Good day, ladies and gentlemen, and welcome to the Allegheny Technologies Earnings Conference Call for 2012. My name is Jody, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Dan Greenfield, Vice President of Investor Relations. Mr. Greenfield, please proceed.

Thank you, Jody. Good afternoon, and welcome to the Allegheny Technologies' Earnings Conference Call for the Second Quarter 2012. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call. Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Dale Reid, Executive Vice President, Finance and Chief Financial Officer. All references to net income and earnings in this conference call mean net income and earnings attributable to ATI. After some initial comments, we will ask for questions. [Operator Instructions] Please note that all forward-looking statements this afternoon are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially. Here is Rich Harshman.

Thank you, Dan, and thanks to everyone for joining today's call. Second quarter 2012 results were similar to those achieved in the first quarter of 2012, even though the global economy weakened throughout the second quarter. This performance helps demonstrate the benefits of our diversified products and markets and our continued focus on key global growth markets, which are less driven by near-term economic volatility. Total revenues were essentially flat compared to both the second quarter 2011 and the first quarter of 2012. While volumes increased for many of our products compared to both periods, revenue and operating margins were negatively impacted by falling prices for most raw materials. Revenue was reduced due to lower raw material surcharges and indices, primarily for nickel, nickel scrap and titanium scrap. Operating profit was reduced from the misalignment of raw material surcharges and indices with raw material cost, although most of this was offset by reductions to LIFO inventory valuation reserves. We believe that the long-term secular growth trends in our key global markets remain intact. Looking at each of our key global markets. First half 2012 sales to the aerospace and defense markets were approximately $850 million or 31% of ATI total sales. Sales to the oil and gas and chemical processing industry markets were nearly $540 million or 20% of sales. Sales to the electrical energy market were approximately $315 million or 12% of sales, and sales to the medical market were nearly $115 million or 4% of sales. In addition, we are seeing strong growth in demand from the construction and mining markets with sales of approximately $214 million in the first half of 2012 or nearly 8% of sales. Finally, first half direct international sales were nearly $975 million or just under 36% of sales. We continue to improve…

Your first question comes from Richard Safran from Buckingham Group.

Listen, I had 2 questions here, which I just tried to expand on some of your comments, Rich, and I wanted to first talk about Farnborough. Going through your booth there, was struck by the fact it was all about alloy parts. But I also note you took down some expectations for your -- here for how rapidly you think 425 alloy is going to penetrate the market and took up expectations for other alloys like Rene 65. So what I want to know is if you could expand on the opportunity set, how you see this impacting the business, is there a near-term component and long-term component to this.

Yes. I think there's -- I think for both of those alloy systems, there's certainly a long-term component. I think on the jet engine side, the alloy development, the 718Plus alloy develop was really -- has really been under development for 7 to 8 years. And that was an ATI-developed alloy that we were targeting for a specific application as our interaction with the engine manufacturers over time recognized that their challenge was going to become more -- much more energy efficient and required a higher-operating temperature. So we began, actually, 7 or 8 years ago, working on that alloy as part of the metal's affordability index proposal, which we won in a competition. And so the development of that alloy is much longer timeframe for the engine applications than ATI 425 has been, and I'll come back to that in a moment. So the aerospace market, as you know, when you enter new products and enter new alloys and new materials, it takes a while to get them qualified because of the critical nature of the application, especially in a jet engine rotating part. The Rene 65 is really a GE alloy. It's a proprietary alloy developed by GE. We were honored in terms of them picking us to work with them to develop that into a wrought product, which we have done over the last 3 or 4 years, and it's really focused at a very high-level on the same kind of issue in terms of how do you increase the life of the part and the component in a higher-operating temperature environment. So those 2 alloys are being inspected now. There -- in the case of 718Plus, it's not only for the next-generation or future generation engines but it's also for replacement parts in engines that are…

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

So I wanted to follow up with my 2 questions, I guess. If we apply your guidance for full year and assume a decline in the third quarter, then you have a pretty sharp ramp in the fourth quarter, and you certainly went through quite a number of projects to expect to win opportunities. So I guess my first question is, can you talk to us about -- first of all, I just want to make sure my assumption is correct about the fourth quarter sharp recovery, but also, how much conviction do you have that these projects will get -- will actually go ahead on schedule? We have seen delays in the past in some of these end markets. I'm just wondering if you could give us some more color on your conviction levels for timing.

