Allegheny Technologies' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Allegheny Technologies (ATI)

Q3 2011 Earnings Call

October 26, 2011 1:00 pm ET

Executives

Dale G. Reid - Chief Financial Officer and Executive Vice President of Finance

Dan L. Greenfield - Vice President of Investor Relations & Corporate Communications

Richard J. Harshman - Chairman, Chief Executive Officer and President

Analysts

John Tumazos - Independent Research

Brian Yu - Citigroup Inc, Research Division

Andrew Chang

Gautam Khanna - Cowen and Company, LLC, Research Division

Kuni M. Chen - CRT Capital Group LLC, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Sal Tharani - Goldman Sachs Group Inc., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

David S. Martin - Deutsche Bank AG, Research Division

Christopher David Olin - Cleveland Research Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Allegheny Technologies Earnings Conference Call. My name is Keisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to hand the conference over to Mr. Dan Greenfield, Vice President of Investor Relations and Corporate Communications. Please proceed.

Dan L. Greenfield

Thank you, Keisha. Good afternoon, and welcome to the Allegheny Technologies Earnings Conference Call for the Third Quarter 2011. This conference call is being broadcast on our website at www.atimetals.com. Members of the media have been invited to listen to this call.

Participating in the call today are Rich Harshman, Chairman, President and Chief Executive Officer; and Dale Reid, Executive Vice President of Finance and Chief Financial Officer.

All references to net income and earnings in this conference call mean net incomes and earnings attributable to ATI. After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to 2 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 Rich Harshman.

Richard J. Harshman

Thanks, Dan, and thanks to everyone for joining today's call. Our third quarter and year-to-date 2011 results during a time of global economic uncertainty demonstrates the benefits of ATI's recent strategic investments and our focus on key global markets and high-value technologically differentiated products. In the aerospace market, the first Boeing 787 and 747-8 airplanes were recently delivered and the first rate increase for the 737 from 31.5 per month to 35 per month occurred last week. Demand from the oil and gas/chemical process industry remains strong, particularly from projects for deepwater, sour gas and unconventional sources such as shale oil and gas and oil sands deposits. Demand remains strong from the medical market for our titanium alloys used in implants and our niobium titanium alloys used in the latest technology MRI equipment. Demand is improving from the electrical energy market. On the negative side, weakness, uncertainty and caution best describe most domestic consumer and general industrial markets that drive demand for our standard stainless products.

Comparing the third quarter 2011 to the third quarter 2010, sales were nearly 28% higher. Segment operating profit including inventory fair value adjustments associated with the Ladish acquisition increased 157%, and increased 177% excluding Ladish acquisition costs. For the 9 months 2011, sales were 31% higher than the comparable 2010 period. Segment operating profit, excluding Ladish acquisition costs, was $523 million or 13% of ATI's sales which was within our expected range. That is a 95% increase over the first 9 months of 2010. Net income, excluding special items, was $209 million, more than 3x higher than the first 9 months of 2010. And finally, direct international sales were 34% of ATI sales.

Our order backlog is strong. Backlog in our High Performance Metals segment at the end of the third quarter was over $1.4 billion and total ATI backlog was $2.2 billion, both high by any historical comparison. Demand remains strong from Asian markets. We expect record sales to Asia in 2011 and year-to-date orders are running significantly ahead of the same period last year. Most of the demand is from diversified projects, particularly in the oil and gas/chemical process industry and the electrical energy markets. Some examples of recent significant orders include nickel-based alloys for an oil and gas project being fabricated in Japan for use in the Middle East, specialty alloys for an electrical power generation facility pollution control project in Korea, CP titanium for condenser tubing and electrical power generation facility in India and zirconium alloy for a chemical process industry facility in China. It is important to note that ATI has been meeting and exceeding customer expectations on large global projects. We continue to win orders because of our diversified capabilities and our performance from a quality, delivery and technical support perspective. This gives our customers confidence in ATI as a key strategic supplier.

It is also important to note that the majority of our sales to Europe or to the aerospace and oil and gas markets, which are driven by global secular growth trends and less influence by short-term European GDP. Our financial position remains strong, with cash on hand of over $430 million and net debt to total capitalization of about 30% at the end of September. We expect 2011 capital expenditures of approximately $275 million to $300 million, and we continue to improve our cost structure with year-to-date cost reductions of over $87 million. We expect to exceed our 2011 cost reduction goal of $100 million.

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