ATI Inc. (ATI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2014 Allegheny Technologies earnings conference call. My name is Matthew and I'll be your Operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would now like to turn the call over to Mr. Dan Greenfield, Vice President of Investor Relations. Please proceed.

Thank you, Matthew, and good morning and welcome to the Allegheny Technologies earnings conference call for the fourth quarter 2014. 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 Pat DeCourcy, Senior Vice President of Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings from continuing operations 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 again at www.atimetals.com. After some initial comments we will ask for questions. During the question-and-answer session, please limit yourself to 2 questions to be considerate of others on the line. As always we will make every attempt to reach everyone in the question-and-answer queue within the allotted conference call time. 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 good morning to everybody on today's call. We made excellent progress during the fourth quarter and achieved several strategic milestones that better positioned ATI to transition to a period of sustained profitable growth. The product commissioning of our hot-rolling and processing facility, or HRPF, was completed on schedule during the fourth quarter. Our Rowley, Utah titanium sponge facility was certified as a PQ titanium sponge supplier by a leading jet engine OEM. As previously announced, we completed 3 major strategic long-term agreements, or LTAs, that secure significant content for our mill products, forgings and titanium investment castings on next-generation and legacy single-isle jet engines. Also as previously announced, we were awarded orders that totaled approximately $145 million for our nickel-based alloy plate in our Flat-rolled products business that will be used in the large oil and gas pipeline for a gas field in Asia. We will discuss these important accomplishments in a little greater detail later in the call. Net income in the fourth quarter was $19.9 million, or $0.18 per share. Segment operating profit was $67 million, or 6.4% of sales. The fourth quarter was impacted by $17.7 million of startup and qualification costs related to the HRPF and our Rowley, Utah titanium sponge facility. We also recorded a net $13.2 million LIFO inventory valuation benefit in the quarter. Fourth-quarter 2014 results include the previously announced $25.5 million of pretax curtailment and settlement gains from post retirement benefit changes. We maintained the solid liquidity position with approximately $270 million in cash on hand and no borrowings outstanding under our $400 million domestic line of credit at the end of the year. We paid down debt by nearly $415 million in 2014. Capital expenditures in 2014 were $226 million and we're near the end of our multi year extraordinary capital expenditure cycle. Here is Pat DeCourcy, ATI's Chief Financial Officer, for a more detailed discussion of the fourth-quarter financial results. Pat?

Thanks, Rich. Turning to slide 4, looking at the fourth-quarter results from continuing operations, sales were $1.05 billion for the fourth quarter 2014. 77% of our sales in 2014 were of high-value products and International sales represented 38% of our 2014 sales. ATI's International sales are mostly to the aerospace oil and gas chemical process industry, electrical energy and medical markets. Net income was $19.9 million, or $0.18 per share. Turning to slide 5, High Performance Materials and Components segment sales were $500 million which was essentially flat with the third quarter 2014 and nearly 15% higher than the fourth quarter 2013. Segment operating profit was $73.4 million, which was $11 million higher than the third quarter 2014. Fourth quarter 2014 sales in our forged products businesses increased 6% compared to the third quarter 2014. Forged products operating profit margins remained below the segment average due primarily to low utilization rates. As Rich commented, segment results continued to be negatively impacted by low operating rates at our Rowley titanium sponge facility and by our strategic decision to use ATI produced titanium sponge rather than lower cost titanium units to manufacture certain titanium products. This is expected to continue well into 2015 until we complete the PQ process at Rowley and ramp production to optimum capacity utilization. Flat Rolled product segment sales were approximately $547 million, 3% less than the third quarter 2014. Fourth quarter 2014 segment sales were over 14% higher than the fourth quarter 2013. Segment operating loss was $6.4 million. Results were impacted by a $10.8 million LIFO inventory valuation benefit and a $10.1 million charge related to the HRPF start up. In addition $6.3 million of PQ qualification costs further reduced operating profit. This includes charges for the market-based valuation of industrial titanium products as well as higher raw material costs due to the strategic decision to use ATI produced titanium sponge rather than lower cost titanium units, so the Flat Rolled products operating loss of $6.4 million would be essentially breakeven net of $16.4 million of HRPF start up and PQ qualification costs and a $10.8 million LIFO benefit. Slide 6 shows the impact of the HRPF and Rowley startup qualification and inventory valuation costs and the post retirement benefit gains had on pretax income from continuing operations. Adjusted income before tax excluding these items was $5.8 million in the fourth quarter. Fourth quarter 2014 High Performance Materials and Components segment operating profit included a LIFO inventory valuation reserve benefit of $12.4 million, which was mostly offset by a $10 million net realizable value inventory reserve charge. The carrying value of our inventory, as valued on the LIFO inventory accounting method, exceeded replacement costs requiring this net realizable value reserve. For our Flat Rolled product segment, the fourth quarter 2014 included a LIFO inventory valuation reserve benefit of $10.8 million. ATI previously announced several significant changes to certain pension and other post retirement benefit programs. These changes are part of ATI's ongoing initiatives to create an integrated and aligned business with more consistent, affordable and competitive health, welfare and retirement benefits. The changes made to post retirement benefits resulted in $25.5 million of pretax curtailment and settlement gains in the fourth quarter 2014. ATI expects to recognize lower retirement benefit expense in 2015 and future periods. Now we're turning the call back over to Rich.

