ATI Inc (ATI) 2002 Q2 法說會逐字稿

Welcome to Allegheny Technologies second quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the one, followed by the four on your telephone. As a reminder, this conference is being recorded Wednesday July 17, 2002. I would now like to turn the conference over to Mr. Dan Greenfield, Director of Investor Relations. Please go ahead sir.

Thank you Jennifer. Good morning and welcome to Allegheny Technologies second quarter, 2002 conference call. Members of the media have been invited to listen to this call. In addition, this conference call is being broadcast live on our Web site at alleghenytechnologies.com and on ccbn.com. Participating in the conference call today are Jim Murdy, President and Chief Executive Officer, Doug Kittenbrink, Executive Vice President and Chief Operating Officer and Rich Harshman, Senior Vice President and Chief Financial Officer.

After some initial comments, we will ask for questions. Please note that all forward-looking statements made this morning are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially.

Here is Jim Murdy.

Good morning. As you can see from our release, this was another tough quarter from a PNL point of view. Our net loss was $7.5 million and nine cents a share. Operating profits was not sufficient to overcome the decline in pension income. This decline reduced earnings per share by 17 cents, compared to the second quarter last year. Now that said, we're pleased that we achieved operating profitability in all of our segments and did very well generating cash. Flat roll products demand was mixed in the second quarter, but we saw a good recovery in demand for stainless cold-rolled sheet and strip. Volumes were up 17 percent and 19 percent respectively as compared to the first quarter. Compared to the same period last year, cold-rolled sheet volume improved two percent and strip volume was up 10 percent. However, softness continued in the capital goods markets, resulting in very low shipments of our plate products. Segment operating income improved by 13 million compared to the same period last year on flat sales, primarily as a result of our aggressive cost reductions.

Price increases were put into effect on July 1 for most of our stainless products, and that should be a benefit to us going forward. High performance metal sales and operating profits suffered from the softening aerospace and electrical energy markets. We believe that lower commercial aircraft billed rates and inventory corrections are likely continued to depress near term demand. Order for our materials used in power generation weakened specifically late in the first quarter and remained extremely soft.

Despite this very tough environment, we expect all bag, our premium nickel and titanium alloy business, to remain profitable this year. While change turnaround is a bright spot in high performance metal segment, in the second quarter, wahchang achieved profitability after three quarters of strike-related losses. We're pleased with efforts of the wahchang employees coming off that strike. And prospects for this business look good, particularly defense-related applications.

Industrial products returned to profitability by cutting costs. And these companies are all generating cash. As we've said in the last few conference calls, these are times to stay focused on cost and cash flow. Our operating managements have done that. Let me mention some of their accomplishments in these areas. Cost reductions reached 35 million in the second quarter before the effects of inflation, bringing gross cost savings to $60 million for the first six months. We're on plan to achieve our 2002 cost reduction goal of $100 million if not beat it. We're identifying additional cost reduction initiatives. Our goal is to have cost structures in all of our businesses that deliver profitable performance, even in the current weak market condition. I'm convinced this can be done while retaining the strength to grow with the markets for our specialty materials, as the economy recovers.

We generated $89,000,000 of operating cash flow during the second quarter, bringing 2002 total cash from operations to $171,000,000. Free cash flow, that's operating cash flow less cash use in investing activities and dividend payments, was $62,000,000 in the quarter and $115,000,000 for the first six months. We also reduced manage working capital by $70,000,000 in the second quarter, bringing total reductions to $112,000,000 year to date. This nearly doubles our original full year goal to reduce manage working capital by $65,000,000. Most of this comes from improved inventory turns driven by our operational excellence initiatives. Gross inventory turns in the second quarter were 3.6 times, that's a 16 percent improvement compared to last years second quarter and of course, as you know, inventories are by far the largest element of our working capital makeup.

