ATI Inc (ATI) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2005 Allegheny Technologies earnings conference call. My name is Candice and I'll 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 towards the end of today's conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's conference, Director of Investor Relations, Mr. Dan Greenfield. Please proceed, sir.

Thank you, Candice. Good afternoon and welcome to Allegheny Technologies earnings conference call for the second quarter 2005.

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, 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.

Second quarter results are another milestone that demonstrates the earnings potential and the diversification of the transformed Allegheny Technologies.

ATI sales and operating profit reached an all-time high. Cash flow from operations nearly $65 million even after further investments of over $100 million in managed working capital.

Some of the accomplishments of the second quarter.

Sales of 904 million were a record for ATI. Net income was nearly 92 million or $.91 per share. Operating profit 142 million.

Segment operating profit reached nearly 16% of sales. Specifically, Flat-Rolled Products at 11% of sales, High Performance Metals at 25% of sales, and Engineered Products at 12% of sales.

Net debt to capitalization improved to 34.3% and our cash on hand increased to $253 million.

Some highlights from the segments.

Robust demand from the early stage recovery of the commercial aerospace market and another strong quarter from our exotic alloys business that drove the High Performance Metal sales and operating profit to record levels.

Our High Performance Metals segment operating margins exceeded the 25% mark. Demand for ATI's titanium alloys, nickel-based super alloys, vacuum melted specialty steels was very strong due to continuing growth of our materials used in spare parts and new aero engines as well as the airframe applications.

Demand remains strong for a bio materials from the medical market. Demand was also strong from the power generation market for our materials used in land-based natural gas turbines and nuclear power plant maintenance.

The average selling price for titanium milled products, included in our High Performance Metals segment, was nearly $21 a pound on shipments of 6.3 million pounds.

ATI's year-to-date sales to the aerospace market improved to 22% of total sales. This represents an increase of nearly $190 million in sales compared to the first six months of 2004.

Our exotic alloys business had another excellent quarter. Market strength continued from government and medical markets, and from corrosion markets, particularly in Asia.

Turning to our Flat-Rolled Products segment.

Operating margins in Flat-Rolled Products improved to nearly 11% of sales. This demonstrates the successful integration of the former J&L assets into Allegheny Ludlum. This integration has created a highly competitive and profitable flat-rolled products producer.

Total flat-rolled shipments were less than the first quarter of 2005, due to ongoing service center and supply chain inventory management actions, primarily impacting commodity, stainless steel sheet. Our products affected represent about 15% of ATI's total sales, or 85% unaffected.

Our high value flat-rolled product mix was particularly strong due to demand for our flat-rolled nickel-based alloys, specialty steels and titanium products from the oil and gas, electrical energy, aerospace and chemical processing markets. Again, the average price for our high valued flat-rolled products was over $6,000 per ton in the second quarter.

Turning to our Engineered Products segment.

Sales in our Engineered Products segment also reached record levels due to strong demands from the oil and gas markets, transportation, automotive, construction, mining and the aerospace markets. Sales were aided by our recent acquisition of the Garryson Limited operations in the U.K., overall segment operating margins were just under 12% for this segment.

We received further positive results from the ATI business system and from our ongoing cost reductions in the second quarter. Employees throughout ATI deserve the credit for these accomplishments.

Our focus on safety has continued. ATI employees achieved a loss time case rate of .71 per 200,000 hours worked.

Employees of ATI Allegheny Ludlum did a great job in improving their loss time case rate to the best ever rate of .6 per 200,000 hours worked, a 31% improvement compared to overall 2004.

We achieved $67 million of cost reductions before the effects of inflation in the first half of the year. So we are well on our way toward exceeding our 2005 cost reduction goal of $100 million.

Managed working capital as a percentage of our sales in the second quarter held at approximately 30%.

We remain confident about the prospects for ATI and continue to build the foundation for further growth. We're committed to grow our high value metals business.

In the first half of 2005, sales of nickel-based alloys, specialty steels, titanium alloys and exotic alloys reached 40% of ATI sales compared to 35% of sales during the first half of 2004. That is an increase of $275 million in revenues in the first half.

Earlier this month, we announced a major expansion of our titanium capabilities. This capital investment of approximately $100 million over 18 months is expected to result in over 200 million of annual revenue growth beginning in 2007.

We plan to see some benefit from this in the second half of 2006. This strategic investment should help ATI optimize market opportunities in the robust and growing markets for titanium products.

We also expect to continue to expand as the global specialty metals company. ATI sales outside the United States for the first half of 2005 reached nearly $430 million, or representing 24% of our sales. That's an increase again of $160 million from the first six months of 2004.

We plan to continue this global approach and expect to continue to see strong demand for our high value specialty products from the Asian and European markets.

