ATI Inc.
Q4 2012 Earnings Call Transcript

Published: 23 Jan 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2012 Allegheny Technologies Inc. Earnings Conference Call. My name is Stacy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please proceed.

[Dan L. Greenfield:]

Thank you, Stacy. Good afternoon, and welcome to the Allegheny Technologies Earnings Conference Call for the fourth quarter and full year 2012. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call. Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Dale Reid, Executive Vice President of Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI. After some initial comments, we will ask for questions. [Operator Instructions] Please note that all forward-looking statements this afternoon are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially. Here is Rich Harshman.

[Richard J. Harshman:]

Thank you, Dan, and thanks to everyone for joining today's call. The fourth quarter was challenging. Our businesses continued to be negatively impacted by headwinds resulting from uncertain global economic conditions. We saw a continued conservative inventory management throughout the supply chains of most of our major end markets. While these headwinds are creating challenging short-term conditions, we remain optimistic about ATI's long-term growth opportunities in many of our global markets. Our financial position and liquidity remains solid with cash on hand at the end of 2012 of $305 million. Cash provided by operating activities was a strong $428 million in 2012. Our net debt to total capitalization was 32%, and there have been no borrowings under our $400 million unsecured domestic borrowing facility. In 2012, we remained focused on improving our cost structure. Gross cost reductions before the effects of inflation were $114 million. We took steps to size our zirconium primary operations to improve its cost structure in the post-Fukushima global nuclear electrical energy market. We consolidated operations in our Engineered Products segment, resulting in the closure of our iron casting facility in Alpena, Michigan. This facility was purchased in 2007, and we converted it from an automotive industry casting business to a facility designed to produce and machine large iron castings for markets like wind energy. The wind energy market and other markets for large iron castings have been challenging for several years, both due to reduced demand and excess global capacity, including significant capacity added in China. At this point in time, we have no plans to produce iron castings at this facility. We are also consolidating certain of our Flat-Rolled Products service centers into one service center location to improve operational efficiencies and reduce costs. As we enter 2013, while short-term global economic conditions and fiscal and regulatory policy uncertainties remain, we are beginning to see early signs of improvement for many of our markets. This gives us some confidence that global market conditions in 2013 will be better than 2012, so we remain cautious, particularly for the first half of the year, since both business confidence and consumer confidence remain low. While uncertainty remains in the short term, we are very optimistic about the long-term secular growth opportunities in many of our global markets. To maximize these opportunities, we plan to continue to enhance our competitive position by improving our cost structure, enhancing our capabilities and growing our relationships with our customers. Looking at our High Performance Metals segment, in 2013, we expect to benefit from 4 main factors

[Operator:]

Your first question comes from the line of Richard Safran.

[Richard Tobie Safran:]

Okay. Rich, I just wanted to first take a stab here at your guidance where you say you expect moderate revenue growth and improvement in segment operating margins. I wanted to know maybe if you could quantify that maybe a bit further for us. I mean, for example, do you think you could do mid-single-digit growth in '13?

[Richard J. Harshman:]

Well, I think, the use of -- the operative term being used is moderate. So we're not specifically giving quantitative guidance. I think as you look past -- as you look backwards for the last 3 years, beginning really in 2010, I think we entered each of the years of '10, '11 and '12 with a view of improving global macro economic conditions, that's how our plans -- that's what our plans assumed. And really, through the first quarter we were tracking very well to our plans. And quite frankly, our view entering each one of those years was really no different than most economists' views, or I think, most views across the industries that we operate in. And then, in each of the last 3 years for all of the issues that we've talked a lot about over the last 2 or 3 quarters, mainly the macro economic issues, the end markets began to weaken, and really, beginning in the second quarter of each of the last 3 years. As we enter 2013, I think that there is more general caution and concern because of the issues that remain unresolved throughout the world. They're mainly fiscal and economic related. So the caution that we're taking is just that, and I think it's prudent, I think it's warranted, it's how we're managing our business. So we're not doing anything differently internally than what we're communicating on this call. So I think that the term moderate means probably the same thing to most people, I think. It's growth. It's not 0, it's not down, but it's certainly in the single-digit range.

