Good day, ladies and gentlemen, and welcome to the Q1 2013 Allegheny Technologies Earnings Conference Call. My name is Grant, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Dan Greenfield, Vice President, Investor Relations. Please proceed.

Thank you, Grant. Good morning, and welcome to the Allegheny Technologies Earnings Conference Call for the First Quarter 2013. This conference call is being broadcast on our website at www.atimetals.com. Members of the media had been invited to listen to this call. Participating 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 morning 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. As we stated in January, we expected the first quarter and possibly the first half of 2013 to be challenging due to ongoing global macroeconomic and fiscal policy issues. We certainly saw this in the first quarter, with continued sluggish demand from many of our major end markets, primarily resulting from challenging global economic conditions and falling prices for most of the raw materials used to produce our products. Slow and uneven growth in the U.S., little to no growth in Europe and Japan, and slowing growth in China continue to impact demand. These conditions resulted in continued conservative inventory management throughout the supply chains of most of our major end markets. As a result, segment operating profit in the first quarter 2013 was $78.3 million or 6.6% of sales, including a nominal pretax LIFO benefit of $500,000. First quarter results were also impacted by higher inventory cost resulting from higher unit conversion cost due primarily to lower operating rates in the fourth quarter 2012 combined with the impact of higher raw material cost, most notably for nickel and titanium that were not aligned with falling raw material indices and surcharges for products with longer manufacturing cycle times. In addition, our High Performance Metals segment operating profit was impacted by continued low demand from the jet engine aftermarket, weak demand for zirconium alloys from the nuclear energy and chemical process industry markets, and reduced demand for forgings from the construction and mining equipment market. Flat-Rolled Products segment operating profit compared to the first quarter 2012 reflected a weaker high-value product mix, largely due to shipments -- delays in shipments of our high-value specialty metals project -- metals for large global projects. This segment was also impacted by continued record-low…

[Operator Instructions] Our first question comes from Rich Safran from Buckingham Research.

Rich, so when you guided for the year, moderate revenue and segment operating profit growth, you assumed stable metal pricing, which we've seen anything but. And so you're $0.09 [ph] was well below what you did in 1Q '12. So I thought you might give us an update here on your expectations for the full year given it wasn't in the release.

Yes, well, I mean, I think that -- as we said in the earnings release that we continue to expect to see quarter-on-quarter improvement for the balance of the year. And that is based upon a continuing economic recovery, not only in the U.S. market, but at least some stability in the global markets outside the U.S. and some stability in raw material prices. One of the continuing issues that we have, especially given how the surcharges and indices work and the longer cycle times for our high-value products, in particular, not only in the High Performance Metals segment but also the high-value products in the Flat-Rolled Products segment, is it's a challenge with raw material costs continuing to fall for the surcharges and indices to match up. So we see margin compression in that kind of an environment just as we see margin expansion from a timing standpoint when raw material costs are going up. And as we look at how the surcharges work -- and they're different between the Flat-Rolled Products segment and the High Performance Metals segment. In the High Performance Metals, there is basically a quarterly lag. So if you look at some of the surcharges and indices that we do publish, at least from a public standpoint, when you look at the impact of the surcharges on titanium, for example, the second quarter surcharges are falling about 10%, a little over 10% compared to the first quarter. The first quarter fell a little over 15% compared to the fourth quarter of 2012. So I think that the comment about the second quarter is not only from a demand standpoint, especially as we continue to see the aftermarket struggling here a little bit, but also due to the margin compression because of the mismatch of the raw material indices and surcharges versus the costs that are flowing through the P&L. If we -- if the -- there appears to be some level of a bottoming forming on not only nickel and nickel scrap, but also on titanium scrap. And if that, in fact happens here in the second quarter, that will remove a headwind as we get into the second half of the year. And that, combined with a hopefully improving demand picture, will lead to quarter-on-quarter improvement over the balance of the year. I think that -- we haven't specifically given either in January a quantitative guidance or today a quantitative guidance because of a lot of uncertainties. And I think it's safe to say that the first quarter was below our expectation, heading into the year. Part of that was because, on the Flat-Rolled Products segment, the price increase that was announced and held for a very short time evaporated. And raw material cost continued to fall. And demand was weaker, quite frankly, in the -- on the aftermarket than we expected heading into the year.

Okay. And then just very briefly here, an aerospace question on the 787. I'm sure you saw Boeing affirmed the 787 delivery guidance this morning. I just wanted to know if you've got a comment here on the rate ramp. They were supposed to achieve a rate break of 10 a month by the end of the year. And if you could, I would just be interested to know if there was any comment on any discussions on rates going beyond 10 a month. And if Boeing were going to raise rates beyond 10 a month, when would they actually have to communicate that to you?