We also are committed to growing our Engineered Products segment. In April we completed the asset acquisition of Garryson Limited in the U.K.

This bolt-on acquisition strengthens our metal working products business and also, this integration today is going well at Garryson in the overall integration into our Company.

We are currently leveraging our broad product mix and technology to further differentiate ATI in global markets. One initiative is our "The Switch Is On" marketing campaign.

A lot of progress is being made to provide technical advice to aid customers in their switch to AL201 High Performance Stainless, our alloy with the look and performance of the most common stainless grade type 304 at a lower and more stable cost.

Several customers in the appliance, food equipment, and construction markets are well along in the evaluation process. Some have already switched.

We have shipped our AL201 High Performance alloy now into Europe and into Asia. This effort has included specific technical support for the customers involved.

In addition, with current high prices of titanium and high nickel-bearing alloys, we have had success with global customers who have switched to our super stainless and duplex alloys in applications such as oil and gas, electrical energy, chemical processing and desalinization. With this broad range of alloys and technically trained sales from a global sales force, ATI is able to offer unparalleled cost effective solutions to help customers meet their specialty materials needs.

Now, looking ahead, we believe the second half of 2005 earnings will be similar to the first half 2005 earnings performance. We expect demand from our High Performance Metals products to remain very robust. Demand in our Engineered Products segment is expected to remain strong.

Overall, for the second half, third quarter 2005 earnings are likely to be lower than the fourth quarter of 2005, primarily due to commodity stainless products. We expect to see reduced shipments of stainless commodity products for most of the third quarter for the following reasons.

First, the normally seasonal slow down in the third quarter for commodity stainless, typical for this quarter. Second, inventory reductions by distributors are likely to continue.

Third, customers are taking a wait and see attitude in order to take advantage of anticipated reduction of surcharges in the coming months. And lastly, mill lead times have shortened and mills have become more reliable in their delivery performance.

Most importantly, even with these influences in the third quarter, we believe the U.S. economy will drive this market for the second half as end markets and demand for these products remain solid.

The GDP growth rate of 3 to 3.5%, a healthy construction and remodeling market and a reasonable auto build rate are just fine for our stainless business. If you data check durable goods, new homes, existing home sales, these indices reported this week, this supports our forecast for the second half.

Now, turning to another very important topic, cash.

Cash flow from ATI operations during the second half of 2005 should be very strong as earnings are no longer expected to be offset by considerable investments in managed working capital. Summarizing this again, we're on track and ahead of schedule in achieving our stated strategic objectives.

The earnings potential and diversification of the transformed ATI was demonstrated in the second quarter of 2005.

Sales and operating profit reached all-time highs. Profitability is accelerating in 2005 over 2004. And we are enabling and now beginning, a self-funded growth strategy for 2006 and beyond.

I think we'll stop here and open the call now for questions.

[Operator instructions] Our first question comes from Robert LaGaipa of CIBC World Markets. Please proceed.

Thank you. Good afternoon.

Hi, Bob.

Pat, I just wanted to dig down a little deep near the stainless steel market and kind of what you're seeing out there. I know you'd mentioned that about 85% of your business is unaffected by the inventory draw down, some of the shortened lead times that you're seeing out there in the channel, but are you seeing any import pressure building? Is there any price discounting occurring in the marketplace? You know, just trying to get a better sense there and your ability to offset that.

I know you've talked about in the past, you know, the strategy of ATI, for the better part of the last year or two, to decouple that the pricing from your, you know, higher value-added products and, you know, the commodity products, and just wanted to get a better sense for what type of margin offset that might have on a go forward basis to absorb any weakness you're seeing on the commodity end.

On the commodity side again going back, when we look at our 201 product, our bright annealed and cool lined products, our automotive product, two quality plate-milled plate, the remaining sheet that you're talking about, Bob, is about 15% of our total revenues. And there's no question that that market will be wider in the third quarter and it's compounded by the things that I tried to mention.

Let me just run back through this. First of all, we have a seasonal downturn in these markets. Secondly, the distributors are de-inventorying and that's because we had a lot of over-ordering in the fourth quarter of 2004 mainly from imports and then we had a continuation of some ordering going on in the first quarter, so we started to see this pressure come to the market really sometime during the second quarter, and you can see from our results, really didn't affect us too much.

As we move into the third quarter other things happen. As you take these pounds, these tons out of the business, things start to happen.

One, we have two levels of de-inventorying. One is that the distributors are trying to move their inventories down to balance from what they over-ordered.

Two, the mills had material that we are taking out of our inventory chain and you can see the reductions publicly announced basically across the globe in the commodity producers. Including ourselves. We're down for this week. We're back to normal schedules for the rest of the quarter beginning next week.

