ATI Inc. (ATI) Q4 2011 Earnings Report, Transcript and Summary

Dale G. Reid - Chief Financial Officer and Executive Vice President of Finance Dan L. Greenfield - Vice President of Investor Relations & Corporate Communications Richard J. Harshman - Chairman, Chief Executive Officer and President

Timothy P. Hayes - Davenport & Company, LLC, Research Division John Tumazos Daniel M. Whalen - Auriga USA LLC, Research Division John Charles Tumazos - John Tumazos Very Independent Research, LLC Brian Yu - Citigroup Inc, Research Division Richard Tobie Safran - Buckingham Research Group, Inc. Gautam Khanna - Cowen and Company, LLC, Research Division Kuni M. Chen - CRT Capital Group LLC, Research Division Michael F. Gambardella - JP Morgan Chase & Co, Research Division Sohail Tharani - Goldman Sachs Group Inc., Research Division Mark L. Parr - KeyBanc Capital Markets Inc., Research Division Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division Timna Tanners - BofA Merrill Lynch, Research Division Christopher David Olin - Cleveland Research Company

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year End 2011 Allegheny Technologies Earnings Conference Call. My name is Keisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to hand the conference over to Mr. Dan Greenfield, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you, Keisha. Good afternoon, and welcome to the Allegheny Technologies Earnings Conference Call for the Fourth Quarter and Full Year 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. [Operator Instructions] Please note that all forward-looking statements this afternoon are subject to various assumptions and caveats, as noted in the earnings release. Actual results may differ materially. Here is Rich Harshman.

