ATI Inc (ATI) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and 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. At that time, if you have a question, press the one followed by the four on your telephone. As a reminder, this conference is being recorded, Wednesday, April 21st, 2004. I would now like to turn the conference over to Dan Greenfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Wayne. Good afternoon and welcome to Allegheny Technologies' earnings conference call for the first quarter 2004. This conference call is being broadcast live on our Web site 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 Pat Hassey, President and Chief Executive Officer, and Rich Harshman, Executive Vice President, Finance and Chief Financial Officer. 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 earnings release. Actual results may differ materially.

Here is Pat Hassey.

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

Our first quarter results, a loss of 63 cents a share, while falling short of the analyst mean, were within our previously announced range.

As we indicated in this morning's release, our first quarter results were impacted by a significant increase in our LIFO inventory evaluation reserve. In fact, LIFO for the first quarter of 2004 exceeded the entire reserve taken for 2003 by an additional $10 million, all in one quarter.

This increase resulted from an unprecedented rise in the cost of raw materials that we use. Nickel, chrome, moly, iron and other raw material costs increased as much as 35% in the first quarter of 2004 as compared to the fourth quarter of 2003.

The ATI business system is driving lean manufacturing in our company, quality improvements and cost reductions throughout. A good example of these results.

Even though raw material costs rose rapidly during this first quarter, managed working capital, as a per cent of annualized sales, decreased to approximately 26% at the end of the quarter compared to nearly 31% at the end of 2003. In addition, we achieved nearly $27 million of cost reductions in the first quarter. This puts us well on track to achieve our $104 million cost reduction goal for 2004.

Turning to our markets.

We saw the first signs of real strength in the market during the first quarter of 2004 for many of our products. Compared to the first quarter of 2003, Flat-Rolled Products segment, sales increased 28%.

High Performance Metals segment, sales increased 11% and engineering product sales increased 12%. This strong demand has continued in the second quarter and we are now booking orders well into the third quarter.

In our Flat-Rolled Products segment, demand from a variety of markets improved during the first quarter, particularly our high-value products, such as strip and precision strip, nickel alloy, special steel and titanium products. Compared to the first quarter of 2003, shipments of these products increased by 7%, while shipments of commodity products increased by 4%, reflecting ATI's strength in producing differentiated products.

Our unique capability to leverage our manufacturing capacity to move up the value chain is an ongoing objective in 2004. Our new Uniti Titanium joint venture illustrates one way we enhanced our flat-rolled products mix.

Formed in June of 2003, Uniti enabled shipments of our flat-rolled products titanium products to more than double in the first quarter of 2004 compared to the first quarter of 2003. Uniti Titanium shows promising prospects for growth, particularly in the international markets.

During the first quarter of 2004, Flat-Rolled Products base selling prices began to recover from historical lows.

The commodity stainless steel cold-rolled sheet base selling price, which excludes raw material surcharges, increased by over 10% from the historical low price experienced in December of 2003. Price increases, along with surcharge revisions, have been effective in helping to offset the rapidly increasing raw material costs on a cash or FIFO basis.

In our High Performance Metals segment, demand for our nickel-based super alloys and premium titanium alloys increased. We saw more stable inventory in the supply chain as any inventory burnoff in the system appears to have ended.

In addition, improving demand for spare parts from commercial aerospace, as well as continued strong demand from military aerospace have increased lead times and forward loads on our facilities.

Our exotic materials business continued to perform well. Demand remained strong from the government market and for super conducting applications from the high energy physics market.

Demand also remained strong from corrosion markets, such as chemical processing and petrochemical, particularly in Asia.

Our Engineered Products segment had a far improved quarter, first quarter of 2004. Compared to first quarter 2003, sales improved 12% and operating profit more than doubled.

Results benefited from strength in several key markets, such as oil and gas, Class A truck, and other transportation, and the strengthening of the wind energy market segment. In addition, these businesses reported pickup in overall customer activity.

Earlier this year, I presented our strategic direction and listed what we intend to accomplish in 2004. I characterize 2004 as ATI's transition year to success. We are making good progress now in several key areas.