Yes. I do think -- we certainly have seen delays, especially in some of the desal. We're more certain today than ever before is the only way I think I could point -- put that because of the confidentiality that we have with our customers. But the projects are still there. The need is still there. They're still funded. They're at various stages in terms of when you would expect the order, which is why we kind of give a broader swath in terms of third quarter order, and we begin producing and probably don’t begin shipping until the fourth quarter. So I think the macro environment certainly still presents a risk in terms of further deterioration globally. Could the customers decide to wait longer, of course, that risk is always there. But I think with the passage of time here through 1 or 2 of these projects being now almost a year later than was originally intended, I think we are much closer and more confident than ever before. Is it riskless? No. Of course, it's not riskless. But I think that we have a high level of confidence. I think that -- those factors helped drive the fundamental view that the fourth quarter is improved compared to the third quarter, and the third quarter is the trough. I also think that as you -- as we look at the other end markets in terms of the supply chain and as you continue to look and listen to the OEMs in terms of their confidence in the rate ramp, and the expectation now that by the end of the year, the 787, which we heard today from Boeing, will be at 5 months. And the more -- the high degree of confidence that they have in their supply chain and their production process, that will drive not only the demand for specialty metals, not just titanium for airframe applications, but also for the engine side and probably take away some of the -- you have the macroeconomic concerns that I think are certainly in the back, if not the front, of everybody's mind. But in the aerospace supply chain, I also think you have the focus on gaining confidence in the rate ramp, and I think that with each passing months and each progress that the OEMs make in achieving their announced rate ramp, the confidence becomes greater and the need for the product and the materials becomes greater because the supply chain inventory levels are pretty much in balance.

Okay. And then a quick one, if I could on -- how much of your aerospace exposure is aftermarket and how much is defense?

The -- generally speaking, when we look at both forgings and we look at the mill products that are targeted to the aerospace market, it's in -- it's generally about 25% to 30% is aftermarket spares related as opposed to new build related.

And defense?

On the aftermarket on defense?

No. Just defense in general, sorry.

Defense in general for us is no more than 5% of total sales, and most of it is in the -- a large part of it is in the naval nuclear program which is really dependent upon on the refills -- the refuel schedule, as well as the new build schedule, and then you have the jet engine OEM, the new build of jet engines for fighters, as well as the aftermarket for those parts.

Your next question comes from Kuni Chen, CRT Capital Group.

I guess just a quick question, first off on titanium mix and high performance. Obviously, there's a sequential decline there because you have less ingot in the mix. Is that going to be consistent in the second half, or does that shift around a bit?

No. I mean, I think the ingot -- the opportunities that avail themself on ingot really depend upon, in my view, the fullness of the supply chain. I think when you see kind of a leveling out of demand, and in this case, I think it would be temporary, that supply chain for maybe some converters who buy ingot and make it into -- forge into a block that becomes machined down into a component. That -- as that supply chain becomes full and is in balance, basically, you see a softening of demand there and you'd see a more competitive pricing environment, quite frankly. And some of those -- in that environment, we have a tendency not to be ones the chase that market. So we back away a little bit. I think that the demand for the product form returns. It's not our preferred path to market, by the way. We -- as you've heard us say many times, we would much rather make a value-added product form. But the demand for the ingot product returns as the supply chain starts to tighten up, and you go to the next-level production rate ramp and the dynamics of the supply/demand equation for ingot change. And then pricing gets a little bit better, and then it becomes a better market. So there's a number of factors that go into it, but it's really not a market that we like to chase. We have customers that we want to support, and we will continue to support but our level of aggressiveness is more market dependent. So another way of answering that question is, I do believe that as the rate ramp happens, the supply chain will get tighter, demand will go up and there will be opportunities -- better opportunities to sell ingot product.

