ATI Inc. (ATI) Q4 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Allegheny Technologies Earnings Conference Call. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dan Greenfield, Director of Investor Relations. Please proceed.

Thank you, Fab. Good afternoon and welcome to Allegheny Technologies' earnings conference call for the fourth quarter and full year 2007. This conference call is being broadcast live on our website at alleghenytechnologies.com and on ccbn.com. Members of the media have been invited to listen to this call. Participating in the conference call today are Pat Hassey, Chairman, President and Chief Executive Officer and Rich Harshman, Executive Vice President, Finance and Chief Financial Officer. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions to be considered of others on the line. Please note that all forward-looking statements made this afternoon are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially. Here is Pat Hassey.

Thanks Dan and thanks to everyone for joining us today. With all that's been going on in the equity markets lately, this is not a time to be pessimistic. It's really not a time to be optimistic. Rather, it's a time to be realistic about the long term, intermediate and short term. During this call, we'll try to separate the fears in the equity and credit markets from the fundamentals and the drivers of ATI's business. We see plusses and minuses. Mostly, we see plusses for ATI. So let's start with the facts of 2007. Firstly, we strengthened our position in key global markets, launched new production facilities and solidified our balance sheet. We achieved record sales and profits. Demand continued to be strong from our key diversified global markets: aerospace and defense, chemical process industry, oil and gas, electrical energy and medical. These markets accounted for 71% of ATI's sales in 2007. Direct international sales increased 25% and reached a record of nearly $1.5 billion or approximately 27% of total sales. We believe that nearly one half of ATI's sales are driven by global markets when we consider exports of our customers. We continue to build on our foundation of unsurpassed manufacturing capabilities. Our major capital projects for titanium sponge production, melting, rolling and finishing are on track. Our titanium sponge production reached 16 million pounds annualized in 2007. We also launched new titanium and nickel-based alloy melting assets including new VARs and our new PAM III Plasma Arc Melting furnace. We remained focused on our performance and execution, resulting in gross cost reductions totaling $112 million, exceeding our 2007 gross cost reduction target of $100 million. Finally, in a very weak stainless market, our Flat-Rolled Products segment set a record for profitability, over $500 million of segment operating profit for the year. Cash flow was strong in 2007. Cash on hand at the end of the year was $623 million. This is after investing $447 million in capital expenditures including $284 million for our strategic capital projects. We repurchased 675,000 shares of stock for approximately $61 million. Our share repurchase program only began on November 13th of last year. We made a $100 million voluntary pension contribution. We have voluntarily contributed $350 million to our U.S. qualified defined benefit pension plan since 2004. The plan was approximately 111% funded at the end of the year. As a result in 2008, we expect retirement benefit expenses to be only $1 million as compared to $30 million in 2007. The key financial metrics for the year were impressive. Stockholders equity is $2.2 billion, giving us the strongest balance sheet in the company's history. Return on stockholders equity was 40%. Return on capital employed was 31% and we had more cash than debt at the end of the year. 2007 may be remembered as a year of extreme raw material cost volatility and extraordinary inventory destocking by some distributor customers. Titanium scrap prices began the year at 18.50 per pound and fell to $9 per pound at the end of the year. And I am referring to 6/4 premium solid scrap, which is the scrap that we buy. Average LME nickel cash price in December 2006 was $15.68 per pound. The nickel price peaked in May at $23.67 a pound and then it fell to $11.79 a pound in December of 2007. This volatility resulted in never before seen customer buying patterns. Lastly, we completed a number of new long-term agreements in the third and fourth quarters of last year. We expect total revenue from these agreements to be approximately $1.5 billion during the timeframe of the agreements. These agreements generally range from two years to five years. These LTAs cover our titanium and titanium alloy, nickel-based alloy, specialty alloy, grain-oriented electrical silicon steel and iron castings. LTAs indicate that long-term supply of these products remain critically important to our customers. We are working on significant LTAs for these and other projects as we report here in the first quarter. Now looking ahead to 2008 and beyond, we believe ATI is well positioned to benefit from diversified global markets in 2008 and over the next several years. The long-term position of ATI and the fundamentals of our markets are outstanding. We're optimistic about 2008. Our short-term view: the first quarter is choppy. So why do we feel this way? Let's start with the aerospace and defense markets and continue from there. We see short-term headwinds as a result of potential delays in the Boeing 787 delivery schedule. Remember, the new schedule is not precisely available. It's not a matter of if we will see strong demand from this revolutionary new plane; it's a matter of when and how strongly ATI benefits from this model as well as future composite titanium airplanes. We are pleased with our growing relationship with The Boeing Company. It is a growing relationship in titanium and value-added titanium products. It is also a growing relationship in specialty alloys as well as cutting tools. The products we supply Boeing can be used and are used on all Boeing airplane models. The commercial airplane market is very strong. Boeing booked 1430 net orders in 2007; Airbus booked 1341 net orders last year. Both have record backlogs. Some analysts in the field say it's a six-year backlog, some say it's an eight-year backlog. Either way, both companies are boosting production. Demand is also strong from