Thank you, Dan, and thanks to everyone for joining today's call. While the fourth quarter presented some short-term challenges, 2011 was a year of significant revenue and earnings growth for ATI. Revenues grew 28% compared to 2010 as growth in our key global markets combined with the May 2011 acquisition of ATI Ladish and higher raw material surcharges more than offset reduced demand and historically low base prices for our standard stainless products. Looking at the growth by segment. In our High Performance Metals segment, 2011 sales increased to just under $2 billion, a 46% or $658 million increase compared to 2010. In our Flat-Rolled Products segment, 2011 sales increased to approximately $2.7 billion, an increase of approximately 17% or $388 million compared to 2010. And in our Engineered Products segment, 2011 sales increased to just over $0.5 billion, an increase of nearly 35% or $129 million. Total ATI segment operating profit, excluding inventory fair value accounting costs associated with the Ladish acquisition, was $640 million or nearly 12% of sales, an increase both in terms of dollars and as a percentage of revenue in each of our 3 segments compared to 2010. Earnings per share, excluding special charges, was $2.23, 210% higher than 2010. Earnings per share including special charges was $1.97, nearly 175% higher than 2010. Our financial position remains solid with cash on hand of over $380 million at the end of the year and net debt to total capitalization of approximately 31%. Capital expenditures were $278 million in 2011, and we invested $273 million in managed working capital to support the growth in our businesses. As we entered 2011, it was our view that the year would be marked by the resumption in secular growth in our key global markets. This was realized in spite of the mostly unanticipated Eurozone sovereign debt issues and a choppy recovery in U.S. GDP growth due in part to certain U.S. government economic and regulatory policies. Looking at each of our key global markets. Sales to the aerospace and defense market grew 44%, or by $454 million, and represented 29% of total ATI sales. Sales to the oil and gas/chemical process industry grew 41%, or by $319 million, and represented 21% of ATI sales. Sales to the electrical energy market grew 16%, or by $108 million, and represented 15% of ATI sales. And sales to the medical market grew 8%, by almost $20 million and represented 5% of ATI sales. In total, these key global markets grew 33% or by $900 million and represented 70% of ATI sales in 2011. As a result of the combination of strong growth and demand from these key global markets and the acquisition of ATI Ladish, high-value differentiated products increased to 75% of total ATI sales in 2011 compared to 70% in 2010. The focus on diversification and a higher-value product mix, both of which are key parts of ATI's strategy, enabled ATI to achieve solid profitable growth in spite of a very sluggish recovery in many of our short cycle markets, especially during the second half of 2011. Over the second half of 2011, shipments and base prices for our standard stainless products declined steadily and appeared to bottom at historically low levels in the fourth quarter of 2011. As a result, Flat-Rolled Products segment operating profit was negatively impacted in the fourth quarter as customers destocked during this period of economic uncertainty and falling raw material surcharges, which resulted from a significant decline in nickel raw material prices. In addition, these same factors, concerns about the Eurozone and the pace of the U.S. recovery and falling raw material prices, led customers of some of our high-performance metals segment products to keep inventories lean at year end. Unfortunately, this outcome was consistent with the cautious outlook we provided on our third quarter 2011 earnings release and conference call this past October. As we look to 2012 and beyond, we continue to believe in the strong secular growth trends in our key global markets over the next 3 to 5 years. ATI is well-positioned to benefit from this growth due to the investments we have made, both in new products and new and enhanced manufacturing capabilities. Since 2004, we have transformed the company by investing over $3.3 billion in capital expenditures and asset acquisitions to support this growth. Virtually all of these investments have been in the United States, and more than 75% has been self-funded. We are well positioned to support our customers for the expected biggest and longest aerospace cycle in history. The OEMs have historic backlogs, and the need for energy and cost-efficient airplanes and jet engines is expected to continue to drive demand. In 2011, the transition to much higher build rates at both Boeing and Airbus began. In late 2011, Boeing delivered the first 787 Dreamliner and the first 747-8 Freighter and throughout 2011 took orders for more 777s than ever before. The A320neo and 737 Max single-aisle aircraft were introduced, and to date both airplanes have received significant orders. These new planes will use future-generation engines that require even more advanced titanium alloys and nickel-based superalloys that can withstand the increased pressures and higher temperatures needed to deliver the fuel efficiency demanded by global airlines. In 2011, our sales to the aerospace and defense market were: jet engine, 15% of total ATI sales; airframe, 8% of total ATI sales; and defense, 6% of total ATI sales. Sales to the jet engine market grew 71%, and sales to the airframe market grew 18%, both compared to 2010. Looking at the global oil and gas/chemical processing industry market, most forecasts indicate an extended period of significant investment will be made to find and develop oil and gas deposits on a global scale. Development of large deep water oil and gas fields is expected to continue to increase in many areas of the world. In the Gulf of Mexico, producers are getting back to work now that the moratorium has been lifted. Shale oil and gas exploration is expanding not only in the U.S. but in many other areas of the world. Horizontal and directional drilling continues to gain share of the global rig count. In addition, infrastructure development is beginning to emerge to consume these new lower cost resources such as petrochemical plants, which use our corrosion-resistant materials. ATI benefits from each of these trends. As the Western economies recover and the emerging economies grow and develop, the world will continue to need more electrical energy. An extended period of significant investment in the world's power generation and power distribution infrastructure is expected. Public reaction to the 2011 Fukushima nuclear power plant accident has slowed the renaissance for new nuclear power plants in some countries. However, the accident has focused attention on safety upgrades and the storage and disposal of spent nuclear fuel, both areas of concentration for ATI. Global demand for coal-powered plants creates demand for our products used in cooling water systems and pollution-control equipment. The new economics of natural gas in the United States is expected to generate new orders for land-based gas turbines. We continue to see growing demand for renewables, such as solar and geothermal power generation projects. One way to reduce power generation requirements is to improve the efficiency of the distribution grid. Our grain-oriented electrical steels are used in new, efficient transformers. Demand for power transformers has historically been driven by residential and nonresidential construction and industrial demand. An upgrade of the U.S. electrical grid is long overdue and will eventually spur increased demand for this product. We also believe that ATI will benefit from the expansion of advanced medical equipment and procedures to the developing areas of the world. We continue to improve our position with the major medical OEMs by offering titanium products and a wide range of alloys and product sizes. Our ability to control the titanium manufacturing process from raw materials to the finished mill product and our reputation for high-quality products makes ATI attractive to the medical equipment customers. The MRI market continues to grow in developing countries as well as in the U.S. 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 2011, we made significant progress in the continuing transformation of ATI to better capitalize on the secular growth in these key global markets. We completed the acquisition of Ladish in early May, and integration began immediately. Through ATI Ladish, we now have advanced capabilities for isothermal forging and hot closed-die forging, which are the processes of choice for most of the advanced titanium alloys and nickel-based superalloys, including nickel-based powders used in the latest technology jet engines. We now offer advanced, complex, large-scale near net shape titanium castings. Our castings are on most Boeing and Airbus models, particularly on the large 787, 777, and 747-8, A380 and A350. We also have titanium casting content on many jet engines. A significant benefit from combining ATI's leading melting and hot-working mill products technologies and capabilities with ATI Ladish forging and casting capabilities is the technology information exchange. We believe this transparent exchange can create better products, improve productivity, reduce costs and compress the time for alloy and part development. All of this enables ATI to create value for our customers. In 2012, we will have a full year of benefit from ATI Ladish sales and synergies. Significant operating cost reduction opportunities have been identified, and many are planned to be implemented and qualified this year. We expect ATI Ladish sales to grow through involvement in our market sector teams. For example, ZKM Forging, our operation in Poland, recently received its first ever order from the oil and gas market. Significant progress was made throughout 2011 at our Rowley, Utah premium titanium sponge facility. With stable input prices for both titanium tetrachloride, or TiCl4, and magnesium, higher production rates and improved plant efficiencies, we expect to produce more sponge at lower costs in 2012 than in 2011. We remain on track to complete the standard qualification process by the end of the first quarter 2012. Production began at our new fourth plasma arc melt, or PAM, premium-titanium furnace in North Carolina in the second half of 2011. This capability is ready to meet the increasing growth for rotating quality titanium alloys from the jet engine market. Construction began at our new advanced hot-rolling and processing facility in Western Pennsylvania in the second half of 2011. The facility is on schedule and on budget. Construction is expected to be completed by the end of 2013, with commissioning occurring during the first half of 2014. This investment creates significant profitable growth opportunities for all of ATI's Flat-Rolled Specialty metals. As we look at our High Performance Metals segment, we expect to benefit in 2012 from the growth in demand from our key global markets, a full year of results and increasing synergies from ATI Ladish, significantly less start-up costs and a lower cost structure at our Rowley premium-titanium sponge facility, additional premium melt capacity and growing demand for new products. For example, ATI 718Plus alloy is expected to grow in use through our long-term agreements for this new nickel-based superalloy. We expect significant new sales in certain ATI proprietary alloys, particularly for high temperature jet engine applications. We have a new LTA, long-term agreement, for landing gear parts, which will be produced at our forging operation in Poland. We expect good growth for our titanium investment castings for airframe and jet engine applications. We have new supply agreements for titanium fastener stock and titanium airframe extrusions, and we expect to begin to benefit from the commercialization of ATI 425 alloy in 2012. In our Flat-Rolled Products segment, we expect to continue to benefit from the growth in demand for many of our high-value products. Importantly, we are also seeing signs of improvement from our standard stainless products. First quarter order entry is much better, and base prices are higher than in the fourth quarter 2011. The base price increase of 10% or more announced during the fourth quarter 2011 has been implemented effective January 2012. It appears the market may have bottomed in the fourth quarter. We're seeing better demand from the automobile, truck trailer and railcar markets. Demand from the process industry, particularly food processing, is slowly improving. However, we have yet to see much improvement from the housing or the consumer appliance markets. Given these views, on balance, we are cautiously optimistic and we'll be watching for signs of sustained recovery and demand growth rather than just restocking for our standard stainless products. Finally, given the ongoing weakness in housing construction and continued low demand from industrial markets, both of which are drivers for the electrical energy distribution market, we expect slightly lower demand and reduced prices for our grain-oriented electrical steel products compared to 2010. In our Engineered Products segment, we see continued growth in demand for our tungsten-based products and for our industrial forgings and castings. Our order backlog is solid. Backlog in our High Performance Metals segment at the end of 2011 was $1.5 billion, primarily due to continued growth in the aerospace market. Demand for our products in Asia continues to be strong. In 2011, we produced and delivered 2 of the largest project orders in the history of ATI. Both orders, CP titanium sheet for a large diesel facility and nickel alloy plate for a large gas pipeline project, were delivered on time, and customer expectations were met. This performance positions ATI as a global leader in the global supply chain for infrastructure development projects that use high-value alloys. Several large projects and one megaproject are pending, so we expect to have another excellent sales year in Asia. While there are concerns about the Eurozone economies, it is important to note that the majority of our sales to Europe are to the aerospace and oil and gas markets, which are primarily driven by global secular growth trends. Looking to the future, although macroeconomic challenges and uncertainties exist, we are cautiously optimistic about 2012. ATI's diversification, focus on differentiated growing global markets, continued commitment to new product and technology development and focus on cost reductions and manufacturing efficiencies are important to our growth strategies. While secular growth trends in our key global markets remain intact and leading economic indicators are getting better, short cycle market recoveries remain sluggish as the unemployment rate in the U.S. remains high. The U.S. consumer confidence index remains low, at least from a historical context. U.S. economic policies and regulatory environments remain uncertain, and concerns remain about the impact of the sovereign debt crisis on the Eurozone economies as well as the rest of the world economies. As we take a balanced view, we believe ATI can achieve double-digit revenue and earnings growth in 2012. Based on these current views and with the expectation of less volatile raw material costs, we expect revenue growth of at least 10% in 2012 compared to 2011 and expect 2012 total segment operating profit in the range of 13% to 14% of total sales. We will now open the lines for questions. Keisha, may we have the first question, please?

