Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Allegheny Technologies Incorporated Earnings Conference Call. My name is Janeida, and I will be your operator for today. [Operator Instructions] Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Dan Greenfield, Vice President, Investor Relations and Corporate Communications. Please proceed.

Thank you, Janeida. Good afternoon, and welcome to the Allegheny Technologies earnings conference call for the third 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. The third quarter was challenging. The global economy weakened further, resulting in continued delays of large global infrastructure projects that use our specialty metals, weak demand and historically low base prices for standard stainless steel products, softening of demand from the jet engine aftermarket and aggressive inventory management actions throughout the supply chains of most end markets. In our second quarter earnings release and conference call this past July, we said that macroeconomic challenges and uncertainties were negatively impacting demand for most of our markets. Since then, continued anemic growth in the U.S. and further slowing of economic growth in Europe, China and Japan, coupled with uncertainties created by the U.S. election, resolution of the U.S. fiscal cliff, the leader -- upcoming leadership changes of governments in China and Japan and the lack of real progress on resolving the Eurozone debt crisis, have worked to exacerbate short-term economic headwinds, resulting in further softening of short-term demand for most of our global markets. Since we have no direct control over the outcome and resolution of these macroeconomic and political challenges, we remained focused on actions and strategies that are within our control. For example, during the third quarter, we continued to improve production at our Rowley, Utah titanium sponge facility. Production costs have decreased each quarter of 2012. Third quarter 2012 production cost per pound is 10% lower than in the fourth quarter of 2011. We have produced over 15 million pounds of sponge cakes during the first 9 months of 2012. We've made good progress in the construction of our game-changing Flat-Rolled Products hot rolling and processing facility. This important strategic investment is progressing on schedule and on budget. The project is scheduled for completion in late 2013 with…

[Operator Instructions] Your first question comes from the line of Richard Safran with Buckingham Research.

Rich, first question on titanium. You made comments before that you expected titanium shipments to accelerate in 2013, so I want to know if we can get an update. And maybe -- if you could maybe parse out mill product shipments from the totality of titanium that you shipped to Boeing?

Well, I think -- you mean comment on excluding what we sell to Boeing?

Actually, both would be fine.

Okay. Well, I think as you know, we're essentially delivering at the minimum take or pay to Boeing as they continue to work through their titanium inventory. I think there are -- there's a lot of speculation that has been made about where Boeing is on their titanium inventory. I think, in reality, only they know, and I do think that they're closer to the point of having the inventory in a manageable position today than they were 6 months ago. And 6 months from now, they'll be closer to that point as well, especially as they continue to ramp up and only take the minimums from their 3 major mill products suppliers. So our view is that -- the conservative view is that through 2013, at least the first half of 2013, that we would be delivering at the minimum take or pay requirements and eventually that the opportunity presents itself, where there is a growth opportunity for the delivery of titanium mill products to Boeing. As we look at other mill product forms, I think, certainly, from the industrial market side, given the delays in some of the decell [ph] projects, which are now beginning to shake loose, we would expect to have a higher level of shipments in 2013 into the industrial market than we have experienced here in 2012. Looking at the jet engine market demands, we would expect that -- I think we've been dealing here in the second half of the year with inventory corrections certainly on the aftermarket side. And as you know, on titanium for jet engines, our primary focus is on the premium rotating quality material, which is -- or those parts that get replaced on an engineered life cycle basis in the jet engine. So when there's an inventory correction…

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

So first question, on the CapEx plans going forward, can you give us any glimpse into 2013? And then for 2012 fourth quarter, it's -- despite the cut to CapEx, it's going to imply a double into the fourth quarter, so just wanted a little more color on that.

