ATI Inc (ATI) 2005 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2005 Allegheny Technologies earnings conference call. (technical difficulty). At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Dan Greenfield, Director of Investor relations and Corporate Communications.

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

Participating on the conference call today are Pat Hassey, Chairman, President, Chief Executive Officer and Rich Harshman, executive vice President, Finance, and Chief Financial Officer. After some initial comments, we will ask for questions. (technical difficulty) 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 and welcome everyone. I'm pleased (technical difficulty) Company's progress, results (technical difficulty) and most importantly rate of change as we move into 2006 with increasing confidence. The fourth quarter was a great ending to a great year. ATI achieved $0.96 per share earnings before net special gain and our 2005 strategic goal of accelerating profitability was delivered.

In fact, 2005 was the best year in ATI's history. Sales grew 30% as compared to 2004, revenues reached $3.5 billion and operating profit was over 530 million; a rapid rate of change and improvement.

What drove this accelerating performance? Revenues from the aerospace market accounted for 25% of total sales, a $420 million increase over 2004. Revenues from the chemical process industry and oil & gas combined grew to 16% of total sales, a $250 million increase over 2004.

Revenues from the electrical market -- that is, power generation and distribution -- grew to 10% of total sales, a more than $125 million increase over 2004. Add the fast-growing medical market, which accounted for 4% of ATI's (technical difficulty) which was about 3% of sales in 2005 and these strong market segments in total accounted for approximately 60% of ATI's sales in 2005.

(technical difficulty) ATI's sales grew from 2.7 billion in 2004 to 3.5 billion in 2005, some $800 million. These market revenues accounted for virtually all of this growth.

We believe the (technical difficulty) oil & gas, electrical energy and medical markets, coupled with our diversified product capabilities and recently announced expansion projects for titanium products and nickel-based superalloys will continue to drive global growth opportunities into 2006 and beyond.

We have successfully increased our presence as an international and a global specialty metals company. ATI's sales outside the United States in 2005 (technical difficulty), 25% of sales, or $1 out of every $4 of revenue. We have an extensive global sales and distribution system. We plan to expand (technical difficulty) in 2006 and we expect to continue to see strong demand for our high-value products from Asian and European markets.

Notably in 2005, over 70% of ATI's operating profit and 45% of revenues were generated by the High Performance Metals and Engineered Products segments. These are our high-growth, high-profit segments where we are investing significant new capital. We are excited about this and this new added capacity coming onstream later this year.

We began this journey in late 2003; that is, to transform ATI. A key strategy was to grow our high-value products businesses. (technical difficulty) 2005 results demonstrate the rate of change and (technical difficulty) we were able to achieve in a short timeframe. The transformation has taken place and the Company continues to drive to create further value for our shareholders.

So now, ATI is a high-value products-driven company. That is where we (technical difficulty) in global markets in terms of the unique range and menu of products we offer, leveraging our advanced product and process technology to create value for our customers.

In the fourth quarter of 2005 (technical difficulty) percent of ATI's sales revenues. Titanium products represented over 21% of revenues, nickel-based and specialty alloys over 23%, precision and engineered over 16%, tungsten materials over 8% and our exotic alloys over 4%. To reflect the transformation to a high-value products-driven company, volume and price data presented in today's news release are now consistently (technical difficulty). This is how we price and sell all of our products.

For those of you who are new to ATI, we have been operating under a three-year strategy -- transform and transition in 2004 -- accomplished. Accelerating profitability in 2005, and I think today we can report accomplished. We're now moving into profitable growth for 2006. The strategy is underway with improved and faster implementation (technical difficulty) strategic capital, focused markets, global penetration, new product technology, growing strategic alliances and further overhead cost reductions and production efficiencies to come.

We are well positioned in 2006 to accomplish our profitable growth objective. The outlook remains strong from our major markets. Again -- aerospace, defense, chemical processes, oil & gas, electrical energy and medical. The outlook in our High Performance Metals segment is truly robust for our titanium products and nickel-based superalloys. The demand level remains high on the exotic alloy side.

In our Engineered Products segment, it's positioned for additional growth (technical difficulty) excellent year. Overall business is improving in our Flat-rolled Products segment. We expect shipments to improve as 2006 progresses. Price increases were announced to the market effective January 19 for (technical difficulty) segment products. And yesterday, a price increase of 6% was announced for commodity products effective for shipments beginning February 20.

We are very busy in the High Performance Metals segment. Demand from customers still exceed our current capacity. Fortunately, our strategic investments in these products are on track and we expect to begin increasing shipments beginning in the second half of this year.

