Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Allegheny Technologies Incorporated (NYSE:ATI)

Q1 2009 Earnings Call

April 22, 2009 1:00 pm ET

Executives

Dan L. Greenfield - Director of Investor Relations and Corporate Communication

L. Patrick Hassey - Chairman, President and Chief Executive Officer

Richard J. Harshman - Executive Vice President, Finance and Chief Financial Officer

Analysts

Timna Tanners - UBS

Kuni Chen - Banc of America Securities

Sal Tharani - Goldman Sachs

Luke Folta - Longbow Research

Mark Parr - KeyBanc Capital Markets

Peter Jacobs - Ragen MacKenzie

[John Tomasos - John Tomasos Very Independent Research]

Chris Olin - Cleveland Research Company

Timothy Hayes - Davenport & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the first quarter Allegheny Technologies earnings conference call. My name is [Katina] and I'll be your coordinator for today. (Operator Instructions)

I will now turn the presentation over to your host for today's call, Dan Greenfield, Director of Investor Relations and Corporate Communications. Please proceed.

Dan L. Greenfield

Thank you, [Katina]. Good afternoon and welcome to Allegheny Technologies earnings conference call for the first quarter 2009.

This call is being broadcast on our website at AlleghenyTechnologies.com. Members of the media have been invited to listen to this call.

Participating on the call today are Pat Hassey, Chairman, President and Chief Executive Officer, and Rich Harshman, 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 common stockholders.

After some initial comments, we will ask for questions. During the question-and-answer session please limit yourself to two questions to be considerate of others on the line.

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 Pat Hassey.

L. Patrick Hassey

Thanks, Dan, and thank you to everyone listening on today's call.

I would like to discuss three things this afternoon - first, the challenging economic conditions and markets that we are facing; second, the actions we are taking to successfully navigate through this very tough economy; and third, the long-term vision, milestones and strategic destination for ATI.

First quarter 2009 presented the most challenging economic conditions we have ever seen; however, we were able to navigate through this economy and generate $169 million of cash flow from operations, deploying $108 million of this cash flow in our self-funded strategic capital investments, and maintain our quarterly dividend, which is $0.18 per share. We view our dividend policy as an important component of total shareholder return.

We ended the first quarter with $506 million of cash on hand, which is more than our actual debt. We have no borrowings under our $400 million domestic credit facility and we have not significant debt maturities until the end of 2011. So our balance sheet remains solid and our financial flexibility remains intact.

In January we said that we expected the first quarter 2009 earnings to be at or near breakeven. We did better than breakeven, earning $5.9 million or $0.06 per share on sales of $832 million in the first quarter 2009.

We consider our cash flow generation and earnings to be good results given the difficult environment and the significant negative impact from out of phase raw material surcharges and indices that we absorbed in the quarter. While we're not satisfied with being marginally profitable, our ability to generate these positive results demonstrates our globally competitive position.

ATI is uniquely positioned, globally focused and diversified in products and markets which have a global reach. Because of this, ATI is now one of the few metals manufacturers in the world that can be profitable in the current global economic environment.

We have been able to navigate this business environment by firstly focusing on high value diversified products and markets that have been driving the performance of ATI; second, using our manufacturing flexibility and lowered cost structure to adjust our operating schedules and production rates to market conditions; remaining focused on ever improving our cost structure - gross cost reductions in the first quarter were nearly $35 million; our 2009 cost reduction goal is targeted for at least $150 million of improvement.

Sales of our high value products were 83% of first quarter 2009 sales compared to 73% for the full year 2008. Our exotic alloys, grain-oriented electrical steel, titanium and titanium alloys, and nickel-based specialty alloys, held up relatively well when compared to standard stainless and other commodity related products and most of our engineered products.

Our differentiated product strategy is working. The long-term agreements that we put in place over the last several years are providing a measure of stability during this steep downturn. We have long-term agreements with customers in our airframe, aero engine, electrical distribution and generation, oil and gas tooling, and medical markets.

As an example, total shipments of our titanium mill products were 10.3 million pounds in the first quarter. This is both high performance and flat roll products - 10.3 million. In answering a question in our January conference call I said that I would be personally disappointed if our full year titanium mill product shipments were not at least 40 million pounds. We're on this annualized rate at the end of the quarter.

However, first quarter shipments of nearly all of our products were down compared to both the first and fourth quarters of 2008. We have been and continue to adjust our production schedules as needed. We have reduced manufacturing and administrative headcount across ATI.