Thank you, Pat. Turning to slide 7, the aerospace and defense market continues to be our largest end market. ATI's sales into the aerospace and defense market for 2014 were $1.45 billion representing 34% of sales. We expect that the commercial aerospace market will be a significant driver of our profitable growth over the next 5 years, as production rates ramp for the next generation engine programs and airframe OEMs produce their record backlogs. Fourth quarter 2014 sales to the aerospace and defense markets were flat compared to the third quarter 2014. While sales for our specialty materials mill products decreased 3%, sales of our forgings increased 6% and sales of our titanium investment castings increased 3%, all compared to the third quarter 2014. High Performance Materials and Components segment titanium mill product shipments decreased 22% compared to the third quarter 2014. During the third quarter, titanium ingot shipments for airframe applications were unusually strong. Looking at shipments for the full year 2014 compared to 2013, titanium mill product shipments increased 9% and nickel-based and specialty steel alloy increased 11%. During 2014 and so far early in 2015, ATI reached agreement on several strategic LTAs with aerospace OEMs that total over $4 billion in expected revenue. These LTAs are for ATI's specialty materials mill products, forgings and investment castings required for both next-generation and legacy platforms. These LTAs support our profitable growth in the aerospace market over the next 5 years and into the next decade. Most of these LTAs continue a trend of being more strategic with a longer term. A trend that we have seen for the past few years. Our current shipset set values for key next-generation airframes and their engines are estimated as follows. The Boeing 737MAX $1.1 million per shipset, that's twice the value compared to the current content on the legacy 737. The Boeing 787 $2.8 million content. And Airbus A350 $1.5 million content per shipsets. We continue to pursue additional LTAs and development opportunities on these programs and the future generation of airplanes and engines, which are expected to enter into service late this decade and beyond. With our focus on creating value through relentless innovation, we have secured important strategic positions on next-generation engines. And with our technology, diversified products and advanced and integrated manufacturing capabilities, we are well positioned to work directly with the OEMs on the development of future generation technologies and products. Turning to slide 8, shown is the most recent forecast of commercial aircraft build rates. The black line on this chart represents the number of next-generation airplanes and the build rate forecast. This black line is a good proxy for ATI's potential aerospace market growth trajectory, since we have secured increased positions on many of the next-generation airplanes and engines that power them. Slide 9 shows the firm order backlog of the major engine programs, which as of November 30, 2014, the latest data available, stands at over 21,700 large jet engines. The first 5 lines show the backlog for engines with power single-aisle airplanes. As expected, the trend in 2014 has been a declining backlog for the legacy engines, shown in the first 3 lines of the chart, with an increase in backlog for next-generation engines. Note the CFM LEAP backlog is now over 8000 engines. The single-aisle engine is the high-volume engine. Enhancing ATI's position in this category on both the CFM LEAP and the PW 1000 is an accomplishment that we have focused on and have been working toward for several years. Moving to slide 10, the oil and gas chemical process industry market is our second largest end market. ATI's sales into this market for 2014 were $752 million, representing 18% of sales. 10% to oil and gas and 8% to the chemical process industry. Total sales to this market in the fourth quarter of 2014 increased 14% compared to the third quarter 2014. Oil and gas sales alone increased by 30% primarily due to initial shipments for the large nickel-based alloy plate order we received for use in a sour gas pipeline. Shipments for this project are expected to continue through the first half of 2015. For our market update, first, recent significant declines in oil price creates uncertainty in future demand for a relatively small portion of ATI's products, especially for the second half of 2015. Second, except for drilling, we are not currently seeing much change in demand and have a strong backlog for our oil and gas products through the first half of 2015. To put this into perspective, ATI's sales for drilling applications represented approximately $150 million of total 2014 sales, or about 3.5% of total sales. We currently expect sales for drilling applications to be 20% to 25% lower in 2015 than in 2014, which represents a potential decrease of less than $40 million in revenue. Third, our oil and gas customers are cautious and are closely monitoring their inventory due to this uncertainty, and we will monitor this market very closely as well. ATI's' strength of diversity in oil and gas products that is downhill – down hole drilling and completions coupled with upstream offshore and downstream petrochemical give us some insulation against short-term shifts in exploration and production capital spending. The offshore segment maintains longer term spend strategies while the downstream segment takes advantage of lower cost feedstocks. For ATI, oil and gas is a global market which includes very large offshore and onshore products that require our corrosion-resistant alloys that can safely operate at high temperatures and high pressures. These multi-billion dollar project projects take years to complete. Further helping to diversify this market segment is our participation in the chemical process industry. The oil and gas and CPI markets are often countercyclical to each other, as lower oil and gas prices can be a positive development for the CPI market. At this time, we're not seeing any planned chemical projects in the US being canceled and large North American LNG projects are moving forward. Another strength of ATI is the diversification of products that we provide to the oil and gas and chemical process industry markets. We continue to expand our product offerings to these markets. The HRPF gives us the capability to offer the market larger and flatter coils of nickel-based alloys, duplex alloys and other specialty alloys and stainless alloys. We are also expanding our forged products position in this market. ATI flowform products is being evaluated for many new applications. Oil and gas and chemical process industry is a target market for our flowform products and has the potential for significant growth as a replacement for products that we currently do not make. Turning to slide 11, the product commissioning of our HRPF was completed during the fourth quarter 2014. This commissioning effort, which began in the second quarter of 2014, went exceptionally well given our diverse Flat Rolled product mix. Approximately 97% of all coils processed during commissioning met customer specification which included first-time runs for all of our alloy systems. Our ATI Flat Rolled products team did an outstanding job throughout this challenging process. As expected the HRPF has proven to be a game changing investment designed to significantly enhance ATI's Flat Rolled product capabilities and reduce manufacturing cycle times for all of our Flat Rolled products. The HRPF investment enables us to reengineer our Flat Rolled products business with a renewed focus on shorter manufacturing cycle times and an improved and much more competitive cost structure. We are only at the beginning of capturing the full benefits of this facility. Our people are embracing the new technology, successfully producing thinner and flatter coils that dramatically improve productivity and operating practices and reduce costs at our finishing plants as well as at our rolling facility. The HRPF is designed to provide broader customer appeal since we can now make wider, longer and flatter coils and alloy systems outside the reach of our 2 legacy hot mills. Our customers like our new and enhanced product capabilities which add to our industry-leading technical capabilities and customer service. We have agreements in place that provide increased participation, add existing customers and significant share gains with new customers. We offer a wider range of products than in the past permitting us to bid on packages previously out of our reach. 