So the steps we've taken to achieve our top priorities of reducing cost and generating cash are working. Using this cash flow we were able to repay all outstanding commercial pay per debt and increase cash on hand to $70,000,000 at the end of the quarter. Looking ahead to the third quarter, which is traditionally the slowest period of the year, we don't see any overall growth in revenue. We continue in our efforts to improve profitability and expect a modest improvement in operating income and continuing positive cash flow in the quarter.

Before we go to your questions I want to emphasize two basic commitments to our investors, creditors and employees, I think, which are particularly timely today. First, we do not compromise our integrity in conducting business and second, we do not compromise the integrity of our financial reporting. Just look at the turmoil in some notable companies today, at the incredible losses their shareholders, creditors and employees have suffered from basic management failures to handle business with integrity and failure to insist on integrity in financial reporting. There's no doubt in our thinking that integrity is a very serious responsibility and vitally important to the success of a company. That's why our board and our management have always been committed to the highest standards of integrity and honesty. Now let's open the line for questions.

Thank you. Ladies and gentlemen, if you wish to register for today's question and answer session you will need to press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. with JP Morgan, please go ahead.

Yes, it's , hi Jim.

Hi Mike.

Two questions. One, could you be a little bit more specific in terms of the end markets where you're seeing improvement? You mentioned that the markets that are softening up for you, aerospace and industrial gas turbines, but could you give us some comments on the end markets where you see improvement? You know, excluding the impact of Wah Chang coming back in.

Well we commented on the , and I think when we look at the flat-roll product side, the titanium business has stayed pretty strong. And our commodity sheet business is reasonably strong.

But let me ask Doug Kittenbrink to comment a little more on the markets.

Yeah Mike. I would say the markets within the rolled sheets the same as rolled sheets side. The service center business has shown some strength, particularly appliance related in those kinds of applications.

We also see some strength in the biomedical area, which affects a number of our business. So those are two areas where I would say we're seeing some signs of strength.

Any change in automotive?

Automotive is in the summer shutdown period, the kind of the historical normal situation. I think we anticipate it being kind of flat. It's slightly down for the second half of the year.

OK. And then last question, Jim, is the board or - changed their opinion on the dividend or could you give us some sense of what your position on the dividend is right now?

Well I think our position on the dividend has stayed consistent. We do that as a very important element of our to return to shareholders, obviously. As well as a necessary, I think, discipline in terms of allocating free cash flow in a manufacturing company such as we have.

So our board looks at that very carefully each quarter in accordance to periods like this where our earnings have not been good, there's a good solid discussion of that. And that's why I think here this year it's been so important that we've been able to do what we've done in terms of generating operating cash flow.

OK. Thanks a lot.

Your next question comes from Michael Morestrom, Bear Stearns. Please go ahead.

Yes. Good morning. I had a question regarding the pension expense for '03. I was wondering if possibly you could quantify that a little further.

And also wanted to know if - I know you alluded to the possible write down that would be a part of shareholders equity, but is there any chance that we could see anything going through the cash flow statement in '02 or '03, related to the pension?

Well, you know, the forecast of pension expense for next year are going to be dependent on where our investments stand at the end of this year. So I really can't - I can't add anything there.

I think it is important, though, and I'm glad you asked this question to reemphasize. And even with the change in the pension accounting, that could be a required if the markets, you know, performed as badly as they've been performing. We should, from a pension funding point of view, we have substantial funding reserves and we don't see any impact on our cash flow from a pension accounting - from what might be required from a pension accounting point of view.

So we're well funded and have substantial funding credits to carry forward in that area.

Thank you.

Dan Rawling, with Merrill Lynch, please go ahead with your question.

Thank you. Just a general one. Given what's hot and topical on accounting, and especially with your comment on integrity, which we appreciate, what's your current view on expensing options to management?

