ATI Inc (ATI) 2002 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Allegheny Technologies' first quarter earnings release conference call.

During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session.

At that time if you have a question you will need to press the one followed by four on your telephone.

As a reminder this conference is being recorded Wednesday, April 17, 2002.

I would now like to turn the conference call over to , Director of Investor Relations?. Please go ahead sir.

Thank you . Good Morning and welcome to Allegheny Technologies's first quarter earnings 2002 conference call. Members of the media have been invited to listen to this call. In addition, this conference call is being broadcast live on the Web site at AlleghenyTechnologies.com and on CCBN.com.

Participating in the conference call today are Jim Murdy, President and Chief Executive Officer, Doug Kittenbrink, Executive Vice President and Chief Operating Officer, Jack Shilling, Executive Vice President, Strategic Iniatives in Technology and Chief Technology Officer, and Rich Harshman, Senior Vice President and Financial Officer. After some initial comments, we'll ask a question.

Please note that all forward-looking statements this morning are subject various assumptions and and release. Actual results may differ materially. Here is Jim Murdy.

Thanks Dan.

The first quarter was very tough from a P&L point of view, but we did quite well generating cash. Our net loss was $11 million or 14 cents a share, but our operating cash flow was $82 million $1.02 per share. Now let's cover P&L first. products were showing some signs of recovery. The March order and our key production facilities are operating with the highest utilization rates we've had in the year. Cost reduction initiatives, including the restructuring actions we took in the fourth quarter last year paid off. That's very clear concerning this quarter with the fourth quarter last year. Total shipment volume was similar and there's was no based price improvement, but with our cost savings we operating losses substantial, in fact we almost broke even.

On the other hand, high performance metal sales and operating profits suffered from the softly narrowed space of electrical energy markets. We believe there is substantial excess inventory in the customer supply change to high performance levels now. This excess inventory resulted from the post September 11th down turn in the aerospace market, and the substantial drop in demand for gas turbines used in the production of electrical energy. Altering high performance metals, we lost money at Wychang because of the strike. That strike is now settled. So we expect the second quarter to be a transition quarter at Wychang, but probably still show some loss. Wychang should be profitable in the third quarter. Industrial products had a small loss in a very tough economic environment. This part of our operation will struggle until the manufactured economy gets stronger in the U.S. and Europe, but these companies are cutting costs and generating cash.

As we've said in the last few conference calls, these are times to stay focused on costs and cash flow. We feel very good about our first quarter accomplishments in these areas. For instance as cost-reductions reached $25 million with first quarter before the effects of inflation. So we on plan to achieve our 2002 cost reduction goal of $100 million for the year. About 70 percent of the first quarter reductions came from Allegheny . We generate $82 million of operating cash flow during the first quarter. The biggest part of this was a $43 million Federal Income Tax refund, which we received in March after an accelerated filing of our 2001 tax return. Our financial staff, particularly our tax people, did a remarkable job expediting preparation of the tax return and the refund. We also reduced managed working capital. That 31 million in the first quarter.

Many initiatives taken in this area over the last couple of years are having their impact. We plan to reduce managed working capital further with a $65 million goal for the full year of 2002. We also reduced first quarter capital spending by 40 percent compared to the year ago period. So the steps we told you we were taking to generate cash, it worked. As a result, using this strong cash flow we've reduced total debt by $56 million. In fact, as of today, we have no short-term debt outstanding. While looking ahead, we expect second quarter results to improve somewhat from the first quarter, but still be at a net loss. Those of you have followed Allegheny in past know that we consider to be a good leading indicator for the economy. That index is running ahead of last year but has still not recovered to a five-year average, and that will be the key. The gap looks like it's closing but there is still a gap. Now we expect products to earn a modest profit in second quarter. That would reverse five consecutive quarters of operating losses, so it'd be an important side for us.

Shipments of commodity products to service center are expected to increase. That we see improving demand for our high value products. We anticipate the high performance metal segments will continue to be hurt by reduced demands by both the commercial aerospace and the power generation markets. The good news is our people at are having success in shifting to other commercial markets where demand exists. Wychang return to profitability looks to be gradual as the transition continues from the 7-month strike. We do not anticipate much improvement in market conditions in the second quarter for the industrial product segment.

And finally, assuming that the economy continues to improve, we do expect to be profitable with the second half of 2002, on total Allegheny Technologies basis. Now I'd like to open the line for questions.

Thank you. Ladies and Gentlemen if you wish to register a question for today's question-and-answer session, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the one followed by the three. If you are on a speakerphone, please pick up your handset before entering your request.

One moment please for the first question.

with Bradford Research, please go ahead.

Good Morning.

Hi Chuck.

Hi, these terms are pretty low on when it comes to turbine projects. I pretty sharp drop in this year, but the question is what are they telling you about the economy of the next up turn? I'm assuming that you're going to be involved early on.

