ATI Inc (ATI) 2003 Q1 法說會逐字稿

Welcome to the Allegheny Technologies quarter earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a Q&A session. If you have a question press the one followed by the four. This conference is being recorded Tuesday, April 22, 2003.

I would like to turn the conference over to Dan Greenfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Duane. Good afternoon. Welcome to Allegheny Technologies conference call for the first quarter of 2003.

This conference call is being broadcast live on our website at Allegheny Technologies -- Alleghenytechnologies.com and on CCBN.com. Members of the media have been invited to listen to the call.

Participating are James Murdy, President and Chief Executive Officer, Doug Kittenbrink, Executive Vice President and Chief Operating Officer and Richard 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 James Murdy.

Thanks, Dan and good afternoon. Our first quarter 2003 net loss before the effect of the change in accounting practice PLL was $26 million or 32 cents a share which is slightly better than analyst consensus. 28 cents per share of our 32 cent loss is attributed to retirement benefit expense which is mostly noncash. I'll get back to that later in the call.

Business conditions in the first quarter were still very difficult as I'm sure you all realize. Let me go through our three segments quickly.

Flat roll products recorded an operating loss of $1 million. Overall shipments remain weak. Higher energy costs were offset somewhat by our natural gas hedging strategy which we started about a year ago.

We improved our position in several key markets such as stainless cold roll sheet, service centers, silicon electrical steel and our high value strip and precision roll strip products. Shipments of precision roll strip were up nicely both from our domestic operations and our stall joint venture in China.

In high performance metals first quarter operating profit was essentially flat compared to the 2002 fourth quarter and continued to suffer from the weak commercial aerospace market. The commercial aerospace business is really tough, and was further impacted by the war in Iraq, financial difficulties of U.S. airlines and then to make matters worse, if they could have gotten worse with the SARS sickness in Asia.

Despite these very difficult poogss we remain profitable and enhance our position in our high performance nickel and titanium alloy business. Orders for the first quarter at our all back operation exceeded shipments for the first time since the second quarter of 2001. This is significant not because it necessarily signals a market turn but it is an indication of all backs enhanced leadership in market share position.

Sales and orders were strong at our exotic alloys business which continues to benefit from good sustained levels of demand from high energy physics and government markets. Our industrial pro -- earning $1.5 million compared to a first quarter loss of $700,000 last year. Sales improved at our tungsten specialty materials business primarily due to strong demands for the oil and gas market.

We've started 2003 prepared for another difficult year, that's why in all segments of the company we continued to emphasize cost reduction and cash conservation. Cost reductions before the effects of inflation totalled $28 million in the first quarter. In recognition of the continuing economic uncertainty, we have increased our 2003 cost reduction goal to 115 million from our initial goal of 90 million.

At the end of the first quarter, managed working capital as a percent of sales improved to 30% compared to 33% at the end of 2002. So we continue to make solid progress in these important areas. Most of our markets are very tough right now. In some cases, the toughest we have ever faced.

But ATI's long term fundamentals are strong and we are determined to find ways to be profitable, even in these times.

Given the uncertainty of the economy and most of our end markets, we plan to continue to reduce costs and conserve cash so that we remain well-positioned across a broad range of products, take advantage of opportunities when the economy recovers. Now, before we go to Q&A, I would like to take a couple of minutes to focus further on the earnings impact of our retire obligations both for pensions and healthcare and our liquidity.

In 2002, we repeatedly warned investors that we expected to face much heavier non-cash P&L charges for these items in 2003. There are three principle reasons for the larger charges this year. First due to market declines through the end of 2002 we suffered the loss of significant value on our pension investment portfolio.

Second, for financial reporting purposes, we reduced our expected return on pension investments of 9% to 8.75% and third, because of the lower interest rate environment, we lowered the pension and healthcare liability discount factor from 7% to 6.75%. So we have a lower investment base, lower investment return assumptions, and a higher liability calculation.