[Richard Tobie Safran:]

Okay. And then just on the aerospace aftermarket, in your comment about demand. Just starting with Investor Day, you've been pretty cautious. You noted that, like for example, the supply chain was managing tightly. We've seen GE spares demand leveling off and Pratt's 4Q orders also appear to be encouraging. So I wanted to know if this now represents a change in view for you for the better. And assuming you think demand is improving, I just wanted to know if maybe you could tell us how long you would expect to see -- how long before you see the pull-through before you see an increase in demand?

[Richard J. Harshman:]

Yes, I mean, it's -- we're beginning. Typically, what we see in that supply chain is some leading indicators of demand improvement from the distribution channel mainly, and we're seeing a little bit of that in the first quarter but not enough to really make a trend. I think as we try to connect the dots and we listen to our customers and we look at the supply chain and we look at the fundamentals that really drive the spares market, I think that the latest projections are the expectation that the global airlines collectively will -- the profitability will grow to the -- up to the level of about $8 billion in 2013, which is an increase compared to 2012. I think that the supply chain has done an excellent job of managing the inventory and lowering the inventory, and we've lived that really through the second half of 2012. I don't think that there's any, what I would call robust signs that would indicate we're going to see a dramatic improvement in Q1, but I think as we kind of look at things and hear things and make the connections, there's a possibility of that in the second quarter and more likely in the second half of 2013.

[Operator:]

Our next question comes from the line of Chris Olin.

[Christopher David Olin:]

I just want to get some clarity on, I think, going back to your comments regarding titanium, and I guess you kind of referenced the supply chain not getting better. And I just wanted to see if your views had changed in terms of Boeing's inventory levels and those, when those could be cleared out. I think previously, you started thinking about 2014 in terms of a balanced market. Anything out there that would suggest it could be earlier or later?

[Richard J. Harshman:]

No, I mean I still think that only Boeing really knows what their situation is and I -- they haven't really changed much of the comments that some of their executives made publicly earlier in 2012 and then over the summer of 2012. And I think most of that would lead to the conclusion that the likely timing is more along the lines of '14. And hopefully, there's no disruption or change in the rate ramp-up from some of the issues that they're dealing with on the batteries. And if that's the case, I think that the logical conclusion is as we're sitting here in the first quarter of 2013, we're closer to being in balance on the Boeing inventory than we were 6 months earlier.

[Christopher David Olin:]

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

[Richard J. Harshman:]

Yes, I mean I think if -- to the extent we have, it might be at the margin level. As we look at the housing, the new housing construction, and the improvement that has been evidenced in the U.S. housing start market certainly over the latter part of 2012, it's really our view and our understanding that most of that is really on in developed plots or developed projects where the infrastructure has already been built and put in place and had been sitting idle as the economy worked through a very bad housing crisis and excess supply. So I don't think that we've really seen any dramatic improvement in demand from that side. When you have a natural disaster like the tragedy of the hurricane, you see some improvement there, but it really, collectively, is not significant enough to drive a big sustainable change in the market.

[Operator:]

Your next question comes from the line of Tim Hayes with Davenport & Company.

[Timothy P. Hayes:]

Two questions, if I could. In Q4, there seemed to be an outsized gain from LIFO. Is -- was there any year-end true-ups? I kind of look at Q4 that maybe I'd want to take a little bit out of the LIFO for Q4 and obviously, with the benefit of hindsight, recognizing that LIFO assumptions are always tough during the year. I would take some of that benefit and throw it back in the first 3 quarters. Was that how I should be maybe looking at the quarterly pattern in '12?

[Richard J. Harshman:]

Well, yes. I mean, there's always the ultimate true-up in the fourth quarter because we're projecting not only inventory levels throughout the year, but also the individual cost elements. And obviously, what you want to do is use the best data available but you don't want to be overly aggressive. And then the volatility of the raw material cost continue to move. Not so much nickel, although nickel did soften in Q4 compared to the rest of the year. It's really a lot of the other elements that we use to make the nickel alloys and the stainless and the titanium alloys that made some pretty significant -- and zirconium, zirconium raw material feedstock to make those alloys that moved pretty dramatically over the last 3 or 4 months of the year. And as you calculate those indices and you lock in the calculation and you know what the layers are doing in each pool and everything, that's really what drives any kind of assessment. I mean, in hindsight, if you knew all of the facts in advance, LIFO would be booked ratably throughout the year, but nobody has the benefit of hindsight until the year ends.