Most of that is really associated with the hot rolling and processing facility and the timing of the payments as part of the progress that we've made on construction. I don't know, Timna, when was the last time you were out to that site, but it's -- we're making great progress in constructing the infrastructure and the buildings, and some of the equipment is shortly going to -- beginning to be installed. So obviously, as we make progress on that, the timing of the cash flows to the contractors and the equipment manufacturers matches with that. So we would expect that kind of a spend rate -- we always seem to project more than we ultimately end up spending, and there are a lot of reasons for that. It's not because of any slowdown in progress. It ends up just being because of the timing of the expenditure. But I think our view is that -- for fourth quarter will be the heaviest capital spend of the year. And part of that, we expect to finance not only from cash on hand but also from earnings and the reduction in managed working capital. As we look at 2013, we're in the planning review process now, so we really haven't set a 2013 target. We haven't had our discussions with our board on that, but clearly, it will be at a rate that is certainly elevated in the same range, if not more than where we end up in 2013 -- or '12 primarily because of the hot rolling and processing facility. That's the big project. There are a couple of other, obviously, operational necessities that we will do. Safety and environmental investments, we always make, so -- but the big bulk of the spend next year will be on the hot rolling and processing facility. And as you know, construction on that facility is targeted for completion by the end of '13. So that's the big cash flow from a CapEx standpoint.

Okay. Second question, if I could. So given the guidance of the fourth quarter of last year and the first quarter of this year was 10% revenue growth and segment operating profit of 13% to 14%, and it looks like we're going to end up lower than that as you've elaborated on. How do you think about projections going forward? Are you going to give them? Are you going to be wider or more cautious with them? Or did the year just really deteriorate beyond your expectations? Can you just kind of explain to us what happened from that time frame to now to -- and how you might think about projections going forward?

Yes, sure. I mean, I don't think we're any different than most people, when you look at it from an economist standpoint in terms of what everybody was expecting, heading into 2012. I don't think anybody was right in terms of what the global GDP would be, what the growth in China would be, what was going to happen in Europe, and certainly, what's happened here in the U.S. So what we try to do, I mean, the debate is always, do you give guidance or not give guidance, and we have a history in this company of doing both. And part of it is, because if we're seeing things differently than what the analysts are seeing in terms of what their expectation are, we think we have an obligation to our shareholders and to the investment community to provide guidance that's more in line with what we're seeing in our markets and what we think from a macroeconomic standpoint. And that's exactly what we did, heading into 2012. So we told you -- and quite frankly, as you'll remember, our guidance was lower, our expectations was lower than what the Street consensus was for 2012, so we felt obligated that we had -- it was appropriate to give guidance. We believed in that guidance. The fundamental demand drivers did take the shape the way we, and I think, most other people thought. And if you're watching earnings guidance this week, and I'm sure you are, we're not alone in that. And so going forward, we're always going to give our best, most realistic view of what we think the markets are going to do. Having said that, at the end of the day, our crystal ball isn't any clearer than yours or anybody else's, so we'll continue to do what we think makes sense to help the shareholders and the investment community understand our business better and understand how we see the markets. And we'll continue to try to be as realistic as we can and not overly optimistic or not overly conservative. That's the balanced approach that we've always taken, and sometimes we're right, sometimes we're not.

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

Rich, this desalination-related order you're starting to see, how big is the size once this fully go through the system? I know you're getting a small piece of it, but what would be the size of it? Would it be as big a project as last one?

Yes, we think there are several different projects in it, but if they all happen the way we believe and we've been talking about this for most of this year, so it's -- I put that caveat on it, right? Until we get the orders, and until we're actually producing it, it's -- yes, there's always a risk. With the passage of time, the projects are still there. They're real. They're funded at the source and it's just that -- it's when is the -- when are the triggers pulled in terms of placing the orders with the fabricator that then flows down into the rest of the supply chain, including our Uniti joint venture, which is really the order -- where the order resides and then the split between the 2 partners in terms of what ATI does and what VSMPO does. So I think I'd like to be able to say that all the orders are in hand, and if they were, we would. The first one is I think that our view and the input that we have is that the combination of these projects will result in demand that is essentially in line with the big project, the single project that was delivered throughout 2011, which -- and since this is public information, as you'll remember, was approximately 6 million pounds of titanium flat-rolled.

Was the 6 million pounds for you or for the total project?

That was for Uniti, but essentially, a large portion of that was us.

Okay. Second thing, your titanium realized price was lower this quarter. Is that just a general function of what is going on in the market, or was it a mix issue?

No, it's a little bit of both, actually. There was a -- when you have less demand on the aero-engine side for aftermarket spares, that obviously is the highest-value product that we or I think anybody makes from a titanium standpoint is rotating quality material. So when that requirement is softer as it was, that's an impact on price. The other aspect was the surcharges for titanium scrap. Scrap, as a component of the surcharge mechanism, has fallen throughout 2012. So that also is part of the answer.

