Allegheny Technologies Incorporated Q4 2009 Earnings Call Transcript

Jan.27.10 | About: Allegheny Technologies (ATI)

Allegheny Technologies Incorporated (NYSE:ATI)

Q4 2009 Earnings Call Transcript

January 27, 2010 1:00 pm ET

Executives

Dan Greenfield – Director, IR and Corporate Communications

Pat Hassey – Chairman, President and CEO

Rich Harshman – EVP, Finance and CFO

Analysts

Timna Tanners – UBS

Steve Levinson – Stifel Nicolaus

Luke Folta – Longbow Research

Gautam Khanna – Cowen and Company

Michael Gambardella – JP Morgan

Lloyd O'Carroll – Davenport & Company

Kuni Chen – Bank of America/Merrill Lynch

John Tumazos – John Tumazos Very Independent Research

Sal Tharani – Goldman Sachs

Operator

Good day, Ladies and Gentlemen, and welcome to the fourth quarter 2009 Allegheny Technologies earnings conference call. My name is Kesha and I will be your Operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Dan Greenfield, Director, Investor Relations and Corporate Communications. Please proceed, sir.

Dan Greenfield

Thank you, Kesha. Good afternoon and welcome to the Allegheny Technologies earnings conference call for the fourth quarter and full year 2009. This conference call is being broadcast on our website at www.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. 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.

Pat Hassey

Thanks, Dan and a thank you to everyone listening on today's call. 2009 is now behind us and I have a few things I'd like to share with you that demonstrate that ATI is a different company.

This business cycles trough in 2009, revealed the benefits of the transformation process we began back in 2004. ATI was profitable in 2009 in spite of the most challenging recession in nearly 75 years. This was accomplished with capacity utilization across our facilities of 50 to 55%. We continue to improve our cost structure with nearly $173 million of gross cost reductions. ATI ended the year with a strong balance sheet and nearly $709 million of cash on hand. We continued to make important strategic, sell-funded investments and our U.S. defined pension plan is essentially fully funded.

Our safety performance continued to be world class. We brought on new assets to provide new capabilities and further improve our cost structure. Our new titanium and superalloy forging facility in Bakers, North Carolina was completed on time and under budget. We're beginning to realize the significantly improved technical capabilities and improved cost structure from this new facility.

Our new premium titanium sponge facility in Rowley, Utah started up at the end of 2009. I visited the facility last week and reviewed its initial production. As the processes are optimized and standardized, we plan to ramp production in a systematic way that consistently provides the best possible quality and cost competitive product from this new facility.

At our ATI Wah Chang operations, we're doubling the capacity of our reactor-grade zirconium sponge, preparing for the increased demand from the global nuclear energy market. We believe ATI is now the world's largest producer of critical reactor-grade zirconium sponge for the nuclear energy market.

We nearly tripled the capacity of our STAL Precision Rolled Strip joint venture operating in China. STAL is now much better positioned to benefit from China's electronics and telecommunications manufacturing market for Cell Phones and Smartphones as well as China's rapidly growing automotive parts manufacturing market. Again, we believe we're the largest producer of these thin strip products in China. We believe our new facility gives us a significant competitive advantage in this growing market.

We continue to improve our position with our key customers and expanded our market, product and global diversification. We signed several important long-term agreements in 2009 in the aerospace, oil and gas, electrical energy and medical markets. The trend continues in 2010. We're seeing interest for our zirconium products for the nuclear energy market and expect to be able to make other announcements soon.

Our industry leading technology portfolio continued to expand and we continued to make important R&D investments in 2009. Our new products are gaining traction in the marketplace. We are particularly pleased with the acceptance of ATI 425 Alloy, an innovative new titanium alloy, ATI 718Plus alloy, our ground-breaking nickel-based superalloy and our ATI 500-MIL alloy which is the first new armor plate product released to the market in over 40 years. These products are aimed at improving manufacturability to help customers get to near-net shape quicker and at reduced costs.

Our new duplex stainless alloys use lower amounts of nickel and/or moly. These products are designed to be more cost effective and typically provide higher strength and better corrosion resistance than conventional stainless alloys.

We added advanced Powder Metals to our wide array of high-end products by creating ATI Powder Metals after our October 2009 acquisition of Powder Metals Assets. Improved fuel efficiency standards and green initiatives are driving jet engines operating temperatures to higher levels.

With the addition of ATI Powder Metals, we have expanded our product breadth for the next generation of jet engines. Direct international sales reached over 31% of sales in 2009. We strengthened our position in Europe, Asia, Canada, South America and the Middle East.

Today, ATI is more globally focused than at any time in our history. We expect this trend to continue as a result of customer focused sales and marketing efforts which we expect to be further aided by the historically weak dollar. We remain optimistic about the secular growth trends of the global aerospace and infrastructure markets.

