ATI Inc (ATI) 2015 Q1 法說會逐字稿

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

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Dan Greenfield, Vice President of Investor Relations. Please proceed.

Thank you. Good morning and welcome to the Allegheny Technologies conference call for the first-quarter 2015.

First, let me apologize for the delay. We did experience a connectivity issue, which has now been resolved.

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 Pat DeCourcy, Senior Vice President of 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 who have dialed in, slides are available on our website, again, 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 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. Good morning to everyone on the call or listening on the internet.

While we are not satisfied with the current level of profitability, sales and operating profit both showed improvement during the first-quarter 2015. Net income in the first quarter was $10 million or $0.09 per share. Segment operating profit was $83.8 million or 7.4% of sales. The first quarter was impacted by $12.4 million of costs related to the HRPF start-up, and our Rowley PQ titanium sponge qualification.

As a result of the hard work and dedication of ATI's flat-rolled products team, our hot-rolling and processing facility, or HRPF, has been successfully integrated into daily operations. The HRPF is producing products, from 60-inch wide stainless sheet to 48-inch wide nickel-based alloys and specialty alloy sheet. The HRPF is also making excellent quality titanium and titanium alloy coils. We are also seeing significant operating improvement at our finishing facilities as a result of the larger and flatter coils being produced on the HRPF.

Our 48-inch wide nickel-based alloy sheet is improving our position in the aerospace, oil and gas, and electrical energy markets. The use of our light-gauge nickel alloys and specialty alloys is growing in the automotive market. We are improving our stainless sheet position with distributors, and growing our position in the exhaust alloys market.

At our Rowley titanium sponge facility, the premium quality, or PQ, product and process qualification is going well, and we expect to be qualified for all major titanium alloys, products and melt methods by mid-year 2015. In fact, last Friday, we received final PQ approval for titanium 6-4 bar stock and forging billet, using Rowley sponge melted at our Bakers, North Carolina, melt shop. The production ramp-up at the Rowley facility was initiated in the first-quarter 2015, and is going well.

We maintained a solid liquidity position with $238 million in cash on hand, and no borrowings outstanding under our $400-million domestic line of credit at the end of the quarter. On March 24, ATI's debt was downgraded one notch with a stable outlook by S&P. Our objective is to continue to make the necessary steps to improve our debt metrics, and position ATI to return our debt rating to investment grade.

Here is Pat DeCourcy, ATI's Chief Financial Officer, for a more detailed discussion of the 2015 first-quarter financial results. Pat?

Thanks, Rich. Turning to slide 4, looking at the first-quarter results from continuing operations, sales were $1.126 billion. 79% of our sales in the first quarter were of high-value products. And international sales represented 40% of our first-quarter sales.

Net income was $10 million or $0.09 per share. Results improved over the fourth-quarter 2014, with higher sales to key end markets. Fourth-quarter 2014 net income was $1.4 million or $0.01 per share, excluding an $18.5-million net of tax, or $0.17 per share, gain from post-retirement benefit changes.

Turning to slide 5, high performance materials and component segment sales were $542.8 million, an increase of over 8% compared to the previous quarter, and 12% higher than the first-quarter 2014. Segment operating profit was $75.9 million. Segment results continue to be negatively impacted by low operating rates at our Rowley titanium sponge facility. This is expected to continue well into 2015, until we complete the premium quality, PQ, process, and ramp production to optimum capacity utilization.

Flat-rolled product segment sales were approximately $583 million, nearly 7% higher than the previous quarter, and 16% higher than the first-quarter 2014. Segment operating profit improved to $7.9 million or 1.4% of sales. Results were impacted by $11.8 million of HRPF start-up charges, and inventory charges related to the market-based valuation of industrial titanium products.

Slide 6 shows the impact of HRPF start-up and qualification costs, and Rowley PQ qualification process, had on pre-tax income from continuing operations. Adjusted income before tax, excluding these items, was $33 million in the first quarter, and adjusted EBITDA was $105.3 million.

Now, I'll return the call back over to Rich.

Thank you, Pat.

