ATI Inc (ATI) 2003 Q4 法說會逐字稿

Ladies and gentlemen thank you very much for standing by. Welcome to the Allegheny Technologies quarterly earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. And at that time if you should have a question press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded on Wednesday, January 21, 2004. I now have the extreme pleasure of turning the conference over to Mr. Dan Greenfield, Director Investor Relations In Corporate Communications at Allegheny Technologies.

Please go ahead, sir.

Thank you.

Good afternoon, and welcome to Allegheny Technologies earnings conference call for the fourth quarter 2004.

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 call today are Patrick Hassey, President and Chief Executive Officer; and Rich Harshman, Executive Vice President - Finance, and Chief Financial Officer.

After some initial comment, 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 earnings release. Actual results may differ materially.

Here is Pat Hassey.

Thanks, Dan. And good afternoon to everyone. Thank you for joining us today.

As we indicated in this morning's earnings release our fourth quarter results were impacted by special charges and noncash inventory accounting charges that continue to position ATI for improving results in 2004. Our fourth quarter 2003 net loss was $210 million, or $2.61 a share. Results include special charges of about 176 million or $2.18 a share, which are detailed in the earnings release. Excluding the special charges our fourth quarter net loss was $34 million or 43 cents a share. This amount includes inventory accounting charges of $11 million or 14 cents per share, resulting from the impact of rapidly rising raw materials, and our [inaudible] accounting methodology. It also includes retirement benefit expenses of $20 million, or 25 cents a share, which is mostly noncash. These two items combined are 39 cents of this 43 cents net loss.

We generated operating cash flow of approximately $30 million in the fourth quarter. For the full year in 2003, cash flow from operations was $82 million and cash on hand increased over $20 million ending the year at $80 million.

This accomplishment is particularly note-worthy considering the dramatic escalation of raw material costs in the fourth quarter of 2003, primarily nickel, and demonstrates true value from the ATI business system in lean manufacturing initiatives. As an example, even though costs of our raw materials increased by approximately 27 percent during 2003, our gross inventory dollars were essentially flat, increasing by less than one percent. We have no cash borrowings under our secured domestic credit facility. Even during this difficult business environment, we continue to invest in our operations. Our two major strategic capital investments are on schedule.

The first, our new flat-roll products electric arc furnace located in Brachenridge, PA began operation in November and is performing well. The second electric arc furnace is scheduled to be on stream later this year. The upgrade of our long products rolling mill located in Richburg, South Carolina is planned for start-up in April of this year. These projects are expected to provide state-of-the-art operating capabilities, expanded capacity in long products, and lower costs to the business.

Cost reductions were $117 million in 2003, exceeding our goal for the year. We significantly lowered our fixed costs as a result of restructuring actions taken in 2003. As an example, we now have more than 680 fewer salaried employees than at the start -- excuse me at the end of 2002.

Total employment has decreased to approximately 8800 employees, from about 10,000 at the end of 2002. These are permanent reductions accomplished through organizational changes, productivity improvement, and process changes. We plan to make continued improvement in this area through the ATI business system going forward.

Before we open the call to questions, I'll make a few comments on each of our three business segments.

First of all, flat roll products had an operating loss of 1.7 million in the fourth quarter. While the benefits of cost reduction initiatives favorably impacted our results, raw materials and energy costs were significantly higher, and average base selling prices remained at historical lows. The good news -- market demand began to improve in the fourth quarter. As a result, we are now seeing very good loads in many of our operations. We have a very full order book for cold rolled sheet and strip, and lead times are out to the second half of March and moving into April.

Price increases for most of our products announced in December are now in effect. We also announced an additional 6 percent price increase for stainless steel products which goes into effect on Monday, January 26 and a $30 per ton surcharge for our silicon electrical steel which is effective for shipments February 1.

