ATI Inc (ATI) 2002 Q3 法說會逐字稿

))OPERATOR: Ladies and gentlemen thank you for standing by. Welcome to the Allegheny Technologies third quarter conference call. During the conference call all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. If you have a question press the one. As a reminder this conference is being recorded Wednesday, October 16, 2002. I would now like to turn the conference over to Mr. Dan Greenfield, Director of Investor Relations. Please go ahead sir.

Thank you, Jennifer. Good morning: Welcome to Allegheny Technologies third quarter 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 our web site at http://www.alleghenytechnologies.com and on CCBN. Present today is Jim Murdy, Doug Kitenbrink, Executive Vice President and Chief Operating Officer, and Rich Harshman, Senior Vice President and Chief Financial Officer. After some initial comments, we will ask for questions. Please note that you'll forward looking statements made this morning are subject to various assumptions and caveats as noted in the earnings release actual results may differ materially. Here is Jim Murdy.

Good morning. Our net loss was 7 and a half million dollars and 9 cents a share, however this included special charges of a nickel primarily for work force reductions. Excluding those charges, the net loss per share was 4 cents. Business conditions were still difficult across all three-business segments, but we earned operating profits in all three-business segments. Operating profit was still very low in total at 14.8 mil million but had improved compared to the second quarter's 11.5 million. Let me quickly go through the segments. Operating income in flat rolled products improved by $10 million compared to the same period last year, and by over 3 million compared to the second quarter of this year. For the first nine months, flat rolled products operating income has improved by nearly 27 million dollars. This is primarily a result of cost reductions. After initial signs that recovery in late spring, end user demand softened during the summer months. Compared to the second quarter of this year, service center business for stainless products was flat. Stainless plate shipments remained low in a weak capital. Shipments of sheet and strip products for the appliance industry slowed somewhat in the third quarter which is consistent with seasonal trend. On the other hand precision (inaudible)remained stronger due to demand from a variety of markets including automatic motive. So our flat rolled markets have shown few signs of a strong recovery yet. High performance metal sales and operating profits continued to suffer from weak commercial aerospace and power generation markets. Announced commercial aircraft believe rates are special liesed at 575 units for 2003. We believe that supply chain inventories seem to be stabilizing at that level also. On the other hand, power generation still looks depressed for several quarters. Growing demand from defense and medical markets is helping, but those markets only partially offset the reductions in commercial aerospace and power regeneration. Despite this tough environment we expect premium nickel and titanium alloy business to stay profitable this year as they shift as much as they can to industrial markets.

Operating performance in the exotic alloys business continues to improve overall, although their markets are also mixed. Their strength now is primarily in three areas, defense, high-energy physics and medical. Corrosion markets remain weak. Our industrial products segment was modestly profitable. The businesses in this segment are a good proxy for industrial production in the U.S. and European economies. They saw few signs that the recessionary slump we're in today is reversing. Within all segments of the company we continue to emphasize cost reductions and cash flow. Our operating company management had a lot of success doing just that. For instance, cost reductions totaled $37 million in the third quarter before the effects of inflation bringing gross cost savings to 97 million for the first nine months so we've already nearly achieved our 2002 targeted cost reduction goal of 100 million. That's particularly important since energy costs and insurance costs are higher than planned. Cash flow from operations was $204 million for the first nine months. We're headed for our best cash flow year since 1998. Pre-cash flow after capital spending and dividend pavements and debt repayment repayments was $122 million for the first nine months. Through the third quarter managed working capital reductions were 120 million. Our original full year goal was to reduce managed working capitol by 65 million so we've had excellent performance in this critical effort. Most reductions came from improved inventory turns driven by our operational excellence initiative -- of course inventories are by far the largest element of our working capital. This is where he must keep showing Gaines since the tight credit markets have put a severe strain on many of our customers and vendors. There are four other items I want to mention about the quarter. First, we reached a favorable settlement with our bank group to revise our financial covenants. As we pointed out, we have no borrowings outstanding under the bank facility and don't expect to have to borrow through the remainder of this year. But the liquidity of these bank arrange give us is definitely important. Second, we announced an investment to upgrade our principal stainless steel melt shop in Brackenridge at a cost of approximately $35 million. This imaginative new product is capital efficient, people efficient, and melt shop supplies efficient. It definitely should enhance the competitive of our flat rolled products business.