Of note, ATI's export/import balance was nearly $350 million positive. This outcome supports another benefit of our American based manufacturing strategy. As we have said, we believe a U.S. manufacturer can compete in the global economy. To be globally competitive, ATI must have the most advanced specialty metals technology coupled with unsurpassed manufacturing capabilities.

Our strategic emphasis on high value products continues. 2009 sales of our high value products were nearly 78% of ATI sales. Of note, shipments of titanium and titanium alloys which include the Unity joint venture products produced by ATI were approximately 34 million pounds in 2009, down 28% compared to 2008. Fourth quarter shipments were 6.8 million pounds. Orders and inquiry levels have improved during the fourth quarter from the aerospace, defense and industrial markets. So, we expect increased titanium product shipments in 2010 compared to 2009.

73% of our 2009 sales were to our core global markets. We remain confident in the intermediate and long-term secular growth potential of these markets. Aerospace and defense accounted for 31% of sales, electrical energy was 19% of sales, the chemical processing industry, oil and gas markets accounted for 19% of sales and the medical markets accounted for 4% of sales.

Defense was a growth market for ATI in 2009. Not many metals companies can report they had a growth market last year. This accomplishment further reveals our ability to "move our periscope" to key markets, particularly to markets where ATI has traditionally been underrepresented. The defense market for armored vehicles and naval structures provides ATI with new growth opportunities. These are outside of the traditional military aircraft applications and utilize our titanium alloys, special alloys and engineered products. We entered 2009 with a global – with a goal to become – to come out of this recession with an even stronger and better company. We believe this goal was accomplished and our direction and vision have remained intact.

Fourth quarter 2009 was by far our best quarter of the year as we began to see modest recovery in many of our markets. ATI earned $0.36 a share in the fourth quarter on 108 million shares outstanding. Comparing fourth quarter 2009 to third quarter 2009 performance, ATI sales improved by nearly 17%.

In our High Performance Metal segment, shipments of our titanium-based alloys declined 5%. However, we believe the titanium supply chain bottomed in the fourth quarter. It has now begun to recover as demand going forward is expected to be more in line with the projected aircraft build rates, particularly for new jet engines and for the jet engine aftermarket.

Demand for nickel-based superalloys and specialty alloys is up 21%, primarily as the jet engine supply chain adjusted to production schedules. Shipments of our exotic alloys increased by 34% due to growing demand for the nuclear energy market and shipments for chemical process industry projects.

In our Flat-Rolled Product segment, fourth quarter 2009 shipments of our highest value flat-rolled products increased 9% compared to the third quarter of 2009. Here's some highlights. Shipments of precision rolled strip products improved by over 13%. Demand continued to improve for nearly all end uses for this product and we are beginning to see benefits from our STAL expansion in China.

Shipments of our grain oriented electrical steel products to the global electrical energy market increased 4%. Shipments of our flat-rolled nickel alloys and specialty stainless alloys increased 13%, largely due to increased project activity in the oil and gas market.

Fourth quarter shipments of our flat-rolled titanium products including the unity conversion improved by 7%. This 7% is in contrast to the 5% decline in the high performance metals section. Fourth quarter 2009 shipments of our standard stainless sheet and plate products were essentially flat compared to the third quarter 2009. However, average price for these products increased 22% due to higher raw material surcharges and improved base prices.

Our engineered product segment swung to a fourth quarter operating profit from a loss in each of the first three quarters of 2009 as we saw general improvement in many markets, particularly in the oil and gas market as demand increased for our Tungsten and Forge products.

In the fourth quarter ATI earned segment operating profit of over $118 million. This was accomplished under circumstances that while improved from the third quarter of 2009 had two significant challenges. ATI was profitable with overall utilization rates of about 55 to 60% across our operations during the fourth quarter.

Operating profit was also reduced by $15 million due to startup costs associated with a new facility, idle facility costs across the company and workforce reduction costs. On the upside, operating profit improved as a result of a LIFO benefit that was $23 million higher than our forecast made at the end of October.

Finally, a quick update on our remaining Strategic Capital projects. The melt shop consolidation at our Brackenridge, Pennsylvania specialty metal melt shop is progressing on schedule. We reduced the footprint and we expect considerable cost savings and production efficiencies from this project when it is completed later this year. We expect to begin to benefit from the 20 to $30 million of annualized cost reductions associated with this project beginning in the second half of 2010. Engineering, permitting and site preparation is nearly completed now on our Brackenridge, Pennsylvania advanced hot rolling and processing facility. We are now in the final vendor selection process.

We expect 2010 capital investments to be approximately $375 million, down from $454 million in 2009. For the six year period 2004 through 2009, ATI invested over $1.8 billion in capital expenditures and asset acquisitions to build the most technically advanced manufacturing base in our industry. During the same period, ATI generated over $2.2 billion of operating cash. Our cell-funded capital expenditure plan has been working and as a result, ATI is better positioned for the next phase of growth.