Your next question comes from the line of Arun Viswanathan with Longbow Research.

I guess, maybe I could ask Timna's question in a slightly different way. I guess, I was wondering, has the visibility across your different -- and maybe you can talk about the different products. Has it changed in the last month -- or sorry, in the last year in this environment? And if so, do you see your visibility going back to a longer time frame in a more normal market? Or what have you noticed as far as your visibility goes?

Well, that's a great question. I think, actually, with all of the -- with all the uncertainty that's out there both economic and political, I think I made this comment in my initial comments, it's more difficult to forecast today than it has been since 2008, 2009 quite frankly. We're almost back into that same kind of a time frame with the uncertainty and the level of difficulty that you have and like the very short lead times. When you look at some of the short-cycle business, lead times for stainless steel sheet and plate today are very, very short, so you don't have -- they're 2 weeks. So you don't have much visibility beyond that, other than continuing to talk to the customers in terms of how they see their end markets and how they see the fundamental drivers of where the demand is coming from at the ultimate end market. And really, lead times, while we have a large part of our high performance metals business is based off of long-term supply agreements, they're really essentially requirements contracts that depend upon what the requirements and the needs are of the customers. And they are with lead times relatively short as well, I mean the High Performance Metals segment, depending upon the alloy system and the product form, lead times are as short as 4 weeks, and the longest is probably in the 10- to 12-week time period. And historically, that's a very short lead time for those kind of products. So the visibility into the demand drivers is much more challenging, much more difficult, so you have to do a lot more discussion and underlying digging in terms of understanding where the supply chain is. And that puts an additional challenge into the forecasting side. We have recently been giving forecasts that deal with the full year, not just the next quarter. And I still believe that, that's an appropriate way to do, because when you focus on just one quarter, it's really far more shortsighted than we think, quite frankly and far more shortsighted than how our market dynamics ultimately end up. So if the decision is made to continue to give guidance, I think it will be along the lines of what we've talked about before with the range and to update that as we see things changing and do the best we can, recognizing that it's not an exact science, not everybody gives guidance as you know. And I'm not sure whether that helps or hurts.

That's helpful. I guess, so just wanted to clarify then, relative to third quarter when you went through those metrics of the percent on the segment operating income and the revenue. Was there -- are there any specific projects you can help us out with, as far as delays or losses that were planned for '13 or '12 that are now in '13 or '14, or where we could expect it to see a recovery?

Well, I think, certainly, on the Flat-Rolled Products side, the decell [ph] projects that I -- we were talking about earlier in response to Sal's question are -- as we entered 2012, that was all supposed to be 2012 business. And at the end of the day, only a small fraction of it will ultimately end up being a 2012 business, and that's in the fourth quarter. Most of that shipment will be in 2013. There are some fairly large oil and gas projects that are nickel alloy flat-rolled plate that were -- have been really expected for the last 6 months. And they've largely been put on hold not because of an ultimate need or change in the view of the viability of the project, it's really just a -- probably a combination of capacity within the fabrication side, number one. The ultimate demand driver from the standpoint of the criticalness of time and is it now -- especially with the economic weakness in Europe, maybe it's not as critical to do sooner rather than later. And then I also think that when you get into a volatile nickel raw material cost environment, the customers look at that. And there's a sense that nickel might be overvalued at some point, and it will return to closer to a fundamental, and the order isn't going to be placed until the nickel fundamentals are achieved in the eye of the customer. So there's a lot of issues that ultimately lead into that. So those are projects that were also expected in 2012 that are now really looking like a 2013 project. And then you have the aftermarket which quite frankly, I don't think anybody heading into 2012 expected. The expectations were from high-single digit to low-double digit growth in aftermarket demand from the aero-engine standpoint. Well, that was certainly true in the first quarter and about halfway into the second quarter, and then the world changed. And the economic climate in Europe certainly deteriorated, the growth in the U.S. was less, the growth in China, which we've all heard about and read about and feel was less than what was expected. Airlines started to manage their business differently from a cash flow standpoint, and part of that is looking at the whole supply chain they have and how much inventory they have in place. Some of the older aircraft get taken out of service. Those are the ones that really drive -- or a bigger drive in terms of aftermarket. So all those factors went into place and really accelerated through the third quarter, and we expect to remain in place for the fourth quarter. So I think, this is the business we have a lot of different end markets. Diversification is one of our strategies and also one of our strengths. It's also one of the things that makes the company maybe more complicated than others.