the regional jet manufacturers. Next, each of these planes has two to four engines hanging on their wings. Our customers like GE Aviation, CFM International, Rolls-Royce announced record and strong orders in 2007. Bottom line: we expect all of this to translate into strong demand for our specialty metals for many years. By the way, strong demand from global markets and extended backlogs are happening while the U.S. fleet continues to age with few new airplanes on order. This is really another insurance policy, if you will, to continuing high build rates well into the future. Now focusing on our titanium growth. We have new production facilities that are scheduled to be launched in 2008. These facilities build on our foundation of unsurpassed manufacturing capabilities that give ATI the most advanced technology in our industry. This gives us the capability to manufacture the most advanced specialty metals for the next generation and future generation airframes and jet engines. In addition, the lowest cost titanium units that we can get from a reliable and qualified sourced are manufactured at our own Albany, Oregon facility. In 2008, we expect further growth in our titanium mill product shipments. We believe demand will continue to remain at a high level from the aerospace and defense market for our High Performance Metals segment titanium products. We expect titanium average selling prices in this segment to be at a lower level than in 2007, but this is primarily due to lower raw material prices and our surcharging indexes. Demand is so strong for our flat-rolled commercial titanium products from the global industrial markets, including the chemical process industry and the oil and gas industry. Sometimes titanium sales in our Flat-Rolled Products have been or are overlooked. In 2007, shipments of titanium products from this segment and ATI-produced Uniti titanium products grew nearly 25% to approximately 10.4 million pounds. With LTAs we have in hand today, which we did not have in hand in 2007, we expect to exceed this shipment level in 2008. ATI's total shipments of titanium products from our High Performance Metals and Flat-Rolled Products segments, including conversion of our Uniti titanium joint venture, totaled over 41 million pounds in 2007. We expect this total of titanium shipments to grow to approximately 50 million pounds in 2008. Now let's discuss the flexibility of our unsurpassed and fungible manufacturing capabilities. I like to use the word fungible. As a multi-metals producer with global sales teams, we have the ability to find and supply growth markets. In some cases, these are applications that are new to us. In this case, our ATI Asia and Uniti joint venture sales teams captured orders with a strong demand for titanium sheet used in plate frame and tubular heating... heat exchangers. We take some of our new titanium sponge, some of our titanium melt capabilities along with some raw material and semi-finished products from our Uniti joint venture partner and make high quality titanium sheets. We expect shipments into this market to be strong under multi-year LTAs that begin in 2008. Moving to our exotic metals division. Demand is so strong from the nuclear electrical energy market and the global chemical process industry that we are now booking orders into 2009. We restarted our idle zirconium sponge capacity in 2007, some of it, and plan to add more zirconium sponge capacity in 2008 to meet this growing demand. Our non-nuclear grade zirconium products are used in processing plants that produce chemicals used in making plastics and fertilizers. Now moving to another strong product. Demand remains very strong for our grain-oriented silicon electrical steel products. Overall, based on the LTAs that we have with several customers, we expect shipments and prices to be up in 2008. While there is some softness in the U.S. market due to the housing slowdown, global demand remained strong from the electrical energy distribution market. Also, interest in our premium light gauge products is robust as the U.S. prepares for new efficiency requirements mandated recently by the DOE. Now turning to the short term. For the first quarter, we do see some choppiness. Our caution comes from questions about the health of the U.S. economy and the near-term aerospace supply chain. At this point, we must separate these fundamentals from fear. From our viewpoint, we do not have a negative outlook for the U.S. economy. Demand for our standard grade stainless sheet products in our Flat-Rolled Products segment is improving. After 2007's inventory destocking, it appears that U.S. service centers now have their inventories in better balance. Recovery in our stainless sheet business seems to be occurring in the U.S. and in Europe. January and February production schedules have filled and we are now loading for March. In our High Performance Metals segment, demand from our OEM aerospace customers, particularly those under long-term agreement, is expected to remain at high level... at a high level in 2008 as airframe and jet engine backlogs are at record levels. Approximately 70% of our business here is under LTAs, some are take or pay, some are guaranteed share and some are market requirement contracts. On the other hand, our transaction or spot business, there is some risk in the first quarter as our non-OEM and service center customers are being cautious, largely due to questions about the 787 schedule, the U.S. economy and volatility in raw materials. In summary, we remain optimistic about 2008. We expect to continue to benefit from the global infrastructure build and rebuild. We expect aerospace and defense demand to remain at a high level. We expect demand from our commercial aerospace to increase once the uncertainties surrounding the 787 schedule and supplicant [ph] ramp up are removed. Our Flat-Rolled Products standard sheet business seems to be recovering. Inventory at distributors is relatively low. ATI's strategic capital projects are on track and we expect another year of strong cash flow. At this point, we believe the first quarter 2008 results are likely, likely, to be similar to those achieved in the fourth quarter 2007. However, we expect to have a better understanding of the potential upside for the balance of 2008 once we get beyond this first quarter. With that said, operator, we will now open up the meeting for questions. Question And Answer