Our number one strategy is to fix our stainless steel business by returning Allegheny Ludlum to long-term profitable growth and cash generation. In this context, we are continuing discussions with the United Steelworkers of America and jointly looking for ways to better secure a strong future for Allegheny Ludlum and its employees.

We continue to make progress in completing the previously announced acquisition of substantially all of the assets of J&L Specialty Steel, which remains subject to certain closing conditions. Our target date is May 3rd, 2004.

So far, we have one, satisfactorily completed the integration trials, which tested the combined operational capabilities of ATI, Allegheny Ludlum and J&L Specialty. We've satisfactorily completed the business in legal due diligence and received consent to the acquisition from our domestic revolving credit facility lenders.

The two remaining conditions are U.S. government clearance and finalization of the negotiation of a new collective bargaining agreement with the United steel Steelworkers of America.

A lot of people are working very hard at reaching these new collective bargaining agreements. Meetings are being held with the USWA International officials, as well as with the local union leadership. We believe that an acceptable agreement can be reached.

J&L Specialty asset acquisition is expected to complement and enhance our competitive position in the North American stainless steel flat-rolled market. It maintains historical U.S. domestic capacity and keeps significant J&L equipment in production.

We said we're going to finish the expansion of our high-performance metals long products rolling mill located in Richburg, South Carolina. I am pleased to record that this world-class mill began production, which includes many qualification orders in April on budget and on schedule.

As we've said, this rolling mill provides enhanced technological capabilities, lowers cost, and adds capacity, thus enabling ATI to grow market positions for our high-performance metal products.

We continue to make progress on our strategy to grow in China. Sales through our Asian international offices increased by more than $6 million during the first quarter 2004 compared to the first quarter 2003.

During this same period, sales at STAL, our precision strip rolled products facilities in Shanghai improved by over 40% and shipments increased 35%.

Concerning our strategies to improve the ATI balance sheet and deliver positive earnings per share growth, we've done a lot to focus our business units. ATI strategies and plans to accomplish these tasks are underway. The next months will be critical as our plans continue to be implemented.

As the second quarter of 2004 begins, we have a management team focused and committed to ATI's strategic objectives. We see improving market conditions across most of our businesses and we're now beginning to see less volatility for some of the key raw materials that we use. As these trends continue, we expect to see gradual improvement in earnings per share throughout the remainder of 2004.

This concludes my opening remarks. Operator, please open the call to questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four 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 your request, press the one followed by the three. If you are using a speaker phone, please lift up your handset before entering your request. One moment please and we'll take the first question. The first question comes from the line of Robert Schenosky from Jeffries. Please go ahead with your question. Hello, Mr. Schenosky, your line is now open, please proceed with your question.

Can you hear me?

Yes, we can.

Okay. Sorry about that. Rich, just one quick question on the interest expense line. Can you talk about why we saw the slight increase in the quarter?

Yeah, hi, Bob. It's primarily due to the, as you remember in June of last year we moved to the secured credit facility and it has a different fee structure for not only the facility itself, but also for letters of credit that are now issued underneath the facility. And we also have slightly more letters of credit outstanding. That's the primary reason.

Okay, thanks. And then to follow up for Pat if I could. Pat, you mentioned that most of your markets are seeing improvement and you expect that to continue through the year. Are there any markets that you see that are still difficult at say commercial aerospace?

Certainly the commercial aerospace, just to mention that, is not at the level that we've seen, of course, in the '98 to 2000 timeframes.

Our other markets, we would like to see more in some of our engineered products, although we've certainly seen a strengthening there. In the Flat-Rolled Products segment, the stainless steel segment, the nickel alloys, and the titanium markets, we are doing quite well in terms of where we are. We're anxious to complete the acquisition of J&L to have the capacities that we need.

Okay. And then just one final if I could. Were you surprised at all at the level of capital expenditures coming back into the chemical processing segment?

I think we were. Our tubing business and also our, even from the exotic alloys businesses out at Wah Chang, all of these businesses that involve corrosion-type applications are really strong and I think stronger than what we had forecast.

Okay. Thanks, Pat.

The next question comes from the line of Michael Gambardella from J.P. Morgan Chase. Please go ahead with your question.

