ATI Inc. (ATI) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2011 Allegheny Technologies Earnings Conference Call. My name is Jennifer, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Dan Greenfield, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you, Jennifer. Good afternoon, and welcome to the Allegheny Technologies earnings conference call for the second quarter 2011. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call. Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Dale Reid, Executive Vice President, Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to 2 questions to be considerate of others on the line. Please note that all forward-looking statements this afternoon are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially. Here is Rich Harshman.

Thanks, Dan, and thanks to everyone for joining today's call. While the second quarter was impacted by costs related to the Ladish acquisition, overall performance was good and continued to support our view that 2011 is the year when strong secular growth resumes in our key global markets. Sales increased to $1.35 billion, 28% higher than the second quarter 2010 and 10% higher than the first quarter 2011. Segment operating profit increased nearly 60% compared to the second quarter 2010 to $187 million, excluding costs related to the Ladish acquisition. That is nearly 14% of sales. Earnings per share were $0.70 excluding acquisition expenses, 94% higher than the second quarter 2010 and nearly 19% higher than the first quarter 2011 even though average common shares outstanding are nearly 5% higher due to the Ladish acquisition. We continued to benefit from our diversified global markets and our diversified product mix. Our key global markets, aerospace and defense, oil and gas chemical processing industry, electrical energy and medical are strong and represented 70% of ATI first half 2011 sales. Direct international sales were nearly 33% of sales during the first half 2011. Let's look at each of these key global markets in greater detail. At 27% of revenue, aerospace and defense sales grew 43% compared to the first 6 months of 2010. ATI's investments over the last several years in manufacturing capabilities, innovative new alloys and strategic acquisitions leaves the company well positioned to benefit from the expected unprecedented strong growth in aerospace demand and production rates over the next 3 to 5 years. We had a successful Paris Air Show in June. Those who visited ATI at the air show saw our expanded capabilities to produce highly engineered technically complex components. These capabilities add to ATI's long-standing reputation as a global leader in producing a wide range of specialty metals products. On display at the Air Show where a number of component products and alloy forms, including ATI Ladish aero engine rotating forgings made of plasma arc melted ATI titanium 17 and ATI 6-4 titanium alloys. And rotary forgings made of ATI 718 nickel-based superalloy, ATI Waspaloy and Powder Metals. Also on display at the Air Show were large structural titanium investment castings from ATI Ladish for airframe and jet engine applications, landing gear and helicopter forgings made by ATI Ladish, a large jet engine low-pressured turbine case made of our new ATI 718Plus alloy, prototype components made of our unique new titanium product ATI 425 alloy, including super plastic form components made from ATI 425 sheet, tubing made of ATI 425 strip, honeycomb made of ATI 425 precision road strip. In addition, we displayed titanium near-net shapes and extrusions, titanium nickel-based alloy and specialty alloy fastener stock and expanded cutting tool and precision machining capabilities. These products have ATI well positioned for growth in the aerospace market. The already record backlogs at the airframe OEMs continue to get even larger. Last week, AMR announced what has been called the largest order in aircraft industry history. This could be an inflection point for the aerospace industry as many U.S. carriers finally entered the market to upgrade their aging noncompetitive high-cost fleets. Moving onto our second largest market. Sales to the oil and gas chemical process industry grew 53% compared to the first half of 2010. Sales to the oil and gas and CPI markets represented 23% of total ATI sales in the first 6 months of 2011, 400 basis points higher than sales for the full year 2010. Global demand for oil and gas continues to grow. Today's rig count has 6 out of 10 rigs drilling directionally and horizontally. This requires the use of our tungsten drill bodies and non-magnetic Datalloy 2 collars, as well as ATI 718 oil patch, a nickel alloy, and titanium alloys for completion systems. We continue to grow our position in this global market. We received another large order for our nickel alloy plate for clad subsea flow lines for sour gas, again, our customers in Japan for a project being constructed in the Middle East. Our proprietary ATI 2003 lean duplex alloy was selected for several sections of a large offshore platform being built for use in the North Sea. In addition, we are scheduled to ship ATI 2003 alloy strip for use in a large subsea flow line project in the Irish Sea. We received a significant order for nickel-based alloy sheet for a large offshore project in Brazil. These orders and others add to