ATI Inc. (ATI) Q2 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Second Quarter 2008 Allegheny Technologies Conference Call. My name is Akiya and I'll be your operator for today. At this time all participants are in a listen-only mode. We'll conduct a question and answer session towards the end of the 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 and Corporate Communications. Please proceed sir.

Thank you Akiya. Good afternoon and welcome Allegheny Technologies conference call for the second quarter 2008. 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 considerate of others on the line. Please note that all forward-looking statements made this afternoon are subject to various assumptions and caveat 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. Second quarter demonstrates our ability to deliver good returns during an uncertain time. ATI is benefiting from our ongoing transformation, our product, market and geographic diversification. Our key financial metrics represent outstanding financial performance for any industrial company. Return on capital employed was over 24%, return on stockholders equity was 30% and net debt to total capitalization was 8.1%. We had $310 million of cash on hand at the end of the second quarter after we invested over $500 million in the business during the first half of 2008. This includes a $271 million increase to managed working capital mostly due to the recovery in the Flat-Rolled Products business and our need to build inventory for third quarter planned equipment outages in the Flat-Rolled Products segment. $257 million was spent on new capital investment. In addition we spent approximately $88 million to repurchase over 1.3 million shares of ATI stock bringing the total share, repurchase plan to approximately 2 million shares in three quarters. As we have stated we have a balanced view of our cash... use of cash. Our primary focus continues to be investing for sustainable, long-term profitable growth while maintaining a strong balance sheet. We are also focused on creating value for our shareholders through our dividend policy and our share repurchase program. Gross cost reductions totaled $69 million for the first half as we remained focused on reducing cost to systematically improving operating efficiencies along with benefiting from our new equipment. We are running ahead of our $100 million cost reduction goal for the year. Segment operating profit was a solid 18.7% of second quarter revenues. In the high performance metal segment, operating profit improved to 29.9% of sales, close to achieving our 30 plus target. Demand for our premium titanium alloys and nickel based super alloys and specialty alloys was good from our jet engine customers. Our customers reported OEM and spare parts demand remains good. Demand was steady for our air frame titanium products. Shipments for our titanium and titanium mill products in this segment declined by 1%, during the second quarter of 2008 compared to the same period last year. However year-to-date shipments are up 11%. In our exotic alloys business, we had another record quarter. Shipments were driven by strong demand from the chemical process industry for plants that produce the Sialic acid [ph] and urea used for fertilizers. We expect demand in this business to remain strong, as we're currently operating at near capacity and booking business well into 2010. We're adding new zirconium sponge capacity in anticipation of further increasing demand from the chemical process industry and nuclear electricity, energy markets going forward. In the Flat-Rolled Products segment, operating profit was 13.3% of sales. We continue to benefit from the ongoing transformation of this segment. Product, market, and geographic diversification have greatly improved. In addition, this segment is benefiting from approximately $400 million in gross cost reduction since 2003. Demand was strong from this segment's largest markets. Chemical process, oil and gas and electrical energy which accounted for 54% of the segment's first half sales. Demand is strong for our grain-oriented electrical steel from the global electrical energy distribution market. We expect demand to be strong for this product for at least the next several years. Our challenge is to continue to de-bottleneck the operation and to ship more of the higher value product. We have significantly grown our participation in the global industrial titanium market. This product is used primarily in the chemical process industry, electrical energy, desalinization, and transportation markets. Last year we targeted industrial titanium for growth as a way of moving our titanium units to areas of market strength, that strategy is working. Total ATI titanium mill product shipments grew to nearly 24 million pounds, that's 19% growth during the first six month of 2008 compared to the same period last year. Demand for our specialty sheet and plate products was also strong demonstrating continuous strength in the global infrastructure build and modernization. Shipments of our standard stainless sheet and plate products improved in the second quarter in a flat to