Well, I could be cynical and say that our options have never created any value, so that seems a little irrelevant, in that sense. But, you know, I think all of this is getting over in a big way by the politicians and the analysts in one way or another, and if the rules are changed in that regard, you know, we'll book them. But, stock options -- stock option programs in our company have always been, I think, well in line with traditional industry norms. We have not been excessive in option , but, when it's all said and done, the impact -- the impact of some of these current proposals on us would be fairly minimal, probably, you know, $4 or $5 million a year -- probably not any more than that, pre-tax. But, you know, the models is such a grand averaging of everybody, that I don't know that that's really the answer in this area. But, if that's where they come out, obviously, we'll comply. Rich, do you want to add something to that?

Yeah. Dan, good morning. A couple of additional things Jim touched on. I mean the issue here is really one of how do you value them. So, that's, I think, a fundamental issue that the -- that the regulators do need to discuss and decide upon. But, from our perspective, you know, I think our disclosure in terms of the valuation of our -- of our options as well as the impact on earning, is very clear in our annual report, and the one comment -- or some of the comments that you read about in terms of -- in the press -- about the impact of options being buried in footnotes, you know, I take exception to. I think ours is very clearly stated in the footnotes, and it's not buried in fine print or in small font size. It's there for everybody to see and to make their own determination and valuation in terms of how it affects our stock.

Thank you.

Your next question comes from with Goldman Sachs. Please go ahead.

Hey, good morning Jim and Rich.

Good morning.

A question -- a question on the working capital area: can you talk about -- in terms of inventory -- if you assume that sales are staying relatively where they are. What kind of an upper limit do think there is to the inventory number?

Well, you know, the target that we've -- that we set as a material overall target -- is to get to time. That's the Harshman target which is -- initially -- which is well understood throughout the company. I think -- I think we're convinced that we can go beyond that. That's not gonna happen -- that's not gonna happen this year, necessarily -- but we do have -- we're now well into the second or third year of a lot of emphasis in this area. These are programs that continue to be a real priority with us, and we are -- even though these are tight times on the capital side -- we are continuing to make the kinds of investments, incremental investments in facilities and in systems that help us to move this inventory statistic even more favorable.

Doug do you want to maybe add to that?

I would just point out, one point to make sure everybody understands is that the numbers we're quoting there are gross inventory turns, include all of our raw materials et cetera, which some people don't use those statistics. But a point I guess to the point you're raising is that the same as volume recovers, which eventually it's going to happen, I think our challenge will be to gain that additional volume without putting inventory back into the system. And I think that certainly is doable, which will improve terms in the stainless company. I think that we're pretty lean there in terms of inventory levels we're at today. That is not the case in our other companies. Frankly I hope my other operating company presidents are listening to this. We have many opportunities left in terms of further improvements in inventory terms, and we've set specific goals both in all back and wahchang and in the industrial segment. I think there remain lots of opportunities to reduce manage working capital between now and the end of the year and going into next.

And if I might ask a second question Doug, in the area of cost reduction you were also showing very good performance. I'm wondering if you could identify a little bit about where those costs are coming out in terms of differentiating between say a variable cost or raw material or energy, or is it more in the head count area? And what types of things in the future? What types of areas are you focused on for the future?

I would say it's pretty evenly split between overhead accounts, like salaried overhead, and variable cost factors in terms of both procurement saving for materials and savings and other factors as well. And it's also pretty evenly spread across our various companies. I think all of the companies have been focused on cost reduction. I think some of the largest categories involved, raw material and material procurement savings; we've also, as you know, taken out some overhead in the salary categories, those would be the largest ones. But it really is a broad based, underlying cost reduction, and we're attacking on all fronts.

OK, thank you.

As a reminder ladies and gentlemen, to register for a question you need to press the one followed by the four at this time. Again ladies and gentlemen, it's the one followed by the four to register for a question. with Merrill Lynch, please go ahead.

Thanks, good morning gentlemen. The pension expenditure's a little bit lighter in the second quarter than I was looking for. Can I use the 6.8 million going forward? Is that ...

No, I would look at going forward for the rest of this year as the same level as the second quarter.