48-inch wide nickel-based alloy sheet expands our presence in the global aerospace and oil and gas chemical process industry markets. 60-inch wide stainless coils expand our reach into new and existing service center customers. We expect to grow in the strong North American automotive market with agreements in place for auto exhaust applications as well as continued growth in the global automotive market as a result of agreements in place for our precision rolled strip products for alloys ranging from specialty stainless to nickel-based alloys. Finally, customers tell us they like our shorter lead times that result from faster flow times and reduce raw materials risk, improve inventory turns and increase cash flow. As a result beginning in 2015, we expect increased shipments and a significantly improved product mix and the beginning of a better cost structure in our Flat Rolled products segment. We expect to see gradual improvement in Flat Rolled products segment operating profit beginning of the second quarter 2015 as volumes increase and startup costs abate. We are forecasting approximately $5 million in startup costs relating to the HRPF during the first quarter 2015. And the legacy hot mills are scheduled to be shut down by the end of the first quarter of 2015. This is expected to result in a significant cost reduction and improve production efficiencies. We expect to realize the sales growth in cost reduction benefits as we increase production volume during 2015. As previously stated, we expect fourth quarter 2015 operating profit to benefit at an annualized run rate of $150 million compared to 2014, which includes the elimination of startup costs. We believe that the HRPF investment in combination with our unsurpassed finishing capabilities and our continued focus on cost reduction and enhancing our market position for both standard grade and high-value Flat Rolled products enables the successful transformation of our Flat Rolled products business into a global leader that can sustain profitable growth through business cycles. Our goal is to ensure that our Flat Rolled products business can be profitable even in weak markets and can average after-tax returns on capital employed greater than ATI's cost of capital through a business cycle. By achieving this objective, our Flat Rolled products business will create value for our shareholders and customers and provide opportunities for our employees. During the fourth quarter, our Rowley facility achieved approval by a major OEM as a premium quality, or PQ, titanium sponge supply. We expect to achieve process and product approval during the first half of 2015, which is ahead of our original schedule. The ramp up process at Rowley has begun. We plan to move from the current capacity utilization rate of approximately 50% to optimum levels by the end of 2015. We will be able to use the Rowley sponge for premium quality products this year. However, operating results will continue to be negatively impacted until Rowley's capacity utilization improves to optimal levels. In our High Performance Materials and Components segment, we are seeing signs that aerospace market demand for our product is becoming aligned with the airframe and jet engine build rates as destocking runs its course. In our Flat Rolled products segment, we expect improved volume and better product mix in 2015 as we begin to realize the full range of capabilities of the HRPF. As I stated earlier, startup costs of approximately $5 million are expected to be incurred in the first quarter 2015 as we transition to full production and idle the existing legacy hot rolling assets in our Flat Rolled products segment. We expect PQ titanium sponge qualification cost to impact first half 2015 operating profit. And costs attributable to production inefficiencies to impact the full year 2015 as the sponge is used and produced into mill products. Costs are expected to improve in the second half of 2015 until optimum production levels are achieved by year end. We currently expect approximately $7 million of titanium sponge qualification costs in the first quarter of 2015 with a similar amount likely in the second quarter of 2015. We expect these costs to be lower through the second half as production ramps increase. We currently expect 2015 pretax retirement benefit expense to be about $78 million, a decrease of $18.2 million compared to 2014 excluding the $25.5 million curtailment and settlement gain recorded in the fourth quarter of 2014. Most of the 2015 pension expense is expected to be non cash. We're currently forecasting 2015 capital expenditures at approximately $290 million, approximately 50% of which is primarily related to the completion of payments associated with the HRPF project and final acceptance testing of the equipment. Depreciation and amortization expense in 2015 is forecasted to be approximately $196 million. So in summary, drivers of our secular growth markets remain intact. While we are concerned about demand from the oil and gas market due to the recent significant declines in oil prices, we believe that our risk in this market is manageable and can be mitigated by our diversification and by potential growth in the chemical process industry and by our new product offerings. Our extraordinary capital expenditure cycle is nearly behind us. The HRPF is in commercial operation. We expect to begin realizing top and bottom line benefits from this game changing asset beginning in 2015. Our Rowley, Utah facility is approved as a PQ titanium sponge supplier by a leading jet engine OEM. Process and product qualification is ahead of schedule and is expected to be achieved in the first half of 2015. We have been awarded over $4 billion in strategic LTAs that secure significant growth for ATI on legacy and next-generation airplanes and their jet engines. This growth is expected to provide significant profitable growth opportunities for ATI specialty materials mill products, forgings and investment castings over the next 5 years. As always we face numerous markets challenges and we must execute. Our challenge and our opportunity is to execute our business strategies and turn the enabling technology and capabilities of the HRPF, the Rowley investment and other strategic investments we've made over the past several years, into value creators for our shareholders and customers. The HRPF combined with lean manufacturing cost reduction and continuous improvement initiatives in our Flat Rolled products business are keys to this business being a contributor to ATI's' profitable growth. We look forward to solving these challenges and delivering on the opportunities. Operator, may we have the first question please?