declining market. U.S. stainless service center inventories remained low and stable during the second quarter according to industry data. Shipments of our AL201 high performance family of lean nickel alloys continues to grow. The switch is on continuous. Many of our customers realize no matter the price of nickel 201HP offers savings compared to the conventional 304 standard grades. Our shipments to Europe improved significantly. Demand was good from key capital markets particularly from stainless tube and pipe manufacturers. Our engineered products segment operating profit in the second quarter was 9% of sales. This segment is now getting its performance back on track. The product mix in our tungsten products business is improving and sales are growing in the aerospace and defense, electrical energy, and mining markets. We also expect to see improved sales in the oil and gas market, beginning in the second half of 2008. Also our new casting shop in Alpena, Michigan is expected to complete qualifications this month for wind energy production, and ramp up in the second half of this year. Demand for our castings is robust in the wind energy applications. We continue our capital investments to give a state of the art manufacturing capabilities. These investments enable sustainable long-term profitable growth, and build new capabilities for our diversified products in diversified global markets. In June, we commissioned our upgraded specialty and titanium plate facility in Pennsylvania. This facility gives us much needed capacity and capabilities. We continue to transform our plate business from its traditional standard stainless plus some specialty products, to primarily a specialty plate business with some standard stainless. The new capacity and capabilities allow us to move more strongly into the aerospace, defense, armor, chemical processing, oil and gas, and electrical energy markets. We can now go wider and flatter with additional alloys to greatly enhance this product line. Primarily due to the announced push outs in Boeing 787 ramp up schedule, we now intend to begin initial production at our premium titanium sponge facility in Utah by the end of the first quarter 2009. This is about three months later than our previous plans. Our titanium and super alloy forging facility in North Carolina remains on schedule, and is expected to begin operations in the third quarter 2009. In addition, the expansion of our precision-rolled strip joint venture facility in China is expected to be fully operational in the first quarter 2009. This expansion is targeted at the growing demand from electronics, communications, and automotive parts in Asia. Updating our views on the markets, aerospace and defense and the infrastructure markets namely chemical processing, oil and gas, electrical energy, plus the medical market, market have been driving our performance. We believe these markets are in a period of sustained long-term growth. These markets accounted for nearly 70% of sales in the first half of 2008. So far in 2008, we have signed long-term agreements in these same markets that have the potential to deliver over $1.3 billion in revenue to ATI over the life of the long-term arrangements which is generally three to five years and we are working on several additional long-term arrangements, as we speak. The aerospace and defense, accounted for 27% of first half sales down slightly from last year due to declines in average selling prices. We attended last week's Farnborough Air Show, Boeing and Airbus announced over 450 orders, adding to an already record backlog. Bombardier announced a new fuel efficient original jet. Three new fuel efficient engine development projects were discussed. The GE snackmerlepax [ph], the patent gear turbo fan and the Rolls Royce open rotor concept could be very good for our premium titanium and nickel-based alloys. During the air show, we introduced ATI Aerospace, our market sector team. This ATI team has the resources and capabilities to assist our customers in dealing with the mission critical metallics, manufacturing, and certainty of supply challenges they face and providing more fuel efficient aircraft. Traditionally, we have provided this market with our titanium alloys and nickel-based super alloys. Many of these same customers also use large amounts of high strength stainless and tungsten heavy alloys, which we also produce. In addition, because we have access to our metallurgist, our cutting tool business has developed expertise in difficult to machine metals such as titanium and nickel alloys. These are products where there is no margin for error and where ATI can excel and differentiate through our product technology. During the air show, we had a lot of meetings, lots of activities and lots of interest. The new market sector team strategy is off to a great start. We think this market sector team can provide ongoing differentiation and growth to ATI. In June, we introduced the ATI Defense to the global industry at the Euro Statutory Trade Event in Paris. ATI defense focuses on ATI's assets and capabilities on non-aerospace defense applications, such as armor for land