OK. And as far as your order outlook in your allvac segment. How's in looking into, say, early part of next year? I know I've heard some of you talk about the weakness in the second half. Any indications on whether that might be a bottoming at all?

I think our visibility is you go out that far is not all that great. I don't think we see any signs of recovery yet for that balance of this year. I think the commonly held view, in terms of forecasting is that the commercial aerospace recovery will occur, in terms of aircraft builds, in 2002. That should translate to metal build. Sometime in 2003, but the precise timing of whether that'll be early in 2003, middle or late in 2003 is not clear to us as I sit here today.

OK, good. Thank you.

But Alex, let me just go back to one thing I said in my remarks that I'd like to emphasize that even though has just clearly been hurt by these developments in commercial aerospace and power generation, they have remained profitable and we are confident they will remain profitable and that's an organization that despite the very significant, you know, impact on revenues has reacted and adjusted to that very well.

Could you possibly identify some of the markets that they've switched over to or -- in order to maintain that performance?

Well they -- you know, they had some backlog -- they had some good backlog to carry forward, which is has certainly helped them here in the first half. But, they are -- you know, they're getting the business that's there to be had in the aerospace side and you know, the medical applications business is important to them and growing some of the commercial applications that markets that they have not been so active in, in the past, they've been able to switch product to and then the military -- the defense side is a plus to them, as well as to .

That's helpful. Congratulations on good cash flow management, this is quite good and we'll look forward to that going forward.

OK, fine. Thanks Alex.

You're welcome.

Your next question comes from of , please go ahead.

Thanks. Jim, I just had a general interest question on these letters that you're going to be asked to sign certifying the financial statements. Do we have to wait for the Senate and House to come up with a bill, the President to sign it, key dates by changed, what are the insurance and lawyer guys counseling the issues are and really, I guess, when can we -- when can the market expect most of these testimonies to be signed by these companies, including yourself?

Well, the -- first of all, as far as I understand the situation, Tom, the President -- the bill was not going to control this, but this is a requirement that came to us directly from the FCC.

All right.

And the due date on that is August 14th. So, you know, we were one of the 900 companies named on that list and, you know, we're in the process of complying with that demand. You know, how -- your broader question, in terms of how this affects, you know, insurance coverage and things like that, I suppose the -- you know, some of the motivation for calling for that, in some people's minds, might be to set you up for that, but at the same time I kind of come back to what I said earlier. Those certifications, I feel and I'm sure Rich feels the same way and , our controller. Every time we've signed the documents we've signed in the past, the annual report, the 10K, the 10Qs, it's with that attitude so if this is a formalization, so be it for reporting practices. But in terms of the attitude that we bring to singing this, those representations that have been required in the past, there's no change in my mind.

Yes , Tom, just from a timing standpoint, and Jim mentioned August 14. That's the SEC timeframe. That would apply in our view to all 10Q's that are filed for this quarter, as well as pull in all previous disclosures relating to not only the current year proxy but also the current year 10K.

And, you know, that's certainly our view, our view of signing that. But in the second quarter - for the second quarter Q, you know, doesn't change, as Jim said, the seriousness we've always taken with that.

Well in no way am I questioning integrity. I'm just wondering logistically if most of these things will come in the second week of August?

Right. Right. August 14 is the deadline, or the implementation timeframe from the SEC.

I'd like to hear the explanations from people that don't expect to make that deadline.

So again, to summarize, most of those things, including your own, might take until the 10th or 12th of August to get that filing in and the formal letters signed and everything.

Yeah. We would be looking at our filing on or about August 14, is the timeframe that we normally focus on.

OK. Good. All right. Thanks a lot.

Thanks Tom.

with Prudential Investment, please go ahead.

Yes. Good morning. It's at Prudential.

Hi Mike.

How are you? Given the, I guess, given the weak market conditions that we've seen through the first half of the year, could you guys talk about your credit facilities? Specifically, what's available under the 325 and where do you stand as far as your covenants are concerned?

Well we have nothing outstanding on that facility, so the entire 325 is available.