Two areas of our Engineered Products Segment stand out. Demand is at record levels for our tungsten materials used in oil & gas exploration drilling applications. In addition (technical difficulty) metals business is doing very well and we expect a full-year benefit from (technical difficulty) acquisition that we made in April of 2005.

Other cost reduction projects underway and new product offerings to be introduced in 2006. Our titanium precision processing business (technical difficulty) is seeing record level of orders. We're expanding our capacity and our capability here. The business provides specialty conversion services for the global titanium industry.

In our Flat-rolled Products segment, demand for our high-value products is very good from aerospace, oil & gas, electrical energy and for our armor plate. We expect to have a robust year globally for our grain-oriented silicon electrical steel used (technical difficulty). This includes new customers in China and India.

Our service center customers report that their inventories of commodity sheet are at a lower level. We expect our shipments to improve as the year progresses.

In 2005, we demonstrated that our Flat-rolled products business can be profitable even in a difficult commodities stainless steel market with an 8% operating margin on sales. We're continuing to implement changes in 2006 that make ATI's Allegheny Ludlum business more cost-effective and efficient.

In summary, we are on track; in fact, ahead of schedule, committed, focused on achieving our strategy and growth objectives systematically, effectively, profitably and rapidly. We remain dedicated to a disciplined plan in vision as we move to concentrate and direct our actions to the profitable growth phase of building the world's best specialty metals company.

Danny, I think we'll stop here at this point and turn the time back over to you.

Operator, it's time for questions, could we open up the lines please?

(OPERATOR INSTRUCTIONS). Brett Levy, Jeffries & Company.

Hey guys, strong quarter. Quickly, can you guys outline CapEx for the next year or so, break out some of the projects and sort of the amounts you're allocating to them? And then just a generally about -- you have cash sitting here now, a little over 300 million. Sort of (indiscernible) some of the potential ideas in terms of cash?

Okay thanks. First all, we announced earlier that we have a capital plan for 2006 of about $225 million. Out of that capital plan, at least 160 million is going into high-valued products businesses.

As we look at this capital going forward, we again go back to two basic strategies. One is to grow our profitable products, and we have some wonderfully interesting things happening in the Engineered Products side of the business with some new products and tools and market penetration that we have open to us in the global market today. We also have some very interesting things in further (technical difficulty) efficiencies in the Flat-rolled side of the business. And we are looking for game-changers, market penetration and products that make money for us.

So when we talked about growth, we're very serious about the organic side of the business with the technology we have and further penetration into the markets that will drive value in those products that we have learned about and learned where we're making the money in this company over the last couple of years.

Lastly, we never said that we are done with new projects or new capital or further investments at the market through either strategic alliances or longer-range opportunities that will require additional capacity from us. The titanium market is very attractive, very interesting and we still have a half a plant open in Albany, Oregon after our announced phases. That could be interesting to us. But basically, what we're going to is drive the capital and drive the investment to the side of the business that we can make the best returns not only currently, but in the longer-term.

And then in terms of the cash levels, and -- any additional applications of that cash?

Well, we also have, as you know, an underfunded pension fund to continue to move on the balance sheet in terms of -- in [approving] that. And we have -- of course there's other options for the cash too, but I think we are going to generate a lot of cash. As we said, we will have a strong year as we did this year and we will be talking more about that as we move forward.

What are you guys hearing out of Washington with respect to sort of the decisions with respect to pension legislation? And when do you think you will hear some resolution in terms of what they are going to do in terms of either accelerating it or leaving it alone?

Obviously, the House and the Senate have passed their own versions of the pension reform. Nothing has come out of any conference committee at this point, and then obviously it has to go on to President Bush. So we are watching it, as most companies are that have defined benefit plans. The way we look at it and understand all of the versions that are out there really does not change our strategy (technical difficulty) several years in terms of trying to improve and intending to improve the funded position of the trust.

Last question -- what do you guys see as being the pension contribution at this point for 2006?

We don't have a require contribution, so anything we would do would be voluntary, would be an assessment of the overall funded position and the best use of cash for the Company short-term and long-term.

Of course, we're always interested in what the discount rate is going to do as we look at the funded position of the Company. Today, we're running a 5.9% discount rate as we look at that from a financial standpoint. And hopefully as the year goes on, we may see those numbers move up a bit. That changes the numbers and changes the liabilities as you do the calculation.

Thanks very much guys.

Robert LaGaipa, CIBC World Markets.