Okay, got you. And then just as a follow-up. Obviously, we're in a tough macro environment. Companies with cyclical leverage are certainly under pressure. Your stock's down quite a bit so far this year, whereas some of the other specialty metals guys are only down maybe 10% or 15%. What do you think? What are your thoughts on what the main disconnect there is? And do you think there are misperceptions on ATI versus its peers, and what do you think you can do to change those misperceptions?

Well, I mean, I think we have to grow, quite frankly. We have to -- I'm not going to sit here and say that we're going to put everything off on the market. I mean, the market is the market. There are some -- the market demand, to a large extent, and the macro environment are things that we really fundamentally can't control. I mean, I think ATI, when you look at our specialty metals peers, I mean, we are a much different company than virtually all of them. Whether you want to look at them from the standpoint of more of a commodity stainless producer, they don't make the specialty metals and the forgings and castings that we do. So we're a much different company than those companies. From the titanium producers and the nickel alloy and specialty alloys producers, they're more narrowly focused than we are, and that's by design, in our view. I mean, we like -- as you've heard us say before, we like diversification. I think that the short-cycle business, if you will, which is more of the commodity products does inject a level of volatility of earnings into us that's maybe different than others. And that becomes -- in a down market and in a macro -- a weaker macro market, that becomes a negative to us as opposed to maybe a positive. In a strong market and in a cyclical upturn, that becomes a huge advantage and a lot of wind under our sails -- under our wings. So it depends on what market you're in. I mean what we have to continue to do is execute in an outstanding way, focus on creating value for our customers, which will, in turn, create value for our shareholders over the long term, continue to work on cost -- taking cost out of the business, continue to work on lean manufacturing principles and recognize that we have to continue to evolve as a company. And to the extent that we can grow and do target our growth into the more higher value-added, less-commoditized part of the business and minimize the level of volatility to our earnings stream and, therefore, our stock price beta by being less dependent upon the short-cycle commoditized business, then that will continue to differentiate us. And that's really what our strategy is. But it's not something that you can do in 1 quarter or 2 quarters or 3 quarters. That's a journey that we've been on now for quite a while and will continue on.

Your next question comes from Steve Levenson from Stifel, Nicolaus. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: In terms of the ingot you were talking about, there -- would you want to make a guess on how much is still in the airframe supply chain? And how long you think it might take to be exhausted or, at least brought back to a level where demand picks up again?

Yes. Steve, I really don't know how much is it. For example, in the Boeing titanium inventory, I don't know how much of that is ingot versus plate versus billet, et cetera. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: In general then, just...

Yes. Well, I think that the -- in general -- and by the way, when I made my comments on the ingot side, it -- that's not necessarily related directly to our sales to Boeing on titanium. It's more directly related to the supply chain where you sell ingot into a converter, who, in turn, makes it into another product form, primarily for airframe, that probably ends up with Boeing or ends up possibly even with Airbus. I don't know. But I think that the -- because the ingot product form is the lowest value product form and affords the highest level of flexibility to be made into an actual component or a part, that I would imagine that, that represents a significant percentage of the inventory that Boeing has been dealing with and working off here over the last 3 years. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Second, a few years ago, you bought Crucible's Powder Metal business, and you've been talking a lot about powders on the call today. Are you ahead of where Crucible was at the time you bought it, and how far along are you to where you think you're going to be?