Now, my closing comment before we take questions. Again, first some numbers. We expect 2010 retirement benefit expense which includes both pension and OPEB expense to be $90 million or $22.5 million per quarter. This represents a decrease of approximately $32 million as compared to 2009 and we expect most of this 2010 retirement benefit expense to be non-cash. We plan to continue to aggressively improve our cost structure through a targeted program of at least $100 million of new gross cost reductions. At this time, we do not expect any LIFO benefit or expense, for the first quarter of 2010.

In 2010, we expect to see gradual and steady improvement in most of our markets during the year. Boeing and Airbus have announced that they plan to hold their respective production rates in 2010. This morning Boeing also announced that they expect to deliver the first few 787s and 747-8 models in late 2010. They expect to deliver several more of these planes in 2011. At some point in 2010, the jet engine supply chain is going to begin to order our metals to build the jet engines for these aircraft.

Now, moving to the oil and gas market. World rig count began to increase during the fourth quarter of 2009. Offshore projects continue to be engineered and ATI is well positioned to win several major orders. Opportunities are growing for ATI from unconventional gas projects such as LNG and shale gas. On the electrical energy market, we expect shipments of our grain oriented electrical steels to be about flat with 2009. We're beginning to see improved demand from the global nuclear energy market. We're also beginning to see signs of improvement from other forms of clean energy such as wind, solar and geothermal. We expect to benefit from investments in pollution control systems for coal fired plants in Asia, but the U.S. legislative uncertainty has practically frozen domestic fossil fuel projects.

In concluding, we think 2009 results demonstrate that we've taken the right actions to make ATI a better company. As a result, we expect to recover and grow faster than our core global markets because we have improved ATI's market position with new customers and expanded long term arrangements, innovative new products, new and technically advanced manufacturing capabilities and lower costs and a global focus on key growth markets. We are seeing stabilization and early signs of cyclical recovery in our core markets. On top of that, intermediate and long-term secular trends are occurring in these markets that require more of our advanced alloys than ever before.

Lastly, we continue to expand our international and new market segment penetration. Recovering volume and the resulting revenue are the necessary keys to significantly improved financial results for ATI. We are optimistic that 2010 is a year of gradual and steady improvement quarter on quarter.

We'll now turn our time to questions, so Kesha, may we have the first question?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Timna Tanners with UBS. Please proceed.

Timna Tanners - UBS

Hi. Thanks for the detail. I'm still looking for a little bit more understanding of what's transpired, if you can give us a little more color in terms of volumes particularly. Because I think you've been very clear over time that better volumes equals better margins, so if we go through the volumes for the different segments, titanium worsened but the other areas substantially improved. Is there anything else you can help us understand about why this is sustainable from the third quarter to the fourth quarter?

Pat Hassey

Well, we have a fairly broad company and I think there's a couple secular trends going on that we like to see. First of all, we haven't talked much but the turnaround in our engineered products segment is reflective of things turning someplace that people are buying tooling and industrial type products so we like what we saw there in the fourth quarter. Secondly, I think we were pleasantly surprised with the turn of events in our flat-rolled products segment where we're seeing more volume. We're just simply seeing better business conditions.

You can debate with the economists, what kind of a recovery that we might see in this country in the global markets and our business today is not tied to the consumer. Most of our business today is tied to capital projects and infrastructure growth, energy, aerospace and defense kind of markets, oil and gas, those things, medical markets and we're seeing recovery across-the-board in these markets. So we're seeing a better first quarter in terms of volume across all of our product lines in all three segments.

Timna Tanners - UBS

And how much would be restocking and how much would be just the end of destocking if you can make a distinction there?

Pat Hassey

I can't tell you what's destocking and restocking. I can tell you that I think we had the end of the destocking and starting the restocking in the fourth quarter. My personal opinion is I don't feel like what we're seeing today is restocking of the shelves. I think the orders we're seeing today is real demand in, just an increasing demand for the products that we sell to capital markets.

Timna Tanners - UBS

Okay. That's really helpful and if you could just give us a reminder of where we stand with any, the CapEx for 2010, a break down of what we're looking for to continue there?

Pat Hassey

In 2010, of course we're finishing up the final expenditures out at our Rowley, Utah titanium facilities for sponge. We have a melt shop capital projects finishing or completing in our flat-rolled products business. We have expansion of our zirconium sponge operations on the West Coast which is with the ATI Wah Chang operations and the biggest expenditure will be the placing of the selector of a vendor and the rolling assets and electrical assets for our new hot rolling facilities.

Timna Tanners - UBS

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Steve Levinson with Stifel Nicolaus. Please proceed.

Steve Levinson - Stifel Nicolaus

Thanks, good afternoon, everybody.

Pat Hassey

Hello, Steve.

Steve Levinson - Stifel Nicolaus

Can you give us a little more information please on the powder metallurgy business? Is there a qualification process or are you ready to go and can you size it for us?

