ATI Inc (ATI) 2003 Q3 法說會逐字稿

Ladies and gentlemen welcome to the Allegheny Technologies quarterly earnings conference call. During the presentation all participants will be in a listen only mode. Afterward 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 recording Wednesday, October 22, 2003. I would now like to turn the conference over to Mr Dan Greenfield, Director of Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you, Anna. Good afternoon and welcome to Allegheny Technologies earnings conference call for the third quarter of 2003. This conference call is being broadcast live on our website at alleghenytechnologies.com and on ccbn.com. Members of the media have been invited to listen to this call.

Participating in the conference calk today are Pat Hassey, President and Chief Executive Officer, Rich Harshman, Executive Vice President Finance and Chief Financial Officer, Doug Kittenbrink, Executive Vice President ATI Business System, Group Vice President Engineered Products, Jack Schilling, Executive Vice President Corporate Development and Chief Technology Officer and John Walton, Executive Vice President Human Resources Chief Legal & Compliance Officer General Counsel and Secretary of the Board. After some initial comments we will ask for questions. Please note that all forward looking statements made this afternoon are subject to various assumptions and caveats as noted in the news release. Actual results may differ materially. Here is Pat Hassey.

Thanks, Dan, and good afternoon, everyone, and thank you for joining us today. As we indicated in this mornings earnings release our third quarter results were impacted by continuing weak demand in pricing for most of our specialty metals. Our continued cost reduction efforts remained on track, but were not enough to overcome these conditions, especially given the higher retirement benefit expenses and higher raw material and energy and insurance costs. Our third quarter 2003 net loss was 28.8 million or 36 cents a share. However, these results do include net non-recurring special charges of $3 million or 4 cents a share, which are detailed in the earnings release. 25 cents per share of the 36 cents per share loss is attributed to the retirement benefit expense which is mostly non-cash.

We generated an operating cash flow of $35 million in the third quarter primarily as a result of further reductions in managed working capital, mainly by increasing turns and reducing inventories. This accomplishment is note worthy, considering the escalation of raw material costs, primarily nickel, and demonstrates real value in our lean manufacturing initiatives. Cash on hand increased to $79 million, an increase of 12 million from the end of the second quarter, and again note worthy considering the rising cost of raw materials. A few comments now on each of our three business segments. Flat roll products had an operating loss of 4.8 million in the quarter. Overall market demand remains weak. Higher energy and raw material costs contributed to the results, which we were able to offset somewhat by nearly $15 million in cost reductions before the effects of inflation.

Year to date cost reductions in this segment are now totalled at $43 million. Let's talk a little bit about the impact of nickel costs on our flat roll product segment results. A surcharge mechanism has been in place for many years. Our mechanism is in sync with our melting costs and shipments. So, the escalating rise in nickel costs have not materially impacted the third quarter results. In addition, carbon scrap is up and other raw material costs are also up. On the market side, domestic consumption of stainless steel sheet and strip declined by 8% in the first seven months 2003 compared to the same period in 2002.

For comparison purposes, ATI shipments of stainless steel sheet and strip declined by less than 5% through the end of the third quarter compared to last year's nine months results. In high performance metals third quarter shipments were up by more than 10% compared to last year's third quarter. However, operating profit was essentially flat due to product mix, lower selling prices and higher raw material costs again. A strong performance from our exotic alloys business helped offset the results from the nickel alloys and titanium businesses which continue to suffer from the weak commercial aerospace and IGT markets. As I mentioned, sales and orders were strong in our exotic alloys business.

We expect to further benefit from sustained high levels of demand from the government, defense sector, corrosion sector and other global markets for these high value products. Our operating management teams in this segment also continue to do a good job in reducing costs. Over $11 million in cost reductions were realized in the quarter bringing year to date cost reductions in this segment to $33 million. In our engineered products segment, which was previously known as our industrial products segment, all three of our companies were profitable in the third quarter despite difficult economic conditions. These companies also have done a good job in reducing costs.

