ATI Inc. (ATI) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2013 Allegheny Technologies Inc. Earnings Conference Call. My name is Jo and I'll be your operator for today. [Operator Instructions] As a reminder, the call today is being recorded for replay purposes. I would like to turn the call over to Mr. Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please proceed, sir.

Thank you, Jo. Good morning, and welcome to the Allegheny Technologies Earnings Conference Call for the Second Quarter 2013. This conference call is being broadcast on our website at www.atimetals.com. Members of the media had been invited to listen to this call. Participating on the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Pat DeCourcy, Interim Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI. If you have connected to this call via the Internet, you should see slides on your screen. For those who have dialed in, slides are available on our website, www.atimetals.com. After some initial comments, we will ask for questions. [Operator Instructions] As always, we will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call time. We plan to end the call at 9:30 a.m. Please note that all forward-looking statements this morning are subject to various assumptions and caveats, as noted in the earnings release and on this slide. Actual results may differ materially. Here is Rich Harshman.

Thank you, Dan, and thanks to everyone joining today's call. As we said in April, we expected the second quarter to be challenging due primarily to ongoing global macro economic conditions [ph]. We certainly saw this with continued sluggish demand from many of our major end markets, primarily resulting from the challenging global economic conditions and falling prices for most of the raw materials used to produce our products. Slow and uneven growth in the U.S., little to no growth in Europe and Japan and slowing growth in China continue to impact demand. In addition, prices for many of the raw materials we use continued to fall. Uncertain global economic conditions and falling raw material prices appear to be the primary drivers in continued conservative inventory management throughout the supply chains of most of our major end markets. Operating profit continued to be pressured by lackluster demand from many of our end markets, the continuing impact on -- of falling raw material costs, most notably nickel and titanium scrap, and the resulting short-term impact on demand for many of our products. Pressure on base prices for most products sold on a transaction or spot basis, the impact of higher raw material costs that were not aligned with falling raw material indices and surcharges for products with longer manufacturing cycle times and low operating rates negatively impacted margins, although these factors were somewhat offset by LIFO inventory accounting. While we can't control global macroeconomic conditions or raw material prices or the underlying demand for our products, we will continue to focus on taking actions within our control. These actions are designed to improve ATI's financial performance and financial flexibility in the short term and keep ATI well positioned for profitable growth over the long term as economic and market conditions improve. Specifically, we continue to accelerate our cost reduction efforts. In the first 6 months of 2013, we have achieved nearly $79 million in gross cost reductions. Recently, we took actions to improve ATI's liquidity and financial flexibility. And while near-term demand remains challenging, we are even more confident in the long term, particularly in 2 of our largest markets: aerospace, and oil and gas/chemical process industry, which together account for over 50% of ATI's sales. We are focused on bridging the gap between the current conditions and ATI's long-term secular growth potential. Slide #5 shows a graphic display of the impact of falling nickel prices since not only early 2013, but also over the last several years. Note the steep price drop in 2013, particularly throughout the second quarter. We have seen a 2.5-year decline in the monthly average LME cash price from $12.82 a pound in February 2011 to $6.20 a pound in July of 2013. Now look at the surcharge table at the right. You can see the impact falling nickel prices have on the surcharge for 304-grade stainless steel, the most common grade of stainless sold in flat-rolled product form. From April 2013 until August 2013, the surcharge will have dropped over $0.13 per pound or nearly 20%. You can see why buyers wait. The surcharge in August is nearly $0.03 a pound lower than in July. Demand in July has been weak. And when combined with very short lead times, we have adjusted our operations accordingly in the Flat-Rolled Products segment. This is expected to continue to negatively impact our Flat-Rolled Products segment throughout the third quarter of 2013. Stainless steel, not all of which is nickel-bearing, accounts for approximately 40% of our Flat-Rolled Products sales and 20% of ATI's total sales. We used grade 304 stainless steel sheet and plate in this illustration, but the same condition exists with nickel-bearing 718 superalloy, which contains over 50% nickel, as it does with the 8% nickel-bearing grade 304 stainless. The next chart shows the decline in raw materials index or surcharge for 6-4 titanium bar. Again, customers typically take a wait-and-see approach in this environment. In this illustration, we use titanium bar, which is primarily used in aerospace and medical applications. The direction of ATI Allvac's raw material index supplies the most titanium products. When raw material prices are falling, customers wait as long as they can whether the material is going into a kitchen appliance, a large oil and gas project or a jet engine. Service centers are cautious because they fear getting stuck with high priced inventory. As we have said many times, our preference is for relatively stable raw material prices, since this is neutral in terms of impacting demand for our product. The next best scenario, at least in a short time -- term time frame, is rising raw material prices. The worst scenario is continually falling raw material prices, like the environment we have seen so far in 2013. On the positive side, our sense is that we are at or near the pricing bottom for many of our key raw materials. During this period of economic uncertainty and falling raw material prices, we have accelerated our gross cost reduction actions. As previously mentioned, during the first 6 months of 2013, we've achieved nearly $79 million of gross cost reductions before inflation. These actions are expected to benefit ATI's operations later in 2013 and beyond. A little over 50% of these cost reductions relate to operating cost reductions and productivity improvements. Approximately 40% relate to raw material