ATI Inc (ATI) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter for 2005 Allegheny Technologies earnings call. My name is Sean and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session following today's presentation. (Operator Instructions). At this time, I would like to turn the presentation over to your host, Mr. Dan Greenfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Sean. Good afternoon and welcome to Allegheny Technologies earnings conference call for the first quarter 2005. This conference call is being broadcast live on our website at alleghenytechnologies.com and on the CCBN.com. Members of the media have been invited to listen to this call.

Participating in the conference call today are Pat Hassey, Chairman, 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. Let me start by saying that we're on track, on schedule and ahead of rate of change targets to achieving the next level of success for ATI which is accelerating the profitability of the Company in 2005. First-quarter results demonstrate that our strategies are working and that actions taken in 2004 to transition and transform ATI are showing the first stages of new, significant and increasing earnings potential. Most of our markets remain strong and the segments for high-performance metals are getting even stronger.

We are also benefiting from our ongoing cost reductions, continuing capital investments and the ATI business system manufacturing implementation. Some rates of change and key measurements for the first quarter of 2005. Revenues increased 52% to $880 million, annualizing now at over 3.5 billion. Net sales -- net income was $66 million, $0.66 a share. Operating profit improved to 114 million. Segment operating profit reached 13% of sales, specifically Flatrolled Products at 7.5%, not where we expect to be, but far improved; High-performance Metals an outstanding 24.2%; Engineered Products a very respectable 12% for this time in our improvement plan.

Net debt to total capitalization improved to 39.4% and managed working capital reduced to 27.2%, and 8% improvement quarter to quarter. Cash on hand at the end of the first quarter was $231 million and as Rich Harshman will tell you again, we had no cash use in our secured credit facility.

(indiscernible) to the Aerospace Market increased to 21% of total ATI revenues in the first quarter of 2005. That's up from 18% for the full year 2004. It is above our historical 20% of revenue performance even with the rapid revenue growth from the stainless steel business. Sales to markets outside of the United States increased to 23% of the total in the first quarter of 2005, up 20% over 2004.

Now some highlights from the segments. In our High-performance Metals segment, sales increased 47% compared to the first quarter of 2004 and up 14% compared to the fourth quarter 2004. Operating profit reached $64 million again with margins at over 24% of sales and driving significant results to ATI's bottom line. Both ATI Allvac, which again produces our specialty metals and titanium metals and ATI Wah Chang, the more exotic products and metals, posted very impressive results. Demand for Allvac's ATI titanium alloys, nickel-based superalloys and vacuum-melted specialty steels was robust and is expanding going forward due to the unprecedented demand for commercial and military jet aftermarket parts, as well as improving commercial build rates. Demand remains strong for our biomaterials from the medical market and in addition, demand improved for Allvac products from the power generation market. We now believe we're in the beginning stage of recovery in demand for our materials used in land-based natural gas turbines and the nuclear power plant maintenance businesses.

Wah Chang had another excellent quarter. Market strength continued from government, medical markets and from corrosion markets, particularly in Asia. Wah Chang's profitability was aided by ongoing cost reductions and the effect of impressive and leading ATI business system manufacturing initiatives.

In our Flatrolled Products segment, sales increased 59% compared to the first quarter 2004 and 12% compared to the fourth quarter of 2004, segment operating profit of $39 million. Total shipments in the first quarter of 173,000 tons increased nearly 38%. That's some 48,000 tons compared to the first quarter of 2004, and again, 9% over the fourth quarter 2004. Demand continued to be strong from residential and construction and remodeling, oil & gas, foodservice equipment and transportation markets. Demand improved from the capital goods markets, such as chemical processing and power generation. ATI employees made a lot of progress in our stainless steel business but we still expect more to come in; operating performance improvements as well as the combined assets of both companies.

During the first quarter, unusually high operating and quality costs were incurred as we balanced production flow. We have now made considerable progress in optimizing these paths. In addition, during the first quarter, we incurred added training expense for the flexible job combinations renegotiated in our labor contract of 2004. ATI Ludlum employees are focused on improving the efficiencies of the business, the yields and utilization which equate in the end to improved operating results.

Also during the first quarter, our shipments of stainless steel sheet, while higher than any quarter in the last year, were lower than expected at some of our stainless steel service centers and tubing customers adjusted their inventory levels. This situation was caused in part by a significant surge of stainless steel sheet imported in the month at December 2004.