Just a couple of questions, Pat. I just wanted to circle back to the Flat-rolled business. Obviously, last quarter you talked about some improvement in the order flow, the inventory overhang looking like it is possibly nearing an end. And when we look as the volume numbers when you adjust for the fact that it's pounds, it looks like the volumes were fairly flat, down about 20% year-over-year. The margin saw a bit of pressure there to. I was just curious as to -- you had mentioned that the inventory levels at the service centers coming down, the possibility or the expectation that shipments are going to improve throughout the year. I was just curious as to what your confidence is, that shipments will start to improve moving forward and where is it coming from?

Let's just first of all backtrack a little bit to the fourth quarter. Volumes are determined by our acceptance level in pricing. If you look at our prices for the fourth quarter, they were as good as the prices in the fourth quarter of 2004 which was a much better year. Overall, prices were up for our products in total. So it is a question and the times of what you would accept and we saw some more aggressive pricing from some of the competitions in the fourth quarter to fill some of their schedules.

As we've said before, our pricing strategy is one of disappointment in that area. We also implemented a surcharge for the gas side of that, and we expect it, to see those revenues coming in also. So it was an interesting quarter as we went through it.

As we move into 2006 now, we see increasing orders. We see that the economy and the market for these kinds of commodity products and general products has improved. We expected that to happen. I think you will see much more of that throughout the first quarter this year. Maybe we thought we would see some of it beginning in December. Some of our competitors did as they filled up, but today our (technical difficulty) are good. As you have seen, the industry has raised prices, not only here in the United States but firstly in Europe and then into the United States. We recently followed a commodity price increase as of yesterday and we are quite a popular Company (technical difficulty).

So I think we are going to do exactly what I said. I think we're going to see increasing volumes as the year rolls through.

And when you look at the overall Company, Pat, if we look at the contract business, the percentage of the company that is on contract in 2005 versus the percent that you expect in 2006, what are those percentages? And if we look at it on a net basis, a base price increase basis, what type of price increases are you seeing across that contract business?

The contract business is in place and so we are talking about precision-rolled strip is basically sold out under contracts. As you know, on the automotive side of the business, those are usually done under contracts. And some of the other products that we might be making in the higher value areas in some of the grain-oriented oriented silicon, electrical steel, those would be under contract. So the price increase that we're talking about today, you can go back and look through how much cold-rolled sheet that we make and how much that product is commodity, and that is what it will apply to.

Last question if I could. Just related to the expectation across the quarters from and EPS perspective. And I know you don't give guidance or anything like that, but you typically have in the past talked about the seasonality within the business and what you expect across the quarters. And I was just curious from your perspective, given the expansions, both in nickel-based alloys and titanium, is that going to change the seasonality in the business where you're expecting the second half truly to be much stronger than the first-half?

What are you talking about -- titanium, nickel-based or stainless or what?

When you look across the quarters for 2006, I was just curious as to the seasonality was in the business and how that's going to be influenced by these expansions. Even though you see some seasonality obviously in the third quarter for example, do you think that these expansions more than offset that as we look across the quarters of the year?

I expect a stronger second half.

Okay, terrific. Thank you very much.

John Hill, Citigroup.

Good afternoon, everyone, and congratulations on a great result. It's wonderful to see you realizing the reward on an awful lot of hard work that we have seen of the years.

Thanks, John.

I was just wondering if you could touch on the subject of -- the exotic alloy pricing was down a little bit in the quarter. We know that there's a lot of contract business in there, it's very lumpy. You have talked about how you think that business is improving. But how should we look at pricing and try to model that as we go out?

We're talking about mixing that business and the utilization of our process capability. Remember, that's a processing business and that business is also running titanium products. So if we have to pick and choose today about where we are, we are actually in many cases happier with the blended titanium combination with an exotic metal; for example, (technical difficulty) something like that. So we've been picking and choosing with the metal units we have available what we're going to run to make the best profitability that we can make. And as you do that, you may take some commercial products that you wouldn't take because it uses a different path through the plant or it just gives you more output in volume.

So in our economics model when we look at maximizing profitability, some of these unit prices will move around based on the mix and based on what we want to run. And the problem that appear on the surface of these numbers is how much of that capacity in exotic metals is moving toward the titanium side of the market today because that business also is the business that provides the starting stock for our titanium wire products, versus how much we have in some of the higher-value, slower-running or difficult to produce exotic materials, versus more of those exotic materials towards commercial markets versus government markets. And so when you mix that altogether, the objective of that business is to maximize its profitability. And the way that we report can sometimes move those numbers around a bit.