Well, from -- I think the answer, in fairness, is 2-phased. One is on the airframe side, which is more of our direct relationship with Boeing. And on there, we're still -- as well as all the suppliers, we're still operating under the -- essentially the minimum contract requirement. And that's as Boeing continues to burn through their titanium inventory. Only Boeing knows how much that titanium inventory is. But each quarter that passes, we get closer to achieving the level of stability on that than we were in the previous quarters. So if, in fact, they go beyond 10 a month on the titanium in tens of 787, I think that would be good, clearly, from an aerospace -- from an airframe standpoint and could accelerate the demand above the contract minimum. The lead time, as we look at that from a delivery standpoint, is probably somewhere in the range of 9 to 12 months, given what happens to the mill products from a machining standpoint and for the actual parts. On the jet engine side, any additional rate ramp beyond what has already been announced is a very positive development for the jet engine because not only is that new technology where we have more concept, but it's, obviously, also more engines and larger engines. And that would be about the same time frame. We'd be looking at somewhere in the 9- to 12-month time frame, not only for mill products, but for forgings as well. So that development -- that scenario which, by the way, I -- you and I have had discussions in the past. And I think that I wouldn't be surprised if, in fact, they move beyond 10 a month.

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

So 2 concerns I wanted to highlight. This is the lowest level of cash in your balance sheet since the middle of 2004. So is that something that we should be watchful of? Certainly, working capital drawn is typical. But is that something that you're comfortable with or prepared to take action on?

Well, I'm not comfortable with it. I mean, I -- the more cash in the balance sheet, the more flexibility we have. And the cash is lower than I would like it to be. So what -- we do expect managed working capital to be a source of cash in the second quarter. And we're working aggressively across ATI's business operations to achieve and beat, quite frankly, the forecast that they have given us. And that's the challenge that I've given to the management team. The capital expenditure in the second quarter -- second and third quarter, actually, will be heavy due to the spending on the HRPF. And this is the biggest year of capital spend on the HRPF. Once we get through, really, this year, it drops dramatically by more than half in 2014 compared to the spend on that in 2013. So that's the comment about the possibility on a short-term basis of looking at the facility. But our use of the credit facility -- but our focus is still on funding the cash flow with cash on hand or the cash requirements on the HRPF with cash on hand, as well as cash flow generated from operations. It is much lower than I would like it to be, the cash balance. I mean, my preference is to have a cash balance of $200 million or more. That's not where we are, and it's primarily due to the timing of the spend on the HRPF. But it's not something that I'm overly concerned about. But it's certainly something that we're focused on to make sure that we maintain the kind of liquidity and flexibility that we like to have on our balance sheet.

So 2 other questions. One is just if you could talk about why there is so much volume on more commodity stainless, if that's been a lousy market. And the separately, can you give us an update on the many projects you've talked about, whether it be North Sea desalinization, I know you talked a little bit about, and then the potential for further chemical processing?

Sure. As you know, the volume in all of our businesses is important because of the fixed investment and the fixed cost, primarily on the front end, of these businesses, the melt shop and the hot-working, the melting and the hot-working operations, and that's even magnified even more in Flat-Rolled Products. So volume is important. And we will go after -- we'd love to have a -- higher base prices. I think that, quite frankly, the base prices, where they are on commodity stainless sheet and plate today, and I've said this before and I continue to believe, that over the intermediate term, are not sustainable because no producer can earn an acceptable return on capital employed. And it's even harder for those who the only product they have is stainless. Thankfully, we have diversification not only in flat-rolled but also across ATI. But volume is important, so absent the ability, from a market standpoint, to raise base prices, we look at volume opportunities as long as they are positive net contribution margin contributors because that does fall to the bottom line and creates a cost structure for everything else we make in the Flat-Rolled product segment; it makes everything else more profitable, quite frankly. So that's the importance of volume in that business. On the project side, the desal projects will -- actually, the projects will deliver into the beginning of the fourth quarter but are mainly concentrated in the second and the third quarter based upon the delivery schedules from the customers. I think what you will also see in the second and the third quarter and, possibly, the rest of this year is some additional volume on the flat-rolled side for oil and gas projects; on nickel flat-rolled plate business, which is a very good business; and some of those projects we have and we're in the process of making and manufacturing, and we'll deliver that over the rest of the year. So there are some opportunities on the projects side, not only for CP titanium in the industrial markets but also on the nickel and specialty alloy side, as well, on flat-rolled.

And did you address the chemical processing question?

