ATI Inc (ATI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Allegheny Technologies earnings conference call. My name is Janeta, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now like to turn the conference over to Mr. Mike Logan, Director of Financial Planning. Please proceed, sir.

Thank you. Good morning, and welcome to the Allegheny Technologies earnings conference call for the 2014 first quarter. This conference call is being webcast 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 Richard, or Rich, Harshman, Chairman, President, and Chief Executive Officer; and Pat DeCourcy, Senior Vice President, Finance and Chief Financial Officer.

All references to net income and earnings in this conference call mean net income and earnings from continuing operations attributable to ATI. If you have connected to this call via the internet, you should see slides on your screen. For those of you have dialed in, slides are available on our the website, www.atimetals.com.

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. As always, we make every attempt to reach everyone in the question-and- answer queue within the allotted conference 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, Mike, and thanks to everyone joining today's call. Mike is filling in today for Dan Greenfield who is home recovering from successful surgery. Dan, we know you're listening, and we wish you a speedy recovery.

As we said in January, 2014 began with a continuation of challenging conditions in many of our end markets, but we noted the global economic conditions appear to be moderately improving although at lower rates of growth in past recoveries. We also stated that we were cautiously optimistic that business conditions would gradually improve as we move through 2014.

As we progressed through the first quarter of 2014, some of the economic headwinds we have been facing over the last several years began to dissipate. However the harsh winter weather presented new and different operational challenges at many of our facilities. In spite of these challenges, we began to see meaningful demand recovery and growth for many of our end markets. As we enter the second quarter, we are gaining confidence that real fundamental growth drivers are beginning to emerge. We are seeing signs that this improvement is sustainable as we move through 2014.

Some specific data points, we ended the first quarter 2014 with a $1.8 billion backlog, the highest in two years. Demand from the jet engine market is improving for both new builds and aftermarket spares. The oil and gas supply chain appears to be in better balance, and we are seeing demand improvement and new projects beginning to move forward. Lead times are extending for most of our products. The long-running headwind of declining raw material prices is being replaced with rising raw material prices and surcharges.

Stainless steel sheet base prices although still near historically low levels are increasing within April 1 base price increase firmly in place in the market, and another announced base price increase effective May 5, and long-stalled project business from global markets is beginning to reappear. Before I discuss our major markets in more detail, I'd like Pat DeCourcy, ATI's Chief Financial Officer, to discuss the first quarter financial results. Pat?

Thanks, Rich. Turning to slide 3, looking at the first quarter results from continuing operations, sales were $987 million for the first quarter 2014, or 7.9% higher than the fourth quarter 2013. Over 78% of our sales in the quarter were high-value products, and international sales represented 38% of our Q1 sales. Segment operating profit was $43.5 million or 4.4% of sales compared to a loss of $10.9 million in the fourth quarter of 2013. Results from continuing operations was a net loss of $18.1 million or $0.17 per share compared to a net loss of $83.8 million or $0.79 per share in the fourth quarter 2013.

Turning to slide 4, high-performance materials and components sales were $484 million which was 10.9% higher than the fourth quarter 2013. Segment operating profit was $52 million higher than the fourth quarter 2013, at $69 million or 14.3% of sales. Flat-rolled product sales were $503 million which was 5.1% higher than the fourth quarter 2013. The segment had an operating loss of $25.6 million which was $2.4 million better than the fourth quarter 2013.

The results of the flat-rolled product segment were negatively impacted by an $8.3 million inventory valuation charge related to the market-based valuation of industrial-grade titanium products, and $2.3 million of start-up cost related to the hot-rolling and processing facility. We expect approximately $5 million in start-up costs related to the HRPF in a second quarter 2014 as we begin the hot commissioning process.

The recent run-up in raw material prices, specifically nickel and nickel bearing scrap and titanium scrap, most of which did not begin until March had little to no impact on operating results for the first quarter. Now, I will turn the call back over to Rich.

Thank you, Pat. Turning to slide 5, in February we announced the acquisition of Dynamic Flowform Corp. which has been renamed ATI Flowform Products. This strategic acquisition adds precision cold forming process technologies to ATI's unsurpassed capabilities to produce specialty materials and components across multiple alloy systems. We expect ATI Flowform Products to enhance and expand our market position in the aerospace and defense, oil and gas, and chemical process industry markets.