Thank you. [Operator Instructions]. And your first question comes from the line of Chris Olin from Cleveland Research. Please proceed.

Good afternoon.

Hi Chris.

I want to get some clarity on the titanium market here. I guess I am going to focus on the supply side. What is your total exposure to the CP titanium market? I guess I'm wondering how much exposure these operations will have once you start to see the Asian capacity boom, and I'm wondering if that's having any kind of impact on your business in terms of too much supply coming on the marketplace?

Good question. Let me just tell you what's happening. As I mentioned in my previous comments, our assets and our capacities are fungible. So we have may be an announcement to make that will be very interesting to people on this call. We are the largest supplier of CP quality sheet in the world. Our Flat-Rolled Products division is the largest supplier of CP quality sheet in the world. We shipped last year, as I mentioned, 10.4 million pounds out of this unit and we expect that business to be further strengthened this year in new markets called plate frame heat exchanger and tubing that goes into power generators and exchangers that go into the nuclear chemical processing business and other markets. So when we look at that market today, we're seeing a growing presence of ATI in those markets. The demand is very high. And it's interesting to me that if there is so much capacity coming online, why we didn't have a problem booking LTAs for two or three years out in these markets.

Okay, thanks.

Your next question comes from the line of John Hill with Citi.

Great. Thanks for the presentation everyone. I was just wondering if we could walk through the new LTAs that were signed in the quarter. We seemed to mention a fair number of those on the call, was everything from high performance metals to exotics et cetera in some new geographies. So could you just give us some illustrative examples of new deals that were signed up in the quarter?

We'll give you some range of the market, John. I'm not sure I want to mention customers at this point in time. But, basically, we're talking about the electrical steel business. We knew that as the U.S. market was coming into some problems that it would be good to have contracts in place. We also have a capability in our business of producing the lighter gauges in this market, which is products that produce a more efficient voltage regulation. So as the household market, single phase market went down, we concentrated on those industrial applications and also the newer DOE requirements in not only the U.S. market, but around the world. We signed some contracts for supply of electrical steel that are new to us and maybe even some new accounts. And we have signed those up at higher prices and higher shares. So we like that. We have some billet customers, again, for the aerospace business and defense market, some forgers, we have some contracts that went into the airframe business. We have a new contract... I'll mention one... with Bombardier for some of their requirements. Other than that, we go into some wind energy kind of contracts for the first time on hubs and stands. We have, as I mentioned, some contracts in titanium, commercial grade titanium for plateframe heat exchangers, mostly for marine applications. And we've got some precision rolled strip kind of contracts that we've put in place that are very attractive to us for such things as parts for turbo diesels for their turbocharger application. So it's been all over the map. Interesting part is that this hasn't ended. As we ended the quarter, we're getting a lot of requests. Today, we are in negotiations for contracts in several market segments of the company today. So people... but the point I was trying to make in the earlier one, and I'll say it again is that people, as they look at the longer term and they look at... when I say longer term, talking three years kind of horizon... continue to be worried about supply and about quality supply for their products as this market rolls forward.

That's great perspective. I was just wondering if we can do a quick follow up very, very mechanical for Rich. On the retirement expense tailwind, I guess, for 2008, is that decline of $29.3 million in retirement benefit expense, is that the whole number or should we also be including the pension line from down below which adds another $30 million or so?

No, that's all [ph] number John. We talk about retirement benefit expense and that two pieces, that's pension expense, and actually, in this case in 2008, the pension expense will be an income and then it's also retirement benefit expense under our OPEB programs. That will be an expense and the net amount is a $1 million expense this year in '08 versus a $30 million expense in 2007.