In our Engineered Products segment, sales increased 32% compared to the first quarter 2004 and operating profit improved to over $11 million, or 12.2% of sales. These results are due to ATI business system efficiencies achieved and strong demand from several key markets. Again oil & gas, again aerospace and especially transportation for commercial Class A trucks, train locomotives, off-road equipment, mining equipment and in total general manufacturing is showing new life for these engineered product businesses. The effects of the ATI business system and our ongoing cost reductions are gaining traction and momentum in the Company. Employees throughout ATI deserve a great deal of credit for these accomplishments. A few examples -- safety improvements. ATI employees achieved a lost time case record of 0.59 per 200,000 hours worked. That's on the road to world-class performance in this company. We achieved again $30 million of cost reductions before the effects of inflation in the first three months of 2005. Again, we are well on our way toward achieving our 2005 cost reduction goal of $100 million with $10 million per month savings in the first quarter. Managed working capital as a percent of sales in the first quarter in 2005 down to 27.2% compared to a year ago at 30.7%.

As we have said, 2004 was a year of transition and transformation for ATI. Our stated goals as of one year ago I remind you were, one, to fix our stainless steel business, returning Allegheny Ludlum to profitability and cash generation; two, to grow our Allvac specialty metals business in market position and returns to grow this business; thirdly, to increase our Wah Chang business profitability and returns and lastly, to manage our Engineered Products segment businesses for good returns and cash generation.

The first quarter 2005 results demonstrate that considerable progress has been achieved and improving quarter on quarter returns demonstrate the sustainability of these efforts. For ATI, 2005 is a year for accelerating the profitability of the Company. Looking ahead, we remain optimistic about the prospects for ATI.

Some observations on ATI's key market -- our largest market is Aerospace. Backlogs in our High-performance Metals are at near record levels and leadtimes continued to lengthen. Backlogs improved by over $100 million in the first quarter compared to fourth quarter 2004 shipments -- excuse me -- the first quarter 2005 shipments. Global air travel is robust with record load factors. As a result, we are seeing unprecedented demand for our products used in jet engines and for the aftermarket parts. International airlines are purchasing new and larger twin-aisle and jumbo aircraft. Therefore, we are seeing very strong demand for our products for new jet engines, airframes and airframe component. As we had talked about in the fourth quarter, long-term agreements are now in place for a majority of our Aersopace business.

In addition, last week, we announced price increases of 5% to 9% for all our titanium alloy, nickel-based super alloy and vacuum-melted specialty steels sold on a transactional basis. Demand remains strong in our exotic alloys business. In our Flatrolled Products segment, most of our markets remained strong and pricing is solid. Some facts -- in early April, we implemented a titanium surcharge on all stainless steel and specialty alloys in the Flatrolled Products segment. The surcharge will be billed beginning with May shipments. Also in April, we implemented a price increase on certain Flatrolled Specialty stainless steels and nickel alloys. These products are used mostly in the capital goods market -- oil & gas, power generation, chemical processing industries.

The global demand for silicon electrical steel is particularly strong. These metals are used for power distribution. Many stainless steel service centers reported continued strength in their and markets (technical difficulty) also tell us that their inventory levels continue to be adjusted (technical difficulty) that we can expect a second quarter similar to the first quarter in supply/demand. Therefore, we believe the stainless steel service centers' supply chain inventories will be balanced by the end of the second quarter.

The automotive market growth continues for our precision rolled strip products, primarily from greater use, greater penetration basically of multilayer stainless steel gaskets, flexible hose connection and parts for turbochargers. We continue to improve our position and share in the automotive exhaust alloy business as a result of the capabilities of our Midland, PA. melt shop and the continuous automated finishing line.

In summary, our Flatrolled Products segment as we have said is strong, it's strengthening, solid pricing and excellent capabilities. We expect to execute better than the first quarter going forward.

Finally, markets for our Engineered Products segment businesses remain robust and are increasingly contributing to the profitability and the diversification of ATI at about 11% of ATI's total revenue, and again, with 12% margins. We plan to see the initial positive impact of our recent Garryson Limited asset acquisition in the second quarter.

I think I will stop here now and open this meeting for questions. Operator, please open the call for questions.

(Operator Instructions). Brett Levy, Jeffries & Co.

Hey, guys. You had mentioned that there was a brief surge in the stainless steel imports. Can you talk about kind of what you are seeing going forward in terms of imports? And then also kind of as you look a little bit further out, what you're seeing in the way of new capacity in some of your key stainless steel markets globally?

Two things on that. We had a very large surge in the month of December. We would estimate that to be about 15,000 tons above normal levels of imports into the United States. Those levels have returned to the average level of 2004 declining in January, declining further in February. Those are the latest results that we've seen. We do not have the March results to date.