But trust me, that business is doing well. We could sell more exotic materials and make less volume. Today, we might elect from a profitability standpoint to move more volume in some of the other areas that give us very good returns.

So net, basically we could have two variables -- obviously the pricing and the margin side (technical difficulty) millions of dollars, you feel very confident that that business will move ahead in '06?

It's going to make more money in '06.

Great. And last question. Could you just give us an update on where we are with the titanium and nickel expansions? You've done a good job of talking about that. But can you just tell us sort of where we are in terms of equipment installed, percentage of capital spend, just sort of what's happening on the ground if we were there right now?

We are well underway. The controlling factor actually in some of this expansion is modernization of the plant. We didn't talk too much (technical difficulty) starting up that same exact plant that we shut down. And so as we increase its control, increase its modernization, increased the safety of the plant and its output, we have a lot of new computers and control systems which pace this thing a bit.

Also, you understand that we also have had a lot of rain in the Northwest in the last -- 22 days straight I think out there. Basically though, what I will tell you is this, is that in terms of the expansions for the start-up of the titanium [sponge] plant, I am going to be disappointed if we don't fire up the first furnace by the end of the first quarter into tune-up. That's how far along we are.

On the nickel side of it, it's paced by contractors and adding melting capacity. That's on schedule and on track and our contractors are doing very well, our suppliers are doing very well and we expect to see those furnaces coming on beginning in the second half of the year. So as we move into the second half of the year, we're going to have increasing capacity coming on stream, hopefully from the middle of the second quarter through the end of the year.

Great, thanks for that and congratulations again on a strong result.

Thank you.

John Tumazos, Prudential.

Congratulations. Looking at the pricing (technical difficulty) nickel alloys in the fourth quarter and for titanium, with the 12.24 a pound for nickel-based special alloys and 27.37 for titanium, there might be three effects -- higher ingredients prices, higher selling prices net of ingredients and stronger mix. Net of ingredients, we estimate (technical difficulty) no nickel alloys and 21.32 for mill products, the (indiscernible) products, which were both very good numbers. Can we use those as basing points for forecasting, or should we take some quarters or dollars off for nickel or dollars off for titanium mill products, because the mix was particularly rich in the December quarter?

Let me answer your question this way. I think you understand our marketing and sales strategies pretty well, John, over the last two years and especially over the last year. So where we are on the titanium side is that we're not taking business (technical difficulty) already priced our raw materials for and have secured supply that we know exactly where we are in terms of generating, at least from the starting raw materials. If we have to buy scrap, that's already priced into those items as we go forward because a lot of this stuff becomes price in effect on any variables.

So from the raw materials side, there is no decline in our conversion margin because of raw material prices.

I never said it was.

That's just one clarification. The second thing to consider is that, in the terms of lead times, the -- titanium always comes first, and basically in many of the markets complementary to the titanium is the nickel-based side of the business that have shorter lead times. And so as those orders now are being placed and those capacities are coming in, they have a tendency to see an improvement in the conversion side or base pricing with all of the variables, including nickel that is going to fluctuate with the market and will be priced with the market. So I would not see any deterioration; in fact, we may see some improvement.

So we shouldn't worry that there was an unusual order of titanium armor plate that drove up the mill products? Or this is all real and getting better still?

This is a real, getting better still. Just to remind you, on the high-performance side are others listening. Our High Performance Metals, we have about 60% of our business under multiyear arrangements. We have about 15% of our business that is negotiated with new prices on a one-year arrangement. So new prices on the multi-year and new prices on the one-year, and then we're selling about the last 15% of our open capacity quarter-by-quarter on the spot market. We haven't even opened up the second half 2006 yet. That's probably the most attractive business that we have today because it's the business that fills in the shorter lead times.

So overall, my estimation is that we're going to see better pricing on about 75% of our volume in 2006 than we experienced in 2005 in the high-performance metals area.

I wanted to ask a very informational question. You in your prepared remarks, Pat, listed several product categories as a percent of corporate revenue that were differentiated, I think 16% for precision strip, et cetera. Could you just repeat those numbers slowly?

Don't have them memorized. 21% of the revenue was for the titanium segment, 23% nickel-based and superalloys, precision strip and Engineered Products, engineered strips are 16%, tungsten (technical difficulty) 8% and the exotic metals alloys about 4%.

Thank you.

David Martin, Deutsche Bank.