savings, including product yield improvements. And finally, just under 9% relate to procurement savings. Our philosophy and approach is that cost reduction efforts are an endless process. We're also focused on reducing our managed working capital, specifically in the areas involving lean manufacturing processes and manufacturing cycle time reductions to improve inventory turns. During the second quarter 2013, managed working capital was reduced by $48 million and we expect further reductions in the second half of 2013. We recently took actions to improve our liquidity and financial flexibility. As previously announced, we modified the covenants of our $400 million unsecured credit facility and extended the maturity date to 2018. There were no borrowings outstanding under this facility at the end of the second quarter. Both credit agencies recently reaffirmed ATI's investment-grade rating with a stable outlook. On July 12, we issued $500 million aggregate principal amount of 5 7/8% senior notes due in 2023. The offering was very well received by the market. These actions, plus the $74 million of cash on hand at the end of second quarter, provide ATI with nearly $1 billion of available liquidity and help bridge the gap between the present and the future. Moving to Slide 9, operating profit in our High Performance Metals segment was impacted by reduced operating rates and lower raw material surcharges not being aligned with higher raw material input costs. In the aerospace market, demand continued low from the jet engine aftermarket due to aggressive inventory management in the supply chain, including the airlines. The good news is the aerospace build rate ramp is on schedule. We are also encouraged that certain jet engine OEMs have recently reported improved demand from the aftermarket, so we could be at or near the bottom here and ready for the growth we've been waiting for. Demand from the electrical energy market remained low for our zirconium products due to the continuing shutdown of Japanese nuclear power plants. We did see some improvement in zirconium shipments in the second quarter compared to the first quarter 2013 due primarily to recent long-term agreements in the defense and energy markets. Demand for our forgings from the construction and mining market remained low, largely due to slowing growth in China and other developing economies, sluggish growth in the U.S. and little to no growth in the Eurozone and Japan. Moving to the next slide, we remain on track to begin the premium quality, or PQ, qualification process of our Rowley, Utah titanium sponge facility later this year. This facility has been producing industrial quality titanium sponge since the fourth quarter of 2010 and standard quality, or SQ, titanium sponge since the first quarter of 2012. The chemistry of the sponge being produced is consistent with PQ requirements. As previously stated, due to reduced global demand for industrial grade titanium products, we have reduced the output at Rowley and are currently operating at approximately 60% of capacity. Although we have been operating at a less efficient rate, we continue to reduce sponge production costs. Until Rowley achieves PQ status, we will continue to assess the optimal production rates at Rowley based on market demand for SQ titanium products. Turning to our Flat-Rolled Products segment in Slide 11. Demand was good from the aerospace market and we continue to improve our flat-rolled products participation in this important market. One of our specialty alloys is being specified for a new airframe safety component. A major aero structure supplier recently again named ATI Allegheny Ludlum a gold supplier, based on 100% quality and delivery performance. Demand for our flat-rolled products in the second quarter was strong from the oil and gas market, as revenue increased as a result of shipments of our duplex and nickel-based alloys for subsea flow lines. However, demand remained weak from the chemical process industry, and we have some concerns in the short term about the lack of new projects from this global end market. Activity in the electrical energy market continues at low levels in the U.S. and Europe since electricity demand is not growing. We are seeing good demand from the renewable energy and spent fuel -- spent nuclear fuel supply chains. On the electrical energy distribution side, while the U.S. housing industry is improving, housing starts, which are a main driver for our grain-oriented electrical steel, in 2013 are expected to be among the lowest levels in history, although beginning to improve. In addition, pricing for GOES products is very competitive due to weak global demand and excess capacity built in China that has resulted in foreign products from a number of countries being dumped into the U.S. market. Demand continues to be strong for our stainless specialty alloy and nickel-based alloy Precision Rolled Strip products from the automotive, aerospace and electronics markets. Flat-Rolled Products segment operating margins were negatively impacted by historically low base selling prices for standard stainless sheet and plate. The total transaction price for the most common stainless steel sheet has fallen significantly over the last several years due to falling raw material prices resulting in lower raw material surcharges and historically low base prices due to weak demand and excess global supply. In addition, segment margins have been impacted by much lower prices for industrial grade titanium products due to global supply and demand and for grain-oriented electrical steel products due to low base selling prices, primarily resulting from high levels of imports for both of these products. For our Engineered Products segment, demand was better from the oil and gas and aerospace markets. However, demand remained weak from the construction and mining equipment market. Looking at Slide 13. We came away from June's Paris Air Show with strong confidence that the aerospace build rates are on schedule. We are encouraged by the optimism of the OEMs and our customers throughout the supply chain. ATI displayed new and innovative products that illustrate our growing content of proprietary and advanced products for next-generation jet engines. To illustrate this point, note the group picture of some of the products we displayed at the air show. From right to left is an isothermal forging made of nickel-based superalloy powders and a forging made of Rene 65 Alloy, GE Aviation's new near-powder alloy developed in combination with ATI. The third product in this group consists of 2 jet engine blades that were made through additive manufacturing using our titanium aluminide powder. This one gained a lot of attention. The low pressure turbine blades of the future engines for single-aisle aircraft are designed to be made from titanium aluminides. ATI has a