As the market goes forward on a global basis, there is some softening of markets in the European community. Markets in China remain strong. We've seen price increases over the first couple of months of the quarter out of China and we have seen a lot less metal coming in.

Alright. And then can you talk a little bit about where your targets are with respect to postretirement liabilities and what the timetable is to get yourself a little bit more on target there, and then also where you see yourself in terms of debt reduction and your target credit ratings levels and that sort of thing?

On the retiree benefit liabilities, obviously on the pension side, the pension liability is largely driven by two factors. One, benefits and any benefit changes which quite frankly from an increase standpoint, we would not anticipate any on our defined benefit plans. And then obviously the interest rates and the discount rates we use to value those liabilities are at historic lows. We determined that at the measurement date. The measurement date is the end of November and we're using a rate of 6.1% that's the lowest rate we've ever used.

So going forward, if you believe interest rates will gradually increase, those liabilities will be remarked at a higher discount rate and will lower the liability.

On the OPEB side, the retiree medical side, OPEB's primarily retired medical. As you know, we took significant actions last year and significantly lowered our retiree medical liabilities by about 36%. And that's reflected by the annual expense going from $46 million roughly to about $70 million this year. And we would expect that because of the positions we have taken both on the collectively bargained and the non-collectively bargained with capping our liabilities or capping the Company costs, that protects us from the inflation side going forward and we would not expect that to change dramatically on the expense side.

On the debt buyback side, obviously we don't have any near-term maturities. The nearest one is in 2011 and we'll continue to monitor any opportunities that we have to reduce those fixed maturities. At this time, we are not taking any action. On the credit ratings side, obviously our desire and goal is to be an investment-grade credit, which we had been for a long time period. I think the improved performance and subsequent cash flow generation that we will demonstrate will certainly help in that way, we believe. And from the standpoint of targeting, the debt to equity ratio obviously as we have said before, we would target somewhere in the, to put a range on it, in the 25 to 35% range.

Thanks very much guys.

Michael Gambardella, J.P. Morgan.

Good afternoon and congratulations on just an outstanding quarter. In that great quarter that you put up, you had some penalties. I think I heard you talking about you have some inefficiencies in the flow on the stainless Flatrolled side of the equation, and you mentioned that you recently put in some new surcharges for titanium and some new price increases. If you did not have those problems with the production flow in the first quarter and you had the surcharges in for titanium and the new price increases, if they were in for the first quarter, just how much higher do you think that $0.66 EPS number would have been? I'm trying to get a feel for going forward.

Mike, of course you know we don't forecast earnings, right? So I'm going to talk to you about some personal feelings about the quarter. We came into the quarter and we saw the inventory adjustments coming out of our distributor business as the surge of imports came in the month of December. I think some distributors decided to turn some good profits into inventory and then to move that inventory in the first half of this year. So we had some open capacity where we could catch up because basically, we had material stock ending the year that we were behind schedule on. And as we assigned those materials to production paths and in some cases not the most optional production paths, and at the same time we're nine months into this integration we're in also at the end of the quarter, six months at the beginning of the quarter into the drop combinations, we're doing extensive training. And as you also know, the first quarter of the year represents our highest energy cost quarter. We started to move those products through and two things happen when you're doing that. One, you're not running as effectively as you could, and two, those items that were behind schedule were probably behind schedule for some issues.

And so we paid those cost of those issues cleaning that out, we paid the cost for the quarter, we paid the cost for some of the inefficiencies. So no excuses. We should do better, we can do better. The markets were solid, the pricing was solid and we took it into our performance a little bit into the first quarter.

Now if you take the first quarter and annualize that quarter at 39.4 million, we have a $160 million Flatrolled Products segment here, and this is the old question about -- you have a problem, how disappointed were you in the problem? Well I was $6 to $10 million disappointed. So you can pick your own numbers from there.

In the Flatrolled segment, the pricing, was the pricing impacted by the mix, a mix change that brought the average prices down a bit?

We sold a lot more hot roll in the sense that we had two meltshops running and we had opportunities to do that. We had some softening as I mentioned in the distributor business. And so we did that. We also have a larger segment now in the automotive exhaust side of the business, the 409 business. And if you peg our interest in obtaining a titanium surcharge, it's targeted at the 409 business, which uses that particular element. So it is a substantial pricing change that we have there that we did not see in the first quarter that's effective in May.

And I guess the dominant player in that business, A.K. Steel (ph), put that surcharge in already -- is that the case?

How that is worked is, we looked at the cost of titanium having been involved in this business in all of our segments. And of course, we have some very, very high pricing on the titanium side. Also for scrap today, there is a shortage in all of the issues with that. So we decided that we would put that extra surcharge in place. That surcharge was followed by our friends at A.K., who have a large segment in this business, probably the same kind of problems that we had in that element. Thirdly, it was followed by North American stainless, and today it was announced that that surcharge is being followed by Carpenter (ph).