Yes, thank you. Pat, I just wanted to go back to your comments about internal priorities and particularly focus on the titanium business. If Boeing and Airbus achieve deliveries of something like 1000 planes in 2008 or 2009, which I guess would be up anywhere from 45 to 50% from '05 levels, how much of that growth can you capture via your current expansion? Or, can you attempt to kind of quantify the opportunity for us?

Of course, we're talking to this part of the market all the time and looking for what the opportunities would be. Remember that we have, as I said earlier, about 50% of our sponge plant that has yet to be restarted or could be restarted in addition to what we have announced.

We have also announced at least so far a certain expansion in our melting capacities. And so this gets back to the product mix that is needed in the marketplace. We have room to grow and we have time to continue to grow this segment of the business with the idea that we would do so under the right conditions, under the right contracts.

And then secondly just a quick one on LIFO accounting. What should we be using as the line item in the first quarter as a potential charge?

Just back to the last question you had asked, when we announced the titanium expansion and a nickel superalloy expansion, we said that the capacity expansion of those investments for titanium and nickel were about 25%, so that might help you think that through.

On the LIFO side, obviously the big driver on the LIFO is raw material elements across our individual pools. I think at this point as you compare -- and remember, what we're going to be doing is (technical difficulty) ahead and trying to estimate what we believe the prices of these raw materials will be in the fourth quarter of '06 as a comparator (technical difficulty) of '05. We know the fourth quarter of '05 part, the projection part of '06, we use a lot of data points, including obviously our procurement experience and the supply-side. But we also use the number of the people on the phones who follow these markets from a mining and a commodities standpoint much closer than we do. So we will pull all of that together.

At this point, I think my best guess would be, I would not expect LIFO to be as significant a component of our first quarter results.

Okay, that's good. Thank you.

Chris Olin, Longbow Research.

Good afternoon. Can you talk a little bit about what's going on in the titanium scrap market? I guess any thoughts on why prices are climbing to the current levels and any concerns on availability? And I guess to add to that, can you talk about anything you're doing new, in terms of redeeming scrap from your customers to make sure you get that supply steady?

Great question. We have seen the same thing that, Chris, I think you have seen. In fact, as we move into 2006, we expect that movement up of scrap from the current growing [tie] market really hasn't materialized.

Secondly, the government depot is exhausted. So there is no release coming from that side of the business. Recognizing the growth rate of this market, and if you just go back, of course you can see that our prices are reflected (indiscernible) this market. They've moved almost 100% in 12 months.

One of the things that we have done in our longer-range contracts is to make sure that we have contracted for a closed-loop system in the scrap so that we have availability of scrap of our products coming back. And as part of that then, that would put less -- at least our portion, less scrap into the open market. I think also, it's just simply the double-digit growth of this market that's driving not only from the aerospace aside, but also from the infrastructure build and the corrosion markets around the world that the constraining factor of growing the market further for some of the fabricators or people that would produce to get the raw materials and the raw stocks, which either come from the sponge or the scrap. So I don't see any relief coming soon in the scrap market.

Can you quantify in maybe terms of percentage how much of the scrap you have to get from a third-party, as opposed to (indiscernible) coming back to the customer contracts?

I don't think I want to get into that with you at this point.

And then just in terms of the sponge capacity, I'm still curious why we don't or you don't make a decision to start that other part of the sponge plant up. Do you see the market, the raw material market more driven by sponge scarcity or scrap scarcity? I guess it seems like it didn't make sense to turn it on right now.

I think as we move forward, you move from one bottleneck to the next bottleneck. And just trust me that our particular plan is based on pacing and based on our ability to melt, our ability to sell, our ability to fabricate throughout the operations what the product mixes are. But we are servicing our strategic customers very well and making sure that -- at least to the potential part of our business, that the flow paths are balanced. And I think it's a very high probability that as we continue to go forward and if this market continues to move like it appears to be moving with the announced orders on the aerospace side of the business and the world stays where it is on the infrastructure builds, that certain more sponge is coming on stream from us.

And the next question is, you can use 100% sponge or you can use (technical difficulty). If you can get the scrap, that doubles your ability to use the sponge but basically double the pound. So all of those things are being balanced out by our production and logistics people, scheduling people as we look at our capital capacity coming on stream in the second half.

Great. And then just lastly, it sounds like Airbus is kind of eyeing into this composite jet, increased titanium consumption in future models. I'm just wondering if you have any thoughts on maybe what they're telling you, in terms of how much more titanium they might need? And is the relationship set where they're coming to you for potentially more product?