When we look at that, we have some de-stocking. The distributor has some de-stocking. We have a seasonal adjustment. And now, two other things happen that compound this situation on a very temporary form.

One is the mills catch up. Delivery performance wasn't that great because of the high demand and so as the distributors cut back, or the market cuts back, then the mills catch up to compound the situation further.

After the mills catch up, their reliability becomes very good so now you don't have to worry or do any extra ordering because you're going to see it shipped on time. And then thirdly, the mills cut back their lead time so you don't need as much inventory that you had when you started the period. All of these things affect the third quarter.

Now, we view this then as very temporary and we are not reacting in pricing. We're not reacting to what's going to be a temporary situation.

We are looking at the data-driven knowledge of over 1.3 million new housing starts and another 7 million existing house sales. We are looking at the appliance market. We are looking at the nickel-based and specialty markets for stainless steel. We are looking at the drive of our assets in the aerospace business and to plate and titanium and high value-added temperature alloys.

And so we're relying less on this and driving our, as you said earlier, our strategy is to combine our products, package our offerings and add value to the customer based on our total offering. We don't have to be the number one distributor of commodity and it's not our intention to be.

It sounds like it's more so on the inventory end and some of these adjustments that you had mentioned as opposed to seasonality. Because I would just imagine that the fourth quarter from a seasonality perspective, you know, you have the holidays, you have Thanksgiving, et cetera, you would also have that seasonal component so would you say it's more so on this inventory and adjustment side? And what gives you the confidence that come fourth quarter that this will be alleviated?

Well, there's two things here. One, I think the items that I mentioned are exasperating a seasonal adjustment. Normally you have customers, just like we do, that have summer vacation shut-downs and have maintenance items that take these markets down. Actually, our fourth quarter is normally stronger than our third quarter.

The other thing we have happening is customers taking a wait and see attitude as they look at the surcharges. Let's face it, if have you to buy some commodity product and you're looking at a $0.06 a pound decline in surcharges for August, and you're looking at another few cents maybe for September and wondering what October's going to be, you're going to take your inventory items down as low as you can until you understand exactly where this market is or have you a defined need to restock.

And so two things happen in my view to answer your question about the fourth quarter. We're going to see, we have a larger than normal turn down in the third quarter for commodity stainless steel, but we should see this market come back in a very nice way starting in the fourth quarter with really truly driven demand.

These inventories are down. The lead times are short. And demand comes back from not only the end customers inventories but also from restocking.

Terrific. And two other questions, if I could, real quick. On the --

Bob, excuse me one second. We have a large number of people in the queue.

Okay.

If you could ask one more question, we're going to limit it now to two and if you need to get back in queue that's fine, but we do want to limit this til 2:00.

No problem. The question that I have is on the income tax side if Rich is available, what are the income tax expectations? I know before you had a run through certain number of carry-forwards before the income tax would be reinstated. You have this 3.5% income tax rate kind of first, second quarter. What are the income tax expectations for the second half of this year and you know, also 2006 if have you that available?

Yeah, Bob, I think it's the second half of the year is very similar to the first half of the year, as we've said. You know, the NOL, have you to burn through that and then we also have the valuation allowance that we recorded at the end of 2003.

So in 2005 for the most part, we are providing a provision on the basis of the cash taxes that we're paying which are primarily related to foreign and state income taxes. We will continue and we will evaluate every quarter the valuation allowance, as we've said. Heading into 2006, at this point, we believe it would be appropriate to model in a more normalized effective tax rate of in the range of 36%.

Terrific. Thanks, guys. Good quarter.

Thank you.

Our next question comes from Alex Latzer of Merrill Lynch. Please proceed.

Thanks. Congratulations to the Company on a good quarter.

Hi, Alex.

Hi. I had a question regarding the impact of your initiatives to move some more volume into the higher value-added side of the market on your stainless steel. I know this is hard to break out a little bit the initiatives that you're doing there with what's going on in the general market, which in some areas is a little bit softer. I just noticed that you had some of the commodity products increase while shipments of high value products decreased.

I know in there you've been shifting more product to higher value-added markets and I was just wondering if you stripped out sort of the seasonal the market impact, what kind of indication can you give us on how that initiative is doing?

Well the engineered strip was down a little bit, and that's probably driven somewhat by the automotive industry, which if you notice today in the announcement, General Motors I think's running out of cars out there and going to a different approach, but we expect that market to come back into the fourth quarter.

If you're talking about how we're investing in the titanium expansion and what we're doing with facilities in our fabricating areas, we have several projects that are related to plate and to sheet that give us more capacity, we've mentioned about a 25% increase and a better product.

We are, I think now, producing a very, very good quality high performing aerospace product and corrosion resistant product, industrial product for titanium. Maybe some of the best that is produced in the global market. And we want to make sure that we are a known quality producer for these products with the full quality systems and controls that are necessary to make this market a very big success for us.