But the net benefit from '07 to '08 is the 29.3?

Yes.

Pulling both pieces together.

Yes.

Thank you.

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

Hello.

Hello.

This is Karan [ph] in from [indiscernible] Research. A couple of questions in this challenging quarter for you Pat. Regarding your private plan [ph], a lot of your different plants are producing your steel, what are your operational improvement initiatives in terms of lean manufacturing, TPM, Six Sigma and how do you see those initiatives benefiting the organization?

Well, the basic initiatives run within our movement toward the Toyota Production System in what we call the ATI Business System. And reliability maintenance has been a major move for us where we have more of a change in our organization, a change in our approach to a reliability centered maintenance, which works on the effectiveness as well as the uptime and yield of our production centers. We've had some tremendous productivity improvements on the same equipment. A good example I can give you is that I think the numbers today are that we are probably up 20% with existing equipment in our electrical steel business. We are up in our melting furnaces down in the Allvac operation. So we continue to move on the premise that people connect the system that our workers are the experts in the manufacturing side of the business, our process and engineers are experts in the process. Put all those people together, put some capital behind them and working together. We are producing some very nice results in productivity across the company.

And a follow up to that question. What metrics are you guys using to manage the manufacturing processes? A lot of companies similar to yours are using like OE and RONA. How important are those types of metrics to you? And as we go forward for the remainder of the year, what do you see as the challenges to improve on throughput and costs within your plants?

Well, we are looking at, again, another $100 million cost re program [ph] on the aggregate. And we look at the metrics of yield, we look at the metrics, first of all, from the quality side, look at our yield, we look at our returns, we look at the effective OEE measurements from the production, but we are also looking at production bottlenecks where we debottleneck on the basis of a flow path rather than PC by PC. So we have different looks around that. We have a new union contract that was put in place and continues in place under the recently early signed agreement and we look to utilize our people better and we have areas where we are seeing some attrition... planned attrition and the rest of the workforce stepping up to what we have in the more flexible work assignments. So we look at productivity, we look at yield, we look at our operational excellence, we'll just call it that. And then we look at flow paths in terms of their total productivity. And we have moved into practices that simplify flow paths that align products to a simplified direct flow path, working on the bottleneck rather than the flexibility of moving those across the systems. We found that to be very effective too.

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

Yes, just for the record guys, that was not me; I don't know who that was.

Hi Gautam.

No problem. I guess one of the questions I have is you had very strong margins in the High Performance segment this quarter, yet titanium pricing ASPs were down, shipments weren't up that much sequentially. Sort of what should we expect heading into 2008 in terms of High Performance margins given the lower ASPs and what do you expect kind of the ASPs to shake out at on the titanium side?

Well we don't report exactly what our titanium margins are, but as a segment --

Fair enough.

We put it all together. And I think we are seeing some short-term volume issues as the 787 program gets reshuffled for the third time. And so we are seeing that and we are also seeing, from a spot market standpoint, a pretty competitive market on that 30% of our volume that we booked. Our target remains to stay north of 30%, 30% or north in total in the High Performance area. We had a very good high shipping quarter in our exotic metals, which had some impact, but not a huge impact with some impact in the fourth quarter. And we see those margins continuing to be very, very strong. We see our margins basically in our long-term agreements remain fairly stable. And then we see more a competitive environment as the stability of supply at fairly high levels meets demand, at least until the 787 program launches and ramps. Then I think we'll see some higher margins as those... that other 30% of the business starts to get tighter than what it is today.

I guess what I was trying to get at it is despite those market conditions which you endured in the fourth quarter, you still had very strong margins at High Performance. So to the extent that things don't get appreciably worse, should we look at north of 35% as reasonable entering 2008? Or because there was a big LIFO adjustment that you trued up in one quarter, we should actually think if the true margins, if you will, in Q4 as closer to the 30% ex the LIFO impact, and assuming that market conditions don't change much from Q4 to Q1, we should be modeling Q1 probably closer to the 30% range?

I think that's a good. We've said 30, 30% plus. I don't know if we want to say more than that. We had margins that were certainly... we still had the problems of the higher cost material from a FIFO standpoint and we did get relief on that with the LIFO reserves coming back in. So that quarter, when you balance everything out, I think is a pretty true quarter. I think as we move into the fourth quarter, what I had said earlier is that we'll see some margin pressure on the 30% of our business that's not under contract. So that may push them down from the 36% to a lower number. I don't think you should go higher than that. But I would say that the 30% margins plus is what we're targeting. Rich, do you want to add anything to that?