Another item -- our stall precision rolled strip facility in Shanghai, China is expected to be very busy throughout 2004. Sold out. In addition, Unity, our titanium joint venture is off to a good start and gaining real traction in the global markets for industrial titanium products. In the high performance metals sector, we had an operating loss in the fourth quarter of $3.2 million. Primarily due to the rapid rise in nickel and other raw material costs, which resulted in a $8.7 million increase in noncash accounting charges. Fourth quarter shipments for our nickel based alloys and special steel alloys were lower compared to last year's fourth quarter. Shipments of nickel-based alloys, however, were up six percent but were offset by lower specialty steel shipments.

Total titanium shipments were down 5 percent lower than the fourth quarter of 2002, but adjusting for shipments for the large GORCO mining project in the fourth quarter of 2002, overall other titanium shipments increased 11 percent in the fourth quarter of 2003. In December, we announced a pricing policy revision for our nickel and cobalt alloys and specialty steel long products. This action better aligns our selling price now to the procurement price of the raw materials. Shipments increased 28 percent at our exotic alloys business in the fourth quarter. We expect to further benefit from sustained high levels of demand from the government high energy physics and other global markets for the materials, particularly the corrosion markets in Asia.

As we begin 2004, we believe demand for our nickel-based alloys and titanium alloys from commercial aerospace market has stabilized. These exotic business alloys remain busy with the schedule in many areas nearly full. The fourth quarter of 2003 was an unusual quarter due to the previously mentioned accounting charges and some times of some shipments at the end of December. The fourth quarter of 2003 was an unusual quarter due to the previously mentioned [inaudible] accounting charges and timing of some shipments at the end of December. Our engineered products segment had an operating profit of $1.6 million in the fourth quarter. Demand remained strong for our tungsten products from the oil and gas and medical markets and improvements from the automotive market. Demand for our forged products improved particularly from class A truck market.

Demand for our cash products improved from the wind power, machine tool, mining and transportation markets resulting in increased market share for this business.

We view 2004 as a transition year to success. We are expecting to see continuing improvement in the U.S. economy. The weaker dollar will also help in our export sales. The ATI business system continues to drive cost reductions, leading manufacturing and quality improvement and other improvements in our operations. While we are concerned about raw material and energy price volatility, especially for nickel and natural gas, we are taking actions to manage the impact of this volatility internally, and we are now able to improve selling prices.

During the first quarter of 2004, as our markets improve, we are seeing higher transaction prices and better volumes. This is really good news. It also will result in higher receivables, and thus some use of cash in the first quarter of 2004.

In 2004, our goal is to achieve profitability in our flat-roll product segment and improved operating earnings in our high performance metals and also our engineered product segments. While retirement benefited expense will again be a significant negative to financial results, it will remain largely noncash. We expect overall business conditions for most of our major end markets to steadily improve throughout 2004.

We'll now take questions.

Thank you, sir. Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4. A three-tone prompt will acknowledge your request. Please note, if your question has been answered and you would like to withdraw your registration, press the 1 followed by the 3.

Once again, ladies and gentlemen, to register for a question, press the 1 followed by the 4.

We have our very first question from the room of Brett Levy of RBC Capital Markets. Please go ahead.

Yes. On the stainless side, you guys have attempted a price increase, and I'm just -- I'm wondering whether or not you guys have heard whether or not North American Stainless has joined in or not?

We haven't heard about North American Stainless at this point, but let me just comment on this. Our schedules are full through January, full through February, basically full through March and loading in April. Our price increases are in the market and will stay in the market.

All right. In terms of like the timing, you guys have targeted another -- check me on this, a little over 100 million in cost savings for 2004. Can you give me a rough sense, you know, is that supposed to be front-end loaded, back-end loaded? When are we going to start to see the bulk of that number?

Many of these are on a continuing basis where we're working through the ATI Business System to improve yields, to improve quality to take our fixed costs down. There will be some other items that we're working on that could be more dramatic that you'll see in any particular quarter and those are simply based on our ability to get those accomplished and into the business bottom line.