Those factors were established near the end of last year and will roll through our quarterly earnings this year at fixed amounts regardless of financial market developments in 2003, whether better or worse than last year.

While we were very clear in our release, let me repeat. 28 cents of our 32 cent loss per share is due to retiree costs. In the first quarter of last year, those costs on an EPS basis were only 4 cents a share. The increase to 28 cents from 4 cents is essentially all non-cash. For the total year, the EPS effect of these higher charges will be $1.12 compared to only 17 cents last year.

This is a 95 cent per share hit which will make it very tough to have positive EPS this year. But we're doing everything possible to mitigate and even overcome this severe financial accounting impact from an operating point of view. That's a tall task in this economy, not only for us, but for a lot of other major companies that find themselves in a similar situation.

Now let's talk further about liquidity because we still hear concerns on that subject for ATI. The best way to address liquidity through Allegheny Technologies is to look at three aspects.

First our current operations, second our balance sheet debt and third our long-term retiree liabilities. Our current operational liquidity is very easy to understand.

We have $111 million in cash as we start the second quarter. That's $52 million higher than at the end of 2002. We have 250 million of availability on our unsecured resolving bank credit line with zero drawn against that line and zero drawings projected for the balance of this year.

By receiving a $48 million tax refund and cashing in $15 million on a favorable debt swap arrangement, wife' built an excellent cash position we've built an excellent cash bogs at the end of the fourth quarter which should comfortably carry us through this year even without any significant recovery in the economy.

For the second year in the row our tax and finance staff about a remarkable job of filings filing on an accelerated basis to capture the tax benefit of last year's operating loss. In addition managed working capital has continued to improve as a percent of revenues.

Our operating companies managed that statistic down to 30% at the end of the first quarter as I mentioned earlier. A year ago, that statistic was 34%. So I'm very confident about our liquidity for 2003.

Next look at our $520 million of balance sheet debt. The current portion is only $10 million. So there's no liquidity issue there.

The two largest pieces of debt are our publically traded notes totalling $450 million. 300 million of that total is non-amortizing due in 2011. Eight years away. The remaining 150 million piece is advertising due in 2025. That's 22 years from now. So our long-term debt maturity picture is quite comfortable.

The balance of our debt includings industrial revenue bonds, capitalized leases and separate debt arrangement leases in China and Europe which present no liquidity risks of any consequence in our outlook.

There's another important point to keep in mind when thinking about our existing unsecured domestic credit arrangement. Bank credit markets are still very tough and may stay that way. The 365 day portion of our line expires this coming December.

We are looking at alternatives which could take the place of that line if we felt it was prudent to do so. An obvious alternative would be to go to some form of asset based financing. That's a very liquid market today and the quality of our customer receivable base and our inventories make this alternative quite viable.

The attractions of asset based financing include fixed terms of up to four years and less stringent financial covenants. There are higher expenses associated with such arrangements, but those are certainly manageable in our circumstances if we decide this is the way to go.

Finally, look at our retiree liabilities. They are large. Pensions total $1,945 million retiree medical total 711 million so combined we are looking at $2,067 million for future liabilities.

I would also look at our investments. Despite the lousy market our year-end pension assets were $1,679 million and our retiree healthcare at $111 million in assets.

This year we will pay out about $175 million in pensions and retiree healthcare benefits combined. That is less than 10%, I repeat less than 10% of our retiree plan investments without any assumption for positive returns this year. We also have several hundred million in unused pention credits from prior years overfunding.

So retirement payments from corporate cash this year will only require $2 million for non-qualified plans and our cash costs net of the BIBA payments for retiree medical will only take about 30 million in cash. Combined the cash needed in 2003 to cover $2,657 million in retiree liabilities is less than 1.5% of those totals.

Believe me, we take our retire obligations very seriously.

But the investing public should be able to see that these issues are managed over q-and-a.