I think I read your latest report. I think you have a pretty good number on all of these aircraft. I don't think the new [single Alpha] has been designed yet, but it appears that certainly the success of the 787 is driving much more interest in a composite smaller plane. And of course, I think some of those announcements have been made. So as those designs get closer to engineered and finalized, we'll get more information.

It does drive what product form is this airframe going to take. And so that drives us in different directions in terms of investment and in terms of if it's going to be part of the flatrolled product side of the business coming out of plate, or it's going to come just simply in slabs and be hogged out or it's going to be in a forging or whatever. So our investments still have yet to be finalized as we look at the opportunities in that business. I think it's very fair to say that the opportunity in the airframe is a tremendous growth opportunity for the titanium industry.

Okay, great.

[Eric Mintz], Eagle Asset Management.

Hey, guys, great quarter. I just wanted to circle back on the titanium expansion. You've said that -- I think what you have announced already, we're going to see a 25% increase in capacity by assuming by the end of '06. Is that right?

That's correct.

And then assuming that there's a Phase II possibility out there, which would be the other half of the sponge plant, would that be another be another 25% possibly in the works?

If it was a full implementation of the second half of the sponge plant, that would be 25% more. So yes, the plant has 50% more than what we have announced yet today.

So coming out of a quarter where you shipped 6 million pounds of titanium, it could possibly be a 9 million number at some point in the future, assuming both of these plants go out?

On a theoretical basis that's correct. (technical difficulty) shipments for you at this point, but we are certainly interested in growing that side of the business.

And then within the high-performance segment, as you begin to source your own (technical difficulty) margins are going to probably go up pretty significantly on that?

I think there's two things that will drive it. One is just the market itself as to availability and pricing of those products. Secondly, any sponge that we can produce is certainly cheaper than going out and buying scrap today on the open market. So yes and yes.

Because I guess I've dramatically underestimated how much you can bring up margins in that group and what you did this year was pretty amazing. You also mentioned that you're capacity constrained in tungsten, but I'm not aware of any plans to increase that.

I did not say we're capacity constrained, I said in the tungsten tool for down-hole oil and gas drilling parts, that we're running very, very full on capacity. It's a very, very full market. But we are certainly excited about the opportunities at our metal working products plants to -- we have some wonderful things on the burner in new products and cost reductions that will be unfolding as the year runs out. Very exciting stuff.

And if you were -- just on the emerging into the airframe theme -- if you were to start doing more business putting titanium actually onto the 78 body, do you think that would be dilutive to the high performance margins? Is that a lower margin product?

It depends on the shape it's going to take. Actually, if somebody is buying, say for example, a big ingot for a forged item, that is less expensive possibly than a bar item. Generally speaking, flatrolled, although having more volume potential, would be a lower price than a round item. So we'll just have to see how the margins play out. But I think the real key there is keeping the business that we have. And whatever we expand in terms of capacity, it's going to be a very interesting result for the Company.

Okay great. And then on tax rate for '06, have you guys given guidance on that?

We have talked in the prior quarters, and it would be in the range of 37%.

Okay, great. Thanks a lot guys.

(Operator Instructions). Aldo Mazzaferro, Goldman, Sachs & Co.

Good afternoon, Pat. I just had a couple of questions around the titanium sponge expansion as well. I was wondering if you could give us an estimate of what kind of headcount increase you might experience as you start it, and then when it's fully implemented?

This is going to be less than 100 people.

Okay.

This is a continuous process basically that then has some additional [people on workers] as you come out of these furnaces and you put this into a sponge form.

Could I ask the same question on the nickel alloy expansion as well?

Again, these are furnace operators and no additional overhead people. This is very modest.

And I don't know if you have an estimate. Is there something we should think about in terms of startup costs you might incur as you bring this on, or is it pretty mild?

There will be some expenses to start it up, I would think. But I don't think they're going to be something that we would say will be significant to our earnings, a detractor from earnings.

Great job in the turnaround and well-deserved on the extra bonus.

Thanks, Aldo.

Chris Olin, Longbow Research.

I just wanted to get real quickly just that guidance. You were talking about earnings growing year-over-year, and I assume that' in EBITDA. But I'm just wondering if you think you can grow earnings on the bottom line with the (indiscernible) tax number in there?

It's certainly our -- let's put it way this -- we're going to work like hell to.

Fair enough.

Jeff Feinberg, [JLF] Asset Management.

Thank you very much. By the way, just extrapolating these trends, (indiscernible) work like hell; just keep doing what you're doing. Connect the dots.