Okay, thanks very much Pat.

Bob LaGaipa, CIBC World Markets.

Hi, good afternoon. Congratulations on the quarter. I had a number of questions for you. One, just to get back to the pricing issue here, can you give us a sense what the base price increases were for both the Flatrolled and also the High-performance Metals business in the quarter, say versus the fourth quarter also versus last year, just to give us a sense for how much has actually been achieved and what to expect going forward outside of these more recent price increase announcements?

Well all that we've said on the High-performance Metals side, Bob, is that we had achieved and completed long-range contracts with our large aerospace customers and all of those price increases we have characterized as double-digit. And I think you see from the performance side of that business, those are substantial to us and very meaningful and the bottom-line results of this company.

The price increases that we were able to continue to put into effect in the Flatrolled Products business are the surcharges and also again on products that use a large degree of nickel, alloy and are in high demand in again our High-performance Products and in our Corrosion Market products. Basically, we're in a situation that on the commodities sheet, the prices are basically flat coming out of last year. And overall quarter-to-quarter overall, our prices are up in Flatrolled about 12%. So base prices -- I'm sorry. And 304 alloy is up about I guess it's still around the same range on the average.

Terrific. Just to get back to the issue relative to the inventory levels and the drawdowns that are occurring or have occurred over the last several months, are there going to be any production changes on go forward basis until that comes down to a more normalized level? I know you are expecting by the second with for that to be addressed, but are you making any different production decisions as a result of that in the Flatrolled Business, the stainless?

We're more interested in the Electrical Steel business these days and more global capacity being allocated that direction. There's some pretty strong markets on a global basis. Also, where we have the chance to utilize our Flatrolled Product assets for more participation in the High-performance Metals businesses, titanium for example, corrosion-based steels, we would give up commodity product for those kind of applications. And in the end, we are going to see I think a very similar quarter in our commodity sheet products as the first quarter and looking forward to what the economy is doing and what we see going forward in the second half of the year.

Now when we look at our end markets, the appliance market is flat basically as compared to 2004. Well, flat is not bad. That market was up substantially in 2004 and we like that business. We see increasing levels in the foods processing business and commercial applications -- that sounds good to us. We're not really affected by the automotive markets in that we have a broad range of customers and actually having the Midland assets, the former J&L assets, have given us additional share in that market. So we are not seeing a negative situation for us in automotive in the emission control. We will actually ship more product in 2005 than in 2004. And application usages -- the turbocharge business, flexible hose business, gasket business -- those markets are actually increasing for us.

Housing starts last reported we are about 1.85 million. That's not 2 million but 1.85 million housing starts for sinks, for dishwashers, for washer and dryers and refrigerators, etc., just say that that level we're pretty excited about the strength of that overall business. And what's driving our business, again, if you go back to housing starts all of these things, commercial markets, is the capital goods markets and the manufacturing sectors versus consumer spending maybe on some of the things like textiles.

The other question I have, actually two other quick ones. One, just in terms of an update for the cost programs that you have in place. And obviously, you've done a terrific job over the last several years in terms of achieving the cost goals and actually exceeding them. Can you just give us an update, just in terms of how much of that $200 million goal has been achieved and maybe differentiate that from the $100 million '05 goal?

What we have done now is put all of these goals together and obviously, we've hit about $10 million a month in the first quarter. If you go back to the fourth quarter numbers of 2004, I believe our cost reductions were in the $40 million ranges. And now we're getting into part of the full implementation of the flexible job assignments that we're putting in place in all of these businesses. The initial of course reductions in the fixed overhead and people are out. The initial savings that come from the transaction itself in the overhead and the depreciation levels and all of those kinds of things are already in place.

So when we talk about a $100-plus million program in 2005, we have that in place, what we think will be from the manufacturing side, and then we have the next group of people that will take the transfer assistance program that's part of that labor contract. As we get people trained up and as we move into this thing on an incremental basis quarter on quarter so that we don't have any disruptions to our good customers or our marketplace, we have a safe operation and we have efficiencies as we take the next group of people out.

Last question if I could, and then I'll pass the baton here, just in terms of the tax rate on a go-forward basis, obviously this is a very strong quarter. Rich, maybe if you could just guide us through or help us out in terms of the tax rate on a go-forward basis? And also kind of in the same vein with regard to cash flow -- is there a specific cash flow goal for 2005? Obviously, the receivables have gone up with the higher sales. I just wanted to get a sense for what the cash flow might look like for '05?