And just to clarify, so you do have confidence though that many of these things will come through in '13 though? And is there a risk that they could be pushed out again to '14?

Well, there's always a risk. I think that -- my view is this. I've talked enough about the uncertainties that we all are living with from a economic and a geopolitical standpoint. I think with the passage of time, the uncertainties get resolved. One of the uncertainties is the U.S. election. It's not necessarily who's going to win, it's -- or rooting for one candidate over the other, it's just the uncertainty of the election. That's going to resolve itself in 2 weeks. Everybody will know what the outcome of the election is, both from the standpoint of who is the next President and who controls the Congress. So that uncertainty gets removed, and actions begin to be taken. Confidence begins to be impacted, either positively or negatively, and clarity becomes on that issue. I think the same thing happens in China on November 8 with the handover of the leadership of next generation of leaders, and the likeliness of stimulus packages that come out of that, which make sense from a political standpoint in China. With the passage of time, I think the issues in Europe get resolved or certainly get clearer or become passed -- kick the can down the road, as we've heard talked about in this country. And then ultimately, I think the bigger concern, as we talk to our customers throughout all of these end markets today, and the bigger concern that I have quite frankly, is really in the U.S. that it's on the fiscal cliff. And the one thing I think it's safe to say is it won't be resolved before the elections in 2 weeks. So then the question becomes, is it resolved in a compromised reach during the lame duck session. And if not then, then it gets resolved at some point in 2013. And I am cautiously optimistic about that, because I really don't believe that our leaders will allow that to happen, because that -- going over the fiscal cliff without a resolution is a economic game changer for not just the markets that we serve, but the markets that a lot of companies serve. So I don't think that, that will happen. So yes, I mean, I wish that these issues weren't things that were dominating the headlines and having a negative impact on our business today. The fact of the matter is, they are, but with the passage of time they get resolved. And then you go back to really fundamental growth drivers that impact our end markets. And I think that 2013 becomes clearer than 2012.

Your next question comes from the line of Steve Levenson with Stifel, Nicolaus. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Just to go back to the titanium question. One of your customers had a representative at the recent International Titanium Association meetings and basically talked about the glut being cleared up going into 2014. What do you think the lead times are right now? How do you see that impacting things? When do you think that will begin to clear up on the order side for Allegheny?

Yes, Steve, that's a good question. I mean, I think that, that the honest answer is -- and because titanium is serving many markets including, as we've just discussed, aero engine and industrial and oil and gas and medical and airframe, I think that as, I think the lead times today are at the shortest that they're going to be. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: And is that still about 4.5 months, plus or minus?

It's less than that. I mean, for some product forms, it's 4 weeks. I mean, we've never seen -- because remember, I mean, capacity has been added over the last 5 years to service the rate ramps and the big growth drivers on aerospace. And that's been delayed by 3.5 years, so the lead times today are really very short. And as the demand starts to come back and starts to improve, which I believe happens when these things get resolved as we head into -- maybe it wasn't in the first quarter of 2013, but it's certainly within the first half of 2013 or just beyond midyear of 2013. The first thing that happens is lead times start to lengthen. And the magnitude and the ramification of that and the supply chain for everything else becomes a significant difference maker in terms of the buying behavior and the ordering pattern. So I think today, if I'm wrong and lead times stay where they are and the Boeing demand drivers, from a growth standpoint, kick in for 2014 deliveries, let's just make that assumption based upon your question, and nothing changes, then really, the fourth quarter of 2013 is the earliest that we would begin to see that. And it may not even be until the first quarter of 2014. If markets begin to recover, albeit gradually, as the aerospace aftermarket begins to recover, and we don't have the kind of inventory correction we've been dealing with for the last 6 months and as engine OEM pushouts and demand drivers start to support the production rate ramp then lead times become elongated and -- I think you have the opportunity from a mill product standpoint, certainly at some point in the second half of 2013 to begin to see those orders. So the honest answer to the question is what are the fundamental economic assumptions you're making across all of the markets and the demand drivers for titanium, and how does that impact the timing of the order entry that's required to meet the delivery schedules that the customer, in this case, Boeing, ask of its suppliers. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. On the nickel side, it appears that shipments, at least, when you measure volumes exclusive of the change in the surcharges, have held up pretty well. Is that something you see continuing? Or is there a change ahead?