a strong backlog for our high-value flat-rolled products. We have performed very well on the Ras Az Zawr desalination job booked by our Uniti titanium joint venture. This has positioned Uniti for the next round of de-sal jobs. The de-sal market for CP titanium sheet products is expected to be strong for the next several years. In addition, we are seeing several new opportunities for our industrial titanium products, both CP titanium and titanium alloy from the global corrosion markets. It is important to note that ATI has been meeting and exceeding customer expectations on these large global projects. We continue to win orders because of our performance and our customers confidence in ATI as a supplier. The electrical energy market represents 15% of ATI first half sales and grew 12% compared to the first half of 2010. Order activity in power generation picked up during the second quarter for nuclear energy, natural gas turbine and solar applications. Shipments of grain-oriented and electrical steel were flat during the first 6 months of 2011 compared to the same period in 2010. We expect shipments of this product to be somewhat softer in the third quarter due to seasonal summer shutdowns at some of our customers. At 5.5% of first half sales, the medical market grew by over 20% compared to the same period in 2010. There's a real change here demonstrating the differentiation in the quality of ATI's products. We are improving our position with the major medical OEMs by offering titanium products in a wide range of alloys and products sizes. Our ability to control the titanium manufacturing process from raw materials to the finished mill product makes ATI attractive to the medical equipment customers just as it does to the aerospace OEMs. In addition, due to faster scan rates and better resolution, demand for 3 Tesla MRI Systems is growing, creating strong demand for our niobium titanium alloys. In summary, our order backlog is strong. Backlog in the High Performance Metals segment at the end of the second quarter was over $1.38 billion. And as a result of major project wins, we also have a solid backlog for our nickel-based alloys and specialty alloys for the second half of 2011 in our Flat-Rolled Products segment. We continue to benefit from our differentiated product mix. We continue to innovate with new alloys, products and technologies. Some examples. There is significant interest in our ATI 425 titanium alloy, with much qualification activity ongoing. It is important to note that although ATI 425 alloy has been around for a few years, it was qualified as a direct replacement for 6-4 titanium in aerospace airframe applications just 15 months ago and was introduced to the aerospace market about one year ago at the Farnborough Airshow. We are pleased with the significant interest and qualification efforts currently ongoing for this game-changing new alloy in such a short period of time. At the May 2011 Aero Met Conference, the industry's largest aerospace materials conference, a joint presentation of industry experts confirmed that ATI 425 alloy has significant advantages over 6-4 titanium for hot fabrication of aerospace parts. This has resulted in even greater interest from a variety of aerospace customers. During the Paris Air Show, customer meetings were held to discuss current and future trials of ATI 425 alloy. We exhibited several hot form parts made of ATI 425 alloy that further stimulated interest in this new product. Our ATI 718Plus nickel-based super alloy achieved another milestone during the second quarter. ATI announced a long-term agreement with Rolls-Royce for the supply of ATI 718Plus alloy. Rolls-Royce is the first jet engine manufacturer to use this innovative new alloy for rotating applications. ATI is continuing to expand participation into the aerospace fastener market. OEM qualification programs are in process and we are shipping orders to fastener producers. We are the only supplier capable of producing, from melt to finish, all 3 alloy systems used to make fasteners. That is titanium alloys, nickel-based alloys and specialty alloys. In addition, we have several proprietary alloys that offer advantages for the more common alloys used to make fasteners. And finally, ATI Allegheny Ludlum and ATI Powder Metals are developing a line of bull [ph] rated stainless steel for uses of barrier to neutrons and nuclear spent fuel storage. Interest in these applications has increased significantly since the Fukushima event in Japan. To meet the long-term growth expected from our key growth markets, ATI is continuing to invest for the future. We have a defined vision of the future and a strategic plan to continue to enhance our competitive position, while creating value for our shareholders and customers. I'd like to update you on some of the strategic initiatives. First, an update on our acquisition of Ladish. On May 9, we completed the acquisition of Ladish, so our second quarter 2011 results contained only 8 weeks of ATI Ladish results. In the short time period, we were very encouraged by the opportunities that exist for ATI shareholders and customers. We are pleased with the customer acceptance of the combination. ATI Ladish, which is a business unit of our High Performance Metals segment, adds advanced forgings, titanium investment castings and precision finishing