ATI Inc (ATI) 2006 Q2 法說會逐字稿

Good day, and welcome to today’s Ladish Company Incorporated second quarter 2006 conference call. As just a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Wayne Larson, Vice President of Law and Finance. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to the second quarter conference call for Ladish. I’m glad everybody could phone in this morning. My apologies. We’re a little late. We had a little technical problem getting hooked up this morning, but that ‘s behind us, and we’ll go forward.

As you’ve all seen the press release and the announcement, it was another good quarter for Ladish. We were pretty pleased back here. While it wasn’t a record quarter for sales, sales were very strong. It was probably one of the most profitable quarters we’ve ever had, so that was the real upside of it. A lot of things went right again in the quarter. Sales and profitability were up at every one of our operating units, from Cudahy Forgings all the way down to Valley Machine. Everybody had a great quarter. We were pleased with everybody’s operating pretty well as expected and doing what is anticipated, and so it all came together for a really strong quarter. We’re really continuing trying to focus on growth, getting to the right product mix at all our divisions, making sure that we’re working on areas where we can really focus on our strength, not worried about, at this point this time, gaining share. We’re really worried about doing the right things and trying to service our customers and trying to perform the best we can for our constituents and owners.

Jumping right into the results for the quarter, obviously, sales were up to $90.2 million, a 36% increase over where sales were last year in the second quarter. Cost of goods came in at about a little over 70% for the quarter, which is again a big improvement over last year, which ultimately ended up with gross profit coming in at about 21.3% versus 14.9% last year in the second quarter. And that’s again, and that’s a step up from where we were in the first quarter with gross profits at about 18.3%.

A lot of things went into improving that profitability, from again, better absorption within the plant, energy costs again continued to trend lower from where we anticipated they were going to be. We are actually, we are really doing well as far as productivity these days. Our overall head count within the corporation is actually down from year end. We are working our people a lot of overtime, which, quite candidly, they like. They’re doing well as far as profitability, but it also works well for the company, because clearly, it’s cheaper for us to work overtime than it is to add people with the attendant benefit costs that go with it. So we really picked up some advantage there, which all has contributed to the gross profit line.

SG&A for the quarter came in at $4.8 million, or about 5.4% of sales. That’s significantly from last year in the second quarter, last June. SG&A was only 2.9% of sales. I’d like to remind everybody, last year in the second quarter we had about a $500,000 credit SG&A from FIN 44, which we had to do last year with variable pricing of options. Those options are all gone, and we’re done with FIN 44, so it’s not quite the swing from last year as you would have thought it was. SG&A is also up this year, really, for the added provisions for profit sharing and incentive compensation for our employees. When the company is doing this well, every one of our operating units does have a profit-sharing program that works from everybody in the shop floor on up. [inaudible] we have had, obviously, make additional provisions for that, too, to recognize the people’s contribution.

That resulted in an operating income for the quarter of about $14.3 million, about 15.9% operating income, up from last year’s operating income of 12%, and up from the first quarter of an operating income at about 13.8%. So nice year-over-year, quarter-over-quarter gain. Interest expense was up in the quarter, as our debt level has increased. We did another private placement of a $40 million of debt in the quarter, which we had announced earlier. Those proceeds were used to pay down some short-term borrowings, so debt is up a little, obviously not at an unreasonable level for us, certainly not at a level where we’re uncomfortable with. But, as we’ll talk in about a little bit on the balance sheet, obviously, our working capital is growing exponentially as this market is ratcheting up with both volume and with price increases on our raw material.