Our strategy to become more global is working. ATI's performance continues to be driven by the global aerospace and defense markets, oil and gas, chemical processing, and electrical energy and medical markets. These markets represented 79% of our total sales in the first quarter 2009 as compared to 70% of sales for the full year. We believe these core markets for ATI are very attractive in the longer term and can still outperform most consumer and durable goods markets in the shorter term.

Aerospace and defense accounted for 34% of first quarter 2009 sales, up from 29% for the full year 2008. Electrical energy grew to 20% of first quarter sales from 16% of the full year 2008. The chemical process industry oil and gas markets accounted for 21% of the first quarter sales, which is essentially flat with the full year 2008. By contrast, automotive was down 5% of ATI sales in the first quarter 2009 from 8% for the full year 2008, and food equipment and appliances were down to 4% of first quarter 2009 sales from 6% for the full year 2008.

Our strategy then to become more global is certainly working. Direct international sales were nearly 30% of sales in the first quarter. For comparison, direct international sales were only 28% for the full year 2008.

We are deploying our cash for the long term in state-of-the-art equipment and facilities, and we continue to make significant progress in putting in place unsurpassed global manufacturing capability. Our Rowley, Utah premium grade titanium sponge facility and our Bakers, North Carolina titanium and superalloy forging facility are both scheduled to begin production in the third quarter of this year. These strategic investments enhance our capabilities to serve our core long-term growth markets.

We plan to ramp our Rowley facility in phases. We will first qualify the process of using Rowley sponge to make premium titanium products. We will then bring on the sponge capacity in phases based on market demand.

The melt shop consolidation at our Brackenridge, Pennsylvania specialty metals shop is progressing. We expect considerable cost savings and production efficiencies from this project when it is completed. Engineering, permitting and site preparation continues on our state-of-the-art Brackenridge, Pennsylvania hot rolling and processing center. As we have discussed, this is a four-plus year project designed to produce all of our flat-rolled products, not just stainless sheet. Our plan is to self-fund this project in line with our ability to generate adequate cash flow as we continue to operate the current facilities without disruption.

We now expect 2009 self-funded capital investments to be in the range of $425 to $450 million.

Turning to our market segments, operating margins in our High Performance Metals were 14%, a level that we're not used to or satisfied with and which was negatively impacted by over $18 million of metal mismatches not offset in the quarter. The segment's largest market, commercial aerospace, was impacted by schedule pushouts and uncertainties as the supply chain adjusted to revised commercial airplane build schedules as well as reduced demand from the aero engine aftermarket. The aerospace supply chain likely needs to further adjust to recently announced commercial aircraft production schedules.

We remain confident in the long-term growth potential of our core aerospace market. Last week GE said that their aero engine orders during the first quarter for both equipment and spares were good. Today, Boeing reaffirmed the current 787 schedule and Boeing's significant backlog of airplanes. The aerospace backlogs are still there; the build rate is moving out, but not being canceled.

Our Exotic Alloys business is solid and growing. We think this business is positioned to do well in 2009 and beyond. The business has a good backlog for large global chemical processing industry projects. In addition, demand is very good and growing from the nuclear energy market.

We believe we are seeing the beginning of a strong nuclear energy up cycle. This first stage is being driven by higher utilization of existing facilities, which results in quicker replacement of nuclear fuel components which use our zirconium and hafnium alloys. The second growth driver is the restart of idled nuclear electrical energy capacity, and the third stage will be the construction of new nuclear reactors. So we see the nuclear energy market as a growth driver over the next several years and in the long term for ATI.

The Flat-Rolled Products segment was marginally profitable in the first quarter of 2009. This was accomplished with a $48 million negative impact from out of phase raw material surcharges. Now keep in mind this segment lost a lot of money during the last downturn, when volume and base prices for stainless were actually better. We are seeing the benefits of the transformation of our Flat-Rolled Products segment that began back in 2004. This is a much different business than it was during the previous downturn. The product mix is much more diversified, our focus is more global, our cost structure is much lower, and our manufacturing capabilities are much better from melt through finishing.

First quarter 2009 shipments of grain-oriented electrical steel and industrial titanium were at reasonably good levels relative to economic conditions. Shipments of our static-grade stainless were very low at just over 100 million pounds or 50,000 tons in the first quarter. Base prices were also very low.

While it's too early to be optimistic about a stainless recovery, there are signs that the market may be near a bottom. Industry data for March indicates that stainless steel inventories remained low had shipments in March were essentially flat with January and February. Last week we announced a price increase for production orders of stainless sheet, strip and coiled plate. Other North American producers also publicly announced price increases. We believe this indicates a pricing bottom even at these extremely low levels of production.

Demand for almost all products in our Engineered Products segment was weak in the first quarter and we lost money in this segment due to the very low operating rates that we experienced.