[Operator Instructions] And your first question comes from the line of Gautam Khanna of Cowen and Company. Please go ahead.

Hey. Good morning, guys.

Good morning, John. How are you?

Hey, I just wanted to ask you to elaborate on your jet engine comments. It looked like in the fourth quarter you saw a pretty nice sequential increase in jet engine shipments and I wanted to ask you to elaborate on what you're seeing in the channel and your confidence about the destocking going away.

Yes, well I think it's obviously been a long row – or long road here over the last several years. First we had the destocking that I think was initially a couple years ago largely attributable to the after market. And once that stabilized, we saw some continuing inventory management actions which were pretty aggressive on the part of at least 1 OEM. I think we – as we head into 2015, I think we see things that are much better in balance. Certainly on the mill products side we're seeing some encouraging signs on the forging side that demand pulls are happening. It's obviously program specific, right? And so I think that I personally am more confident that as we head into 2015, then I have been in a whilem, and it's more than just anecdotal. It's actually demand pull and resulting in shipments. So I think things are better. Certainly the rate ramps are there. The backlogs are there. The after market, I think, has largely stabilized. But that's not – in this cycle, that's not the real big driver quite frankly, is not after market. It's new builds. It's the record backlogs at Boeing and Airbus that require engines. And I think in 2015, it's kind of the beginning, the early stages of the demand growth from the next generation engines. But as we've been saying for quite a while, that demand growth in strength really is more a 2016, 2017, 2018 opportunity than it is 2015. But I think bottom line is it's better.