Pre-tax income for the quarter at $13.3 million, or 14.8%, nice increase over last year, we’re at $7.5 million for the quarter, so again, pre-tax being driven, obviously, by all the other reasons we talked about earlier, why our gross profit was up and operating income, all falling to the bottom line. Our tax provision for the quarter was $4.7 million, we’re using about a 36% tax rate right now, which is down about two percentage points from where we were last year, with a 38% tax rate, really just a factor of the credit we get from extraterritorial income on foreign sales. It’s really causing that 2% swing, and it looks like that’s probably where we’ll be for the year, somewhere in that 36%, 37%, probably down just a percentage point from where we were last year. Again, I’d remind everybody we’re still using NOL, so we’re still not a taxpayer, but for presentation purposes, that’s what you can expect for the remainder of the year.

That got us down to $8.5 million out of net income for the quarter, or 9.4%, again a nice improvement over last year, when that income came in at 6.9%. The effect of that is a final result in a $0.60 per share of diluted income for the quarter. So again, it’s a nice improvement from where we were last year, and again, a step up from the first quarter.

First half came in at about $185 million in sales, a nice 41% growth over the first half of ’05, which we’re certainly pleased with where the business is headed. 19.7% gross profit in the first half, at $36.5 million, significant increase over last year, when the first half came in at about 13.1%, so again a lot of things going right, a strong first quarter, followed by, from a profitability perspective, even better second quarter, so things have obviously added up well for the first half of the year.

We came in with $27.4 million of operating income, 14.8%. We are, if things are, we are hitting things right. For the first half, interest expense, again, was up to about $1.8 million, again a reflection of a higher debt level this year. Prior to the private placement, our short-term borrowings, obviously, as far as interest expense, short-term borrowings were up, and interest expense obviously, on a revolver was drifting north along with the interest rate increases we all went through in the first half of the year.

We’re pleased with the long-term debt we put on back in early May to replace that $40 million at 6.14% for a 10-year note, so we thought that was the judicious thing to do at the time, and we think that will serve us well going forward and certainly give us some stability as far as the balance sheet and where we’re going to be. For the first half, we came in with net income of $16.1 million, 8.7%, which translated to, for the first half of the year, at $1.14 in EPS. So, again, a pretty strong first half of the year.

Jumping over to the balance sheet side of the equation for a minute, cash was down a little, to about $7.8 million from where we started the year, actually up a little from the first quarter. Working capital continues to be probably our biggest challenge here as this business ramps up. The, obviously, raw material is going up significantly, which is correspondingly causing part of the issue behind our working capital rise. Inventories are up so far this year about almost $32 million. Receivables up to $66.8 million, which is another $15.3 million gain, and on the other side of the balance sheet, payables are up a little over $4 million, so the net effect of that is, you’ve got about a $42 million increase in working capital that we’ve obviously in large part financed that operations this year, partially out of the borrowings with the additional senior notes that we’ve played.

Depreciation for the first half of the year was about $5.2 million, so we’re running, depreciation’s running a little ahead of where it was last year, where we were about 4.7, so we’re about a half million dollars ahead in depreciation, which is about where the year should come in. Increase in depreciation is just a reflection of what’s been going on within the company from Capex to the acquisition of ZKM and Valley, so that additional assets being depreciated is what’s driving that number.

Capex for the first half of the year was $5.5 million, pretty much on line with where we think the year is going to end up coming in, somewhere around $10 million for the year, notwithstanding the new press project, and I’ll talk about that in a second. The other issues that came along during the course of the year, dropping down from there, equity was up to $137 million from $117 million. I alluded to the fact that actually, employment is actually down a little. We ended the quarter with about a little over 1,900 employees, which was down about 50 people from where we started the year. A lot of that are reductions come at ZKM in Poland, although we’ve obviously managed to pretty well keep our head count pretty level at the other operating units. Obviously, that just, as I indicated earlier with the overtime, it just allowed us to really hit the bottom line better and manage our resources a little better and get the productivity out of the people who are here. They’re being rewarded for it as the company is being rewarded with improved profitability.