Thank you, sir. Ladies and gentlemen if you would like to register a question at this time press the one followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, press the one followed by the three. If you are using a speaker phone, please lift the hand set before entering your request. One moment please for our first question. Our first question comes from the line of John to Tomasso with Prudential. Please proceed with your question.

Good afternoon. Congratulations on doing so well in such a bad environment for benefits and energy and nickel. Somebody like Dick would have made all that money hedging gas and interest rates. That's great.

Thanks for your compliment, John.

With regard to nickel that got as high as 406 in early March, but has been around 360 the last four weeks or so, which monthly income statement is the worst point of nickel squeeze? And when do you start to benefit from nickel prices falling while you're selling prices are not? I know it's very different math for stainless flat role versus high performance alloys. Please help us with this.

Well, the -- on the flat rolled side, of course we have the surcharge mechanisms, and I think you're quite familiar with the way those roll through, and on the high performance side, basically the almost all of those contracts cover fluctuates in nickel price under their terms. So I think with what's happened currently in the nickel market, John, it's not a reason for a lot of fluctuation in our bottom line results.

You know, even in the flat roll business where we have annual contracts and that, we always cover those with forward purchases. So as we look at this on an overall company basis, and even within the segments, we think the contractual arrangements in place, plus just the way the -- you know we've managed our inventories that the nickel price itself is not a big fluctuation from the bottom line factor to us. I might ask Doug to add to that.

John, this is Doug Kittenbrink. I just agree with what Jim said. Generally speaking the way our commercial arrangements and our surcharge mechanisms work is that nickel pricing risk, if you will, is something that's passed through to the customer. So generally speaking, you mention the word where would we see the squeeze, both on the high performance side and the flat roll side. I don't think that we would see any significant impact of a move in nickel one way or the other.

You may overestimate our familiarity. Could you just review the time lags on the surcharge mechanism for sheet, and on alloys, if the customer buys the nickel, in effect.

Well on alloys where the customer buys the nickel, which is other than fleet and plate, the pricing is determined at order and the nickel is hedged or purchased at that point. So in that case, the decision is made at order entry, and is handled in terms of the way the material is priced, and we go ahead from a procurement perspective and we buy that nickel. We cover that position, in fact.

And on the flat roll side the way the surcharge mechanism works, it is -- it is prior month LME average. And that happens to mesh very well with the lag time between when you melt the material and when you ship it.

I'm sorry is LME average are you talking about the three month?

No it doesn't average three months. That's the European mechanism. Our mechanism --

I'm sorry are you talking LME spot or three months?

Spot. Spot position prior month LME average.

If it's prior month, then it's a one month --

I would say one month lag, that's correct. And that meshes -- but it's a surcharge that is supplied on the date of shipment. So the prior month is basically reflecting the fact that the material was melted in the prior month from when it was shipped. So it matches.

Thank you very much.

Thanks.

Next question comes from the line of Michael Morsrow, Bear Stearns and Company. Please proceed with your question.

Thank you very much. Good morning, gentlemen.

Good afternoon.

First off we wanted to agree certainly that your liquidity situation is quite sound in our position as well. I'm glad that you highlighted that. But in regards to the pension side of the equation, can you talk a little bit about the credits that have been built up, quantify that a little bit better and talk about, perhaps, if the markets did not go according to what you guys are projecting which is a 9% return, just more of a longer term view and how it's affecting ATI and what your plans are to perhaps revise some of these contracts that you have outstanding. Have you made any initiatives towards the labor force?

Okay. Well, we really haven't disclosed the, you know, the total situation on our overfunding credits because that's a -- it's kind of an interesting subject by itself. It's not without its complications but that's why we try to summarize it by saying we don't see a funding requirement, you know, for the next several years. I think that's the practical result there.

You know, if the investment portfolio does not grow, that will continue to impact us because whatever our return assumption is, you know, we drop that to 8.75% from 9%, you'd like to assuming, over time, you'd like to expect over time that you would have positive investment returns, and that that would flow through your P&L at the rate you've assumed here on that investment base.