[Operator Instructions] Your first question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

I guess on the revenue side being up 10%, I listened to the forecast, but I also listened to all the end market demand that you enumerated on in your introductory remarks. I'm just wondering why 10% when you did 28% in 2011? You've got Ladish making a better contribution. You've got -- you said the 425 will start to be commercialized. Can you talk just a little bit more about what's changing 2012 over 2011 versus 2011 over 2010?

Yes, I think part of it is that we do expect the surcharges, raw material surcharges, to on balance, to be lower. A big driver of it is obviously the cost of nickel. If you look at the cost of nickel, which really peaked in the first half of 2011 at nearly $13 a pound on the LME and then began to gradually begin its descent in the second half and troughing at the end of the year at a little over $8, the average was almost $10, a little under $10.50 throughout the whole year. That isn't something that we're expecting to see in 2012. I mean, our expectation is that roughly the current cost of the raw materials will be – is the expectation for 2012. To the extent that, that proves to be low, then revenues will grow higher. So that's one aspect that we think about and look at a lot. The other is as you look at the end markets, I mean, as we look at the High Performance Metals segment, I mean, I would expect revenue growth in the High Performance Metals segment to be above 20%. That's where a lot of these end markets are, and the strong growth in aerospace and oil and gas and the addition of Ladish for a full year. So we certainly expect that segment to grow at a rate that's above 10%, in the low 20s, let's say. The Flat-Rolled Products segment, which is a large component of it, is the standard stainless products. There's -- I wish I could say everything in Flat-Rolled was the high-value products and the differentiated markets. The fact of the matter is it isn't. So when you look at that, we are cautious in terms of the pace of the recovery on the standard stainless side. We're very encouraged by the early signs. Hopefully, as the U.S. economy continues to grow, perhaps maybe our estimate is a little conservative there. We'll see; it's only January 25. So I think when you look at that segment and pull it all together, I would expect something in the range of mid-single-digit growth. And then the smaller segment, the Engineered Products segment, I think that, that growth will be a little bit above Flat-Rolled but nowhere near the High Performance. So when you roll it all together, that's where we see growth of at least 10%.

Okay. That's really helpful. The second of my 2 questions is just, if you could elaborate a little bit more on what happened, you talked about some of your larger customers of the High Performance Metals or your higher value-added products also were destocking? I just never really understood how that works. I thought those were all a little bit more contract-sticky businesses. And the stainless side, destocking, restocking, I understand. But how do we know that, that was a temporary phenomenon? And what have you seen that's given you conviction that it's recovering already?