As we look at these applications, we have intentionally moved our sales emphasis toward a global approach with more sales representation and drive to the global markets that fit our production paths and generate the most profitable products that we can possibly make.

The second thing that's happening there is that our electrical steel business, our silicon business, silicon steel, on a global basis, this market has increased considerably with the expansions in Asia, India, and also just in the United States with some of the weather conditions and growth in replacement projects here so we're re-emphasizing again our ability to come back into that market in a larger way that again suits us in using the best, making the best use of our assets that we have in place.

Thanks for that, Pat. My last, or second question would be, on the Garryson acquisition, I see that it's, because of the purchase accounting, it didn't have any impact really on operating profit. When do you see that having a, I know it's relatively on the small side but incremental, when do you see that having a positive impact and is that the type of perhaps small bolt-on acquisitions that we may see going forward?

Yes, yes, and yes. It's the kind of stuff that we like to see because it's a triple play for us in terms of the fully integrated business, the powder, the tungsten rod and the end products so we like those kind of bolt-ons and purchase accounting should be finished now and we should start to see some advantages of this business in the third quarter to the profit line.

Thanks very much.

Our next question comes from David Martin of Deutsche Bank. Please proceed.

Thanks. And congratulations on a good quarter. I wanted to start with the High Performance Metals segment. I guess thinking about your margin in the quarter of 25%, a pretty impressive number obviously. How should I think about the margin in the second half of the year?

And I guess maybe a better question would be backlogs are pretty important to this particular segment. Can you give us a little color on how your backlogs look today or at the end of the quarter?

Two things. First of all, the margins of 25% seem reasonable to us for the current demand supply and the relative value of these products to customers in the markets today.

The real question is supply and demand, and there is more demand than supply available for many of these things. So if anything, there is a pressure to get more.

We're not being picky in this business. We're being a responsible good supplier that is looking for longer-term relationships that drive our profitability on a consistent basis through this cycle.

As we look at that, we are finding a lot of interest in what we do and how we do it, and our ability to deliver the services and products that are demand in this industry as we now see growth into the airframe that is new as well as the industrial projects that are around the world.

One of the numbers that we gave you was on this call was 6.3 million pounds of titanium shipped in the High Performance Metals segment. That doesn't mean that's all the titanium that we are producing or shipping. We're producing, shipping, titanium in the Flat-Rolled Products segment, also.

We're also have a joint venture called Unity with VSMPO that is producing products in addition to those numbers, so we are a major player, a major producer, a growing producer in the titanium markets on a global basis. So just to give you a flavor for that, those are growing, we have a lot of interest.

We can sell today basically everything that we can make, i.e., the expansion announced in our melting, the restart of our sponge facilities also the improvements in our fabricating facilities on the flat-rolled side. If you think about that going forward, we're looking for additional business as we move into 2006 and '07 through additional capacity and capabilities we have.

We are just now beginning to open the 2006 schedules to those people that would like to place orders that [we] need for the year 2006 versus companies that would give us a longer range viewpoint of their business, i.e., two to three-year, four-year, five-year arrangement.

So the margins are good. The business is good. We're happy with it.

And when we look at what we've done over the years in this business, the costs we've taken out of it, the amount of investments that we've made in our Richburg facility and other facilities, we're now reaping some of the benefits of that and more to come as we invest more money.

Okay. And then secondly, I just wanted to come back quickly to your comments about your 201 series product. I believe I missed some of those. But you can give us an idea of how much of that product you're shipping on a quarterly basis and maybe also give us some color on what you think the potential market potential would be?

Two things. One is that we intentionally on this call tried to point out to you that we are under a lot of evaluations at the moment. And that this product with technical assistance is a wonderful high performance product that can replace 304 in many, many applications.

So we're at the beginning stages of that and I don't want to get ahead of the game in telling you what we expect to get out of this product, but I will say this, I'll be surprised if we don't ship 50,000 tons of that product this year.

Okay. Great. Thank you much.

Our next question comes from John Hill of Citigroup. Please proceed.

Good day, everyone. And congratulations on a great result.

Thank you, John.

A quick question on the part of the business that moves the needle here, High Performance Metals. Everything obviously is thoroughly utopian in aerospace as we're instructed yet shipments of nickel-based and specialty steel alloy is down for the quarter. Just kind of wonder if you could comment on kind of order lumpiness and what that's all about and what we should look for next time around?

I think you're going to, I think it's a good catch and it's a good observation and we also didn't talk too much about the amount of LIFO charges we have in that number that we demonstrated this quarter with the increasing value of the titanium.