The aerospace and defense market continues to be our largest end market, with first-quarter 2015 sales of $408 million. This represented 36% of ATI's total sales, and breaks down as follows: 18% jet engine, 12% airframe, and 6% defense. We expect that the commercial aerospace market will be a significant driver of our profitable growth over the next five years, as production rates ramp for the next-generation engine programs, and record backlogs at airframe OEMs are delivered.

First-quarter 2015 sales to the aerospace market increased 14% compared to the fourth-quarter 2014. We saw double-digit demand growth from both the jet engine and airframe customers of 14% and 22%, respectively. Organic growth of our specialty materials mill products led the way.

Sales of our nickel-based alloys and specialty alloys increased 15%. Sales for our titanium alloys increased 16%, with a good mix of value-added products. And sales of our precision forgings, castings and components increased 5%.

With our focus on creating value through relentless innovation, we have secured important strategic positions on next-generation airframes and jet engines, with our technology, diversified products, and integrated manufacturing capabilities. In addition, we are well positioned to continue to work directly with the OEMs on the development of future generation technologies and products.

Turning to slide 8, shown is the most recent market forecast of commercial aircraft build rates. The black line on this chart represents the number of next-generation airplanes in the build-rate forecast. This is a good proxy for ATI's potential aerospace market growth trajectory, since we have secured increased positions on many of the next-generation airplanes, and the engines that power them.

As you can see, the largest growth is expected in 2016, 2017 and 2018. The market forecast is from Airline Monitor, which opens a debate on the 2019 estimates. Announced OEM build-rate objectives indicate 2019 to be at least flat with 2018, rather than the decline showing on the Airline Monitor forecast.

Slide 9 shows the reported OEM firm order book of the major engine programs, which, as of February 28, 2015, stands at over 21,700 large jet engines. The first five lines show the backlog for engines that power single-aisle airplanes.

Moving to slide 10, the oil and gas, and chemical process industry, market is our second-largest end market. During the first quarter of 2015, sales to this market were $210 million, and represented 19% of ATI sales: 12% oil and gas, and 7% chemical process industry, or CPI. First-quarter 2015 sales to the oil and gas/CPI market increased 3% compared to the fourth-quarter 2014.

Our diversification is critically important to how we serve the oil and gas, and chemical process industry, markets. For example, our flat-rolled product segment strong sales of high-value nickel-based alloy and specialty alloy products for a large pipeline project, flow lines and enhanced recovery applications more than offset a 17% decline in high-performance materials and components segment sales for exploration and other down-hole applications. Because of add-on orders, we now expect to have nickel plate shipments for the pipeline project extend through July of 2015.

Enhanced oil recovery, or EOR, is favored in many parts of the world to produce additional oil from existing wells. EOR technologies use our nickel-based alloy and specialty alloy flat-rolled products. Demand from this market application continues to be good.

Another of ATI's strengths is our ability to provide new products enabled by our new capabilities and our focus on relentless innovation. We continue to expand our product offerings for the oil and gas/chemical process industry market. The HRPF gives us the capability to offer larger and flatter coils of nickel-based alloys, duplex alloys, and other specialty alloys and stainless alloys, so we can improve our position.

We are actively pursuing innovative applications of our ATI Flowform products made from our nickel-based alloys and specialty alloys. So far, early trials are going well, and the Flowform pipe and tube products have attracted significant interest from oil and gas equipment producers due to the value proposition of this manufacturing process.

Further helping to diversify this market is our participation in the chemical process industry. At this time, no planned chemical projects in the US have been reported to be cancelled. In fact, new, large North American LNG projects are moving forward, and many other large chemical projects are on the board.

We are adding the automotive market to our list of key growth markets. For ATI, the automotive market is differentiated, global, and our focus is on applications that have high technical barriers to entry. Evolving regulatory requirements and consumer demands impacting the automotive market are driving a secular change that benefits ATI and the products we offer. Today's cars present more challenging requirements.

Government agencies, such as the EPA, and consumers require better fuel economy and reduced emissions. Drivers want performance, comfort, and longer warranties. To meet these objectives, car manufacturers continue to develop smaller and lighter engines that use turbochargers to boost performance. This creates an engine environment that demands specialty materials capable of operating in high-pressure, high-temperature environments in such applications as turbochargers, gaskets and connectors.