based vehicles and ships. Customer interest is strong. Inquiries are growing rapidly and we have booked orders for our titanium and specialty armor products. During the second quarter, we introduced a new product to this market called ATI 500-MIL, a high-hardened steel for armor applications. We are truly encouraged by the prospects for this new market for ATI. The chemical process, oil and gas industry accounted for 24% of our first half sales. This is the largest market for our exotic alloys and for our flat-rolled products business. Demand remains strong for our products for such things as acetic acid, urea used for fertilizers, sulfuric acid used in mining, producing fertilizers and for oil refining. This market is being driven by global growth to make a better world and feed the growing population. The oil and gas market is strong and is getting stronger. During the second quarter we signed two important long-term arrangements. We signed a three year agreement for sales for our stainless and duplex alloys used in flexible supply lines in off shore oil and gas applications, primarily in Brazil and Europe. We signed a seven year agreement for sales of our Tungsten products for down hole drilling applications. In addition as part of this LTA, we have a technology development agreement to create a better drilling system that lasts longer on the whole. We're really excited about the prospects for this new technology. Rolling out the ATI oil and gas sector team next month at the Off Shore Northern Seas Conference being held at Norway. We expect this team to receive the same reception as we have seen in the aerospace and defense markets, due to our diversified product offerings. Lack of energy accounted for 15% in first half sales. We have already discussed the strong market conditions and extended prospects for our grain-oriented electrical steel. We continue to add long-term arrangements for this product line, extending out four to five years. Current demand is also strong for conventional power generation, projects that is called Natural Gas. We believe, we are in the beginning of a nuclear renaissance and we see increasing inquiries from this market. We also received orders for nuclear waste applications. Turning to alternative energy sources, demand for our castings for wind energy applications is also strong. We should benefit from our new Alpine and Michigan facility, in the second half of this year as we ramp up and also enter the first stage machining markets for these products. We are becoming increasingly convinced that solar energy could be a big new market for a stainless plate and procedural strip products. A final comment on our markets, direct international sales were 27% of ATI sales during the first half. Strong demand continues. For example ATI Asia set a new order entry record for the first six months of 2008. This demonstrates what we mean by global infrastructure growth and our product market and geographic diversification. Here are some examples of key orders; Titanium, for a nuclear power plant in India, industrial zirconium for Chinese fabricators, titanium for new power plants in the Middle East, duplex alloy plat for mining refinery in Australia. All these are global infrastructure projects where economies continue to grow at double digits. Aerospace and defense and infrastructure continue to drive our results and we believe these markets are in a period of long term growth. Our strategy is to deliver earnings stability and growth as we move through the extended cycle. Growth and demand for commercial aerospace is slowing as a supply chain adapts to revised schedules for the new air plane program. Air plane backlogs are at a record level and growing. We are taking actions to grow ATI's overall presence in this market through the introduction of ATI Aerospace and ATI Defense market sector teams. Demand from the global infrastructure markets is strong and we expect this trend to continue. To grow our presence in the oil and gas market, we are introducing the ATI Oil and Gas market sector team next month. We continue to see our new markets and new applications for our uniquely diversified product offerings. We're seeking out these applications. The world is a big place. We have good coverage through our internationally located selling arms. ATI Asia, ATI Europe, and our joint venture in China with Baosteel and our unity titanium joint venture with VSMPO of Esma. Looking forward in the near term, we expect the normal third quarter seasonal slow down. We believe though we're well positioned to continue to achieve good performance in this uncertain U.S. economy due to our product and market diversification and our global reach. At this point, we expect full earnings 2008 to be in the range of $5.80 to $6.10 per share. This will be the second best year in ATI's history. We expect return on capital to range from 20% to 21% and return on stockholder's equity to range from 24% to 25%. We also expect strong cash flow in the second quarter of the year. With that kind of update and those kind of descriptions of the business Dan, I think we will open the meeting for questions.