Well, I hope the answer to that first question is yes, and I think it is. Yes, we are ahead. We've made good progress in really bringing that into the ATI family, if you will, and putting in the kind of operating and manufacturing controls and processes that we think are important to run a successful business. We have been working hard on the aero engine side with the OEMs in terms of positioning that business to be a viable, long-term supplier to the OEMs, which is -- which was something that when it was owned by Crucible, it really never was. So we have definitely made progress in that area, and the natural need for more powders for the new-generation engines that are just now being produced and will continue to be produced in greater volume necessitates the need for the capability that we have there. So I'm very confident that that's a business that we can turn into a significant supplier into the jet engine business. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And you were talking about fasteners before, too. Is there much investment required to get into the fastener business or the fastener stock business? Or is it really just a matter of qualifying what you're already making for aerospace?

Yes. It's -- and just to be clear, it is the fastener stock business. And a lot of the investment, I mean, the big bulk of the investment, quite frankly, we made a number of years ago in the 2003-2004 timeframe when we significantly enhanced and rebuilt the capabilities of our continuous rolling mill, long products rolling mill facility in Richburg, South Carolina. So that, and the coil finishing capability that was added at the same time, really gave us a lot of the capabilities, not all, because we've had to do a few things to really put the kind of level of quality and dimension and surface condition control capability onto that mill, which we now have. So I think the bulk of the investments have been made. Now to the extent as we look at growing that business as being uniquely positioned to produce all -- virtually all of the alloy systems that fastener stock is made from, both nickel and specialty alloy, as well as titanium alloy and different alloy systems, and the fact that we're integrated all the way back to melt in each one of those alloy systems, and in the case of titanium, actually all the way back to raw materials in terms of titanium sponge, we're uniquely positioned. And that's the capability and the technology that is serving as an entrée for us into the market. As we continue to grow and position our self in that market, we may need to do something in terms of adding capability on the wire finishing side, both from a coil product, as well as the straight-length product, and we are looking at that. That's our operations in Alabama, as well as in eastern Pennsylvania. And -- but to the extent that we need to do something there, I mean, you're talking about less than $100 million and probably less than $75 million.

Your next question comes from the line of Jonathan Sullivan from Citigroup.

I just had a quick question. Looking at the high-performance metals revenue line and looking at the volumes and pricing, it looks like the revenue that would be attributable to the Ladish portion of that business declined quarter-on-quarter, and is that true? And if so, would that be attributable to the stairs market weakness that you referenced in the release?

Yes. I don't think there was a meaningful decline or increase. But to the extent -- I mean, our expectation would have been that there would have been an increase in that business, and there wasn't. And there are 2 factors in that. One is the spare in the aftermarket side. The second is that management of the supply chain all the way through where no one is really building anything in excess to match the production of the engine on an as-required basis. And then the third component is, actually, that business is impacted by lower surcharges, too, on a pass-through basis. So when titanium scrap falls and when nickel prices fall and nickel scrap prices fall, that impacts their revenue line. It doesn't impact their IBT line, but it impacts the revenue line. So those 3 factors would have been the fundamental reason. But it isn't anything that is either structural or, quite frankly, an overall concern to me other than, I think, once the confidence and the rate ramp really takes hold in the supply chain, I think some of the caution and the conservatism in managing inventories will go away.

Your next question comes from John Tumazos from Tumazos Very Independent.

Following on the last question and, Rich, you have to bear in mind, we see things through the very jaundiced, specific numerical categories you give us and you have a better picture. I'm directing my question to the decline in margin in high-performance alloys. We know that it's not due to LIFO, because LIFO was credit and not charge. There is no longer a start-up cost for Rowley, Utah, which should be more productive. There's no longer the write-up of the inventory years ago -- a year ago at Ladish. And if the surcharge in the titanium scrap prices are lower and all that stuff and it's a wash, there's less revenue but the same profit and that should, other things held constant, benefit the margin. Then when we multiply the high nickel pounds times prices, we get a good number. And when we multiply the exotic pounds times prices, we get a good number. When the titanium contribution to revenue is poor, because the volumes were very low, we understand that. Then when we multiply price times volume to get revenue for titanium, high nickel alloys and exotics, the residual was $21 million smaller in June than the March quarter. Just following up on the prior gentleman's question. So that if Ladish's revenues didn't fall $21 million, the residual of everything not in those first 3 categories from before you bought Ladish went down $21 million. And if you could talk to that $21 million and the margin issues feel like, looking at the numbers from the outside, like something dropped -- something out of -- like -- almost like it was a $10 million, $20 million defective order in the segment.