This secular shift is somewhat similar to the trend we see in jet engines. ATI is well positioned to transfer aerospace technology to the automotive market. High-pressure, high-temperature engines often require aerospace alloys, such as nickel-based superalloys and specialty alloys, including ATI 718 and ATI 625 nickel alloys, as well as other specialty alloys, including recently developed ATI proprietary alloys.

With the HRPF, we now have the capability to produce these products more efficiently, in larger coils, with tighter and more consistent gauge control. Our customers are global, and we can better serve them through our aligned and integrated global supply chain through our facilities in the US, Europe and Asia. The HRPF also enables our growth in non-nickel-bearing, or ferritic, stainless alloys used in automotive exhaust systems. Auto exhaust system demand is growing due to the increasing build rates in North America from both traditional US-based car manufacturers, and European- and Asian-based car manufacturers with new assembly plants in North America.

We are near the end of our extraordinary capital expenditure cycle that has transformed and modernized ATI. We have built the foundation for creating long-term value through relentless innovation. We have secured our position to grow faster than the market during this once-in-a-lifetime aerospace market transition from legacy to next-generation airplanes and jet engines. With the largest capital investment in ATI's history, the HRPF, our flat-rolled products segment is better positioned to enable profitable growth across business cycles.

Over the last several years, we have completed major strategic investments that are designed to meet the evolving and growing needs of our customers, and position ATI for sustainable long-term profitable growth. Slide 12 provides a summary of these major investments. Our Rowley PQ quality sponge facility moves ATI to an integrated titanium supplier position, from sponge through melt, forging, casting, machining, and cold rolling, to machine forgings and investment castings. We believe that these integrated capabilities provide a competitive advantage to be a strategic supplier to aerospace OEMs, both airframe and jet engine.

Our plasma arc melt, or PAM, furnaces are often the preferred process for many premium quality titanium products, such as jet engine rotating parts and medical applications. PAM also provides the capability to melt diversified raw material inputs, including sponge, solids and turnings. ATI is currently the only qualified rotating-part PAM melter in our industry.

Our unique 10,000-ton open die press forge and large radial GFM forge expands our capability to produce fine-grain forging billet, removing a design barrier for next-generation nickel-based superalloys for jet engines. The specialty plate upgrade gives ATI the capability to manufacture superior titanium alloy plate for the aerospace industry. It also provides a capability to make superior nickel-based alloy plate for applications in the oil and gas industry, such as the major pipeline project that is driving our oil and gas performance during the first half of 2015.

As we have discussed, our HRPF enables the transformation and reengineering of ATI's flat-rolled products. As expected, the HRPF is proving to be a game-changing investment, designed to significantly enhance ATI's flat-rolled product capabilities, and reduce manufacturing cycle times for all of our flat-rolled products. The HRPF investment enables us to reengineer our flat-rolled products business with a renewed focus on shorter manufacturing cycle times, customer responsiveness, and an improved and more competitive cost structure.

Now that the HRPF is integrated into daily operations, we turn to the successful completion of the equipment final acceptance test, and continuous improvement in quality, operating efficiency, and delivery performance. We have just begun to realize the benefits of our new capabilities. We see them every day. Our team is pursuing many opportunities to reduce production and overhead costs through process simplification and standardization.

In order to adapt to the slow growth global economy and the accelerating competitive environment, we must continue to offer our customers the highest possible quality product on time, with short and flexible manufacturing lead times. Enabled by the HRPF, and previous investments made in our specialty plate facility and our flat-rolled melt shops, ATI flat-rolled products has a global leadership position in many of our high-value products. That leadership position is being extended, as we pursue product innovation that extends our reach to new customers, products and applications.

While underlying demand is reasonably good, the standard stainless business has begun 2015 with a familiar scenario. Falling raw material prices -- for example, see the chart on the bottom right of this slide -- lead to falling surcharges. Plus, once again, we are seeing revised and uncertain global GDP growth projections. All of this causes our customers to wait. They de-stock their inventory, and buy only when necessary; another reason why shorter manufacturing cycle times enabled by the HRPF represent a competitive advantage for ATI.