Cost reductions before the effects of inflation in the quarter were $2 million bringing year to date cost reductions to 6 million. This segment has been renamed the engineering products segment to reflect the product engineering and technology capabilities required in these businesses. Total cost reductions before the effects of inflation across ATI, including the corporate office, totalled $85 million for the nine months of 2003. We're on target to achieve our $115 million cost reduction goal. Managed working capital improved by $18 million, and as a percent of sales was reduced to 30.6% at the end of the third quarter of 2003 compared to 32.4% at the end of 2002.

Before we take your questions, I'd like to make some personal comments, if I could. On October 1 I became President and Chief Executive Officer of ATI. I retired from Alcoa earlier this year after a 35-year career at that company. I had been consulting with the leadership of ATI during the last six months and had joined ATI's Board of Directors last July. As many of you know, all of my business experience has been in the metals industry with emphasis in many of the global markets that ATI serves, aerospace, defense, automotive, power generation, durable goods and selling through distributors. This is certainly a difficult period for ATI, as it has been for all manufacturing companies in the last three years. The problems in manufacturing are not just related to the cyclical economy.

Global markets and competitors are shaping how we will change ATI to compete going forward. I decided to join ATI because I believe this is a great company with great opportunities ahead of it, great people and leading technologies. Yet it is a company needing to overcome some difficult circumstances and challenges. I am convinced that with the changes we were making, we can meet these challenges and return ATI to acceptable levels of profitable. The basics of what we need to accomplish include stopping the operating losses at Allegheny Ludlum. We need to judiciously invest only where acceptable returns are earned.

We need to have the courage to change and the skill to implement the changes we are making. As the world around us continues to change, so must we change to meet these challenges and take advantage of the opportunities being created for ATI today. We cannot wait for the U.S. or the world economies to make us better. More needs to be done and faster. We continue to focus on reducing costs, improving productivity and streamlining our organizations. As part of these efforts, we plan additional work force reductions in the fourth quarter of this year.

We plan to provide more information on the impact of these additional reductions at a later date. But understand we're going after lowering our breakeven costs for this company at current market conditions. Yesterday we announced we have changed certain reporting relationships and expanded responsibilities of our executive management team. These moves were made to quickly move ATI forward and to better focus our joint efforts on building the ATI business system. I had been consulting in this, and I'm confident that our team can take the necessary bold actions to achieve profitability and growth.

While details are provided in yesterday's news release, among the most significant of these changes are the presidents of ATI's Allegheny Ludlum, Allvac and Wah Chang business units, our three largest operations, now report directly to me. The accountability for the critical task to accelerate lean manufacturing through the new ATI business system has been elevated to be the prime responsibility of an Executive Vice President; namely, Doug Kittenbrink, formerly our Chief Operating Officer. Through my experience at Alcoa, I'm a true proponent of lean manufacturing, including systemic and integrated methodology across ATI and best practice sharing across our companies. ATI has done a respectable job in this area in the past few years. And again, a lot more needs to be done and can be done quickly.

Our goal is to establish ATI as a value-based global company in which the foundation of our value system will continue to be integrity in all that we do and the parameters for free action in the leadership. We are committed to the environment and health and safety of people and the communities in which we operate. We will drive quality and excellence in all functions of the business and we will move for continuous and quantum leap improvements in our operations. Our objective is to have a systemic and integrated business system in use. Our goal is to provide excellent customer service and build our profitable market segments.

We will continue to engage our people in the business and connect all systems through our people. Profitability and accountability will be emphasized in our new value structure. As I said, I joined ATI because of the many outstanding opportunities here. Accelerating the deployment of the ATI business system and leading this company to compete profitably in the ever-changing global economy are the foundation of these opportunities. We will now open the lines for any 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 acknowledge your request. If your question has been answered and you would like to withdraw you registration, please press the 1 followed by the 3. Please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Robert Schenosky from CIBC World Markets. Please go ahead.

Hi. Good afternoon. This is actually Bob LaGaipa. Just had a few quick questions for you relative to what you're seeing in the end markets. If you could provide us maybe with a little bit more color relative to second quarter versus third quarter, incrementally what you're seeing each year in ends markets, also on the pricing side. And lastly on a supply/demands basis, if you've heard anything or seen anything with relative to Usinor's plan with J&L?