Thank you. Good afternoon. Two questions. One, can you discuss how you think the surcharges will play out for you in the second quarter, given the movement in the raw materials recently?

We're seeing some backing off as we move. We may be at the peak, if we can forecast raw materials. Although, we're seeing nickel backing off a bit.

Unfortunately, we've seen such things as manganese, moly, cobalt, other raw material prices move on it, so depending on the product line and the product segment, Mike that you're talking about, you could see some areas going up and other areas going down, but overall we don't, we have, there's still a very strong demand out there and we're hoping that these prices have peaked and will at least stabilize.

You have a 30-day lag on the surcharges?

Not a 30-day lag in what you're seeing, but basically in terms of our raw material usage, by the time that we put it into production, melt it, and move it into schedule, we're very much in step and I would say really right on from a FIFO basis, a cash basis with our pricing and our surcharges.

And then on the J&L situation, what's the progress on the new labor agreement?

Where we are this week as we're talking, here we have Doug Kittenbrink working as the lead negotiator for us, who has been the negotiator earlier, he has a good relationship with all the steelworkers. He was as you know former President of the Allegheny Ludlum business. And that negotiation continues with the local unions working to finalize any kind of arrangements. And of course continuing on with the international issues.

I think I would characterize this negotiation as making progress. Moving forward to the conclusion dates that we need.

Okay. Thank you.

The next question comes from the line of Michael Morrisroe from Bear Stearns. Please go ahead with your question.

Thanks. I just had a couple quick questions. Regarding I guess Ludlum exclusive of the J&L transaction. Hypothetically if that doesn't go through it sounds like you're attempting to renegotiate there. Can you just elaborate as much as you can on what exactly you're looking for there? Is it a collectively bargaining agreement that you're attempting there also?

The negotiations and the contingency on the purchase of the J&L assets as part of the contingency of that and the consolidation in the stainless steel business is a labor agreement with the United Steelworkers who are parties to both the J&L Specialties company and of course the Allegheny Ludlum company that would make this acquisition a viable entity for the long-term going forward. We've seen the framework of previous negotiations from ISG, from the United Steel negotiations and others that have set a framework that is attractive to integrated companies and also would be attractive and competitive to the combined entity of the J&L assets and Allegheny Ludlum.

So as part of this overall arrangement, we have always said that this includes to basically reopen and look at the issues that we have in our current contract that would expire in 2007. And so those are the issues that are being talked about and those are the issues that are being looked at to come to a joint decision and a competitive agreement, a win-win agreement for the shareholders, the employees, and the bargaining unit, and employees of the entities that would give us a strong and positive future for this company.

Okay. Just as a follow-up. If, again, the J&L purchase does not go through, is that something that, are you working with Ludlum exclusive, or is it strictly contingent on the J&L purchase?

The context of these negotiations are contingent on the purchase of J&L Specialty assets.

Okay. And then on the LIFO outlook as a follow on, as it looks like prices have abated a little bit, can you just attempt to give an outlook or explain how the dynamics would work going forward and should we expect I guess positive cash flow going forward?

We've had positive cash flow from the operations that we're investing back in things called receivables. As the volume goes up and as the prices go up, then of course our receivables have gone up and I could tell you at this point in time we have not entered into any part of our credit facilities other than to guarantee our letters of credit. So, yeah, we have a positive cash flow coming into the company and we have a strong market.

Okay. And then, lastly, did you pay a dividend in the first quarter? Because I --

Yes, we did.

And why was that not listed on the cash flow statement?

Rich, do you want to comment on that?

Mike, it was paid at the end of the month on March 31st.

Thanks.

Thanks.

Ladies and gentlemen, as a reminder, to register a question, press the one followed by the four. The next question comes from the line of Alexander Latzer from Merrill Lynch. Please go ahead with your question.

Thanks, good afternoon. A question on the potential impact of the use of the discount rate, the move by Congress to allow the use of the corporate long-term bond rate as opposed to the Treasury Bond rate, excuse me, and the deferrals. I know you've often spoken of not having any cash requirements for the next year or two, but as far as on the accrual, there is a sizeable expense that you point out on your income statement. I was just wondering when you could take advantage of this higher discount rate in terms of your calculation of your pension obligation insofar as how that might impact your accrual on the income statement?