Looking deeper into ATI's two largest end markets, aerospace and defense and oil and gas and chemical process industry, the aerospace and defense market continues to be our largest end market, representing 35% our first quarter 2014 sales. We expect that the commercial aerospace end market will be a significant driver of our profitable growth over the next five years. ATI's first quarter 2014 sales to the aerospace market were $321 million or 13% higher than the fourth quarter 2013.

Turning to slide 6, as depicted on the chart the projected demand increases from aerospace are being driven by unprecedented build rates of commercial aircraft. Boeing has recently announced that they plan to increase to 787 production rate from 10 per month, to 12 per month in 2 years, and again to 14 per month by 2019. Boeing also has announced plans to increase the single aisle 737 production from 42 per month, to 47 per month by July 2017, and has determined that there's currently sufficient demand to further ramp to 52 per month the by the end of the decade.

Likewise, Airbus is anticipating increasing its single aisle A320 production from 42 per month to 50 per month by the end of the decade, while the production of the much-anticipated A350XWB which is on schedule for the first delivery before the end of 2014, is projected to reach nearly 9 per month by 2017. All of these aircraft and those of other commercial jet airline manufacturers require the materials and components that ATI produces for both the airframe and the jet engines that power the airframe.

Turning to slide 7, as you would expect, the increase in airframe build rates results in a corresponding increase in jet engine demand. There are now over 20,000 large jet engines on firm order with nearly 60% being future generation aircraft. Why is this significant to ATI? Because while we enjoy strong positions on most of the legacy programs, our continued leadership in alloy and product development and the capital investments and strategic acquisitions we have made over the past several years are enabling ATI to gain content on future generation aircraft and engines.

As slide 8 depicts, alloys and products such as Rene 65 Alloy, ATI 718Plus nickel-based superalloy, ATI 425 titanium alloy, titanium aluminides, nickel-based superalloy powder, and isothermal forgings, titanium investment castings, powder metal shapes -- powder metal net shapes, Flowform products, and titanium fastener stock, and titanium extrusions all represent significant growth opportunities for ATI.

In addition, we continue to work with the airframe and engine manufacturers to develop new alloys and components to enable higher operating temperatures for improved fuel efficiency, lighter components, reduced emissions, and longer engine component lives. All these attributes are important in the commercial aerospace industry's efforts to reduce operating costs for airlines and improve the industry sustainability initiatives.

In summary, aerospace OEM backlog and build rates are at record levels. Demand from the jet engine aftermarket is improving, and demand from airframe and jet engine OEMs is now in much better balance with current airframe build rates. In addition, ATI gains content from our new alloys parts and components that are specified for future generation jet engines. These are all positive developments and represent long-term growth opportunities for ATI.

Moving to slide 9, our second largest end market is oil and gas and chemical process industry which represented 16% of our first quarter 2014 sales. Looking specifically at the oil and gas market, ATI's first-quarter 2014 revenue was approximate $91 million which was 12% higher than the fourth quarter 2013. We're seeing a large number of enquiries for international projects that depend on specialty alloy products made by ATI.

As we move through 2014, we believe demand for our alloys and products in oil and gas market will continue to improve as new global mega projects transition into construction. As we look at the next several years, we expect the oil and gas and CPI market to be important growth drivers for ATI. As global economies recover and grow, demand for new energy and new and upgraded infrastructure grows. These are both growth drivers for ATI.

Some analyst are forecasting the drilling of 83,000 new development wells globally this year, of which around 80,000 will be onshore, mainly US shale gas plays, and 3,000 offshore. However, a forecasted 17% increase in oil and gas demand by 2020 means that annual well completions will need to increase by 35%, resulting in an additional 670,000 new wells being drilled by the end of the current decade. The oil and gas market present particularly strong growth opportunities for our flat-rolled product segment.

In the first quarter 2014, demand remained strong for our duplex and lean duplex family of alloys used in umbilicals and flow lines and in downhole applications. We have not yet seen significant demand from new mega projects for our flat-rolled, nickel-based alloys and industrial titanium products. Shipments of titanium flat-rolled products for industrial markets, specifically the [D-sale], CPI, and shipbuilding projects remains soft in the first quarter of 2014.

However, order activity has recently been stronger, and we are seeing a meaningful increase in project quoting activity that is expected to result in improved demand beginning in the second quarter and stronger prospects for demand growth in a second half of this year. Now an update on the current status of our two large strategic capital investment projects, our hot-rolling and processing facility, and our Rowley primary titanium sponge facility.