We are also seeing a surge in imports. For example, imports of cold-rolled stainless sheet and strip from China increased 115% in 2014 compared to 2013, and the surge continues. According to the latest data available, imports of cold-rolled stainless sheet and strip from China increased over 350% in January 2015 compared to January 2014, a familiar story. The EU initiates trade cases against China, and the US market becomes a target for Chinese producers to dump product.

While ATI continues to be active to promote fair and free trade, we also recognize that we must have a cost structure that generates profits from our stainless business throughout the cycles. We are taking actions to achieve that goal. This requires more than just the investment in HRPF.

Employment costs represent a significant share of our non-metal operating costs. We must have an overhead and employment cost structure that is more competitive with others in our industry. This is what we mean when we say that our strategy is to use the capabilities of the HRPF to transform and reengineer our flat-rolled products business, to be profitable throughout business cycles. This strategy will continue to unfold as we move through 2015.

In summary, long-term drivers of our secular growth markets remain intact. The markets we serve are inherently cyclical. We are currently in an unusual time when some of our key markets are very volatile. Our strategy is to offset or limit the resulting negative impact from this volatility with the benefits of ATI's diversified product mix and end-market focus.

A good example of our diversified product mix is the solutions we provide to enable the secular trend in the automotive market. As we discussed, we are adding the automotive market to our list of key growth markets due to a growing trend, and our ability to transfer our aerospace technology to the automotive market.

Our extraordinary capital expenditure cycle is nearly behind us. The HRPF has been integrated into daily operations. Our flat-rolled products team has done a great job of completing, commissioning and integrating the HRPF.

As we move through 2015, our focus will be on improving the operating efficiency of the HRPF, and implementing a more competitive cost structure in this business. We continue to expect fourth-quarter 2015 operating profit to benefit from the HRPF at an annualized rate of approximately $150 million, compared to 2014, which includes the elimination of start-up costs.

Our PQ titanium process and product qualification is expected to be completed by mid-year. Timing of the titanium sponge qualification is well aligned with the growth in demand from the aerospace market. We expect to see demand for our nickel-based alloy and titanium alloy mill products, forgings, and titanium investment castings to grow throughout 2015, and over the next several years, due to strong demand from airframe and jet engine OEMs.

As always, we face numerous market challenges, and we must execute. Our challenge and our opportunity are to execute our business strategies, and to turn the enabling technology and capabilities of the HRPF and Rowley investments into value creators for our shareholders and customers. Our strategy includes being focused on actions to align and integrate ATI specialty materials businesses, and enhance ATI's competitive position, and continuously improve the cost structure and operating efficiencies of our businesses to achieve long-term sustainable profitable growth.

Operator, may we have the first question, please?

Of course.

(Operator Instructions)

Steve Levenson, Stifel Nicolaus. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Steve. How are you?

Good, thanks. Good report. Is the premium qualification for the 6-4 bar stock and billet enough to start the ramp in Rowley production, and if so, is that material that will be used internally, sold to customers, or both?

No, it is enough, and we have already begun the rate ramp in anticipation that we're very confident that the vast majority of the titanium alloy products that are focused on PQ will be qualified by midyear of this year. That, we're not waiting to begin the ramp up. We're doing that, and we will be using the sponge. It's not our intention of selling the sponge externally.

Got it, thank you. On the HRPF, I know your comments suggested that that oil and gas project is going to help the second quarter, but what's next? How does the order book look now that you can make these new sizes and gauges?

That's the largest oil and gas project we've ever had. They don't come around often. There are projects out there that follow on that, that will probably be more later in the year.

I think that the capabilities of the HRPF are more than just the oil and gas market. It's all the markets that we serve, and we intend to continue to realize the benefits of the HRPF. Quite frankly every month we've been operating so far in 2015, the capabilities and the operating efficiencies continue to improve.

We'll be focused on opportunities that are out there in the CPI market. Certainly the automotive market is there. Some of the consumer [durable] markets other than automotive are reasonably strong. The housing market is actually not bad, for example.