Okay, and just to follow up, and by the way, Rich, to elaborate on that point you didn't see push outs incrementally in the fourth quarter? It didn't appear that you did in your numbers.

We did not, we didn't.

And on the HRPF now that – you mentioned that you're qualified now, you're obviously making product. You've run carbon steel through it, and I just wonder when do you think we should expect some sort of partnership agreement? Should we expect something in 2015 or is this something that your potential partners are sort of waiting and seeing to see how the ramp up goes?

No, I think that – yes, I think there's some of that. I think the important part was really focusing on, does the facility have the capability of producing the product, the carbon steel product to the requirements and the expectations of the carbon steel producers? And that has been the focus really in 2014. And I think the answer to that is yes in a resounding way. So now it's really – and having said that, as I've said all along, while I think strategically, it is our desire to have a partner in the HRPF because I think it's a value creator for us as well as the partner and I'm confident that at some point that will happen, our primary focus in 2014 was to commission ATI's products first. And where we could work in the carbon steel, we would do that. And we've done that. I think that there will be additional volume of carbon steel products being run early in 2015 as we get later into the first quarter and certainly the second quarter. So that will be part of the normal process. And our dialogue continues in terms of a structural way for the facility to be a value creator, not only for us but also for potential partners. So when is that? There's a lot of dynamics there. I think that it's likely in 2015, but we're going to take it in an orderly fashion. And it's not just one sided, there are 2 parties to make a deal. And I'm confident that there's a value proposition there for someone else and it will happen.

Thanks a lot, guys.

Thank you for question. Your next question comes from the line of Stephen Levenson of Stifel. Please go ahead. Stephen Levenson - Stifel Nicolaus & Company: Thanks. Good morning, everybody.

Good morning, Steve. Stephen Levenson - Stifel Nicolaus & Company: I see that some of the payments have fallen over into 2015. Can you break out how much of that the $290 million of capital expenditures relates to those payments and how much is new and what sort of projects you're working on?

Yes, well as I said about 50% of the $290 million is HRPF related. The majority of that is the payments related to the final acceptance test of the equipment and those milestones. There's some that are related to spares, right, for critical spares on the mill itself. But about half of the $290 million is HRPF related. The rest is either maintenance CapEx, which is not a significant given our relatively new installed asset base. The biggest project quite frankly that we have at this point in time in 2015 is our expansion of our titanium investment casting capabilities in support of the LTAs that we have been awarded by OEM customers. So that project in total is not huge, but relative to the spend in 2015, it's the biggest individual project. And we have some other strategic-oriented capital projects that we're working on, but certainly none that would venture into the specific disclosure issue at this point in time. Stephen Levenson - Stifel Nicolaus & Company: Okay, thank you. Separately, since your cash flow is now on the road to improving, do you see acquisition possibilities? Do you plan to pay off more debt or is there a chance of returning some of the funds to shareholders either through dividends or buyback?

I think that there's – Steve, you know us well in terms of the history here in terms of how we deploy cash. The cash flow deployment has been really focused on HRPF and Rowley over the last several years. And with that ending and with profitability improving, we should be generating good cash flow once we replenish the working capital that requires – that's required in a growth mode. The dividend is an important part of shareholder value creation from our perspective and our Board's perspective, so that will be there. I think the liability profile of our debt is okay. We don't have any near-term debt maturities out there for the next 4 years. And quite frankly, to pay those off early given the nature of our debt instruments is at a premium that's not a value creator for our shareholders, so I don't think we would do that. I think that there are other – there are certainly acquisition ideas and opportunities that are more bolt on and expansive of our strategy to continue to move forward into a parts and components using the alloy systems that we know very well and that we're technical leaders in. So those opportunities are out there, quite frankly some of them are small. Some of them are – and we'll look at those from the standpoint of do they fit us strategically? Are they good assets? Is it a good technology? Is the cost structure acceptable? And is it accretive to our shareholders? And at the end of the day when you work your way through all of that and historically as you know, if when we had free cash flow that was in excess of what our needs were and the best way to create shareholder value was to have share buybacks, we've done that in the past. So that's always part of the toolkit in terms of creating value for our shareholders. Stephen Levenson - Stifel Nicolaus & Company: That's great. Thank you very much.