Turning to slide 10, you see some pictures, the two top pictures are new pictures that we're showing fro the first time. The one on the left is the hot plate been removed from the discharge by the discharge machine from furnace number one at the new HRPF, and the picture on the top right is the hot plate rolling on delay tables after reduction through finishing stands. Our flat-rolled products segment hot-rolling and processing facility, or HRPF, completed its cold commissioning phase in the first quarter 2014, and we began the hot commissioning phase on schedule in April.

This is a significant milestone, and the project continues to progress on time. As we have previously discussed the hot commissioning phase is expected to be completed in October of 2014. By the end of 2014, the HRPF is targeted to be hot-rolling all of ATI's flat-rolled products, all stainless, ferritic, and austenitic grades, grain-oriented electrical steel grades, nickel-based alloys and superalloys, and titanium alloys, and titanium and titanium alloys.

These hot-rolled intermediate products will then be sent to our finishing facilities for further processing into final flat-rolled products forms, plate and continuous mill plate, coiled sheet strip, and precision rolled strip. The HRPF has also been designed to be capable of hot-rolling the next generation of advanced lightweight carbon steels for the automotive sheet markets and dual phase carbon steels used in oil and gas applications.

This game changing investment is designed to significantly enhance ATI's flat-rolled product capabilities across alloy systems, enhance ATI's flat-rolled products market position, reduce manufacturing cycle times for all of our flat-rolled products, and significantly reduce production and overhead costs. We believe that the HRPF investment enables the successful transformation of our flat-rolled products business into a global leader that can sustain profitable growth through business cycles.

Turning to slide 11, the premium quality, or PQ, qualification program at our Rowley titanium sponge facility remains on schedule. We have produced all of the sponge required as part of the qualification process, and the sponge is now being melted into mill products for further processing.

As we have said, this qualification program is done in coordination with jet engine OEMs and requires ATI to not only produce a certain volume of titanium sponge specifically for the qualification program, but also requires that the qualification program sponge be melted using all of our melt technologies, vacuum arc remelt, electron beam, and plasma arc melt, and then produce the output from the melts into defect-free round bar product. We remain on track with the qualification and aim to successfully complete the program in 2015 or sooner if possible.

In the meantime, we continue to produce high quality titanium sponge at the facility. The sponge is being used to produce standard grade titanium mill products. However, due primarily to the still relatively low demand from industrial markets, we continue to operate the facility below capacity. This is expected to continue through 2014 until we complete that PQ process.

The Rowley facility and the capability of producing premium quality titanium sponge is an important part of our long-term titanium products growth strategy. The facility is expected to provide ATI with a reliable, safe, and secure supply of high quality competitive titanium sponge. Recent geopolitical events reinforce the importance of this strategy.

In summary, while the first quarter was challenging, business conditions improved as the quarter progressed. As we enter the second quarter for the first time in several years, we're beginning to see early signs of what appears to be sustainable improvement in demand growth from most of our end markets. Lead times are beginning to extend for many of our products. Modest base price increases are being realized, and raw material surcharges are moving in a positive direction.

While these are early signs, they support our view that business conditions will continue to improve as we move through 2014. As result of these trends, we expect to achieve at or near breakeven results from continuing operations in the second quarter 2014, excluding the HRPF start-up cost.

As we look at the short term, we are continuing our cost reduction actions, aggressively identifying and acting on market opportunities to provide important optimum business volumes opportunities, and implementing actions to reduce and manage -- reduce managed working capital. As we look at the next three to five years, we are focused on maximizing the value creation from the investments in new products, strategic capital projects, and strategic acquisitions we have made over the past several years.

The headwinds that have made business conditions challenging for the last several years appear to be dissipating. Global market conditions are beginning to show signs of sustainable improvement. We are negotiating a number of new long-term agreements and extensions of existing agreements with strategic customers. These agreements are targeted to enhance and grow ATI's competitive market position, not only in mill products, but also for parts and components.

We're not satisfied with our current financial results. We're focused on continuing to take actions to improve our near-term performance, complete our two large strategic capital projects, and further enhance our opportunities for sustainable profitable growth as market conditions continue to improve. Operator, may we have the first question, please?

(Operator Instructions)

Julie Yates, Credit Suisse.

Good morning, guys.

Good morning Julie. How are you?

Good. Rich, with base prices now moving off the bottom and we've seen several increases, after the May 5 increase, how far are you off the bottom? Where are prices relative to the last few years?