Rich, I'll let you handle this question.

Alex, the Congressional action and what President Bush signed, had to do with the funding side, the ERISA side of DB plans. We use a 6.5% discount rate on the GAAP side, which is on our financial statements, obviously, to discount those liabilities. So the Congressional action really doesn't affect the GAAP accounting side, it does affect the funding side.

And, as you know, as we've discussed before, the funding relief is really an extension of what has been in place for the last two years and primarily impacts companies that are in a position near-term of having a minimum funding requirement, which ATI is not in, but obviously as we file our ERISA statements, that funding relief obviously is impacted in terms of the liability profile of that plan, but it would not have had any impact on our funding position near-term.

Longer term, obviously, the rising interest rates, as interest rates eventually rise over time, will have an impact not only on the funding side but also on the GAAP accounting side. At 6.5%, that's a relatively low rate when you look at it historically. I think the longer term rate that most companies have used is between 7 and 7.5. And to the extent those higher interest rate times return, that will have a positive impact on the GAAP side, not only on the liability but also on lowering the pension expense.

Uh-huh. Thanks, Rich, for clearing that up for me.

Yeah.

I had a question on the working capital. Again, going forward, you said you have a fair amount invested in accounts receivable, how do you see that playing out? Is it just going to be with the flow of the raw materials cost?

Well, it's going to be with the overall pricing that we have and the volumes that we have. You know, maybe being too basic about this, but we have a very strong market. Currently today a good portion of that overall third-party price is taken up by surcharges.

But we're coming off of an era that we've had the lowest conversion margins in the company's history, maybe the lowest conversion margins in the industry's history. When you compare the conversion margins in North America, the U.S. domestic market, with the European market and other traditional global stainless markets, we're still a very low-price conversion market. And I would hope that, as we look at those receivables, they're going to reflect whatever strength that there is in the market in terms of volume and overall price.

Okay. And, lastly, thank you for that. On China, what are you seeing in terms of the stainless activity among the smaller mills there, they have been very active, they've been very growth oriented, we have seen scrap, carbon scrap prices and demand dropping and while steel prices are holding up a bit, we are certainly seeing some of the local prices decreasing. I was just wondering, a lot of questions that have been focused on the consumption side rather than the consumers of the raw materials and the manufacturers. What are you seeing over there as far as the demand and the growth from the small stainless steel mini mills in China, if you have any recent 2004 comments?

The only comment that I would make on that, and this is on the stainless side, is that the production in China is being used in the Asian market. It continues to draw imports, it continues to draw specialty stainless products and nickel-based products imports into that market based on the technology that's currently available in China. So if you're asking us do we see much imports coming into the U.S., do we see much Chinese imports turning around on the ships coming this way, the answer's no.

Uh-huh. And demand in China is holding up the growth?

In our particular segments, which we're most familiar with, but we do have a very good sales force that moves throughout Asia, we're seeing demand holding up in our products very well. In fact, it's going to tax our capacities, we're going to be sold out.

Great. Thank you very much. Good luck going forward.

Thank you.

The next question comes from the line of Mark Parr from Key McDonald. Please go ahead with your question.

Thank you very much.

Hi, Mark.

Hi, good afternoon. I had a couple of questions. First of all, what is the financial impact, if any, if the J&L acquisition, for whatever reason, you know, is not concluded?

Well --

Are there any contingencies or anything like that?

Let's -- we could all speculate together. First of all, we're again reiterating some of the things I've said.

We believe there is a deal to be made. We believe that we're making good progress and we should not see any really show-stoppers from the Justice Department or from this negotiation. If it continues on the same track it's on, we can find an acceptable agreement to both parties.

Now, having said that, we can speculate what could happen without the J&L acquisition one way or the other. In my own personal opinion, and I'm going to say again personal opinion, I would hate to see anything that would take the current assets out of production or reduce production.

If you would take a very short-term off-the-cliff kind of view, I think if J&L decided to do something very severe in terms of the previously announced sale or liquidation, if we take the liquidation side, there would be nothing but very, very strong demand and a very large shortage of capacity in North America.

Right.