Thank you. Your next question comes from the line of Julie Yates of Credit Suisse. Please go ahead.

Good morning. Thanks for taking my question.

Hi, Julie. How are you?

Good. Rich, you mentioned that aero market demand is aligning with build rates on both airframe and jet engine. This is certainly nice to see and something we've all been waiting for, for a long time, and I think you answered some of my questions on jet engine with Gautam's question. But wanted any commentary you can offer on where you are from an airframe perspective with titanium shipments relative to your minimum contract levels and then how you expect that to trend in 2015 as inventories continue to drop?

Sure. Well I think I know that in 2014, we shipped at a level that was above the contractual minimums in a healthy way. I think it's our expectation, based upon the dialogue we're having, that that's likely to continue in 2015 above the contractual minimums. I don't think that it would necessarily be above the level of 2014. So I think it's more stable at an elevated level above the contractual minimums. And to the extent that there are opportunities to do more than that, we certainly stand ready to support our strategic customer to do that.

Okay, understood. And then are there any additional opportunities for content gains on both jet engine and airframe in 2015 or has most of that content been awarded at this point?

Yes, in 2015, for shipment in 2015 given the lead times and everything, probably not. Beyond 2015 are there opportunities? Yes, I think there are opportunities. A lot of the big LTAs quite frankly have the competition has occurred in 2014 and early 2015. So we're very pleased with the position that we've achieved not only from a milled product standpoint, but from a forgings and a castings standpoint. It doesn't mean that we're satisfied. It means that we've made progress. So I think that there are other opportunities that are out there. We need to continue to execute well. We need to continue to take costs out of our process and deliver on time. And all those things I think endear you and continue to be focused on the technology capability that we have all of which creates values for the customer. And if we're competitive, and I think we can be from a cost standpoint, then you win. And that's what our focus is. But in terms of 2015, maybe there's some opportunities that in a small way, but I think the opportunities are more beyond 2015.

Okay. Great, thank you very much.

Thank you for your question. Your next question comes from the line Timna Tanners of Bank of America. Please go ahead.

Yes. Hey. Good morning, guys.

Good morning, Tina. How are you?

Good. Thanks. Wanted to – thank you for the detail on oil and gas, that's definitely been a big focus. But also of concern to investors lately has been the weaker global growth. And so wanted to ask if you could elaborate a little bit more on your overseas demand and what you're seeing in those direct sales?

Yes. I think we're probably less focused today on the more commodity side, for example in Europe. In the past 5 years or so, we have shipped reasonable quantities of stainless sheet into the European market. We still have important customers there, but I think the growth opportunities because of the relative low growth in Europe are less. I think the bigger focus, or the key markets, if you will, that are global by nature, aerospace, oil and gas and CPI, medical, to a lesser extent electrical energy, I think there are some industrial gas turbine opportunities out there. We haven't really seen any – the aerospace market is a global market and the demand is the demand. So while there are European-based customers there, that demand is growing. The oil and gas opportunities, while we're watching them very closely, I think they're there, at least at the present time. It depends upon what project it is and whether or not it's – what the nature of the project is. The medical market is very competitive in Europe but it remains a growth market. So I think the – and in Asia when you look at Asia, the demand in China given the nature of our products and really where it's going which is more in the higher end, the demand appears to be good and growing. So I think we're certainly conscious of the slower global growth that's out there. It's really depends, though, on what the end market is. I think the construction and mining market continues to be relatively weak. But the higher end markets where there's higher technical barriers of entry and represents our higher product range, I think the opportunities are still there and we continue to focus on them.

Okay, cool. And then fully aware that your focus is on the higher margin products and that's where the growth is, can you still give us an update on what you're seeing in the stainless steel and electrical markets and do you have enough volume on the high end to enable you to pare back what you're producing on the more commodity side yet?

In Flat Rolled, probably not. I actually think the demand in Flat Rolled for stainless products is reasonably good. Pricing has improved off of the bottom. 2 of the 3 base price increases for commodity stainless products that were announced in 2014 remain in place in the market. The last one did not. The Flat Rolled – the higher end nickel alloy and specialty alloy sheet, plate and precision rolled strip demand for our Flat Rolled products, which are global markets, it's corrosion markets, it's aerospace, it's automotive, those markets are pretty good. And a matter of fact, strong. So I think the stainless market, while I'd like – I still believe that pricing from the standpoint of really the producers generating acceptable returns on capital employed by my definition, maybe not by their definition but my mind – by mine, pricing needs to go up, but that's a fundamental supply and demand issue and we're not necessarily banking on that in 2015. So we're more focused on the commodity side in Flat Rolled becoming more efficient, taking costs out, being leaner and improving the profitability of the product that way through the HRPF capabilities.