Well, I guess I don't think there's anybody that I'm talking to verbally about the next step Chuck. But I think as we see things today, you have to clearly look beyond this year to see that. So we would expect some of that in 2003, and frankly I don't know whether today we should say early 2003 or later in that year.

Because if they start shipping more planes let's say in 2004, I'm assuming that you'd be favorable impacted in 2003.

Yeah, that's right. You're right about the lead times in that we're being pretty cautious at this point. So we're happy about as we see it a 12-month lead-time to those deliveries.

What about the turbine generator business to get turbines. Those things are almost impossible to get last year, and I guess maybe people overbuilt. Is there some kind of schedule when the will come back again.

Well that's a very where our customers have seen a very rapid turn down in short-term orders. We look at it over the longer term as still being an attractive market though; because electrical generation is growing those leads are growing. So we think we're going be in a period here we got probably about a year were we're going to see a very big down turn. But hopefully as we get into next year that starts to come back.

Thank you.

Thanks.

Our next question comes from from Prudential. Please go ahead.

Good Morning. It's interesting commodity volume was lower than a year ago in March, and lower than the the fourth quarter. corporate profitability in the second half, is it part of it proceed and part of it that you times that you're losing money as you got some of that capacity?

We have yeah, we are always trying to upgrade the mix and the first you can see that in the first quarter compared to the fourth quarter last year, that although our overall shipments were up just slightly improvement in the mix for the higher valued material. But as you look, as we look at the balance of this year, John, we've looked for stronger volumes on the commodity side and we're setting path, we really need to see a better pricing before we're going to have the kind of results that satisfy us or our shareholders in the part of the business.

Jim, the best performing commodity in the last six months or so in the metals group, or the paper group or maybe even the commodity chemical group. Could you talk a little bit to guide us as to the selling price spreads versus the input whether the high nickel price is helping you, because the distributors are trying to buy ahead of it. The nickel people say there's no scrap around. I'm trying to figure out why the nickel market is good and try to give us some comfort as to those dynamics profitability.

Well, I think if we're a strong company that benefits from a P&L point of view from a higher nickel price. In the sense that that usually reflects stronger demand. In any given share I'll say quarter, you can have price with nickel that is influenced very strongly by some of the funds and others. So that it may or may not be tied directly in the given quarter to industrial demand, but over time over time it is. So we have nickel through our results in a number of ways, I'd say very directly on the commodity materials where there's a surcharge mechanism and given the fact that you have a lot of scrap.

If there a relationship between scrap and the surcharge rate that tends to be a little favorable for us. On the those parts where our business (inadudible) and the high nickel alloy where we have a contract that this was that we protect ourselves there so the nickel fluctuation is less significant than just the basic margin that some of those products yield, and then they're always trying to improve our mix. So it's as an overall generalization I think the stronger nickel price will reflect a stronger but it's not a dollar for dollar relationship and it's not .

Forgive me for being interested and asking a lot of questions, if I may. Are difficulty obtaining scrap? Has your scrap ratio changed? Are you continuing to benefit because you use more scrap than the average company?

All right, let me have Doug comment further on that.

Hi John, this is Doug Kittenbrink.

Thank you.

No, we're not having any trouble obtaining scrap. There's a supply and demand relationship there, but we certainly can have all the scrap we need with long term relationships with with those . So that's not an issue, we're continuing to enjoy the benefits that we've historically in terms of being a better than average user in scrap .

Thank you very much and good luck.

Thank you.

Our next question comes from with Goldman Sachs. Please go ahead.

Good Morning, John.

Good Morning, Aldo.

I have a question on the high performance metals area. My impression was that that business was a fairly high variable cost type business. And I'm looking at an 8 percent decline and pricing and seems like an 80 percent drop in operating profit. I'm wondering if you could break that out for us. Was it a situation where your raw material costs were rising in a sense when you're prices were or could volume have that big an impact on the margin?

And Aldo are you looking at the first quarter versus the fourth quarter?

Yeah, I'm sorry that's what I was looking at yeah.

OK. Well, a couple things there. First in the high performance area, we were actually hurt more in the first quarter than we were in the fourth quarter from the Wychang. Right.

OK.

So you know that's behind us although as I mentioned in my comments we're still going to be a little bit of bad taste in our net results from that in this quarter. But, the other thing is that the we there was drop in volume in revenues so there's some loss of business there in that comparison. But in the fourth quarter of last year, we had some favorable factors on the cost side in our costing system, because as we reported in our year-end report we had some nice profits which are basically fourth quarter profits, and, a good piece of those related to the high performance area.