And incidentally, we mark-to-market at the end of each year on our investment portfolio. So, you know, some companies, because the FASB allows it, you can smooth that over, you know, two, three, four years. We don't. We are mark-to-market fully at the end of November which is our measurement date. November of 2002.

And, you know, we're not -- so, you know if we're in a long-term, very long-term bear market where the environments don't have a positive return, you know, that can have a consequence to us down the line. There's no question about it. But I think as we, you know, we have a diverse portfolio, and we would expect to, you know, to do reasonably well as we generally have done in the past in that regard. On the liability side, this is also a part of the proposition that we pay a lot of attention to, but in the -- represented workforce, we have contractual undertakings there that we have to honor. And certainly there are a lot of retirees and that's, you know, there's limited flexibility in doing anything there. We are not in bankruptcy. We are not about to do, nor do we have the ability to do what companies have done in adjusting some of those from a bankruptcy point of view.

But, you know, the benefit proposition in this company is one that we do pay a lot of attention to and hopefully we'll be able to make some headways over time in managing that liability proposition. But I think we do have the liquidity, we have the investment base here that allows us to take a longer view on these obligations, and that's the way we look at them, and that's the way we invest.

Okay. You're saying that you have not had any discussions with the labor force, and are certainly not planning on that until the expiration of some of these contracts? Is that a fair statement?

Well, I just -- first of all, we just -- we really can't comment on what we are talking about or not talking about on the labor side because that's a very sensitive area. I'll say on the non-represented work force, by and large we have gone to defined contribution plans and most of those moves were made 10, 15 years ago. So I don't think there's -- I don't think there's much that we have to do on the nonrepresented side. And on the represented side, we'll see what happens.

Thanks.

Okay.

Our next question comes from the line of Aldo [Inaudible] from Goldman Sachs. Please proceed with your question.

Hi, good afternoon. I guess you answered the question I was going to go after the opportunities you might have to change some of the labor, you know, cost situation you have in the absence of a bankruptcy filing. I was -- maybe I could ask it in a way that -- do you see anything on the overall sector in stainless in terms of potential consolidations between some of the players or anything that could, you know, work towards tightening the market a little bit or possibly reducing costs that you may incure on the labor front?

Well, you know the question that was asked by Michael was really specifically on the pension side. Now, we expect that year-to-year we make headways with our organized labor side on productivity issues and other things that are also very important costs to us.

And, you know, Doug and his people have been and continue to be, you know, very active in looking for opportunities to make gains there, and we are in a situation where, over the next few years we do have a lot of retirees, a lot of retirments from the blue collar force and I think we're going to have something to show for that as we move along. So I don't -- I don't want to create the impression that there isn't progress, and that there isn't an outlook for progress in lowering the total costs that we have for the hourly payroll as well as for the salary.

But on the question of consolidation, Aldo, it kind of beats the hell out of me, where will it come from. There are some theoretical consolidations but those have been possibilities for the last four or five years and not much, if anything has happened, you know for reasons that I think you can understand in terms of who owns what in this industry here in the U.S.

Whether there are any significant developments that say this year or next year in that regard, I suppose there could be, but that's not what we're planning on, and we are managing our business as it exists and as we've set our strategies over the last few years.

Jim, also on the -- this might be a point of detail. If you were to decide, at some point, to purchase say hot rolled bands or something in stainless, would that come under the prohibition of outsourcing in your labor contract?

Doug, why don't you cover that, please.

It's a complex answer, Aldo. Generally speaking the answer is yes, but it would depend on how it was done and under what circumstances. And you've always got the option, you can do that through mutual agreement as well. So, the complex answer is, it depends on the circumstances, but generally that would fall under the contracting out portion.

That would be your starting point.

Correct.

Great. Okay. Thanks.

Ladies and gentlemen, as a reminder to register a question or a comment, please press one four at this time. We do have a follow-up question from the line of John Tomasso, Prudential. Please proceed with your questions.