Well, the order entry in the first quarter and the fact that for most of the products we're booking for delivery into the second quarter. So I mean, I think it is something that's not a unique phenomenon that we saw just at the end of 2011. I mean, there are year-end plannings that always seem to happen on the inventory level side in the supply chain. And the other aspect is that the surcharge or the index there is a lagging index, and when you look at things like nickel alloys, for example, even on the lawn products side to the extent that you didn't actually need it at year end, it actually is smarter to wait until the first quarter because the index, the raw material index, will be lower. So we saw some of that quite frankly. And also on the titanium side, with titanium scrap backing off a little bit, we saw some of that inventory planning action as well. So I don't -- I think it was a unique year-end issue that isn't the first year it happened, and the conviction we have is where we're loading and filling up for the first half of 2012, number one; and number two, the realities of what the aerospace ramp is and the continuing strong demand from the other markets that we've already talked about.

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

Can you give us an idea of what your titanium shipment outlook is for 2012?

The total, Sohail, relative to the 45 million pounds in total in 2011, is that your question?

Yes.

Yes. I think we'll be somewhere in the upper single digits.

Okay. That's the volume growth?

That's volume growth, right.

Okay. And I noticed that your pricing was pretty strong in the fourth quarter. Was that a mix issue?

Some of it was mix. Some of it was mix. Clearly, some of it was, base pricing has been increasing throughout the year. But I think the bulk of it was really a higher-value product mix on the titanium side. Less ingot, more higher-value product. The other thing to think about on the total titanium volume, which includes the impact of our industrial business through the Uniti joint venture, some of that obviously is on the airframe side, and with the airframe and large part of that -- most of that, quite frankly, is with Boeing. And with that being at the minimum take-or-pay, you're really not in 2012, seeing the growth on the volume or on the revenue side from the airframe. I think eventually, as Boeing ramps up on the 787 and the other programs, you will begin to see that. So if you're thinking about a high single digit, let's say a 7% or 8% volume growth in total titanium, most of that is, quite frankly, being driven off the jet engine side.

Yes, and my next question, there's a lot of concern about the rising input costs. Can you give us some idea of what -- how you stand on your titanium tetrachloride for the Rowley facility and the silicone for the zirconium facility?

Sure. Well, on the Rowley facility, in terms of the rising input costs to produce titanium sponge, we don't have rising input costs. And we've been asked that question a lot in 2011 because of what the industry is seeing on the aluminide side and the rutile side, and as we've said consistently, our contacts are structured that we're not seeing that increase. That's an important part of the capability we have in Rowley. On the zirconium side, clearly the zircon starting materials are higher. They actually corrected a little bit and were down a little bit towards the end of the year, but the vast majority of that, we manage that risk by how our contracts are priced in terms of pass-through and structures like that. So we're really not negatively impacted by the rising raw material costs for zirconium.

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

Rich, I just have one. I'd like to revisit something that I think you've discussed previously and try to get some additional clarity on and color on. It's on some incremental opportunities here. The 87 is in production, but we're still talking about derivatives like the -10. We know that the 737NG is in production, but we're still talking about derivatives like the Max. Now Boeing is going through inordinate efforts to reduce weight on all their designs, and I'm wondering if you're getting any sense of an increased use of titanium parts to reduce weight on these derivatives. And I guess, the second part of that is, should we be counting on higher titanium content for derivatives? And to any extent you can comment, is this translating to some near-term opportunities?

I think the short answer is to all those questions, Rick, is yes, we are. We do think that as they look at the derivatives and do some reengineering and look for weight reduction, there are some opportunities for changing out of some of the metals. We are working with the customers on that. There are opportunities, we believe, as we have continued to state for a while on ATI 425. On the single aisle, the 737 Max and the A320neo, those are -- the ability for us there is more on the engine side, although I do -- with some of the new alloys that we have, although I do think that there may be some opportunities on the airframe side, as well. I had mentioned a couple of things in terms of titanium fastener stock and titanium extrusions, I think those are where -- that is where those opportunities play, is on some of those derivatives. So yes, the opportunities are certainly there, including opportunities on ATI 325 -- 425.

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

I did want to just ask about Q1 a little bit, given some of your comments on order entry and the fact that we're not going to have any LIFO true-up obviously, we don't assume one going into the year. Just kind of where do you -- the margins in Q4 were light both at Flat-Rolled for the reasons you mentioned and at High Performance maybe due to the destock. But I guess what should we be anticipating through the year, if you can give us a sense for how the year progresses? Is Q1 going to be just marginally better than Q4 from an earnings perspective and we ramp linearly through the year? Or how do you see this playing out? And also what is the timing of the Yandu [ph] 3 project in your best estimation right now?