Now looking ahead, we see some other signs of stabilization and opportunity for ATI in certain markets. Here are some examples:

The U.S. Department of Defense 2009 supplemental budget and comments by Secretary Gates point out the need for and recommend the funding for more and better ground combat and support vehicles. This sector of the defense market is a target for new business for our ATI defense market sector team. Product development work continues as we build a suite of titanium and specialty metal alloys and products to service this market.

The U.S. stimulus package provides opportunities for ATI products used in transportation, energy efficiency, electrical energy distribution, renewable energy and clean water.

Finally, recent developments and economic reports out of China indicate that the fundamentals there are improving. Both GDP growth and industrial production growth in March were much better than expected. Importantly, increased bank lending and government spending appears to be stimulating that economy.

We are seeing real evidence of this in our China precision rolled strip joint venture. Shipments grew steadily throughout the first quarter 2009 from a low level in January. Our ATI Asia sales and marketing team reports that they are seeing some encouraging signs. Demand from the chemical process industry facilities remains good. Letters of credit from banks are opening up and the thermal power plant inquiries have picked up. So, overall encouraging signs from China.

Looking forward to the second quarter, we still remain cautious. We are not immune from the extended downturn in the global economy. While we see some signs of stabilization in some markets, demand for many of our products remain at very low levels, the pricing environment remains challenging, and visibility is limited.

As a result of these conditions discussed, we expect second quarter earnings to be modestly better than first quarter 2009. In addition, we expect to end the second quarter of 2009 with a significant amount of cash on hand while continuing to self-fund our capital investments.

Our focus and actions are intended to keep ATI profitable through what appears to be a challenging year. We expect to generate sufficient cash flow to self-fund our capital investments, maintain our dividend policy, and preserve our financial flexibility with a solid balance sheet.

We remain confident in the long-term potential of our core aerospace and infrastructure markets that have been driving ATI's performance. These are the right markets for ATI and therefore our strategic direction and vision remain intact.

I think we'll stop here and ask for any questions that you might have, so, Operator, may we have the first questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Timna Tanners - UBS.

Timna Tanners - UBS

I was wondering if you could give us a little bit more color on a few things. So first on your cash guidance, you say with a significant amount of cash on hand. Does that mean an increase sequentially? Does that mean any guidance for working capital liquidation continuing?

L. Patrick Hassey

Well, I think if we have the same exact levels of business that we have now, we will have some working capital improvements, but basically we're talking about cash in the $475 million to $500 million range even with further funding of our capital investments in Rowley, Utah and Brackenridge for the melt shop and also in North Carolina for the superalloy forge plant. So net-net-net, our cash will be in a very good position at the end of the quarter.

Timna Tanners - UBS

And then I wanted to follow up on stainless. You said that you and your competitors put up a stainless price increase that we all saw. Why would prices go up with the amount of excess capacity out there? Is there improved demand that you're also seeing?

L. Patrick Hassey

I think we're seeing some stabilization. We have certain segments that are improving. Believe it or not, we're seeing some life in the automotive sector for the first time in five or six months as we're looking at some of the parts that we make for couplings, hose clamps, windshields, different kinds of things.

But I think overall the right answer for this is prices can only go down to a certain level no matter what the volume levels are. There is no endless drop in prices. So prices have hit that level. A price increase was put out there and the market followed that price increase because there's no affect of a price increase on volume levels today.

Operator

Your next question comes from Kuni Chen - Banc of America Securities.

Kuni Chen - Banc of America Securities

My first question's on electrical steel. You'd mentioned that demand was good, another competitor earlier in the week had said trends were more challenging than expected, so I'm just trying to kind of reconcile those two statements. Are you seeing any impact from some of the project deferrals and cancellations that have been discussed? Where do you see your market share in this segment going this year?

L. Patrick Hassey

Let me clarify one thing. I said our business remains relatively good; I didn't say the market was relatively good.

Our business is relatively good in a market that's down 35% with building and construction in the United States and some trimming of some projects in Asia which I think could get restarted. But remember, in terms of our particular approach to this market, we are in a very good position to ride this market through. And I think we shipped 27,000 tons in the first quarter, which is basically on track with what we shipped last year at this time.

Kuni Chen - Banc of America Securities

And then just on the titanium side of the business, just pertaining to the High Performance Metals segment, you shipped a little bit below 7 million pounds in the quarter. What catalyst do you see for volumes to improve sequentially from here? Are there any kind of supply chain issues that you foresee going out a couple quarters that could lead to either higher or lower volume trends?

