves and PCC, Timet, and to a lesser extent in the industrial side RTI, but you also have the Japanese producers who also produce sponge. You have the Koreans now in that market with their arrangement with Kazakhstan, and you have the Chinese at the lower end. So that is really probably a slower recovering market that's based upon more macroeconomic and big project opportunities for industrial titanium than the other markets.

And I think that 2014 is probably going to be pretty similar to 2013 there. And there are longer-term horizon, I know there are other big, big projects on the drawing board that will probably become clearer in terms of the timeframe as we work through 2014.

Maybe just ask one last one on nickel alloys. Your carpenter is building a facility down in Athens, and I just wondered how does that overlap if at all with your product portfolio, and does it have any implications for share pricing given what you can see today? I appreciate it, thanks.

Yes, I don't know what some of the alloy systems that they talk about are. So I don't know what an ultra premium alloy is. I know what 718 is, I know what 720 is, I know what 718 Plus is and things like that. So we are focused on end markets and applications for the alloys and the product forms that we make. I assume they are focused the same way.

They're much bigger than we are in air melt and structural steels and lower end alloy systems, I would call it, the 600 series and the 300 to 400 series that go into landing gear and structural components. On that side we are not a real big player on the mill product side, we are a bigger player in the forging side interestingly enough of those using those alloys systems. So they have their strategy and we have our strategy and that's what makes it an interesting world.

Thanks a lot.

Thank you.

Your next question comes from the line of Julie Yates Stewart with Credit Suisse. Please proceed.

Good morning.

Hi, Julie.

Rich, maybe as a follow-up to the question kind of on the competitive landscape. How do you view the impact of the recent announcement that Alcoa and VSMPO are teaming up?

I think it is interesting. I think that Alcoa on the engineered product side has -- certainly has some capabilities in terms of titanium based products. And VSMPO obviously is more integrated going all the way back to sponge through melting and through making a wide variety of parts and components. So what the specifics -- you probably know better than I in terms of what the specifics of that joint venture agreement are. I think everything will depend upon that more so than anything else.

Okay. And then inventory management at the OEMs has clearly been a big factor as you just referenced in both airframe and jet engines, and as we get closer to 10 a month and now that Boeing has formally increased their rate beyond that, how do we think about just from a high-level from just aerospace top line when ATI will see the benefit of that rate increase in both airframe and jet engine? So when you guys will be more aligned with the actual production rates? It sounds like from your comments that that will be almost kind of a 2015 event, but I just want to make sure I'm clear.

I think the new jet engine side, I think you'll start seeing it both in mill products and forgings at some point in 2014, and I would say second half. If I had to predict I would say second half. I think on the airframe side I think there will be some modest opportunities in 2014 and maybe 2015, but the greater growth opportunity probably is in 2016, maybe late second half of 2015.

Okay.

I also think that from the programs that we are positioned on with our alloy systems like 718 Plus and Rene 65 and on the forging side and the programs that we are positioned on with the new engine programs, there will -- you will see growth in 2014 and 2015, but the substantial growth because of the ramp-up and where the jet engine OEMs are and where they are positioned in those airframe OEM platforms, we see the biggest growth going from 2015 to 2016.

Okay. And then switching gears back to the HRPF. How do we think about start up costs as we go through the year as you achieve the cold commissioning and the hot commissioning and as the old facilities are still operational as well?

Yes, one of the things that we intend on doing is managing -- you are seeing some start up costs now quite frankly that are flowing through that under the accounting rules like training, there's quite a bit of training that is going on with our hourly work force right now on the new equipment and the new control systems, et cetera. Because it is a pretty big change from going from a 60 plus-year-old hot strip mill to this HRPF. So some of that is happening now.

The real issue is when we began the commissioning process, first the cold commissioning, but more significantly the hot commissioning. And part of our strategy to manage that and a lot of work is going in upfront in terms of theoretical testing and to make sure that everything is working the way it was designed, and then that gets somewhat validated in the cold commissioning, but when we do the hot commissioning it is our plan to actually do that on production orders. So that gives maybe an indication of the confidence level that we have that the facility will be ready to produce good product early on, and by doing it on production orders that's actually a more cost efficient way for us to do it.