A couple of other items just for a perspective of where people, what it be. I did allude to the fact that energy costs are coming into low plan. We’re pleased with where that’s been, and it continues to happen. Byproduct sales continues to be a strong item for us, as raw materials prices stay up, fortunately, byproduct sales for scrap and short ends and degenerate part product that we generate that doesn’t go into finished goods. It stayed relatively strong, also. That all flows through the cost of goods as a credit to material, which obviously helps the bottom line, also. So again, a lot of things happened. We’re going the right way.

One of the things in the year-over-year comparison that isn’t quite going in our favor, but just to sort of give a true perspective of year over year, the first half of this year we did incur a little over a million dollars of pension expense. That compares to last year, when we had about $100,000 of pension credit income. So, again a reflection of just how much stronger this year is going than last year.

Looking forward, we’re still pretty optimistic of where we’re at in this cycle. We think this cycle has some length to it. We think there’s some length to go, and where we go in this cycle. One of the issues that we’re going to have a challenge, probably in the second half, is going to be on probably some push-out on some orders related to Airbus’s A380. They’re behind, no surprise to anybody, I’m sure, on this call. But their delays on that is probably going to push back to Rolls Royce, which is ultimately going to result in probably some push-outs to us. We’re not expecting any cancellations, we’re not expecting to lose any business. We just think probably some of the business we thought was going to hit the second half of this year is going to drift into ’07 and correspondingly into ’08. From our perspective, that just gives more viability to the length of recovery of this aerospace cycle.

The order flow for the quarter was certainly good. We had over a, well over $100 million in new orders for the quarter, again outpacing shipments. Backlog has risen again to $526 million, in comparison to last year at that time, it was at about 377, and even though we ended the first quarter with a backlog only at about 502. So backlog continues to grow, the demand continues to be out there, so we are optimistic about where things are headed for the rest of this year and for ’07 and ’08 and in the foreseeable future.

As always, I’ll give you my standard warning. Don’t start multiplying anything in any one quarter by four. Given Ladish’s history and our job shop business, it just doesn’t work real well. The third quarter, in comparison to last year, we had a pretty robust, profitable third quarter. Third quarter last year was really benefited by a fair amount of missile and rocket business, that we were closing out some of the final orders on that stage of the shuttle at that point in time. That business isn’t around right now. We’re still optimistic, obviously, long term on the space program. We’re happy the shuttle’s flying again, and we’re excited about the new design for the lift vehicles that’s going to use shuttle solid rocket technology, which means, obviously, Ladish and Alliant Tech will be powering the new launch vehicles into space for the foreseeable future. So, while we’re excited about that, that’s really not going to probably turn into a item as far as income for Ladish into the ‘08/’09 time frame. So, in the mean time, our missile rocket business is going to be relatively meager from our perspective, and we’ll be really focused at serving Boeing on the ELV and probably the Japanese on their H2A rockets.

The other issues looking forward is for certainly the second half. Again, second half is always a little short for us with respect to working days. We did have a one-week shutdown in July for maintenance. We’ll have the typical holiday issues in November and December. So keep that in mind when you’re trying to figure out where things go. We will be battling our way through those issues.

Raw material in the second half, it certainly, I don’t think, is going to be a problem as far as availability. But as raw material continues to have escalation issues and we pass that escalation through, raw material is going to continue to grow as far as a percentage of sales for us. And that has a correspondingly negative impact on profitability as far as a percentage of sales. That’s just a fact of life these days for us. We’ll continue to be working through that. I guess the good news is the escalation of raw materials seems to have somewhat—I won’t say it’s headed downward, but it at least seems to be leveling off at this point in time, but leveling off at a relatively high level, so our inventory is going to continue to grow as far as a percentage of sales going forward for the next quarter or two.

That all factors into working capital growth. Obviously we’re going to be watching that going forward in the second half. The second half of the year is usually the cash-driven year for this company, where we generate a fair amount of cash. We’re certainly looking for an improvement in cash generation in the second half of this year, and hopefully keeping our working capital under control.