[Timothy P. Hayes:]

Right. Right. Turning to the hot mill at Brackenridge, that -- it's supposed to be adding like incremental capacity, just a very little bit of increase in capacity on the hot mill site. How much capacity might that add in cold-rolled capacity throughout your system? And what's more important in terms of how should we look at it from an industry standpoint? Is hot-rolled capacity more important or cold-rolled capacity more important?

[Richard J. Harshman:]

No, well, first of all, it doesn't -- since it's a hot mill, it doesn't do anything to add to our cold-rolling capacity. Our cold-rolling capacity is what it is. However, there are some efficiencies that we gain because of the gauge control that we will have on a new modern state-of-the-art mill that we don't have on a 60-year-old mill that enables us to target the gauge off of the end of the hot mill to make our finishing facilities much more efficient and lower cost. But it doesn't do anything to capacity, from the standpoint of bringing on additional capacity, of the finished product. In the stainless business, unlike in the carbon steel business perhaps, there isn't a real big market for hot pans or hot-rolled products. I mean, the market is for cold-rolled and finished products, at the targeted gauge and at the targeted coil length and the targeted width in alloy systems that the customers and that the market needs. We have never viewed the hot mill as bringing on additional capacity of our finished product. What we view it as is the HRPF replaces a 60-year-old mill that has done great work for 60-plus years but makes it harder for us to compete, as the markets, believe it or not, have changed over the last 60-plus years. So what it does do for us is it enables us to more fully participate in the market opportunities for the wider product, the larger coils, as well as makes it -- us more efficient in producing some of the ferritic grades, the 400 series grades that, quite frankly, we have a difficult time doing on our existing 60-plus-year-old hot mill. So we've always looked at that investment as an enabler of us fully participating and creating value for our customers across the wide range of flat-rolled products that the market wants at a much lower cost and a much leaner flow path and cycle time.

[Operator:]

Your next question comes from the line of Steve Levenson with Stifel, Nicolaus.

[Stephen E. Levenson:]

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

[Richard J. Harshman:]

Yes. Well, I think it's consistent with what you're seeing in the supply chain of the continued vertical integration. And we -- that's obviously been evolving here over the past, not quite 10 years, but certainly, in the last 8 years. I don't -- I personally don't view that as a surprise. There's been a lot of signals that have been sent by PCP over the years that they would be looking at integrating backwards into titanium. TIMET is a very, very fine company and was certainly a worthy competitor we had a lot of respect for, and that doesn't change anything with PCP because we view them the same way. They're a good customer and a very worthy competitor, and we think that there's enough opportunities in the world's markets for both of us.

[Stephen E. Levenson:]

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

[Richard J. Harshman:]

Maybe as a -- maybe, at the margin. I mean, I think that you know that in the aero engine market or the jet engine market, as well as in the airframe market as it's evolved over the past 5 or 6 years, and jet engine's been longer than that. The directed source agreements that exist from the OEMs directly with the mills that require the forgers to buy their mill products from certain mills really is a big driver in terms of the supply and demand equation in the supply chain. That isn't going to change, quite frankly. That is what it is. The OEMs have evolved to that, being led, quite frankly, by GE way back in the mid-'90s, and now, all the engine OEMs pretty much do the same thing and the airframers are doing the same thing. So I think that, if anything, what the vertical integration does is that it creates leaner cycle times and a more streamline operating and supply chain that the OEMs see a benefit in. And I think that's fundamentally why you've seen the supply chain consolidation happening. It was a big driver, quite frankly, behind our acquisition of Ladish, and I think that those kind of moves will continue.

[Stephen E. Levenson:]

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

[Richard J. Harshman:]

Yes, it's a great question. I do think that it employs and provides an opportunity for Powder Metals. It's one of the reasons why, quite frankly, we bought that business back at the end of 2009. And not only is it being driven by the powder metal forge products that are taking a hold in some of the jet engine applications, but on the additive manufacturing side. And the near net -- I would put -- I would broaden the definition to be more along the lines of near net parts or near net shapes because that's really where the additive manufacturing is going to come from and help create value on the customer side. So you're seeing a lot of the OEMs investing in it. I do think it creates an opportunity for our powder business. Additive manufacturing is a technology that we are following very closely. I think it's like a lot of new and emerging technologies that, especially ones that are geared to the aerospace market, it takes a long time. And so I think it will begin to gradually gain a foothold and -- but it's going to take quite a while for that to replace more of the traditional rot parts that are made into forgings or castings.