Sure. Let me take the last question first because obviously, the cash flow will be largely driven by earnings. I think as we headed into 2005, we saw with the continued improving market conditions and bringing the businesses to a higher level of economic activity, that we would continue to make investments and manage working capital principally receivables and to a lesser extent inventories. And that is exactly what we saw in the first quarter. I think that as we continue on through 2005 and I think we will see a leveling-off of the need to make significant investments in managed working capital and throw off a considerable amount of cash. So if you just fundamentally look at the first quarter with the roughly $5 million of use of cash in the first quarter from operations, that was after $122 million growth in managed working capital. So I think with that leveling off somewhat and maybe just a slight investment in the second quarter and then we're flattish in the second half of the year, that's how we think of and look at the cash flow generation ability of ATI.

Are you going to be making any additional contributions to the pension plan as a result of that maybe late in the year once that starts to reverse?

It's something as we've said in our public filings as we've said before, we will continue to look at the funded status of the pension plan. We'd like it to be better funded and we will look at and make what we think are prudent decisions from the standpoint of a use of cash.

Great, and just the tax rate lastly.

The tax rate, as we look at the tax rate, the first quarter was largely driven by the state and foreign income taxes. That is going to continue probably for the balance of this year at a similar rate. And on the federal side, because of the deferred tax valuation allowance that we have in place we booked a little over a year ago, there was very little impact in the first quarter provision from a federal tax standpoint. And at this point, we would expect that to be relatively consistent for the rest of '05.

Terrific. Thank you very much. Great quarter.

John Hill, Smith Barney.

Good day, everyone, and I would echo the complements on a strong internal and external performance. I guess just revisiting the Stainless and Flatrolled Products business, do you believe that you can drive that up over 700,000 tons this year meaningfully? And although it's a bit of a mixed metaphor, what level of capacity utilization are you at right now? It sounds like with the various workforce initiatives that you can go better.

It depends on the paths of course. We have some segments that are oversubscribed and we have capacity on the commodities side at the moment. Precision strip is very, very full, our high-performance metal part is very full, our plate business is running relatively full. I think 700,000 tons is certainly possible. We had 179,000 tons in the first quarter. So we would think if the second quarter is similar and then it just depends on the second half of the year, doesn't it. So yes, I think would be my answer. And I think the overall utilization in the 80-some percentile range.

Great. Turning to the more esoteric and exotic elements so to speak in your product mix, a lot of that is pretty opaque to the outside and much of it of course driven by defense, nuclear, government contracting. Was there any particularly lumpy government contracts that came in during the quarter and obviously supporting the obvious outperformance there, and how should we look at that going forward?

I think on the High Performance Metals side, we are really being driven across all of the product segments, I'll give you just a couple of examples. In the titanium side of the business, we are at what we would call record levels and unprecedented supply requirements for that, and that runs anyplace from armor plate to the aerospace business and aeroengine to the airframe business and fasteners and parts to the wire business for drawn titanium wire products. And to give you an example, those businesses in wire are up 400%. So we have a large pull in those segments on the titanium side.

We're very strong in the military replacement part market. We're very, very strong in what we will call government usage of these specialty and high-performance and exotic metals. And generally, the commercial market is very similar to last year's usage from the nuclear side.

Again, should we look at this as -- particularly the government business -- as a very contract-oriented and recurring? Or again, was there anything particularly lumpy that came in in this quarter and amplified the results?

I think it's a very consistent business up from earlier levels in 2003, up in 2004 and 5.

Great, thanks again guys.

John Tumazos, Prudential Financial.

Congratulations on the great results, especially fro the Performance Alloys. If you could describe the typical contract or price duration for the very high nickel alloys, such as alloy 718 that might be sold to the jet engine vendors or the electric power industry gas turbine people or medical implants, etc. -- are those typically multiyear contracts to the largest users, or one-year contracts? And how much of that business, if any, would be priced quarterly as opposed to annually?

The largest contracts, John, are multiyear, three-year contracts and those would be associated with the aeroengine business and also other parts of the aerospace business. Other contracts that we might have put in place could be in the medical or biomedical, could be six months, could be a you're. Other kinds of businesses that we have are transactional and we are still selling many of these products and price and effect at time of shipments. Some of our business that is taking up future schedules -- and by the way, we have not opened up 2006 for orders at this point -- are actually requiring a downpayment on the product, a non-refundable payment so that we're not overseeing an over ordering situation. We believe that demand we have is firm, it is real demand and it's being handled on a basis of being able to serve all of our customers in the most appropriate manner.