capabilities to ATI's product portfolio. ATI Ladish enhances ATI's position on the supply chain to create greater customer value by providing the capabilities to meet OEM desires or near-net shapes for finished components. We expect sales through ATI Ladish to grow greater than the secular growth expected from the upcoming aerospace build ramp. ATI Ladish is well positioned on the next generation and future generation jet engines. In addition, ATI Ladish is capable of forging ATI's proprietary new alloys and Powder Metals into technically advanced components. We also expect growth from our focus to expand ATI Ladish capabilities into our non-aerospace growth markets such as oil and gas, chemical processing industry and electrical energy. Next is an update on our Rowley, Utah titanium sponge facility. Our Rowley facility has now produced over 5 million pounds of titanium sponge in the first half of 2011 or an annualized rate of 10 million pounds. We expect to continue an orderly increase for the production rate in the second half of 2011. This sponge is being used to produce industrial titanium products. The chemistry of the Rowley sponge is outstanding and is consistently meeting premium grade specifications. We have made good progress in standardizing manufacturing practices, which is key to the aerospace grade qualification process. Our focus is to achieve standard grade qualification by early 2012. We will then begin the premium grade qualification program. As we have said many times, ATI's ability to produce titanium sponge with the Rowley facility and the available additional capacity from our Albany sponge operations enables ATI to maximize profitable growth opportunities for titanium products. To support our production of titanium sponge, we have long-term raw material supply agreements in place to provide stable input pricing. On the titanium melting side, our new plasma arc melt, or PAM, furnace in Bakers, North Carolina has begun melt trials. This is ATI's fourth PAM furnace and is coming online in time to support the record aerospace backlog and the expected unprecedented aerospace production rate ramp, as well as the strong growth expected from the medical market. Finally, we expect to begin construction of our Flat-Rolled Products segment hot rolling and processing facility later this summer. Site preparation is essentially complete and final engineering drawings are nearing completion. As a result, we now expect 2011 capital expenditures to be approximately $275 million to $300 million. Concerning our stainless products, our Flat-Rolled Products segment provides a good view into today's economic realities. On the one hand, demand for our high-value products from our key global growth markets is strong. On the other hand, demand for our standard stainless products has been soft due in large part to weakness in consumer durables and weak consumer confidence. Industry reports indicate that the service center inventories for stainless products were 2.7 months in June, down from 2.9 months in May. Most service center customers have been focused on reducing their inventories due to the declining surcharges and uncertainty in the domestic market. Demand for our stainless products has been soft in July. We used this slow period to accelerate maintenance on our equipment, which will impact third quarter results by approximately $6 million. Looking beyond the third quarter, we expect demand for our standard stainless products to improve in the fourth quarter. ATI Allegheny Ludlum recently announced the new surcharge calculation that is designed to better align raw materials costs with the surcharge and bring added stability to an increasingly volatile market. This surcharge calculation change is effective with shipments beginning October 2, 2011. We announced late yesterday that the tentative agreements reached on June 30, 2011, with the USW-represented employees at ATI's Allegheny Ludlam and Albany Oregon titanium operations were not ratified. We will continue to work with the USW to reach an agreement. In summary, in spite of the uncertainties resulting from the ongoing debate about how to deal with the U.S. budget deficits and debt ceiling, combined with the European debt crisis, we remain optimistic about the current demand for most of our major markets and the secular growth opportunities over the next several years. We are building momentum across our businesses and continue to see 2011 as the year when secular growth returns in our key global markets. Over the next 3 to 5 years, we expect ATI to continue to benefit from our new alloys and products, diversified global markets and differentiated product mix. With the Ladish acquisition now complete, we expect 2011 revenues of $5.4 billion to $5.5 billion compared to our previous expectations of $4.6 billion to $4.8 billion, and segment operating profit of 13% to 14% of revenues, excluding the impact of purchase inventory accounting charges. These expectations are based on the strength in our key global markets, improving shipments and base prices for many of our high-value products, the expectation of improved demand for our standard stainless products in the fourth quarter and the view that certain raw material costs will moderate slightly or at least remain at current levels. Operator, we can now open the call for questions.