No, I... Gautam, I think that... I think your point about the fourth quarter and the LIFO impact, especially in the High Performance Metals segment in the fourth quarter, because it is a true up to year end, there probably was more of a LIFO benefit that more than offset the FIFO margin compression there. Now when you look at, especially in the titanium side, the manufacturing process we have given the product mix is long. And I think we're still likely to see some FIFO margin compression in Q1 as we work through the higher cost raw material that's being matched up against a much lower index. And we would not expect at this point that to be offset by any LIFO benefit in Q1. So I think it's a combination of many things including in Q1 our expectation at this point that volumes on the spot business side might be a little lower because of the ongoing caution in the supply chain because of the issues that Pat talked about regarding 787.

Okay. And so, just to conclude on that point, we basically have in Q1 ASPs working against us, we have a little bit lighter volume because there is softness in the spot market and you have... you don't have the one quarter true up of the LIFO adjustment relative to your expectations. And so it would not be absurd to go to closer to 30% versus 35?

Yes, I would agree with that, and then just add one other thing when we see a stronger Flat-Rolled side.

Right. And that's the second part of the question and then I'll kick it to other people. But you had guided previously directionally 15 to 20% in Flat-Rolled over time and we are at 8.5% in Q4. Kind of what's the shape of that recovery and do you get to 15% by Q2 or when do we see that again?

Yes, I think that the year was 17.5, 17.4 for the total year. And I think as we get to any kind of a normal level in the standard side of the business, we are back in that 15% range. 15 and higher, yes.

15 and higher. So maybe we'd get to 15 over the course of the year on average, but probably not much beyond that given kind of our visibility today.

This thing is going to move up from the fourth quarter level. So we don't... we won't expect to have our best quarter of the year in the first quarter. So it's going to ramp up, but better than what we saw in the fourth quarter. Averaging, I won't change that number, I think for the year we averaged 15 to 20%.

Okay, thank you very much guys. I appreciate it.

Thank you.

Your next question comes from the line of Tony Rizzuto from Bear Stearns.

Thank you very much. Hi Pat and everyone.

Hi Tony.

Just a couple of questions here too. My margin questions have been asked, and thank you for that insight. Did I hear you correctly? Did I hear you say the 50 million pounds of the titanium product volume in '08 you are kind of holding to that, that was kind of in line with your previous guidance? Is that what I heard? Did I hear it correctly?

You did. It's still with the High Performance side plus growing Flat-Rolled side. We had the 41... actually, 41.1 last year and we're looking for 50 million pounds this year. It's in the three categories: High Performance, which is aerospace and defense; our commercial products from direct business and our Flat-Rolled side and our Uniti joint venture, direct and conversion business there.

Okay. So in total about --

50. Yes, 50 --

20% roughly. And then the other question was in regards to your free cash flow, and I was very happy to see you buy back some stock in the quarter, should we assume when you look at other uses of that free cash flow, given where your stock is now, should we assume that that's probably a pretty attractive area for that excess cash, if you will? Or should we also maybe think about with equity valuations coming down and your strong balance sheet, might acquisitions move up a little bit in terms of that relative attractiveness?

We don't... we certainly don't remove anything from the horizon. I think that we have a balanced approach to our cash with some aggressive capital program for organic growth that really will position this company as we move forward with the capabilities; not just capacities, capabilities for the sizes and products that we need to have to compete in this world as we go forward. We're really in a great position to put these assets in place and we're doing that with the majority of the cash this year. We also have the opportunity with... certainly, with what's in the market today, to be a very value-based buyer in buying our stock back. So we have those two things. And of course when we look at valuations across and outside of the company with this strong balance sheet, it opens up the door for us to do things if in fact they look like they are the right strategic move for the company at the right time.

All right, Pat. And my first, obviously, question wasn't really a question, but if I could ask one more maybe just to pursue Engineered Products a little bit. It was disappointing in our eyes and I'm sure in your eyes too. But when should we expect that the ramp up, the combined ramp up of... you've got good end market demand, it seems like, but the raw material side has continued to be a bugaboo. How do you see that proceeding as we move into 2008 here?

I feel like a broken record on this one, but it's this quarter. We should see that business back in shape and back into a normal profitability this quarter.

Okay. By normal profitability, what do you mean by that? If you could maybe use a similar vernacular to the way you described for us the margins?

We are looking about a 12 to 15% business. That's what we want there.

Okay. Thanks very much, Pat.

Thank you, Tony.

Your next question comes from the line of Michael Gambardella from JP Morgan.