Pat Hassey

This is an ongoing business, so it is already in operation. Of course, our emphasis on this business will be to our core markets which move that business further into the jet engine market as time goes on. What we're looking for out of this business is a broader product offering as we look at the next generation of jet engines, where the engines are going to run hotter for both efficiency and greener type engines. And as you look at those engines, even though we can move our products up the line with our rock products and our new capabilities and new alloy developments along those lines, we like the broader aspects of the complete product line now of powder alloys that can compliment that.

So, it isn't too important to us today the size of this business today. What's important to us is I think is that this business is going to grow four or five X over the next five years and I really don't want to size it for you at this point.

Steve Levinson - Stifel Nicolaus

Okay. In relation to that, Boeing was just on the tape while the call was going on and saying that they're going to investigate reengineering the 737 and I know Airbus is already talking about the same thing for the A320.

Pat Hassey

Right.

Steve Levinson - Stifel Nicolaus

What does that do for Allegheny?

Pat Hassey

Well I think anything that becomes a newer efficient or larger engine is always good for us. You still have the basic parts of the engine of low compression and high compression and drive shafts and the more is torque, you get the more stronger alloys you need. The hotter these engines get the more that you move toward our nickel-based alloys and titanium alloys in the lower combustion section.

Some of our new alloys such as what we call 718Plus alloy is a really great alloy for the newer engines and the next generation. We also like what we see in this powder business and qualification and as we announced last year, a major nickel contract with a major supplier in this industry that we have not had a major position with which we do now, which is Rolls-Royce and we also have major positions with General Electric.

So, growth in any of these engines that bring in new type of challenges for the capability of the engines is right up our alloy as to, right up our alley as to the alloys that we are currently offering this market.

Steve Levinson - Stifel Nicolaus

That sounds good. Last question, do you think you can move from the nickel forward in the engine under those same agreements or those are all completely different and renegotiated or completely separately renegotiated agreements?

Pat Hassey

I think the powerful part of the agreement with Rolls-Royce is that they now understand the capabilities of ATI, have selected ATI as a major partner with them when they look at the technology of the company, the equipment of the company and our ability to deliver both from a quality and a capacity standpoint. So we have set the agreement together in an overlying partnership relationship with the first product line being nickel. So I think it bodes very well for this relationship, as we deliver on that contract that we can expand it to other areas and new alloys for a Rolls-Royce, as they see fit to use our products. And I hope that goes every place from the new Powder Metals to titanium to our new nickel-based alloys.

Steve Levinson - Stifel Nicolaus

Great. Thanks very much.

Operator

Your next question comes from the line of Luke Folta with Longbow Research. Please proceed.

Luke Folta - Longbow Research

Good afternoon guys.

Pat Hassey

Hello, Luke.

Luke Folta - Longbow Research

It looks like we won't be seeing some stabilization in titanium prices on the spot market. And should this be the case or should we actually see higher prices in 2010 for titanium. Will this be reflected in your high performance metal segment realizations or is there some sort of lag that would at least delay somewhat the realization of that?

Pat Hassey

Well, first of all under the Boeing contract, of course we have a contract for that quantity of material that we've been shipping consistently through this cycle. But in all of our arrangements as you know we have a surcharge mechanism for scrap and so you've already seen the first movement into the first quarter with the surcharge mechanism for the scrap market moving. And as you combine those together with, I think in an improved market, the scrap market moving that you will see higher revenues overall for titanium products, especially on a transactional basis. So we're encouraged about the titanium business. I think it's evidenced by the current price for movement in prices for wieldable solids and turnings and also the tightening of supply in the United States for these products.

Luke Folta - Longbow Research

Okay. That's helpful. Thank you. And then can you just talk about your raw material strategy in titanium over the next year or two? Do you plan on keeping Albany down for a while and maybe will you try to take advantage of the discrepancy between scrap and sponge prices and maybe try to increase your scrap intake?

Pat Hassey

We have a very, very carefully crafted formula and plan as we look at our outside purchases for sponge, our internal generation of sponge and the quantities that we'll produce as well as how it fits with our purchases of scrap. The longer range secular changes and the use of this metal and it's not just the aerospace business, but it is new markets and anything from desalinization plants to deepwater offshore exploration to heat exchangers to nuclear, to the growth of the 787, the A350, the A380, any new generation single aisles that and also the captive scrap that will stay in other countries than the United States as these products are beginning to be produced to closer near net size out of Russia that we will feel very, very good about our sponge investments in the United States and the capabilities of those investments as we move to the intermediate time frame and longer time frames.

So, we're very confident of what we've done. In the short-term we exercise the advantages of the markets as we see them fit. We have good outside like other competitors. We could claim all the great contracts that we have with outside suppliers just like other people do. But we do like our assets and we do like the capabilities of the swing assets that we have in Oregon and the core assets we have in Utah.

Rich, do you want to add anything to your thoughts around that?