Okay. Let me take the last one first. I mean, our best estimation, recognizing that our past best estimations have not always been exactly accurate, but we are very confident that, that project is there. It's not a question of if, it's a question of when. We think from all the input that we're hearing now that it's -- the decision is sometime in the first quarter. That could mean next week. That could mean 2 weeks from now. That could mean next month. But it is sometime in the first quarter, and that is the latest in realtime information. I think as we look at and think about 2012, I would -- we are expecting that the first quarter is better than the fourth quarter. And we also are expecting the improvement throughout the year. And we think that the short cycle businesses, excluding on standard stainless, really has a lot to do with that. That probably -- not probably, it does have some impact on our outlook. I mean, we are -- we think we're being pragmatic here, but we're not ignorant of the fact that there aren't some issues out there from an economic standpoint, both in the U.S, in terms of the pace of the recovery, as well as in Europe. I think that on the aerospace side, I think you will continue to build momentum over the year and, quite frankly, into 2013 on the ramp, the production ramp, the rate ramp. We've talked a lot before that while we'd all love for the rate ramp to be kind of a shooting rocket from one quarter to the next, in reality it is a stair-step function that goes out over about a 2-year period. And the supply chain is really pretty good, both on the engine side and once they work through their titanium inventory situation, on the airframe side, in terms of matching the pace of the deliveries to the rate ramp of producing the engines and the airframes. So I think that from where we sit today, first quarter is better than fourth quarter, but the first quarter is probably the lowest quarter of the month, and the revenue -- and the lowest quarter of the year, and the revenue and the earnings continue to grow and build momentum through 2012.

And if I could just follow up on the pension situation, you mentioned 84% funded in the press release. That doesn't trigger an ERISA contribution but -- required contribution, but do you elect, are you going to elect to put some cash into the plan this year? And if so, when and how much?

Yes, Dale can handle that.

Yes, I mean, as you pointed out, we are not required to make any contributions here in 2012 to our U.S. DB plan. We'll wait and see in terms of how the asset performance is throughout the course of 2012. I mean, if you look at it from a valuation standpoint, let’s just say a point-in-time valuation once a year, at the end of the year, I mean, we basically were in a situation where interest rates were at historic lows. So you would expect going forward if we were to get some sort of thought process in terms of interest rates going up that, that valuation and that funding percentage would just go up because the discount rate that we would be utilizing would be slightly higher. So right now, there's no need to put money in the plan, but, obviously, as we evaluate it going forward, we will make that decision. But there's nothing in our near-term plans to do anything at the moment.

Your next question comes from the line of Michael Gambardella with JPMorgan. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: I've got 2 questions, the first on stainless and then the second on titanium. On stainless, on the base metal pricing being so low, I mean, is that a combination of a new player with Thyssen down in Alabama as well as just nickel prices being about 40% of their peak back in '07 and it's just hard to get people buying stainless when nickel's trending down?

I think that's part of it. I mean I think the inventory at year end from the published information and the feedback that we get, inventories aren't in excess abundance. I think that for the second half of the year, there was a lot of caution and no risk-taking quite frankly, on the part of the customers, either service centers or direct customers, in terms of buying more than they needed. And I also think that many of the end markets for the commodity stainless sheet, and to a lesser extent, plate, were softening because they're short-cycle, more GDP-relative. You look at things like an end market, like consumer durables, consumer appliances, and what the Whirlpools and others of the world are saying about their demand. I think that, that was clearly reflected in the consumption of the austenitic grades, the 300-series grades of stainless, which is really what our focus is on. We are not big players in the automotive exhaust, the 400-series alloys in automotive exhaust. We participate in that a little bit, but we're not as big as some others. So when you look at where our products are going and what those end markets are, nobody was getting ahead of that and trying to catch that falling knife while nickel continued to fall. So they were buying only when needed. A lot of the buying was, quite frankly, out of ready coil from the mills and we're seeing that changing a little bit here. I think it's interesting to note that the raw material, the surcharge, will be higher in February than it was or is in January, and yet that doesn't appear to be negatively influencing the volumes that are being entered in order entry for February delivery. So the question still fundamentally remains, is this just kind of a replenishment or restocking of more normal levels of inventory, or is this a fundamental improvement in end market demand? And quite frankly, we're hearing more of the latter at this point, but I think people want to look at and see more data points. There has been additional price increase announcements above and beyond that which was announced in the fourth quarter, which was effective and is implemented in the marketplace beginning in January. Three producers now, as of today, including ourselves, have announced another price increase. I think that's good because, quite frankly, I still don't believe that the current base price is sustainable because it doesn't generate the returns on capital employed that the size of investment that exists in making the product requires. Does the "new entrant" into the market have an effect on that? I don't know. I mean, we kind of view it as they're not a new entrant. They've been in this market for a long time. They're the largest importer, quite frankly, collectively when you look at their products in terms of where it's coming from. The producing it in the U.S. probably gives them a better variable cost basis in order to produce the product. So we'll have to see. But I think it's more, Mike, I think it's more of being fundamentally end-market-demand-driven than anything else. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: On your standard stainless, though, isn't about 60% of standard stainless goes through service centers?

Yes, it's probably a little bit less than that now. I mean, we used to have 80% going through, but now it's probably closer to 50-50. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay. And then, second question on titanium. I heard what you're saying on the TiCl in terms of the costs, that you're not feeling any costs from DuPont. But is that true for the rest of the contract that you have with DuPont? And how long is that contract for?

Well, it's true for as long as we have the contract for, which runs several more years. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: And then, what about your purchases of sponge iron from Japanese and Kazakhstan sources? Are you seeing any cost increases?