Yes, good afternoon Pat and Rich.

Hi Mike.

Hi Mike.

Two questions. One, when you gave your guidance for the first quarter being basically flat with the fourth quarter, are you referring to EPS of $1.45?

We are referring to EPS, yes.

And what is your underlying assumption then for LIFO, the total LIFO in that guidance for the first quarter?

Zero.

Okay. So you had a fairly sizable benefit in the fourth quarter and you are assuming that the EPS is still going to stay the same without that benefit in the first quarter.

Exactly. Remember, in the fourth quarter... third quarter and the fourth quarter, the reason I tried to point out these dramatic swings in our starting raw materials is that in our business, as we are moving some of these longer lead time items through, the third quarter was dramatically affected by nickel on the Flat-Rolled side and the fourth quarter was dramatically affected by titanium scrap prices in the High Performance side. Fortunately, under the accounting that we had in LIFO accounting, we have the ability to mitigate that with the LIFO reserves. And as Rich pointed out, I think we've basically offset all of that in the fourth quarter. So Mike, your point that the... if you want to call it this way that the first quarter without LIFO was a much cleaner quarter to look at margins and earnings. We are saying it's similar to the fourth quarter overall, but maybe one that you can get a fairly better viewpoint of an improving margin base, yes.

The LIFO in the fourth quarter was about $73.5 million?

Right.

And then, so if you tax effect that, you are looking on an EPS basis you are about $0.46?

Yes, that's right Mike.

So you really look... pre-LIFO, you are looking at $0.99 in the fourth going to somewhere around a $1.45 on an equivalent basis in the first. So even with all this noise going on and concerns and everything, you are still looking at a pretty substantial up quarter sequentially from fourth to first?

Yes. And we get rid of the... we have some lagging bufferstop... bufferstock type material that has to get out of the way. But we are basically saying that the negative effect of higher metal prices and higher in-process inventories and lower selling prices due to the surchargers are now taken care of and the margins that we see are margins that we have built into these businesses.

Okay.

And then if you want to take the LIFO completely out of the equation, what your... you're math is right.

All right. And then last question. What is your lockout period for doing your share buyback program? When can you next go into the market and buy shares?

Yes, Mike, this is Rich. Our view is that it's just today.

It's just today.

Right.

So tomorrow, you could be in buying shares?

We could.

So, I mean, not to put words into your mouth, but with the stock down almost 50% since October, are you viewing the share buyback as one of your primary near-term uses of cash?

Well, as Pat said, we have a balanced view of cash usage, but we bought 675,000 shares back in the fourth quarter at an average price of $90.72. And we thought that that was a good buy, so you can make your own conclusion.

All right, Rich. Thank you very much.

Okay.

Your next question comes from the line of Robert LaGaipa from Oppenheimer. Bob LaGaipa - Oppenheimer & Co.: Hi, good afternoon.

Hi Bob. Bob LaGaipa - Oppenheimer & Co.: I just wanted to follow up on the last question of the sequential change in terms of the EPS about being the same. What other puts and takes should we take from that? I mean you mentioned the High Performance, you mentioned Flat-Rolled getting better, you are going to get the benefit of the lower retirement expense as well, which is obviously going to help out. I mean what type of tax rate are you using in your forecast for 2008?

Bob, at this point, we're using 36.5% as the normalized tax rate. Bob LaGaipa - Oppenheimer & Co.: 36.5%. Now that's actually... that's a little bit higher than what you've been running at the last couple of quarters. I mean is that just assuming that you are not going to get some of these tax benefits and what's the likelihood of additional tax benefits?

Well, we don't have... most of the tax benefits that we realized in 2007 were the reversal of various valuation allowances that we had on state tax NOL credit carryforwards because of changed circumstances that we... under the application of GAAP. We have some opportunity perhaps for some items in 2008, but that would be based upon a specific facts and circumstances evaluation every quarter. So I mean at this point, the only thing that we are thinking of is a more normalized tax rate of 36.5%.

You don't think it will be higher?

No... well, I don't think it will be higher. Bob LaGaipa - Oppenheimer & Co.: Okay, terrific. And last question if I could, just on the volumes in the Flat-Rolled business. Obviously, they have been coming down for most of the year, kicked back up here. You mentioned the inventory seemed to be under control, or the order activity has picked up in the last several weeks. What kind of volumes are you expecting in the first quarter and what kind of ramp can we assume for the remainder of the year?

Well, what we've said is that our targeted volumes are between... around 350,000 tons and we expect to meet that rate in the first quarter. Bob LaGaipa - Oppenheimer & Co.: Okay, terrific. Thanks very much.