On an overall basis, obviously, we’re once again pretty happy where things came in. As I said, every operating unit within Ladish is running pretty well full steam, is doing well, and we’re pleased that everybody’s keeping their eye on the ball and performing to a pretty high level.

With that, I’ll be happy to take questions and answer what I can, and I’ll turn it over to you.

Thank you. [Operator Instructions]. Our first question is from J.B. Groh from Davidson. Go ahead, sir.

Hey, Wayne.

Hi, J.B.

How are you doing? Couple questions. I think you said you were going to give us an update on the press building, maybe I was taking a mental nap, but I didn’t hear too much on that. Is that still slated to sort of be completed in the 2007 time frame?

It’s going to be, we expect the new isothermal press to be up and running in the first quarter of ’08.

Q1 of ’08.

Right. We are, in fact, I got an update yesterday at the Board of Directors meeting, where, as always with a capital project of this magnitude, a little behind from where we would like to be, but the project is moving forward. A number of decisions have been made, and we’ve pretty well narrowed down where we’re going with this, the design, which was part of the real issue of, obviously, trying to improve the press. We like the presses we have now, but as always, being an engineer-driven company, our guys want to make the new one better, and that’s been really one of the issues as they worked through the improvements that they wanted in the new press for what the press design guys and manufacturers. So they’re still pretty well confident we can have this thing up and running in 18 months, and it is moving along, and I expect some more significant developments later this quarter with the press.

Can you give us sort of a, and presumably the productivity of that would be better than the older generation. Can you give us kind of a clue as to the revenue potential something like that would have in terms of how much does it increase capacity at Cudahy?

Well, it will be a significant capacity increase on the isothermal side, as far as—it’s hard to say what the total capacity increase will be. Certainly, we think it’s going to be out there, it’s going to be a viable piece of equipment for us, and it’s applied to what our customers are telling us they need as far as capacity, particularly in the ’08 time frame. We don’t think we’re going to particularly miss much of anything in ’07. We’re pretty well covered, we think. Really, the demand comes for that press in ’08. So we think we’re going to be in fine shape as far as having it up and running where the demand really hits.

Okay. And then on your backlog, is that typically 18 months, or how should we think of that in terms of the length of the stuff in the backlog?

You should think of it as 18 months worth of backlog at this point in time., J.B. We’ve stretched the backlog out a little bit just to accommodate raw material lead times. But I also remind you that that backlog number really doesn’t include much of any backlog for shorter lead time items that we deal with. On the industrial side, domestically for people like Caterpillar, ZKM’s backlog looks a lot like Cudahy Forging’s does when it comes to the industrial side of their business. It’s very short in duration because of the nature of the product. It turns around incredibly rapidly, so it’s, effectively, it’s 18 months worth of projected business. It’s really focused at the jet engine side of the business and, to a little lesser extent. general aerospace.

Okay. And then you made some comments on A380 and how that might push some stuff out. Are you making an assumption there, or have you been told that stuff’s going to get pushed out, from your customer?

Rolls Royce has pretty well told us.

Okay.

We haven’t worked out all the details yet as far as what parts they want when, but they’ve already, Rolls has pretty well told us that there’s going to be a lag time with when they’re actually going to need our parts because of when Airbus is actually going to need engines. So we’re expecting a 6-month delay or so as a result of that.

And normally those would have shipped the latter half of this year?

Yes. It’s probably, we’re going to see work move out of the way third quarter and the fourth quarter, it’s going to move into next year.

Was any of that happening this quarter? I mean, the revenue number’s a little light of my estimate, so I’m just trying to reconcile that.

No, that really wasn’t—the revenue was down a little this quarter. That was really more of a reflection, in all honesty, of a couple of our other customers that are putting in new operating systems that are, shall we say, debugging them and having some issues as far as trying to figure out what they need, when they need it. As a result of which our inventory, particularly our finished, ended up a little higher than certainly where we would like it to be. Probably $4 or $5 million of orders that we thought should have gone in the quarter didn’t, and sales-wise, it would have looked much more like the first quarter if we would have been able to ship what we thought we should have been able to.