OK.

And we expect to be in compliance with our covenants.

What are your covenants?

We have an earnings covenant and we have a debt capitalization covenant.

And where do those stand? Is it still 60 percent debt to cap three times even without interest?

Right. Yes.

Is that going to go up to three and a half, though? That's what I read the release on that. I'm trying to get some - I don't know what the timing is or ...

Not this year. The timing for the increase from three to three and a half under our current bank agreement is 2003.

2003, but you're still 60 percent debt to cap?

Yes. Right.

Is that going to change at all in 2003?

No. Not under the current agreement.

Not under the current agreement. And when is that 325 come due?

Pardon me?

I'm sorry. When does the 325 million come due?

Yes, there are two - well first of all, there is no borrowings outstanding. There are two components of it. There is 60 percent of the 325, there's a five-year borrowing facility and 40 percent is the 364-day borrowing facility that would expire in December ...

December.

... this year.

OK. That's great. Thank you very much.

Thank you.

John Tumazos of Prudential, please go ahead.

Congratulations on the great cash performance and holding things together in a tough market.

Thanks John.

If you could update us a little on the dividend policy first, and second, elaborating on question, describe what changes in corporate governance your board might make regarding the new rules. Not only disclosed but perhaps further tightenings contemplated.

And if I could just site as an example, board retained a second audit firm for internal audit -- basically suggesting that the directors who are not full-time employees really aren't in a position to run the audit committee, and their audit committee retained their own separate counsel -- outside counsel -- for governance issues, which I thought was very interesting because, you know, some company's boards are active and others resemble a nursing home. And, I think it's very realistic for directors to admit that they don't have time to get to the bottom of a World Com, should it occur. And, has complex issues because they're in Indonesia, and they have a joint-venture partner who owns one sixth of their common stock and sits on their board. And they have unique governance issues that a simpler company in America, like Allegheny, doesn't have. But, I would appreciate your thoughts on that as well, Jim.

Well, I think these are times when the governance committees of all boards are going back through their existing policies and -- so, that's a -- it would be a pretty naïve board, or a pretty uninformed board that didn't take times like this to stop and reconsider all that they have in place, and see if they want to supplement that in any way. Our board met last week and that was a meeting around which we had the committee meetings on the governance committee. On -- I think where we feel we stand is by, certainly, let's say by the independence rule for things like that. We feel that we are in very good shape on those criteria.

On the internal audit side, it's kind of interesting to see what various companies are doing and I wasn't aware of the example, specifically, but other companies have done things like that -- not just now, but over the last few years. We have an internal audit staff, and we think that it's a very -- a very solid internal audit staff, and I personally take issue with the thought that, somehow or other, that shouldn't have a direct reporting responsibility to the chief financial officer in addition to that has to the audit committee, which has always been our set-up. You know, you see some people now talking about moving the internal audit staff away from the chief financial officer, which I think is just -- when you think about it -- is a terrible mistake because I think the chief financial officer has to have every resource available to him to do -- or her -- to do the job that they're expected to do in terms of being a, you know, a crucial check and balance in the system. And, you know, maybe there's some screwy CFOs around, and if that's the case, so be it. That's a different kind of problem. But, in terms of just seeing the way things have actually worked -- and worked well in an organization, I think the traditional alignment there of the internal audit staff should stay in place. Obviously, they always have access to the board. They always have access to the CEO, for that matter. But, to somehow or other deprive chief financial officers in our economy of having that as a very important internal resource, I think is a terrible miscalculation - would be a terrible mistake to be made, if it turned out that that became any kind of a trend or a requirement for the stock exchange or the SEC.

With regard to having a separate law firm for the audit committee, given dynamic nature of the regulatory climate; and not just new rules being implemented but contemplated, do you think that's a desirable sort of action?