Well, I think there's a little change ahead in the fourth quarter, which is certainly part of our guidance. I think the fourth quarter is probably going to be softer. And remember, that's nickel and specialty alloys. So the specialty alloys, as we noted in our earnings release, the volume growth on the specialty alloys side was 66% year-over-year, and that was driven by oil and gas primarily, not exclusively, but primarily. That kind of a growth rate is hard to sustain, especially with the total rig counts either flattening out or retrenching a little bit. And then on the aero engine side, the aftermarket side, there's also an aftermarket for nickel alloys on the jet side. So I think that, obviously, is what we're seeing here in the fourth quarter. Once we get beyond that, and as we head into 2013, I think there is reasonable growth opportunities for nickel and specialty alloys across these end markets that we've already talked about. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Last one. Sorry, let me just sneak it in here. When do you see starting the premium qualification for titanium sponge coming from Rowley?

Yes, I think, as we talked about when we had the investor meeting at Rowley, I think that sometime in the first half of 2013 that we lock in the manufacturing processes, and we freeze the manufacturing processes, and we start the premium-grade qualification journey.

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

Maybe a follow-up to Stephen's question, presumably, I understand it's multi -- it's a dynamic question on titanium at Boeing, but -- I mean, on lead times elsewhere. But can you tell us -- I mean have they given you a forward schedule for '13? I know you mentioned the first half is likely going to be kind of flat with the minimums. But should we plan on it being flat in '13 and just gradually up in '14? Or how should we think about that?

Gautam, I can't tell you how to build your model. I mean, there's a contractual obligation on the part of the customer to give us, in accordance with the contract terms to how they want 2013 loaded at minimum requirements that they are obligated to take. And there is some, because we try to be very flexible and provide all of our customers the kind of value service that they expect from us. Within reason, we have some ability to flux that. We have some ability to move around the different product forms based upon what their needs are, so it's not really locked and loaded, if you will, for the full year in terms of exactly what product forms they're going to take. But we have an idea, right, as we head into 2013, and we're essentially there. We know what the minimums are, so -- but there'll be some flexibility around that, and possibly, even some opportunity to provide and meet their needs with more than what the minimums are. And that has certainly been the case historically as well, so we'll just see what they need and what they want. But I don't think that -- I'm not expecting it to be -- I'm expecting it to be any guidance that we were to provide in the first -- early in 2013 would be more for that particular end market -- would be more along the stable and level side.

Okay. And just to follow up, Rich, you made some very positive comments on sort of Ladish, and how they're performing. You mentioned Rowley is ramping fairly well and the start-up costs had dropped. Sequentially, the implied LIFO benefit in Q4 is whatever, $4 million or something in the high-performance segment, so it's a headwind sequentially. And if you stripped out the $12 million this quarter, you're under 15% margins at high performance. And so what I'm trying to get a sense for is, obviously, this quarter is an aberration with the amplified aftermarket destock and the like, but going forward, I mean, is this going to -- do you think that kind of the 20% margin you started with this year is where we're going to be next year, I mean, just given a normal environment? Or is there something that structurally changed or fundamentally different, but we're going to be tracking well below that early in the year, and then maybe helpful to get back there?