But as you know, when you look at jet engines, you have a hot section, you have a cold section, you have rotating parts and you need nickel-based alloys as much as the rest but there's more producers of nickel-based alloys but as we complete these longer term arrangements and tie this business, as we look at what we're trying to anticipate going forward, we're going to, I think, see some additional business on the nickel side as the inventories smooth out and the lead times come into equilibrium. Nickel-based lead times are a little bit less than the titanium today.

Okay. And on the exotic alloy pricing, that was the one portion that ticked down a little bit in the quarter. Is that a function of order entry or how should we look at that?

That's a function strictly of mix and that's going to recover in the second half of the year.

Okay. And then last one, which I guess we always have to ask, 67 million in cost cuts, what's your estimate in terms of the percentage of these cost cuts that get dropped to the bottom line? Of course lots of companies with lots of cost cuts, yet the cost of goods sold line goes up every quarter.

This company is an exception. You have tangible things to point to, but with these cost-cutting programs, how much realistically percentage-wise should we think about dropping to the bottom line?

I think we need to, we're talking about taking care of all of our inflation and more so we're talking about maybe 40 to 50% of that dropping to the bottom line and as we said today, we're about 33% ahead of plan, if you annualize the number.

Okay. Great job, guys.

Thank you.

Our next question comes from Michael Gambardella of JP Morgan. Please proceed.

Yes, good afternoon. And Pat, I just wanted to say congratulations on not just the quarter but everything leading up to the quarter, you know, starting with the J&L acquisition, new labor contract, the number of the pricing decisions that, you know, kind of put the Company in position to have such a great quarter.

Well, thank you, Mike. We also appreciate the encouragement of people that understand the strategy.

I have two questions. One, you talked a lot about the seasonality in the third quarter for the stainless operations. Can you talk a little bit about the seasonality for the High Performance segment?

Right now, Mike, it's pedal to the floor. We're not seeing anybody backing off on orders.

One thing I didn't mention that I should mention to this group today is we are just, I think I just said we're just, we have not opened the 2006 schedules for general order entry. I think the day that we say you can place an order in 2006 for everything we have, we may fill it.

So we're very careful about protecting our valued customers, building long-term relationships through this entire cycle, and the interesting part to me is, as you look at where the orders are coming from in these High Performance Metals, it's the first time in my experience that we've seen the aerospace build coupled with the infrastructure builds in Asia and the Middle East and around the world for project work, coupled with a new application for air frame that this doesn't look like the typical cycle.

This looks like a long cycle and it also looks like if we continue to see progress in the U.S. airlines, which still have the largest fleets and have the largest ordering potential, coming in toward the end of this cycle, we could get pretty excited about the length of time and what we've got here.

Second question on the cash flow. You had a very good quarter on cash flow and you talk about cash flow going into the back half of the year, and specifically, about working capital, because, you know, second quarter you had pretty good cash flow even with the working capital build.

Well, the working capital build, I mean, we now see hopefully an equilibrium if not some decline in raw materials with the exception of titanium. And you can see from our financials and our accounting practices what the LIFO charges might be in the second half of the year for the High Performance Metals segment that is seen a pretty good chunk in the first half of the year.

So if, and you can, we didn't casually mention that our working capital has maintained at about 30% thus far of our sales. So assuming that we have an equilibrium or a reduction in the cost of raw materials, we continue with our shipments where we think they'll be in the High Performance/Engineered Products, and some inventory cash generation out of the third quarter for the stainless steel business, we can see very, very strong cash flows out of this Company second half of the year. Much better than thus far.

Thanks a lot, Pat.

Our next question comes from Scott Blumenthal of Emerald Advisors. Please proceed.

Good afternoon, Pat, Rich and Dan.

Hi, Scott.

Hey, I don't know if I caught it or not, but did you mention any backlog numbers to the previous caller?

No, we're not projecting backlog other than to, are you talking High Performance total Company? What are you --

Total company.

Lighter on the steel side than the rest of the company but really strong orders in the Engineered Products and High Performance Metals, having to expand capacity strong.

If we look at the markets on the stainless steel side, electrical business is very strong. The strip business is good and actually we'll have a stronger quarter in strip in the third than in the second.

The specialty products that we make still remain very strong. Lots of project work coming in for, lots of quotes on the High Performance Metals both for sheet and plate.

The only softness that we're really experiencing that has some effect is this inventorying, de-inventorying on the commodity side, and hopefully we're going to get through that, and it's a little bit exasperated because of those other things I mentioned.

Okay. Great. With regard to the Engineered Product, I was on a call earlier this morning that talked about the drastic increases in tungsten prices. Do you guys have any, has that had any effect on your business? Can you comment on that?

It's had some LIFO charges for us that we didn't expect. We've also made some buys that will be advantageous to us. And we are passing along the price, the cost of the material in our prices.