And lastly, and then I'll pass the ball. Can you talk about some of your international initiatives? And are you -- do you remain somewhat inquisitive on that front?

Um -- I think, let me just start with the China operations. Our stall facility we are very pleased with. We are very pleased with the results of this over the last three years. And this has been a really -- a great footprint for us, and a great success going into China.

Our facility for this year for producing the kind of products we produce the high value strip products that that facility finishes, are basically in a position of being sold out for 2004, and we continue to look at other opportunities in this part of the world.

Second comment, we are consolidating our metal working products business on the continent in Europe, and we expect to see that performing well for us as we're moving forward, moving operations into switch-and-run but maintaining our distribution and selling efforts throughout Europe. That should pay up for us as we expand that business.

The last one we have is the operations that we have in Sheffield, England. There is there primarily for the aerospace jet engine business and other needs of the aerospace business and high value metals. The good news, I think, for our company is we are positioned to supply both sides of the ocean in the aerospace business, both sides of the ocean in commercial airplane, and both sides of the ocean in aero engine.

All right, thanks. I'll get back in queue.

Thank you.

Thank you, sir. Continuing on, our next question comes from the line of Jared Muroff of Prudential. Please go ahead, sir.

Thank you. I just wanted to make sure I understand what's going on with the valuation allowance on the deferred tax asset, and what -- and you indicate that you will not see a benefit if you post a pretax loss in 2004, you won't see a benefit from the income tax in the income statement, but yet you -- and you wrote down your deferred tax asset, yet you still have 30 million or so on the books as a deferred tax asset. I'm trying to reconcile those two, why it wasn't written down to zero, and that means?

This was a very technical calculation, a conservative calculation and I'll let Rich Harshman, our Chief Financial Officer, comment on that for you.

Hi Jarrett.

Hi, Rich.

The valuation allowance under FAS 109, as Pat said, was, we think prudently and appropriately conservative and reflects the requirements as prescribed by FAS 109.

The remaining assets that we have on the books are those assets that, under the FAS 109 standards, are realizable under the technical requirements of FAS 109. So that the gross net deferred tax assets before the $130 million valuation allowance is roughly $165 million. The net remaining on the books is about 35 million after the valuation allowance, and those assets are realizable under the technical accounting standard.

But it's right to assume that if you post a pretax loss, there will be no tax benefit recorded on the income statement?

Yeah. I mean that's, as we say in our news release and if you go back and look in our third and second quarter queue, we go through quite a bit of discussion of the deferred tax accounting issue. Since we've established a deferred tax allowance, a valuation allowance, any GAAP losses in 2004 would not show a tax benefit reducing that GAAP loss to get down to an EPS.

Mmmm-hmmm.

The valuation allowance under various circumstances going forward does reverse, and can reverse, and quite frankly, you know, we would expect that it would at some point in time.

When we pre announced this issue in December of 2003, you know, we said that the charge, not only doesn't it effect our liquidity, or our ability to utilize and realize the deferred tax assets in the future. It also doesn't reflect our long-term outlook for the business. ATI was in and remains in a pretty unique position of not having a history of any expired tax credits in our past. We have been able to realize all of our operating losses through cash refunds, and we would expect to be in a position of doing that going forward as well.

Okay. Just one question to follow-up on Pat's comments on Europe. If you could just -- do you have a sense of what the impact of the Euro has been in terms of how we could weed that out in terms of what the prices are, or are prices there set in dollars? You know, in the high performance segment, what the -- what the impact of the stronger currencies, the Euro and the pound was on the price realizations?

First of all, the operation is in Sheffield, so we're in pounds to the dollar, number one on our cost basis. The selling price for most of the aerospace business is set in dollars. So the impact on the Euro, really, is not as a significant a factor there. On the other side, since we are producing our product in Europe, and also selling in Europe, it's a one-to-one relationship to us in terms of our cost and our selling prices for the metal working products revenue.