Yes, the bottom was if you look at the higher volume 304 grade stainless steel, it was approaching $0.45, $0.46 a pound. Today with the April 1 increase, we're about $0.07 to $0.08 a pound above that, but still well below what something that at least the $0.60 a pound or more. When you look at the industry at least in the Western world, I think it's really hard to earn an attractive and acceptable return on capital employed for that product with the starting with anything with a 5.

I think we have a ways to go. It's early. Part of the benefits that ATI has is that we're capable of producing more than just a commodity or standard grade stainless. A richer product mix can help us achieve a better return on capital employed than if we were just only making the more standard grade of stainless products. It still is a meaningful beginning coming off the floor and beginning to move up into a more acceptable level, but still a long way to go.

Okay. Then how much of the improvement in demand sequentially in flat-rolled has been driven by destocking at distributors, due to nickel versus actual and market recovery?

Yes, that's always the question we try to focus on when we look through the markets. I still think that while there has been some probably inventory replenishment which typically happens in the first quarter because of inventory management actions that many people take in the fourth quarter, I think the encouraging sign is that is we're projecting even stronger demand in a second quarter than in the first quarter, and lead times continue to expand.

So that tells me that it's more than just an inventory restocking. There's a fundamental improvement in end market demand, and as we look through the distribution side into the end market drivers, we're seeing that from a number of data points. I think that's what gives us some additional level of confidence, unlike in the past several years where we had a good first quarter, and then demand seemed seem to tail off, and in some cases trough in late summer and in the third quarter. The second quarter demand right now is not showing that which is certainly a positive.

Okay. Great. Thank you.

Richard Safran, Buckingham Research Group.

Rich, I wanted to ask you maybe a three-part question here on the HRPF. First is, can you give us an update a bit on the older hot strip mills that you were planning to shut down? I just wanted to know if those are on schedule as well. Is it possible for you to give us the expected split for the HRPF in terms of high-value and standard products? Lastly, now that the facility is nearing operation, I was wondering if you can give us any sense of how much output you might see from the facility, any type of measurable quantity there? Anything you could give us would help.

Okay. In terms of the old hot strip mill, we've just begun the hot commissioning and as we've discussed before, the process of the hot commissioning which is really a six-month effort because we have 140-plus different grades and products to commission through the new HRPF, we start with the softer grade. Then we move up the hardness levels into the harder. The nickel alloys will be the last thing towards the end, the last alloy systems towards the end of the process.

The plan is that we will continue to run the old hot strip mill until all the projects transition off of that. The earliest that -- our planned which has been in place for number of years, the earliest that, that could possibly happen is October of this year. But really, our plan is that we will continue to run the hot strip mill through 2014 and then decommission it, if you will, in the first quarter of 2015. As we enter 2015, we expect all of our products to be produced on the new HRPF.

In terms of the split, quite frankly, the mill is capable of producing anything we want it to produce. Obviously our goal is to maximize the throughput and utilization of the new HRPF and continue to grow, not only the high-value products, obviously -- as much as the market opportunity is there to do that. But also grow into the standard grade products that we have not been capable of producing because of the limitations of the 65-year-old hot strip mill.

I don't really want to get hung up, and we don't think about it that way strategically. We're going to target what we think is the appropriate product mix. The mill can handle much more than quite frankly what the market opportunity will likely be for us to sell which is one of the reasons why we designed to also hot roll certain high-end carbon steel grades. From an output standpoint, it's really the same question. As we look at these markets going forward, we've made this investment not only for 2015 and 2016, but for very long time.

We're working with the 65-year-old hot mill now so this is an investment that's going to last this Company 40 to 50 years. We will continue to look for global market opportunities and end markets that we view as attractive and grow the volume on that as much as possible as long as it generates acceptable returns on capital and acceptable levels of profitability.

The one benefit that the new HRPF brings obviously is, in our view, it further lowers our variable cost structure. When you think about that we have more flexibility, if you will, even back to Julie's question of how low -- how high have we moved off the bottom. If we had the HRPF in operations when the base price bottomed in 2013, we would have had more acceptable financial results because the cost structure of the new HRPF is better than the old 65-year-old hot strip mill. That makes us more competitive and makes markets that perhaps in the past we've view as not as attractive. It makes those markets more attractive for us.

Thanks, Rich.

Sal Tharani, Goldman Sachs.

Good morning.

Hello, Sal. How are you?