So I don't think in the short-term, if you took the worst-case scenario for us, not a long-term, not what we would want to happen, would Allegheny Ludlum be worth anything less in the next six to nine months, a year than it is today, it would be just the opposite, it would be much more valuable production. Is that a close enough answer for you?

Okay, yeah, I appreciate that. Secondly, I just wanted to get back to the cash flow statement for a minute. The $75 million increase in working capital investment in the first quarter and the other which is $89 million cash inflow, is that, Rich, were those the letters of credit you were referring to?

No. That's, Mark, a large piece of that is LIFO. You know, 48. Because on the funds flow we're showing managed working capital, which is gross inventories and in the other is LIFO. Also flowing through there is the noncash OPEB component. But $48 million of that number is LIFO and about 13 or $14 million is OPEB.

Okay. Alright. Terrific.

And the rest is just changes and accruals.

Okay. That's a big help. Just another question on the capital structure. I mean, what was your liquidity? I mean you may have put this in the release, I apologize if I didn't pick it up. But what was ATI's total liquidity at the end of March?

By liquidity, you mean cash and available borrowings?

Yes.

The cash balance was $67 million and under our secured credit facility, we had no drawings under that. A portion of it was used for letters of credit as Pat indicated, but under the formula that is in the letter of credit facility, we had a little bit more than $260 million of undrawn availability in that facility.

Okay. Terrific. Thank you very much. I had just one other question. On the LIFO situation, can you break that down for us at all between the flat-rolled and the high-performance metals areas?

Sure. It's in the release Mark but I'd be happy to.

I'm sorry if I didn't pick that up.

That's alright. In the Flat-Rolled Products segment it's about $38 million and in the High Performance Metals segment it's about, just under $9 million. And then it's just under $2 million in the engineered products.

Okay. Terrific. And then, lastly, are there, do you see any near-term further increases in base stainless prices? And if base stainless prices didn't go up any more in the second quarter, what would ATI's realized price be 2Q versus 1Q?

I am trying to sort this question out. We're up about 10% from the fourth quarter of 2003. We're going to see some changes, we hope either stabilization or reduction. There is some reductions planned in May for the surcharges. And as I said before, the North American market continues to be at still some historical lows in terms of conversion pricing.

So I'm not going to speculate on what the market will do or won't do other than to say that our schedules are pretty full. We're booking into the third quarter. Other suppliers are full also, so depending on what the market does is what our conversion prices will be able to be.

I didn't want to try to put words in your mouth, but I had a feeling, though, that you were pretty well filled out for the second quarter.

We are.

And I'm just trying to get a sense of what, you know, we might expect as far as sequential revenue momentum. It's okay if you don't want to tell us but I just thought I'd ask the question.

We already have build into that schedule about 3 cents of conversion margin increases.

Okay.

But as you know, what we've said is that those prices are subject to change based on market conditions.

Okay. All right. Terrific.

We have not offered firm prices, other than our contractual prices that are in some of our premium businesses or premium segments, other than that it's spot prices and those are variable prices they're not fixed.

Okay. Thank you very much. Again, thank you.

Uh-huh.

The next question comes from the line of Robert LaGaipa from CIBC World Markets. Please go ahead with your question.

Hi, good afternoon.

Good afternoon.

I just had a few quick questions. Rich maybe if you could just help me out with the increased borrowing for the STAL venture in China, the additional $6.5 million what that was being used for?

It's basically being used to meet some of the longer term commitments and obligations that STAL had as well as to finance some additional working capital requirements as that business grows.

Okay.

And these are all letters of credit that range anywhere from a one-year facility to three-year facility to support the business at STAL.

Okay. The other question I had, or one of the other questions I had was just related to the federal drug benefit program. You had mentioned in the release you were waiting to evaluate what the impact would be pending accounting guidance, when would you expect that to be?

Well, the FASB had issued a draft that the expectation is sometime before the end of the second quarter, that the draft rules will be finalized, and then the authoritative guidance will be there. And at the earliest, we would expect that we would look at something in the second quarter as a possibility if there's a delay on the implementation of it, it could be the third quarter but it's more likely the second quarter.

Do you have any preliminary thoughts as to what the impact might be, positive impact?