Okay. Thank you.

Mmmm-hmmm.

Thank you. Our next question comes from the line of Michael A. Morrisroe of Bear Stearns & Company. Please go ahead.

Thank you. Good afternoon.

Hi, Michael.

I had a question on the flat roll products area. Specifically on I guess base stainless pricing. Just wanted to get your thoughts on why it's remained weak while almost other commodities have risen to a degree, and it does appear that demand was steadily improving, at least late in the quarter. And then, as a follow-on, you're talking about achieving profitability next year. Can you talk about what type of pricing environment from base perspective you're incorporating in there, along with your volume assumptions? Thanks.

Well, we see an improving market, as we said it started in the fourth quarter of last year. I think the gross domestic product growth that we saw in the third quarter, something in the 8 to 9 percent range, again I think followed on by what appears to be 5 percent, something like that, 4 to 5 percent in the fourth quarter, and we're looking at, at least in our markets, I guess it's finally, Michael, seeing that kind of recovery in some of the end markets that either our customers serve or that we serve. The building and construction market for residential remains pretty solid for us throughout the fourth quarter and I think results are now showing that for the December numbers and still strong moving into the first quarter we're seeing recovery in some of our durable goods markets. We're seeing some -- finally some expansion in projects that see some of our other base metal businesses start to move. So it's early to tell where we're headed.

But indications are that the domestic product that -- growth that we'll see in our market is finally moving into some of the things that we do well, and we're expecting, in at least from what we've seen so far, very much in the first half of the year we're fairly confident that we're going to see it. We're going to watch the second half of the year.

So you're expecting base stainless pricing to improve significantly, is that a fair statement, or is it more of a supply issue that's constraining? It sounds like you're optimistic on demand which would imply, certainly, pricing heading higher.

Well, I think we've seen some companies decide that they would rather do some other things in a few of our product segments. So we're seeing some demand, and I think it's a basic balance of supply and demand, and with the capacity that we have to supply this market, our particular capacity to the market demand, I think we're going to see a continuing improvement in prices as we move forward.

Thank you.

Thank you very much. Continuing on. Our next question comes from the line of Aldo Mazzaferro, Jr. of Goldman Sachs and Company. Please go ahead.

Good afternoon. Say Rich, I just had a quick question on the tax rate. I understood the deferred tax asset write-down. I'm wondering, did I hear you say that if you report a pre-tax loss in 2004, you would not get any tax benefit against that?

That's right.

And I wonder, Pat, if you could help us a little bit understand where the incremental cost savings would be derived? Is it still yield improvement, mostly?

I think it's yield improvement, I think it's energy improvement. The new arc furnaces are much more efficient than our old equipment. We're seeing some capacity gains coming back into our long products. We are getting quality levels, we are getting the advantages of some of the things that we put in place in 2003, including some of the impaired assets that we have taken off the books, and we also will see a -- just an overall improvement of our operations working with our work force through the ATI Business System, and how we're affecting that into the operations.

Thanks. And if I could just ask one more. I understand the new electric furnace is supposed to be -- have much greater output than the existing ones. Are you -- do you plan to close the existing furnaces, or have you done that already?

We -- we have one of the furnaces up and operating. The second one will come up and be operating in the second half of this year. And when those two furnaces are performing at the levels that we expect them to, then the rest of the old furnaces will be closed.

And would there be a head count reduction associated with that?

Yes, there is. A -- 55 people, I think is the reduction in the melt shop with those two new furnaces.

Aldo, if I could just go back to your question on the deferred tax asset for a moment. When you -- when you read the disclosures that we have already made, in our queue, as well as in our December pre-announcement and this news release, the major reason for our net deferred tax asset before the valuation allowance is due to post-retirement benefit expenses. And when you look at just, without commenting on 2004 results, when you look at 2003 results excluding the special charges, the major driver on the negative side is the retirement benefit expenses.