Yes, chemical processing is -- the biggest impact that -- in the chemical processing industry has really been construction in China, for the most part. And with the slower GDP growth in China, some of those projects have been put on hold. They're not -- our sense is they're not really canceled; they're more delayed. We are seeing some quoting increase, quoting activity, not so much on zirconium alloys, as we're seeing on specialty alloys and nickel alloys. So that's a positive development that hopefully we'll see some benefit from as we move through the rest of 2013. The titanium side, the CP market, the projects, there are some projects out there. Pricing is aggressive. Because when you think about the titanium supply-demand equation, there has been a lot of capacity on the titanium side put in place to support primarily the aerospace ramp on the 787 but also on the other platforms which also use titanium from both Airbus -- from both Boeing as well as Airbus. And that capacity is there and is available and is, quite frankly, looking for uses. And that puts pressure on the industrial market, from a pricing standpoint. So while the projects are good and attractive and provide volume and margin expansion opportunities, the pricing is aggressive. And so that -- we're dealing with that as we go forward. There are some power generation projects in queue that will kick in for delivery in early 2014 for CP-titanium, commercially pure titanium, on the industrial side. And obviously, Uniti and Uniti's partners, which are us and VSMPO, are aggressively working in supporting Uniti winning their fair share of those projects.

Our next question is coming from the line of Sal Tharani from Goldman Sachs.

You have, in the past, sometimes given us the backlog data. Do you have that? How does it improve over quarter-on-quarter?

Yes. For the High Performance Metals segment -- just hold 1 little second. Our current backlog, at the end of first quarter, in High Performance Metals is approximately $1.3 billion. And that's basically flat with the fourth quarter. The one thing to remember in terms of how we record backlog is that we record backlog at based -- at base prices, with the trigger mechanism in for surcharges. So any fluctuation in the surcharge actually has an impact on backlog, either up or down. And the second is, when we have a long-term agreement, let's say, it be 2 years, 3 years, 5 years, 10 years, that whole agreement is not placed in the backlog. The only thing that gets placed in the backlog is when we have essentially a release against that LTA, long-term agreement, and we have some definitive delivery date for the product. So the backlog tends to be a very conservative presentation of the opportunity going forward. And obviously, lead times in the Flat-Rolled Products business are relatively short, especially in the commodity business. And even in the High Performance Metals segment, in both nickel and titanium, lead times, depending upon the product form, are ranging anywhere from 6 weeks to 12 to 18 weeks. So the lead times are pretty short.

The next thing, the titanium scrap prices have been consistently weak. And I know you have flexibility to moving with -- to move between sponge and scrap. And I was wondering if you are taking advantage of it and how you're balancing it against [ph] the ramp-up you're doing on the sponge facilities, which you have just started? Are you forced to use more sponge because of that?

No. We blend, just like everybody blends. I mean, in some cases, we have specification limitations in terms of how much scrap we can use, especially on the rotating quality materials. So there, it may force us into a richer mix of prime material than it does scrap. But we look at the total blend cost and try to maximize -- minimize the cost but also in terms of managing inventory. The one thing that we're looking at and we continue to do is manage Rowley from a production standpoint as -- so that we don't continue to build excess inventory levels of titanium sponge from Rowley since Rowley can only be used for standard-grade applications and not for rotating material. We will continue to manage the production levels of Rowley in order to effectively manage cash flow. So -- but our focus is to continue to use the right mix and the right blend of either scrap, and that would be [indiscernible] would be solids, that would be reburn [ph], that would be purchased scrap, that would be scrap that we get as part of the closed-loop system with our customers under long-term supply agreements, as well as our various sources of sponge, both internally produced as well as purchased.

What is the utilization rate of Rowley right now?

Rowley right now is operating at probably about 60% to 65% of capacity. And we may in fact lower that a little bit due to the requirements coming from the industrial project side so that we don't just continue to build sponge and it's not an efficient way to manage cash.

Our next question is coming from the line of Steve Levenson of Stifel, Nicolaus. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: In relation to Rowley, can you tell us a little bit about the premium qualification and where things stand right now?