A third item we received a large order for a titanium products from Inco's (ph) co-huge mining project in New Caledonia. We feel that order demonstrates our coordinated business development initiatives. Our technical people were involved in the early design phase and we were selected to provide all of the specializes titanium rock products to with stand the highly corosive environment. We don't think any other company would provide these materials with equivalent technical and service support. Fourth, we received an initial order for corrosion resistant flat rolled products for nuclear material storage. We're very well positioned in this new market, because of our wide variety of product offerings.

Before we go into your questions, let me sum up my views of our situation today. We see the potential for further weakening of the economy in the fourth quarter quite frankly, but who really knows. This economy is not giving manufacturers an easy ride. Customers are cautious. While current business conditions are difficult and uncertain, we believe in the fundamental strategic strength of Allegheny Technologies. Allegheny Technologies has the financial liquidity to ride out this tough economic environment.

Now, I would like to open the lines for questions operator.

Thank you. Ladies and gentlemen, if you would like to register for today's question and answer session, you will need to press a one followed by a four on the telephone. You will hear a three tone prompt to acknowledge your request. You may withdraw by pressing the one followed by the 3. If you are using a speaker phone you will need to lift your hand set before entering your request. One moment please for the first question. Your first question comes from the line of Mark Parr with McDonald and Company security. Please go ahead. ))

Good morning. ))

Hi, Mark.

I had two questions: First just wondered to what extent you could give some color on your out look for commodity stainless pricing in the fourth quarter, and secondly, you know to what extent does say a shift, a significant shift in market share say from Boeing to air bus mean for your specialty and materials businesses, if anything?

I think on the stainless commodity pricing, as we look at order entry today it's stable, but you know this is, you know, this is not an aggressive buying environment by our customers. So I would, our internal projections here would show basically stable prices going into the quarter, in the fourth quarter here, where we see some opportunities, though, some of the precision products and some of the contract and negotiations under way, which hopefully we can get some pricing help there, because the precision business has stayed fairly strong. But your question on commodities I would say probably now is a pretty flat out look for price prices.

Okay.

On the shift from Boeing to air bus, of course that's interesting to watch, and there's been a lot in the news here over the last couple of weeks on that. Mark, we've often commented on the fact that most of what we make goes into the jet engine, and the engine procure procurement is independent of the air freight procurement. And we are important suppliers to all the engine manufacturers. So I think compared to maybe some of our competitors in the titanium business, we would be somewhat more indifferent to that shift, and we're really more interested in and we're more affected by the overall rate of production of new aircraft, you know, some considerable expense, but also you know the very heavy exposure we have in spares and replacement and maintenance.

Okay. I just wanted to make sure that that point was clear. I just if I could ask one follow-up question related to the upgrade of Brackenridge, and I just you know curious, you know you had made some general comments here on the call about how this is a good move for Allegheny looking out over the next five years. Could you talk a little bit about what your expectations are related to this capital expenditure contributing to cost reduction or quality improvements or increased capabilities.

Okay. I'm going to have Doug comment on that, because of course that project is right directly in his area of responsibility and he was very active in developing this version that we finally committed to. Doug.

Okay. Terrific, thanks.

Hi, Mark. First of all, that project in my view is an excellent capital project. It is a cost reduction base -- I believe on our announcement we indicated it will generate about $20 million a year in annual cost savings once both of the furnaces are installed. So it is, and those are very solid hard dollar bottom line cost reductions. We should be able to deliver those once those new furnaces are up and running. This has been an area, the only real significant weakness in the primary area that Ludlum has had is the old furnaces were about 40 to 50 years old, actually over 50 years old and actually this will mitigate and give us a competitive melt shop going forward. It also will improve quality. That's part of the cost reduction if some quality improvements. It also will increase capacity to limited degree perhaps 10 percent coming out of that melt shop. So roughly that's what it's about.

Terrific. Thank you very much. .

Next question comes from the line of Chris Olin with Midwest Research.

Good morning. There is significant up side -- which includes the numerous military aerospace projects. When you begin to or when do you expect orders to reflect pick up in military demand, and also I'm wonder wondering, are projects such as fighter program when would they announce the key suppliers for that in terms of the metal?

Well some aspects of the qens defense build up are also reflected on the order book and to a more limited extent in their actual shipment, but we are seeing that and of course we also see some of that in Wah Chang in the exotic materials so defense is not just limited to Allvac. On the joint strike fighter, I think that's you know still in very early stages of development and there really has been little if any significant procurement for that program. That's a very long-term, a long-term program, but we Pratt and Whitney will be the engine manufacture there, and we are a key supplier to Pratt and Whitney. So they will certainly be a nice participation, we would anticipate a nice participation on our part in that program, but that's not an important element in our near-term out look in terms of 2002 certainly or 2003 revenue.