Those are timing differences between when they are recognized on the financial statements for GAAP purposes, and when they're ductible as those benefits are paid for tax purposes. So when you record a loss on the GAAP side, and you tax benefit it, you are creating a timing difference on the tax side where you can't deduct those until you pay them at some future point. And because of the nature of those, that's a very long time period when you pay them and deduct them on the tax side. That creates a deferred tax asset. And under the technical aspects of FAS 109, because of ATI's recent cumulative losses, we're in a position of really having to overcome that issue, and establish a valuation allowance.

And when you look at the results going forward, if retirement benefits expenses are going to continue to drive a GAAP loss, if you were to tax benefit that loss, you would be increasing your deferred tax asset, which you've already established a valuation allowance, a partial valuation, but substantial one, to value the remaining net-deferred tax assets, the $35 million plus on the balance sheet at the end of the year, at its realizable value as prescribed by FAS 109. So that's really why, in a '04 situation, under FAS 109, you cannot provide a tax benefit to a GAAP loss.

Great. Thanks, Rich, that was a great explanation. I appreciate it.

All right.

Thank you. Ladies and gentlemen as a reminder, we welcome your questions and/or comments. Please feel free to press the 1 followed by the 4. Our next question comes from the line of Robert La Gaypa from CIBC World Markets. Please go ahead.

Thank you. Good afternoon. I had a few quick questions for you. One, I was hoping you could be a little more specific in which end markets you are seeing the most improvement. Two, maybe you could be more specific as to how you are managing the volatility in raw materials and energy costs. And finally, as it relates to OPEB the increase from the 42 million to the 68 million I was hoping you could elaborate on that, and also give us a sense how significant the federal law regarding prescription drugs might impact that for the better?

I'm having a hard time remembering your first question, but let me back up.

The end -- the end markets, what we're really seeing is the -- is basically the end product markets for our stainless products, flat roll stainless products have finally got some traction, and we're seeing demand that we haven't seen for the last three years, at least in the end of the fourth quarter moving in throughout the first quarter.

From the aerospace standpoint, we've seen early signs of movement in the titanium market which usually is a 14-month to 16-month market that's [inaudible] for some recovery in the aerospace business, but we're mostly on the jet engine side, so that can be from running the fleets the way they are today at high levels that take replacement parts or for new OEM, but we're seeing some strength in the titanium side, and we're seeing some short lead time requests for our high-nickel based alloys that go into that business. So that's a very good sign.

Mmmm-hmmm.

We're seeing strength in the class A truck market for the first time. We're seeing strength in our other transportation markets in the casting business for engine blocks. Our tool business is one in the metal working products that is getting a higher usage which also tells us that people are, throughout the world at least where we're participating, seeing some increase in cutting tools and manufacturing needs.

Mmmm-hmmm.

So those are all signs for us that we have a general recovery taking -- taking place. Tell me again what your second question was?

Second question was what actions you've taken to manage the volatility in the raw materials and the energy costs.

Well, we have some -- let's just take the energy. We are using some hedging methods that help us to average the costs and the run-ups. We will not experience the total run-up in the natural gas prices and the same thing we have basically managed the electrical side to mitigate that one.

On the nickel side, we have some contracts, but basically we manage that through our contract suppliers, and we -- we are also managing that and trying to sell some less -- less -- some alloys that use less nickel. That's the 200 series. We also, of course, have the surcharge mechanism that is sensitive to the prices, and we pass them along.

Okay. And just finally, with regard to OPEB, the increase from the 42 million to the 68 million, maybe if you could just elaborate on that a little bit, Rich, and also give us a sense as to how significant the favorable impact might be from the new federal legislation.

Sure.

The increase from 42 million of OPEB expense in '03 and 68 million in '04 is really fundamentally driven by an update of the medical inflation trend rates not only that we're looking at, but, you know, we think every company, as you look at the kind of inflation trends that everybody has experienced in 2002, 2003, and what our advisors and actuaries view as likely going forward, that has an impact under FAS 106 on the expense in '04. We've also lowered, a little bit, by 25 basis points, the discount rate that is used in accordance with FAS 106 to value liabilities, and that has an impact, although lesser than the inflation trend rate assumption.