Yes. We -- the first -- what we've been doing over the last number of months is using the internal capabilities we have throughout ATI in terms of doing walk-throughs in the facility in advance of formally asking the engine manufacturers to begin the PQ process. So as I've said in the past, what we're looking at is, first of all, do we have in place a cost-effective manufacturing process that we can lock in place? So we've been working on that really for the last year. And then we've moved to the next phase of doing -- I mean, it's called a hazard review, basically, where you would have multiple sets of eyes going through the facility, looking at the flow paths, looking at the equipment, to identify any issues that may present a problem from a PQ qualification standpoint. And we have the capabilities in this company because of our involvement in rotating quality, melting and use of PQ sponge for years. So we have used those resources internally to do that hazard review. For the most part, the review was very successful. We do have some corrective actions and modifications to the flow paths that we want to make before we begin, formally begin, the request of the engine manufacturers to command and conduct the very detailed PQ qualification process. We're targeting that formal process to begin with an initial visit at the end of the third quarter, the beginning of the fourth quarter of this year and then begin the process. We know what has to happen from the standpoint of how much product we have to produce from a PQ standpoint. I will tell you that the history of qualifying new greenfield titanium sponge facilities for premium-quality applications typically can run anywhere from 18 to 24 months once the process starts. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okey-doke. So we're still a ways away from that. Got it. On the HRPF, assuming pricing doesn't get any worse and volumes stay about where they are, how much savings do you think you could get from that in 2014 and then in 2015?

I think the -- what we have to get through in 2014 is the commissioning process, the cold and hot commissioning. We will be doing that by alloy and by product, hence the reason for the commissioning process really lasting into the third quarter of 2014. So what we'll be doing is staging the products. And obviously, the higher-volume products, we will target to get through the commissioning process first so that we can begin using the capabilities of the HRPF on those higher-volume products. But we have 200 types of products that we have to get through the commissioning process, which is why it takes so long. And by that, I mean producing product that is sellable but you still have to get through the manufacturer of the end product, be it either a plate or a sheet or an engineered strip or a precision rolled strip. And then really, the fuller magnitude of the savings and the capabilities of the HRPF begins to kick in, in 2015. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And do you have a level that you're estimating? Or it's still too early?

A level of what, savings? Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Yes.

Yes, we have -- we do, and we've identified what that is. And well, it's really twofold. One is it's the expansion of the capabilities, the service, the whole market. So as you've heard me talk about many times in the past, today, from a market standpoint, we can really only effectively service about 45% to 50% of the market because we don't have the capabilities of making wired product and we really don't have the capabilities because of the age and the power and the control systems on our existing 50-year-old mill to produce the full range of ferritic and austenitic alloys that we need. So as we look at the margin expansion, because of additional volume, even looking at flat prices, where they are today at very low price levels, and the cost reduction opportunities, our view is that in 2015 compared to 2014, that you're looking at somewhere in the range of $150 million to $250 million of additional operating profit through the combination of additional volume and additional absorption, a lower-cost structure from the HRPF, a better opportunity to manage and match the raw material costs with the surcharges because of the quicker cycle time. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Great, got it. That was very helpful. Last one, on the LEAP engine, can you talk a little bit about your content and when you expect the ramp in demand to begin?

Yes. Well, obviously, we have -- the ATI 718Plus is a significant component on the LEAP, as well as Rene 65 and some powdered products. So we haven't dollar-ized that content, but the content -- our content on that is larger than on the current engines that the LEAP would be replacing, not only on the rotating material side but also on the forging side and also on some of the static components on some of the titanium investment castings side. So the LEAP, and really the next-generation, the whole array of the next generation of engines from all of the OEMs, our content, because of the proprietary materials we have and as well as the positions that we have on forgings and castings -- which by the way are still being quoted. Quoting packages are still coming out on the LEAP, not only for rotating components but also for castings, and we are obviously participating and focused on winning our fair share of those parts.

[Operator Instructions] Our next question is coming from the line of Mark Parr from KeyBanc.

When will the zirconium flat-rolled business cycle so we don't see these real negative comps?

Well, we've -- we addressed some cost structure issues. Last year, we took some pretty aggressive actions in trying to rightsize that business because we -- and we're not done. I mean, we'll continue to look at that from an opportunity set standpoint. But the 2 real big drivers there are obviously nuclear -- well, 3. One is the naval nuclear program, which actually is fairly stable. We have a long-term supply agreement in place to support the naval nuclear program that provides some level of stability, quite frankly, over the next 7 years. That's a 7-year LTA that was just negotiated at the very end of 2012. That's -- that affords a level of stability on that side of the business from a defense application standpoint. On the commercial nuclear side, it's a challenge. I mean it's part of the reason why we took some cost out, and we'll continue to look for ways to reduce the cost structure of that business. I think that the environment that we're operating in today is artificially low, or at least I hope, largely because of the uncertainty in Japan. Having said that, there are refueling opportunities that exist that are matters of timing. So as we look at the refueling opportunities not only on the CANDU reactors but also our support of the other reactor manufacturers who also have primary a zirconium capabilities, we actually sell material into the likes of AREVA and the Russians as well as Westinghouse. So that will afford some level of opportunity. On the newbuild side, with a lot of the newbuild in China, there is some emerging capabilities on the zirconium side in China that, probably at this point, in our view, won't be enough to support all of their needs as they build these…

So you would look for '13 to be a trough for zirconium and then begin to pick up next year? I think that's what...