Anyhow, on that note, the first question that I had was the High Performance Metals business, which all of us, even the shareholders and supporters like myself have underestimated, has continued to improve tremendously, and it sounds like we're talking to the customers that we're second inning of that. I just wanted to understand. I know we have big ramps. I think you've talked about $200 million of incremental sales capacity, which I think is 30% margins, which I assume is sustainable. There's another 60 million of EBIT coming on. In addition to that, as per the earlier questioner's comments, is it fair to assume that we'll have other -- and I think you talked on the press release, but just to clarify -- separate from that, you'll have other incremental benefits going forward sequentially in the High Performance Metals business? This is sort of not the ultimate base that we're adding capacity on, but we have some incremental improvements in that business?

I think both of those things are correct. The other thing I would suggest on looking at the titanium business, the $200 million, was the estimated margins at the time that we announced the expansion. Prices have moved up since then.

(indiscernible) and now there's (indiscernible) 200 (indiscernible) capacity?

(indiscernible)

Okay, great point. Obviously, it couldn't be more (indiscernible) that particular business. On the Flat-rolled business, just step back, obviously it's good to see industry pricing actions going on, but I just wanted to understand. I think on some of the prior calls, you've talked about a 10% operating margin target in that business. And obviously in a more normal environment like 2.2, you were 10.5, you've shown that you can do that. Are the actions that you're taking both on the cost side and the pricing side such that you still feel 10%, which makes it roughly a $200 million in EBIT business off the depressed levels running now achievable?

I think that is a fair question and a fair way to put it. If you look at 2005, we had a declining market in a difficult situation with the destocking, at least on the commodity side of the business. Although on some of our other products, we did a very, very good job of moving the mix. And as you have a disciplined approach to the market on pricing, you lose some volume. So as the markets recover, which I think they will, I have not changed my targets. And I said we would target an 8% return at a minimum in a down year, and I think we saw that last year, and 12% in a good year, and average 10.

Okay, I didn't realize a 12 in a good year. And again, (indiscernible) sense qualitatively that next year has the potential to be a good year?

Let's put it this way. Maybe the middle is where we'll wind up. I don't know. We're going to work hard to we're to take the cost side down and we're going to see what the market delivers.

Wonderful. Final question, you touched upon it earlier with regard to seasonality (technical difficulty) so that I understood that correctly. The High Performance Metals business has averaged $15 million sequential improvement over the last six or seven quarters. It sounds like that trend should continue, that there really is no seasonality, it's just strong secular demand and we should have quarterly improvement throughout '06.

I think that's a good assumption.

Thank you, sir.

Dan Khoshaba, KFA Capital Partners.

I don't know if you look at your business this way, but how is the cutting tool business holding up? And I'm really thinking about your tungsten that goes into the carbide. What do the demand trends look like there?

Good. We have seen a lot of growth, especially coming out of oil and gas. The interesting part is, as I said in my introductory comments that we are going to be introducing some interesting new products in 2006 that we're pretty excited about. So if the economy [just] has a growth factor to it, I think we're going to do just fine.

Now, correct me if I'm wrong, but you make, in addition to just -- I mean, you make tungsten carbide as well, correct?

Correct.

Okay. And when you sell that, a lot of it goes to cutting tool manufacturers who are making tooling for aerospace, okay? So when you think about the percentage of your business going to aerospace, do you take that into account, or is that just -- is that end market just industrial?

We know the percent that's going to aerospace. It is growing, and of course the good news on that is those are more expensive tools. And so that's really a fine market (technical difficulty) share of.

Let me ask one more related question if I could. The carbide tool business I believe is growing very quickly in Asia, and to a lesser extent, although it's also growing in South America. Are you guys participating in any of that?

We are participating on the higher end tools that are maybe the higher end of the business. In fact, the president of that business unit will be in Asia in the next couple of weeks.

Have you ever considered making carbide in Asia?

Not to date.

Alright, thanks.

Thank you.

Alex Latzer, Merrill Lynch.

Thanks, congratulations. Question, Rich, on the pension and OPEB balances at the end of 2005. I saw the pension expense was outlined in the press release. Where is the company at with respect to the pension and OPEB balance?

You say balance, what do you mean?

I know it's a number of items in there. The underfunded/overfunded?