And your next question comes from the line of Lloyd Carroll from Davenport & Company.

Circling back to Flat-Rolled, if I look at profitability on an operating profit per pound, which I think is better than percent margin, there was a $0.30 drop from Q3 to Q4. Was there anything unusual in terms of LIFO that would account for a very depressed number in Q4?

Let Rich take that, go ahead.

Not really, Lloyd. If you look at the Q3 in the Flat-Rolled Products segment, we had an $18 million benefit and in Q4, we had a $14 million benefit. I think the real issue was the significantly lower operating volume that we had in the second half of the third quarter that translated into higher per unit cost of much of the product that we shipped in the fourth quarter.

Okay. So, as volume bounces back to service centers and other commodity customers, then unit margins, however you measure it, should be rebounding on some schedule. Great. Okay, thank you.

Thanks Lloyd.

And your next question comes from the line of Sal Tharani from Goldman Sachs.

Good afternoon Pat.

Good afternoon.

Just one question on electrical steel, if you can give us some color on the electrical steel you make. Is it all grain-oriented or do you make both grain non-oriented, grain-oriented, what's the percentage?

We make all grain-oriented electrical steel. All of ours is grain-oriented. It's a product that we've made for many years, it's a high quality product. We specialized in some of the lighter gauges that are shipped in that product that give better voltage regulation. And we have a worldwide market today. We are shipping one out of four pounds outside the U.S., and we are shipping 90% of our products under LTAs that have been signed and are locked.

Are these LTAs repriced every year?

They're repriced this year and they're take or pay.

I see. And do you... did you get... I mean, one of your competitors yesterday mentioned that they got a 20% price increase, more than 20%. Was this similar in your case?

Well we don't usually talk about that, but we would think that's a conservative price increase.

And what kind of volume do you produce on electrical steel?

120,000 tons.

And that's in your high value-added Flat-Rolled?

It is in our higher value-added schedule now, yes. Part of the high value in Flat-Rolled, yes.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Luke Folta from Longbow Research.

Hey, good afternoon.

Hi Luke.

Hi. I wanted to drill a little bit more on the... maybe can you talk about what you're seeing from your customers in the commercial aerospace supply chain regarding their inventory levels and what you've been seeing as far as order rates are concerned over the last couple of weeks?

I would say this that the order levels at the direct customers seem to be in line with their production and their increasing build rates moving into 2008, up 5 to 10% on existing models. I think what we are seeing is people buying for the needs that they have in the general distribution business, in the specialty side of this. I think there is caution from that part of the business in terms of how fast do you put in materials. They are putting in materials that they need, but are cautious about building inventories for the higher build rates. Our own feeling is that the 787 program and its qualification will debottleneck that whole side of the business. So today, we operate with about 70% under contract and 30% from the market that you are asking us. About the best description I get today is that the order entry is busier and more active and there is a lot bubbling up, whatever that means.

Okay. And just on a side issue, since last time you had your call, one of your competitors, TIMET, decided not to go ahead with their sponge capacity expansion. And I just was wondering if you could maybe comment on what you think the implications are there for the industry and kind of your overall take on that decision.

Well, at the same time, that corresponded to a contract with an outside supplier from Japan. And so I think that was probably a move that was calculated by them as to make or buy, and they decided to buy at the best outlet. One of the things that we said all along is that building a state-of-the-art new sponge plant is not an easy undertaking in the United States with air permits, building permits, the technology of doing this and supply and engineering expertise. So all those things combined, you will have to TIMET what their decision was. But our plant is up and the buildings are coming up, the engineering is on track. It's been a... it's a big project, but we are very, very pleased and proud of the people that are running it. It's really quite a site out in Rowley, Utah right now. And we expect that one to be just as good as bringing up our Albany, Oregon plant, which is up and humming very, very well for us. As I said, it's the best source of metal units that we can find today at the best value, at the lowest cost to make it ourselves.

You said you are at 16 million pounds annual production now?

We annualized last year at 16 million pounds. We expect that will be 20 million pounds in 2008.

Great. Thank you very much.

Thank you.

[Operator Instructions]. And your next question comes from the line of Timothy Hayes. Timothy Hayes - Davenport & Co. of Virginia, Inc.: Hi, good afternoon.

Good afternoon Timothy. Timothy Hayes - Davenport & Co. of Virginia, Inc.: Just to clarify on the LIFO, I know in Q4, there can true ups. Can you quantify for the two segments what, if any, true-ups occurred in those LIFO gains?