On the liability side, if you just look at our OPEB liability on the balance sheet and as we look at the percent of that that's really tied into a prescription drug obligation, it's a potential benefit looking at the full tax credit of about $70 million, but the accounting treatment of that in terms of how that would flow through the income statement, based upon the current draft guidance that's out there, it would be recognized over a number of years going forward. So it wouldn't all be a one-time pickup but it would be a reduction in the annual expense.

Okay. Terrific. And Pat maybe if you could just help me out with understanding the Powergen market and also new deliveries for commercial aerospace, are you seeing any pickup there?

Well, we have seen some pickup in the Powergen market and it certainly may be some international kind of orders, you've seen some of the news releases on that and business overseas and I think, secondly, as we look at that market and we start to look at the rebuild schedules, we may be seeing some work coming in from some major overhauls so that market has shown some activity that we haven't seen in the last two years starting in this year. Certainly not at the level that we had seen back in the '98, '99 and 2000 timeframes.

The commercial aerospace market, and this is my opinion on what is happening there. When these markets turn down, like they did starting in 2001 there is a pretty good amount of material that is in the supply chain and also other material that is in inventory.

Now, as those build rates turn down to a pretty stable level, which if you take around 600 large aircraft and then the commuter aircraft maybe at 900 to 1000 airplanes versus 13, 1400 total build including private aircraft in all that material does, two things happen. The supply base gets hit from the downturn in orders. It secondly gets hit from the inventory burnoff, both the in process inventory that was already in the pipeline and the inventories needed at the OEMs and first tier and second tier suppliers to maintain those inventory builds.

I think we're through that period. And I think we're very stable, material that's being generated now by the suppliers are being used in the aircraft and the build rates where they're at.

So we have now burned off the inventory level, we have a stable inventory supply channel, and what that means is that as the business improves and when it improves, whenever that is, in the next, you can pick your own timeframe, the end of 2005, 2006, whatever, that's going to have to be purchased. And there will be a little bit more purchased as that builds up to rebuild those channels because of the lead times that will be generated there.

And the last thing I would mention is I think you have to look at international build rates and international air carriers' needs versus all the publicity you see on domestic carriers. Not that domestic carriers aren't an important part of this industry segment these days, but there's a global market out there that still has a very large passenger growth rate which will drive this industry at some point.

Great. Terrific. Thank you very much.

Ladies and gentlemen, as a reminder to register for a question, press the one followed by the four. The next question comes from the line of Jarrod Muroff from Prudential. Please go ahead with your question.

Thank you. I have a couple of questions. My first one is, I want to make sure I'm reading your guidance on taxes correctly. It appears to me that what you're indicating is that profits, you won't pay taxes, there won't be a provision for taxes until profits cumulatively reach the level of the loss reported in 2003. Is that correct? Will you be able to book profits tax-free until they reach the cumulatively about a $270 million level or so?

Well, it you know, first of all, because of the evaluation allowance we took in the fourth quarter, we're recording no benefit today. We would record a benefit to the extent that we have a cash refund on taxes. To the extent that we have cash-tax payments, we would record a provision.

But as you would note in our annual report, in our income tax footnote in the annual report, we had just under a $30 million NOL, net operating loss carry forward that was generated in 2003. If you convert that and that's a tax basis.

So the GAAP basis income is obviously different from the tax basis because of all the book tax differences and any provision that we would record in 2004 or going forward would depend upon whether we're a cash tax payer or a cash refund on a taxable income basis, not a GAAP basis. Does that help?

I must admit only a little. I am just trying to, it says in the release that you would not record, I'm talking now on a GAAP basis.

Yeah.

Let's split it in two. On a GAAP basis it sounds like you won't record a provision on income taxes until you record profits that cumulatively add up to the loss taken 2003. Is that the $30 million NOL, or is that the $277 million?

It's on a tax basis. So the $200 million, $250 million loss you're talking about in '03 is on a GAAP basis. On a tax basis, we were able to realize part of the tax loss in 2003 with the refund, the $7 million refund that we recorded received in the first quarter.