long history of making this product. Moving to airframe. The product on the left-side bottom is made from ATI 425 alloy. ATI 425 cold-rolled titanium sheet was qualified for airframe use in April 2010, so the alloy has come a long way in a short time for the aerospace industry and is now beginning to gain significant momentum. To the right are examples of ATI's fastener stock made of ATI 6-4 titanium, ATI 3-2.5 titanium, ATI 425 alloy, ATI titanium 45 niobium alloy and specialty alloys and nickel-based alloys. Each of these is a new product to us, and we define a new product as one that we did not or could not make 5 years ago. We are often asked to quantify ATI's shipset content on Boeing 787. As shown on Slide 14, the current estimate is approximately $2.7 million per shipset and growing. This includes both airframe and jet engine products. For forgings, castings and net shapes, we know the value of our content. For mill products, certain conservative assumptions have been made. Not included are products that we can't quantify or products that are in development. For the A350, we have significant content on the Rolls-Royce Trent XWB engine, which is presently the only engine certified for that aircraft. We're also working on many opportunities to improve our position with Airbus and its supply chain. In the longer term, we have already won considerable content on the new jet engines being developed for the new single aisle aircraft. We have strategic and long-term supply agreements with the OEMs, with more agreements expected. For our long-term plans, as we quantify the potential of our new products, remember those products we did not or could not make 5 years ago, we expect these new products can represent 25% of our sales to the aerospace market in 2017. Many of these new products are enabled by the capital and technology investments and acquisitions we have made over the last several years. Turning to the oil and gas market. We continue to see a large number of inquiries for international projects needing our specialty alloys, particularly for sour oil and gas fields. We're seeing some inventory management actions in the supply chain for our nickel and specialty alloy drilling products, resulting in lower demand for these products, which is likely to continue through the end of the year. We're also seeing some delays and deferrals on project business. In spite of these short-term disruptions, we see long-term growth for ATI's products driven by subsea pipelines and downhole drilling and completions, and we remain well positioned to benefit from the expected secular growth in this important global market. Turning to Slide 16. Our $1.2 billion investment in our new Hot-Rolling and Processing Facility, or HRPF, is proceeding on schedule and on budget. As previously stated, the HRPF is expected to be production ready by the end of 2013, with commission occurring through 2014. Beginning in 2015, we plan to idle the existing old and noncompetitive hot strip mill and our underutilized steckel mill and produce all ATI flat-rolled products using the HRPF. We continue with our plan to mitigate startup risk. Several recent milestones were achieved. The HRPF is now on permanent power, with the substation being fully certified in early July. We recently completed a successful automation test. Remember, this is designed to be a fully automated integrated facility. In rail service between the HRPF and our Midland, Pennsylvania melt shop and automated sheet finishing facility is now operating. We are transitioning from thousands of truck trips each year to moving product via unit train. This improved scheduling efficiency and reliability and reduces cost. The HRPF is designed to significantly expand our product offerings' capability, shorten manufacturing cycle times, reduce inventory requirements and improve the cost structure and profitability of our Flat-Rolled Products business. The HRPF is designed to reengineer and transform our Flat-Rolled Products segment and position this business as a significant profit contributor to ATI in the future. We currently expect 2013 capital expenditures to be approximately $575 million, with approximately 90% being associated with the HRPF. During the first 6 months of 2013, total capital spending was approximately $223 million. As we look ahead to the second half of 2013, we're currently not seeing any significant signs of changes in market conditions, although this is fluid. The third quarter may prove to be even more challenging than the second quarter, as it traditionally is the softest quarter of the year in many of our end markets, especially in Europe. We are encouraged by recent signs of stabilization in nickel and titanium scrap prices. If this continues, we may begin to see an improvement in demand and stabilization of selling prices beginning in the fourth quarter 2013. We believe many of our customers will continue to be cautious as near-term global economic uncertainties remain, lead times remain short and raw material prices remain volatile. Looking beyond these short-term challenges, our strategy is to continue to ensure that ATI remains well positioned for profitable growth over the next 3 to 5 years and beyond. Our unmatched diversification in specialty metals products, technology leadership, unsurpassed manufacturing capabilities, customer responsiveness and increasingly competitive cost structure are the key elements of our growth strategy. We continue to believe that market conditions remain favorable for long-term secular growth from our key markets of aerospace, oil and gas/chemical process industry, electrical energy and medical. In summary, we will maintain our focus on the continued execution of strategies to enhance ATI's competitive position and to create long-term value for our shareholders by reducing cost, increasing inventory turns and improving cash flow from operations; successfully completing our strategic capital investments, most notably the HRPF project; introducing and qualifying innovative new products; continuing our strategy to produce higher value-added products, parts and components; improving our position with existing customers and growing our position with new customers. Finally, as previously announced, Pat DeCourcy was named ATI's Interim Chief Financial Officer, replacing Dale Reid, who retired for personal reasons. I have known Pat and worked with Pat for many years. Pat, who's with us today, is highly qualified to lead ATI's financial organization. As Pat steps into his new role, he inherits a strong financial organization and brings a very strong operations background to the CFO position. As we begin our comprehensive search for a permanent CFO, I am confident Pat will do an outstanding job and he will be a strong candidate during our search process. Operator, may we now have the first question, please?