Yes. I think that that's a -- I think that's a fair way of characterizing it, Mark.

Okay, terrific. Just one other follow-up on the new rolling mill. I know you've got a lot of commissioning opportunity -- or a lot of commissioning work to do for your existing products. Is there any activity going on to try to preload some new product opportunities, maybe in terms of preselling things, working with outsourced mills and then to bring new products into the mill with a -- with our -- with a preset customer base?

Yes. Great question. And actually, it's something that we've been doing over the last couple of years. We've taken some aggressive opportunities on some of the ferritic side that historically we've stayed away from because of the limitations of the mill. But we have very good technical and operations people in that business, and we're producing actually more 400 series today than we have probably in the last 10 years, I think it's safe to say. And we're doing that to establish a relationship and a foundation upon which to grow from. We've also done the same thing on 60 wide. Now we don't have the capability, obviously, of producing 60 wide because of the 48-inch-wide limitation of our mill. So what we're doing is we're buying from outside sources 60-wide hot band. And we are finishing it on our Direct Roll, Anneal & Pickle line finishing facility and selling that into the market. And once again, that's to establish a foundational relationship with those customers, and we're doing that. So the ways that we -- any way that we can do that we can begin to establish that relationship not only with existing customers but also with new customers so that we take full advantage as quickly as possible of the HRPF when it is commissioned, we are doing.

Our next question comes from the line of Jeffrey Stafford from Morningstar.

Could you give us an update on the Ladish business? Has the strength that you saw in 2012 continued in this year? How has it performed relative to the rest of the business?

Yes. I think I'm pleased with the integration of ATI Ladish with the other -- the rest of ATI's businesses. I think the -- that's -- Ladish is really fairly well integrated from the standpoint of forging, not only with hammer forgings but also with isothermal forgings as well as with hydraulic forgings on the smaller size for rotating components for jet engines. We also have very good low-cost capabilities in Poland, with our operations over there. And that was historically a heavy equipment industrial market which we -- producer, which we have -- which we -- the last management team has turned into and then qualified from an aerospace standpoint, as well. We have value-added machining as part of that integration capability. And then we also have the titanium investment casting business. The investment casting business is very well positioned to more than double in size from the time we purchased Ladish and closed the transaction in 2011. And over the next -- in this aerospace cycle, we would expect that business to double. I -- 2012, Ladish performed very well. And I think, when you -- when we look at it from a valuation standpoint and the EBITDA, that it contributed to ATI and ATI's shareholders, it was very successful. This year, starting off on the aerospace side, obviously, a lot of the growth in Ladish from a forging standpoint is ahead of us because of the positions they have on new engines, not only with their traditional forging technologies but also with the isothermal; and the marrying of ATI's powder capability and raw product forging capability with supplying billet to Ladish that they will use the isothermal to make into a forged disc and a forged component. But the nearer-term challenge we have is -- there was a significant component of the Ladish business that is industrial focused, as opposed to aerospace focused and, more significantly, on the construction and mining equipment business. And you can -- you know from those public companies, the comments that they've made about their ongoing production, reductions and inventory management actions beginning really in the fourth -- late third quarter through the fourth quarter of last year and likely expected to continue through the first half of this year, before they see a resumption in growth; that's obviously impacting the Ladish business because we supply into that market. But as we look at the full range of capabilities with Ladish, the expectation here over the next 3 to 5 years, given their positions in the aerospace market as well as the industrial markets, is that is a growth platform for ATI.

Great. And then quickly on CapEx. You've guided to $550 million this year, with $450 million of that related to the hot-rolling facility. Is that leftover $100 million a good approximation going forward for a maintenance CapEx once HRPF is done?

Yes. I think that our depreciation post HRPF will be in excess of $200 million. If you look at what we've been doing here over the past -- and I'm sure you have, over the past 7 to 8 years, we've made a lot of strategic investments to really update and essentially recapitalize the manufacturing capability of ATI. So a lot of our asset base is new and relatively new, so once we get past the HRPF, from a pure maintenance CapEx standpoint, I really don't see it as -- maybe half of depreciation is a fair characterization. It might even be a little bit less than that. It could be $50 million to $75 million because we're dealing largely with a relatively new installed capital base.

Thank you for your question. I would now like to turn the call over to Rich for closing remarks.

Okay. Thank you very much for joining us in the call today. 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.

Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Have a good day, everyone.