If the joint strike fighter begins production in 2005 shouldn't we see titanium order activity in 03?

Yeah. Late '03. This seems to be shifting around a bit in the budget process in Congress and DOB (ph) but at least the last members I saw called for a fairly modest build up in, you know in the initial production of that fighter. So you know we'll see how that develops, but we, I think the fundamental point is we should have a nice participation in that. I think it will be more on the jet engine side maybe than other structural elements, but you know defense we were looking at something here just currently, and back to the overall defense point, I think year to date we've probably seen somewhere between a 15 to $20 million increase in defense related sales. Given the nature of how our product gets into the defense product, we don't have perfect tracking on that, because you know some of the same customers who are on the commercial side of again primarily the engine business are also in the defense side. There's not necessarily a distinction in the materials themselves, but that's our best read on what's happened in that market so far year to date. .

Thanks a lot. That helps.

Sure. ))OPERATOR: Your next question comes from the line of Aldo Mazzaferro (ph) with Goldman Sachs. Please go ahead.

Good morning. ))UNKNOWN: Good morning, ALDO.

Doug, I was wondering if you could break out for us a little bit of how the $20 million in cost savings gets derived from the melt shop project?

It's predominantly in two categories. One is in the material side of the equation. It actually increases the efficiency or the effectiveness of the AOD, the downstream process, and saves us material cost in the NOD and labor. We will go from four furnaces today feeding one AOD down to two (inaudible) furnaces with a combined crew feeding one AOD so there is significant labor cost involved. Those two combined represent about two thirds of that number and the balance is just small miscellaneous supplies and materials, electrodes, power consumption, things of that nature.

So when you say material savings in the AOD, are you talking yield loss?

That's a small yield component to it. But predominantly the ability to use our levels to levels of scrap instead of primary nickel saifgsz on the fact that you can supply a larger melt load going into the AOD. It's a complexity that's a little difficult to describe, but it enables us to reduce our - (inaudible) consumption, increase our scrap utilization, things of that nature.

Any ballpark numbers on the head count changes?

In excess of 50.

Okay. Thanks very much. .

: ALDO, let me just add that from the other aspect, of course, not in the 20 million per se, but it was a very important element in the board reaching a decision it did is the capital avoidance. Because in the earlier versions of this project, I mean, we saw numbers a few years back that were closer to $100 million. So what Doug covered of course and what we had commented on the release are the real savings vis-a-vis operating costs today, but what doesn't come out in that number, and yet was a very important part of our decision making process, was the that's why I said imaginative approach they came up with here that really saves a lot of capital dollars and moves a project that wouldn't have otherwise moved.

And also let's us complete the project with minimal down time in the shop so we can continue operations during construction. .

And say, Jim, maybe you could talk about how does this all tie into your dividend situation.

Well, this particular project, of course, won't come on stream for a couple of years, so we won't be seeing the benefit of that in our operations until latter part of '04, '05. So you know the dividends question is one that continues to be a key decision that our board looks at each quarter and I think my remarks on that, Aldo, would be pretty repetitive. We look at ourselves as a kind of stock that investors expect a yield from. At the same time we have to be satisfied that the dividend we're paying is a dividend we're earning and that's been a tough, that's been a tough criteria here, given the operating results for the last several quarters. Our cash flow has stayed strong, and that has certainly sustained the dividend so far this year, but I'll just repeat what I've said in the past. The dividend is an important decision for the company. It's one that is very carefully considered each quarter, and the next dividend meeting is the December board meeting -- I'm sorry, the November board meeting. So I'm sure it will be a subject that is well reviewed and discussed at that time.

Jim, is there a thought process that goes through your head when you think like for the dividend for this year, for example, you've essentially financed it and the capital spending you financed pretty much from the working capital reduction. If you look at '03-'04 and you're not maybe able to squeeze that much out of the working capital and you're faced with the question of borrowing money to actually finance the dividend, does that strike you as something that would be less beneficial to the long run of the company.

Yeah. We're not going to borrow money to pay the dividend. .

Great. Thank you. . ))OPERATOR: Reminder ladies and gentlemen to register for a question you would need to press the one followed by the four at this time. Mark Parr, please go ahead with your additional question.