[Operator:]

Your next question comes from the line of Gautam Khanna with Cowen and Company.

[Gautam Khanna:]

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

[Richard J. Harshman:]

I mean, I think that -- I think we all learned a long time ago that you have, you develop hopefully, a deep understanding of markets and opportunities in where you can create value for your customers and what their needs not only are today but what they're likely to be in the future. And that's, quite frankly, a benefit of this kind of -- the deep strategic relationships that we have with many of our customers. So I don't think -- when you're driven by what others do, you can make bad decisions. So I don't think, as I said earlier, we're not surprised by that move. I think it's been signaled for a very long time. I would be surprised that people were surprised. So I think that it isn't going to change our strategy. I think we have communicated to the investment community that our view of getting closer to the customers and not only in the aerospace supply chain, but in other major markets as well, that integrating forward into value-added parts and products and components, and providing the capability and technologies and benefits for the customers of near net shapes, is a strategy that we identified several years ago. And sometimes it takes a while for those strategies to unfold, especially when they involve making an acquisition. So it doesn't -- it isn't going to compel us to do anything differently than kind of the strategic roadmap that we've already laid out for ourselves.

[Gautam Khanna:]

Okay. And just one quick follow-up, Rich. Can you maybe give us a sense for some of the share opportunities that might be present because of the consolidation? Maybe there's some blowback against TIMET as they're now in competition with some of their customers. And perhaps on the other side, could you give us a sense for how much nondirected material ATI today supplies, or last year supplied to Precision Castparts that could go away and how you look at those opportunities and potential risks?

[Richard J. Harshman:]

The answer to the latter question, how much nondirected do we supply? The answer is not much. Because most of it is geared towards the aerospace market and, as I've said, most of that is through directed source agreements, so there's not much of the latter. I think of the former, I think, I've read and seen a lot of conjecture and some comments written by other companies who aren't fully integrated that when you become fully integrated it presents opportunities because et cetera, et cetera. And I think at the end of the day, the customers that we are dealing with are very sophisticated. They are risk-averse. They value technology. They obviously want their products at a lower price than what they're paying for it, but they also realize that there's a value proposition there, especially when you have the capabilities to innovate and create new alloys and create new products. And we don't wait for our customers to tell us that we need to become more efficient. We know that we need to become more efficient every day. That's the lifeblood of how you're going to continue to grow and survive. So I don't think that -- on the fringe, might there be some isolated pockets of opportunity? Sure. Is it something that's going to dramatically change the landscape of the supply chain? No.

[Operator:]

Your next question comes from the line of John Tumazos with Very Independent Research.

[John Charles Tumazos:]

Prime Minister Abe in Japan made some optimistic statements after his election about restarting the nuclear industry and not having the 40-year phaseout to try to restart Japan from recession. If demand comes back for the zircon alloys, have you downsized the facility in such a way that you could call the people back and bring the capacity back? That's the first question. Second, there's research in China, India and Pakistan for thorium-based electricity reactors. Do you receive orders for materials for those type of reactors?

[Richard J. Harshman:]

John, the first question is yes, we do have the capability of -- we're following -- we followed that election very closely. I think it is positive in many respects but certainly a positive from the Japanese perspective in terms of nuclear energy. I think that the next real important political event in our view will be the lower house elections in July, I believe, that if they support the new prime minister's views, not only on nuclear but the whole economic policy front in Japan, then that would be a very positive development for the restart of many of the reactors in Japan. So that would be a very positive or that would certainly be a positive development for the nuclear industry, one that we're following very closely, and we do have the capability of ramping up very quickly if need be. On the thorium-based reactor side, I'll be honest. I mean, we -- I have followed that. I know that some of that is going on. I don't think that -- I haven't heard that it is an important driver yet within ATI for demand for our products. But as you indicated, it's early. So those kind of reactors will obviously require some specialty metals. And as we continue to follow and gain understanding of whether there are opportunities there, to the extent that it becomes meaningful, we'll certainly comment on that to the investors.