Rich Harshman

I think, Luke, one of the things we've commented on in terms of our strategy in Albany is we haven't gone to what could be described as a cold shutdown. It's a warm idling and we will continue to evaluate the market in terms of our metallic requirements and on a quarter to quarter-to-quarter basis, so we can restart Albany if need be pretty quickly depending upon what the demands are.

I think we've always said that even with Albany and Rowley up and running at capacity, the markets for our titanium milled products across the market segments and our products will continue to use a balance of our own produced sponge, our outside purchased sponge and scrap. And that's what we're doing today and that's how we view things going into the future as well.

Luke Folta - Longbow Research

Great. Thanks a lot for the color, guys. I'll turn it over.

Operator

Your next question comes from the line of Gautam Khanna with Cowen and Company. Please proceed.

Gautam Khanna - Cowen and Company

Yes. Based on the current expectation for the 787 production ramp, when do you anticipate supplying above your minimum contractual obligations under the Boeing agreement with respect to titanium?

Pat Hassey

Well, of course that all relates to Boeing and how fast that they ramp this. I was encouraged by the call this morning, when they were talking about getting into some production in their new facility in South Carolina as early as late 2011 and 2012. So it depends on how fast that they ramp this up, Gautam and what they consider is a reasonable buffer and safety stock that they need to hold. Obviously, they have built titanium inventory over the last two years with this program delayed two years. So the question is how fast are they going to ramp it and the other question is how much do they consider as enough to hold with a supply coming from around the world.

So you can conjecture where you'd like to but I would think that as we move to the second half of 2011, you're going to see Boeing start to move maybe out of these minimum levels into preparation in this whole supply chain, for the ramp to ten a month some time between 2012 and 2013.

Gautam Khanna - Cowen and Company

Okay. That's helpful, thanks, Pat and maybe as a follow-up when we think about your titanium mill product tonnage that you ship, how much of that goes to the jet engine manufacturers? Is it a little bit more than the airframes? How should we think about total poundage in '09 that went out to jet engine OEMs, so we can characterize the delta in 2010 from the abating destock? Thanks.

Pat Hassey

I think we have to look at that market in three sectors, four actually sectors today. We have airframe, we have jet engine and that's a two part OEM, new engines and spare parts. There is a new market segment we have to look at almost by it self today which is land-based vehicles and defense. And then we have the industrial part of the market which goes any place from oil and gas, chemical process, desalinization and heat exchangers.

So, I don't want to just comment on the aerospace engine as separate markets between the two. I want you to understand we have these other three major markets that we're dealing with today. So, I would say that when we look at the total tonnage today, aerospace is still 60% of this business and if we're successful as we think we'll be across the global markets this whole pie is going to get larger and I think aerospace will decline to about 50/50.

Gautam Khanna - Cowen and Company

Okay. May I just ask, because I think it's now been years past, you've provided us a break down of jet engine versus airframe in the titanium high performance business. It used to be 60/40 air hub engine and now it's presumably much lower number just because of the destock plus, Boeing maintaining the minimum shipment commitments. So, what I'm trying to get at is in '09 could you give us a sense for what that split may have been so we can figure out just from a return to normal demand how much of an uptick we might get in terms of volume?

Rich Harshman

Gautam, this is Rich. I don't believe that we've ever broken out titanium and nickel that finally. What we have done is that when you look at our aerospace and defense revenue which in 2009 is 31% of total sales, there were three major components of that of the 31 percentage points. 12% is jet engine, 11% is airframe and 8% is government, but that's of all products that we make that are going into that particular end market so obviously that's titanium, nickel alloys and specialty alloys etc.

Gautam Khanna - Cowen and Company

Okay. I'll take it offline if you don't mind, thanks.

Pat Hassey

Okay.

Operator

Your next question comes from the line of Michael Gambardella with JP Morgan. Please proceed.

Michael Gambardella - JP Morgan

Hi. Good afternoon, Pat and Rich.

Pat Hassey

Hi, Mike.

Rich Harshman

Hi, Mike.

Michael Gambardella - JP Morgan

Hi. I have a question and I know it doesn't have a specific answer but could you give us a feel for what the aerospace supply chain is like in terms of, there have been a number of delays in some of these models coming out like the Dreamliner and before the A380. And you said, I think you kind of alluded to the titanium component with Boeing may have anywhere from 18 months to 24 months of inventory backlog because they've been taking this stuff. But in general, just beyond titanium, in aerospace, how much of a hesitation do you think you'll get from the demand pull for your material? Like how much inventory is out there sitting there to make these airplanes?

Pat Hassey

I think when you look at different parts of that supply chain, Mike, it changes. Boeing has a particular, let's call it a safety stock because remember they are the store house for all of these first tier suppliers of theirs. And I don't think those people are stocked up very much on anything, so that's on the titanium side.