Operator may we have the first question please. Question And Answer

Sure. [Operator Instructions]. And your first question comes from the line of Michael Gambardella. Please proceed, sir.

You gave for the full year the $5.80 to $6.10, what's your assumption for just the back half of the year on the LIFO for the company?

It is just an equalization of what we've taken so far Mike. We... as you know we have project here in numbers and what we've now taken in the first half of the year, we had a LIFO pick up and high performance. We had a $16 million hit in LIFO on the flat-rolled side, due to everything except nickel. When you put those two together, it's about $3.5 million net for this quarter, but when you are going forward if that was 16 million, you can start to figure out numbers. Rich do you want to comment on that.

Yes, now Mike it would where we expect the full year to be is above $9 million in total. So $4.5 million in the first half and $4.5 million in the second half. That's based also... obviously our view and assumptions today, of all the drivers of LIFO and all the various market basket of raw materials that we buy.

Okay.

Mike I will answer the question, not a big impact.

Okay, great. Thank you.

Thank you.

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

Thanks and good afternoon everyone.

Hi John.

Just wondering if we could revisit the subject of commodity seamless. In the past the company has stated that it's focused on a target of roughly £700 million this year to essentially support the margin structure across the rest of the product line. It looks like we're kind of on track. Is that still a good target, a good metric and do you feel we can still hit that?

John, it is a good target and it is a good metric, if you back up. And just coming back to a little bit of LIFO, if you look at that quarter at 13.3%, if you took the LIFO out of that quarter, we were right at something over 15% on our margins to sales. So, when we look at that and we look at the balance that we're currently achieving between electrical steel plate, precision rolled-strip, our nickel based alloys, and our standard alloys, we're really pretty much on track to do what we said we would do. One of the things people miss in this whole transformation of this business is that we've taken $400 million of gross cost reduction out of that business. If you consider that, maybe half of those gross cost reductions were absorbed through higher cost over the last four years. That's $200 million or about $50 million a quarter that wasn't there previously. So that's how we have come to this basis that ₤350 million of ₤700 million is going to be something that we need get. Now, when we look at that whole market together, we've been achieving these volumes in a market that is flat to declining. And part of the reason for that now on standard sheet is that about 25% of that market is now our 201 high performance materials. Secondly, we have reaches into markets outside the United States, and thirdly our products performed very well in the tube and pipe markets for project work. So, as we look forward, we continued to believe that that's the right direction for us. Those are the right kind of quantities and we will make those kind of goals.

Great perspective. And then, as a follow-up, there is obviously being concerned about Boeing titanium volumes, let's say out in 2009 or 2010 located. Are they going to take their volumes this year but doesn't that create an over hang in the supply chain later. If we redirect these titanium units into the Unity JV focusing on the chemical process markets, would those margins on those titanium's be higher, lower or about the same margin as what we see on the Boeing contract business?

I think they are slightly lower on the average but there is portions of that market that are just as good as the aerospace business. We actually started that strategy in 2007 knowing after this first slide of the Boeing program that we were going to need to look to where the strength in the market was. So, with our Unity joint venture with VSMPO and the assets we have in place, we are very well placed to grow in those markets and offset the aerospace tonnage losses that we had anticipated. The question is how well are we going to do in the profitability side? We like that market and we like the armor market. And we like the defense of land-based vehicles a lot. So, we're looking at those kind of places to put material where we can use our expertise on our technology and deliver value.

Great answer, great answer and great work protecting American Forces too. Thank you.

Thanks.

Your next question is from the line of Tim Hayes of Davenport & Company. Please proceed. Timothy Hayes - Davenport & Company: Hey, good afternoon.

Hi Tim. Timothy Hayes - Davenport & Company: Questions on the titanium side. I was just a little surprised with the sequential improvement in the titanium realizations. Could you elaborate on what caused that to turn higher in Q2?

I'm sure it's mixed. There hasn't been a lot of great news on pricing any place. So as we looked at the product mix that we're developing, of course, our plan is to always move towards the more value-added products. And as we look at that, I guess you are saying that you anticipated our average revenues to be little lower than what they are today. Am I interpreting that right? Timothy Hayes - Davenport & Company: That's correct.

I would say that when we're talking about freight, and we're talking about products that are further down the value chain, where we can actually realize better margins. Timothy Hayes - Davenport & Company: Okay. And then, your previous guidance for titanium shipments for '08 was £50 million any update to that? And, are you in a position to put forth anything for '09?

Let me tell you, £50 million was approximate, and that's was our goal. We are at an annualized rate of £48 million. So I'm going to predict it will be between £48 million and £50 million. How is that? Timothy Hayes - Davenport & Company: Good. Anything... any thoughts on '09?

I think we're going to have to get close to where we are. I see a lot of opportunities for us. Like I said earlier, we're looking at the armor business. We're looking at more of the industrial markets. We think that the infrastructure builds continues. I mean, you go back and we've had our absolutely best six months in our history, in China. And all that is still due to this rapid growth there. I mean the second quarter, I think in China was over 10%. Compounded annual growth was something like 14% or 15% last year. You add those two together, the markets are 25% higher this year than last year in these kind of markets that use raw materials. So, it's our intention with our global region diversification of products, and the mix that we have and our relationships with these long-term customers that as they grow, we're going to grow. So, our hope is and our anticipation is that yes, we can grow into these markets and achieve what we need to do. Timothy Hayes - Davenport & Company: And last and real quick, your guidance... your EPS guidance for '08 is that with or without tax benefit?