Okay. Great. Thank you.

Thanks a lot, Scott.

Our next question comes from Brett Levy of Jefferies and Company. Please proceed.

Hey, guys. Can you give just a little bit of an update on sort of the pension and the post retirement health fund and then talk a little bit about what you guys are hearing out of Washington here with respect to some of the legislation and sort of where, I know you guys think it might be going?

Yeah, Brett, this is Rich. I don't think we'd like to venture a guess as to where it might be going in Washington, obviously there's a lot of dialogue both from the Bush administration as well as from both sides of Congress, the House and the Senate relative to, you know, changes in the funding legislation.

I think as we look at it, we still feel, you know, very confident that at least for the next several years, we're not going to be in a position of a mandatory funding. We will continue to look at, you know, a prudent strengthening of our funded position of the pension trust just as we did last year, so those are things that we'll continue to evaluate.

On the earnings side, or the EPS side, the impact on pensions, obviously it won't have any change this year. Next year, we'll see and evaluate at our measurement date at the end of November what discount rate assumptions are appropriate given where the interest rates are. And also where we are in terms of our asset levels and what the equity markets do.

And so I think it's too early to say the impact in 2006 on the earnings side. Suffice it to say that our assets are still in good shape relative to where they ended up last year and, you know, we're basically funding the payments out of the earnings at this point, so there's no deterioration in asset level, and to the extent that we decide to make an investment or a voluntary contribution, that obviously will be tax deductible and we'll get the benefit of that.

Finally, the discount rate comment, you know, we did use a 6.1% discount rate at our November 30, 2004 measurement date. That's largely based off the Moody's AA yield. That yield today is below 6.1, it's closer to 5.2. So depending upon where that rate ends up at our measurement date on November 30, 2005 we will set that.

Having said that, we said in our 2004 annual report that the reduction from 6.5% that we used at the end of 2003 to 6.1% at the end of 2004 resulted in about a $6 million increase in our pension expense. So you can do the calculation, each 10 basis points, about $1.5 million, so you can figure out what that might do in '06 setting aside where the asset levels end up.

And then in terms of 2006 Cap Ex, have you guys started to think about a number there and what are the significant projects?

I think we would hold those comment for a later call.

Okay. Thanks much, guys.

Thanks very much.

Our next question comes from Jeff Feinberg of JLF Asset Management. Please proceed.

Thank you very much. Nice job, guys.

Thanks, Jeff.

Just to follow-up on the High Performance Metals business. You touched upon your comments I just wanted to make sure I understood correctly. The 77 million in operating profit that's reported included a $17 million LIFO charge in there?

That's correct.

And I assume that was a catch-up because that LIFO charge was only $6 million in the first quarter. That was an above normal LIFO charge?

That's correct.

So if we sort of normalize the, if you will, High Performance Metals operating profitability, you know, roughly, 5, $6 million higher then? That's the correct way to think about it?

That's correct.

Okay. And then as we're thinking into the future for next year with regard to the expansion projects in the High Performance Metals business, of course we don't know exactly how much capacity will get up and how quickly but, whatever we get from the incremental volume of the expansion that you talked about, that should be added it would seem, to a base of, you know, 320 million or so, whatever this run rate on High Performance Metals that we're currently at. Is that the way to think about the incremental volume?

What we said is we would start to see benefits of that was expansion in the second half of 2006, fully implemented in the year 2007, we're estimating it worth at least $200 million.

Okay.

Revenue.

There would be no reason, if I'm understanding correctly, for the base High Performance Metals business which, you know, just call it a normalized basis, did a little over 80 million this quarter, there's no reason to think that that level would be diminished?

No. In fact, it's busy.

Well, phenomenal. Okay. Thank you very much.

Thank you.

Our next question comes from Mark Parr of KeyBanc Capital Markets. Please proceed.

Good afternoon, guys.

Hi, Mark.

I was wondering, Pat, if you could give a little more color on the marketing strategy behind the titanium expansion in terms where you expect to see the new demand or the new capacity being applied?

Well, it's going to be basically applied to the growth in the aerospace business with also growth in the industrial products business. We have still some decisions to make around the allocation of that new capacity for us.

We're continuing to receive our allocations and our supply contracts on a global basis for titanium sponge and now we have this additional kind that has to match up with our ability to melt and our ability to fabricate, and so depending on where we find any bottlenecks or restraints is where that's going to go, but we don't think we have a problem utilizing every pound of it.

Okay. Terrific. Have you said what the mix of the money that you're investing, what the mix is between restarting the sponge operation and additional rolling of processing capacity?

What we've said is that between the restart of the sponge plant, the additional melting capacity, and additional investments in our fabrication facilities that it's ballparking about equal across the three.