I don't think there's anything structurally or fundamentally that's changed in our business. I think it's fundamentally a demand driven business, right? I'm not aware of any business that's demand agnostic, so basically, it's -- that's what's going to drive -- I mean, I will say to you, and I think we've said this that the High Performance Metals segment is really the combination of 3 major businesses. One is the nickel and titanium and specialty alloy long products business; one is the ATI Ladish, which is forgings and castings; and one is the zirconium and related alloys businesses. So those are just 3 really different businesses that service essentially similar markets when you really fundamentally look at it but in different ways. I mean, if you go back and look at when Ladish was a public company, their operating profit, as defined, was not 20%, right? Their operating profit ranged, on average, when you look at it -- trying to look at it through a cycle, ranged at about between 8% and 10%. And our objective in terms of growing that business and diversifying that business and making that business stronger because of the ability to provide it with their raw materials, which is our long products out of the ATI Allvac operations enhances the opportunity and the ability to improve the level of profitability of forgings and castings as a percentage of sales. And so I think you've heard -- you and others have heard me say that as we look at that business over the next 3 to 5 years, we expect the forging, again the casting business to grow into a 12% to 15% type of operating profit of sales, which would be above where they historically operated. And I think that we have the ability…

I have no problem with the accounting. One last one on the retirement benefit expense. I know it's early, and you'll mark it December 31, but with discount rates down and probably asset returns better, do you expect it to drop much? This year was a big year for that being a headwind. I just wondered, order of magnitude.

Well, I don't think the -- I mean, the discount rate's really the big driver. And Dale, do you want to comment on that?

Yes. I mean, yes. Gautam, this is Dale. And so -- I mean, if you look at your discount rates, obviously, they're down from where they ended 2011, and we give sensitivity as we've talked about in the past, our annual report saw a 0.5% change in the discount rate. We're currently using 5%, and so if you look at Moody's AA, that would probably put you somewhere down around 4.5% or thereabouts. That drives about $11 million increase in our expense from a GAAP standpoint for 2013. The issue with both the discount rate, as well as the return on assets, it's a point-in-time calculation so it's wherever we end up the calendar year 2012, so we'll see where that ends up. Right now, just looking at the discount rate, we'll probably be adding $11 million. As Rich mentioned in his earlier discussion and comments, from a cash standpoint though, we don't have any minimum required contributions as far as with U.S. defined benefit pension plan for 2012 or for the next several years. So it's a GAAP recognition issue for us at the moment and see where the rates end up.

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

I just had a couple of follow-up. And Rich I appreciate all the color. There's been a lot of information. Did -- I may have missed this, but did you talk about the sources of the slowdown in CapEx for 2012?

No, not specific projects. We had some projects in there that are good projects that make a lot of sense over the long term, but given the uncertainty that we're seeing from an economic standpoint, we think it's prudent to not move forward until we have better clarity.

Okay, so this wasn't a cancellation, it was just more of a timing issue. Is that fair to say?

Yes, I think it's fair to say. Although, I think it's interesting when the business units and the operations management comes up with projects, they are not short of having great ideas. And so we always go through a prioritization of those projects in terms of what's the best strategic investment for generating shareholder return, and that's how we prioritize them. And it's also for other prioritized uses of cash as well, because we're committed to self funding these investments over time. So I hesitate a little bit, because I don't -- there could be great ideas that come up as part of the 2013 planning process that actually shove some of the ones that we've deferred from 2012 into '13 further down the priority list. So it might be a thing of timing. It might be something we say, "We have other better ways to deploy our capital for the benefit of our shareholders, so we're not going to do that at all within the planning here."

Okay. Just -- had another operational question. You talked about Rowley -- Rowley's sponge costs, about 10% lower than they were in the fourth quarter of last year. Has that been kind of a consistent improvement? And I guess on top of that, could you give us some color on what the opportunity is for further cost reduction at Rowley, say, over the next 2 or 3 quarters?

Yes, I'd say it has been a consistent improvement. The third quarter was lower than the second, which was lower than the first, which was lower than the fourth last year. So we're on the right trend line. And we expect the fourth quarter to be lower than the third, quite frankly. And we know what needs to happen in order to do that. And Mark, you didn't have the opportunity to go to Rowley, but as we discussed there, we're not going to stop there. In -- by the end of 2013, our expectation is that the cost of producing a pound of sponge at Rowley will be lower than it will be at the end of 2012. So I think the opportunities are still there. And it really is as you come down the learning curve, as you get the cake size up, as you get the yield improvement, et cetera, et cetera. And it's a wide variety of activities that are going on from a cost reduction standpoint. And it's really the reason why we have not begun the premium-grade qualification program, because once you do that, you're basically locking in and fixing the manufacturing process. And we don't want to do that until we're satisfied with the cost structure.