That's with the tax benefit. Timothy Hayes - Davenport & Company: Okay.Thank you.

Thanks Tim.

Your next question is from the line of David Lipschitz of Merrill Lynch. Please proceed.

Hey guys.

Hey David.

Question, just let me make sure I heard you correctly. Did you say something about 15% for the flat-rolled business for the second half, or is that just with the LIFO economy?

I just said that the second quarter, if you take the LIFO out of it and just look at it as a pure quarter without material fluctuations, in either direction it was 15.3% of sales. And so, when we look at the mix that we have and the cost reductions we have Dave, and the question was around that 350,000 tons, is that strategy working? The answer to that is that, even in these tough markets, where we're seeing a flat to declining market, we've been able to achieve, excluding the LIFO, our 15% target, which to me is working. We're working the markets as we had anticipated that we are able to do with the cost position of the business today. So we're trying to continue on that strategy and work the market and work the kind of products that we want, and the customers where we want them into our business to get that 350,000 tons a year.

So, with regard to the second half of the year, does that mean that you could see a slowdown now, because it's seasonal slowdown or is the high performance going to see a slowdown as well in the second half?

I think the high performances is within 5% of the ranges that we are in now. So I'd call that pretty flat. I think there is no doubt when you look at the summer time outages that customers take, the holiday season in Europe, and the Olympic Games in China that we're going to see a seasonable adjustment in the third quarter with a stronger fourth quarter in those standards.

Okay, thanks.

Your next question is from the line of Dave Martin of Deutsche Bank. Please proceed.

Yes. Thank you. Just a few questions, first coming back to the discussion on standard stainless and the seasonality for the back half of the year, can you comment on the scale of the outages you would be taking in the third quarter and what the shipments would look like in the third quarter? And secondly on standards stainless, have you seen any slowdown in kind of the export activity or demand at the end of the second quarter or beginning of the third?

Well, I think the outages that we take are the normal outages. We've take about a one week outage in both the bar and melt shops to do the normal maintenance house cleaning that we need to do. We take about a week's outage, ten day outage on our hot strip mill. And then we have some outages on selected cold rolling and other major pieces of equipments that need maintenance for the year. So it has some impact, but we try to run our business so we can run with the business levels. Further out, we can run ahead and keep a reasonable movement into that market. My own feeling is that the third quarter is probably similar to the first quarter and fourth quarter is similar to the second quarter. So, I think we're about on track to lead our 300,000 tons to 350,000 tons in that market and the interesting part of course is that we're able to do that with the products that we are offering, the 200 series with some of the kind of market end uses that we are really good at. And we are finding those niches and those customers that I'd like to do business with and our appointed distributors find our service and quality levels to be very good. So we are in that same strategy as I described and I think even if the market is declining we are still going to find the volumes and the customers that we need to have. Demand in Europe will be lighter in the third quarter because of their August holiday probably coming back stronger in the fourth quarter.

Okay and then secondly turning back to your comments on electrical steels, could you remind us what your capacity is and then secondly you had appeared out earlier this week talking about contract commitments into '09 with substantial price increases, can you make any comments on contract arrangements for '09 and any color on price increases you may anticipate?

Well as you know we've had multi year contracts now for the last two years in our electrical steel business and so those contracts have been 3 to 5 year contracts that expire at different times. So each year as those contracts overlap and one finalize it then the new one comes in, we have a increasing price situation. So our prices are averaging an increase each year. We expect that increase to continue in the second half of this year and into next year and our volumes will have no problem of being sold out. Whatever we have an arrangement in the U.S. we can sell globally anything we can make. Our stated capacity is about a 120,000 tons.

Okay, thank you.

Your next question is from there line of Kuni Chen of Banc of America Securities. Please proceed.

Hi, good afternoon folks.

Hello.

Hi Kuni.