L. Patrick Hassey

I think there's a couple things.

The market for the aerospace business is under some flux at the moment as there's been some announced pushouts later on for the twin aisle aircraft and I think when you do that you have a couple of effects. You have the inventory adjustment, which is a one-time effect, and then you have the basically tuning up for the lower volumes there. So the aerospace market, I don't think we're going to see the trends until the 787 flies and that production begins to roll that we'll see those pulls there.

On the industrial side of the business - which, remember, on the industrial side of our business, those results are basically showing up on the Flat-Rolled Products side of the company, so it doesn't show up in High Performance Metals - our tonnage shipped, mill products shipped, was over 10 million pounds, which is about what we thought, a reasonably good performance for us; a 10 million pound quarter is not a depression for the titanium business for us.

And we're seeing that market as a market that, when we're looking at the nuclear business, we're looking at chemical processing plants, we're looking at the marine markets, across the industrial sector it may be down 14% - 15%, but there's no real crash there. And our particular position in that market, with the quality of our products and global reach, continues to improve.

So we still feel that the titanium business is an excellent business for us. It's an excellent business in this market and it's a really excellent business for us in an up market. So we like the titanium business. We're making profits in the titanium business and it's both on the industrial side as well as the airframe and aero engine side.

If there's any upside that could come out of this thing, as I mentioned, I think, in my earlier comments, we like the defense business opportunities that could be out there - and that's a could - and that is the idea that as the defense budget swings around from some of the more advanced weapons systems and airplanes to more combat systems on the ground, there's several prototypes that are out there that the military services are looking at and vendors are providing that are land-based vehicles that transport troops and provide other services for the Army and the Marines that have good opportunities for titanium. So we think that's an upside to the market if in fact those vehicles get produced and the Army does move in that direction.

Operator

Your next question comes from Sal Tharani - Goldman Sachs.

Sal Tharani - Goldman Sachs

I just wanted to get some more color on your second quarter guidance. You're saying modestly better. Are the trends getting stable in the business or are they getting worse because you are going to have $45 million less mismatch accounting problem which you had in the first quarter of $65 million versus $20 million, but still you're talking about only modest improvement. Was the first quarter better in trend?

L. Patrick Hassey

Sal, I think I'll let Rich answer that and if I want to add anything I will.

Go ahead, Rich.

Richard J. Harshman

I think that when you put - you're right about the raw materials surcharge mismatch improvement. It does improve by $45 million pre-tax. The one thing that we won't or at this point we don't expect to have is a tax benefit in the second quarter; those are discrete items that are fundamentally quarter specific based upon resolution and specific facts and circumstances. I would imagine that we would look more at a more normalized effective tax rate in the second quarter in the range of 37%. So you have that issue.

And I think as we said in the earnings release and as Pat elaborated on his call, while we're seeing some signs of stabilization, we still see very low demand in virtually many of the markets that we serve and many of the products we make. We see a continuing inventory correction in the supply chain in titanium and nickel as it pertains to commercial aerospace and there we're talking primarily about aero engine, not so much about the stability of the volume that we're delivering on airframe primarily under our Boeing agreement.

So I think when we pull it all together, the cautiousness that we see and the fact that some of the upside opportunity from the stimulus package to the extent that we begin seeing that, we really don't think we're going to see that in the second quarter, so when we pull everything together we think that the second quarter will be modestly better than the first quarter.

Sal Tharani - Goldman Sachs

On titanium shipments you shipped about 10 million pounds, similar to what you did last year although in the HPM business or section that was down 20% - 6.9 million versus 8.8 million - so apparently your industrial shipments are rising. Are you getting some market share in the industrial side or is it demand has increased over there from last year?

Richard J. Harshman

I think the demand is down slightly, but we've gained some market share there, yes, on the industrial side.

Sal Tharani - Goldman Sachs

And is that a trend we should expect? Is there a lot more business to gain over there?

Richard J. Harshman

I think this is a very large market. There's a lot of opportunities coming from projects in the nuclear field and in the energy field, plus some of these large projects that are still going on around the world from the larger oil and gas companies continue, and there's the chemical processing business that continues to grow and to expand on energy and chemical processes, mostly in the Asian and Middle East markets. We have customers that seem to be participating in this global infrastructure build, so as long as we have those customers and they're successful, we'll be successful.

Sal Tharani - Goldman Sachs

On the selling price of exotic alloys, I know it's always been a mix issue, but it has been rising consistently and it was a significant jump this quarter versus last quarter. Is the base price also rising besides a mix change in here?