On the aero engine begin side I think we've now been through a major burn off of any excess inventories in the second half of last year. And the reason for that is that there was some type of a disconnect between in my view, between the aero engine makers and the air framers as to exactly how many airplanes would be produced in 2010. Everybody seemed to be waiting for a decline in projected requirements and now that we've passed October and then we passed November and now we passed December there was really no cutbacks. Everybody understands that this aerospace cycle has a plateau to it versus a peak.

So as we go into the second year of plateauing at over 900 airplanes a year, suddenly you've got to build engines and so we're going to see those engines built and we're going to see pulls on the jet engine side to produce those engines. We're also going to see pulls to produce more engines, new generation engines for the 787 as it begins to ramp up production throughout the qualification period. And then you have the 747 and you have the A380 now going up about double in size and these are of course big engines that use a lot of material, so we like all of those things.

The next question comes to spare parts. So, does 2010 have a normal get back to at least some type of an increase in revenue passenger miles or flights versus a 6% decrease in the United States and some type of a decrease on a worldwide basis? We're going to get back to that 4.5% or 5% growth a year in revenue passenger miles. Any improvement where we get to the plus side of that equation is spare parts because it's more time in the air.

So my belief is we're going to get to the plus part of that in 2010 as the people that are in the economic chain that are still traveling and feel more confident in their jobs and where they're at in life are going to continue to grow and we have more international travel. So if that moves to the plus side, the build rates as stated today hold where they are, I think the supply chain has bottomed out and we're going to see pulls as this goes forward.

The second part of that you're going to see even a possible higher pull is when the schedules -- people start to order and the schedule used to be eight weeks and then it went to ten weeks and then it's 12 weeks and then as soon as it gets to 12 weeks somebody says -- not only do I have the problem that I need more materials but I can't get it as fast as I thought I could. And therefore we're going to see some type of a restocking in addition to the pull.

Michael Gambardella - JP Morgan

Okay. But on say with Boeing on the Dreamliner, you mentioned that the project's been delayed two years and Boeing had a take or pay contract on titanium.

Pat Hassey

That's on the structural. This is nothing to do with engines.

Michael Gambardella - JP Morgan

Right. I understand but I'm just -- I'm not saying just engines, I'm saying aerospace in general -- what type of inventory is out there, is it I think you said 18 months or could it be 24 months on the titanium side?

Pat Hassey

No. Let me make this clear. Boeing continued to honor its take or pay contracts at minimum levels. Other people did not have take or pay contracts that they've honored. They have closed off those production -- as those delays took place under three different announced delays, those orders are either stopped or cancelled along the way.

So there is no excess inventories sitting out there that people took on the 787 program waiting for this thing to move forward. Those stopped well over a year ago.

Boeing on the other hand had placed long term arrangements with certain suppliers for only the titanium side of this aircraft and my own opinion of that is it's probably a pretty good strategy when they look at what happens in the titanium markets as demand moves around. So I think we'll see the pull from that program almost instantaneously as the build rates start to ramp.

Michael Gambardella - JP Morgan

Okay. I thought you had just said mid 2011.

Pat Hassey

For Boeing. The question was when do you see Boeing pulling more material for the structure. That's the group that has continued to build inventories throughout this period of time.

Michael Gambardella - JP Morgan

And that would be mid 2011?

Pat Hassey

Yeah. Somebody asked me my opinion, I gave them my opinion.

Michael Gambardella - JP Morgan

Okay.

Pat Hassey

It depends on how fast Boeing ramps the programs.

Michael Gambardella - JP Morgan

Okay. Thanks a lot, Pat.

Operator

Your next question comes from the line of Lloyd O'Carroll with Davenport & Company. Please proceed.

Lloyd O'Carroll - Davenport & Company

Good afternoon.

Pat Hassey

Hi, Lloyd.

Lloyd O'Carroll - Davenport & Company

An semi-theological issue called LIFO -- can you tell us what the annual true up was and you've given us that in past years -- and then of the $23 million of higher LIFO, was it predominantly you took physical inventory lower or was there some pricing actions that caused the $23 million?

Rich Harshman

Lloyd, I'll take that. Thanks for the theological reference to LIFO, that's a great line. I'm going to have to remember that one. I think actually just to go back from when you look at 2009, remember as we've said many many times, we look at and project what we think are raw material costs are going to be in the fourth quarter as well as other costs and what our inventory levels and mix are going to be and then we ratably book that throughout the year and update those estimates and forecasts every quarter.

And if you look at 2009, we booked in round numbers, we recorded $103 million of a LIFO benefit. That is a reduction in the LIFO reserve and had we been -- had our crystal ball been absolutely accurate and perfect every quarter -- we would have booked $25.7 million of LIFO benefit every single quarter and when you go back and look at how we did in the first two quarters of 2009, we were pretty close to that.