[Operator:]

Your next question comes from the line of Mark Parr with KeyBanc.

[Mark L. Parr:]

I had a couple of questions. First, I'm curious, you have a lot of end markets you're participating in. Could you just identify for us maybe 2 or 3 areas where you have the least amount of visibility right now?

[Richard J. Harshman:]

Yes, well, it's probably -- the one that we have the least amount of visibility is always the distribution market for shorts that service the short cycles. And when I say that, that's generally the standard stainless products. So we try -- we work very hard to try to look through at what the end market drivers are and clearly there, while we don't sell all of our products into those end markets through distribution, in some cases the markets have evolved that the quantities are big enough that you're going directly to the customer. Appliance is one of those. But that's probably the most difficult one. The lead times are the shortest. They're more GDP-driven. It's more a fundamental view and impacted more by confidence than anything else. I think as you get into some of the longer-cycle markets like aerospace and oil and gas, and those markets have, because the construction and the production time of the product is so long and the backlogs are so deep and rich that not necessarily from our perspective but from the OEM or the major fabricator perspective, you have a longer, longer viewpoint into that, and that becomes somewhat easier. The other challenge is not directionally. It's more of the timing of some of the large infrastructure projects. I mean, because the gestation period of those projects can be years in terms of how they evolve from concept into bill of material ordering. And that while the project doesn't go away, sometimes it gets delayed because of shorter-term economic issues and we certainly experience that, for example, on the desal projects that I think the industry was waiting for those to be awarded, quite frankly, in November of 2011, and they are just getting, for the most part, the first order came in December or late in 2012 with the follow-on additional parts of the order coming here in the first quarter. So those kind of project businesses are notoriously lumpy, to use a technical term, and become very difficult to project.

[Mark L. Parr:]

But if you look at both of those areas that you talked about in terms of large project and the short-cycle distribution business. It would seem that in your matrix of pricing by growth on the axes, they're not the ones in the lower left-hand quadrant. I mean, maybe are they more toward the middle right now? Are they -- is that fair to say?

[Richard J. Harshman:]

Yes, certainly -- you mean the project business?

[Mark L. Parr:]

Project business and the standard stainless business.

[Richard J. Harshman:]

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

[Mark L. Parr:]

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

[Richard J. Harshman:]

Well, no, standard stainless is the weaker, harder business right now because the visibility we have is so short. And the demand for the product is more driven by confidence and when there's a lot of uncertainty, you get uncertain, uneven and low demand.

[Mark L. Parr:]

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

[Richard J. Harshman:]

Well, they're both important. I think that, I think -- I'm not sure, quite frankly, that you necessarily get the stabilization in China without some stabilization and minor pickup, modest pickup in Europe, I mean, and in the U.S. 25% of China's GDP is driven by exports and to the extent that, that demand isn't there and they're managing their economy and their growth in a delicate balance between political stability and employment and inflation, they've got a lot of capacity. So what happens is that they, quite frankly, dump their product and they dump it, especially the more commodity products or standard products, they dump it in Europe and in the U.S. and that creates problems. So if I was forced to pick one, I would say that for us, a return to a reasonable and stable and, let's just say, I don't know if it's 6.5% to 7.5%, but if China is growing at 6.5% to 7.5% consistently with the size of that economy, that's a very -- it's important only from a demand standpoint for some of the projects and the higher value products that we make that they can't make at this point in time, which is a market for us, and that demand sucks up some of their capacity that then they don't look at dumping elsewhere in the world. So if I was forced to pick which one was more important, I'd like to say they're both important but I think the stability and the good growth in China is very important.

[Operator:]

And your next call comes from the line of Kuni Chen with CRT Capital Group.

[Kuni M. Chen:]

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

[Richard J. Harshman:]

Well, not really. I mean, other than it will be lower. We're not going to get into that kind of a fine breakdown of our operations. I mean, I think that, I think that the fundamental driver in that particular segment is we've taken -- we'll have less of a drag because of startup issues in the Rowley sponge plant. We'll have less of a drag because of lower volume on the zirconium side because we've taken cost out and kind of sized that business into where it needs to be right now. And hopefully, with some more stable raw material costs and even net of LIFO in a market where raw material costs continue to fall, because of the manufacturing cycle time of those products, we get out of phase with the raw material surcharges and it hits P&L negatively even after any kind of a LIFO benefit. So those factors combined with improving volumes. I mean, we're not, quite frankly, banking on any significant move in base prices at this point in time. I do believe that, that's an opportunity, especially in the second half of the year if the demand improves and the global economic condition improves and you see a lengthening of lead times and a tightening of the supply, that, that certainly is a possibility in the second half of the year. So, I think it's a variety of factors that will help us achieve moderate improvement in earnings in the Flat-Rolled -- in the High Performance Metals segment in 2013.