Okay. Well I think, obviously, that will be in our annual report in our footnote. But when you go back and look at our 2004 annual report, on the accounting side we are still at a pension deficit of around $250 million as it's measured on the accounting side. And the real reason why we didn't make an improvement after 100 million of our contribution is that the liabilities grew by about 100 million by using a discount rate of 5.9 versus the 6.1 that we assumed last year. And the driver there, as you know, is the Moody's double-A bond yields, which were lower at our measurement date at the end of November than they were the prior year.

And on the OPEB side, we are at a total liability that's on the balance sheet of about 461 million, and we have -- that is after a little bit less than $100 million in assets in our [VEBA] trust, which partially funds part of our obligation there.

Okay. So that would be net of 100 million of assets?

Correct.

Thanks for that, and I will look for that in the annual report. If I move on then on to the contract side, Pat, I just wanted to understand, you said earlier that 70% of the volumes remain to be priced, or that we were pricing heading into '06. And I just was not sure if they were every three years. So I know that it was priced at a disadvantageous level at the end of 2001, and then '04, you had a pickup. And again then again here, I would have thought maybe at the end of '06 heading into '07, but I didn't realize that you had that much volume I just wanted to clarify.

What I was saying, of the High Performance Metals segment, the total revenues in that segment, between the multiyear contracts and the single-year contracts and spot business, we expect that 75% of the pounds that we ship in that segment will have a higher price on them than they did this year. Excuse me -- than they did last year.

I understand versus '05. That is a real positive. Lastly, thanks for the classification on that. Certainly, we have seen the industry respond to the higher demand levels and continued growth in the order and potentially the build rate. There are other suppliers, VSMPO is one. I was just wondering if you had a sense of the industry where the industry capacity was going and whether amid this growth, whether prices would be able to continue to improve or whether they might flatten out some, then everyone would share in the higher volume and the growth outlook.

It is difficult to predict what prices, but we have basically what I just told you, probably at least over two-thirds of our products priced in that segment for the year. Others are open. But in the end, I think it's a question of who can produce the semifabricated products. And it's going to a question of who can produce the products and who has the volume to give it to the marketplace. And of course, we are in a good position with restarting of our sponge facilities, we're in a good position with our basis of our contracts that are in-place. I think the market is going to get the products that it needs and it's going to take some investment from the industry to do that.

I understand. I noticed that VSMPO is making some pretty high claims placing metal on the 787 and [I was] somewhat incredulous about their claims. So that's why I asked about that. Thank you.

You bet.

Robert LaGaipa, CIBC World Markets.

Good afternoon again. Just a couple of quick follow-up questions. One, just on this contract business and (technical difficulty) the 75% of the pounds you expect to be at a higher price for this year, obviously, the pricing year-over-year is up to your point earlier 100%. And obviously, I can't imagine it being up that much. Can you put some parameters around what type of increases that you're seeing? I mean is the something that's 10% (technical difficulty) sort of benchmark?

I think it's in the low-double digits. That is on (technical difficulty) not because of raw material cost or anything (technical difficulty).

We're talking our conversion costs. The fluctuation in raw materials will be price in effect, or it has been hitched.

Okay. And the other quick follow-up was just related to the cost programs that you have in place for 2006, the $100 million. Where are you targeting for those cost reductions? Because I know you have just this idling of the (technical difficulty) Pennsylvania finishing facility, and that's expected to save you $10 million beginning in '07 and I'm not sure if you're getting part of that in '06 because that's included in that number. And also, do those savings to some degree, I guess they should offset some of the startup costs and the additional headcount with regard to the expansion. So I'm just trying to put that all into context.

We're still finishing up on our -- basically our union contracts with more flexibility in the work force and that side of the business. Secondly, we are concentrating on yields and recoveries with these high prices for starting raw materials, and then overheads.

Okay. Terrific.

And it is more heavily weighted toward the Flat-rolled side of the business.

Okay.

And (MULTIPLE SPEAKERS) you also added the incremental headcount because of the expansion. I wouldn't include that, because if you think about that, the incremental headcount is covered by the expansion because of the additional revenues resulting from the expansion. That's the cost of manufacturing your product that should not be an offset to a cost reduction program.

Right, because it's not apples-to-apples.

Right, exactly.

Good point, great, thanks again.

I think that this will stop all of the questions and conclude this conference call today. Again, I want to thank everyone for joining us, I want to thank the support that we have had for this company over the last two years. As always, the news releases may be obtained by e-mail and are available on our website. Also, a rebroadcast of this conference call is available. So this will conclude our comments for the day. Thanks for joining us.

Ladies and gentlemen, we thank you for your participation in today's call. This concludes the presentation and you may now disconnect. Have a great day.