We had another roughly $30 million tax refund NOL carry forward that if you look at that number that's in our Note 7 in our annual report, if you look at that number and tax effect that using a 35% federal tax rate, you get about an $85 million tax loss that hasn't yet been realized because it's being carried forward, and it will be carried forward and it won't expire for 20 years.

So on a GAAP basis, because of the unique position we're in under FAS 107, we will not record a provision or a benefit unless there is an actual cash tax payment or a cash refund received.

Until such point as --

Until such point as on a GAAP not to make this even less clear than it probably is. Until such point as on a GAAP, not to make this less even clear than it probably is, until such point that on a GAAP basis we have been profitable over a reasonably extended period of time and can reverse the deferred tax valuation allowance that we recorded in the fourth quarter of last year.

All right. I think that makes a little more sense and I thank you for going through that.

Okay.

The next question I have is it looks like things are going better operationally, prices are moving up, volumes are moving up the firm's getting close to making money, it feels like, on an operating basis. I am just wondering if you can give us a flavor or some color to the argument you're making to the union at Allegheny Ludlum who you are asking to take in concession where the only benefit they get is the, you know, the benefit to their fellow USWA workers being able to, at J&L being able to keep their jobs. It sounds like you're going to them and asking them to make concessions where the benefit to them is a little more nebulous. I'm just wondering if you can give us a flavor for how you're making that argument to them and how it's being received?

Well, we're negotiating this contract with very smart people that understand this market and understand our business and understand the value of a long-term viable competitor and understand what they need for the employees of this company to have a secure future and a future that pays the kind of benefits that the steelworkers expect to have. So don't think this is any kind of a one-way street.

In saying that, remember that the framework that was established with the ISG and the USX agreements are the frameworks within the context of the discussion which doesn't mean they're the same but it means that they're the framework that we begin with. With that understanding, we really don't make any other comments on our negotiations from either side.

Okay. Thank you.

The next question comes from the line of John Tumazos from Prudential. Please go ahead.

I apologize, I wasn't on the full call in case you've gone through this.

Hi, John.

In terms of the mechanics of the LIFO charge in the quarter, nickel at the end of December was around $7.16 and of course was a little bit higher in the middle of the month. At the end of March it was around $6.42. Today it's around $5.64. I presume you took a charge for nickel and other things chrome, moly, et cetera because of your rivals costing more in the March quarter with the sharp decline in nickel prices, is it reasonable to expect if nickel closes the quarter at $5.64, that a substantial part of this LIFO will get reversed in the June quarter? I know steel scrap and moly have escalated too and it's a complicated computation.

John, you are as technical an analyst as I think that I ever talk with, and let me just say it this way. With the good ATI business system results and taking our inventories down to the levels they're at, that we are at base levels of inventory in the system and we had about a 30% increase in raw material costs across the company in the first quarter. So if we see a particular pool, an important pool to us, in our LIFO reserve, like nickel moving from the level that we ended with, and the current surcharge by the way is about $6.13 for the month of May, and they do drop, say to your number of $5.64, certainly we will take a positive, we'd have a positive result in the LIFO reserve reversed. Rich Harshman might want to make a couple comments about that.

Hey, John. I just wanted to point out to you know, the LME in December is really the basis for January's purchases because of how the producers sell nickel, right. Because you don't know what the average LME is until the month end, so therefore that becomes the basis of what you pay in January and consume in January.

And when you look at, and the LIFO is really on the basis of how your inventory is turning and using Ludlum as the example because it's really the big driver in the LIFO in the quarter, Ludlum's inventory turns roughly four times a year. So at any point in time you're going to have three months' worth in average costs in inventory.

So the LIFO in the first quarter's really the consumption costs of the first quarter versus the average of the consumption costs of the fourth quarter. And so that's what really drives the LIFO index in the first quarter. And virtually across the board on all the key raw material elements that we use, they averaged up 30% and in some cases we're 35% or more higher on average first quarter over fourth quarter. So we --

Looking forward --

In the second quarter, as that backs off on nickel, you know, it depends on what all the other elements do as well, as you know, moly and scrap, et cetera.

If I could follow up on Jarrod Muroff's earlier question to make sure that I understood your discussion. What you're saying is that the GAAP NOL is not relevant if you begin having to owe cash taxes because your tax basis $30 million used up, you'll then provide for those cash taxes in your provision for tax line on the income statement?