That was quick. Thank you. Yeah. Jim, I was wondering if you could make a few comments on the pension situation. You know, there's a lot of companies that with the stock market performance recently, are really looking at big shift. Obviously you've gone from a pension benefit to a pension expense here in the course of '02. Do you have any sense at this point what sort of pension P & L expense you would be looking at for '03, and also any sense of what your thought process might be as far as changing the underlying assumptions associated with pension accounting?

Okay. Well let me make a couple of comments, and I'll ask Rich Harshman then to fill in as necessary. The drop in the value of our pension i investments has been pretty severe over the last two and a half years now primarily the equity markets have taken a real dive. So the reporting benefit we have had since the combination with Teledine in 1996 has much diminished of course this year, and in this area you're almost a year behind actual investment results, because your pension income calculation is a straight line calculation based on the value in your pension investments at the end of the year's measuring period and our measuring period is actually the end of November. So if the further loss of value in the equity markets that we've seen that they have experienced so far this year aren't significantly reversed by the end of November, in our case, our pension income -- our net pension P & L charge next year will be even more negative than this year. Now, I think the point that we want to make sure everybody understands, though, is that is non-cash. On the pension side, because we are still very well funded in our pension plan, and again, primarily because of a Teledine situation, we have a substantial carry forward of surplus pension funding under the IRS and VOL(ph) regulations, so we are not looking at the necessity to put cash and to fund our pension obligations for several years. I mean, even if markets stayed very poor. But there is an immediate P & L impact, and we don't level our pension investments either. Our calculation is based on market value at the end of the measuring period. Some companies kind of level that over three years, and a period like this I wish we could level, but we can't. The cash impact though that we have felt from the loss of the surplus and it's an important item here in our set up, and it has affected us this year, was the fact that we dropped the low, the over funding level that allowed us to recoup some of our retiree medical expenses from the pension assets. Now, in the case of Allegheny Ludlum we have built up a pretty substantial investment fund in a VIVA account so we have over $100,000,000.00 in the account and we're able to repay the retiree blue collar health care cost in Ludlum out of that account. So that has, that's mitigated the impact of losing the surplus somewhat, but you know as we've said before, somewhere around you know $30 million, 25 to $30 million cash effect on us from not being able to draw those amounts out of the pension surplus, and that's the condition we've been in here for all of 2002. The other impact is one that we potentially face on our balance sheet here at year-end, which commented on before, and I just ask Rich to maybe take you back to that.

Rich, before you do that, if I could just ask a follow-up. The 25 to 30 million cash impact on health care that you got into this year, is there a potential for that to escalate significantly in '03, you know, given the incremental deterioration we've seen in the underlying value of the pension assets?

No. That wouldn't -- it would have nothing to do with the pension assets. That's the function of the demographics and the cost in health care.

Okay. Fine.

Let me just add one thing though, because you asked a good question. I probably should have covered it. On the one hand, health care costs are increasing, so that's a negative to that factor. On the other hand, an awful lot of these obligations are, go back to closed companies, Teledine closed companies, and the age demographics are in our favor, so actually this year in that whole category, I was looking at something just a couple of nights ago, the actual cash payments for that group were coming down despite the increase in health costs. So you know I don't see that as, right now, we don't anticipate that that's going to be an increasing cash demand overall for us of any real consequence. .

Okay. Thanks.

Just a couple of other things, Mark, and I'll touch on the assumption question you asked. In addition to what Jim said, we said in our earnings release and we said it in our second quarter queue, that the change in the pension asset level driven by the equity market performance is likely to result in a significant increase or change in retirement benefit expense in 2003. At this point we don't know what number will be until our measurement date of November 30, and with the volatility in the equity markets that we've seen for a long time, but certainly looking at the last four or five days, you know the potential of continued recovery in those markets is certainly there. So it would be premature for us to comment on that, until we really see where we end up. Wherever we end up, however, on pension expense or income, but more likely expense in '03, it will not have any impact on our interest coverage debt kuf nant under our bank agraoefmt. That was one of the important modifications that we from our bank group here in August and that is detailed in our second quarter queue and will be reported and repeated in our third quarter queue. On the assumption side, you know, we have had for quite a while a long-term expect thed rate of return on assets of 9% in our pension trust. We look at that eveevery --.

Where do I sign up for that one?