[Operator Instructions] Your first question comes from the line of Steve Levenson from Stifel. Stephen Levenson - Stifel, Nicolaus & Co., Inc.: There have been some questions that we get from the people that we deal with about the market and competition. First of all, can you get the qualifications completed in time to meet the supply requirements of your customers? And second, if somebody was to start today to add melt capacity, how long would it be before they could deliver their first pound to an aerospace customer?

Well, I'll answer the first part of the question, Steve, first. Yes, the answer is we're -- we think that these investments are coming on right at the right time and the qualification process is different, obviously, for furnace -- for melt versus titanium sponge production. One of the reasons why we're really accelerating and focusing the sponge qualification program for standard grade, once we achieve that standard grade qualification, which is more of an internal certification, that opens up the non-rotating aerospace market as well as the medical market for use of the Rowley sponge. And the process that we're on is really one that by the end of the first quarter, we expect to achieve the standard grade qualification. The rotating or premium grade qualification is tied into the qualification programs run with the engine manufacturers and that is dependent upon, not only us and us performing but also the engine manufacturers and their qualification process so that takes a little bit longer but with the flexibility we have of using the Rowley sponge, we'll be quite happy with how we use that sponge across all of our applications. On the melt side, as you know, we've -- we now have -- this will be our fourth PAM furnace. It is essentially a sister furnace to PAM 3 that we went through the qualification process from mid-2010 into mid-2000 -- early 2011. And so we know what to do there and we know what the timeframe is. And we think that, that furnace is coming on right at the right time to meet the expected ramp for the OEM builds and obviously the necessity of the aero engine side. Now as far as somebody new bringing on melt capacity, it really depends upon what alloy system are you talking about. What is the application for that? Is it a VEM [ph], is it ESR, is it VAR, is it plasma arc melt? We're the only plasma arc melter in the world qualified for rotating materials, so I think we have a pretty good knowledge of how that process works. Is the material going into static components or is it going into rotating components? If it's rotating, the qualification process is longer. So it is highly dependent upon what the melt technology is and what the end application is. But it isn't something that -- first of all, to make those investments, you're looking at lead times that are easily more than a year and in some cases, could be up to as long as 18 to 24 months for the furnace. So you're talking about a couple of years at least of construction time. And then beyond that, you're talking about a qualification process. So it's not something that happens easily, that's why we like the approach we've taken of where these -- the timing of these investments and coming on right at what we think is the right time. Stephen Levenson - Stifel, Nicolaus & Co., Inc.: Got it, and just a quick one. The $1.38 billion backlog you talked about in the high-performance metals, do you have the comparable figure from a year ago?

I do, but that includes Ladish. So if you look at the comparable period without -- first of all, the Ladish backlog is probably easily $100 million higher than it was a year ago and the ATI backlog is probably -- the non-Ladish backlog is probably roughly in the same range.

Actually, we're a little bit higher. So last year -- Steve, this is Dale. Last year at this time, we were at $545 million in backlog.

Your next question comes from the line of Chris Olin from Cleveland Research.

Just wanted to ask a question regarding titanium. The growth rate slowed a bit from the first quarter. I know you did 7 million pounds, but is there a reason for that? Was there anything in there from the high-performance materials and you expect that to ramp in the second half as maybe aerospace comes on or will it be more of a 2012 timing?

Well, I think first of all, you're talking just about the High Performance Metals segment because the total titanium product across ATI was up dramatically because of what we have in the Flat-Rolled Products segment. I think when you look more narrowly focused at the High Performance Metals side, there was a richer product mix in the second quarter than there was either in the first quarter or the year-ago quarter. And as we have commented many times, in our alloy systems, it's not just about volume, it's about product form and value added product form over the intermediate product of an [ph]. So our focus will always be on a richer product mix because the focus is on earnings rather than just volume.

And can you comment on the potential impact these higher retail costs could have on your operations? I was under the assumption you'd get some long-term contracts so it should be minimal? Is that going to hold?

Well, I think first of all, that's one of the reasons, Chris, why it's important for -- in our view to be -- to have the capability of producing your own sponge and kind of locking in the cost structure of producing your own titanium sponge, which we have done through Rowley and have the capability of expanding, if need be, in Albany if the market conditions are right. The purchased sponge, and we still do buy sponge from outside and will continue to do so, is under LTAs that I wouldn't say are firm fixed price. I mean, they have quantity mins and maxes, and they have pricing mins and maxes by formula. And one of the reasons why it's very difficult in some of these markets, primarily airframe and increasingly in aero engine, selectively, where the customers want a 5- or a 10-year LTA. Unless you have the ability to produce some of your own sponge, it's very difficult to quote firm 5- and 10-year LTAs when you're making titanium melt products because you can't buy the raw material, that is the sponge, firm over that kind of a time period.

Any comments just on -- I'm sorry, the inputs into creating -- making sponge? Are those costs changing munch?

Well, they are. But that's why we have long-term supply agreements for our magnesium and our tickle. And all of that is factored into us building a box, if you will, around the cost of producing our own sponge.

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

So have you broken out or are you able to talk a little bit about what the high-performance metals segment would have looked like without Ladish? Because on my numbers it looks pretty good. Volumes, prices, all look pretty good. So just wondering if the trends changed at all there.