All right. Well, I understand your question, and it's a very valid and fair question.

You own stock, I'm sure you understand. I bought more stock in the last month, and I've never sold a share of your stock, Rich.

Yes. Well, we appreciate that, John, and I own a lot. I mean, 35% of my net worth is tied up in ATI, and I'm proud of that and confident of the future. We do -- the easy question, and this is in our earnings release, is that we did have about $3 million of IBT negative impact because of -- and it’s primarily because of nickel where the nickel surcharges fell. And because of the long manufacturing cycle of the product, we had higher-cost nickel and received less revenue dollars from it because of a lower surcharge. So that's $3 million off the top. None of that, by the way, was in the forgings and castings business. So that's all in the mill. That's all in the mill products business. The other thing that you had was we have a much lower operating volume at the front end of the zirconium business because of the low demand. I mean, you have to look at the zirconium business in terms of while the volume was there or may have been better, it all depends on what product form you're making and how much of it was hafnium, niobium, titanium alloys versus zirconium. Zirconium was down because of the nuclear market and because of the weakness in the CPI market, primarily in Asia. And with that lower demand, the front end of that business, in terms of where we produce the raw material products, we have a different cost structure that impacts everything that's going through there. So that's part of the reason, not the sole reason, but it's part of the reason why we had a salaried-staffing reduction that we have impacted there so that we can restructure that business and have a better cost structure. By the way, that…

Rich, 2 descriptive questions. Is zirconium front end separate from the exotics? And CPI, I presume, does not mean Consumer Price Index?

No. It means chemical processing industry. And no, the zirconium front end is part of the exotic business. I mean, when you go to ATI Wah Chang, we're producing the raw materials that we then melt, that we then produce into a finished component like a tube reduced extrusion or we produce into a mill product like a billet. But the front end of that business really is a high fixed-cost front end, and you need a certain level of volume in order to have that be as cost efficient as possible.

And those are exotic pounds per your definition.

Yes. Those are exotic pounds. And you've heard us say this many, many times, John, the exotic business is -- you really just can't go off of -- necessarily, just off the pounds because it's very mix sensitive. The margin opportunity on some of the products that give you volume isn't as great as some of the more high-value products like a tube reduced extrusion or a hafnium product or a niobium product, et cetera. That business, we go all the way from making the raw materials at the start point of -- to produce zirconium products and extracting the by-products, which are hafnium, and going all the way into producing wire. So it's really a very sophisticated, integrated business.

Your next question comes from Mark Parr of KeyBanc.

Is -- first, just to go back to Farnborough, and congratulations on those LTAs. Is there -- can you give us any more color on potential magnitude of the other ones that haven't closed yet?

Yes. I mean, I think it would be -- the several that we're working on that are near would bring that total number of $1.2 billion up, closer to $2 billion.

Okay. And how do -- how would that compare to the LTA activity you did -- you guys achieved last year coming out of Farnborough?

Yes. It's more. It's -- I mean, I don't remember the specifics there, but we -- this is a much higher level of activity that we're seeing because of the nature of the alloys, the new alloys and the position that they have on the new engines. And we're one year closer, quite frankly, to ramping up and producing these engines than we were a year ago.

Your next question comes from Sohail Tharani from Goldman Sachs.

Rich, on the aerospace, particularly 787, there's been a quite a bit of improvement in the processing of titanium over the last 5 years. You, yourself, have been part of metallurgy technology there, more near net shape. Also, close die casting versus open die casting has reduced the volume of titanium you need to process to bring it to the fly weight. I was just wondering if in your model or demand, has there been a conservative reduction in the actual purchase of titanium for 787? Is it like a 5%, 10%, 20%? Have you done some math on that?