So as we have brought down our inventories as we've generated the cash we've commented on here in the last few quarters from inventory reductions that's also had a P&L benefit and the fourth quarter of last year was particularly good for the high performance and basically there's none of that in the first quarter of this year. I think the other that happened here in the fourth quarter was something we really hadn't anticipated but it's good in this sense, although the power generation business starting dropping off, some of the contracts that we were shipping on actually had some heavy demand in the fourth quarter.

So we've got a benefit from that and what's interesting is that demand now has dropped so much here in the first part of this year, we are fortunate to have very little of that material in our inventory. We will be impacted because obviously our customers are going to have some inventory in their supply chain, so it's going to impact our orders. But we are we have very little of the 706 material in our inventory, so a little bit of a break for us there.

Right. So it seems like what you're saying is most of the sharp drop was reflecting better you know than average numbers in the fourth quarter rather than anything unusual about the first.

Now part of that and I would and you know our outlook certainly over the balance of the year for the high performance group is to have better quarterly results then we've shown here in the first quarter.

OK, and then in the area you know the statement steel pricing globally has been it's funny, it's been outpacing some of the carbon steel pricing and the opposite is true in the U.S. I'm wondering you know if you're seeing those same trends and what you might what you might you know relate that to?

Well we'd like to see better prices in the U.S. to state the obvious, but again let me have Doug talk a little bit about this because this is probably the last subject we talk about before we get on this call.

Yes, Aldo, we've announced several price increases one for hot roll product in late March, one for coil plate product in early April. And our border entry rates and our utilization rates have remained quite strong throughout that period. So we're expecting that those price increases will hold. As far as going forward, we don't want to comment too much about prices going forward, but obviously we're continuing to study that. As you say prices have strengthened in Europe. There have been some stainless price increases in Europe that have held. So I think there certainly are some signals and there certainly is a need within the business for a better pricing environment.

Right. So you don't see the North American stainless capacity as having any impact yet in the market or what do you think about that?

Well as we've talk about before that capacity at this stage is essentially melting capacity not not a significant increase in finishing capacity. So does it have an impact on the market, that would be foolish to say it does not, but it is not a direct relationship in terms of their ability to service the customers because they .

OK. Thanks and Jim can I ask one more question. Do you want to make any comment on the sustainability of the dividend at this point?

Well as we've said in the past, the dividend is awfully important to us, and given the still the weak earnings picture, we think it's particularly significant that we've had the kind of success we had here in the quarter in generated cash, because that's what we pay the dividend with.

OK. Thank you.

Yes.

Ladies and Gentlemen as a reminder, if you wish to ask a question please press the one, four at this time.

Our next question comes from with Deutsche Assets Management. Please go ahead.

Hello Gentlemen. I was wondering if you can give me an update for cap ex for 2002?

We have announced a capital program of $50 million for this year, and we had some carryovers and that's why the capital spending in the first quarter, although it's from the first quarter year ago would indicate a somewhat higher annual rate. But I think the $50 million is still a good number and in this shows something that we've talked about in the past too, that when we're in a period like this we can cut back, we can sustain our capital base, our operative base, at something less than our depreciation charge. But and then another thing that's relevant to our operations is over the last two or three years we've made quite a bit of new capital investments, so other than then finishing some of things we have underway and getting started on the joint venture with that we announced earlier this year, we think we have a very good control over our capital spending and think that that $50 million number is a good one to peg for this year.

OK. You also said that you have no short-term debt outstanding. Does that mean that $70 million I believe in commercial paper has been put on to the bank facility?

Well we at the end of the year, we paid off about 59 million of that through the end of the first quarter and here in the first couple weeks of April we've extinguished the balance.

OK. So there's no commercial paper outstanding?

Right. Now that's you know I'm not saying that we're going to go through the balance of this year without any commercial paper outstanding, but you know the generation of cash flow so far early in the year has been small enough that we've been able to eliminate all of our short term debt.

OK. And how much bank borrowing under the two facilities is aggregate available to you right now?

We have an availability of about $350 million.

So you draw out the full 350 million?

I'm sorry 325.

325.

325.

OK. Great thank you very much and congratulations.

Thank you.

Our next question comes from with Merrill Lynch. Please go ahead.

Good Morning Gentlemen:

Hi Alex.

Hi.

Question on the inventory side. There was a comment that they had gotten a little high, not specifically your company I believe but perhaps in general. I was wondering if that was nickel or titanium or a little of both?

Yes, both of those. Probably more so on the nickel side than titanium, but the material the high performance materials through commercial aerospace, we think clearly got a have a build up in the supply chain there and the gas turbine business.

Can you compare that to titanium had a pretty supply of inventory increase the last cycle? How would you compare it to previous cycles? My feeling has been thus far that inventories fall higher versus the lows this cycle their inventory management practices have improved some.

Yes, let me let Doug answer.