Yes. I think that's been talked about in the market. I think others have said that the prices are higher in 2012 than they were in 2011, and that's true. But quite frankly, you remember when you look at our total titanium volume, the total of the 45 million pounds of titanium products that we sell into the marketplace, the vast majority of that volume has raw material surcharges or indices in it to the extent that it's covered by a contract either 12 months or longer in length, and the transactional-type business is priced to reflect the current raw material cost input. So in actuality, from a risk management standpoint, don't think of titanium sponge for the most part as being any different really than nickel going up on the LME. When nickel goes up on the LME, you have a raw material index or surcharge that is used to manage that risk, and we have essentially the same thing when titanium sponge goes up. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: So you get a complete pass-through of higher titanium sponge purchases with your Boeing contract?

I said for the vast majority of the 45 million pounds that we sell, we do. Not for all of it. So the airframe would be part of that, that we do not. But when you look at -- when we look at and know how that has been priced, I think we're comfortable when we look at how we get our raw material units from all sources, both purchased sponge, produced sponge and scrap, that we know how to manage that risk.

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

I'm just curious, can you talk a little bit about your exposure to the military and defense markets? Any risk of lower volumes associated with cutbacks in defense spending or discontinuation of the war effort?

Yes. I think it would be disingenuous to say that there's absolutely no impact. I mean, it's about 6% of our total revenue. A reasonable piece of that actually comes to us from Ladish, which has been heavily involved in making forgings and machine forgings and parts for the helicopter market, and that market actually looks pretty healthy and growing. And I don't think that there's any major discussions about the defense budget negatively impacting that. I think that as you cut back operations in certain areas of the Middle East, maybe you have less consumption and less flying of jet fighters, and therefore, that may impact some of aftermarket business there. But quite frankly, it's not be a big earnings driver. I think that on the zirconium side for the nuclear market where we're dependent upon not only the retrofitting of the existing nuclear fleet but also newbuilds there, that could have an impact, but quite frankly, probably not as much in '12. I mean, that's more of a longer-term issue. But from everything we're seeing in terms of the defense budget, that doesn't look that's going to be a huge negative to us either. So I think when you put it all together, maybe it's a neutral equation and it's not a growth market. There could be some growth opportunities, we still believe on the armor side because some of these armor projects will move forward in some way, shape or form. But when you add it all together, we think of it largely as neutral at this point in time. Having said that, I mean, I don't think anybody in Washington knows where the defense budget’s going to end up, either, and what programs will be impacted, so we're just going to have to wait and see.

And just one quick follow-up. Do you have any contract associated with the Joint Strike Fighter?

We, on the engine side, we're involved with that but not on the airframe, no.

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

Similar to the segment level revenue guidance breakout you provided for Tim there, can you comment on that from a margin standpoint? Where do you think the ranges are for High Performance, Flat Rolled?

Yes. I think I would certainly expect in 2012 that High Performance would return back in the low 20% of revenue side from a segment operating profit standpoint. Certainly, when we look at the Flat-Rolled Products segment with all of the pluses and minuses and cautious outlook on some of the short cycle business there, that's probably flattish as a percentage of revenue. And the Engineered Products segment I think will be a little bit better. I mean, that's a segment, quite frankly, that should be closer to 10%, and that's what we're challenging them to deliver and present at this point in time. That's not my long-term expectation, but 10% at this point in time. So that's what we would be focused on.

Okay, great. And then my second question is, back on the titanium, you are posting good growth there, but most of it is it more on the CP side or it's in Flat-Rolled. And on HPM, titanium mill shipments are growing at a much slower pace. With everything that's happening in the aerospace sector and less supply chain inventories on the engine, when do you think we're going to see an acceleration on HPM titanium mill shipments?

Yes, it's a fair question. I think that you really have to kind to step back and think about the product forms and the -- that we're selling there and the 2 major end markets, which are engine, jet engine and airframe. On the airframe side, it's flattish, right, because it's being taken at the minimum. So to the extent you are seeing growth, and we are, it's on the jet engine side both in terms of mill products as well, obviously, now in terms of forgings and castings that we're making through ATI Ladish. I think what we are seeing and what really we're focused on, and we have said this consistently for a number of years because it's true, that we're focused on the higher-value product forms. So to the extent that the opportunity is to use our capacity to produce aerospace-quality billet or bar or shapes or rod or wire as opposed to ingot, we will do that because that's better for the shareholders from an earnings standpoint. So that factors into, if we wanted to maximize volume in pounds shipped only, we would ship the maximum amount of ingot that the market can absorb. But that's not our strategy because that wouldn't maximize returns on capital employed or earnings. So I think that there's clearly growth on the engine side. It matches the growth on the engine market because we're at least maintaining share. On the airframe side, I wouldn't expect the airframe demand to return to a growth mode until 2 things happen: Boeing works through their supply and gets it down to a level that they think is reasonable, given the production of the airplanes that they have, and the ramp happens. And I think that's not '12. Is it '13? Maybe. Is it '14? Yes, probably.

Your next question comes from the line of Steve Levenson with Stifel, Nicolaus. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Just following on that question. When Pat retired and you took over, I think the thought was that 2014 had the possibility of being a big year, but the titanium supply chain would begin to tighten up by the end of this year, beginning of next. Now do you think that's still the case? And how might that impact base prices, especially given the near net shapes that are producing the scrap?