Question on rally [ph], you guys mention that's a... that its basically been pushed out of quarter due to Boeing delays, anything else figuring into that, are there equipment delays or you are finding that you are perhaps a bit aggressive on your timeline and can you also talk about the time frame to ramp up once you do get started in the first quarter and then also gives us an update on the capital cost does that change at all?

Okay. The bottom-line is that we are working over time, we are not working Saturday's and Sunday's. There is no reason to bring the plant up any sooner than what we're doing. We are not really delaying anything except going back to standard schedules which moves us out 90 days. Everything is on schedule, everything is on track, the construction is going well, the budget is 460, we're within budget, and the plant will be ramping up on a qualification basis. We start at the end of the first quarter of 2009, our major targets will be to get this plant qualified in the highest level of aerospace quality titanium sponge which means to take these steps necessary to get the plant qualified for rotating quality as well as all aerospace products. As we move through that, that will be a ramping period that moves up and maybe that plant might be a plant that is producing, lets just pull a number out, may be ₤12 million outside of the qualification pounds that would be then diverted to an industrial market. So we don't see this as a major capacity spurred into an industry that doesn't need it. We can handle these kind of volumes coming online. The critical part for us is to get this plant qualified and up and ready to run heavy in 2010.

Okay good, good answer. I guess a follow up on the aerospace market, can you give us some color on the lead times going into both the airframe and the jet engine markets, lead time is pretty steady here, or do you see the books either shrinking or starting to maybe even improve slightly.

I think the place is pretty stable in the all the products that we're making. When you look at where these airframes are running from about 480 airplanes this year up to over 500 each next year and even when you look at their book free [ph] rates, so far this year exceeded what they are going to make for the entire year and our customer base of course is the OEMs, the first tier suppliers, the engine makers, the forgers, those kind of people. That system is pretty steady. The only issue that changed that dynamic was the push out on schedules of the 787 and earlier from that of course the delay of 380. So, as we look at those programs with these increasing build rates on the... what I'll call established airplane models, and then the new models coming on with the new engines. This thing is going to continue to improve, but it's going to be what I'll call a gradual, normal aerospace kind of cycle improvement in six months, increments versus a steep climb. So, what we are looking at is what are we going to do to find the right markets for these products. Make sure that our products are the ones that are there on time. There's certainty of supply and the quality levels that our customers expect. So, we expect to be the number one supplier in terms of the things that they need to meet their potential for these new aircraft. So when I look at this, I think it's pretty, just what I said in the comments, pretty steady at the present time and if we don't get a spike because of the new programs I think it will steadily ramp but the lead times will stay the same. So for titanium we're talking nine months ahead, in some cases you could say a year that usually the things are starting into the supply chain and on engines maybe its six to nine months.

Okay, great. Thanks, I'll turn it over.

Your next question is from the line of Gautam Khanna of Cowen and Company. Please proceed.

Hey, given the airlines you're talking about cutting capacity in Q4 and `09 and I think it's a couple of years ago you disclosed that jet engines sales and high performance was about 40% of the segment sales for half the market. How confident are you that you can keep titanium mill shipments flat in `09 with '08, and also on the nickel side as well.

Well, it's a very interesting question, because you're making a lot of assumptions as you're inside of that... of that statement. As you know today, we had the first decline in parked airplanes, and it's no surprise to anyone that the MD-80 models are coming out of the U.S. system. And when you look at the U.S. system, for single isles, it's about 20% to 23% of the orders that are on the books, and every time anything has moved it has been backfilled by somebody else. The bottom line though in your question is when you look at the number of airplanes that are flying, there's more airplanes flying this year than last year. When you add a thousand new aircrafts in the build rates, unless they retire over a thousand aircrafts, which is highly unlikely, there's going to be more airplanes flying next year. So on the aftermarket standpoint, what we have said on the jet engine side in the past is, it's about 50% OEM, and about 50% spare parts. And so we think the spare part business of anything will get better next year, not remain flat, get better next year, as more units are in the air, and more total models globally, not the U.S., globally, are flying.

Okay. So are you still fairly confident you can keep your mill shipments flat titanium around 50 million in `09 with `08?

What we have to do in total, as we look at these programs between the... if you look at the amount of material we have now going into the industrial markets, you have to consider the industrial markets, the defense markets, as well as the air engine and airframe markets. In total, it would be our plan to be in that 48 million to 50 million pound range, just like we are now.