Well, we look at that every year, and that is a long-term expected rate of return. That is the criteria that faz 87 requires and if you look back at over a long period, those returns have been supported especially given the higher equity asset allocation that we have in our pension trust. And we'll continue to look at that and the 9% I might add is pretty much right in the middle. It's actually to the lower side of middle of where the broad range of assumptions have been for public companies in 2002. And you know we're looking at that data for 200 as we speak. The discount rate that we use, the discount rate assumption is 7%. Once again that is pretty much right in the middle. There are a number of companies that use higher and some that use lower, but that's something that we also look at every year and we'll continue to do that here as we, in the fourth quarter, as we set our assumptions for the 2003 year. .

Okay.

Mark, that 9%, let me just come back to something I said, but to Rich's point, since we do not smooth our pension investment results, that 9% would be, if we hold to that, would be measured off of today's market, which is of course substantially written down. So I think companies that market the way we do will look at that and you know they will look it up one way. Companies that are smoothing their investment returns may have to think about a little, be a little more conservative, but I don't worry about those guys.

Right. The other thing, and this is in our annual report, I mean, we do, we also have, and Jim touched on this, we also have a fairly sizable assets that fund our medical obligations primarily on the united steel worker side as Allegheny Ludlum. Those assets remain more than $125 million, and there is a return assumption on that as well that historically we have used 15% because of the higher concentration of investments and private equity in those assets. And that is one that we're going to look obviously long and hard at for 2003, because of the shift that has taken place where we have more equity oriented investments than private equity. So we're going to be looking at that very hard, and obviously to the extent that we we reduce that, that will have an impact on -- expenses in '03: A.)Under FAS 106. .

Terrific. Rich. Thanks a lot for those comments.

Your next question comes from the line of Alex with Merrill Lynch. Please go ahead Thanks. Good morning. On the charge for the 1 million small tough but the one cent charge for I guess the new Piper aircraft that was an investment charge for investment held for sale, as a result of this charge, will that no longer then appear in other expenses? Because other expenses includes some of the equity losses there.

Let me have you talk to a director of New Piper. .

Right. .

Well, Alex, one the reason why we highlighted that as a non-recurring charge is because it was. It was an item that new Piper recorded in their third quarter that adjusted their product liability exposure for aircraft manufactured before they emerge from bankruptcy seven years ago. So this was a one-time event that is non-recurring. Their adjustment and our share in that from the equity accounting method represents the one cent a share. Going forward, whatever the earnings or losses from new Piper we continue to pick up under the equity accounting method as long as we have an interest in that investment.

Okay. What do you have, what is your ownership in that?

It's approximately 30%.

Okay.

And that actually goes back to the teleteledine days, it was teledine was a creditor of new Pipe Piper. They manufactured engines, as new Piper emerged from bankruptcy, teledine was one of the creditors, and that, the amount owed was converted into an equity position, which we have retained. We retained that asset as part of the spin off of teledine with the full intention that we would, you know, eventually sell it, and that remains our intention.

Okay. Well, we'll wait for better days to realize that value. Thanks for explaining that. The other question I have is as we look ahead to the fourth quarter, what at all can we look for say with some of the Deltas moving up ward or the Deltas moving lower. I think you alluded earlier in your comments to IGG is weakening still and aerospace is pretty flat but you showed nice cost reductions which helps you to show a little bit of improvement in the third versus the second. What about the fourth versus third for instance?

Well, I think we'll continue to benefit from those cost reduction programs here in the fourth quarter. They will definitely carry forward, and up we're well along in the planning process for the cost reduction program for '03, and you know, a little of that sometimes kicks in early. So my comments were not intended to indicate any slackening on the cost side. I just, as we look at things overall, it's pretty tough to see that this economy is -- and therefore, I think we have a pretty cautious look at the fourth quarter at this point. You get some seasonal shut downs too you know at the end of the year. So in a lot of our businesses the fourth quarter or December rather is kind of a weak month. So it's, we just felt that as we talked to the investing room today that wee reflect that caution because that's the way we feel.

So you haven't seen much change in your order outlook really, what you've seen is what you've been able to control really?

You get some encouragement. There is no question about that. But the whole question is whether that's going to really carry through.

Right. Do you get a feeling some of your customers, what do you get the feeling the level of their inventories. Have they brought them down to a level if they had some more confidence on their business they would need to restock and is the supply pipeline pretty lean right now and I guess outside of the titanium and commercial aerospace area.

I'll have Doug take a crack at that. In the stainless side the service center inventories has picked up a little bit particularly the early part of the third quarter. So I think there will probably be more than likely some restocking between now and year-end. Generally that's pretty typical in that business as they try to move into the year-end position. I think that's supply chain is a little bit of extra in it right now. Not a tremendous amount. You mentioned commercial aerospace I think we see that supply chain right now is pretty much stable assuming something in the neighborhood of 575 unit aircraft billed for next year.