[Operator Instructions] Your first question today comes from Julie Yates Stewart from Crédit Suisse. Julie Yates - Crédit Suisse AG, Research Division: Rich, I'm a little surprised that aerospace continues to be so weak, even though -- I mean, we know that there are inventory corrections going on. But with 787 ramping to 7 a month, then as you referenced the jet engine OEM is showing a nice recovery in the aftermarket, can you talk more in detail about the inventory situation in both airframe and then OE and aftermarket for jet engine?

Yes. I mean, I think we'll talk about the airframe first. I mean, I think we've had a lot of discussions in the past, because that primarily impacts us in 2 ways: One is titanium mill products as 1 of the 3 major suppliers to Boeing for airframe requirements, and the second is through titanium investment castings. So first, in talking about Boeing, there's -- I mean, we've had a lot of discussions in the past about where Boeing is on their inventory situation. I think with each passing month and each passing quarter, as they continue to ramp the rate, they continue to eat into their inventory -- their titanium inventory supply. That continues. I mean, they're not, at this point in time, above the minimum take-or-pays. To the extent of when that will be, I think we're closer to it than we've ever been, obviously, as we continue the rate ramp. But really, only Boeing knows what their inventory situation is. We have a lot of dialogue with them. They're an important customer to us and we believe we are an important supplier to them, so we'll continue to work with them to meet their needs. On the titanium investment casting side, there is significant growth opportunities in that business for us. We're seeing that this year in the forgings and castings side, but it's really just at the very beginning because a lot of our efforts have been on the new programs, on the new engine programs, including the LEAP and others that really don't begin their growth profile until 2016, 2017. So the programs that we've won, we are in first article production and we'll begin to see some of that growth -- early growth in 2014. The programs that are longer term will begin to kick in, in most likely 2015 and 2016. On the engine side, where we service nickel and titanium alloys, but specialty alloys as well, I think that there -- it has been, quite frankly, surprising to a lot of us in terms of the aggressive inventory action -- management action that has been ongoing for more than a year now. And not all of it, quite frankly, is aftermarket related. I think some of it is really focusing on the inventory throughout the supply chain that supports the engine build that supports the airframe builds. And traditionally, the aero engine supply chain inventory situation had a tendency to ramp up ahead of the airframe requirements and I think that, that happened again this time. And I think the dialogue that we've been having with the customers indicate that -- on the aftermarket side, we've all talked about that, we know where that has been. I think we're seeing some encouraging signs because, quite frankly, that can only be a short-term cash flow management for everybody in the supply chain, starting with the airlines. And I think that they're nearing the end in terms of what they can do and the fundamentals of air traffic and airline requirements remain strong. So I think the aftermarket, I'm not surprised with some of the comments from the OEMs because we knew that, that was a temporary short-term issue that would gradually take care of itself. And I think it's healthy that we're beginning to see some of those orders coming in and we would expect to begin the benefit from that, if not late this year, then certainly in 2014. On the new build side, I think the inventory situations are obviously in better condition and better shape today than they were heading into 2013. And I think we're close to the point in time where we're going to see inventories at a level that the demand for the products that we make will then be -- will be supported by the production rate of the airframes. And once again, I think we'll begin seeing that in 2014. A lot of the programs and efforts and new products that we have, Julie, as we've talked about in the past, are really focused on the new engines. And that growth is in 2015 and 2016, as those engines begin to be produced to support the airframe deliveries. Julie Yates - Crédit Suisse AG, Research Division: Okay, great. And then just one follow-up. Now that we're a little bit over 6 months into the provisioned time at combination, is there any -- has there any been any change in the competitive dynamic?