Okay. And then a couple more items. On your inventory increase, how much of that is just driven by the value of the raw materials versus volume by weight or some other measure?

Volume by weight, it’s actually, our inventory hasn’t increased horrendously on volume by weight, but our inventory has increased. It’s shifted as far as product mix driven, so there has a lot less, shall we say, cheaper type material in our inventory right now than what there traditionally has been, and a lot more higher-priced material. So poundage, you really can’t, it doesn’t tell you anything. But, and clearly there is probably a, out of that, I’m looking at it at $30 million increase in inventory, there’s probably, at least one-third of that is probably price, J.B.

Okay. And then lastly, you had a principal payment in June. Correct?

July.

July. Okay, so that happens in this quarter. Is that just getting replaced one for one, or does the debt level actually go down a little bit?

The long-term debt goes down a little, short term goes up a little as we balance things out. But that was one of, that was a traunch of our 2000 sub notes that were out there at 7.19, so actually, we’re replacing higher-priced debt for the short term with lower-priced debt.

Your short-term’s priced at—

At LIBOR plus 1.25%.

Okay. Hey, thanks a lot, Wayne.

Sure.

Thank you, sir. Our next question goes to Mr. Rob Damron of Twenty-First Century Research. Please proceed with your question.

Oh, hi, Wayne, and great quarter.

Thank you.

Just a couple questions. The new forging press. What kind of Capex should we assume for that going into ’07?

I don’t have a final price on the press. What we’re looking at right now, it’s probably going to come in, I know it will come in north of 20, and we’re certainly hoping that it comes in south of 30.

Is that mostly in ’07?

There will be a little—part of that’s going to get spent this year, a smaller portion, probably a fair portion of it will get spent next year, with the remainder of it in the first half of ’08. So next year it’s probably somewhere in the ballpark of $10 to $15 million of Capex that’s going to go into the new press next year.

Okay. And then, let’s see. I also wanted to ask you a little bit about that powdered nickel superalloy business that was recently bought. Has that disrupted your supply of that product at all? And should we expect, is that all of concern to you?

It hasn’t disrupted our supply of powder at this point in time at all. In fact, we’re pleasantly surprised those guys are 100% on time with delivery these days. So, no, that hasn’t had an impact upon us yet, and we’ve been given every assurance by our supplier and by our customers that it won’t disrupt our supply. So we’re really not losing any sleep over that one at this point.

Okay, good. And could you let us know what your exposure is to the Airbus A380? How much revenue were you anticipating from that business in the second half, and do you think you’ll be able to replace that with other business in the second half of this year?

A good portion of what we, there’s going to be a little falloff in the second half from the 380, but we will replace it. We’ll be able to replace most of it. There may be some that we won’t be able to, just because of the nature of the product, but it is a, obviously, it’s a disappointment. You’re gearing up, but again, as I said earlier, it’s not something that’s earth-shattering here. We’re going to ship that product later. It’s not that the product isn’t ultimately going to be there, that we’re losing business or we’re losing orders. So, it’s a, it’s not a deal mover. We’re going to make it. We’ll make up for it, and we’ll figure something else to do. There’s a pretty robust demand right now, so we’ve got X amount of forging guys out there. They’re making other parts instead of making A380 parts right now.

Okay, and then if we look at the gross margin, a huge increase in the margin this quarter. Is that a sustainable number, at least for the near term, or what one-time items in that number could possibly either bring that up or down?