Good. Can you give us some idea of what the weather related impact quantified, what the quarter was? And if you're seeing continuation in a second quarter? Or are you all set with the weather now?

Yes, I hope we're all set with the weather. Although, if you are in the Northeast last week. We were 81 day, and 10 the next day. I think the worst of the winter is behind us, I hope. It clearly impacts any kind of manufacturing operations, not only in the Northeast, but also as deep as the Carolinas where there was some extreme weather. I think we haven't called it out because it is what it is.

I think when you look at the downtime and some of the additional costs that we experienced largely which impacted the first quarter, I don't think there's a significant carryover at this point in time into the second quarter. It was in a range of $4 million to $5 million pretax that it hurt us in the first quarter, if compared to what we would view as a more normal winter.

Okay. The FR -- the new flat rolled start-up cost, $5 million next quarter. Is that going to rise over as we go towards third and fourth quarter? Do you think that's a run rate we should assume for the next few quarters?

Yes, I think we gave some guidance in January that we expected $30 million to $35 million worth of start-up cost in 2014. Most of that is really associated with the hot commissioning, as you think about it. With the hot commissioning really just starting in a second quarter, we had $2 million and change in the first quarter, $5 million in the second quarter. If you think about the range that we gave of $30 million to $35 million, I think it will be more heavily weighted, the third quarter will be more than the second quarter, I would expect. We'll have some residual in the fourth quarter.

Great. Thank you very much.

The peak would be the third quarter.

Okay. Thanks a lot.

Timna Tanners, Bank of America Merrill Lynch.

Good morning. You quantified the cost of starting up, of course, the new hot-roll mill, but have you been able to quantify the inefficiencies of running the old one while you're running the new one? So we can get a sense of what that might look like when that tails off?

Yes, I think we've incorporated that in the $30 million to $35 million, We look at the redundancies and the inefficiencies when you're running two mills, and also just the commissioning of the product going through. It's our intent because of the design and the approach we've taken on design and the care we're taking on the commissioning side to minimize start-up cost as much is possible by producing salable product as we commission on the HRPF. If we're successful in doing that, I think the $30 million to $35 million is the appropriate range.

Got you. The other question I had was really to follow-up on some things that I felt like you touched on, but didn't really specify very much in some of your comments. You noted that you had been negotiating or re-negotiated some agreements. One thing we've all been waiting for of course is the timing on any announcement on other uses -- or other third-party [tolling] uses of the hot-roll mill -- or the new one.

Also the comments about geopolitical strife, can you say anything more specific about those negotiations specifically to the hot-roll mill? Separately, can you say anything about how the situation in Russia could be changing VSMPO and your customers' relationship with them? Thanks.

Yes. On the HRPF, obviously we are having discussions with potential partners on the HRPF. A big part of that as you would imagine is the success of rolling the carbon steel product through the HRPF. We are coordinating that with interested parties, and as we're confident that, that will be successful that will further accelerate any discussions that we may have.

I'm not going to put a timeframe on when we think that, that would happen. Obviously, we're interested in that happening as soon as it can. Whether that's in 2014 toward the end of 2014, or 2015 remains to be seen, but the dialogue continues and it's pretty much on the pace that we would expect at this point in time, as the project has -- construction has really just been completed, and the commissioning has just begun.

On the geopolitical front, I think that I can't speak for our customers. But the one thing as you think about the issues that are going on in Russia and the Ukraine, it really comes down to effective risk management decisions that are the responsibility of all companies to do smartly for their shareholders. We've spent a lot of time from the standpoint of our sourcing strategies and looking at, making sure that we have a balanced source of the supply because you never know.

Whether it be a geopolitical issue, whether it be a natural disaster, or whatever, you don't want to not have a diversified supply base of critical materials and components, so we do the same thing. We assume our customers do the same thing. The dialogue that we've had with the customers suggest that they do the same thing. However, I think it's hard when you look at any of these end markets that are sophisticated and aerospace is certainly that, that the supply chain is global.

Any impact to that supply chain can cause impacts to all participants in the supply chain. I think we're very attuned and have had discussions. I think what it does is it reinforces to us one of the major themes and reasons that we built Rowley, was to ensure that we're not completely reliant on others for titanium raw materials.

Titanium is a very important part of ATI's business, and it's one of the fundamental reasons why we built Rowley. I think that our customers are certainly sensitive to the geopolitical risks and they are looking hard at their supply chains to make sure that their effectively managing that risk, relative to things that are outside of their control.