I don't think so. I think that the first half on the exotic alloys was weaker than we expect the second half to be and some of that is due to the lumpiness, if you will, of some of the project business on exotic alloys. But the titanium and the nickel and the specialty alloys in the long products area progressed the way we would've expected it to in the quarter. I think that we did have -- use the phrase that has been used by some, there's a lot of noise here in our second quarter, which typically happens when you have an acquisition, especially under the purchase accounting rules. So we dealt with that in the quarter and we'll have some of that in the third quarter. But once we get through the third quarter, that will work its way out. I think when you remove that even with Ladish in there, which is only 8 weeks of performance, when you remove those non-recurring costs that should not be there beyond the third quarter. And I would include in that -- I think that over the second half of the year as we ramp up in an orderly way the production at Rowley, we'll have less startup cost impact at the Rowley facility as well. I think you, can come up very quickly to a 23% type of segment operating profit on sales and that includes a LIFO charge in there. Without the LIFO, it's closer to 24%. And at this point in the cycle, which in our view is pretty early, that's pretty good.

That's super helpful. So just as a follow-up then, if I switch over to the flat-rolled. I mean on a standard stainless side, is it demand, is it the nickel surcharge? I'm a little confused about what's driving the weaker volumes and weaker outlook in the stainless piece.

Yes. I think it's a combination of both. I mean I think that, that business is more of a short cycle business, if you will. The lead times are pretty short. Even in the best of markets, the lead times are much shorter than the high-value products. I think that the volatility of nickel and the fact that nickel on the LME was in a continued month-over-month decline for about 4 months, and it's a lot like no one wanted to catch the falling ice. And so the inventories were kept very lean. I think that some of the uncertainty over the economy and the slowdown in the GDP growth in the second quarter -- and as I said, it's clear to us that this uncertainty in Washington is impacting consumer confidence. And that business on the standard stainless sheet side is a consumer confidence-driven gain. And all of those factors were combining to see a significant weakening in that business throughout the second quarter, which we saw, in our view, bottoming out in terms of order entry and shipment levels for July. August is beginning to look a little bit better. One month does not make a trend so we'll see what happens. But as we look fundamentally through to the end markets, the end markets don't appear to be in that bad of a shape. The end market demand appears to us to be poised for some increase in growth and demand as we get into the fourth quarter and inventories are lean throughout the supply chain so those are the factors that give us the confidence to make the statements we have about the fourth quarter.

Your next question comes from the line of Brian Yu from Citi.

Great. Richard, I want to get a clarification on your answer to Chris' question earlier just about sponge. So my understanding is that titanium concentrate price have gone up, sort of [ph] TiO2 and we're thinking that, that would flow through to tickle. I get the sense that maybe you have some caps and collar [ph] within your contracts that doesn't allow the full price increase and that's why you're better protected on the input side, correct?

That would be correct, yes.

Okay, great. And then just on this new reporting with Ladish and HPM. Do you -- the reported pricing numbers, the dollar per pound, does that reflect Ladish's value add in those figures or will they be comparable to prior years?

No, it does not. And we -- so the numbers you're seeing are very comparable to prior years. There's no apples-to-orange comparison in any of those numbers. Ladish is -- on the volume and pricing pays that we have in our annual report -- or in the quarterly, Ladish is not reflected in there.

And you had good volume pick up. Was some of that attributed to greater sell-through to Ladish on a nickel alloys side?

No, I don't think so. I mean, the level of business that we have been doing with Ladish has been fairly consistent. So the volume pick up, you're talking about primarily on the nickel and specialty alloys side, is really driven by aerospace, aero engine, nuclear, oil and gas, very strong in oil and gas; and medical.

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

Just looking at the accounting of the Ladish purchase, if I'm reading your balance sheet correctly, it appears that $414.8 million was recorded as tangible assets and $483.8 million is goodwill and intangibles. Could you talk a little bit about the appraisal processes and final valuations or whether those have begun or completed, whether that subject interim adjustments, et cetera. My sense is that you wouldn't have bought the company if it wasn't worth more than that.

John, this is Dale. Yes, as far as the acquisition accounting, we have engaged an appraisal firm to assist us with coming up with a fair market values of the Ladish assets and liabilities there. So the second quarter results do reflect our initial valuation in terms of all of their assets and all of their obligations. It is our expectation that all of those will be finalized by the time we get to the end of the year. So the second quarter results would include the associated additional depreciation and amortization associated with both the property, plant and equipment and the amortizable intangibles.

But that's subject to change as the appraisals come in?