Okay. All right. Terrific. If I could ask one more question. Have you seen on the commodity stainless business, have you seen any deterioration of base pricing at all or could you talk, give us some color on what's been the, you know, the base pricing levels over the last several months?

I think there's been some spotty deals made to fill out various things. I think it's rather an interesting phenomena because when we look at this particular market, we have one competitor that we believe, so we'll draw prices to fill another competitor, might be looking at opportunistic kinds of things, but in the end our pricing hasn't changed and our approach to this market hasn't changed, as if we're correct, and if we're correct, with the data driven indices that we see, we've got a, you know, you can take your own timing whether it's a quarter or whether it's four months or two months, four months, five months, I don't know exactly what it's going to be, but if the demand is there then our facilities are going to be utilized and it's just fruitless for the suppliers to go into a death spiral on pricing.

Okay. Thanks very much. And congratulations.

Thank you.

Our next question comes from Dan Coshaba of KSA Capital Partners. Please proceed.

Good afternoon.

Good afternoon.

Do you know what percent of the growth in tungsten is coming from product substitution out of, for instance, tool steel into tungsten carbide? It looks like tungsten carbide is taking a lot of share from tool steel globally and that that may be accelerating. Have you looked that the market? Do you see that trend versus, and perhaps adjacent to the growth in demand coming out of China and India, and emerging markets?

Well, in our particular business and market we have a very large operation in Europe called Stelram. We're selling that brand name now, the Garryson brand name, and Firth and some others across these markets. We're selling in China. We're selling in the U.S. We're selling in Europe.

So it's difficult for us to say exactly what's driving each of these market segments from the standpoint that we've got some robust things happening in the end markets. Such as oil and gas production downhole drilling and self capital and durable goods markets as well as the automotive and now the aerospace market.

So all I could tell you is that our demand is up and I can't explain exactly whether there's substitution or what's going on. I really don't know except it's good.

Are you like, I mean are you aware at least to some degree that there seems to be a major product substitution out of tool steel into tungsten?

I think generally the answer to that would be yes. Because that's a potentially very large market.

Well, we hope you're right. We hope you're right.

Okay.

Good job, thanks.

Thank you.

Our next question comes from John Tumazos of Prudential Equity Group. Please proceed.

Congratulations. It's great to see the titanium margins double in one quarter. Keep it up.

Thanks, John. How are you?

Good. You indicated, Pat, the second half profitability would be like the first half. The first half profitability was $0.61 in the first quarter, $0.91 in the second quarter. Is the second half going to be more like the first quarter or more like the second quarter?

Well, let me tell you what I think's going to happen. One of the reasons that we're talking about it in the second half is because I think when people look at the commodity stainless steel and we still have a little bit of that draw-down on us, I'd just like to just say, John, I think we've fixed the stainless steel business that it no longer is a detractor from anything, it can make money, it will make good money, it will make a lot of money under the right market conditions.

And so when we looked at the second half, let me just put it to you this way, I think the third quarter will be better than the first quarter and I think the fourth quarter might be somewhat less if you add the LIFO and everything in, than the second quarter. So we said the second half looks similar to the first half, I hope it's better. Make sense?

Sure, sure. Now LIFO could be a credit because nickel and moly and cobalt went down.

That's true.

And titanium scrap has been stable. Is your LIFO pull influenced by the titanium finished product price or the in put price?

It's the in put price.

So then you have a shot at a very good sized LIFO reversal?

Maybe some day. I think the market will determine how much we have. We're, at some point in time it may change a little bit as you see the revert get a little bit broader back into the market. In many of our cases, we have closed loop supply, so we're looking for the growth in our business from the sponge that we're adding on.

Thank you. Thanks, John.

Our next question comes from Chris Olin of Longbow Research. Please proceed.

Hey, Pat.

Hi, Chris, how are you?

Good. Just a couple of titanium questions, I guess following on the titanium scrap comment. Can you talk a little bit about what you're seeing in scrap availability and where you see prices going, going forward?

Well, I think there's been some backing off of some of the really high prices that we've seen. We can get the scrap and physical supply if we want to go out in the market and buy it.

The prices are somewhat moderated from what we saw maybe at the end of the first quarter into April where we had some really spiky prices, but we have bought some material on the open market for particular orders at very high prices, we continue to be able to find physical supply. But it isn't cheap.

And then have you to get back into can you melt it, can you fabricate it, can you deliver the product that the customer is asking for, and also in the time frames that they're asking for. We've had to turn some business down simply because we can't make the time frame.

Okay. Just to be clear, are titanium ingot prices, are you still seeing those moving up now or have they been flat for a while or what's actually going on there?