So that's a diversified market approach for all of our flat-rolled products. We're confident that the market demand will be there throughout the year. We need to continue to focus on improving our efficiency and addressing some of the structural cost issues that we have in that business.

Okay, thank you very much.

Thanks, Steve.

Your next question comes from the line of Gautam Khanna, Cowen. Please proceed.

Hi. Good morning, guys.

Good morning, Gautam.

I was wondering, the jet engine sales you've shown have really picked up nicely on a sequential basis, and I was hoping you could maybe elaborate on whether you're seeing any lingering destocking, and if you've been picking up market share, and if so, how can you tell? Then I have a follow-up.

First of all, I think there are a lot of drivers in the aerospace market, the commercial aerospace market. One on the engine side is obviously spares, and I think when you look at the spares inventories, the destocking in my view is over. The demand is growing from that market. I think GE even commented on that in their quarterly earnings call last week. So that's a positive element.

The jet engine build rate is building. It really depends on the mill products side, it's basically targeted at all of the engine programs, whether they be legacy programs, or whether they be new engine programs for the most part. There are some alloy specifics that are used more in the next-generation airplane like powder alloys and Rene 65 and things like that. That growth trajectory is there, and we've talked about that on one of the slides. The mill products I think is really pretty much across the board.

On the parts side and the components side, it really depends upon what part you have and what engine program it's on. For example, there are some engine programs that are in support of the A380 for example, which is not necessarily in a growth mode. There may be some continuing inventory destocking going on there because of the commercial realities of the A380. The other next-generation engine platforms, the 787 and the A350 extra wide body, those are in a continual ramp rate mode. I think there, we're not seeing any kind of inventory correction going on there.

We're seeing a pull-through demand that's representative of what the build rate is, so it's an easy question to ask, but a more complicated answer unfortunately because of the drivers behind it. I think on a net basis we're seeing growth. We expect to continue to see growth as we move through 2015. As we head into 2016, I think you'll see the growth from the LEAP engine begin to show significant opportunities for ATI.

As far as your question of how do we know whether we're gaining share or losing share or whatever, it's the reality of the competitive process in the negotiation and awarding of long-term agreements. Many of those were awarded in 2014 and early 2015. We've talked about those in the past.

I'm not going to get into specifics, but we know what our share was under the expiring contracts. We know what our share is, and I'm confident when I say we've gained share. In some cases, for example, on the LEAP, our position in terms of parts and components on the CFM, the legacy program, were minimal, and our share wins on the LEAP program were substantial on a part basis. It's a new engine platform. Is that a share gain? Yes, that's a share gain.

Okay. That's extremely helpful, and one follow-up. I just wanted to ask when you do in fact get PQ qualified across the board, how should we think about the utilization ramp at Rowley, and what that confers to the P&L? Thanks.

Yes, I think that our expectations by the end of the year, we'll basically be ramped up to essentially the practical capacity of that facility. What happens when that happens is that, Gautam, you've been to that facility, so you see and understand the scale size and the fact that it's a process oriented manufacturing process.

To a large extent, the cost structure is somewhat fixed. It's not completely fixed, but it's somewhat fixed until you add crews. We're adding crews now as we ramp up, so that becomes the variable component, but a lot of the other costs are fixed.

The size of the cake, the improvement of the yield of the cake, the volume of production drives the per unit cost lower. That helps obviously on the cost side of a cost per pound of sponge which will gradually eliminate the disadvantage that we've been talking about for a couple of years where the costs of producing sponge in Rowley is higher than other raw material sources that we need to make our titanium alloys. With a higher volume, you drive down the cost, and you narrow that cost disadvantage.

I think that then, there's two aspects to it. One is the qualification and start-up costs gradually get reduced and eliminated as we move through 2015, and I would expect in 2016 those costs are gone. Then as the sponge cost becomes lower, and we begin to use that and melt that, you'll see the benefits of that largely in 2016 as it flows through P&L as we produce product using that sponge. Does that help?

Yes, it does. Thanks a lot, Rich.