Yes. I think we are pretty close. But yes, we are giving ourselves a little leeway here to finalize that here in the third quarter, hopefully, and maybe it will spin over a little bit to the fourth quarter.

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

Rich, wanted to understand a little bit more color on the sponge qualification process for the second part, which is the rotating part. You have obviously been qualified in the past with the other [ph] facilities. So is the process going as quickly as it went last time, or are you seeing any hurdles? And also, where would the sponge come while you are qualifying in the meantime?

Okay. Well, first of all, the Albany facility was never qualified for rotating quality material. That is a different manufacturing process than what we're using in Rowley. The Rowley qualification, as I've said, for rotating quality material is working with the aero engine OEMs. And we have to produce a certain quantity of product using that sponge and produce it all the way down the bar, and you go through sonic inspection and everything to ensure that the material is compliant with rotating quality specifications. So that process is longer than the standard grade qualification, which from the time that we have what I would say frozen manufacturing processes in place, which is just around midyear of this year, it's about a 6 to a 9-month process for standard grade qualification. The rotating grade qualification will be at least that long, if not longer. And a lot of it depends upon how well the process goes and what the market conditions are, quite frankly. So what we do for the raw material needs as the aero engine market ramps is, as you know, we are currently buying sponge and we buy sponge from several suppliers who might have that rotating quality qualification in place and we will continue to do that. We'll continue to do that quite frankly, Sal, after the 24 million pounds. Even if we had 24 million pounds of certified rotating quality sponge out of Rowley, whenever that date is, it's our expectation that our raw material needs for sponge will be greater than that for all of our mill products. So we will continue to buy -- so our expectation that we will continue to by sponge from third parties. And the good thing about rotating quality sponge is that it is the most flexible. You can use it for any application. If its qualified for rotating quality, it can be used anywhere. You can't say that about standard grade sponge or non-aerospace grade sponge. The applications are limited.

And when you qualify, would you qualify for the whole mill or would you qualify for a portion of the mill?

No, we qualify for the whole mill. Any supplier who's making rotating quality sponge today, there is a certain part of the cake that -- of the sponge cake that gets sheared off and gets diverted into standard grade or even in industrial grade sponge [ph]. So that's a normal part of the process that, most of it on yield side, the vast majority, a very high percent will be rotating quality. But you will, just by nature of the process, have non-rotating quality sponge produced.

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

Yes, maybe for Dale. If you could just break out first the recurring versus the non-recurring deal cost. So at Ladish, you do have intangibles amortization that'll persist, if you can give us that number on an annualized basis. Also, I just want to understand the guidance a little better because presumably, you had $19 million pretax of Ladish cost, $13 million at high performance and $6 million in corporate. And it's guided to be $8 million to $9 million of kind of inventory step up related to segment cost in Q3. So that's a $10 million positive pre-tax swing sequentially. Yet, the comments on standard grade sound a little more ominous. Should we be thinking that the earnings per share will be below 59, the printed number in Q2 or should we think of 70 as our starting point? So if we could get [ph] the intangibles as well as the EPS guidance.

Sure. Just talking about the depreciation. Right now when we look at all of ATI in terms of depreciation for 2011 including Ladish in anything that might be coming out of purchase accounting, we think that, that number is going to be around $174 million for the full year. As it relates to the deal cost in the Ladish adjustments, the numbers that you were referring to, the $19 million and the $8 million or $9 million that we'll have in Q3, the $19 million being in Q2. You are correct, and those were factored into the guidance that we gave in terms of where we saw operating -- segment operating profit for the full year.

Yes. And Gautam, we're not giving guidance on a quarterly basis. I mean, we're giving guidance at the revenue line and at the segment operating profit percent, excluding the purchase accounting cost, that's what the 13% to 14% relates to. I will say that our comments about some of the seasonality in the Flat-Rolled Products segment, number one. And number two, the comments about the weakness and the higher maintenance costs charges in the third quarter. One could conclude that we view the third quarter -- if you look at the second half, the third quarter is expected to be below the fourth quarter from an earnings standpoint.

I mean, I know you don't explicitly give guidance but you gave a number of pieces. And so it also appears as though the Q3 EPS guidance is below the Q2 EPS guidance -- Q2 EPS, and that's what I was trying to clarify. And may I just ask another follow-up to Dale on the purchase accounting. Ladish in the quarter, you had the $13.2 million at the segment line. So was the operating profit contribution from Ladish 0 or was it actually negative?

When you look at Ladish overall, including what you have as far as the operating profit as well as the transaction costs, it was a negative.