Yes. I do think that's still the case. I mean, maybe it isn't the end of this year, but it's -- I think you're going to begin to see that in 2013. I think that's consistent with the views on a question that I answered earlier that, does the earnings profile ramp up as you go through the year? Yes, it does. And I think that's part of it. I think when you look at all the drivers for titanium and all the end markets, if the world continues to develop the way we think it will, with all the appropriate cautions and caveats there, that Europe holds together and the airframers meet their ramp schedule and the other markets develop the way we believe that they will, that I talked about in my comments, that the titanium and, quite frankly, the nickel alloy supply chain and capacities tighten considerably, and that supports increases in base prices and margin. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Do you think the ratio between, in terms of weight, sorry to ask a weight question, but in terms of weight, will nickel generally be double titanium?

You mean, in terms of the total shipments of that we have? Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Yes.

Yes. I think because we -- it's nickel and specialty alloys. So I think when you look at all of the markets and the fact that nickel typically weighs more, twice the weight of titanium, yes, I think you always see that in terms of how we participate in the markets that nickel and specialty steel, from a total weight standpoint, will be greater. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Last question is, do you have Ladish backlog broken out separately from total backlog?

We do not, but -- and we're not going to because, quite frankly, Ladish is now part of us. But when you look at the $1.5 billion, Ladish has a healthy backlog. Their backlog today is higher than it was when we bought them, and it's a growing business. So we're very pleased that Ladish is part of ATI.

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

The flat-rolled outlook is somewhat guarded of course, Rich. And there is a tendency for distributors to pare inventories too much when the nickel price falls. And many U.S. economic indicators have been okay, as in auto production inching up and multifamily housing and other things inching up. Do you think there's a chance you're too cautious on the standard flat-rolled, almost ignoring the potential that the distributors restock? Or are you really saying that you're worried that the new entrant is going to clip your market share?

Yes, I'm not worried about that. I mean, we're not oblivious to it, obviously. But I'm not really all that concerned with that because we're going to have a significant position in this market. And quite frankly, part of the growth in the stainless market, when you look at the overall statistics that get published and you see the total volume of stainless flat-rolled and apparent domestic consumption, it always includes emission exhaust alloys, the 400 series. And quite frankly, partly because of our 55-year-old hot mill, that's a market that we can't broadly participate in today as much as we can and we will when that new hot mill comes online. So when you strip out and look at the austenitic versus the ferritic grades, there was good solid growth in the ferritic grades much more and there was a reduction, shrinkage, on the austenitic side, and that's really the comment that I made earlier. Could we be -- I mean, I can't say that we're being overly cautious, I mean, because we don't take giving this kind of guidance lightly. I think we're being realistic, trying to weigh and look at all the factors. If you ask me if I believe, will there be opportunities to do better than that in flat-rolled? Yes, and to the extent that those opportunities present themselves. We will.

If I could follow up on a different topic. The balance sheet changed a little bit with the $500 million of debt, the Ladish intangibles, the $400 million noncash working capital employed, of course, Rowley monies have been put in place and hopefully are going to start contributing robustly and visibly. And you've got the $1.1 billion for the hot strip mill or so. How much will the CapEx be in 2012 and '13, excluding the hot strip mill? And I guess I'm looking at the balance sheet of $6 billion of assets and $1.8 billion of tangible equity and $2.2 billion of net debt equivalents, including the benefit slightly greater than the tangible equity. So it looks like until 2015, when the hot strip mills kick in, you really shouldn't be doing any more acquisitions or major capital programs.

Yes. Well, I’d say that's not an illogical conclusion because that -- the investment of the hot mill is a large investment for a company of our size. I think when you look at the 2012 capital number of $485 million, about 70% of that is the hot mill. When you -- and I would imagine that, that kind of ratio will probably stay in place in 2013, as well. So clearly, the focus -- and part of the reason quite frankly, aside from the 2008 Lehman Brothers and the 2009 challenged economy and 2010 not being where '11 was, I mean part of the reason why we are now really just beginning to construct the hot mill is because we were pacing the capital spend on the other projects, just from the standpoint of financial resource availability. So I think that the investment grade credit rating is important to us. I think it's a differentiator in this space, quite frankly, so that is important to us. We recognize that with the Ladish acquisition that it’d be hard to do another acquisition of that size. It's not impossible to do another kind of bolt-on acquisition that makes sense and to manage the resources accordingly. But between with the hot mill project and the cash outlay and resulting debt that we took on with the Ladish acquisition, we're focused on completing the hot mill as quickly as possible on time, on budget, getting it qualified and commissioned and integrating and realizing the synergies of Ladish, and then we'll go from there.

[Operator Instructions] Your next question comes from the line of Kuni Chen with CRT Capital.

Just a quick follow-on to John's question. Obviously, it doesn't look like you're considering anything large as far as potential M&A goes, but as far as bolt-on opportunities over the next year or 2, can you maybe give us some color as to what areas, niches you might look into where you'd look to fill in and add to Ladish or other parts of your business?

Yes, well, we're not going to take any sharp right or sharp left turns from what we know how to do, which is really specialty metals and the value-add and getting closer to the customer, the end customer with parts and near net shapes and things like that. So there -- Kuni, there are always opportunities that are brought to our attention, and we try to take a pretty disciplined look at it. But other than that, it's really not appropriate to talk any more about it.

Your next question comes from the line of Tim Hayes with Davenport. Timothy P. Hayes - Davenport & Company, LLC, Research Division: On the falling nickel prices, I understand how that's going to affect the sales growth in '12. But the falling nickel should actually have a boost to operating margins for both the Flat-Rolled and the High Performance segments. Is that correct?