I mean, I would say that -- it's hard to say that there's one single driver. I mean, I think, obviously, PCC has a process that they're very good at when they make an acquisition, and they're playing that the way they normally would. But that's really only one of the dynamics, I think, that's affecting the titanium marketplace. I think the other dynamics are the inventory corrections that are ongoing and the aero engine supply chain. The other dynamic is the weakness -- a relative weakness or comparative weakness, I should say, in the industrial titanium market where you have capacities that have been built on a titanium mill products production side that are flexible enough and designed to service all the markets for titanium products. And with the industrial market not where it was expected to be because of global market uncertainties when these capacities were planned, I think that creates pressure on the short term for transaction business that magnifies the -- any kind of disruptions that had been going on because of supply chain inventory management or behavior that we're seeing from TIMET as part of PCC. So I think it's a combination of all of those things.

The next question comes from Richard Safran from Buckingham Research.

Rich, I wanted to...

Yes. Rich, you're...

We have lost Rich. We seem to have lost him there. My apologies. We go to the next question from Gautam Khanna. My apologies there. He's from Cowen and Company.

So we've heard a lot of noise out of the Boeing supply chain in the last 6 months about partnering for success. And I wondered if you could comment on how that initiative might impact ATI, if you expect any negative pricing results from it. And sort of where are you on those conversations with Boeing?

Well, we are, as I said earlier, we -- Boeing is an important customer of ours and we believe that we're an important and a strategic supplier to them. We think that we bring some value to them or they wouldn't be -- they wouldn't have the relationship they do have. So the discussions are deep, they're rich and the opportunities -- there are opportunities that exist for us. And what we are engaged with them in is conversations of how we can be an outstanding partner with them and for them, as well as position ATI in a way that creates values for our shareholders. And that's always the -- going to be the equation that we have with all of our customers. I think Boeing respects that and I'm confident that the dialogue will result in opportunities for ATI to continue to grow with Boeing. And quite frankly, if I -- I think there's been a lot of discussion, obviously, from the OEMs about -- and everybody has their own process, whether it's partnering for success or whatever nomenclature that the customers use. We, quite frankly, have the same type of dialogue with our suppliers. So it is -- I think it's a healthy process. I think it's helpful and healthy long term in the aerospace supply chain, as well as any other supply chain, that the supply chain be as efficient as possible in order to meet the fundamental demands and requirements of the end customer. And in this case, it's the flying public and it's the airline. So I think that the process is not necessarily different than the relationship that has been in place with us formally with Boeing since 2006. We have similar relationships with all the jet engine manufacturers in terms of recognizing the importance of providing value to them in a win-win relationship. And I think that the OEMs are sophisticated enough that they know the value proposition that an ATI brings. They know the importance of having a diversified supply chain. They know the importance of having a reliable supplier that also is committed to developing the next generation of technologies that meets their needs, that helps them create value for their customers. So that's the kind of relationship that we have with all of -- we try to have with all of our customers, quite frankly, not just in the aerospace supply chain. And I'm confident that, that relationship with Boeing will continue to grow.

The next question comes from Timna Tanners from Bank of America.

So I wanted to ask a question and Ron wanted to ask a question. So my question is really for an update, if you could please, more specifically on desalination shipment, nuclear opportunities and what's happening with chemical processing. That's my one question.

That's great. Well, on the desal, we are delivering the -- through Uniti, the desal projects that Uniti won earlier this year. A significant volume was delivered in the second quarter. The third quarter has the largest volume component of deliveries on those desal contracts that were won, and it tails off a little bit in the fourth quarter. The pricing on those orders were -- was aggressive. So while it is good business and its profitable business, I think it's safe to say it certainly wasn't at the level that the last contracts were because of the competitive pricing dynamics that exist today that didn't necessarily exist 2 and 3 and 4 years ago. So that's desal. On the nuclear side, I assume you're talking about heat exchangers for -- is that your specific question, dealing with titanium? Or is it a broader question dealing with nuclear?

It's a broader question given the resurgence of activity that seems to be happening in Asia right now.