Let Rich talk to some of our direct customers.

On the direct customer side when you look at our stripped (ph) business units associated with automotive. I would say we see strength in the automotive side, some strength and things associated in housing starts. Those areas of our business I think the supply chain is relatively lean and we see some, you know, potential signs of hope there.

Good. Thanks, Doug.

Thanks, Alex.

))OPERATOR: Next question comes from Michael Gambardella with JP Morgan Chase.

Good morning, Jim.

Good morning, Michael.

I have just kind of a follow-up question on working capital. You've done a great job in the first half of the year in really getting some cash flow out of working capital reductions. I haven't seen the details yet, but how did you do in the third quarter, and what's left for the rest of the year and beyond?

Well, we continued to reduce inventories in the third quarter. Not quite, not at the rate we had achieved in the first half. But the, you know, the target of working capital reductions through improving terms -- continues. And we would expect that the fourth quarter should be you know should add to that. You get into some year-end tax planning here, which, you know, sometimes affects your fourth quarter a little bit, but some of that is on the customer side. Some of that is on our side. But the third quarter inventory reductions were just a little less than $10 million.

Uh-huh.

And that has come from you know some real good work through most of operating groups. Most of that inventory reduction is still coming from the flat rolled product side, but the increasing amount now is coming out of the high performance side particularly Allvac and they have had, they do have longer inventory cycles so we think that there's considerable ground to be gained there, but that does take some time. Michael Gambardella : And final question, do you have any assets sales or divestitures that you're pursuing right now?

Well, we have some things that we would sell, and Rich, for instance, mentioned our equity position in New Piper. There could be some other miscellaneous things that could be sold. We still have some residual of surplus real estate that would hopefully generate a little bit of cash, maybe some earnings but cash here in the fourth quarter, maybe the first quarter of next year. In terms of doing something significant with any of our business units or parts of our business units, this is, this is just not a market that seems to be willing to reflect any value. And so we aren't pinning our hopes for in any of our financial forecasts on substantial assets sales, which as you know, Mike, if you go back over the last three or four years we've generated a lot of cash out of that. Most of, you know, most of those big programs were completed I think pretty successfully, and now with the smaller scale and but even then I think in many respects things that we would be willing to consider just don't seem to be the right time. And so we've concentrated on running them as well as we can.

I was just trying to think about you know if your markets kind of continue to bounce along the bottom here for longer than expected, how much more can you really wring out of working capital and even small assets sales to kind of perpetuate or sustain the dividend levels?

Well, I think working capital would be key to that, and you know, we're still in the situation where basically a one-turn improvement company wide is almost $100 million. So the targets are still substantial, and they are still out there. But, you know, you wouldn't, I wouldn't be looking at any significant asset sale as such as a source of funds for dividends.

. All right. Okay. Thanks a lot. .

Our next question comes from the line of (inaudible) Troy with Inaudible) British. Go ahead.

It's actually Richard Todd. A question on the bank. If you could just say what was changed on the expiring date and if any of the covenants were changed and it looks like the total amount hasn'tt been changed.

Yeah. The, we have two pieces. We have a five-year piece that doesn't expire until December of '06, and that's 60% of $325 million availability under the bank agreement, and then there's 40%, which is a one one-year piece, 364 days, which will, you know, be renegotiated here in the fourth quarter actually in December. The modifications to the bank agreement that were made in August are detailed at great length in our second quarter queue, but basically we had the interest coverage ratios, interest coverage Covenant modified and lowered and staggered in terms of when it begins to recover back to the original 3 and a half times coverage, and then on the -- as I mentioned earlier, we importantly we had the non-cash pension expense beginning in 2003 removed from the calculation of EBADA. And which is the component of the interest coverage test. And then on the leverage or the total debt, the total capitalization Covenant, we had the impact or any impact of having to write off our prepaid pension asset which we discuss not only in the earnings release but also in our second quarter queue that are at or below our liability, we would write off our prepaid pension asset and - record the minimum pension liablilty and that could be net of deferred taxes and that could be as much as a $400 million reduction to our shareholder's equity. It's non-P & L and non-cash so it's really a balance sheet impact only. To the extent that we have to do that, it will not impact our leverage test. And to the extent that assets recover, at some future point, above the ABO liability, we get to write that asset back on the books at the amount that it was originally written off. So those were the important modifications that were made. The only change that was made actually to the downward side is we agreed to lower the leverage test from 60% to 50%. But with the modification of not impacting the test with the potential write off of the prepaid pension asset we're very comfortable with that leverage.