Okay. Thank you.

Gautam Khanna, Cowen and Company.

Good morning.

Hello, Gautam. How are you?

Pretty good. A couple questions. One, Rich, on the HRPF economics you guys have described the $150 million to $250 million of cost structure improvement. That was made in the context of base prices that I believe were lower and volume levels that may have the lower, so I wondered post the May price increase, how do you think about where the new facility will track relative to that range? If you just -- (multiple speakers).

If you take the $150 million to $250 million range was the combination of not only cost reductions but also margin growth because of the ability of us to produce product and service the market that we can't do today with the 65-year-old hot strip mill, so it was a combination of both. When we look at that and did that calculation, just as we never tried to justify a capital project off of prices and margins at the peak of the market, we also don't try to underestimate benefits at the trough of the market.

What we do is we look at what we think is a reasonable expectation through the market cycle of the products that are running through those assets. I think arguably when you look at the flat-rolled products segment -- compared for example to ATI's high-performance materials and components segment, given the nature of the markets that we serve. The business cycle, if you will, when you look at it at a weighted average basis, is probably somewhere in the four- to five-year range as opposed to a five- to seven-year range on higher value -- the high-performance segment.

We looked at that and came up with an estimate that we felt was appropriate for the benefits. I can tell you that it wasn't off of the low point of the prices, and it wasn't off of the high point, so we'll see what happens. I think to the extent that markets continue to improve and grow, and base prices move up which is natural. When that happens, when you get a better supply and demand equation, could that put some upward pressure on that $150 million to $250 million? That's why we used $150 million to $250 million.

Okay, fair enough. If you could elaborate a little bit more on what you're seeing in the jet engine supply chain? You mentioned a little bit better demand, and last year I think the sales were down over $100 million from 2012. Do you expect that we're back on that 2012 pace exiting this year? How should we think about the pace of recovery in the jet engine market?

Yes, I think it really depends on what program you're on, whether or not it's a mill product or whether or not it's a part and which OEM you are talking about. I think that's really driven by what fundamental engine programs the OEMs are on. I think that the short answer is that in the supply chain, even when there was some dramatic inventory management actions that took place in 2013 on the parts side, there's less dramatic impact happening in 2014.

Then on the mill products side, I think the mill product side for the most part is in much better balance today on the engine side than it has been probably in the last couple years. Obviously, the rate ramps from the airframers are there. They need engines. Some of the new programs are beginning to take hold. Although when you look at programs like [LEAP], that's really more of a 2015, 2016 growth factor than is a 2014.

I think 2014 is getting the supply chain back into much better balance than it has been in the last couple of years. But I still believe that the overall strength in the jet engine business, at least from ATI's perspective, that's the only way we can talk about it, is 2014 is better than 2013. But the real growth drivers are in 2015, 2016, and 2017 when the new engines and the new technology engines start to take off.

Rich, I appreciate that color. I wondered though on the parts side where you mentioned things are maybe still not as balanced as they are in the mill product side, do you have a sense for when they might be, just based on consumption rates? Are we looking at two, three -- (multiple speakers)?

Yes, I do. My sense is that the second half of 2014 is probably better than the first half, assuming these airplanes get built. At some point, the inventory corrections are over and production has to get in balance with when the airframes are being built. I think there's been extensive inventory corrections on the part of some OEMs, not all, on the jet engine side, and that was dramatic in 2013.

Quite frankly, you can attribute most of that $100 million decrease in aerospace revenue to that issue in 2013. I don't think we're going to see that kind of dramatic impact continuing in 2014. I think it will be better, but the real growth side is probably more weighted on the parts side into the second half of the year and 2015 and 2016.

Thanks a lot. I appreciate it.

Gautam, when we gave our comments in January about how we were viewing 2014, all of that was really factored in. We're not seeing any negative changes from that view. If anything, if there are any changes it's more on the positive upside then on the downside.

Chris Olin, Cleveland Research.

Good morning. I want to touch little bit on the frame side now, and I guess one of the things I've been watching has been the upward movement in titanium scrap prices. But it doesn't seem like the ingot market has followed, and I guess I just wanted your thoughts on how you see titanium playing out this year. Is this competitive issue going to be a factor here in terms of not getting higher ingot pricing?