Right.

It's a -- it's an important point to make that -- that that $68 million estimate is not really reflecting, in our view, a significant change in cash outflow between '03 and '04 on OPEB.

Mmmm-hmmm.

We still have the ability -- because obviously this is an accounting and actuarial accrual based upon projected benefit payments so we're not going to see that kind of an increase, in our view, on a cash payment side in 2004, number one.

And number two, we still have a sizeable VIVA trust asset that we can use to pay a substantial part of the United Steel Worker retiring medical and life obligations in 2004, just as we have in 2002 and 2003.

Right.

Um -- on the -- on the -- the -- the active side, as well as on the non-represented work force side, there -- there is a cost sharing mechanisms already in place that -- that -- that are much different than on the represented side, which -- which also helps control the costs from an affordability standpoint for ATI.

Mmmm-hmmm.

The impact of the new federal Medicare prescription drug program as we said in our news release the FASB came out last week with some guidance that gave companies a choice of making a wide series of assumptions and reflecting that in their fourth quarter '03 results, or delaying it or deferring it. And so they came out with more authoritative guidance.

We have elected to wait because we're not really certain what guidance the FASB will come out with on the accounting treatment for the 28 percent credit that plan sponsors will be getting under the new program. Suffice it to say, a large portion of our OPEB liability under FAS 106 is prescription drug-related. So we will see a benefit that will be material, in our view.

How that translates into how you record it on your liability and your balance sheet, as well as the P&L impact really depends on what the FASB comes up with in terms of guidance.

Right. Terrific. Thank you very much.

Thank you. Our next question comes from the line of Mark L. Parr of McDonald Investments. Please go ahead, sir.

Hi, good afternoon. Can you hear me okay?

Yes we can, thank you.

Okay. Terrific. I just -- I don't want to belabor this tax rate thing, but Rich, I was wondering are you going to accrue state and local tax against losses in '04 or is this going to be a zero?

Well, I mean -- I think the state and local taxes, as well as the foreign taxes, I mean, quite frankly, are -- in the great scheme of things, are not significant to ATI.

Okay.

We obviously have various tax planning strategies that we utilize to appropriately minimize the impact. So I don't think that that would be material.

Okay. Terrific. Um -- all right. In the release, maybe I missed this, Pat, when you were talking about, you know, the various segments.

Mmmm-hmmm.

There was a note on specialty steel alloy shipments being down 30% in the fourth quarter. I was wondering if you could add some color around that, and what's going on there, and what the outlook would be over the next several quarters.

I think I'll let Rich take that one, because he had the same question you did just earlier.

Yeah, Mark it's really broken down -- the major -- the major driver for the negative change year-over-year, is this our specialty steel alloys in the U.K. And fundamentally, there was less demand from certain end markets, including commercial aerospace, as well as some corrosion markets for our jets at [inaudible] operations which are part of the all back limited operations in Sheffield. Those are the machined parts products that we -- the shafts for Rolls-Royce engines that we produce, as well as for corrosion and oil and gas markets. There was some overinventorying in some of the markets which impacted us on a quarter-over-quarter basis.

The core specialty steel products in both the U.S. and the U.K. were relatively constant. So it was really a more isolated situation on some of the lower value products that we make and produce out of Sheffield.

Okay. All right. And is that something that you would look to continue in the first half of '04?

I mean I think that those markets are still recovering, and -- um -- and I don't know that it would be as dramatic as you saw on a '03 to a '02 basis. It won't be as strong as '02.

Okay. All right.

I certainly would say that in terms of the market in total, the fourth quarter was a -- an unusual quarter in how we had it end, and what customers were doing around year-end to control their own shipments and so on. So I think if you look at those numbers, they'll be more back to the what you'd expect to see, or have seen as we move forward.