Richard J. Harshman

We've had some base price increase. We've had some material cost increases that are passed along, too, when you look at some of the raw materials that go into those products. But basically the market has been improving and is strong and we've been able to achieve some base price increases along with the material cost increases.

Operator

Your next question comes from Luke Folta - Longbow Research.

Luke Folta - Longbow Research

My first question was regarding your titanium business. Is it possible you can break out for us how much of that is spot and how much is contract?

Richard J. Harshman

I think the ratios stay about the same, probably in the 65% to 70% under contract and 30% to 35% spot business. Spot business, of course, is the one that has a weaker pricing level and is more sporadic.

Luke Folta - Longbow Research

And are you able to give us those statistics for your nickel-based alloys as well?

Richard J. Harshman

Around 60% is LTA or contract related and the rest would be spot.

I think the use of the word spot is interesting. The spot market, I think, connotates more of a sale through distribution. I think a better description of it would be transaction based because some of it is through distribution, but much of it, including on the titanium side, is more project related. So it may not be a long-term agreement that goes over multiple years, but it's a bill of materials type of sale that pertains to specific projects. So just one point of clarification on that point.

L. Patrick Hassey

I think it's important to note, Luke, that a lot of this work is not in the United States. It's global and we are a global supplier to these markets around the world these days.

Luke Folta - Longbow Research

And just one more. In your second quarter results, should we be thinking of a similar type of LIFO benefit as well?

Richard J. Harshman

Yes, Luke. I mean obviously, as you know, we project or we try to project what we think year end LIFO inventories are going to be and what, based on our inventory turns, what our fourth quarter average cost will be. It's a little easier to do that on the conversion side than it is on the raw materials side. So assuming our assessment of the market remains the same and our assumptions remain the same, the second quarter would have the same kind of a LIFO impact.

Operator

Your next question comes from Mark Parr - KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

I had a couple of questions. First, Pat, I was wondering if you could talk a little bit about how mix might have impacted the profitability of the Flat-Rolled business as opposed to cost reduction and other things that have been going on.

L. Patrick Hassey

Okay. Well, I think that the mix is just a part of the whole story. We only had about 50,000 tons of commodity sheet, so that's about, out of 100,000 tons, that's about half. And so the other half of the business was electrical steel plate, nickel-based alloys, titanium plate, titanium sheet, and other products that are specialized. So the mix certainly in the sense of upgrading the overall earning power of the assets that we've done over the last four years is certainly showing up at the bottom of the cycle.

And I'm not saying that all these markets are not affected; they're all affected by the volume problems. But the profitability coming from some of these other product forms is certainly protecting us from some of the dramatic drops in the volume level of our commodity sheet products.

Now, the other thing that's been, I think, very helpful to us is the work that's been done in this business unit over the last five years now of perfecting, if you will, how to operate at the most efficient levels and in the most efficient ways. We have great cooperation from the work force. We have a good relationship with our work force, and I think we have some very good outcomes in terms of making this a more effective globally competing business.

So we're operating on some different kind of schedules today. When we operate, we like to operate full, so we may run a full production schedule for half the month and actually furlough people for the other half of the month. You say well, gee whiz, why don't you just lay people off? There's a two-edged sword to that. One is you don't operate as effectively if you're running shorter volumes and shorter shifts. And secondly, all those people that leave over time lose their health care, lose a lot of things.

So our approach has been one of how do we work together to make this business a profitable business in how we schedule, how we operate, the cost savings we have, the markets we're in, the sales force going after particular profitable products and customers. And just very frankly, I'm very pleased with the Flat-Rolled Products group and their performance.

Mark Parr - KeyBanc Capital Markets

And that's clearly shown through with the performance that you had in the first quarter.

I was wondering, have new labor contracts allowed greater flexibility to do these kinds of things that you might not have been able to do in previous downturns?

L. Patrick Hassey

Absolutely. Absolutely. I give all the credit to the people that are doing the jobs out there. They're experts in the manufacturing cycle. They contribute to the work rule changes and the changes in the practices at the plant. They put their dedicated time into it. The management works with them. The safety records are great. The performance that we're seeing is great. We're making improvements on our yields, making improvements on our quality, making improvements in value to our customers, adding that with better equipment. You can't run tired old assets forever, so adding new equipment, new leveling capabilities, new finishing capabilities that add a better product to the market.

And all in all, the formula in total, it's sort of like asking somebody if they're healthy; well, everything has to be working to be healthy. So it's not just cost reductions, it's not just work rules, it's the products, it's the market, it's the strategy, it's the capital investments, it's the energy policies, it's the schedules.

But overall, Mark, you've been around a long time like I have and you're watching all these stainless steel producers and other kinds of producers and metal-related companies and in this market we think it's a good performance to make some money.