There will be some start up costs obviously inherent because we are going to be running two facilities at least through most of 2014. Once a particular grade or product gets qualified and completes the hot commissioning on the HRPF, all of the product then and all of the customer orders will be produced on the HRPF. So if you think about it, it will be at some point probably around midyear, maybe beginning in the third quarter we will start to see a crossover where the HRPF is producing more production orders than the old hot strip mill, that runs its course through the end of -- for the most part through the end of 2014. And then in 2015 everything is produced, and all the full benefits and range of benefit opportunities begin to take effect in 2015.

We are going to see start up costs that are probably in the range of maybe $15 million to $25 million in 2014, and we will identify that as we begin it, as it becomes more significant. We are not identifying it today because quite frankly in the great scheme of things it's not all that significant, maybe it is $1 million or something like that. But as we begin the process in 2014 we will identify that by quarter so that the investment community has an understanding of what's nonrecurring, because it is a nonrecurring effort.

(Operator Instructions)

Your next question comes from the line of Phil Gibbs with Keybanc Capital Markets. Please proceed.

Good morning.

Good morning.

Rich, I had a question on just a follow-up to this past question that was asked. The costs that you had targeted, this $15 million to $25 million of start up in 2014, would that be inclusive or exclusive of redundancies of running both hot mills effectively?

That would be inclusive.

Okay.

That would have the inefficiencies built in because we are running two facilities.

Okay. And how should we think about the CapEx in 2014 as far as the trajectory of it as we move into the back half of the year?

It will be significantly less. Part of the reason for the higher projected CapEx in 2013 than the last guidance we gave is that we are in good shape on the HRPF, and some of the funds that have been projected to be spent in the first quarter of 2014 have moved into 2013, which is a good sign. It is not that the overall budget is increasing, it is just the timing of it, so that's a good thing.

We haven't really set our or had any discussions with our Board on our 2014 capital plan yet, other than I can tell you that it will be significantly less and I don't really see that number being more than 50% of this year's, so if you want to use an outside number it is no more than $300 million, and about two-thirds of that by the way will be the final spend on the HRPF. There's a significant amount of the cash outflow on HRPF that doesn't get paid to the equipment manufacturers until the completion of the hot commissioning. So that's part of the contractual retention and withhold based upon the completion of the commissioning process.

So that spend will run really through most of 2014 with the heaviest period being in the first quarter as we complete the cash spend on the completion of the facility itself. But in total, it will be a less than $300 million.

Thank you very much.

Thank you.

Our final question will come from the line of Dave Martin with Deutsche Bank. Please proceed.

Good morning, guys.

Hi, Dave.

I wanted to come back to the Boeing agreement, just I had a couple follow-ups there first. Rich, in responding to Chris's comments about the minimums you had said that they would be increased, and when you say increased do you mean versus the old agreement or year over year? Then secondly, where do the Boeing LTAs stand with other products including forgings, which weren't mentioned in your most recent release?

Yes, the Boeing agreement that we have that we've just extended is for mill products only. The forging and the parts and components is a different set of negotiations, a different set of contractual arrangements either directly with Boeing or with a higher tier in their supply chain. So those are -- we have positions in that, but those are also ongoing as the whole supply chain is preparing for the rate ramp across the Boeing platforms.

The answer to the first question, the simplest way to say it is yes. It is really yes to both. It is an increase from the previous to the current and it is an increase year over year primarily moving from 2015 to 2016.

Okay, that's helpful. And then lastly I just wanted to get your latest thinking, Rich, on the dividend. Does your increased liquidity and the fact that CapEx will be coming down make you comfortable, more comfortable with the current levels of your dividend? Or do you take more of an approach in which maybe it needs to be right sized given the near-term outlook?

No, I think -- I would answer it as more comfortable. Obviously that's a decision by our Board based upon my and Management's recommendation. But our sense is that and the Board's sense is that the dividend is an important part of the total shareholder return picture, and we need to have the discipline from a cash deployment standpoint to focus on those shareholder valuation issues.

So I think that the amount of capital investments that we've made we need to generate returns on those capital investments. And I think we are positioned to do that. I think we are capable of doing that, that doesn't mean that we won't have other projects that will be very strategically important for us, including perhaps some in 2014 to become part of that CapEx number in 2014. But the dividend is a very important component of the picture, and I think the things that we've done give us, even though the economic times remain challenging, I think it gives us more confidence that that can remain in place.

Okay. Thank you much and good luck.

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

Thank you, Rich, and thanks to all of the listeners to 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.