So what's the unrestricted amount you disclose in your annual report, where does that stand now and presumably the Banks don't do something free, what was the fee charged for doing this.

The total fee was less than a million dollars or in that range. And the amount that we comment on in our queue is how much room we have on the equity side which I think was around $320 million, before you would begin to impact an overall test of not being able to pay a dividend, but as Jim has already indicated, the dividend decision is driven by more than just that test. It's driven by the issue of liquidity and the ability to earn it, and the opportunity to make investments for the long-term benefit of the shareholders as opposed to paying a dividend.

Okay. Thank you if I can just slip in one more question. The potential of doing a stock buy back program you said in the option note there. What is the thinking on that.

Well, on the one hand this would be great time to have a program at these prices, but we're just are not in the position to do that given our own commitments to liquidity and at this time, and that would not be a positive to our recent activity in the credit markets so it's not part of our outlook at this point.

Thank you.

I would love to be able to get back to something like that, but that's not in our near-term plan. . ))OPERATOR: Your next question comes from the line of Valerie Davidson, (inaudible) Asset Management. Please go ahead.

Rich. How are you today?

I'm fine Valerie. How are you?

I was thinking because of the inventory reductions that you've had this year that implies that production was below shipments or demand right or it was actually in the raw material side?

Well it's both. We did make significant reductions in raw materials especially at Allegheny Ludlum. On the rest of the reductions are really a work in process. And Allegheny Ludlum-- you know not all of it is as result of lower production levels. Allegheny Ludlum on the hot end side is operating on the primary side at very close to capacity. It's really a result of you know our focus on lean manufacturing and Doug in his team's leadership under operational excellence. I mean all the things that we've discussed with the invest investment community and with yourself before in terms of focusing on lean manufacturing, cycle time improvement, most of the reduction in lift that we've achieved at Allegheny Ludlum this year is a result of that, the big opportunities still remains on the high performance metal side especially at Allvac and Wah Chang, and you know we're focusing on that as well, and that's, that will begin to show some fruits I think, additional improvements here in the fourth quarter, and hopefully in 2003 as well.

Was there any negative impact to your earnings as a result of the fact that you were drawing down the inventory?

Yeah. There is.

Can you quantify that in 2002?

We don't talk a lot about that, because it really gets into the cost system and everything, but as you, you know, draw down or have an impact on a time basis of lowering production, you know, for example, in the high performance metal segment, as you lower production, you know, not all the fixed costs go away, so that transcends into higher per unit manufactured costs, so to speak, and that has an impact on carrying value and inventory and on margins, and to the best of, you know, there's a lot of elements that go into that on a growth inventory basis, and I think that you know through nine months, we're probably looking at somewhere in the range of 20 to $25 million of negative impact on operating profit as we have drawn down inventories. The other side of that is the -- as you bring down inventories, most of our inventories are in -- and as do you that you could have either a benefit or a negative impact on operating profit depending upon whether you're liquidating higher cost layers. And to the extent that we do liquidate a higher cost layer, obviously that has a negative impact on P & L. But it has been significant. I mean, our view of it and the reason why we haven't talked about it is that it's how we value inventory and it's part of our cost system, and you know, we don't talk about the positives on the way up, and we don't dwell on the negatives on waydown.

So one of the opportunities in 2003 as your production equals your demand next year, you should be in a better cost position compared to 2002.

One of the things that clearly we have done and I think you're seeing the benefit in 2002 in the flat roll product segment is pulling out and the cost reductions, we have significantly lowered our break even point. So to the extent that demand and end markets improve and hopefully pricing begins to improve, the earnings leverage in the flat rolled products segment is significant. Doug, I don't know if you want to answer that.

I think you covered it very well. I will say this though, I think in the flat rolled segment that there's probably going to be begin to become more of a stable situation in terms of overflow and operating levels. In other words that the significant inventory reductions will stabilize there. We are far from that point in my opinion in the high performance metals group. There's still lots of opportunities to further reduce inventories going forward. So when you say that going into 2003 I think your statement was correct for flat rolled products segment. I think there's some significant lean manufacturing opportunities that go beyond just the reductions and order entry. And into running the business with less inventory on a sustained basis..

Okay. Thank you very much.