It was -- that's a slight negative, right?

So without the transaction costs, it was slightly positive.

Okay, without the transaction cost, slightly positive. And the transaction costs exactly were how much again in the segment?

Well, they're not in the segment.

So you're just saying the $13.2 million is -- the depreciation, it's the amortization. That's the cost within the segment?

Yes.

That's the recurring cost is going to be. And it steps down a bit because the inventory step up was smaller in Q3.

No. I mean, what we were talking to about the $13.2 million is the fact that because of the acquisition accounting we had to write up their inventory and we didn't get to recognize what their normal margins were in that inventory and that's the $13.2 million.

So if you think about the $13.2 million there, Gautam, and based off their inventory turns, that $13.2 million, there's no -- I mean the additional depreciation or whatever is going to be there. So we didn't call that out as nonrecurring, that would be...

Got it, okay. That's what I want to make sure. Now I get it.

Yes. The $13.2 million drops the $8 million to $9 million in the third quarter, and we expect it will go away in the fourth quarter.

Your next question comes from the line of Daniel Whalen from Capstone Investments.

I think you pretty much just answered my question here, but my question was in the sense of the fine-tuning of the segment operating margin from roughly 15% down to about 13% to 14%. That's largely -- the fine-tuning, as minor as it is, is largely due to the Ladish transaction and not really change in product mix outlook for the core ATI business?

Well, I think it's a combination of several, several things. I mean it's the fact that a big component of the expected revenue growth, not all of it, but a big component from the previous guidance is due to Ladish. And Ladish -- at this point in time, Ladish's segment operating profit margins are not at the level that the whole segment is. And I say at this point in time, because that's one of the opportunities we believe we have is to using the available capacity that exists at Ladish and growing them in markets that they haven't historically or at least recently been in to increase the level of growth and profitability at Ladish. So that's -- longer term, that's number one. And number two, it's certainly the second quarter and in our view, the third quarter and the flat-rolled side on stainless is weaker than our view it would be at the beginning of the year, and even weaker than our view was in April. The deterioration in demand and the competitiveness in pricing, as you recall, we tried to raise to lead a price increase on commodity stainless steel sheet earlier in the year effective April 1, and it was effective for exactly one month before it collapsed. And it collapsed because of the demand and the weakness in demand for standard sheet and standard plate. That weakness we expect to continue here through the third quarter, we expect it to get better in the fourth quarter. We'll see. That's more of a short cycle business and very dependent on the consumer confidence that we talked about earlier. So I think there's a number of factors that work into that, but those are the 2 biggest ones.

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

I was -- I think you answered my question because we were curious about the opportunity for any potential mismatch between long-term supply agreements on titanium and purchased sponge. And I think you, or I think, Dan, may have mentioned to us in some previous conversations that there are surcharges, there's pass-through mechanisms. Is that the correct way to think about this that you're not really exposed on a sponge squeeze, so to speak, as you look out into 2012?

Yes, I think that's right. There are 2 ways -- I'll just tell you how we think about this, right? I mean, there are -- generally speaking and historically in our business, for titanium, LTAs were not firm fixed price. I mean they -- on the aero engine side, they had surcharge mechanisms in place to protect against the volatility of raw material costs that we had no control over. And the raw materials are either titanium raw material units, either a sponge or a scrap and vanadium and aluminum because that's the preponderance of the alloying elements going into titanium alloys. As you move forward in some of these markets with multiyear LTAs in place because of how the business model works for air framers or other end markets, they're really looking more for some price certainty from their standpoint so they want to eliminate the volatility of having the raw material surcharges. That's an important reason to be -- and it won't be for 100% of the market, it's just pieces of the market opportunity that we think will exist. There's 2 ways for a producer to deal with that, a company like ATI. One is you can just quote -- or 3, I guess. One is you can say we'll we can't quote firm fixed price because we don't have any way of controlling sponge cost 3 and 4 and 5 and 6 years from now and therefore, you won't get the business. Or you can quote it and hope that you don't get hurt by the volatility of sponge or you can make your own sponge and control the costs. And therefore, have the confidence in your ability to price something firm that you have an effective risk management process in place that won't damage the shareholders. And that's how we think about it, and that's one of the reasons why we built Rowley.

Okay. And to the question of Rowley, and I appreciate that color. To the question of Rowley, you had given I think on the last call some indication of the magnitude of ramp up that you expected in the second half, and I just wonder if you could give us an update on that.