I always hate to tell people to start multiplying by four. Clearly, it was a good quarter. One of the challenges we’re going to experience here in the second half of the year, as I alluded to, is high raw material pricing continues to work its way through our inventory. It will have the impact of bringing down total profitability as a percentage of sales. So that’s probably the biggest risk factor out there as far as bringing down gross profit, from my perspective. There was one item that really drove profitability in the second quarter. It was a lot of things going right and people doing the right things. It’s certainly, as I alluded to several times, it certainly has helped that our guys have been able to maintain a pretty constant work force. We haven’t been adding to head count. We’ve been getting by and getting productivity through our people and living off of overtime. So those things all help, and hopefully you can continue that for the near term.

What was the capacity utilization during the quarter?

I still think on an overall basis, we’re probably somewhere in the low 80s, I would guess. Obviously, we’ve got some pieces of equipment that are significantly higher than that, and it kind of varies from operating unit to operating unit. We are selectively adding some capacity at different places. We’ve added a couple of new machining centers over at Valley, we’ve got a couple of more new machining centers hading in there. We’ve repaired some equipment that was in badly need of it over at ZKM, so we’re trying to give them some added capacity and help them get things boosted up. So it’s just been selectively across the board, trying to pick up some capacity in each operating unit without having to go into, obviously, any major investment in capital expenditure to get there.

Okay, that’s helpful. Thank you.

Thank you. Our next question goes to Elizabeth D. Franks from Ryan Beck. Go ahead, ma’am. Please proceed with your question.

Hi, it’s actually Steve Levenson. Good morning.

Hi, Steve.

You mentioned ZKM. Can you tell us anything about when you might be getting, delivering aerospace parts from that facility? Have you received any orders to date?

We’re still really counting on booking our first aerospace orders yet this quarter, Steve. From the last report I had, it looks pretty positive. We’ve had a number of aerospace customers that are current customers of Ladish through the facility that seem pretty excited about putting work in there. We expect to receive our first aerospace order this quarter, which means, you’re talking about hopefully shipments in the first half of next year. By the time we get the orders in, get them tooled, and get the parts made and out of there. But it’s progressing as we had expected, and actually the acceptance of the aerospace industry has been a little more rapid than we thought when we started into this process. We’ve installed a new operating system over there, which was one of the keys to be able to start taking aerospace work into the place, was to have an operating system that had the single part serial number traceability potential, and we’ve got that in place. We went live with that system the end of last month, so that’s definitely a positive, and our people over there are pretty excited about that, so it’s definitely moving forward, and we would certainly expect in ’07, we will be putting aerospace products out of ZKM.

Sounds good. Thanks. In terms of the raw material costs, if there’s some percentage that you’re unable to pass through, or is the—I think you can give us a breakdown on what you can pass through and what you think you can’t pass through.

No, we’re passing it all through, Steve. When I say, when I was forewarning about it having an impact on profitability in the second half, it’s just, we worked through the age of our inventory, and more old inventory has gone out of here, obviously, is being replaced by higher-priced new inventory that ultimately it’s ramping up our EBITDA. The piece of raw material as far as a percentage of sales. And while that’s all being passed along, it’s not being passed along with any margin attached to it. So it decreases profitability as a percentage of sales. Doesn’t increase total profitability, but when everybody wants to look at gross profit percentage-wise, it is going to have a negative impact on that as raw material becomes a bigger percentage of sales.

I understand. Thank you. Lastly, over at Thornborough, one of the things that was a departure from the norm was that Pratt & Whitney said they’re going to begin servicing other manufacturers’ jet engines. Do you think that’s going to have anything positive for Ladish?

We’re certainly aware that Pratt has started up a operating unit that’s going to sell other manufacturers’ spare parts. We certainly have had discussion with Pratt regarding where that goes. We've always considered ourselves a good Pratt supplier, but we’ve also, obviously, have been good suppliers to all our customers, so we will continue to work with them and the other engine manufacturers that are trying to—we will try to avoid getting sideways with anybody in the process. But we’re certainly, we respect people’s intellectual property, but if somebody’s going to need a product, and we can make the product, obviously, we’re going to be interested in making product for them.