Mark Parr - KeyBanc Capital Markets

Oh, yes, absolutely. One thing, just kind of along those lines, there's been an awful lot that's been written about some of the big carbon steel guys and their supply discipline and the very low levels of production, and some of your specialty markets and some of your more niche-oriented businesses perhaps are a little bit more difficult to track. I was wondering if you could provide some commentary, say for example on how you're seeing supply discipline across the entire marketplace, say for some of your specialty businesses as opposed to the commodity businesses where you participate?

L. Patrick Hassey

I think the purchasing people across all these businesses are using the same strategy. Businesses today are not buying products that they don't need. If we have a longer-term agreement with a particular customer direct, we're trying to work with customers to honor those agreements. They're honoring the agreements. We're trying to be as flexible as we can possibly be in those agreements. So that's a little different arrangement than somebody operating under just a transaction that got an order today. So we're trying to be responsive. We're working with our customers.

But if you're asking the question are people buying more because they're in a specialty metal or a titanium user, no. They're buying for their needs. This business today, as we positioned ourselves in it, we have a very effective international selling force. We're exporting. We're selling in Asia. We're selling in Europe. We're selling in Canada, some things in South America. We've locked in on some nice project work. We've locked in on longer-term arrangements with what we'll call customer partners, we're a partner in their business, they're a partner in our business. And these kind of things don't happen overnight; they happen over long periods of time. And we've seen the benefits of it in the first quarter of 2009.

Operator

Your next question comes from Peter Jacobs - Ragen MacKenzie.

Peter Jacobs - Ragen MacKenzie

Most of my questions have been answered, but I did want to just pick your brain on the retirement expense line going forward and if you can help give us a sense of what that line might look like both this year and then perhaps out in 2010.

Richard J. Harshman

It's easier to answer that question for this year, and this year, as we say in the earnings release, the combination of pension expense and other post-retirement obligations, which is primarily health care related, is approximately $149 million pre-tax, which is a significant increase over 2008 by about $140 million and the vast majority of that increase is in the pension expense side.

Going forward I think to the extent that there is volatility going forward, once again, it's primarily in the pension expense side because for the most part our retired medical obligation is capped. The pension issue, I wouldn't even want to venture a guess in terms of what it will be in 2010 because it's dependent upon what Moody's AA bond yields are, it's dependent upon what the asset level ends up at our measurement date at 12/31 and that's dependent primarily on what the global equity and fixed income markets do.

So obviously we're not happy with the size of the increase here in 2009. It's an issue that we're dealing with and we'll continue to deal with. I think we minimized that to the extent possible by doing some things on the strategic asset allocation of the pension assets where we took risk off the table at the end of 2007 and moved 15% of our strategic allocation out of equities into fixed income. That helped, given the equity market performance in 2008. In 2008 we made a tactical asset allocation move of taking another 10% out of equities into fixed income. That's more of a temporary move unless we change our strategic asset allocation. So those two moves actually helped in terms of the 2009 retirement benefit expense. It could have been worse.

Peter Jacobs - Ragen MacKenzie

Is that a cash contribution, that $150 million?

Richard J. Harshman

No, no. That's all non-cash. We're in a position, because of the surplus balance on the funding side, that we're not in a mandatory funding position in 2009. As we've said, we will look at that. We've made voluntary contributions in each of the last four years. We think that it's prudent to do that and we'll continue to do that. To the extent that we do anything, it would be later this year.

Peter Jacobs - Ragen MacKenzie

And if I could just slip one other question in, I'd appreciate it. Pat, when you're thinking about the operating margins in the second quarter relative to the first quarter, which of the business segments do you think might have the most improvement in the second quarter versus the first quarter and which might continue to see a drag?

L. Patrick Hassey

I think we'll have the most improvement in Flat-Rolled Products and that's probably because we're getting rid of the mismatches. We have just had one price increase roll through and we have other volumes that are under contract and under pricing, so I'm more optimistic about Flat-Rolled. We have some softening still on the aerospace side. We'd like to see some defense work happen; that would be helpful to our Flat-Rolled also. And we may get a little relief in the Engineered Products group, but I wouldn't see much else.

I think on the High Performance side we did have a mismatch that we had no offset for in the first quarter. We still have a mismatch moving into the second quarter, but it won't be as large.

Operator

Your next question comes from [John Tomasos - John Tomasos Very Independent Research].

John Tomasos - John Tomasos Very Independent Research

Pat, could you give us a little flavor on the different parts of specialty flat-rolled, whether any of those product classes had volume gains or steady volume or whether all of those niches were down?