So we did our fourth-quarter negotiation of our largest contracts. And again, across all of our businesses, and this is -- the same ratio holds true for the High-performance Metals business -- 96% of our shipments beginning in January of 2005 had higher prices than the products of 2004.

Would the Industrial Gas Turbine business be three-year contracts like Aerospace?

The Industrial Gas could be a year contract. We have had longer range contracts than that.

Thank you very much.

Mark Parr, KeyBanc Capital Markets.

Thank you. Good afternoon. I have a question, a basic accounting question. What sort of operating leverage should we expect out of the Flatrolled business on a go-forward basis? Is there any kind of level that you think would be realistic? I guess more specifically, for each incremental dollar of sales, how much of that should go down to the operating line? Silence.

We're trying to (MULTIPLE SPEAKERS) interpret your question.

What I'm looking is, from fourth quarter to first quarter, there was a big pickup in -- or no, looking at the year-over-year number I guess, there was a big pickup in revenues, like $400 million. And the profit number's up 50 million, but that is less than 15%. A lot of companies, when you look at that operating leverage compared to what you achieved on your High-performance Metals business. And I am just wondering at what point are we going to begin to see some improvement? My sense is that your operating leverage should be a lot higher than 15% at this point in the cycle. So I don't know how high you think it should be.

I think when we look at our margins as a percent of sales, what we've said in the past we haven't achieved yet. So I'm going to keep it into the same levels in today's conversation, but I understand where you are driving. We have said that within the cycle and we're at the higher part of (technical difficulty) the stainless steel business as we've configured it today should range in the lowest part at 8% and the high part at 12% and average 10%. If we -- that's our targets as we look at our combined businesses. Again, if you look at the stainless steel business in the first quarter averaging 7.5%, today that was on about a $160 million annualized operating profit. As we said earlier, it's the question of how much better can we do. We will do better going forward.

Okay, thank you very much.

Alex Latzer, Merrill Lynch.

Thanks, great quarter. My question pertains to some of the cost savings. I was trying to get a sense of your cost savings, how much you've been able to offset inflationary pressure that you're seeing beyond that, which you've been able to pass through on your surcharges. For instance, you have a cost savings of 30 million companywide in Q1 and that was before the effects of inflation. Is there any way to sort of gives us a sense of what the cost savings have been, including the effects of inflation?

Yes. I think Alex, the best way to think about that is as we think of it consistently is that we target gross cost reduction to equal twice the rate of inflation. So that's how we put together our annual cost savings plans. And over time, that is what they equate to. Your comments about the surcharges -- the surcharges as you now are, especially in the Flatrolled Products segment, are essentially passed through costs of the raw material cost volatility. However, when you look year-over-year, especially the first quarter to the first quarter, part of the reason for the margin improvement has been that there were new surcharges that were implemented toward the end of the first quarter last year that the new elements to the surcharges that did not exist before, especially in iron scrap. And that has allowed us to basically negate the volatility of the raw material cost while on a broader elemental basis than existed prior to the first quarter of 2004. And all of those are in place and remain in place with the latest one being added here recently within the last week for titanium.

Okay, Rich, I appreciate that, that helps tremendously. I have a question, just going back to taxes again. I understand for this year, you gave guidance. Going longer-term, do you have any sense -- I know the statement in the press release was pretty much dependent on the level of earnings that the Company generates. But if the Company continues to generate these types of profits, do you have a sense of when we might begin to see the phasing-in of sort of a more normalized tax rate?

Yes. I think the way we look at it, first of all, one of the things that we will continue to evaluate on a quarterly basis and at some point, be it the end of this year or next year, is the valuation allowance and will be re-evaluated, and that would revert back to income at some point as we have discussed before. Setting that aside and you look at a more normalized effective tax, I think when you look ahead to 2006 at this point, that is when we would expect setting aside the valuation allowance accounting; that's where we would expect a more normalized tax provision to be made.

Alright, I look forward to talking again as the year progresses on that. The other question I have is on the LIFO charge. It was really de minimus. I think there was nothing really, and I had thought -- what does that reflect? I thought maybe we would have continued LIFO charges. Does that just reflect the effectiveness of some of the new instruments you have put in place with some of your surcharges, or help us with that LIFO perhaps going forward, is there a delay that we might see some LIFO charges ahead?