Well I don't, but I don't know Freeport, McNamara and circumstances. I think doing things like that really runs the risk of confusing reporting lines, confusing responsibilities and if in a certain set of circumstances and board or audit committee or whatever felt maybe some dissatisfaction with the quality of the work that's being done in that area, then hiring a second firm could make some sense. But these things are pretty damn theoretical, and I think you really have to match them up against what works and what you need to have so the people, whether they're your internal people or your external people, auditors or outside law firms, they understand what they're responsible for and there's no ambiguity. And when you start duplicating these professionals on the outside, whether it's law or audit point of view, you are just driving into a fog bank eventually.

OK. Could you talk a little bit about the dividend policy and outlook? The earnings have been soft, but the cash flow good. The borrowings didn't increase, so those are obviously encouraging. But obviously you need earnings too. And whatever you're allowed to say Jim, we appreciate the guidance.

Well, I commented a little earlier on that question John, I'll just say again how important ...

I took a couple calls on your call, I apologize.

No, I'll just say it again. Dividends are an important part of our view of return to shareholders and our allocation of free cash flow. We have to earn to dividend in the final analysis. We don't argue with that at all. But that's why in these times it's been so important to be able to show the strong internal cash flow generation we've been able to show and pay off all of our borrowings too, so we don't have that issue. We are very cautious, but we continue to be encouraged that this operating situation is improving. And therefore our belief that we can sustain this dividend, and we're going to have the earnings base that's the same as dividend in a very traditional way will be restored. That's the current state of our thinking, but I said earlier, John, if you weren't on the call, that this is a matter that the board takes very seriously, and we have serious discussions on that every quarter.

Jim, the nickel prices have been very resilient in the 325, 350 neighborhood in the last few weeks, while the particular competitor, North American Stainless, would love to keep the cold rolled sheet price in the $1,300 neighborhood as long as possible to make -- to stimulate consumption in the U.S. to European or Japanese levels, which is a wonderful way of motivating, I guess, predatory pricing. Given that the input has gone up a great deal and the product prices have not gone up as quickly, how much flexibility does Allegheny have to move out of the vanilla 304 cold rolled and into other niches where the particular competitors was active?

Well , I think you're aware that we are -- we have a smaller percentage of our product mix in the commodities side than the rest of our competitors and that's been a long standing strategy of this company to try to get more and more of our product into the -- using your phrase, the niche markets and that's -- you know, this is a -- I think this is a fundamentally sound strategy and it's one that we continue to pursue and it's one that we've had a lot of success in doing. You know, our growth in precision as being a very good example of that. So the product mix in all of our businesses is very important and stainless mix is no exception to that.

Roughly, what proportion of your tonnage is commodity 304 at the moment?

Well, I think we've disclosed in the past of about a third of collateral business is what we consider commodity grade, that goes beyond 304 but of the revenue dollars and that's about the same today.

So that it's probably reasonable, I guess, to think of a more traditional profit function on the two thirds that is differentiated, where you can raise prices to manage cost et cetera and that one third is directly impacted by the commodity grade pricing.

Well, I mean, they -- you know, I think that that's -- as a general statement, that's true. At any given period though, like we are now, where the economy is weak I think that affects all of our products, even the niche products. But, you know, if you take a longer view I would agree with your statement.

Can I add a comment there? This is . I just want to be clear, while certainly, you know, all companies prefer niche products over commodity products and that's certainly part of our strategy, at the same time I don't want to leave anyone with the impression that we do not -- that we view the stainless sheet commodity business as a bad business. We can compete in that business. We can compete very well with the competitor you just referenced. We're not trying to run away from that business and you know -- in face, I think our participation in the stainless sheet business has grown in recent time, in terms of service center type applications. We have very good customer relationships with the service centers and I think we intend to continue to, you know, compete in that product line. The other point I would make is you mention nickel and I'm not sure I grasp the element. But that is a pass through cost element for the commodity end of the business.

With a surcharge mechanism in pricing, that increased cost for three or four sheets gets passed through directly to the customer and that - there's nothing going on in the marketplace that's changing that.