Okay, cool. And then electrical if you wouldn't mind?

Yes, I'm sorry, The grain-oriented electrical, I think demand is better, slightly better may be it stabilized a little bit. There has been some opportunity for price increases, modest price increases I would call it. So I don't see – I don't think that market is getting worse. I don't think it's necessarily just treading water, maybe it's a little bit better. The trade cases are still uncertain. They're being appealed. So we're watching the level of imports very closely. The fundamentals of the goes market are still relatively significant excess production supply capability compared to demand in the world. And with that, you don't get a lot of opportunities for the kind of pricing that one would like.

Okay.

But it isn't getting better. It's maybe modestly – isn't getting worse, maybe modestly better.

Okay. Thank you.

Thank you. Your next question comes from the line of Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

Good morning.

Hi, Phil. How are you?

Doing well. How are you?

Good. Had a question on the shipset content, really appreciate you providing that for the 737, 787 and then the 350. In regards to the 787 and the A350, any color you could give us on what may have been incremental with these recent wins?

Well with the recent LTAs, I think the recent LTAs are more focused on the next-generation single-isle than they are on the 787 and the XWB. Having said that, I think on the parts and components side, there have been some wins that have been important, that have resulted in us growing our content on those platforms. I think there remains some opportunities on the 787 for forgings that were – and actually across the platform, that we are working on. We haven't talked a lot recently about the developments on new alloys or relatively new alloys like ATI 425 alloy, and another titanium alloy we are in qualification on that I think would be growth opportunities for ATI and the qualification programs are going well. I think 718Plus and Rene 65, the new alloy systems, are there to support a wide range of engine programs. So I think when you look at it in total, it's probably more specific to the single-isle, but the existing newer technology platforms on the wide bodies are also part of that.

Okay. So it sounds like more of the wins then on the single-aisle relative to where you had been?

Yes, it's more than 1 platform. Yes.

Okay. And then curious, given the recent weakness in the ruble and your relationship with VSMPO on the Uniti JV, how that plays into the relationship? How should we be thinking about that?

Well, we haven't seen any change. The relationship with VSMPO is an interesting relationship, right. We're very competitive on the markets other than industrial and we're a partner on the industrial side. And we've been a very successful partner for not only each other but for the customers over the years. So we haven't seen any change in that and certainly no change in the relationship. I think the biggest change in that in Uniti is really on the market side and in terms of what is the demand? And where are the projects and what is the pricing and that? So that's an issue for both partners, both ATI and VSMPO. But we continue to work together to try to figure out and identify markets that are attractive where we can earn acceptable returns and there are some early signs of improving in demand. I think base pricing or pricing is a little bit better. I think it bottomed out at some point in 2014. And we've seen some price increase opportunities on some of the industrial titanium products, but very competitive market.

So the weaker ruble doesn't help or hurt you as far as a relationship? Do you view it as more of a neutral or –

I think at this point in time I would say, it's neutral. It's not – there's not an impact from it at this point in time.

Okay. And lastly if I could, on the inventory side, your build quarter on quarter, curious what that may be related to if that's some staging for the oil and gas business or the –

Yes, exactly. It's mainly or almost all attributable to that. It's – the 625 nickel plate order has very aggressive shipping schedule. Started nominally really in the fourth quarter with late November, December shipments. But all the product has to be shipped in the first 6 months of the year so we had the melt and introduce that into the production flow, and that's the biggest driver in terms of inventory growth in the fourth quarter. And that will obviously liquidate itself from an inventory standpoint through the first half of the year and from a working capital standpoint by the end of the third quarter with the collection of receivables.

Do we expect inventories to be flattish year on year this year or down? How are you viewing that?

Rich Harshman, Allegheny Technologies Incorporated - Chairman, President & CEO 43 Well a lot depends obviously on what the raw material costs are and what does nickel do? What do the other alloying elements that we use do? I think from a volume standpoint I would expect volume of inventory year end to year end to be lower in Flat Rolled. Certainly we'll see not only the liquidation of the inventory and the big plate order but also the benefits from the HRPF. I think that the growth in the aerospace market as production rate ramps continue on, I'm confident that we can through our lean manufacturing initiatives and effort that we can manage that growth without a significant investment in inventory. And all that obviously is dependent upon what do the raw material input – what are the raw material input costs.