Well, let me just say the third quarter was pretty much a carbon copy of the second quarter for us. It was very flat with continuing growth in our specialty metals. We've been pleased with the growth in the exotic metals business, especially from the defense markets, and we see continuing opportunities for us going forward there. We've had nice growth in the overseas operations, both in China and in Europe, and I think if you look at the news release on our earnings, you now see that we're now generating over 30% of our revenues from offshore. So, we're not just looking at the North American stainless steel markets as we look for growth. In that particular market we see it remaining stable, at least at this point in time. We have very short visibility these days. But we don't see many changes in that market from what we've experienced thus far. Pricing remains difficult, and we still see the oversupply position in the industry as demands improves.

Mm-hmm. Any thoughts relative to J&L?

I don't think we have any thoughts to offer relative to J&L at this time.

Fair enough. Thank you.

Our next question comes from the line of Daniel Roling, Merrill Lynch. Please go ahead.

Thank you. Welcome and congratulations.

Dan, hi, how are you?

I'm fine, John. A question just in general about the stainless steel market, which has been weak. It's good to hear the other parts of your business picking up, but just what's your first impression of the outlook for stainless from an Allegheny standpoint and if you're planning any just re-evaluation of its approach to the market?

Well, let me start here, Dan, by again pointing out that when we looked at the performance this year versus last year, the North American stainless market overall is down 8%. Allegheny's business in that market is down less than 5%. So, we are in a competitive position in this market. We're not giving up share in this market. The second side of this is that our strategy is to remain competitive in the basic stainless steel business. And the initial new furnace coming on in our Allegheny Ludlum operations is ahead of schedule. We're looking for some significant cost savings out of the dual complex that will be completed during 2004. We're also looking for additional business from other parts of our capital investment. We think that we'll be at capacity in China in 2004, up from where we are this year. One of the key assignments from Doug Kittenbrink as we move forward next year is to reassess our European strategy. And with our current currency condition and market conditions, we think we have opportunities offshore also there. So, I think in the industry in total, very similar to most industries in this country today, there's an overcapacity available. And at the same time the market seems to have stabilized and we're looking for a very competitive position in the market, not the lowest cost position, but a competitive position with our total menu of products, our capabilities in the individual specifications, our technology in the key differentiated parts of that market to drive us forward.

Thank you.

Thank you. Our next question comes from the line of Michael Gambardella. Please go ahead with your question.

Yes, good afternoon. I have two questions. First, for Allegheny Ludlum in your stainless sheet business, shouldn't you be experiencing a margin expansion during a rising nickel market the way the formula works with the delay in the nickel costs that are feeding from your inventories into your shipments? I would think it would have a lower nickel price, yet you're charging customers for the current nickle price on the LMAs. So, I'd think you'd have margin expansion there.

Let me just comment this way, Mike: The way that this formula works is that is it really in sync with our flow time, our purchasing and our end shipments. Even though we experience the price pass-through, if you will, it's not a conversion price increase for us. The price pass-through when we make the shipments, we are currently then buying the materials and putting them into the end process under the new prices. So, it's very much in sync. It doesn't give us an advantage, but it doesn't give us a disadvantage.

Okay. And then second question, just in regards to interest expense on the quarter, it dropped from 8.4 million last quarter to 4.1 million. I saw the two and a half million was income from a tax settlement.

Mm-hmm.

What's the differential then? That would make it the gross interest expense, 6.6 on the quarter, versus the 8.4. But what's the differential between those two numbers?

The differential is a one-time gain in the interest earnings from a tax return which amounted to about $4 million for the quarter. Oh, it was 4 million. I though it was two and a half.

Mike, this is Richard Harshman. On the segment report that's interest expense is a pretax number. The two and a half million is an after tax impact of the 4 million pretax.

So, it's 4 million pretax?

That's right. A one-time event, though, Rich. Right, it's a one-time on prior year refund. Okay, very good. Thank you.

Thank you. Our next question comes from the line of John Tumazos from Prudential. Please go ahead.

It's been a while since we had $5 nickel, particularly in the high performance applications as well as 200 and 300 series. How much is customer usage and preference changing at this price level for nickel?

John, as far as we've seen, the shipments really haven't been affected by the rising price. We haven't experienced any substitution in the marketplace. The pass-throughs are going through. They're certainly not welcomed.