Yes. First of all, scrap has moved. I think it's moved pretty meaningfully over the last six months for the first time in four years, at least. That's important. Actually when you get into some of the bulk scraps which are important to us in some of our melt technologies, the bulk scraps have moved even more as a percentage than the solids have moved even more than some the turnings and chips, et cetera.

I don't think you're seeing that yet on the ingot side. I think when you look at ingot as the lowest value-add product form, there are probably more players on the ingot side than there are as you move up the technology chain into more value-added mill products for jet engine rotating applications, et cetera. I also think that the ingot side is still one that is impacted by the inventory management actions on the airframer side because the ingot is much more flexible in terms of a product form.

Having said that, I think another impact overall on the titanium side is the still relatively weak demand from the industrial market. Because the industrial market is an important market for most titanium mill products companies, not only here in the US but outside the US. When that market is weak and you have the capacity to service all of the markets for titanium, from industrial to aerospace to medical, that obviously creates a surplus capacity that won't be consumed until you really get the big growth drivers coming out of the aerospace market primarily, and you have a more reasonable demand profile from the industrial market.

I think those are the things that are probably putting still some pressure on the ingot pricing, but as we've said many times, we sell into the ingot market on a transaction basis. We do have ingot as part of our [LLTAs] that are not transactional oriented pricing, but it's not really the focus. We use the ingot market as a balancing for our manufacturing facilities. We're much more interested in selling higher value-added product forms including parts and components.

Okay, that make sense. Just one follow-up, any thoughts or visibility on when the frame market could be balanced in terms of inventory?

Were talking about plate frame heat exchangers?

Air frame. There you go.

I think it's better today than it was three months ago or six months ago. I'm not going to answer for Boeing, but I think that's been something that the industry has been dealing with, and it's been a challenge really for the last three or four years. I think we're much closer to equilibrium today than ever before. I think as we move through 2014 it will continue to improve.

Okay. Thanks a lot, Rich.

Steve Levenson, Stifel.

Thanks. Good morning, Rich and Pat.

Good morning, how are you?

Good, thanks. Could you tell us a little bit, just in relation to Rowley, about the timing of the premium qualification, and what sort of contracts are up for grabs right now? And if that will keep you from bidding on certain products or parts? Or if you can substitute your material, once the premium qualification is reached?

Yes, the Rowley qualification process will not stop us from quoting or bidding or participating or winning any contract business or any transaction business, for that matter. We have multiple sources of titanium raw material units, not only scrap but also long-term agreement in place with another sponge supplier that we view as an important part of our titanium raw material strategy going forward, even after Rowley is qualified on a PQ basis.

The timing of it -- I'll put it this way. The sponge from Rowley can be qualified as PQ sponge and will be before the product that you have to make out of that sponge are qualified. At some point here, when we're successful you will hear the nomenclature that Rowley has been qualified as a premium quality producer of titanium sponge, which is great. That's the first threshold. Then the second threshold is, are you able to use that sponge to produce rotating quality material that is turned into a part?

Then that's the second phase, and that's really the part why it is takes so long ago. If you all you were really aiming for was the qualification of the facility as being a PQ sponge producer, that will happen sooner rather than later. It's then you have to make these into products. You have to use the sponge in all of your melt technologies and produce products, and then mill products. Then the mill product conceivably be may have to be produced into a final product, but that is not always the case. That second phase is really what takes us in all likelihood, into 2015.

Got it. Thank you. Second one just to follow-up on the geopolitical situations, can you talk a little bit on the Indonesian nickel ore situation, and what you think the impacts might be hurtful or helpful?

I think it's probably one of the factors that are impacting the run-up in the price of nickel on the LME. It's clearly the band, from what we're hearing in the marketplace it's certainly there. It's real. There's no leakage coming out of that at this point in time. I think it removes an important part of the supply chain for nickel units, and therefore puts more pressure on other sources including scrap. The scrap market is probably the first thing that gets tighter.

I think that at some point, there's a feeling on it because a lot of the mining capacity of primary nickel had been taken out of production. I think with prices where they are now and really anything above $7.50 a pound is something that many of the mining companies would view as acceptable price and bring supply back on. We'll see. Nickel has way of, as most commodities that trade on LME, to be driven by factors other than -- in the short term anyway, factors other than just supply and demand equations. I think that the Indonesian issue is one of the reasons that nickel has probably run here recently.

Got it. Thanks for the additional detail.

Phil Gibbs, KeyBanc.

Good morning. Thanks for taking my call. I appreciate it.