Well, I mean, not really. I mean, because in theory, at the purest level, it's a pass-through. Now in reality, maybe in some aspects of the Flat-Rolled Products segment where the manufacturing cycle time is longer, the speed -- and certainly in the High Performance Metals segment where the manufacturing cycle time is definitely longer, the speed at which nickel falls and how the indices or surcharges work actually works against you. You get squeezed a little bit in terms of not having the index or the surcharge matched up ideally, and you have higher-cost nickel hitting cost of sales matched against a lower nickel price that drives the surcharge or the index. So in actuality, it hurts. Timothy P. Hayes - Davenport & Company, LLC, Research Division: Yes. And I wasn't thinking so much of that near-term timing aspect. Absent that, I was thinking more of if -- I guess, in simple terms if you’re taking the nickel component out of those sales and COGS or sales and operating costs, the percent margins and that percent margin that you gave your guidance on, that percent margin would go higher.

Yes. Right. It would. It would, but at the end of the day, that -- we try to make that less of a factor, right. Because in reality, through a cycle, it's really if your business model is based on the fact that the only time you can make money is either in a rising raw material environment or a falling raw material environment, you don't have a very good business model. So it's really all about execution and conversion margin and the [indiscernible] markets, et cetera. Timothy P. Hayes - Davenport & Company, LLC, Research Division: Right. Yes, I'm just trying to get a feel for if the improvement that you're expecting in segment operating margins in getting into that range of 13% to 14% this year versus, what was it? I guess, 11.8% achieved in '11, how much of that should we think of as just from the fall of nickel prices versus the remainder which would be maybe less of a drag from Ladish and then underlying in the performance of the segment?

It is much more the latter.

Your final question will come from the line of Mark Parr with KeyBanc.

I was curious if you could -- I realize you've included Ladish into the legacy business. Can you give us any sense of how the growth in their backlog has compared to the growth of the backlog for the legacy business?

Yes. I mean, let Dale look that up real quick and…

Okay. The other thing, I just wanted to just bring up this again, and it may be a complete nonissue. But with the vertical integration move to Ladish, there's always the potential that some of your current customers may view you as a competitor. And I'm just wondering to what extent there has been any impact that you're aware of based on people maybe shifting business around as a result of you acquiring Ladish. Or have there been any other issues as far as requalification that might be delaying the, whereas you're going to be supplying metal into Ladish, where Ladish had been buying it from someplace else, maybe some requalification delays in getting an upside to Ladish's business?

Yes. I don't think there's any requalification issues because for the most part, the qualification's really driven by the OEM, not by the forger. So when you're selling into the jet engine market which is -- or the airframe market, for that matter, the qualification program of the mill is driven by the OEM. And we're selling to those OEMs, anyway. So I don't think the qualification issue is a significant factor. The other question, in terms of the reaction of our other forging customers, I mean, quite frankly, we haven't seen any negative reaction of any significance. I mean, I think we make a good product. We make a high quality product. We try to service the customer very well. We're not known as the lowest-priced producer, and I think that's a good thing for everybody on the call, including all the shareholders. So we try to balance all that -- all those issues. I do think that in many cases and more and more in what we're hearing from the OEMs, the benefits of a seamless real supply chain going all the way from melting these high-end alloys into forging and casting them into near net or final parts, the OEMs recognize the value of that single, seamless supply chain over the virtual supply chain of multiple producers being involved. And since more and more of the OEMs are becoming the directed source of where the forgers buy from, quite frankly, I think that that's the change in the market that is going to take hold even more so going into the future. And being integrated from melt all the -- in alloy development in melt all the way through the forging of the final part is a strength, not a weakness. And by the way, the High Performance Metals segment backlog, without Ladish, was up 27% from year-end 2010, which was, Dale?

$650 million.

$650 million.

And we do have time for one last question. That question will come from the line of Dan Whalen with Auriga USA.

Just in terms of the New Castle finishing operation, are there any preliminary targets as to when that will be restarted? And then secondarily, whatever the easiest way to frame it is, can you just talk about your capacity utilization rates for when we would really start to see some of these secular upshifts here.

Yes. I mean, the New Castle, I mean, I think we will be in a position that once we have the hot mill, the new hot-rolling and processing facility up and running, it's probably capacity that we will need or may need. So it's a temporary idling at this point in time. It wasn't a big part of the finishing of our product, but it was -- so the facility has been underutilized and, therefore, not as cost efficient as our other options. And your other question was on the capacity utilization going forward?

What it was in the quarter and, I guess, what going forward as well would be helpful.

Well, I mean, what capacity are you talking about, right? Because...

Well, right. If you could break it down, I mean, what -- the easiest way to frame it, either if it's HPM or just generally speaking.

High Performance, I mean, we are not operating at full capacity at all of our melting furnaces. We certainly have with the investment we've made in the TSAF, we certainly have forging, both rotary and radial, as well as large forge press capacity to support the growth that we've been talking about here, so it's not significant investments being required. On the exotic alloy side, we have capacity on the zirconium sponge as well as the melting site for exotic metals to grow over the next couple years at the growth that we think is available. On the Flat-Rolled Products side, we have 3 melt shops in Western Pennsylvania. None of them are fully utilized from the standpoint of full crews, so we have capacity available there as well as on the finishing side. And the hot mill, the existing 55-year-old hot mill, is not a bottleneck operation. So long story is, we have the capacity to grow over the next several years without making significant investments. Okay. Well, thank you very much for joining on the call today, and thank you for your continuing interest in ATI.

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

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