Are the distributors overbuying because they think nickel's a rocket going to five or 10 bucks and they're going to buy before your next hike or to catchup?

In our particular appointed distributors we see the inventory level still remaining low, not increasing.

So, they're actually timid and buying a little less, maybe?

I think it's early to make a judgment that the prices are where they are, and as we move further into this I'm sure we'll see our customers making their own decision as to where the nickel prices are going.

You and Rich and Danny may not want to answer this, but what's the earliest quarterly time frame you can imagine your cost reductions and price catch-ups getting the company above break even?

I think we would have to break the question between operating income and the non-cash health benefits, retiree benefits issue that we have. As you know, the retirement benefits issue is a non-cash issue for the next several years for the company based on the pension asset funds. Everything that we're doing going forward is targeting and focusing this organization in the short-term to returning the company to operating profitability quickly. That's about what I'd like to say about that.

Thank you and congratulations on just staying even. Sometimes I think that's a lot of work that we don't notice.

John, it's good to hear from you. I look forward to seeing you soon.

Our next question comes from the line of Mark Parr, McDonald & Company Securities. Please go ahead.

Thank you and good afternoon.

Good afternoon.

I just was wondering if you could help to break down the cost reductions that you've achieved thus far in terms of personnel or operational enhancements? And also, at least, Pat, based on your commentary regarding additional cost reduction incentives, I got the impression that there might be somewhat of a charge in the fourth quarter that we might be looking for. Could you put some round numbers around that in terms of order of magnitude, what it might be? And then lastly, are you in a position at this point to offer any guidance regarding operations and performance for the fourth quarter excluding all the unusual items?

Three interesting questions. First of all, let me just comment on our cost reductions. The theme of the ATI business systems, for those of you that know me from Alcoa, you can probably guess pretty quickly that it's the same approach that that company has taken in terms of systemic and integrated manufacturing, lean manufacturing methods, faster flow times and all the gains that we can make from simplification and directing our efforts in the area of the manufacturing side of the business. However, the items that we're talking about early on in our cost reduction programs, we're targeting our break even points, we're targeting the fixed part of the business where we know that the gains, once they're finished, are in place. And then we'll move very quickly under Doug Kittenbrink as we move forward into the areas of the manufacturing side that I just mentioned. We will have a charge in the fourth quarter. I don't want to comment at this point. We will make a news release when we have it ready for you. But we are targeting the thick side of the business. And I forgot the third part of your question. I'm sorry.

The third part was if you were in a position to offer any guidance as far as performance or earnings for the fourth quarter excluding any non-recurring items?

We're just putting these plans in place, and I wouldn't offer any guidance at this point in time. We're also working very diligently on our fourth quarter plans. And as part of this reorganization, we brought the four major businesses to the executive portion of the company in part of the Executive Committee that assists me in forming policy and directions. So, we have our four major businesses, which is of course the Allegheny & Ludlum steel business, Allvac, Wah Chang and our metalworking products business, which is a business that's over 200 million, also. So, we now have a reach down into the company where we'll have a very good picture of what's going on and also the impact of the changes that we're putting in place. But I'm just not prepared today to talk to you about any guidance for the fourth quarter.

All right. Just as one follow-up, should we expect a follow on cost reduction program to be announced for the '04-'05 time frame?

We will continue with our cost reduction programs in '04 and 05 and we would expect that we will be getting good benefit from them.

Okay. Thank you very much.

Your next question comes from the line of Chris Olin, Longbow Research. Please go ahead.

Good afternoon.

Good afternoon.

Can you talk a little bit about what you're seeing in the titanium market for the fourth quarter? I guess for that matter, in the nickel alloy markets, as well? Any feel for whether or not this market has bottomed yet? And do you expects to realize any kind of benefit from the defense market or from the new Airbus 380 in the immediate future? Thanks.