Okay. Well, I mean, the activity in Asia is really driven in China and there are requirements in China that we are meeting. There's also competition in China, quite frankly, because with the award of the reactor builds to Toshiba-Westinghouse, there was some technology transfer that happened that gives the ability or translates into the ability for the Chinese to make some of the lower-end zirconium mill products that we and others traditionally made. But the opportunities from a new build rate are primarily in China, not just for zirconium, but also for other specialty metals we make. But there's also opportunities in Korea with KEPCO and some of the wins that they have had primarily focused on the Middle East market. So those are the growth opportunities with new builds. Outside of that, it's really a refueling issue in process. And a big part of that market was taken out, quite frankly, because of the Fukushima issue and how many of the reactors, which are essentially all, except for 1 or 2, that are down in Japan. And the expectation is that some might come back on, but it won't be nearly at the level that Japan was previously. And it's unlikely to be a significant demand driver in the future because of the levels of inventories that they had on the reactor plants that probably won't come back. So that's one of the reasons why we have rightsized our operations -- or zirconium operations in Oregon and continue to look at that. And we've taken quite a bit of the cost structure out of that business and size it at the appropriate level. And it had a solid performance in the second quarter and we would expect that to continue over the balance of the year. What was the third piece? Chemical processing industries?

Yes.

Yes. The chemical processing industry, I mean, we service that market with a wide variety of alloys, but it's really a project-related basis. A large part of the growth over the -- prior to the last couple of years had been in demand from China. With the slowing economy in China, you're not seeing this kind of chemical processing build rates of new plants in China that we had seen 3 and 5 years ago, so that's a negative on the CPI market. On the positive side, you're seeing more activity going on in the U.S., quite frankly, because of the low cost of natural gas. But those projects are in the fairly early stages and I would expect that the demand from that, we would begin to see in 2014 and '15 and '16, but we're not seeing significant demand today.

All right. Second question is from Ron.

Okay. All right, Ron.

So just to walk through, again, I guess, I'm having trouble understanding why your volumes in your aerospace businesses aren't picking up quicker, right? I mean, we've heard from most of the engine manufacturers at this point and they're saying their aftermarkets pick up, engine volumes are good, Boeing's delivering a lot of airplanes, Airbus is delivering a lot of airplanes. So both on the OE side, and even now on aftermarket side, we're really starting to see things pick up. And I guess, I was kind of surprised to see that your aerospace end markets haven't picked up more by now, right? So I mean, maybe I just don't get it or something, but maybe if you could give us some more color on why that's happening.

Well, I think a lot of it is on the programs that you're on, right? So it's the engine programs that you're on. On the forging side, the programs that we are on and that we're winning are mainly geared towards the A350 and the LEAP. So you're not seeing very much growth at this point in time on the A350 or the LEAP. You'll begin seeing that in '14, '15 and '16. And the same could be said on the titanium castings side for static parts. Where you are seeing the growth, obviously, with the 787 program and the single aisles, there it's -- we are seeing growth in certain of the products that we make, but it's being largely offset by the reduced demand from spares and the inventory management actions. So I think that's a short-term problem that will rectify itself as we exit 2013 into 2014 and you'll begin to see a more -- because it's -- there, it's mainly for us mill products as opposed to forgings and castings. And so the mill product growth will recover as the inventory situation and the reduction and the impact on the aftermarket take -- runs its course. Remember, the products that we sell on that side of the business are really the same product forms, whether it's an aftermarket or whether it's a new engine build. So I think each situation, you have to look at and say, "How does ATI participate historically in the jet engine market and what programs we're on?" And a large part of the growth opportunity on the new programs, with our new alloys like ATI 718Plus and Rene 65 and powder alloys and isothermal forges -- forgings, et cetera, are really 1 to 2 years away.

The next question comes from Richard Safran from Buckingham. And apologies before, I'm not sure what happened.

Rich, I wanted to ask you -- I was interested in your Slide 14. I wanted to ask you a couple of questions about that. So first off, on your latest expectations, which I'm assuming in your forecast, is having a meaningful impact here. So given what's been happening with CAT and Rolls, et cetera, can you just give me or just discuss what you see is the incremental opportunities here? Maybe tell us what you think the growth profile for the latest part of your business is going to be? I'm just very interested in how you see that part of the business developing.