Well, I appreciate that color. And just lastly, if I could, just real quickly, I mean, is there anything -- any color you can give us on the outlook for nickel prices here over the next quarter or so? I mean, it's really rolled back over as the QE3 effect has kind of worn off, is kind of what it feels like. Is there anything fundamental out there that you're aware of that might help improve the outlook for nickel pricing?

No, I mean, Mark, I could ask you the same question. What do you think about nickel? But I think that...

I think it needs China. I mean, I think, China needs to come back and -- because that's really where the biggest consumption is in the world.

I think you're right. I mean, I think there is a floor that gets created because of the switching that the Chinese do away from pig nickel into prime so there's a floor that gets created. And then there's also conversely a ceiling that gets created for exactly the same reason. I think the big fundamental driver for nickel has always been and will always be for, in my view, stainless. And stainless, globally, is weak. The demand for stainless is weak in Europe, it's weak in the U.S., it's weak in China, and that's really where the fundamental drivers are. I agree with you that the spike up in the previous couple of months was primarily due to liquidity and QE3, et cetera. Today, the cash price is about $7.40. I don't know. I mean, that -- between $7 and $7.50 feels kind of in the range that is supportive of the demand drivers right now. That's just our view.

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

On the grain-oriented steel trade litigation, are you unprofitable in that product line, which would support a high level of injury? And is loss necessary to meet that standpoint -- standard? And secondly, concerning your general guidance of challenging and uncertainty and all that sort of thing, I'm concerned that some listeners might not hear what you intend or may hear it differently than another listener. Did any of the businesses suffer irreparable damage? For example, has a major aerospace customer caused you to roll back your gross margin 50% due to market conditions or cut a bad long-term deal?

The latter question, the answer is a definitive no. Absolutely not. And it's just -- there are a lot of dynamics that go into that. The long-term agreements that we have -- we don't enter into a long-term agreement with a customer that we're not satisfied with the economics and the fairness of the economics and that are in our shareholders' best interests. And we have a pretty sophisticated review process here. The business units can't enter into a long-term supply agreement without the fundamentals and the economics and the profitability and the risk management assessment being reviewed and approved here by -- from a law department standpoint by Elliot Davis, who you've met, John, by Dale Reid, our CFO and by me. So no, there's been no irreparable damage. The dynamics of the market are the dynamics of the market, and we respond and react to that the same way everybody else does. On the grain or electrical steel, that's an investigation that's being done by SSINA, and through the formal process that is well established. I think you know the answer is that the damages is calculated on the basis -- I mean, a producer has to be able to earn a reasonable return on an after-tax basis to cover the cost of capital. So you don't necessarily have to be in a loss position, you just have to, on a GAAP basis, it just has to be at a level where you're damaged because product is being dumped or sold illegally. And it's -- the calculation is also based on the domestic industry and not just ATI.

I just wanted to stress, Rich, that the sort of the vague or general phrases you use may make people jump to conclusions about a particular product, market or customer. And if you're a little more specific as to where problems lie, it might -- I just don't want people thinking it's worse than it is. We're suffering enough today.

Well, I don't even...

Pat sure knew when to retire.

Yes. I try not to be vague, and I try to be as specific and open as we can, without providing information that I think does competitive harm to ATI.

Your next question comes from the line of Dave Martin with Deutsche Bank.

Rich, wanted to come back to capital. I know you stated you see working capital as being a benefit in the fourth quarter. I'm just curious as to whether you think that'll offset the CapEx increase. And then, secondly, on this dividend, do you think your current payout ratio is kind of the right base dividend in this environment?

Yes, I mean, we -- the dividend -- we believe and our board believes that this -- ATI should be a dividend-paying stock. We think that's an important component of total shareholder return. Ideally, it's share price appreciation, which is the bigger aspect of it, and that hasn't been happening lately. And so we, obviously, need to address that. And we need markets to cooperate a little bit with us on that. But I think that we look at the dividend payout ratio, not just on a quarterly or an annual basis, it's more of a cumulative basis over -- at least through a business cycle. So there have been times when you go back and look at that where our dividend payout ratio looks low, and there are times where it looks high, so we tend to look at the average. It is the use of cash. It's prioritized use of cash. It's not the only use of cash. I mean, fundamentally, we have our obligations to take care of -- and the rest is how best do you create shareholder value. And capital investment has been an important part of our strategy here, and I think will continue to be. I think if you look over a longer time period, our payout ratio is just under 30%. And sometimes it's higher, sometimes it's lower. But the dividend is important to our shareholders, and it's important to our board, so we will continue to focus on that and work hard to generate the cash that supports all of the uses.