Okay, thank you.

Your next question comes from the line of Richard Safran, Buckingham Research.

Hi, good morning.

Good morning, Rich. How are you?

I'm doing real well. Thanks very much.

I wanted to ask you this Rowley question in a slightly different way. Given that you're coming close, so close to PQ certification, I wanted to see if maybe you can give out some numbers. It's a bit of a multi-part here. Could you maybe discuss at Rowley where capacity utilization is now? Where you're expect it to be by year-end? Also, where you think it will be at the point when you achieve optimum capacity utilization?

If you could, maybe comment on how much product do you intend to produce at this facility?

We're currently operating at about 65% of capacity. We say capacity. We're talking really about practical capacity, given the nature of the process. You have maintenance downtime and things like that. I would expect that by the end of the year as we head into 2016, we'll be at the 85% to 90% of capacity which is essentially operating at capacity. Could we get it to 92% or 93%? Yes, maybe, but 85% or 90% in a process like that is essentially operating at capacity with some ability to flex up if need to be.

Based upon how the facility is structured today, we're looking at somewhere in the range of 24 million to 26 million pounds a year of sponge production. As you know, while we aren't contemplating this, when you build a facility like this you're building it for the long haul, and as the markets continued to evolve and grow over the long term, which I believe titanium will, we have the capability of adding additional furnace sets if the market supports that and have the capability of getting to about 44 million to 45 million pounds if needed.

I think our strategy of building Rowley all along was that it would not provide 100% of our sponge requirements that we need, but it was a very important part of the strategy to be able to responsibly, with the evolution of where the market was and where the customers were driving contractual arrangements, to be firm fixed price for long periods of time that the only way you could really responsibly do that was to produce a portion of the sponge on your own, where you had tighter control of the cost structure. Because you couldn't really negotiate those kind of lengths of supply agreements with sponge producers that are qualified to make the kind of sponge we need, by the way all of whom are also our competitors. Think about that for a moment.

You also couldn't really go long on a scrap position, either from an availability or the ability to reach a long term supply agreement with firm prices on scrap. All that really, plus the fact that the OEMs were really driving more of an integrated supply approach from a risk management standpoint is why we built Rowley.

Great, thank you. Now just one other quick one here, when do you transition entirely to the HRPF? When do the older hot strip mills get shut down? Just if you could, how much of the $100 million in cost reduction is coming from the HRPF?

Okay, $100 million, yes. We have idled our Houston, PA, rolling facility in April which we use for certain grades and certain products as a breakdown mill. The 70-year-old hot strip mill is essentially being warm idled, meaning that in reality, essentially all except for one grade that we're still working on that is a more complicated issue is all being rolled on the HRPF. We're keeping the hot strip mill warm until we really gain confidence that it can handle the one particular grade that I'm referring to.

What that means is that the costs, it's really just one crew. If we do run it, we run it on a campaign basis, so it's not a significant cost driver. That really doesn't bother me from the standpoint of is it going to impact our cost reduction objectives in 2015 with the HRPF.

I think that of the $100 million in gross cost reductions, about 50% of that is really resulting from the HRPF, but most of that in the back half. The vast majority of that just from the planning and execution standpoint was expected more in the last three to four months of the year, as opposed to throughout the year.

Now remember when we said the $150 million, there's three real components of that. One is you eliminate all of the qualification costs and the start-up costs, so that goes away. That's a component of the $150 million annualized run rate. The second is the pure cost reduction, and the third is the advantage of being able to sell products at a margin that we couldn't produce from the existing hot strip mill.

All of that, and the incremental volumes, and the impact of absorbing having a more efficient cost absorption because you have a higher volume because now you're able to sell products that you weren't able to sell before, all of that factors are components of the $150 million annualized comment that I made earlier.

Terrific, thank you.

Thank you.

Your next question comes from the line of Michael Gambardella, JPMorgan.

Good morning.

Hi, Mike.

Hi, Rich. Good. I have a question, Rich, just on what you were saying about the $150 million cost improvement, or operating profit improvement from the HRPF. How much are the start-up costs that you're eliminating from that?

On an annualized basis, it was about $30 million.