So that's true in Europe. It's true here. It's true across the world, that the surcharge mechanism enables us to pass through our raw material costs for both nickel and chrome directly to the marketplace.

Thank you.

OK. Thank you.

Your next question comes from Dan Roling with Merrill Lynch. Please go ahead.

Thank you. Just to follow up on something you said earlier about industrial gas turbine business.

Could you help quantify the year on year decline in shipments and in orders? And if you look out through the balance of the year, could you describe what's happened to your order rate or your backlog?

And is there any near term positives or negatives as it relates to the industrial gas turbine business?

I don't have last years numbers right off the top of - at my finger tips just for that product line, but it was very strong going into the latter part of last year. And frankly, industrial gas turbines dropped off the cliff late in the first quarter.

Rich is helping me, probably about $60 million a year last year. And on an order entry basis right now, that business is soft - would be an exaggeration. Would be an understatement. I think it's almost non-existent.

I would say that the inventory correction in that business happened much more slowly than it did on commercial aerospace. And it happened much more rapidly. In other words, what I mean is, it occurred later but when it occurred it was much more dramatic.

And so there's been a significant drop off in order entry and a significant increase in cancellations associated with power gen business, I would say since sometime in March.

Yes. Of all of our products, Dan, that's the one that shows the largest percentage decline in net new orders.

Could you speculate, and maybe you won't, but would you speculate that some of your customers are caught with significant inventory of unsold product, then, if the orders have been cancelled?

There's probably still some inventory in the supply chain. That's - but I, we, I think that's close to being settled out at this phase. I mean, I think if you look at GE power systems, they continue to ship it at fairly strong levels for some period in that market.

So I think a lot of the inventory in the system did flow through, but, you know, I can't tell you exactly. I still there is some overhang in the supply chain, but I don't think - I think it's mostly behind us.

Lastly, I assume, if I remember right, looking forward, part of the allure of this will be the replacement cycle. When does that kick in?

Well the replacement cycle for that type of business is much slower. The life cycles are much longer for those - for that kind of product. So I don't see that as a major factor in terms of recovery in this marketplace.

Particularly for the parts that we supply. We supply some of the larger rotating parts that are less subject to repair and replacement and ...

... for the parts that we supply. We supply some of the larger rotating parts that are less subject to repair and replacement, and wear and tear.

Thank you.

OK. Next question comes from Leo with Standard & Poor. Please go ahead.

Good morning. Could you give us the cap ex and depreciation for this year and next?

Well, depreciation this year will be just over $90 million, and capital spending, about $50 million. Depreciation next year will step a little bit from that, because some of the re-capitalization that took place when went public back in 1987 expires, so I think our depreciation will drop to somewhere between 80 and 85 million next year.

We have not our capital spending plans for next year yet, but, you know, if you were to ask me to guess, I would say that we're gonna still stay very constrained on capital. There's some critical strategic things that we'll want to do, and can do, within a constrained capital budget, but I would -- I would be very surprised -- well, I shouldn't say very surprised. At this point, there would -- we would not expect to spend our depreciation for next year.

Thank you.

Christopher with Midwest Research. Please go ahead.

Good morning.

Good morning, Chris.

Can you discuss any material developments regarding new-market penetration in titanium? For example: where are you making headway? Where is the focus? Thanks.

I'd say the most significant growth area in the titanium business would be in biomedical. There continue to be more and more applications in the biomedical field. I think the other potential direction that we see is in the end of the business -- the, you know -- products that eventually as -- you know, could make their way into automotive applications and machinery applications. I think that's still, you know, some distance out. I mean, I'm not saying we're seeing a lot of order entry for that type of thing right now, but we do see some development opportunities in those markets

Thank you.

Thank you.

Once again, ladies and gentlemen, to register for a question, you need to press the one, followed by the four at this time. Gentlemen, I am showing no further questions at this time. Please continue.

OK. Fine. Well, we'll wrap up the call then and thank you for your participation. Bye.

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