And I think you mentioned earlier that some of the pricing in the industrial market or profitability rather was just a little bit lighter than the aero, so we should think of titanium EBIT corporation wide. I understand though from which the collateral will be down in `09 versus `08.

I think we gone have to see how mix finally shapes up. It's kind of early to say that, but if we can hold the relationships that we have today and the markets that we have today, I don't think the pricing is going to be deteriorating.

Do you think we can hold titanium EBIT flat in `09 versus `08?

Depends on the mix that we actually got and we'll have to see that, when we get there.

On the high performance nickel alloy side, given nickel prices are a little bit lower than they were before, is there any sort of effective profitability in Q3 and Q4 that will bring down the high performance supported margin understanding a LIFO --

Yeah, I am going to let Rich answer that because he is going through all the details in the markets but I don't see any gross changes, no.

No, I think that's right. Remember, a large part of our nickel alloys are under long-term arrangements and a large portion of that are actually... the nickel content is actually hedged with our customers. So the issue of... is somewhat mitigated in terms of significant fluctuations on nickel and how the endosis [ph] versus the surcharges match up. I mean you are always going to have a little bit of a mismatch there, but I don't see that as being a significant driver to us in the second half.

Rich, now just a follow up. Looks like the titanium mill mix on the high performance side is better this quarter, more played [ph] I assume, is that something we should assume going forward or I mean, how should we think about that on the performance side?

Well I mean, I think it... once again it all depends upon the releases and time when we ordered. As you know our pounds really have crossed both the high performance metals and flat-rolled product segments are mix sensitive. I don't say... this quarter isn't an anomaly. I mean we have had other quarters where we have had that kind mix as well. So I think that our focus is always on a higher value added product form and to the extent that's what the customers and the markets want. That's what we will deliver.

Thank you.

Your next question comes from the line of David MacGregor of Longbow Research. Please proceed.

Hi, this is actually Luke for David. Good afternoon gentleman. Hi, I just had question quickly regarding the aerospace prices. One of your competitor actually not a competitor but a distributor, last week on their conference call was talking about how they are forecasting base prices to be materially in the coming quarter. I just was hoping to get your thoughts and what the competitive environment looks like internally?

I think it's a competitive environment. I think the product lines again, what we're trying to emphasize, what we're doing, we have less exposure to just simply going out head-to-head with a very large mail on three or four standard sheets. We like that product and we do use that, but we also have other products that help mitigate whatever is happening in that pricing market. So it's our intention to say that although prices and certain product lines will be under pressure other product lines will not be segregating and we'll just have to see the mix and how it all turns out. I think we've given you a pretty good guidance for the second half so that doesn't allow it to go down very much.

Okay and can you just remind us what CapEx will be in `08 and may be give an estimate for what '09 would look like too?

Well, `08 is going to be around $500 million plus and `09 will be in the same category.

Yes, if I could just add one thing, I mean when we talk about CapEx; they are really two pieces that you have to understand. One is the roughly 500 million of CapEx on the ATI projects and then we also have this significant expansion going on in China which actually because we consolidate that joint venture, it appears on our balance sheet and in our capital expenditure but remember essentially all of that expenditure this year will not be through our cash flow or ATI cash flow, it will be self funded by the joint venture for using the joint venture without any parent guarantee or ATI guarantee behind any borrowing. So we talk about our 500 million that's more ATI focus, it might end up being more than that because of the joint venture CapEx.

I see, thanks a lot guys and best of luck.

Thank you.

Your next question comes from the line of Sal Tharani of FFCH [ph].Please proceed. Sal Tharani - Goldman Sachs & Co.: Hi, Sal Tharani from Goldman Sachs, how are you?

Nice, Sal. Sal Tharani - Goldman Sachs & Co.: Quick question on your guidance, the range you are giving of $0.30. Just wanted to see which segments do you think will impact this variability, means what, what can go wrong that you go in the bottom end of the range and could go right to end up on the top end of the range, which segment will be the most impactful, there?