And should we interpret the nickel alloy volume gain and the exotic pricing gain as a trend or are those just statistical flukes?

L. Patrick Hassey

Let's start with the Exotic Alloys. I think that's a great question, John, and it is a trend.

I think on the Exotic Alloys side when we look at the needs across the planet for nuclear energy. And it's not just the United States with the 10 reactors that are currently under consideration and maybe 42 in the next 15 years are going to happen in the U.S., but when we you go and look at the needs of the world, including China, including India, including Russia, the Middle East, there is a market that I have never had in my working career because as I got into the business, maybe as you have, too, the nuclear era was, if you want to call it this, misspeaking here, but basically ending, and it went into a maintenance mode for the next 35 years. Well, now there's a lot more people in the world, there's a lot more need for electricity, and if we ever plug in cars, it's going to be very interesting on how much more is needed.

There's a move to nuclear as part of this whole mix. Besides being green, besides the alternative energy, wind energy and the rest, nuclear becomes a major part in the replacement of carbon fuel. There is a definite trend on the High Performance Metals side for zirconium or hafnium for the nuclear metals and that goes all the way from reactors to refueling to building new stations to the exchangers and all that go into the specialty nickel-based alloys. It's a very big move that I think will be a big part of ATI in the future.

Now answering your questions around flat-rolled, the volume increases would have come in flat-rolled titanium products. Again, we shipped over 3 million pounds of titanium flat-rolled products in the first quarter, so putting that together, it's 1 million pounds a month of titanium that's coming out of the Flat-Rolled business that, it's not very good English, but didn't used to be there, right?

Also, we've made some inroads in some specialty steels. We've made some inroads in the aerospace business; that has some specialty steels in it. And we are now venturing into the defense markets, so that mix is on a higher value plane. I think if I would step back and look at that business today I would say electrical steel is back at 25,000 tons, 27,000 tons first quarter, a very good quarter for us in electrical steel. The plate business is building. We're increasing our capabilities on the nickel-based alloy and titanium. That makes up the difference from what the business used to be.

Operator

Your next question comes from Chris Olin - Cleveland Research Company.

Chris Olin - Cleveland Research Company

I am trying to figure out when the titanium industry could enter into some type of period of demand recovery and I guess I'm looking at the 787 and if you consider or if you assume that this plane successfully test flies in the second quarter, I guess that assures that 2012 production schedule, and then ultimately you would need about 30 million tons to drive that platform. If you're buying something in the neighborhood of 12 months in advance and you cross off the inventory issues out there, I guess that would assume that you would start to see some type of recovery some time during 2011, I guess. Is that when you're thinking maybe demand could start to rebound for titanium?

L. Patrick Hassey

I think that's probably a pretty good timeframe for the commercial airframe business. I think the really good news for titanium producers is what you just talked about in terms of the 787 with still 980 plus orders for that airplane. That's like having the best new car on the market, but you can't wait to get one out and it's hard to get one. I'm sure that the Boeing Corporation's going to ramp that program as fast as they can control it through their supply chain. They've said that they'd like to get to 100 airplanes as quickly as they can, but they're going to do it in more of a normal ramp up than a spiked ramp up.

So if you look at that and you look at what the supply chain might be out there, I think you're someplace toward the end of 2010, 2011 to see that material move up. And it's not just the airframe, but it's also the engines.

The other good news on these cycles, even as you see the build rates maybe moderate, the airplanes are larger - that will be built are larger - as the total units moderate, and also the use of titanium increases. So you could actually see the titanium industry having a growth period even with units showing a leveling or going down period. That's one thing.

The second part of this is there's a tremendous market on the industrial titanium side of this on a global basis. I think people have talked about this market being 60% to 70% aerospace and defense, but I think if we really understood the total demand factors across this globe we would say that 50% of this market is aerospace and defense and 50% of this market is industrial today.

So we want to participate in both in this company.

Chris Olin - Cleveland Research Company

I hear what you're saying on industrial, but I guess the concern would be the amount of new supply that's kind of targeted those markets, especially in Asia. Does that become an offsetting factor?

L. Patrick Hassey

Well, the issue is mill products; it isn't sponge. And so you have a situation where you have to have quality. And if you're making a welded tube heat exchanger and you're talking about miles and miles of small diameter tube that can't have a leak in it, we're not just talking about being able to generate the primary metal. We're talking about being able to generate a close tolerance, perfect surface sheet that can be split perfectly so that when you bend it and weld it you get a solid weld and a tube that works.