[Kuni M. Chen:]

I guess my second question, on the CapEx side of the equation. You guys have always sought to be self-funding, you self-fund your growth projects but that doesn't seem to be the case this year. Does that reflect any different thoughts on CapEx and growth? Or would you look at this year as just more of an aberration since you're finishing the hot mill projects?

[Richard J. Harshman:]

Yes, I think it's an aberration. Look, I mean, our desire is to self-fund it. That's our primary focus. When you spend $550 million on CapEx and you have a moderate expectation on growth in the end markets and you have those factors all combine to and you have the view that business will improve and will require some investment in managed working capital, although I think we're going to work hard to minimize that because we have opportunities to do a better job, quite frankly, in managing our working capital, especially on the inventory side. That's the reason for the view that we might have to, at least on a temporary basis, from a timing standpoint of some of the expenditures, utilize our credit facility. But the ultimate goal is to not do that. I think that as you look at and reflect upon the guidance we're giving on capital expenditures, $450 million of that is the HRPF. At the end of 2012, so that's a 1 point -- we'll use round numbers, $1.1 billion investment. And at the end of 2012, we have invested, in that project so far, just under $500 million. So let's just say we have about $600 million to go, $450 million of that occurs in 2013 mainly because our goal is to complete the construction in 2013. The rest of the cash outlay moves to 2014 mainly because the contractual requirements are that there's a contractual withhold until we get through the commissioning process and then the investment is done. So as we look at 2014 at this point in time, our capital requirements are going to be significantly lower than they are in 2013. So 2013 is the peak and is the pinnacle in terms of what we're spending on CapEx.

[Kuni M. Chen:]

Okay, great. And maybe I could just sneak one more in. Just can you give us the overall titanium volumes across both segments for the year?

[Richard J. Harshman:]

For 2012?

[Kuni M. Chen:]

Right.

[Richard J. Harshman:]

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

[Dale G. Reid:]

Yes, Kuni, this is Dale. For 2012, our total titanium shipment volume was 37 623, so 37 million pounds.

[Operator:]

And your next question comes from the line of Michael Gambardella with JPMorgan.

[Michael F. Gambardella:]

I have 2 questions. First, just a follow-up on the LIFO question earlier. When I look back on the numbers, you had a LIFO credit of $7 million in the second quarter, $22.1 million credit in the third and then you had $47.6 million credit in the fourth quarter you just reported. You had almost a $48 million LIFO credit in the fourth quarter compared to the $33 million in the EBIT that you put up. I mean, some of that in the fourth quarter to that credit must be associated with previous quarters.

[Richard J. Harshman:]

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

[Michael F. Gambardella:]

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

[Richard J. Harshman:]

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

[Michael F. Gambardella:]

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

[Richard J. Harshman:]

Well, you can do whatever you want. We wouldn't have any LIFO in the first quarter. So however you want to build your model, you'll build your model.

[Michael F. Gambardella:]

No, I'm just saying, if you didn't have any LIFO in the fourth quarter, you would have had a loss on an EBIT basis.

[Richard J. Harshman:]

Yes, but we did. And since most of our inventory is valued on LIFO, in that gap it's really an irrelevant question.

[Michael F. Gambardella:]

I just thought there was some catch-up there.

[Dale G. Reid:]

But also, Mike, this is Dale. I mean, as Rich talked about, there is a mismatch between what the surcharge is and what our inventoriable costs are. So, granted, we would not have a LIFO benefit in the fourth quarter, but we also wouldn't have had the mismatch that we had in the fourth quarter also. If you look at what happened with nickel here, obviously the price of nickel fell to $7.39 at the end of November and that's meaningful to us because the way that we buy nickel in the month of December is based upon the November price. So the fact that nickel is down 10% and it basically fell from $7.82 to $7.39 in 1 month had a favorable LIFO impact for us, but it also is going to create some issues here as we roll through the first quarter of 2013, so we'll see what happens.