We recorded $27.5 million of LIFO income in Q1, $27 million in Q2 and then in Q3, if you remember -- what was happening in Q3 was especially on the nickel side and the nickel scrap side -- nickel started to run -- and we became a little more conservative in forecasting where we thought some of these raw material costs would end up in the fourth quarter and as a result, we only recorded $4.5 million of LIFO income in Q3.

Well, as we then go into the fourth quarter, those raw material costs begin to adjust a little bit largely back towards the levels that we were assuming earlier in the year and so we ended up recording $43.8 million of LIFO income in the fourth quarter -- which had everything been equal and no changes would have been made -- that's about $18 million higher than what we would have ended up recording on a purely ratable basis throughout the year. So the train left the track on the commodity markets in the third quarter.

We got a little more conservative in our estimates and everything corrected and so really the Third and the fourth quarter are the two quarters that got out of whack a little bit. But so I guess to your question, how much of the fourth quarter is a true catch up per say? About $18 million pre-tax. Now part of that was -- quite frankly when we gave our updated guidance in December and we moved the guidance to a range of $0.20 to $0.25 a share from what we had previously said in October of the fourth quarter looking more like the Third Quarter which was $0.01 a share. In actuality, a significant part of that improvement from roughly $0.01 to the range of $0.20 to $0.25 was due to the LIFO estimate, so for people to conclude that the full improvement in Q4 of $0.20 to $0.25 to $0.36 was all because of LIFO -- isn't correct. The vast majority of that LIFO increase was actually reflected in our updated guidance in December.

Lloyd O'Carroll - Davenport & Company

So you knew exactly where I was headed.

Rich Harshman

Well, I didn't know where you were headed but I wanted to make sure I made the point.

Lloyd O'Carroll - Davenport & Company

Yes. And then a second question is you appear to feel deliberately not to use the word guidance with no EPS guidance in Q1. Is this just a lack of visibility or are there just too many moving parts right now?

Pat Hassey

I think it's a policy we would like to set for 2010. We're going to give you qualitative guidance. We're not going to give you numbers unless we feel there's a real need to get into numbers. This is getting kind a crazy quarter to quarter estimating to the penny what we're going to make here.

Rich Harshman

And if I could just add to that, Pat, I think if you actually go back prior to the second half of 2008, I think that it's been the longstanding policy of ATI to not give earnings guidance, to give more discussion about market conditions and qualitative discussions. We began to give guidance really going back into the latter part of 2008, when the markets were just going crazy -- going back to the Lehman Brothers' bankruptcy and the impact on commodities and the wild swings there and then all the turbulence in terms of the general economic conditions in 2009.

But going forward I think our focus is really on executing obviously, discussing how we see the markets and what our strategy is to continue to grow profitably through a business cycle and that fosters both an emphasis on short-term execution as well as long-term value creation for our shareholders.

Pat Hassey

We've looked at this year and obviously what my statement was in the opening statement we don't think the First Quarter will have any influence from LIFO, either positive or negative and so we can calculate where we are in the fourth quarter and earnings, somewhere around a dime up -- $0.10 without that. Now, what we've also said is we have some very favorable things happening in our view, we're optimistic about these markets. We don't think it's inventory going on the shelf. We see real some demand in the capital goods markets and as we put those together, we see improvement coming this year and we said steady and moderate quarter on quarter.

Lloyd O'Carroll - Davenport & Company

Yes. The dime is the fourth quarter without LIFO.

Pat Hassey

The dime is the fourth quarter without LIFO.

Lloyd O'Carroll - Davenport & Company

Well, I appreciate all your color and we'll see if anyone has some non-theological questions.

Pat Hassey

Okay.

Operator

(Operator instructions). Your next question comes from the line of Kuni Chen with Bank of America/Merrill Lynch. Please proceed.

Kuni Chen - Bank of America/Merrill Lynch

Good afternoon, everybody. On grain-oriented electrical steel you mentioned your outlook is basically flat for 2010. Others in the industry have discussed more optimistic growth expectations. Can you just elaborate a bit on your flat outlook?

Pat Hassey

Our flat outlook is one where we don't see much -- we don't see much growth or actually negative growth in the construction and residential markets in the United States. We have contractual long-term arrangements with several of our major customers or so we know basically what our price is going to be and basically what our volume ranges are going to be. So we see a flat year which we had about a 4% improvement in the fourth quarter over the Third Quarter I think. And we see 2010 in total as we look at shipments outside the U.S. and in the U.S. and we'll probably have 20% of our product going outside the U.S. in 2010 as flat. So if that's the case we'll have another good year in grain-oriented electrical steel.

Kuni Chen - Bank of America/Merrill Lynch

And again flat is volume or revenue or both?

Pat Hassey

Flat performance basically is volume and we're going to be someplace in the range of within plus or minus, not plus, probably minus 10%.