Well, they've moved up this year as John Tumazos said earlier. We've basically had a doubling in our overall price for finished pound going out of the business under all products, so I don't know if those prices have now stabilized going forward or we're going to see additional rises.

But I think it depends on the continuing market demand and as I said, I think we have, in the titanium market, the three major factors, a whole new market segment coming on board which is going to move up the entire, as you know, industry for titanium, robust demand in the industrial markets, the corrosion markets, downhole drilling applications we haven't seen, at the same time we're seeing this just general pickup in the overall aero demand. So it's a very robust situation.

Okay. Just finally quickly, do you think there's enough melt and sponge supply to meet the peak level demand that people are talking about now?

Well, we're adding a lot more over the next 18 months. So we're going to be able to take care of the customer base that we have and also their increased demand.

Okay. Thanks.

Our next question comes from Mark Bishop of the Boston Company. Please proceed.

Hi. I think my question kind of got asked but I'm still a little unclear. Your second half is similar to the first half. Is that referring to EPS or are you assuming the LIFO charge stays the same? Are you adding, are you saying if you added back, then you said Q4 would likely be better than Q2, I think.

No, I said it might be a little less than Q2 when you add the LIFO into the numbers of Q2.

When you add the LIFO back into the Q2 number.

Yes.

It's a list less than a buck, then like a buck 16 or something?

That's what it would have been when you add it all back in. But I think what we're saying is that the ranges that we saw in the second half of the year that's been put out there, look reasonable, and we didn't want to give you guys guidance that the third quarter is going to be just an increasing profitability quarter over the second quarter with the stainless side, but we didn't want to tell that you the second half doesn't look a lot like the first half in total earnings, and from there I'm going to let Rich give you any other technical data here, Mark.

Yeah, Mark. The comment is geared toward GAAP earnings. So it's the EPS number that we achieved in the first half, which is, you know, $1.53 on the income statement. That's what we're referencing in our comment.

On the LIFO side, you know, and this is public information, so our, what we do is project our year-end LIFO reserve requirement based upon projected year-end quantities and projected year-end costs. And so basically, the $32 million total LIFO charge in the first half of the year, which was split roughly 6 million and 26 million, that $32 million, based upon our current assumption would be 32 million in the second half of 2005, 16 million in Q3, 16 million in Q4.

Now, obviously, we evaluate that every quarter based upon updated facts and circumstances and projections and we'll see how our assumptions work out as we close the third quarter.

Okay. So what you said about Q3 and Q4 in terms of how they'd be relative to Q1 possibly and Q2, that assumes that you have 16 million a quarter of LIFO charge?

That's correct.

All right. Great. Thank you.

Thanks, Mark.

Our next question comes from Jamie Goodfriend of Citadel. Please proceed.

Hey, guys. Nice quarter.

Hi, Jamie.

Hello. Most of my questions have been answered. I was wondering if we can touch a little bit more on some of the comments you made regarding your backlog. Specifically, you had mentioned I think that some of the contracts that you were looking at were potentially multi-year negotiations in some of the industries that you look at.

I was wondering if you could provide a little bit more color as to, you know, sort of what industries those would be and then sort of how you're thinking about what those arrangements could look like in the coming years?

Let me just put it this way. In the aerospace business, or as we get into the High Performance Metals business that have ongoing requirements, especially if they're growing and expanding where we have to look at a customer base and make some decisions as to the amount of supply that we have with various companies, we want to make sure that our long-lasting relationships and our valued customers that we've had over the years are well taken care of and that we remain their supplier of choice and so in that business it's not atypical to have a multi-year contract for supply through more than one year.

There's other customers that have bought on the spot basis, there's other customers that would buy on an quarterly basis, there's other customers that would buy on an annual basis. So we're, we've basically on the High Performance side in many cases opened up the 2006 schedules for those customers that are multi-year customers, down to one-year customers, down to we haven't opened up spot business.

Is your bias then going forward to try to lock in longer term contracts?

I'd say our bias is for longer lasting valuable and valued relationships that we know are the people we'd like to do business with that takes some of the cyclicality out of some of these markets.

Great. And just one quick housekeeping item. Does your back half of your guidance assume any LIFO charge?

The LIFO charges are assumed at 16 million a quarter.

In the back half of the year.

Yes, sir. Yes, ma'am.

Okay. Thanks very much.

Thank you, Jamie.

There are no further questions in the queue at this time. Please proceed to your closing remarks.

Well, thank you, everybody. We appreciate your questions, we appreciate your interest in our Company. We appreciate your coverage and investors on the phone, we appreciate your investments and all that you've done for us.

So this concludes my comments. I want to thank you for joining us today. And thank you for your continuing interest in ATI.

Thank you, and thanks to all the listeners. As a reminder, a rebroadcast of this conference call is available on our Web site. That concludes our conference call.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.