Okay. I had -- I had -- I had two other questions here.

First of all, you know, just -- this is more of a conceptual question, because I know you've been talking about cost savings in terms of -- it's more of a theoretical number prior to inflation. You look at all the great progress that you made in '03 and with over $100 million in cost reductions, and you know looking at consolidated EBIT on an operating basis it's down 10 million year-over-year.

I was wondering if you could, perhaps, if there's any way you could help us reconcile the cost savings within the context of reported EBIT for '03, and also, just to try to give us some sense of, you know, how those issues that impacted you negatively in '03 could persist in '04 against another expectation for $100 million in cost savings.

I think some of the -- some of the cost savings that you're -- that you're talking about were also savings that we took charges for in '03 that we had to spend money to get in terms of the fixed cost reductions, in terms of consolidating the corporate headquarters. Some of those kinds of things now will be going forward that we have those in -- in place.

We also certainly saw some effect of rapidly rising energy costs and rapidly rising raw materials, including the scrap side of the business that have an effect that we weren't able to cost impact into our prices. So those kind of things offset the savings that we -- that we netted out.

Hopefully now, as we move forward into the market and we're able to pass along these charges, and to see better performance in our -- in our -- in our operations including the new equipment we have in place, that we're going to take more of these savings directly to the bottom line.

Okay. Would it be fair -- I mean is it -- is there any way that, you know, we could have any -- should have any kind of an expectation around how much cost savings, you know, we could expect to flow to the bottom line, or what sort of marginal contribution from this level of operations makes sense? Just a way to try to model this, you know, within the context of improving pricing and improving end demand.

Well, one of the things you have to look at is our OPEB costs and I'm going to let Rich comment on that, in terms of how these things can impact these outcomes.

Mark, your question deals with EBIT and looking at -- it sounded like you're trying to compare '02 to '03, in light of the $117 million cost reduction, and where did it go in terms of the bottom line. The Delta in '03 compared to '02, retirement benefit expenses in '03 was $134 million pre-tax and 2002 was $21 million. So -- so $113 million of that Delta was just to -- was the cost savings -- of the cost savings was just to offset the impact of pension and OPEB.

Throughout 2003, as you know, at least until here in the fourth quarter, most of the end markets that we were serving were weak. And volumes were down, base prices were down. There was clearly inflation from the standpoint of natural gas costs and electric energy costs. So all of those things -- I mean it's a -- it is a fair question, it is a good question, but fundamentally, the answer is that the situation would have -- would not be what it is today had we not taken $117 million of costs out of the operation.

Oh, no, I hear that. I was just -- the number I was looking at, Rich, was actually above the pension income number.

Okay.

It was before corporate. Basically it was just the -- you know the operating number, and so I understand. Just -- okay. I appreciate that.

I'm still -- I'm just trying to get clarity on this, that's all. I appreciate your response. I just had one last question.

As far as your cash OPEB costs, you know, healthcare costs, '04 versus '03, what assumptions are you making, you know, as far as what your health insurance expense is going to be for active employees this year compared to last year?

I think the out of pocket dollars will be about the same with the changes that we've made in the plants.

Okay. Thank you very much.

Okay.

Thank you. Our next question comes from the line of Anthony Rizzuto of Bear Stearns. Please go ahead.

Thank you. Hello, gentlemen.

Hi, Tony.

You guys obviously have such a wide range of products, end markets that you serve, but if you look at some of the less critical applications, what successes have you guys had of possibly reducing the nickel content in certain of the [inaudible] fields, and maybe in some of your higher nickel alloy. Have you had any success? I think I saw in the text that you alluded to maybe some alloys.

We have been certainly working on that and we're certainly trying to sell it. We are -- we've got some new alloys and some new different kinds of products going out that I think you -- that you might be interested in.