Yeah, that's right. And there is a scenario because of the differences in book and tax where you could have a loss on a GAAP side and be a tax payer on the tax side and therefore provide a provision even though you were generating a GAAP loss.

Or you could have GAAP pre-tax income, tax pre-tax income, and owe cash taxes, in which case you would show that provision because you provide for cash taxes in the income line even if there's a GAAP deferral.

That's right. And conversely, you could have a GAAP loss and have a tax refund, you know, especially if Congress, for example, extends the NOL carry back, which is currently under consideration in both the House and the Senate, if they were to do that, we would be able to realize that $29 million NOL by amending our '03 return and that would flow through as a tax benefit, assuming we got that refund.

Thank you very much.

Thanks, John.

The next question comes from the line of Ryan Bells from the Banc of America Securities. Please go ahead with your question.

Yeah, hi. I was looking at your selling and administrator expense this quarter and it's down pretty dramatically from the fourth quarter even though sales are up. Is that the cost savings you're seeing there? How should we look at that going forward?

I think we said in the fourth quarter that we were working on our overhead expense and continue to work on our overhead expense. Our corporate office expenses have been reduced, although we have some accruals for some incentive programs that were taken in the first quarter of 2004 that were not in place or had not paid to be in place in earlier quarters. So we are continuing to monitor and to work on our overhead expenses and minimize those as part of our overall improvement plan for the ATI corporation.

Okay. So that should stay here or go down further from the current rate?

Rich, you want to --

I would just say, I mean obviously SG&A's an important focus and we're continuing to focus on that. The fourth quarter of '03 is more of an anomaly because there were nonrecurring items in the fourth quarter of '03 that flowed through in many cases through the traditional income statement and SG&A. But I would suggest the level that we're at now on selling and administrative expenses is more applicable than the fourth quarter of '03.

Okay. Can you give us an update on the project at Brackenridge?

The project at Brackenridge is on schedule. The first furnace is up and operating and meeting expectations. For the savings the second furnace is on schedule to come onstream before the end of the year. We'd expect to be tuning that furnace from September on.

Okay. Thanks.

We have a follow-up question from the line of Alexander Latzer from Merrill Lynch. Please go ahead with your question.

Thanks. I just wanted to follow-up on the percentage of your contract versus spot business on the stainless flat side, and then how is J&L on its contract business, if at all, and if you put the two together, where would your contract percentage be and where would that be relative to, kind of like what your long-term strategy is on your portion of your sales that are on contract?

Let me just say this about that. It sounds like a politician, doesn't it?

First of all, we won't comment on any of the J&L contracts or businesses. We don't own J&L and that's their business at this point in time.

On our own business, generally for specific products or specific applications, especially in the higher-valued products, we enter into some form of a contract [priat]. Our spot business is mostly on the commodity kind of products and on tubing and on plate and on mill depots and those kinds of things, and so those are easily flowed through.

Our contract business does have provisions for surcharges, or they have provisions that someone has hedged some of the material that is in that. We also have contracts that are on a continuing basis coming up for renewal and then being renegotiated and priced out at the current conditions.

So it's a very fluid question and it's a very fluid answer that I'm giving you, but we are, as we go forward, our contracts will reflect current market conditions and those that we've taken a lot of times in many cases if they're a fixed-price contract do have provisions to have hedged the raw materials or will be in a situation to accept a surcharge.

Okay. I was more along the lines if we do get a nice pickup here above the 10% that you commented, you know, how long would it take before you saw an improving spot market flow into some of your realizations?

I would just say this, that I would think we're going to have a better second half than we have first half.

That's something to work, that is great.

Thanks.

Thank you very much.

Thank you.

Mr. Greenfield, there are no further questions at this time. I'll turn the conference back to you. Please continue with your presentation or closing remarks.

Well, thank you very much for joining us today and thank you for your continuing interest in ATI. This is Pat, thanks.

Okay, Pat, thank you very much and thanks to everyone who was on the call today. As always, news releases may be obtained by e-mail and are available on our Web site. Also a rebroadcast of this conference call is available on our Web site. That concludes our call. Thank you.

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