Valerie, just to add one thing there. If you go back all the way to September of '01, so if you go back 12 months, we've had more than the 20% reduction in WHIP (ph)-- and the total company basis. So your fundamental point is quite valid. And of course, that is that's a factor that's, you know, we do measure, but as Rich said, it's a little tough to comment on, because at the same time you're also doing other things to reduce costs, but it's an element that has been somewhat unfavorable to us in our accounting.

I guess, the conclusion is I just want to make sure the utilization level, if you had similar volumes in 2002 and 2003, your 2000 utilization would be higher because you're not going to have a draw down of inventory say for example in flat rolled products.

No. That's valid.

Okay. Thank. ))OPERATOR: Once again ladies and gentlemen, if you have any questions or comments you will need to press a one followed by a four at this time. Mark Parr, go ahead with your follow-up question.

Thank you. I just wanted to shift gears to your USW situation there's been a lot of talk in the carbon steel area particularly some of your neighbors there in Pittsburg about perhaps modifying the pattern agreement or making, getting some labor concessions. I just wonder if you have any thoughts about that. Maybe if you could, you know, talk about some of the significant differences, if any, between your USW contracts and the ones at U.S. Steel or national or Bethlehem, and how you might benefit from some changes possibly under way here. .

Mark, this is Doug. You know.

No one left for that question.

Mark. I'll answer your question but probably not totally. Obviously, it wouldn't be advisable at least in my mind to try to negotiate with our union via this conference call. You know U.S. Steel and the other carbon steel companies are not viewed as a direct competitor with Allegheny Ludlum yet many of aspects of our agreement are similar to their agreements no doubt. As they make changes in the quote unquote pattern agreement, certainly we would expect there would be consistency on the part of United Steel Workers but it's also true in ourselves and the other parts of the specialty stainless business for example J & L and other represented components of the stainless business, so certainly our view is that there needs to be a level playing field, and if they are going to move, move the playing field, that they need to move it on a level basis.

Okay. All right. Terrific. Thanks. I know it's a tough question, but I just had to ask it.

Okay. .

))OPERATOR: Next question customs from ALDO, please go ahead.

Just a quick follow-up. Rich, do you have a budget for capital spending for '03, and how much of that would be the projects at the melt shop?

Go ahead.

Yeah. We, although we have not established a firm budget here for 2003 under the operating companies are in the middle of putting their '03 plan together that will be reviewed with Doug and I in early November and then with Jim in late November, and then with the board in December, you know as I think we've commented before, that we expect, you know appreciation next year to be in the range of 80 to $85 million. You know, this year our cap X will come in at roughly 50 million being maybe a little bit more than that. You know, next year I think Jim has made the general statement that at this point given the uncertainty in the economy, we wouldn't think we would be spending or at least have plans going into '03 to spend at our rate of depreciation. We may be somewhat higher than this year because of the carry over of some very important strategic projects that we've already talked about, including the melt shop upgrade at Allegheny Ludlum, and also the investments in our Richburg operation that are tied in with our alliance, if you will, with (inaudible). So it will be somewhere in the range of, somewhere between the range of 55 and 85 million, Jim, I would think.

Yeah. (INAUDIBLE).

Rich, can I ask you a question on that item in the press when you say you could anticipate as much as a $400 million hit to your equity. I understand how it won't go through the income statement, but to derive that 400 million, is that essentially a pre-tax reduction in the assets of the pension plan that would then be tax affected and applied to the equity? Is that a correct way to look at it?

The correct way to look at it is just look at balance sheet and you have a pre-paid pension asset of around $640 million that reflects the cumulative pension income that has been recognized since 1987. And as you recognize that in your P & L, you tax affect that through deferred tax accounting. So if you have to write that off, you would also write, you know, reverse the deferred tax accounts and the net impact is in the range of 400 million.

The final impact obviously won't be known until we know where the assets end up, and whether or not there is an additional requirement to record a non-cash, non-P & L minimum pension liability. So at this point our best estimate, if we do have to take this write off equity, is in the range of 400 million.

Okay. I think you guys are doing a great job in managing a terrible situation, you know.

Thanks, ALDO.

Thanks. .

Gentlemen I am showing no further questions at this time. Please continue with your presentation or any closing remarks you may have.

Thanks a lot. And Dan has a couple of concluding comments.

Thank you all the listeners for joining us this morning. As always news releases may be obtained by e-mail and available on our web site. A rebroadcast is available for the next 30 days on our web site. That concludes our conference call. Thank you. .

Ladies and gentlemens, this does conclude your conference for today. We thank you for your participation and ask that you please disconnect your line. --- 0