Well the easier one is the Flat-Rolled Products segment, because if you go back and look and see where we were booked on LIFO in each segment as of the end of the third quarter, that would have suggested that we would have had a $5 million LIFO benefit in Q4 and in... or a provision, I'm sorry, in Flat-Rolled Products, and we had a $14 million benefit. So that was a $19 million swing there. And most of that had to do with liquidation of inventory as we focused on quite frankly getting our inventory quantities better in line. The High Performance Metals segment was probably the bigger benefit there. We were booked at roughly a $35 million benefit through the third quarter. So that would have suggested that we would have had roughly an $11 million benefit in the fourth quarter and instead we had a $61 million benefit. So there was a $50 million benefit in the fourth quarter, largely due to a continued, rapid decline in the cost of titanium scrap from in the neighborhood of 12 to $13 a pound in the third quarter down to around $9 a pound in the fourth quarter. Timothy Hayes - Davenport & Co. of Virginia, Inc.: Okay. So then just make sure I've got the numbers right, so a true up of $19 million for Flat-Rolled and $50 million for High Performance?

Right. Timothy Hayes - Davenport & Co. of Virginia, Inc.: Okay, thank you.

Okay.

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

Hello.

Can you hear me?

Yes, we can.

Okay, terrific. Just to follow up on your titanium assumptions in '08. You mentioned 50 million pounds. Kind of what are your assumptions with respect to the 87 program? When does it... does it pull the same amount of metal as you're anticipating on the Q3 call? And secondly, kind of how does that Boeing agreement work so that if they... is there kind of a minimum they have to buy, a maximum and then a level at which if they order more in a given period, whether it be a month, a quarter, or what have you, the profitability improves on those incremental units? And so kind of what's the sensitivity around a delay, a further delay?

Well we have a minimum take or pay quantity in this contract. We have a nominal targeted quantity and then we have a search quantity. What you're referring to in the search quantity is that that has some pricing formula to it that may be different than the guaranteed or nominal plus 25%. We have some ranges there. So when we look at that contract, I would just say this that in 2008, remember, again, all this metal that we are supplying the Boeing corporation is fungible to Boeing into all of their airplane programs. They can use this titanium from the 737 through the 747. So the 777 to us would be... they're buying for the ramp up of that program, but they're also... this metal at least is fungible across their system. Our projections and understanding for Boeing is that we will have a better year with Boeing in 2008 than we had in 2007. And so once we get to that point in time, I would say that until this, and this is our view of life from ATI, until this program powers on, until it gets up for its first test flight and we have a more precise schedule as to the build rates and when it ramps, the surge that we're looking for is going to occur subsequent to those events.

Okay. I guess what I'm wondering is Rich had mentioned in prior calls that you're looking for a 25% uptick in shipments '08 and '09 mill product titanium. Right now, you're talking a little under 25%, going from 41 to 50. Presumably, there is uncertainty on the 87 that's sort of driving the variability there. And it sounds like the mix is shifting more to industrial markets. The net effect of all this, I'm wondering is, is there a risk that if indeed the 87 is delayed, call it, six weeks more, the fact that you're not in that surge bonus round, or what have you, of the shipments where profitability presumably is better that High Performance margins kind of stay at that 30% throughout the year as opposed to, what's implied at 32.5 or so?

I would say this. I would say we have a bigger risk on margins staying in the range that you just described from the 30% of our business that is spot business and is competitive in the marketplace without the surge in the airframe programs. I think our margins under our LTAs are pretty well locked in for us and we expect to see those. The competitive part of the business comes in the serendipitous spot business, and now [ph] those markets, defense markets, medical markets and general distribution for titanium products, where you don't have the... where you have a very balanced situation be it at high levels between demand and supply right now. So that's where there is more price competition. And I think that turns the corner when we see what I'll call a surge in orders from the ramp up of these new airplane programs, both the 380 and the 787.

Okay. And lastly, could you guide us on what you think ASPs are going to average out at on titanium mill next year, '08?

I'd rather not guide on that. Thank you.

Thanks a lot guys.

Thank you.

I would now like to turn the call back over to Mr. Hassey for closing remarks.

Well, we want to thank everyone for joining us today. It's an interesting market to be in and it's some great questions and the overall picture for us is just outstanding. And we have some optimism for what we'll see at the end of the first quarter. The first quarter looks solid as to what we have guided to here. So we want to thank you all for listening and joining us today. And as always, any news releases may be obtained by e-mail and are available to our website. Thanks very much.

Thank you. That concludes our conference call today.

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