Thanks so much.

Okay, thank you.

Thank you. Your next question comes from the line of Josh Sullivan of Sterne Agee. Please go ahead. Q –Josh Sullivan–Sterne Agee: Good morning.

Good morning.

Good morning. How are you? Q –Josh Sullivan–Sterne Agee: Good. Just one question on the HRPF. When we think about the breadth of the new product offering at the facility, how much of the new market opportunity are you adjusting in the 2015 targets versus what we should see in 2016 as customers become more aware and you're better positioned?

Well, I think we're already seeing some the demand especially on the stainless wide product, we – to put it in perspective without giving specific numbers, because it's really competition sensitive, in the first 2 months of 2015, we will ship 3 times as much 60 wide product as we ship all in 2014. Now having said that, we didn't ship a lot in 2014, but it's only 2 months. So the magnitude of that, you're going to begin to see and are seeing in 2015 with the capability we have to go wide. And I think you'll see the same thing on some of the wider nickel products. And – but I think that the opportunity while we'll see that growth in 2015, I think it's really only scratching the surface in terms of what the opportunity set is in 2016 and 2017 and beyond. Q –Josh Sullivan–Sterne Agee: Okay.

But it'd certainly be a contributor in 2015. Q –Josh Sullivan–Sterne Agee: Okay. And then lastly, sorry if I missed this and I know you mentioned the ruble, but can you talk about any other dollar exposure you may have throughout your portfolio?

Pat, you want to comment? A –Pat Decourcy: There's nothing significant. We hedge over transactions that we do in euros. So we have no significant exposure there.

Yes, most of our costs are US-based and most of our transactions are dollar-based. But to the extent that we have any exposure of a cost, a US-based cost matching up with a euro sale which is really the typical that's the exposure we have is mainly in the euro, we hedge that in order to protect the – to lock in the profit, if you will, on the sales transaction. Q –Josh Sullivan–Sterne Agee: Okay. Thank you.

Thank you for your question. Your next question comes from the line of Sal Tharani of Goldman Sachs. Please go ahead. Q – Sak Tharani – Goldman Sachs: Good morning.

Good morning. How are you? Q – Sak Tharani – Goldman Sachs: I’m all right. Thank you. I wanted to ask you if the dollar appreciation is impacting the imports of stainless in the US? Have you seen any impact and which countries are increasing their imports to the US?

Yes I think we've seen some quite frankly that tends to be offset to a large extent by the volatility of nickel. Because what can happen with the volatility of nickel is the transaction price is set and then nickel falls and then the selling price is after the 30 days on the water and you have a different surcharge mechanism, so that forms some of the mitigating factor. I don't think it's – as a primarily a US-based producer, it's not helpful to us. It does make imports more attractive, but the disadvantage is time. Raw material cost, volatility, freight costs. So I don't think it's – at this point time it's a major driver. I think the bigger issue is, do you have – where in the world is there excess capacity and where do they look to dump? And the US is the best market to dump because it's really the only open market. So we spend a lot of time watching imports and where they're coming from and surges and the focus is always on China. But not just China. And we do that not only from an ATI perspective, but we do that from an industry perspective through SSINA, the industry group of which ATI is a leading member of. But at this point, I don't think it's really necessarily the dollar issue, it's more fundamental than that. Q – Sak Tharani – Goldman Sachs: Got you. And lastly on – have you given any numbers on your backlog, how they're shaping up to be at the end of last year versus 2013?

Yes, we had $1.7 billion, $1.8 billion backlog. And remember, when we talk about $4 billion plus of LTAs, none of that gets entered into the backlog until we have specific releases, purchase orders under the LTA that has a defined shipping date. So those releases get entered into the backlog as we receive the orders. So that explains the disconnect between $1.7 billion, $1.8 billion and $4 billion. Q – Sak Tharani – Goldman Sachs: Got you. And also wondering what was it last year at the end of 2013?

I think it was about the same. Raw material costs were higher at that point in time. We also when we enter into – when we enter an order, we enter it at the current raw material values and then it gets adjusted based upon how the surcharge mechanisms move. Q – Sak Tharani – Goldman Sachs: Okay, great. Thank you very much.

Thank you for your questions, ladies and gentlemen. I'd now like to hand back to Management for their closing remarks.

Okay, thank you for joining us this morning. If anybody has any follow-up questions or any additional questions, please don't hesitate to call Dan. And as always, thank you for your continuing interest in ATI.

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