We did have at the total company level 5.6 million of LIFO charges, and most of that, 6 million of that, was in the high-performance metals segment driven by the high cost for titanium, titanium scrap primarily. I think the way to think about LIFO is that this year, we are doing what most companies do on an interim basis, and that is we are projecting the expected material and conversion cost changes in the fourth quarter of '05 and comparing that to the actual cost in the fourth quarter of '04 to develop for each of our LIFO pools a current year index and then applying that and determining what the projected year-end LIFO reserve will be year end '05 and then booking that ratably throughout the year. And so as we look ahead and use a lot of our -- the input, including some from some of the analysts on the call in terms of what they think raw material costs, especially nickel and to a lesser extent iron scrap, but certainly moly and things like that, chrome -- and what we expect that inflation to be year-over-year, recognizing that we ended 2004 at a very high cost basis. So we would not expect to see the kind of 40% year-over-year increase in raw material cost this year that we had last year. And that's really what's reflected in the first quarter provision and it's something that we will update every quarter, including the second quarter and the third quarter. And fundamentally, the end result of what you end up booking on LIFO depends upon really what raw material costs are likely to be in the fourth quarter of this year.

Okay, I did actually follow you on that. It was very helpful. Don't ask me to repeat that. No that was very helpful. What kind of percentage increase -- it was 40% last year.

Alex, I hate to do this, but we still have five people in queue, and we're going to limit now to like two, three questions. If you want to get back into queue, if your question hasn't been answered, please get back in. We want to make sure everybody has an opportunity.

Thank you.

Craig Thomas, SAC Capital.

Quick question. Sounds like a lot of positive things are going on from a mix perspective and you have the ability over the next quarter or two to shift to some higher value-added product. Can you help clarify this a little bit and help me understand the margin impact? I know you have said 8 to 12, but does that reflect the shift?

That reflects our goals, and let me just go back to the answer to Mike Gambardella. I said I was about 6 to 10 million disappointed. Somebody else can calculate how disappointed they were. So you can put that in your own disappointment column from the first quarter of extra costs that we incur. I think Craig, as important as the stainless steel business is to the overall Company's performance, we are continuing pricing. We just put a price increase in of 9% on many products into the second quarter. We see extending leadtimes, we see extending usage. And so we have to do well in the stainless steel business. And well in the stainless steel businesses, we've said let's get that business to our goal of 10%. And we should excel in the markets that are being driven by very, very high demand and unprecedented levels of replacement parts as these revenue passenger miles and aircraft get back into service and the OEMs are building aircraft as their schedules move. And remember that our business in 2005 is not the 2005 build rates, it's the 2006 build rates. And our business next year will be the 2007 build rates. And we have also, I said earlier in my comments, that we see an early sign of a recovery of the land-based turbine business. If you combine the land-based turbine business, the nuclear business, the aerospace business, the spare part aftermarket business, the government business, the military business and a good stainless steel business, and you know what's in my head.

Perfect. I appreciate it. Thank you.

Andrew Schwartz, SAC Capital.

Hi, guys. Sorry for the confusion in the two separate calls. We were both on the line, and anyway. Can you talk about the contract business versus the transactional business and as it relates to pricing? I know that you talk about the renegotiated pricing going into 2005 in the contract. That was renegotiated, but can you talk about the level of spot pricing relative to where you settled those contract prices?

Well, let's just say that a transactional price on a day-to-day basis that was not a packaged contract for a particular share of business over a three-year period of time, we will have a higher transaction, daily transaction price and it is also subject to the growing demand. So the first sign of that, Andrew, is the 9% price increases just announced in the last week.

So your business could start to actually move higher than your contract business, is (multiple speakers) pricing?

Yes is the answer.

Scott Blumenthal, Emerald Advisers.

Good afternoon, gentlemen. Great quarter. Following up on the last question, could you give us an idea of how much of the business is contract versus transactional?

We said in the overall company, about 35% of our total business is under contract. When you tune that into the aerospace side of the business by itself, about 70% of the Aerospace segment is under contract.

Thank you. There were a couple of mentions of positive outlook for the global electrical steel markets, and I was wondering where you saw that part of the business right now? Are you going to be shifting capacity from other parts of the business to meet that demand? Do you have excess capacity for the increasing electrical steel demand? And what inning, if you were to equate it to a baseball game, what inning do you see that recovery?

Excellent question. We just spent the last day on this subject with several people and in prior times in the first quarter, we spent many days looking at this business. This is a very interesting opportunity for us in that we have underutilized assets in the electrical steel business. We have capacity in our melt shops and we have capacity on our hot melt and we have underutilized finishing capacities in total. We have a global market situation that is being driven by the power transformer business and the infrastructure growth not only from the weather conditions that occurred in the south in the United States, but also in Asia from just the infrastructure build of these emerging economies and growing economies, especially in the Chinese market, Southeast Asia markets and the Indian market. And so we have a particular niche in that business that we're very good at. We've been in this business for many years, we have the technology to do. It's not easy product, it's hard to get into. There's great barriers to entry in this business and there's a limited number of competitors. Putting all of those things together, we're not in the first inning, we're in warmup. We're in the bullpen trying to get the arm loose.