And that's why ATI is so powerful in this business in the sense that we can produce those semi-mill finished products and mill-finished products that help produce those end products. So it takes not only the titanium and the melting, it takes the rolling and the fabricating to get there.

Chris Olin - Cleveland Research Company

If I look at it from the opposite side, all that industrial business, how much would you say of that market the Chinese can compete in, then? Is there a way to look at that in terms of your exposure?

L. Patrick Hassey

Today it's probably less than 25%.

Chris Olin - Cleveland Research Company

Last question. When the sponge plant starts running, would it be dilutive off the front because of - is there any issue with demand going through the system?

L. Patrick Hassey

No, what we're going to be doing is we're going to be adjusting production in our Oregon and in our Utah plant to meet the demands that we have within the company, so basically we have a more efficient facility coming online with the best technology in the world. We need to get it qualified and then we need to ramp it up, as I said in my comments. We're going to ramp it up in phases as to meeting the current market demand that this company has. So we're looking forward to bringing up the facility.

Operator

Your next question comes from Timothy Hayes - Davenport & Company, LLC.

Timothy Hayes - Davenport & Company, LLC

My question is on the commodity stainless business and specific to the sequential change in volumes from Q4 to Q1. We were surprised that didn't go down much at all. When we look at some of the industry figures, seeing service centers destock on top of weakening end markets, I would have figured that that would have been a bigger sequential decline. I wonder if you could add some more color on why that held up maybe better than we thought.

Richard J. Harshman

Well, you know, we don't take a big share of that. We're looking at our particular share. So if you think the whole thing declined, then we must have gained some customers. What do you think?

Timothy Hayes - Davenport & Company, LLC

That was one idea.

Richard J. Harshman

Then the second side of this is it's an interesting game. I think the philosophy that you can lower your price to the point that you run other people out or that you can fill at the expense of other people, that's just a dead concept. It doesn't work.

Operator

Your last question comes from Mark Parr - KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

A couple of quick things. In looking at the revenue outlook for the second quarter, given some of the ongoing headwinds in the end markets is it fair to say that we still haven't seen the bottom in your revenue momentum yet?

L. Patrick Hassey

I think we're still under pressure on the revenue side and in some markets on the volume side. As I said in my comments, I think we have some markets that are stabilizing at these low levels. We have different customers within markets that are under long-term agreements that provide us that stability outside of the market. And then we have some softening on the aerospace side that will, I think, be related to an inventory adjustment as well as build rates because when you have the changes in builds what you get is a twofold effect. First you get a steeper adjustment as people adjust not only to the new build rate but adjust what they've been carrying in inventory and in process through the build rate. So this thing could actually come down a little bit and then come right back up in a different quarter. It could come down more than it's going to be down. It could come down and come back up.

Mark Parr - KeyBanc Capital Markets

In terms of trying to think about the timing process, should we think more about revenues bottoming in the second half of '09 and then beginning some upward momentum next year or is this something that could bottom as quickly as the second quarter? Any color on how you feel about that, about the timing?

L. Patrick Hassey

Mark, my personal opinion is this thing's going to bottom by the end of the second quarter or early third quarter. That's just my opinion.

Mark Parr - KeyBanc Capital Markets

And if I could just ask one other quick one, in terms of your second quarter guidance, are there one or two things you could point to that you think are most likely to surprise you on the upside or surprise you on the downside?

L. Patrick Hassey

Upside would be some defense business that we've been working on for awhile. That's got a nice opportunity for us. Another upside surprise would be some of the projects that have been put on hold in China breaking loose through financing now becoming available on things they want to do in energy and power generation and chemical processing business.

The downside, there's just too many areas out there that you could delve into, but I don't think it's going to do us any good. We're going to have to see what happens. Hopefully all the stimulus packages are out there. Consumer confidence, there seems to be points of interest out there building in different places. People ask me the question, I would say this: If you think that we've got double the unemployment rate with people that stopped looking, so we've got 85% to 88% of the people in the U.S. are still working, it's probably true in some of those ranges around the world, some of those people that are still working are going to be more confident that the bottom's there and I think the economy is going to have some bright spots to it. If I'm right, then hopefully we're passing through the worst of it now.

Mark Parr - KeyBanc Capital Markets

Okay, terrific. Thanks, again, for all the color and good luck.

L. Patrick Hassey

Thank you. Well, we appreciate everyone being on the call today. As usual, we appreciate our shareholders, appreciate those that follow us and people that have an interest in ATI. We thank you for your continuing interest and we thank you for joining us today.

Dan L. Greenfield

Thank you, Pat. Thanks to all of the listeners for joining us and that concludes our conference call today.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Allegheny Technologies Incorporated Q1 2009 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts