ATI Inc (ATI) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Allegheny Technologies fourth quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, Tuesday, January 21st, 2003. I would now like to turn the conference over to Mr. Dan Greenfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Barbara. Good afternoon. Welcome to Allegheny Technologies' fourth quarter 2002 earnings 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 website at Alleghenytechnologies.com and CCBN.com. Participating today are Jim Murdy, President and Chief executive Officer, Doug Kittenbrink, Executive Vice President and Chief Operating Officer, Jack Shilling, Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer, and Rick Harshman, Senior Vice President and Chief Financial Officer. After some initial comments, we will ask for questions. Please note that all 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.

Thanks, Dan. Our fourth quarter 2002 net loss was 39.7 million, or 49 cents a share. That did include special charges of 36 cents a share, so excluding those charges, the net loss was 13 cents. Now, business conditions stayed very difficult across all three business segments.

Let me quickly go through our three segments. Flat-rolled products recorded an operating loss of $12 million, including the settlement of our prior year's profit sharing dispute with the United Steelworkers that resulted in a special charge of 3.9 million. Segment volumes were the lowest in a decade. In fact, the lowest since the 1991 fourth quarter. The U.S. consumption of stainless sheet and strip remained at very low levels. You may remember at 2001 consumption was 20% off the normal growth pattern for those products, and unfortunately, 2002 didn't show much recovery. However, we believe we held market share for our key stainless products. On the positive side, for the full year, segment operating performance improved by about $30 million, compared to last year. That's because our strong cost-reduction actions more than offset further price decline. For instance, over the last two years, we have reduced employment in our flat-rolled products segment by nearly 25%. Total ATI employment has been reduced by 15% since 2000. In high-performance metals, fourth-quarter operating profit was essentially flat compared to the third quarter and continued to suffer from weak commercial aerospace and power-generation market. The segment was helped by particularly good performance at our exotic alloys businesses as a result of strong shipments to the high-energy physics, mining, and government markets.

Our industrial products segment was modestly profitable. Total ATI sales declined over $200 million in 2002 compared to 2001. Nearly half of that resulted from lower sales to the aerospace market. Other significant areas of decline include electrical energy and food processing. Helping to offset these declines were gains in government sales which doubled over last year and higher sales to the construction and mining and medical markets. We started 2002 prepared for a difficult year. That's why in all segments of the company we emphasized cost reductions and cash flow.

Our operating company management had a lot of success in those areas. For instance, managed working capital reductions totalled $146 million. This more than doubled our original goal of 65 million. At year end, managed working capital was 33% of annualized sales compared to 37% at the same time a year before that. Cost reductions totalled 135 million before the effects of inflation. That exceeded our 2002 goal of 100 million. Free cash flow after capital spending and dividend payments was $111 million. As a result of this very good cash flow performance, we were able to reduce debt by 86 million and increase cash by 26 million. We have no significant debt maturities until 2011, and we have no borrowings outstanding on our $250 million bank credit agreement, so we have good financial liquidity.

We'll stay focused on cost reductions and cash flow in 2003. Our new cost-reduction goal is $90 million. Detailed plans to reach this total are already developed at the company level and have full buy-in from operating management. We limited capital spending to under $50 million in 2002. Our 2003 capex plan is somewhat higher, since it includes carry-overs on two major strategic projects. The upgrade of our Richberg, South Carolina, high-performance metals rolling mill and the upgrade of our Breckenridge, Pennsylvania, flat-roll products melt shop. Capital spending this year will be watched very closely and will be less than depreciation, which will be approximately $80 million in 2003. We're committed to build on Allegheny Technologies' strong reputation for quality, service, delivery reliability and technical leadership.

In flat-rolled products, we improved our position with key distributors of commodity stainless, and we're also awarded a new long-term agreement with the manufacturer of electrical transformers representing potentially 30,000 new annual tons of silicon electrical steel. In addition, our stall operation in Shanghai, China, received important new contracts for precision-rolled strip products in that market.

In the high-performance metal segment, we strengthened our position in premium nickel-base alloy, super-alloy and titanium markets. Our exotic alloys operation made good progress recovering from last year's strike and has strengthened its position in several markets, including high-energy physics, medical imaging and government programs.

Our release identifies the negative impact we were hit with in the swing from a large pension investment surplus to a pension-investment deficit last year. Unfortunately, the accounting impact only gets worse in 2003, since the loss of value in pension plan investments in 2002 continued, compounding the negative equity market returns for the third-straight year. The negative charge will increase by about 90 cents per share in 2003. This increase is all non-cash, but clearly limits our ability to show positive VPS performance. There are several possibilities for operating segment improvements this year, but we start 2003 with a weak economy and uncertain financial markets. How these evolve will have a lot to do with how our total earnings picture develops. It's anyone's guess. But our attitude is that this is no time to be passive. That's why we're hard at work on every controllable aspect of our operations. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to be acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of John Tomaso from Prudential.

Good afternoon.

Hi, John.

When we talk to other companies, like nickel companies, they tell us how wonderful the business is and how the price is just soaring, and I presume they're selling nickel alloys to someone putting power turbines in Uranus or Jupiter, and obviously, the U.S. nickel stainless market is down 15% from peak at 1994 levels, full year. I don't have the benefit of the information in your fourth quarter release to try to calculate exact fourth quarter consumption. It's in your shareholder interest for you to file a lawsuit against NORILSK and all the producers who buy (unintelligible) as some of them buy on behalf of clients when they're oversold and some of them buy to manipulate the market. And what NORILSK did, taking the bank loan, is what (unintelligible) did in copper seven years ago. Why not file that suit?

Well, John, that's -- you always have an interesting angle on things.

I'm your --

we're not in this call today to talk about those matters.

In terms of your core business and the soft fourth quarter volumes, are there particular customers or end markets that were bad in October, November, December months? Was there a particular distributor that couldn't buy metal because he was broke, or was it across the board?

Well, let me ask Doug to comment on the market situation.

It was not a particular customer. I would say it was generally speaking across the board, capital goods, and, of course, it's fairly typical this time of year, but I would say more -- more significant this year at being the -- you know, the decline in service center, orders and shipments, as they try to trim up their inventories going into year end. So I think that -- but I would not point to any particular customer or circumstance. I would say it was pretty much across the board with a little bit more severe decline associated with inventory adjustments at year end in service centers.

Congratulations on having done as well as you've done. It's a tough market, and they always get better.

That's what we're counting on, John. Thanks.

Our next question comes from the line of Aldo Mesapharoh from Goldman Sachs.

Hi, Jim. I had two questions on the -- I wonder if you could talk about the spread you're seeing currently on your nickel versus stainless pricing. I know you hedged some of it. But, you know, if you look at the third quarter into the fourth quarter, was there a deterioration in the spread, and what you might think the spread might do in 2003. And then the second question, separately, was, are you having any discussions with your labor force at this time along the lines of possibly enacting something close to the -- you know, the ISG or new template for a cross structure emerging from some of this consolidation? Thanks.

Well, on the nickel side, of course, the surcharge mechanism absorbs an awful lot of what happens in the -- on the pricing side there, and, you know, prices were very stable here until the last several weeks, and there's -- you know, there's a lag in that mechanism, so I don't think that that's a matter that really has much of any impact in the -- in our actual results for the fourth quarter 2002.

Mm-hmm.

Let me pass your second question to Doug, because it's -- it is clearly an important subject, and Doug's the guy that, in our setup, has the primary responsibility for dealing with relations, particularly with the Steelworkers.

Hi, Aldo.

Hi, Doug.

Let me talk first in general. We have ongoing discussions with the Steelworkers, and recently have had, shall we say, more in-depth discussions, or have agreed to go into more in-depth discussions along the lines of what we need to do to improve our competitiveness. We've said -- I've said on these calls before that it's important that we play on a level playing field in this business, and there is a commitment on the part of the Steelworkers to work with us in terms of improving our productivity, more flexible work rules, more flexible approaches going forward. Having said that, though, I think it's important to recognize that the ISG arrangement, you know, dealt with the acquisition of facilities that are coming out of Chapter 11.

Okay.

And, you know, the mechanisms that were used there to shed legacy costs. You know, are not the case for a company such as ours, so I would distinguish those two situations along those lines. We expect to be able to make some progress with improving productivity through collaboration with the union, and they have committed to support us on that.

Great. And your labor contract right now runs through -- is it July '06 is that --

'07. June 30th, '07.

'07. Thank you.

Our next question comes from the line of Mark Iltar from McDonald & Company Securities.

Hey, good afternoon.

Hi, Mark.

Hi, guys. I had couple of questions. First, I wanted to follow-up on Aldo's situation. You know, the -- one of the -- one of the things that the carbon steel guys have indicated is, you know, not only do we have the ISG model, but we also have had, you know, this -- there's been an acknowledgement of competition from the flat-rolled minimills, and given the fact that, you know, I'm going to guess -- at least some of your issue on the commodity stainless side relates to, you know, new entrants in the market with, you know, with nonunion capacity, I mean, wouldn't you think that would really be a very compelling argument for, you know, you guys to be just, you know, demanding something similar to what ISG has put together?

Well, Mark, there really isn't a lot that we can do to get into the particulars of our discussions and our thinking with the Steelworkers, but let me just assure you that we're very aware of what's going on, and, you know, whether -- how we're able to make headway remains to be seen, but when I talked in my prepared remarks about a 25% head count reduction over the last couple of years at Allegheny Ludlum, that was both salaried and hourly. So, this is an area that the company does have a pretty long history of making good productivity gains, which we are able to make under our contractual arrangement. Obviously, a very sensitive area, but big dollars to us in terms of going forward. So I just rather than, again, get speculative on it and that, I just want to reassure you that this is -- these are developments that we are very close to, very keen to -- to follow and see how they can be translated into developments in our situation that can benefit us going forward. But it is a -- it is a sensitive area, and we have contractual obligations that we certainly will honor, but at the same time, we think we've got some pretty good flexibility in our contracts. So, Doug, you want to add to that?

I'll just make re-emphasize again, I think the encouraging thing is that the United Steelworkers have recognized, in my view, the importance that companies such as ours are able to compete on a global basis on a level playing field. And certainly, we have had those discussions with them, and we will continue to have those discussions with them, and, as Jim said, we're not going to go into the specifics here, but I do believe that there is somewhat of a new attitude amongst the United Steelworkers of recognizing the importance of competing on a global basis.

All right. I appreciate that. And I don't mean to get -- get in your face about it at all. But it just seems like it would be, you know, something of -- a matter of some urgency. I had another follow-up question. You had indicated some market share gains in the electrical steel market. Just curious what that might -- what kind of impact that is going to have to overall average price realizations for the flat-roll group in the first quarter?

Well, that's not a particularly high-priced product, but I think the significance -- the significance to us is that it is important volume, and that does have a -- that does have a measurable impact on our bottom line in terms of our cost absorption, so, you know, all other things being equal, because, you know, silicon electrical steels are just a part of our total mix, we think that that's an important contract, and we think that -- it is long term, so it's just not a -- it's not a one-year development, and we think it's going to be a positive to our -- to our operations, but when you ask specifically about the impact on pricing, it's -- it's not a big plus there, because those are lower-priced products.

Okay, all right. Well, let's -- hey, thank you very much, and congratulations on, you know, on the market share initiatives, where you're making good progress.

Yeah, those were -- you know, we had talked about that earlier in the year, in several respects, and I think we're very pleased with what's happened in 2002 in that regard.

Great. Thanks, Mark.

Our next question comes from the line of Michael Morrisral from Bear Stearns.

Thank you. As a follow-on to the market share that you guys referred to in the text, on a high-performance side, can you guys, given it's a very consolidated mark, maybe speak about the trouble players, perhaps special metals or such, that you've taken share from, or is it more in the titanium area? And how much of that is related to price undercutting, for lack of a better term, and then finally, looking ahead to next year, assuming these are new contracts, I guess we could expect an improved performance for the high-performance area?

Okay, well, first, I won't comment on our competitors' situation. But the -- you know, this is a, as you said, this is a pretty tight market in many respects, and these are times when -- where you have to be very competitive to get business. Now, once that's said, I think what is distinguishing about these products, though, is that it is not pure price competition. There's a -- these are some of the most demanding products we make, some of the most demanding products in the metals industry, and it is, you know, price is part of the equation, but it's -- it's very much a question of being able to meet the technology requirements, the very tough criteria that these products have, and convincing the customer base that you not only can do it now, but that you are a -- as we are, a long-term player there and a long-term investor, and if you look at -- at some of the capital dollars that were spent in 2000, in 2001, and, frankly, you know, one of the two largest products -- projects that we have under way right now is in the high-performance area, so we have a -- we not only have a good, solid record of producing these products over the last several years, but we have -- we have made investments to make sure that ground is not lost. So we price in the environment, we buy in the environment, but these are profitable markets, and these are key customers to us in the short term and very much in the long term.

So assuming conditions do not deteriorate any further, we can assume an improved performance just based on some of these new contracts?

Yeah, when you look at our plan for next year in this area, you have to recognize, though, in the early part of the year, in 2002, we were still shipping out of some backlog that has weakened on a comparative basis through this year, so we're still in a trough period, and these are developments that should help us, I'd say, measuring more from what went on in the second half of 2002 versus trying to compare it to the first half of 2002, because if you look back at those numbers, they were still pretty strong and high performance, still a lot of shipments going out, but important for the entire year next year and beyond.

Thanks, Jim.

Yep.

Our next question comes from the line of Charles Bradford of Bradford Research.

Good afternoon.

Hi, Charles.

Hi. I'm having some trouble reconciling some of the stainless steel data from the American Iron & Steel Institute and hope maybe you can help a bit, because they're showing production of stainless for last year, all 12 months, to have been up 20.3%. We only have 11 months of shipment data, but they're showing only 3%. Normally, there isn't that kind of gap. Is somebody building up a lot of inventory, or is that just the process of -- do you think, of American Stainless adding all of that capacity?

I don't have those tables in front of me, Chuck, so I couldn't try to reconcile that. Doug is --

the only -- you're saying this is AISI data.

Yeah.

Without the data in front of me, I can't respond either. But I think the difference that's occurred this year has been the North American Stainless melt shops. If what you're looking at is melt tons, you see a significant increase in North American melt tons as a result of that melt shop starting up. That's not an increase in shipments.

No, I understand. I'm trying to reconcile the difference between the two, because usually it's a relatively small, this time it seems to be quite large.

And what I'm saying is that in prior years, there were slabs that came into the United States that were finished at North American Stainless. The difference, I believe, is -- I'm just guessing, not seeing your data, but I have not seen any production data that says that finished shipments have gone up by 20%. So the only thing I can surmise is that what you're looking at is melt tons, and that that reflects the fact that in prior years, there were -- there were slab tons coming in to Carrollton, Kentucky from [indiscernible] that are not coming in today.

I mean, the shipment figures show a plus three.

Right. I think it's the difference between semi-finish and finished goods, and certainly North American stainless is producing more of their melt here in North America this year than they did in prior years.

I understand North American is non-union.

Excuse me?

I understand that NAS is non-union.

That's correct.

Does that give you a little bit of leverage with Leo, because Leo is out giving interviewing saying he won't make any contract adjustments until the contracts terminate, and yours is 2007.

Well, we have ongoing discussions with the United Steelworkers and Leo, if we want to use that phrase, and including the importance of us competing on a level playing field, with all of our competitors, including North America Stainless.

We're just getting --

-- talked about quite a bit.

We're getting a couple of different stories coming out of the union in Pittsburgh, and was trying to get a little clearer understanding, but thank you very much.

Thanks, Chuck.

Our next question comes from the line of Michael Clarfield from Goldman Sachs.

Hi, thanks. Just a couple of quick questions. With the change in the product mix in the exotic alloys, do you expect that to persist going forward?

Yeah, that should be a favorable development on a total year basis, if for no other reason, they were on strike and had reduced shipments. They were operating, but they certainly had reduced deliveries through the first quarter of '02.

Right. -- fourth quarter, it looked like the price per pound went up significantly.

Yeah, these are -- I mean, where they've made their gains, most recently, have been on some of the higher-valued products.

Okay.

And there will be some carry-over to that.

Okay. And another question, I noticed SG&A was down pretty significantly from earlier levels in the third quarter, is that because of head count reductions, or was that also because it will continue at the same level going forward?

Well, some of that reflects as adjustments for incentive accruals that build up during the year. I think our overhead costs are in very good shape in that regard. I would, when you look at next year's plan, it would -- you couldn't -- you couldn't annualize the fourth quarter, because there were some credits that rolled through there.

Okay.

But it's not going to be much off pattern. And the pension expense issue does affect cost of sales percentages and SG&A, as they go forward, but, you know, the fundamental -- the fundamental staffing, the attention we pay to those areas is -- is very -- very tight cost control. Some of the costs that did -- that are in that number now, and will continue unfortunately -- I mean, for instance, the step up in some of the insurance costs, particularly for directors' and officers' insurance, an those types of things, but when you look at what's really controllable, I think we do a very good job and have done for a number of years there.

Okay. Just one last question, was the breakdown in New Piper, is that in the breakdown of the restructuring costs? Well, not restructuring, it's writing off a minority investment. Rich, do you want to --

Mike, this is Rich. Are you looking at the income statement?

Yeah.

Because if you're looking at the income statement, it's in "other." In the other line item.

That's what I was wondering. Thank you.

Our next question comes from the line of Dan Rolling from Merrill Lynch.

Thank you. Yes, going back to an earlier question about supply of raw materials. Have you all had any problems getting nickel or other raw materials in this market?

No, we haven't -- we haven't seen any shortages or had any problems with availability in material.

Okay. And second, have you seen any change in the industrial gas turbine business?

No.

So it's still years in the future?

It's still not here. I can say that much. I don't know how far in the future. It's still essentially nonexistent as we speak today.

Okay. One last question, where would you say you're seeing the most strength of all your divisions?

Well, I think that would be on the -- on the flat-roll side, as well as in the Wachangs operation, relatively speaking.

Okay, thank you very much.

And, Dan, let me just go back to one thing on the power generation. You know, I heard something last week that was kind of intriguing in terms of the -- of the maintenance cycle for some of these facilities, so when you say years in the future, there's -- there's some thought that this industry is going to start to see a nice step up in the level of maintenance replacement on these facilities and in '05, so it's a couple of years, maybe a couple of years away, and I don't know how much of a backup in terms of metals ordering it that's required. But apparently, these are -- when these plants go down, the major plants go down for repair, it's a total replacement proposition, so they run like heck for a while with maybe not very high with very high-replacement parts, but when they do go down, it's a total repair.

The other thing that's kind of interesting, I was reading the GE release earlier this week, or whatever it was, Monday or Friday of last week, and they were pretty bullish about some of the orders that they're seeing on the wind-energy side, and that's -- we think that's good news for us, because we are -- we're a supplier in that supply chain out of our casting service business, and then they also were talking more optimistically on locomotives, and there again, these are products that have been in a depressed state. They are not a big part of our business. If there's some recovery there, that'd be a nice development for industrial products group.