I think that's a very good question. If you look at our reporting on the titanium mill products side, we have some, compared to last year, we have some stronger shipments. And this is without the recovery of the commercial air frame or the IGT markets. So, I guess personally I would say I'm encouraged by the titanium market, but I'm also a realist that we need the commercial air frame market to see some light and we need the IGT market to be back to the levels that we enjoyed in the '98 and '99 kind of time frame. Now, if we go back and look at those two particular markets and we look at the cycles and we read what we read and know what we know about the markets, I think that one of the first materials that we'll see some improvement will be titanium because of its longer lead times. So, if you start calculating a recovery in the aerospace market for orders or deliveries in 2006, you can back that off yourself as to when the titanium market might start to move with 12-month or longer lead times. Also, with the expansion of the IGT market in the '99, 2000, 2001 time frames, we will start to see probably in the 2006, also 2005, 2006 cycles some recovery for spare parts and rebuilding of those engines in the use that they have, and we'll see something in nickel-based alloys and titanium there, also. So, we're just going to wait and see what we get. But it certainly post-second half of next year and hopefully earlier than later.

Okay. Thanks. Good luck.

The next question is a follow-up from the like of Mark Parr, McDonald & Company Securities. Please go ahead.

Thank you very much. Pat, one thing I thought I heard you say is that on the stainless side that you don't aspire to be a low-cost producer. And first of all, correct me if I'm wrong there, but I wanted to ask a hypothetical question. If the low-cost producer is, let's say their cost is 10, and let's just say, for example, your current cost, Allegheny's current cost is 20, how close do you think you could get to the low-cost producer?

Let me come back on that one. What I'm saying is I don't think that we will be in the Standards commodity sizes with gauges and so forth the lowest cost producer. I did not say that we would not be a low-cost producer. We'll be a competitive producer. Secondly, there is no other producer that is producing the range of products that we produce, and in the differentiated side of that business where we are and we'll continue to be the lowest priced source for those kinds of products in those quantities with sizes that are ordered. So, we'll segment our market to be the best producer in those things that fit us the best and maintain our competitive position in what I would call the more commodity side of the market. I don't think we would be the lowest cost producer in North America, but we will certainly be in the lower cost producer quadrant in the world for these products.

Okay. Thanks for that clarification. I just have one other follow-up. Is there any reason to assume that the performance of Allegheny's pension funds have not been in line with the recovery of the general markets over the past nine months?

No. I think we look at that for next year's planning at the end of November, we certainly will be, I think, very much in line with the rest of the general market.

Okay. Terrific. Thank you very much.

Our next question comes from the line of Aldo Mazzaferro from Goldman Sachs & Co. Please proceed.

Thank you. I had two questions on the stainless business regarding your plans to improve the business. I was wondering if you might comment as to whether you expect any significant changes in the product mix, within stainless and possibly whether the volume might change significantly?

I guess the answer to that is we would like to see it continue to shift to the items in the market where we're making the best returns. And at Allegheny Ludlum we have what we call a strategic renewal process underway where we're going through our customer base looking at customer by customer and our market segment base looking at each parts of that market segment to see basically where we can add the most value to the marketplace and which are the best products for us. So, if it changes, it will change under that total analysis. We have a defined capacity at this business, and we have been able to utilize a good portion of that capacity, and we intend to keep doing that.

And just a little follow up. On the head count reduction that you envision, as well, are you referring to something that might be for both salaried and hourly workers?

What we're talking about on the fixed side certainly involves our salaried work force and our overhead structures and our organizational structures on how we manage these businesses, lead these businesses and approach the marketplace. We have been making some good progress in our operating mill jobs. And it has some influence, therefore, as we get productivity gains in those jobs. Those are as important to us as any other fixed reduction. And what I'm talking about is the overall cost in such things as central services as well as in the operating line jobs.

Great. Well, thanks very much for all the great information on the call.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you would like to register a question, press 14.

Well, gentlemen, ladies -- oh, go ahead, Dan.

I'm sorry. She'll say there's no more calls.

Is there any more questions from anyone?

There are no further questions. I'll turn the call back to you.

Thank you. Well, everyone, thank you for joining us today and thank you for your continuing interest and support of ATI. We look forward to meeting with as many of you as possible over the next several months. Appreciate your time in being with us today.

Thank you. And thanks, all the listeners, for joining us this afternoon, as always. News releases may be obtained by e-mail and are available on our website at www.AlleghenyTechnologies.com. Also a rebroadcast of this conference call is available for the next 12 months on our website. That concludes our conference call.

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