I think the CAT -- and it's not just CAT, it's basically the mining and the large construction, large mining and construction equipment market. That is going to be completely dependent upon the new builds. And there is a little bit of an aftermarket in that business, but not significant, quite frankly, from us. So that -- the industrial market in our forging business has been a meaningful part of what that business is. It's about 40% -- 35% to 40% of that business, and that is down considerably this year. And I didn't have the opportunity to listen to anything that CAT said this morning, but I will. But we're -- what we're seeing from them is, I think, reflective of what they said in their news release here. So when that recovers, we'll see. I think a lot of it is going to be driven by the exploration budgets and the mining budgets, in terms of dealing with commodities. I think the bigger growth opportunity, quite frankly, for ATI, on the forging side, is on the aero engine side. And I think, there, once we get the aftermarket correction behind us, which I think is going to be as we head into 2014, then we're really focused on the growth opportunities for the parts that we have on the Trent XWB, the Trent 1000, the LEAP-X, those type -- the turbofan, those types of opportunities, quite frankly, began depending upon the nature of the product -- the nature of the engine, begin to make a meaningful growth in 2014, for example, on the XWB, and we see a growth profile that is significant from '13 to '14 on the XWB, continuing through our forecast period of 2017 and 2018. On the Trent 900, which is an important engine program for us, that's the A380, that -- we're not seeing a growth profile there. We're seeing some inventory management actions because of the order entry rate and the build rate of the A380. So there, we kind of consider that to be more of a stable requirement over the next 3 to 5 years. The Trent 1000 demand is, we think, is a growth opportunity for us beginning in 2015. '13 and '14 is probably more stable and that growth continues through our forecast period. The LEAP -- various versions of the LEAP, with the -- with -- not all of the awards have been made on the LEAP, for not all the forgings or castings, quite frankly. So that continues and will continue here through the balance of this year, probably in the next year. So there are very good opportunities for us to grow our share content on the value-added parts and components on the LEAP engines. So there, that growth really begins in a modest way in 2015 and begins to take off in a very meaningful way in '16, '17 and '18 so -- and the geared turbofan, really, the same thing. The airframes, that's really flat, quite frankly, maybe a little bit of growth over the next couple of years but strong growth opportunities beginning in '15, '16, and '17. So it -- you have to -- it's dependent upon what programs you're on and what the status of those programs are and where the rate ramp is for each one of those programs.

And just really quick, thanks for giving us the shipset content on the 87. You say it's growing. Is that share gains or due to the 87-10? And also if possible, can you tell us what the A350 content is relative to the 87? I mean, is it half, quarter, that kind of thing?

Yes, we are in the process of working through the A350. There, it would be more -- the 787, because we're a significant supplier of titanium mill products to Boeing, that content is on there. We're not a significant supplier, at this point, to Airbus, but we are on the engine side. So we're working through, quite frankly, to make sure that we're comfortable and confident before we share that information on all of the various platforms. So the A350 is the next one that we're -- one of the next ones that we're working on.

The next question comes from Michael Gambardella from JPMorgan. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: I have a question, Rich. In the past, you'd kind of downplayed our claim that your earnings are highly correlated to the nickel price. But now, I hear you saying that lower nickel pricing is bad for you in your earnings. So with that in mind, if we look at the stainless steel industry globally and we look at the different grades of stainless steel, the prevalence of austenitic 300, ferritic 400 and then the newer series, the 200 series that has less nickel in it. This 200 series with the lower nickel component has gone from virtually nothing 10 years ago to 20% of global demand for stainless at the expense of austenitic or the heavier nickel-bearing stainless steel. So it seems to me that, that's not going to stop. That trend is going to continue, of the lower nickel-bearing stainless steels, which is bad for the nickel pricing environment. And isn't that, therefore, a negative for your earnings profile going forward on a macro basis?

Yes. Well, on the first one, Mike, and we -- well, you and I have had many discussions about this or several. And without getting into a debate, I think the fair characterization is that it's a lot like the chicken and the egg, right? Or the cart and the horse, right? What drives, fundamentally, nickel on the LME down. And since stainless, historically, has been about 2/3 of the demand requirements for nickel, and if you remove -- which is hard to do because you've got some big financial players playing speculative games in the commodity markets on the LME. But if you try to remove that, because I think that's more of a short-term issue, when you remove that, the fundamentals of nickel are heavily influenced by the fundamental demand for stainless, right? So our point to you has not been that nickel drives our profitability over the long term, as much as it is the demand and the pricing for stainless drives the profitability. And nickel, and the impact on nickel, is a result of that. So let's just put that away, okay? Michael F. Gambardella - JP Morgan Chase & Co, Research Division: But if you have -- if you have the 200 series...