Kuni Chen - Bank of America/Merrill Lynch

Okay. Got it and then just as a follow-up, can you just comment on start up costs ahead for the First Quarter? I think you said in the past that the peak in start up costs for Rowley would be the fourth quarter and the First Quarter so do we see another $15 million number in the First Quarter for start up at idle facility if you could just give us clarity on that.

Pat Hassey

I'll let Rich comment on the number, but I think we would move it out three months now that the start up costs at Rowley will be through the first half of 2010. Part of the start up cost we had was our superalloy forge facility down in Monroe -- or in Bakers next to Monroe -- in the fourth quarter. That facility is now up and running very, very well and we just started Rowley. Rich?

Rich Harshman

Yes, the reference to $15 million, the $15 million in the quarter was idle facility start up and severance costs associated with all of the operations in that segment. Not all of that would be associated with Albany and Rowley. I think we have commented in the past that when you look at Albany, the idle facility costs there are somewhere between $3 million and $4 million a quarter. Most of that is depreciation expense, so it's really non-cash.

On the Rowley side, I think it's going to be dependent -- it will probably look similar to the fourth quarter or in that range. We certainly will have more production, but we've got the manning up to a reasonable level there and as we start producing larger quantity production runs of sponge obviously some of that won't be thrown off as idle facility costs. So I think at this point, comparable to the fourth quarter is probably reasonable.

Kuni Chen - Bank of America/Merrill Lynch

Thank you.

Operator

The next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please proceed.

John Tumazos - John Tumazos Very Independent Research

Thank you. Could you elaborate a little bit more on the technical building blocks of starting up a titanium sponge plant -- electrical completion, electronic completion, mechanical completion. And then is the first batch of titanium salable or what are the impurities that you have to get out of it, but some of us might use the phrase start up without knowing what it means.

Pat Hassey

Start up, John, let me just put it this way. What we've said is that we have 36 sets of furnaces there. We have to get the first set up and running and see what we get out of that set. And so this is a plant that is the latest and most modern that is in the U.S. and as we look at that we'll evaluate the quality of the material from the first runs and then we're going to be standardizing and optimizing those runs in the next few weeks. And I would say by the end of February we'll have several more furnaces up and March we'll have several more furnaces up and by the end of the first half of the year, we'll be fully in operation.

Our objective of course in this plant is to qualify to the highest level of quality which is rotating quality parts and now as we move up then there's qualifications we have to do. We have to produce X number of pounds of rock product in various forms to be qualified without any problem to the highest standards. So that production out of that plant will be moving to those products and also moving to markets other than rotating quality until we receive all of the qualifications. So I can tell you this that the plant in the first units is up.

We're going to be qualifying that material now, finishing up on the finishing equipment in the plant which includes qualifying the shares, qualifying the crushers, qualifying the inspection equipment that basically we have the control systems of the plant. If you run one unit you can run all of the units. So that's up and running.

If you got the water system on to run one, you can run all of the units. If you've got the electrical power units up to run one, you can run all of the units. So the plant is up and running. We're going to stage the start up and at this point in time, I would expect that we'll be getting the plant to its full production levels as planned by the middle of the year.

John Tumazos - John Tumazos Very Independent Research

So it's built and your crews are learning how to run it furnace by furnace?

Pat Hassey

We have over 100 people operating people in the plant on the payroll right now. But we are -- titanium is kind of an expensive product -- and so we're not going to be running a lot of furnaces until we have a standard practice for these new units and so we as bring these units up, we will be continuing to run more units each and every week.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Operator

The next question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Sal Tharani - Goldman Sachs

Good afternoon. A quick question on engineered products, if I go back, you actually turned the corner after four weeks of significant losses and if I look back in 2007 and the first three quarters of 2008, you were running at a rate of about $30 million of operating profit. How do you look at this business or how do you think this business will be for the next few quarters going into 2010?

Pat Hassey

Gradual and steady improvement. We think that this -- we have different parts of this engineered products. We have a casting business, we have a forging business, we have a tooling business, we have a tungsten business and some fabrication and finishing facilities. So each of those are at one phase or another phase and this engineered product section, we make a lot of parts in this business.

People think of us as a metals company but this part of the c is a parts company so as the markets recover we recover with it and I think it's going to be -- it's interesting to us that we've turned the corner, Sal, as you said and I think our expectation is to gradually -- basically the fourth quarter was a breakeven -- we made a few hundred thousand dollars. So quarter-on-quarter improvement and it's going to be based on how well the economy is doing as we move forward.

Sal Tharani - Goldman Sachs

Great. Thank you very much.

Operator

Ladies and Gentlemen, we've reached our time limit for the question-and-answer session. I would now like to turn the call back over to Mr. Pat Hassey for any closing remarks.

Pat Hassey

Just thank you for joining us today. We thank you for your continuing interest in ATI and are looking forward to a year that's improving steadily and moderately throughout the year. Thanks very much.

Dan Greenfield

Thank you, Pat. And thanks to our listeners for joining us today and that concludes our call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.

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