[Michael F. Gambardella:]

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

[Dale G. Reid:]

Sure. As we talked about in the release, it's not unusual for us, like any other public company. Basically, we operate in multiple tax jurisdictions both here in the United States, in the various states, as well as overseas. And as we close out tax years, we will book gains or losses depending upon how those tax years close out. The tax rate, as you know, is basically a function of what the tax provision is versus what our IBT is. And given our low level of IBT, it had a dramatic impact on the rate. As we look at what the rate will be in 2013, that rate should get back to the more normalized basis of around 35%, because we are primarily a U.S. manufacturer.

[Operator:]

Your next question comes from the line of Dave Martin with Deutsche Bank.

[David S. Martin:]

Rich, I had a bit of a follow-up on your outlook for High Performance earnings this year. I would conclude that lower costs are going to be a main driver of better earnings in that segment. I'm just curious if, first, if you can give us some color on where your backlogs or order books are in that segment versus maybe a year ago; and then secondly, I'm hopeful that you could give us an update on Rowley cost progress and operating rates and your current plans to pursue PQ certification. I know you said in the release sometime in 2013, but I recall, at one point, you saying that was likely to begin in the early part of the year.

[Richard J. Harshman:]

Yes, we -- I think the backlogs, if we look at them in total for the segment today are pretty consistent with where they were about a year ago. And we obviously don't ship exclusively out of backlog, we get orders, quite frankly, every month and certainly from the more transaction-oriented businesses with lead times being what they are, which are relatively short even in the High Performance Metals side both for titanium and nickel alloys and mill products. We'll get orders today that will ship in the first quarter. But from an indicative and a trend standpoint, I think that the backlogs are pretty similar. Where there is good strength and growth in backlog is on the forging side, the forging and the casting side with ATI Ladish. So I think as we look at the full year, revenue is always kind of an interesting indicator because, remember, we have raw material surcharges in those products both on the mill product side, as well as on the forging side. So we're assuming that in 2013, on average, raw material costs will be lower than they were on average in 2012, and yet we expect to have moderate growth in that segment in the year. So in actuality that means volume growth as well. So that really is our view at this point in time in that segment. On the Rowley progress, we continue to make good progress in getting the costs down. As I've explained before, we really do not want to start the PQ or premium-grade qualification process until we have our costs and yields at an acceptable level because we have to freeze the method of manufacturing process at that point and use that throughout the production of a significant quantity of sponge that has to be then turned into mill products in order to obtain the jet engine qualification for rotating quality material on PQ. So the timing of that is really dependent upon when we're satisfied that we have a process and a yield and a cake size that is acceptable to give us an acceptable cost structure going forward, because we do not want to start and stop the PQ side. I'm hopeful that, that's going to be some time, if not in mid-year then early in the second half of 2013. But quite frankly, given the fact that we have standard-grade qualification approval, which means we can use that sponge on everything that we make other than rotating quality product for jet engine and some limited medical standards and specifications that we have other outlets for the sponge, so I'm really not driven by the sense of need and urgency to start the PQ process before it's time. I'm really more driven by the fact that I want the process to be locked in and to be a very cost-efficient process, so that we only do it once. And the goal is to begin that in 2013. If that happens, great. If it doesn't, it's not the end of the world, quite frankly.

[David S. Martin:]

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

[Dale G. Reid:]

Yes, so we're 77% funded. I don't have those exact figures off the top of my head, let me get those for you. But if you look at it from [indiscernible] standpoint, we're about 97% funded. They haven't finalized the rates in the calculation to do the valuation yet. But that's why from a funding standpoint, we don't have an expectation that we would have a required cash contribution here in 2013 given the fact that we have a credit balance coming out of 2012 there. The assets are roughly like $2.2 billion and the liability is about $700 million higher than that so it's like $2.9 billion.