Along those lines on the maintenance, I think when the industrial gas turbines had maintenance repairs, they'd be the smaller piece, the blades and stuff, much more than the big rings you make, though.

Well, apparently, they go through that whole setup in a very -- very aggressive fashion, and this is -- this will be one for us to get more information on. But I was -- I was talking to a person who, I think, from outside the company, who has some pretty good background and knowledge in this, and was at least a little different perspective than I had previously had in that regard. We'll see.

Thank you. That was very interesting.

Yeah, we'll see what happens.

Ladies and gentlemen, as a reminder, to register for a question, please press 1, 4. Our next question comes from the line of John Paul Lotesto from TD Securities.

Good afternoon. I was just curious how much exposure you guys have to the transportation and residential markets in terms of, you know, like sinks and appliances and stuff like that, and, you know, how those markets have been serving you? And the second question is with regards to pricing, are markets just so depressed right now that it's not even thinking about any -- any kind of price increases outside of surcharges, you know, for the foreseeable future?

Well, I think the pricing environment for any manufacturer is very constrained right now. So that's -- until there's just more fundamental strength throughout the economy, I think prices are going to be tough to deal with. We are -- we're always looking at opportunities where we do see some strength to take pricing action, but our -- our sense, and certainly in building our 2003 operating plan, was not to count on -- on anything very bullish on the pricing side.

And there was, if my memory serves me right, like sometime in the last year or so, like there were some marginal price increases at various producers flat-roll stainless were getting. Does it seem like any price increases that have been gained over the past year, year and a half have been given back?

That's probably a good summary of that. We're not seeing much in the way of any further erosion, but what gains we had through the summer, basically I just don't think there was any follow-through on some of the early signs of economic strength this summer, and the second half just didn't -- just didn't develop the way the most people were hoping, and as a result, you saw some slippage in prices.

Okay.

You know, some of these markets you asked about, we do pull that information together, because it's information we use our annual report, and we're just seeing this really for the first time ourselves today, but, you know, the transportation markets, if you include automotive in that, you know, it's probably 12% of our business last year, it's been higher in the past, but last year would have been a little bit of an increase over 2001, but the transportation-meaning infrastructure is about 2% of our business, so on the -- on the appliances, appliances are a pretty good market. It's been a double-digit market for us in the past, the preliminary data for '02 shows that is just under 10%, but --

under 10% growth?

there's so many markets we participate in, it's an interesting question always it see what is happening among our various markets.

On appliances and stuff, you mentioned 10% of growth in 2002, you figure?

No, no, I'm saying as a percentage of our revenues.

Oh, okay.

They would have actually dropped back in terms of -- of percentage of our revenue, and also we saw some drop in -- in tonnage in those markets, too.

Great, thanks.

Okay.

Our next question comes from the line of Mark Elpar from McDonald & Company Securities. Go ahead with your follow-up.

Yeah, thank you. I was wondering if you were in a position to provide any guidance related to the first quarter or for the full year?

Mark, the guidance that we're giving is really just specifically on the pension income side, because that's one that everybody seems to have, you know, a lot of trouble trying to sort through, so we tried to lay that out in as clear a fashion as we can in the release, and in my comments earlier. But I say as we look in the -- normally, the first half of the year is -- is seasonally better for us, but we are very early in the year, and just we don't have any other advice or counsel or guidance at this point.

Okay, thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press 1, 4. Gentlemen, I'm showing no further questions at this time. I will now turn the presentation back to you.

Okay, well, thanks for taking some time with us this afternoon. I'd like Danny then to wrap up for us.

Thank you, Jim. And thanks to all listeners for joining us this morning. As always, news releases may be obtained by email and are available on our website, www.Alleghenytechnologies.com. Also a rebroadcast of this conference call is available for the next 30 days on our website. That concludes our conference call.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.