Yes I agree with your comment on the end. Our experience in this case is that the supply chain was much more efficient or in much better shape going into this down cycle then it was the last time around. So the overhang of inventory in the commercial aerospace system, as we see it now, is less than it was during the last down cycle. Doesn't mean it's nonexistent, but it is clearly less of a factor than it was the last month.

Good. Thank you very much.

The next question comes from with Midwest Research. Please go ahead sir.

Good Morning.

Hi Chris.

Two questions regarding Wychang, want are you seeing in terms of the customer demand out there any indications that fundamentals are improving? And secondly, any market share issues that are related to the strike? And then looking at industrial products are there any indications that the order activity has bottomed in particular what are you seeing from the customers overseas?

Wychang is a very complicated customer picture. It has a number of very specialized products and different border patterns among the customers. I think we I think we clearly we're hurt on the order entry side during the strike. It just went on so long that so of our customers, although we operated and we operated well, I think they just had to take some action they considered prudent. So that's one that we'll have to look for some recovery on. Market by market, whether we paying share or loss share, if we've lost it I think we can get back. I don't think we're in a situation where the strike did permanent damage in that regard.

On the industrial products side it looks as though we are seeing some signs of better markets there but they are very gradual and one week can look very different from the other. So that's those parts of our business are really so depend on overall economic activity that you know the same kinds of general manufacturing statistics that you see here are what we looked at. And you know somewhat better but you know far from levels that you'd consider to be strong for those business. Let me just ask Doug and see if he wants to add anything on the Wychang side.

Jim, pretty much covered it. In certain product categories because of issues we had during the strike. Certainly we lost some business particularly related chemicals. But we're in the process of going back after that business, we expect to recover it. In other product categories there's tremendous upside potential in Wychang's business, particularly anything associated with military or Naval nuclear. As we reach the second half of the year, in some of those categories we'll be able to ship everything we can make. So our challenge is to get the productivity up and increase our shipments, because there's certainly plenty of opportunity to pick up additional business if we can get it through plan.

Thank you.

Our next question comes from with Bear Stearns. Please go ahead.

Thank you. Good Morning.

Hi Michael.

Backlog and high performance metals declined to about 350 million from the beginning of the year. Can you just give your views on how you view more cancellations particularly in the land based gas turbine market and if you can quantify how much of the 350 million you believe is actually going to be collected?

I think we're still in a period where we're seeing a net positive order entry but that cancellations have continued. We had an internal conference call a little earlier this week just on that point, with our people. And I think their sense that the pace of cancellations has slackened. So yes there's still some settling out going on in those markets, and I wouldn't say today that we've seen the end of that.

Have you increased an allowance account or anything along those lines in accordance with those thoughts?

It's not it's not a P&L issue it's in fact a flexibility issue, because the customers in those markets are pretty strong customers from the credit point of view. It's the impact that these things will have on our level of business. Doug was making the point that these cancellations before we've even gotten into the manufacturing process for the orders.

Thank you.

Ladies and Gentlemen as a reminder to register for a question please press the one four on your telephone.

with Prudential please go ahead with your follow up.

Jim you were mentioned that the cash flow is of course important to the dividend. It looks like your definition of the 82 million of cash flow included the $41 million working capital reduction plus the $43 million tax refund. Am I understanding that correctly?

That's right.

So excluding those two items, the cash flow from operations was minus two.

Well that's you know that's ...

Because you won't cut inventory every quarter and you won't get a tax refund every quarter.

Well we won't we won't get a tax refund of that magnitude every quarter that's for sure, but the inventory reduction was, John, we've continued to do well in that. So but when it's all said and done the dividend issue is one that's of getting ourselves back to better earnings.

Of course, of course. This is just my opinion not really a question, I don't think that unearned dividends benefit the shareholders it's just a return of capital. There are probably are a lot of people who want to use our stock, but would rather have the dividend disappoint behind them, and you have more support for your stock after you cut the dividend then when people are worrying about being on the verge of it or getting side swiped by it later.

John, we our intention is not to disappoint shareholders with a dividend cut.

Good luck with the market, I know you're the best stainless company, it's just a tough market.

It's a tough market.

Gentlemen I'm showing no further questions at this time. Please continue with your presentation or any closing remarks.

OK. Well thanks for taking the time to talk to us this morning. As I commented on came out in some of the Q and A, I think the overall business seems to be getting better, but we still have a long way to go before earnings reach levels we want to see. That's going to take stronger volumes and a much better pricing environment. And we hope we're seeing some early signs that are positive in that regard, but those still are early signs. So again, thanks for taking the time this morning and we'll be talking to going forward. Thanks.

Thank you Jim, and thanks to our listeners for joining us this morning. As always news releases may be obtained by our email and our Web site at AlleghenyTechnologies.com also. A rebroadcast of this conference call is available for the next 30 days on our Web site. That concludes our conference call.

Ladies and Gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.