Okay. And then secondly, Rich, if I may, I wanted to ask about LTAs. I think, previously you had suggested you may book another almost $1 billion of LTAs in the second half of the year. Has that type of activity also slowed, or where does that stand?

No, I think we're on track to basically hit that. I mean, most of the LTAs unfortunately that we enter into, we have requests from our customers for nondisclosure for a variety of reasons. And where there is one that is material enough that we believe from a disclosure standpoint, we have to disclose then we push back on those customers, and we work something out, because that is a responsibility and obligation we have from a disclosure standpoint. I think, actually, as we look at the ones that we're working on today that are likely to turn into something before, either before the end of this year or in the first half of next year, it's well above $1 billion, quite frankly. Now some of them range in length from 3 to 5 years to 7 to 10 years. It just depends upon the product, and it depends on the market, and it depends on the customers. But the concept of LTAs is not going away. It's an important part of being a strategic supplier. And in our view, there are a lot of benefits of that, not the least of which is from a capacity planning standpoint, from an investment standpoint, from a focus of R&D initiatives, et cetera, because those kind of relationships are very deep and have some pretty significant technical and technology exchanges to them as well.

Your next question comes from the line of Douglas Dethy with DC Capital.

I just have a question. I mean, the results are clearly disappointing. And I guess I've got the concern, the business is either too complex or complicated to manage the cost effectively, given the changes in the environment. Could you comment on that?

Yes, I don't agree with it. I mean, the business is not -- it is not an easy business. We have a good management team that runs these business operations. It's not all vested in one person. The issue here isn't really necessarily the cost drivers. The issue is demand. And we have facilitized ahead of many of our competitors to meet the expected demand growth from these end markets. And our view is that the demand growth over the next 3 to 5 years will happen, and our facilities are in existence and are qualified to produce the product that the customers are going to want. I would much rather be in that position than trying to scramble to get new alloys developed and qualified and new facilities built, because you're going to miss the next 3 to 5 years.

Yes, but I think that's a false choice. I mean, considering there's so much inventory here, I mean, and working capital. The revenue's down, but working capital's up. And you've brought it down a little bit in this quarter, but to me, it's just -- it's not a good sign from where I sit.

Well, we appreciate your comment.

Are you happy with the level of inventory and the working capital management? Are you doing all you can?

I'm never happy with the level of working capital employed in the business. And yes, we are doing everything that we can do while we still support the customers. Because at the end of the day, it's really hard to create shareholder value without having customers. So it's a process that we go through. And it's a cycle time issue. It's a -- there's a lot of different things that go on into the business. But quite frankly, to be perfectly honest with you, if our working capital was 30% lower than it is, I still wouldn't be happy. So that's the honest answer to your question.

Our last question comes from the line of Jonathan Sullivan with Citi.

I just had a quick one on the High Performance Metals segment. I was wondering in terms of the decline in 3Q operating profit margins, if there were any sort of negative cost impacts that we ought to be thinking about. Or is it really just a function of weaker product mix and demand?

I think it was largely that. I mean, there were some -- there was the $6 million absorption issue, if you would, the zirconium business that we highlighted that we wouldn't necessarily expect that to be a permanent continuation going forward, because we're working on ways to continue to streamline that business. We're not banking on the nuclear demand to come roaring back here, that would be foolish. But there are some projects that we're working on, on the defense side that would provide a stable volume that would help that issue that appeared in the third quarter. And we've also taken some costs out of that, of that business that we've implemented at the end of the second quarter. And then we have the surcharge mismatch, because of the fall in nickel and titanium scrap and the longer cycle of those products where the surcharge doesn't match up. When you add those 2 items together, they were essentially offset by LIFO. So the rest of it is really mix issues and the fact that the aero engine market, from an aftermarket standpoint, was weaker.

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Rich Harshman with any closing remarks.

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

And thank you, Rich, and thanks, everyone, 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.