[Richard J. Harshman:]

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

[Dale G. Reid:]

Yes, so this year, we're going to use a discount rate or at the end of 2012 of 4.25%. Last year, we used 5% and basically it's driving about a $200 million increase in the obligation there. Also given the forecast by the analysts who do this kind of thing, the expectation as far as return on assets whether it be equity or whether it be fixed income given the fact that the risk-free rate has basically been at a very low level and is anticipated to be at a very low level for an extended period of time, we're lowering our expected return on assets by 25 basis points also. So that costs us about $5.5 million on an annual basis.

[Operator:]

Your next question comes from the line of Arun Viswanathan with Longbow Research.

[Arun S. Viswanathan:]

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

[Richard J. Harshman:]

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

[Arun S. Viswanathan:]

Right. So that was I guess going to be the next follow-on was maybe you can just help quantify maybe your lead times across different end markets. Is that something that you can kind of speak to or...

[Richard J. Harshman:]

Well, I mean, lead times are relatively short by any historical metric pretty much across many of the end markets that we serve. That's very sensitive. Lead times can and do move out very quickly, especially on the aerospace side. And the big impact, quite frankly, in the second half of last year from the aerospace market was on the aftermarket side. And I think if you reflect upon and listen to what all of the engine OEMs are saying. And quite frankly, we were the first company that commented back in April of last year on some softening in demand on the aftermarket side on jet engines, and that's because we kind of see it first because of the nature of the products that we make and we have a pretty high concentration of our aerospace market that's focused on jet engine and we focus on the premium market applications for rotating components on both nickel, superalloys, as well as premium titanium alloys. So as we see it, we saw significant inventory corrections throughout the second half of the year. The engine build rate, I mean, GE has already publicly said on new engine builds, a growth of about 6%. Rolls-Royce and Pratt are seeing growth so the real big impact is, quite frankly, on the aftermarket side. And when you look at all of the fundamental drivers in terms of revenue passenger miles and fleet utilization and profitability of the airlines and where the inventories are, those are all the factors plus what our customers are telling us, those are all the factors that go into us putting our plans together and doing the best job we can of communicating what our expectation is to the investment community, and that's what we've done.

[Arun S. Viswanathan:]

Okay. And then, maybe another kind of follow-on to that is can you quantify your backlog or the book to bill in the fourth quarter on a quarter-versus-quarter basis or year-versus-year basis?

[Richard J. Harshman:]

We'll certainly do that in our 10-K.

[Arun S. Viswanathan:]

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

[Richard J. Harshman:]

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

[Operator:]

And your last question comes from the line of Jonathan Sullivan with Citibank.

[Jonathan Sullivan:]

I just had 2 quick questions. One, I believe, before, you mentioned in response to a question about the growth in '13 that you would expect to see single-digit growth, was that referring to revenue or segment operating profit? And then I guess the second question...

[Richard J. Harshman:]

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

[Jonathan Sullivan:]

Great. And then the last question. In 2014, I wondered if you could talk a little bit about the cost benefit you expect to see from Brackenridge and how that might flow through, I guess, in '14 and '15 taking into account the commissioning process in the first half of '14?

[Richard J. Harshman:]

Yes, I think most of the benefit, quite frankly, will be in '15. '14 is the commissioning process we go through. We have to commission the mill for rolling every single alloy and product that we make, which are in the hundreds. It's not the same kind of a commissioning and qualification process that we have to go through when we bring on a new asset that is involved in producing a rotating part for jet engine, mind you. But it's still a commissioning process to make sure that the product is consistent with the specification, both the internal and the customer specification, and that process will begin early in 2014, probably on some of our higher volume products. And then we'll continue, really, through the first half of the year on all the other products. We'll be producing product once something is commissioned. Our goal is to hot-roll that and sell that as a finished part, finished product, I should say, once it is commissioned through the mill. So that will be happening throughout 2014. And then in 2015, that's where really the old hot mill, the existing hot mill will be shut down and all of the cost advantages will roll through the operations. So and that's a fairly significant number that we have not commented on publicly other than to say that the reason for the investment is it allow us to participate in the 40% to 50% of the market for flat-rolled stainless that we cannot participate in today because we don't have the capability of producing the product. It will be a lower cost flow path and it will be a leaner flow path with less inventory investment required, not only on our part, but on our customers' part. So those are all of the driving factors and the benefits behind the investment. Okay, thank you for joining us on the call today, and thank you for your continuing interest in ATI.

[Dan L. Greenfield:]

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

[Operator:]

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