Well I think the real issue is of course our price and volume. So, I think we have a pretty good view on the high performance side through the third quarter and we have long-term contracts in that business unit that gives us a fairly good projection through the fourth quarters. If we look on the engineered product side, that business is one that happens every 30 days, except for our casting business and forging business that are in the industrial markets under long-term arrangement. So the tooling business is one that happens every 30 days. And as you know on the standard side of our flat-rolled business, it's one that happens on every four to six week basis too. So, if there is any ranges that we're going to see is what possibly could happen. We probably have more fluctuation on the flat-rolled side of the company than we do the high performance side of the company. But that again, as I have tried to point out in the last couple of questions, is we have a defined strategy for that. And that we see the third quarter weaker than the second quarter and the fourth quarter is more like the second quarter. So, we put all that together, that's where the ranges come from. Sal Tharani - Goldman Sachs & Co.: Alright, thank you. Also on the sponge side, you are bringing in the capacity, say around middle of 2009 and you mentioned earlier that you expect the mill shipments to remain flat with 2008, about ₤50 million. Are you going to... how are your sponge contracts out, right now what are you buying on contract or are you buying on spot and would you able to get out of those contracts?

Well, what we do, we have some volume ranges in our outside contracts. We have our own internal sponge production and then there is mix of scrap that's bought or sold etcetera, bought and put into the business. So, it's a combination of all three year as to how we adjust our usages up our own internal scrap, our own internal sponge to our own internal scrap, our outside purchases of scrap. We are a large outside purchaser of scrap in the market and our external contracts. We balance those altogether and it's probably a combination of all those factors that will lead to the final allocation in each of those areas. Sal Tharani - Goldman Sachs & Co.: And also, can you give us some color on your sponge capacity was it chromium, what is the timeframe, how much are you bringing it in?

I won't give you a number on the capacity. I would say that we're looking at a two year ramp to up about 20% to 25%. Sal Tharani - Goldman Sachs & Co.: Starting when?

Starting fourth quarter this year. Sal Tharani - Goldman Sachs & Co.: Thank you very much.

And your next question is from the line of John Tumazos [ph]... of John Tumazos, independent. Please proceed.

Thank you.

Hi John.

Congratulations on doing so great when the economy is a little slow. With regard to the first half $255 million rise in the dollar value of inventory, with nickel now dancing in between $9 and $10, is it too optimistic to expect about half of the dollar growth in inventories and receivables to reverse, given the revenues are similar to a year ago?

That's a great question John. And how I think we see it is the growth in the first half of the year of... in managed working capital of about $270 million. I would expect at this point it's about half of that to revert in the second half of year. And obviously, if we can do better than that, we will.

Rich as the economy evolves in some of the commodity sectors like distributors and autos and housing slow but the exports and process industries and energy specialized application super boom, is your mix changing so that you are doing more specialized higher value-added, more different stuff and a little less plain vanilla and that's affecting the working capital usage?

Absolutely. Our inventory returns, even in the flat-rolled products segment are less than they historically have been when we were more heavily focused on standard grade stainless sheet. Standard grade stainless sheet inventory turns are still really pretty good. We're turning those inventories six times a year, 6.5 times a year. But as you get into the more differentiated product and more higher value product form, the manufacturing process is longer.

So we shouldn't expect the metrics to stay the same. It's good management to adapt to the way the market is evolving?

Yes, that's our... we measure managed working capital using a variety of different metrics. I mean the traditional inventory returns and day sales outstanding, and deep day purchases outstanding but we also use kind of as an overall check as managed working capital as a percent of annualized sales and that's why we include that in our earnings release. And we have been fluctuating over the past three years or so anywhere from the high 29% of sales to 32% and I think that ideally based upon our mix and how we see the end markets developing that our initial target would be to try to manage that at about a 30 to ... between 30% and 31%. If we can do that I think we're being pretty efficient on managed working capital

Thank you.

ThanksJohn.

And at this time there are no more questions. I would like to turn the call back over to Mr. Dan Greenfield.

This is Pat. Thank you for joining us today. We appreciate your interest in ATI. We appreciate your support and look forward to talking to you at the end of next quarter.

Thank you, Pat. And thanks to all the listeners for joining us this afternoon as always. News releases maybe obtained by email or are available on our website. Also, rebroadcast of this conference call is available on our website. That concludes our conference call.

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