In essence, are you then saying the real cost benefits or the profit improvement benefits of having the HRPF are $120 million a year?

Yes, that's pretty good, don't you think? That's what we've identified. That's the first year of operation, so you need to come out and see that facility, Mike, and get a real appreciation as to what it is and what it does.

The net, when you talk about like $100 million of gross cost cutting for the Company, I'm just trying to get what the net numbers are. The $150 million for the HRPF, the net number is really like $120 million. What was the investment?

On an annualized basis?

That's correct.

On an annualized basis, not for the whole year of 2015.

Right. On an annualized basis, right, $120 million. What the capital investment for that? A billion?

Yes, $1.2 billion.

Does the $120 million still meet your initial forecast for return on that investment?

In the first year of operation, yes. Over time, no. Over time, the combination of cost reductions, efficiencies, improved yield, lower quality costs, and growth opportunities is about $250 million a year, but that was never in the first year. Anybody who would put together an ROI for a project like that saying they could deliver that in year one is better than me.

You're still expecting $250 million ultimately?

Actually, no. I'm expecting more because I think that we've identified a line of sight to that, but I think that as I've told the team for the last three plus years, and they're proving it. They're proving it today, with the real start-up of that facility in January.

As they run it in April, the dramatic differences between January and April are incredible, and I think that they're going to continue on that path, and 2016 will be better than 2015, and 2017 will be better than 2016. They're learning capabilities of this facility that quite frankly weren't even thought of in the design concept. Yes, I'm very optimistic that this investment over time will generate significant value for our shareholders.

The $100 million gross cost cutting, what do you think the net will be this year?

We always target about twice the rate of inflation, so sometimes it's a little bit more than that. Sometimes it's a little bit less, depending upon what we're able to do and what the inflationary pressures are. That excludes raw material costs, by the way, so that's all of our costs other than non-metallic. The target is basically twice the rate of inflation, which is why we talk about gross cost reductions, and the net just, divide it by two, and you have a reasonable number.

What would the net be in dollars then versus the $100 million in gross?

If it's $100 million, the net would be $50 million. I think that's what half of a hundred is.

You're just saying net of the raw materials?

No, I said it's $100 million is really excluding the impact of raw material cost inflation or deflation. The reason why we do that is because if raw material costs go down, we don't want to take credit for that. We haven't had any impact on that.

Now to the extent that there is a yield improvement, we'll calculate a cost reduction on a yield improvement based off of the current cost of the raw materials. That will be reported as a cost reduction, and we only count those cost reductions as you know, Mike. I think you followed this Company for a long time.

We only count the cost reductions for 12 consecutive months, and then they don't go away. In theory they become a cost avoidance, had you not done that particular activity. But they're identified on a project-by-project basis.

They're audited by Pat and his financial team. They're validated that it's a real cost reduction and not a cost shift from one area of the operation to another. We only count them for 12 months, and then the project drops off, and we identify new projects.

I don't know. If you have gross cost reduction estimate of $100 million, but your net is $50 million, but your raw material costs I thought are going down.

So are the selling prices going down. Anyway, I don't know how else to help you, Mike. Do you have any other questions?

Okay. No. That's it. Thank you.

All right. Thanks.

Your next question comes from the line of Timna Tanners, Bank of America Merrill Lynch.

Hi. Good morning, guys.

Good morning, Timna. How are you?

I'm great. I'm in shock that we've gotten this far on the call, and no questions on stainless. That means you aren't just a stainless Company. I'm in shock.

Mike was asking about stainless.

Okay. Your luck is over. I wanted to dive in a little bit more. Are you able to call out for us the impact in the quarter of the nickel price weakness? Is that something you're able to delineate?

No, falling nickel prices in the short term, until they find an equilibrium, are not necessarily helpful, especially when you don't have a LIFO offset which we don't. I think that the real issue is more on the longer cycle products, not so much on stainless sheet. It's on the longer cycle products, unless we hedge it. In some cases like the plate project we did because the price was known, and we worked with the customer in order to do that.