In fact, I'm going to let Jack Shilling talk to you about that. He's here and he's our chief of tech -- technology pushing these kind of things, Tony and he's got, I think, what you want to hear.

Thank you very much.

Hi, Tony, this is Jack Schilling.

One thing that we're particularly excited about is a new duplex alloy, so-called duplex alloy that we just received a patent for it last year. It's alloy 2003. The duplex grades are stainless grades that have excellent corrosion resistance, and they achieve that at a significantly lower nickel content. And the work horse alloy in the duplex family is an alloy called 2205 that's been around for a long time, and over the last ten years or so has made significant inroads into corrosion applications for stainless steel.

The new alloy that we just got patent awarded last year 2003 takes the 2205 alloy to -- to a new level from the standpoint of cost effectiveness. It has excellent corrosion resistance, but it's significantly less costly to manufacture.

For example, the 2205 alloy has 5 percent nickel our new alloy 2003 is 3 percent nickel. So anyway, one area of interest to the stainless industry and ATI in particular is the promotion of these duplex alloys.

Another thing that ATI is looking at very hard with our customer base in the more commodity stainless area is an alloy that's been around a long time, 201. It's a stainless grade that has about 40 percent of the nickel level in 304, and ATI is very-well positioned in this alloy, and has made it for a number of years, and as we sit here today we're out promoting that alloy, explaining it to our customer base with nickel levels where they are.

Okay. The feedback has been good so far, Jack?

On an alloy like 2003 the initial feedback is excellent. Alloys like that take awhile to get into the market because they have to get qualified and approved. The initial reactions on 2003 have been very favorable.

The 201story is one where the customers are always interested in this alloy, and it takes them a little while to switch over from an alloy like 304 to 201, and what it depends upon really at the end of the day is how long the nickel stays up at these levels. But if nickel stays up here for a while, people will gradually switch from grades like 304 to 201.

The market just for what it's worth in our estimation is looking fairly tight and it looks like it could continue for a sustained period. Let me ask you a question just to follow-up. Regarding the changes and I must apologize I have not been paying as close attention recently, but you made some revisions in your surcharge mechanism. Could you review those with me, please for both nickel and cobalt you indicated?

Basically, Tony, what we've done is to better reflect the cost of the materials that are going into the products. So we'll put it to you in this very plain terms. When a customer gives us an order in our all back operations for these high nickel containing alloys that have other nickel, cobalt and those kind of things, they have two choices: they can look in the price and we can hedge the metal for them at that time and that price is locked in at time of shipment, or we can tell them we will make a product on basis of prices that we have estimated at that time, and it will float and when the product is shipped, the surcharge will be an effective price at time of shipment.

If customers can decide if they think the price is going up or down, but we are protected. That's the basic deal in the special metals products.

In the stainless market, the formula has basically stayed the same, and we've been recovering those costs in base metal price increases. In the silicon market, we've added a 30 dollar per ton surcharge onto that for the iron content or the scrap content of the scrap prices that we're currently experiencing. Those are the basic changes we have throughout the market. In the stainless side, we have affected three discount points or three percent, three percent, three percent since the first of the year with the prices in effect as of 1/26, the last two discount points changed for 1/26th this month .

Okay, thanks very much. I appreciate your detailed explanation. Thank you.

Thank you. Ladies and gentlemen, once again, if you would like to register for a question, or you have a comment please press the 1 followed by the 4 on your touch-tone phone.

Gentlemen, there appears to be no further questions. I'll return the presentation to you to continue, or for your concluding remarks.

Okay. Thank you very much. Thank you all for being with us today. Thank you for your interest in our company, we look forward to meeting with you as many of you as possible over the next several months, and we look forward to a transition year that leads this company forward into better success moving forward. Thanks very much.

Thank you, Pat, and thanks to all of our listeners for joining us this afternoon. As always news releases may be obtained by e-mail, and are available on our website. Also 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 all for your participation. and ask you kindly disconnect. Once again, thank you, and have a great afternoon .