Hello, Phil. How are you?

Good. I just had a question on the titanium pricing, Rich. It was down 10% quarter-on-quarter. I'm just trying to think about how we should view that in light of maybe a richer mix of business with Boeing this year? Whether or not that may be a trough, at least in the high-performance business?

Yes, I think it may be, for a couple reasons. One is it is somewhat mix-sensitive. You could have a quarter that on the LTA site, not on the transaction side, based upon what I indicated to Gautam earlier on. There's a heavier mix of ingot or lower value mill product than the higher value products. Mix is always going to be very impactful in terms of the average titanium prices.

The second thing is quite frankly remember the raw material indices are on a quarter lag, so you really saw the scrap prices bottom out. You're really seeing that in the first quarter average, and I think it's for the first time in four years that our index for titanium driven by the higher scrap prices is forecasted to rise in the second quarter. That's the first increase on a quarter-to-quarter basis in probably four years. I do think it probably is a trough at this point because of those two factors. We'll see.

The equally important thing as opposed to price is also volume. I think as the volumes continue to grow as the lead times extend, you'll probably begin to see not only raw material indices move, but also base prices move on transactional business. Especially as lead times begin to extend, and they are beginning to extend.

Okay. That's good color. I appreciate it, Rich. Just on the exotic alloy business, do you sense any change in sentiment with the Japanese nuclear restart, or at least some talk about it? I know there's been some upside this year in uranium which may speak more to supply, but I know the longer term fundamentals there are better. I'm just trying to think about how that may impact your business moving forward.

Yes, I think the new political leadership and the economic reality is setting in. In Japan that while they may not restart all of those reactors that were idled post-Fukushima, they're no longer talking about not restarting any of them, which is a big change in sentiment. I think that from a supply standpoint, my understanding is they still have very robust supplies -- inventory supplies, in Japan, especially if they're going to operate fewer reactors. I don't really consider that to be a short-term driver.

I do think longer-term, it's a positive development from the standpoint of the nuclear industry. You still have certainly on the commercial nuclear side you still have a challenging business environment where there's most of the building is going on in China and some in the Middle East. I think there are clearly opportunities.

As you look at some of the existing reactors being extended beyond their expected useful life of 40 years. Then you get to a different refueling cycle. Most of those reactors are now be looked at to extend and applied apply to the Nuclear Regulatory Commission for another 20-year life which carries into 60 years. I think that, that will longer term be positive on the nuclear side for our products.

Many of the US plants are either looking at or in the process of moving, especially spent fuel rods, that have been in wet storage for a long period of time into dry storage. That's the nuclear storage cast business which is important for a Company like ATI because it requires specialty materials to build those casts, including products like borated stainless steel which we have the capability of producing. I think longer term, over the next three to five years, that's a market opportunity that I believe will be there.

The government nuclear business this year in 2014 is reasonably good. Longer term, that depends upon what, aside from the refueling, depends on how many surface and subs that US Navy, for the most part the US Navy operates, so that will be a depender on that. But I think for the next couple of years that's a fairly stable business.

Okay. I just had one more if I could sneak one in, just more on the housekeeping side. You mentioned that you had a year-end cash target of $400 million, and I know that you had some upside here in working capital to start to the year, and you also made the acquisition of Flowform. Just curious, can you update us on that?

Yes, I think $400 million is a nice number, $300 million is an okay number. It really depends on what the other uses are. If it requires building and replenish managed working capital that we get quick turnaround on because business conditions are favorable and profitability improves, that's a great use of cash, right? But that doesn't mean that we don't have more work to do in terms of lean manufacturing and cycle time, primarily on the inventory management side because we do.

The reason why we like to have that range of cash on hand is to take advantage of things and opportunities that come into play very, very quickly that are not predictable like Flowform. When we see something like that, that is an outstanding bolt-on acquisition that meets all of our strategic criteria from the standpoint of the kind of businesses that we think help create value for our shareholders through business cycles.

It's an efficient use of capital, and it's a reasonable valuation, then we're going to move out on that in a balanced way to do also everything possible to retain our investment-grade credit rating. Those are all the things that we look at, $300 million to $400 million, $400 million would be better. But if it's at $300 million or close to that, that would be okay.

Thank you.

This is all the time we have for questions. I would now like to turn the call back over to Rich Harshman for any closing remarks.

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

Thank you, Rich. Thanks to all the listeners for joining us today. That concludes our conference call.

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