I think the impact in the quarter to put an approximate number on it because of the longer cycle products in flat-rolled is probably about $15 million of the negative impact. Nickel has basically troughed. It bounced off as you know a price below $6 and has been more stabilizing in the $6.50 to $6.75 range here more recently.

I think the other impact is when that happens, customers are sitting there today because of the transparency of the surcharge. They know that if they wait until May to buy the product then the surcharge goes down by $0.18 a pound (inaudible) reinforced stainless. They sit there, and they wait unless they absolutely need the product, and that was the comments I made in my comments at the beginning.

That does have an impact on volume. It has an impact on, we throttle back melt shops obviously, so that has an impact on absorption that does carry through for a quarter until that stabilizes. I think those are some of the headwinds we face really heading into the second quarter.

So $15 million would include the hit from volume and from price?

Yes.

Or just the price?

The first quarter volume really wasn't negatively impacted on the volume side. The volume was actually pretty good. Where the volume has dropped off is with the orders dropping off in April because of customers waiting until May.

You don't make up that volume unless the demand is there to increase the volume requirements in May and June, and quite frankly at this point while it's early, we aren't necessarily seeing that. Part of that could be because of the material available from the Chinese that's in the market.

I was going to ask about that, but just before I do, just to clarify on a LIFO hit, you didn't have a LIFO offset because other prices for your products are going up even if nickel prices had been weak?

No, it's not quite that simple. I'll let Pat talk about LIFO because of the kind of unique situation we're in on a consolidated basis.

We're a net [debit] position, Timna, so we have an NRV reserve, so there was no impact to LIFO in Q1.

Even if we calculate a LIFO reserve which we do, and as we move through the year if prices remain where they are, we're required to calculate what our LIFO reserve impact would be for 2015. If it's a LIFO pick up which it could be based off of where raw material costs are today because we're in a consolidated net debit position, you go through this net realizable value calculation, lower cost of market basic calculation. That really requires us to offset any LIFO benefit with an NRV reserve, which we've been doing for the last couple years.

You don't get the benefit of the LIFO reserve. It gets offset by the NRV reserve, and then when it flips the other way, for example, in 2016 as you have a provision that you have to start booking, before you book that provision, it gets offset by the reversal of any NRV until you have a P&L effect. That's impacted us both in 2013 and 2014.

Okay, I see. Then the only other question I wanted to ask is to the extent that you touched on it already, and knowing that you aren't just a stainless Company, but looking at the commodity stainless side, (inaudible) imports have really jumped over the last couple quarters. The Europeans are blocking or just filed a case, I think, succeeded in their case against Asian imports of stainless. So how do you see the risk of those showing up here? How do you think about responding to that?

They're here. They are showing up here. I mentioned some statistics that are available that I think it's having a bigger impact on the market right now from a pricing standpoint than our domestic competitors are, quite frankly. Some might make comments about our domestic stainless competitors in terms of their impact on the market. Quite frankly, I think that the current impact is more from imports from China.

It's not just China. It's also Korea and Vietnam to an extent, but China is the real big. Now, part of it could be because, the surge in 2015, could be because of the West Coast port strike that had a lot of material bottled up, and not able to be unloaded in the fourth quarter last year. Therefore, when that strike ended, now the material's coming onshore, so it's a combination of maybe three or four months that was sitting there that hit.

What we're doing, as you know, we're fairly, not fairly, we are appropriately aggressive and active in Washington on unfair trade issues. We think that this is an unfair trade issue. We let our voices known.

SSINA, which is the industry association which ATI has a significant leadership position in, is working with the firm that works with SSINA to look at whether or not there is factual support to bring a trade case. In the US process, trade cases appear to be a little bit longer than they are in Europe or in other countries of the world, but data is being collected and has been collected for a little while as we speak. We'll see what happens there.

Okay. Thanks a lot.

Thank you, Timna.

I would now like to turn the call over to Rich Harshman for closing remarks.

Okay. Thank you very much, and we appreciate everybody's participating in today's call, and continue to appreciate your interest in ATI and your support. Dan?

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

Thank you for your participation in today's conference call. This does conclude the presentation. You may now disconnect, and thank you for joining.