Very good. Thank you.

Daniel Roling, Merrill Lynch.

Thank you. Gentlemen, one of the things we've been hearing about up until yesterday was the possible slowing of China. And yesterday, we saw their GDP number 9.5%. You've got a new operation there and last we talked, it was doing well. Could you tell us if you saw any slowdown during the quarter, and what is the outlook for the rest of the year?

The interesting part Dan is you expressed it so well. We hear these things and then we try to track it under our own experience and we saw prices increasing in China. We saw nickel prices not declining but moving up. We saw scrap prices have a little bit of a patch and then come -- iron scrap come right back up. That tells me that China is fairly strong and the numbers coming out of the first quarter indicate that the economy is fairly strong. So there's still a net importer of cold-rolled sheet and products. Now they export and import just like we do, just like Europe does. But overall, the net numbers are import numbers. So in our particular niche in that market, which is in the precision rolled strip business, we're at capacity and adding some capacity.

What type of capital are we talking about, or how do you measure the capacity addition? Another adjacent building, or just another machine in the building?

We're looking at short-term and longer-term and what I was referring to in this conversation was incremental capital of increasing some intermediate finishing capacity so that we could maximize the core assets on the rolling side and have a fairly significant increase in our ability to move the bottleneck operations. When I say fairly significant, meaning 20 to 30%.

And then lastly, how are things looking in Europe and in the UK at your facilities? Now those are probably more related to oil & gas and aerospace, but have they been strong?

Much better year for those guys. We are still -- the Sheffield operations, we're still moving along. We're still bringing product in from North America to sell through our distribution networks in Europe and those import products are very strong and we're in the renegotiation stage for contractual obligations around the oil and downhole drilling, as well as qualifying more products in the aeroengine business there.

Thank you.

Chris Olin, Longbow.

Hi, guys. A couple of quick questions. First of all, are you seeing any type of alleviation in the titanium scrap costs for the first quarter versus -- or I guess second quarter versus last quarter?

It's going up.

What's driving that?

Just demand and the sponge production is at pretty practical capacity, let's put it that way today. And with the increase in demand for product and some new applications, I would say that just the availability of Reverb (ph) coming back into the market has been really strained. And then you have the infrastructure growth in the petrochemical business, especially in Asia, pulling again from the commercial side of the titanium markets on the high, high levels of utilization at the same time that you see the aerospace and aeroengine business beginning to show great strength. And you put those two market segments together and you're going to have high-tech indium (ph) scrap prices. People have to make choices, but just that the really the great news for us is that as titanium becomes tighter, then some of the applications for the corrosion markets move back to our higher priced and highly corrosion resistant stainless steel alloys that then give some of that shift in business back to our ATI Allegheny Ludlum operations, which I was referring to as market shifts and high-priced products that we would like to support in the stainless steel side.

I was under the impression there was a lot of excess capacity for sponge worldwide, and that you could still see some ramping up to offset this scrap pressure?

I don't think there's any excess capacity available without significant capital. And if you decided to put the capital in some of the Japanese producers (indiscernible) other people are talking about some incremental capacity coming on at the end of 2005, maybe moving into 2006. But everyone else is at practical capacity as far as I know.

Okay, and then (indiscernible) titanium, I'm looking at the long-term upside. You had the better delivery schedules, you have these planes that are going to be more titanium intensive, the Joint Strike Fighter and oil & gas. So if I look at all of the drivers, I'm coming up with a peak market near 150 million pounds for worldwide demand. Do you have any kind of forecast?

I'm going to use your number.

Okay. Well, is there enough supply to get to that type of number then, in terms of melt or raw material?

I don't think there is.

So we're going to be pretty tight going through '07, '08?

I think that's a very good forecast. It's your forecast, but I think it's a very good forecast.

Do you know of any new supply coming online that could help get rid of some of this pressure, be it sponge or melt?

I don't think there's that's anything announced that's coming online that I'm aware of at this point.

Okay, great. Thanks, Pat.

Other than what I mentioned, there's some incremental capacity out of Japan in sponge.

Thanks.

Gentlemen and ladies, I haven't heard any ladies, but gentlemen and ladies, thank you for joining us today and we really appreciate your continuing interest in ATI. It's always a pleasure to meet you in the meetings and it is a pleasure to have you on the call today. 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, a rebroadcast of this conference call is available on our website. That concludes our conference call. Thank you.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Have a great day.