Yes. I mean, one of the things that we continue to look at is balancing the ramp up in an orderly way with the importance of a timely certification achievement of standard grade certification. So we're constantly kind of trying to balance that to reach the right framework. Obviously, we can -- we could ramp it up quicker and reduce some of the non-recurring startup cost that we're experiencing. But then we're producing sponge that only has industrial grade application to it, and you're investing that those dollars in inventory that might be there for a while. Or you could strike a balance where you minimize the -- don't eliminate, but minimize the startup cost due to ramp up in a less aggressive way and refocus a higher priority on achieving the standard grade qualification, and that's what we've done. So as we look at, if you look at the first quarter in the sponge we produced in the first quarter, we were running at about a 9 million pound annualized run rate. The second quarter, we were running at a little over 11 million pounds annualized rate. The third quarter, we expect to be in the range of 15 million to 16 million pound rate. And the fourth quarter, we expect to be in the range of 16.5 million to 17.5 million pound rate, and then we'll continue in 2012 to gradually ramp it up to full productive capacity of 24 million pounds.

Okay. So in your revised guidance, are there more start-up expenses than what you had envisioned earlier in the year?

Yes. I think we said that we expected in the second quarter the start-up and qualification cost of Rowley to be around $4 million, and we were about double that or about $7 million in the second quarter. I think the third quarter will be a little bit less than that and the fourth quarter will be less than the third quarter, that's the focus that we have.

Your next question comes from the line of Tim Hayes from Davenport & Company. Timothy Hayes - Davenport & Company, LLC: Just a further question on Ladish and the inventories that have been adjusted to fair value. When in Q3 do you expect to have been flushed through cost of goods sold? Would it be close to the end of Q3, say, end of September or might be early August?

They -- this is Dale. They turned their inventories about 4x a year. So it should take them about 3 months to work their way through that. So they should be well -- they should have that well behind it by the time we get to the inventory. Timothy Hayes - Davenport & Company, LLC: Okay. And that's an inventory turn that's faster than the segment as a whole, correct?

Yes. I mean, when you look at basically depending upon the product form that we are making, it takes longer for us to make a higher value material than it does to make, let's say, whether that's on the nickel side or on the titanium side. But yes, their turns are pretty fast.

Yes, the inventory turn when you're making a forging is certainly a lot less than when you're going from melt all the way through the qualified billet, specifically what we would have sold to Ladish's billet product form.

Your next question comes from the line of Michael Gambardella from JPMorgan. Michael Gambardella - JP Morgan Chase & Co: I have a question on the nickel surcharge here. You're trying to change the structure in the industry of the nickel surcharge from 3 months down to 1 month. Just wanted to know what the status of that is. I know -- I think the new Thyssen plant went along with that and maybe one person -- one other producer. But I wanted to see, what the status of that is and what you expect to gain from that.

Okay. Well, it's our understanding from the commercial marketplace that our move was followed by Thyssen, by NAS and by AK. The only change that was made was when NAS followed it, their effective date was October 1 and ours was September 4. So we -- yesterday, we notified our customers that the effective date for our new surcharge mechanism would be October 2. So I think that the industry has aligned and everybody has made essentially the same move. You're probably familiar that this change is pretty much in line, pretty close to what has been the surcharge mechanism in Europe. So it's -- and since 2 of our largest competitors in stainless are European, they have a lot of familiarity with how the surcharge work. It was our view, and the reason why we made the leading move is it provides some added stability to a market that was becoming increasingly volatile. And it actually is a better alignment of raw material cost with the surcharge based upon when we have to declare our raw material needs and what we pay for our raw materials versus how the surcharge works. So we didn't look at it, quite frankly, as a revenue generator or anything like that. As a matter of fact, we think it's neutral from the standpoint of that aspect. We just think that it brings more stability to a market that was becoming increasingly volatile. Michael Gambardella - JP Morgan Chase & Co: Great. Second question is your competitors from Germany, ThyssenKrupp, have a brand new mill in Alabama, in Mobile. What are you seeing from them in the marketplace in the U.S.?

Well, I mean they're in the marketplace. I think they're in the marketplace -- they've always been in this market as you know, largely as imports either from Europe or China or Mexinox and we continue to see that. They're in the startup mode down there. They're focused on certain alloys and certain sizes as they bring other mill online. So at this point, it's -- I would characterize it as orderly.

There are no further questions at this time. I will now turn the call over to Mr. Rich Harshman for closing remarks.

Thank you for joining us today on the call and thank you for your continuing interest in ATI.

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

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