Yes. I mean, actually, the total -- the buy weight has come down but only because of the product change form. So as the -- I won't speak for Boeing, but -- or you -- the question is directed more toward Boeing, but as you look at what Boeing is trying to do in terms of getting to near net shape, I mean, that's a much more efficient value-added product form and a lean manufacturing concept than them taking a plate or an ingot or a billet or a block and machining it down into a part and generating a lot of scrap, which obviously gets reclaimed throughout the manufacturing process and goes back to melters like us. But it's really an inefficient process. So what they have worked very hard on and what they did and what they talked about in terms of the delay on the design and the qualification of 787, they spent a lot of that time really looking at and reengineering the manufacturing process and going more to a near net shape. So when they do that, they are buying less titanium by weight per airframe. But if you explode that back up into a melt, right, a near net shape, it still requires melting of an ingot and then remelting it into a -- either if it's a long product, it's an ingot and then a bar, a billet and then a bar and then a shape. If it's a flat product, it's slab and then a plate and then a fabricated component. So really, from the standpoint of the capability of producing the product, you still have to go all the way back to melt, and there isn't an appreciable change in terms of what the total requirement is to make the end product. It's just a more efficient end-product form and a more lean manufacturing concept end-product form for them to buy.

So is it fair to assume that because it's a much more finished product that the price they're paying compensates for the lower volume of titanium they're buying?

Yes. I mean, I think that -- yes, I mean, absolutely. You're going to pay a different price for a shape or a casting than you are for a billet or a slab or a plate. So yes, it does compensate you for it. And the interesting thing is that if you look at the titanium producers, I mean, not everybody is really capable of producing all of those product forms or a large portion of the product forms that they're looking for, in terms of both value-added flat-rolled product, value-added long product, a specific forging, a near net shape in -- the way ATI is, and that's part of our strategy.

Our final question comes from Tim Hayes of Davenport. Timothy P. Hayes - Davenport & Company, LLC, Research Division: On the flat-rolled commodity stainless, it was a pretty surprising jump in the shipments sequentially. Is that -- wanted to know what your thoughts, what was the -- what caused that? From our end, it looks almost like you took a decent bit of market share.

Well, I don't know if we -- I think the overall volume and consumption in the second quarter was -- it was better than the first quarter. The pricing was more challenging, quite frankly, in the second quarter, especially towards the end of the second quarter, than it was throughout most of the first quarter. I think we -- you know that we think that the European market is an important market for us in terms of stainless sheet. And we've been supplying that market for a couple of years, and we continue to do that. There are different aspects of different levels of commoditization of what we call standard sheet. Some of the markets aren't all going into consumer and consumer durables, so some of that product goes into things like oil and gas and railroad car construction and things like that. And those markets were actually pretty good or decent, much better than the appliance market, for example. So we -- our job, quite frankly, is to identify where those market opportunities are, be as competitive as we can in getting -- in loading the front end of the facility because of the importance of the absorption factor and as -- on all of the products that we make in Flat-Rolled Products. So that's what the commercial focus is, is to first meet the needs of the customers, but secondly, to be competitive and go after the markets because of the importance of the volume. And we always look at it from the standpoint of making sure that the product, the order that we take has to be a net contributor. I mean, we have to be profitable at the contribution margin level so that it is actually contributing to the bottom line. And we have a really good handle of what our costs are and what our variable costs are and what mix we're really looking for, and the team did a good job of that. So I think the third quarter is always a seasonally weak quarter in the stainless business because of Europe, quite frankly, being down for, essentially, the whole month of August, and you have some shutdowns and vacation schedules and things like that. So there's a more -- normal seasonality, but I think we just -- we were responsive to what the market demand was, and we need to continue to do that.

And out of the commodity stainless, how much would go to Europe?

I mean, it's less than 100,000 tons a year.

I would now like to take this time to turn your call back over to your host for today, Mr. Dan Greenfield.

Okay. Well, thank you for joining us today on the call. And as always, thank you for your continuing interest in ATI.

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

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