The work forces at the former national steel, U.S. Steel and the Lewisport operation of Commonwealth Aluminum have moved to various employee cost sharing on medical. And, of course U.S. Steel is going to have a new labor contract in May of '03 ahead of their scheduled August 1, '04 expiration.

Are you going to approach the union and ask to reopen your contract on medical given the extraordinary 12% inflation in prescription drugs nationally last year and the events that other companies that signed the steel workers contract first? Second, we made a very rough calculation that if introduction of co-payments or deductibles or other cost sharing mechanisms reduced the cost of the Steel Workers' Union plan to that of a normal salaried plan or about 50%, your common equity per share would rise $1.97 per share given the reduction in the post retirement medical, maybe 35% of which would go to deferred taxes and 65% to common [inaudible]. Could you talk about your strategy there on medical?

Well, let me just say -- make a quick comment on that, then I'll ask Doug to expand. I did see those forecasts you put out, I guess it was last week, wasn't it, John, or week before last?

Last week, I believe.

And you set a high bar for us to achieve, but, you know, I think your fundamental point that over time, if companies can make headways in this area, it's damn important, there's no question about it. Now, to try to predict that that's possible, or when that could happen, or how you get there, that's another matter. But, you know, you threw out, I think there were three or four companies in your analysis there, and we were part of it and there are big bucks involved, no question. Let me have Doug, since Doug is the closest to our industrial relations issues, particularly with the steel workers.

John, we've talked about this before and it goes to one of the earlier questions. I think it's fair to say we are encouraged by the fact that the United Steel Workers International has recognized the fact that healthcare cost sharing is a critical issue for, you know, their member companies and that things such as productivity improvements are a critical issue. And we have certainly communicated that those types of things are critical issues to us as well. We are not -- it would be counter-productive for us in this forum to talk about discussions we are having with the United Steel Workers or we are not having for that matter. We are not going to go into the details of any discussions we may or may not be having. Certainly you can rest assured that we view those issues as critical issues and we've communicated to the United Steel Workers, you know, that view.

Doug, in June of '01 when the LTV management under Bill Bricker approached the union asking them to substitute the salaried plan for the steel workers plan on medical --

Yes.

-- they said that the salaried plan cost half as much. Now, since then prescription drugs have grown almost twice as much as other medical costs, and prescription drugs are 70, 75% of the retiree medical since Medicare pays for hospitals but not prescription drugs. In your case, is the union plan -- is the salaried plan half as expensive as the union plan or less than half as expensive or more than half as expensive? Can you just give us an idea of how different the magnitudes are?

I don't believe, if you count all of the expenses that anybody's plan is half as expensive on the salaried side as it is on the labor side.

Assuming it's less than half as much.

That's certainly not the case for us. It is -- I'm sorry. Are you talking about retiree medical or are you talking about actives? My comment had to do with actives.

Actually if you could comment as to both.

With respect to actives, I don't think there's a 50% difference between anybody's two plan. Certainly our salaried plan is lower cost for us than our hourly. But it's not 50% by any stretch of the imagination.

On the retiree side, you're right the prescription drug issue is much more relevant, and, you know, certainly in that case I haven't -- I can't tell you I've done the math on this, but it could approach that kind of percentage. But, it's not anywhere near that on the active side.

Thank you.

Okay.

Mr. Greenfield, I'm showing no further questions at this time, sir. I will turn the conference become over to you.

All right. Thanks for listening in this afternoon. And if there are any follow-up questions that we can be level with, we'll get back to Dan or Rich and we'll be talking to you next quarter.

Thank you, Jim. Thanks to all the listeners for joining us. News releases will be obtained by e-mail or on our website. Areplay of this conference call will be available on our website for the next 30 days. That concludes this conference call.

Thank you ladies and gentlemen. This concludes this conference call. We ask that you please disconnect your lines. Have a good day.