Now, on the short term, to answer your question, on the short term, clearly, a falling nickel or a falling raw material environment, because of how the surcharge works and how, on some of our longer-cycle products, it doesn't match up in a continuing or a rapidly falling raw material cost environment, that hurts us in the short term. Now LIFO has a way of mitigating that somewhat. But that hurts us in the short term and it also hurts us just fundamentally on the demand side because typically that happens on the downside, that happens in a weak macro environment, which means that as supplies are plentiful, lead times are very short. So it influences the customer demand and the buying behavior of the customer, which magnifies the weakness. It also works the other way going back up, where we benefit from that. So the point that we're making and have made for a very long time, that -- and we don't have any control over this, but if we did, we would like stability because our customers like stability and therefore, that's helpful from a macro and a fundamental standpoint. Now the question about -- you're absolutely right. And a matter of fact, ATI was a big leader of the change in the switch from 300 series to 200 series, back when nickel ran up in the mid part of the last decade to over $20 a pound. We drove a lot and worked with our customers on an engineering standpoint to help them understand that 200 series could work in their application and was actually a good move for them because they didn't need the fundamental performance of the higher nickel grades. I can also say that while there's been a big move -- or a move that's not insignificant from 300 series to 200 series over the years on some of those applications, there's probably been an equally big move, if not greater, from 300 series to 400 series, because traditionally, stainless -- when nickel was at $2 and $3 a pound and some of my predecessors at this company and when this was primarily a stainless company, complained about nickel being really volatile when it moved from $3 a pound to $3.05 a pound, right, that was the environment they were in. And the stability of that or relative stability of that gave rise to the use of stainless -- nickel-bearing stainless in applications that really didn't need it from the standpoint -- or performance standpoint. And when nickel ran up into the mid-teens and $20, a lot of that shifted out into 400 series and won't come back. So I think eventually, all of this takes care of itself, quite frankly, with the basic laws of economics, right? The miners aren't going to be producing and generating more nickel if the market doesn't need it. The mining costs today are higher than they were 20 years ago. So there's a natural floor that appears to be being created that -- it was interesting when nickel dropped below $6. It didn't stay there long, it bounced right back up. So you have to look at the cash cost of the miners. And you're probably, Mike, far more familiar with that than I am. So those are the issues that are driving the raw materials side. Having said that, if you do get stability, and if one could predict that nickel at $6 a pound is going to be stable and you're not going to see a run-up into the 10s and the 15s and $20 a pound, I think that, that bodes well long term for the use of nickel-bearing stainless in applications because it is a very good alloy system. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Right. But I think from all the data I've seen on global stainless, the overwhelming majority of the loss of austenitic or the 300 series has gone into 200 series, not really that much in ferritic. But in any of that, there's a structural...

We disagree... Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Decline in the demand for nickel, which is negative for nickel prices and the miners really didn't anticipate this shift in product 10 years ago. I guess, just one -- my second question then. Beyond the raw material, negative raw material kind of longer-term picture, I think, anyway, is you still have this issue of significantly higher capacity on stainless and then you still have an issue on titanium, selling Boeing titanium on a take-or-pay contract for the last 5 or 6 years. With the Dreamliner delayed at 4 years, there's still got to be a fair amount of titanium supply in the system. So how do you get through the stainless overcapacity and the pressure on base prices and then the titanium supply in the aerospace supply system?

Yes. I'm less concerned about titanium, quite frankly. I think that you have seen virtually no growth -- no demand growth at this point on the A350, which is also a titanium-intensive airplane. Boeing is already -- Boeing is on their way to ramping up to 10 a month on the 787 and probably more with the derivatives. They've already signaled that. So I'm less concerned on the titanium side. I think that the growth in the titanium side, especially the capabilities that we have that are required in these higher-value markets, that's an issue of timing. That's not a structural shift. The industrial market is a more interesting challenge. But once again, I think that, that's a timing issue based upon global fundamentals. I think the stainless issue is certainly a more challenging issue. The barrier to entry there is a lot lower than it is on titanium. I think that you'll see, it's not just U.S. phenomenon and a U.S. issue. Quite frankly, it's a global issue with stainless. So I think you'll see -- continue to see some rationalization and probably consolidation happening there. I think that the HRPF that we're doing is not just for stainless. As we have said many, many times, it's for all of the alloy systems that we make in flat-rolled product forms that service global end markets that have strong secular growth rate. And the advantage and the benefit of the HRPF is that it basically puts us back in the game to compete with others for stainless business that is important, from a volume standpoint, that we can't make today. And it also significantly lowers our cost structure. So you have to ask yourself -- the fundamentals are the fundamentals. We understand them. What's the best way for us to be an important and profitable supplier over the long term through cycles, and that's to have the ability to make all the products, to lower our cost structure, to make the products faster from a cycle time standpoint at a higher quality and give the customer what they want. And I think that will be a value creator for ATI shareholders over the long term. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay. And my colleague, Brian, had a question that I'll ask for him. What was the LIFO impact on the quarter?

The LIFO impact basically offset the impacts of out-of-phase surcharges and some of the higher cost of capitalized variances because of operating at lower operating rates. So I think that our attitude here, because it's really been misinterpreted by some, not by all, that when there's a LIFO benefit, that gets deducted, but when there's a LIFO hit, that doesn't get added back. In reality, most of our inventory is valued on LIFO. It is one component and it's not a component that should be cherry-picked. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: So what was the EPS impact on LIFO?

You'll see it when we file our Q.

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

Thank you for joining us on the call today and thank you for your continued interest in ATI. If we did not get to your question, please call me. I'll be available today. And thanks, everyone, for joining us. That concludes our conference call.

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