Could you think there would be any margin differences on product like that as compared to traditional OEM-type business?

Probably too soon to say at this point in time. At this point time we’re trying to figure out who wants what and how—it’s a new issue. Obviously, the nature of how we run our business is involved. Forging dies may be the property of Ladish. They’re designated, held exclusively, for the use of whatever customer they were made for, as an example, so if somebody wants us to make a similar part, they’re going to have to come up with a design for a similar die for us to use. So we’re still working through those kind of issues, Steve, so I—where things are going to end up profitability-wise on our end, it’s a little too soon to tell.

Okay. Thanks. Just lastly, are you hearing that anybody else might go with the back market, as well?

No, I haven’t exactly heard anybody else saying that they were going to head down that road at this point.

Okay. Thanks very much.

Sure.

Thank you. Our next question goes to Seth Hiekin from Hanover Strategic Management. Go ahead.

Good morning. In your press release, you mentioned seeking opportunities to capitalize on the upturn, both internally and externally. I was curious if you could elaborate on what you see as the internal and external opportunities potentially out there, and what your criteria are for taking advantage of those, both strategically and financially?

Sure. We are always looking for strategic acquisitions that meld well with the company, ZKM and Valley being our two most recent. And I would guess I would tell you, by and large, that you’ll continue to expect to see that out of us in the coming quarters. We are at relative, we’re relatively selective as far as what we buy. It needs to fit, we have a number of other criteria, and we generally expect acquisitions to be accretive when we buy them and to be able to pay, effectively pay for themselves, which I can tell you, for instance, Valley almost already has in the first two quarters that we’ve owned them. What we really look for on the acquisition side is something that’s complementary to our three main areas of business, which are obviously forging, investment casting, and high-tech, value-added with on the finished side. So outside of here, we will be continuing to look to add to business. We are not somebody who’s grown our business by trying to steal market share. Our perspective in this industry is you steal market share by buying market share, and that’s never been Ladish’s approach.

Internally, we’re going to continue to try to improve the businesses, I think we’ve done, sequentially, year over year. We’re very driven at the lean manufacturing processes in every one of our operations, which is providing some nice return for us. Our employees are all involved in it, and we’re continuing to push through on that basis and get productivity up on that. We also perpetually work with our customers on joint cost reduction efforts, finding ways to take costs out of the production process and then, obviously, which we then share with our customers. But obviously it helps our bottom line by doing so, so we’re going to continue to drive this business. We’ve been pretty relentlessly focused on cost here, forever. We are when we’re in a down cycle. We don’t give that up when we’re in an up cycle. So that’s what we’ll be doing internally, and again, externally, you’re going to continue to see us pursuing smaller built-on acquisitions that just make sense and give us another edge in the industry.

Thanks, and can I follow up on the comments you made about the possibility of having had an extra possibly $5 million of sales in this quarter except for some system implementations at a couple of customers? Do you see any extended effects from those system implementations? Where their requirements might actually permanently decrease—?

No, I don’t think so, and I don’t think it’s really an issue of their requirements decreasing. It’s just, in all honesty, we’ve been through this in years gone by, and it seems to happen. Some of these new operating systems are so complex that the installation of them tends to throw some real monkey wrenches into the supply chain, and it’s not taking a shot at them. We’ve been through it ourselves. When we’ve implemented a new operating system, trying to work out what you have in inventory, what your demands are, and what your needs are, as everyone continues, obviously, to try to operate on a just-in-time basis, tends to occasionally throw some excess noise into the procurement cycle that you really don’t need. But I don’t think it’s any kind of a long-term threat situation.

Thank you.

Thank you. Our next question goes to Mary Anne Sudol from Caris and Company. Go ahead.

Good morning, Wayne. I wanted to ask if you could put some color on the sales mix in the quarter and in the quarters coming up. You alluded to the NASA business kind of fading away and tailing off, but can you take us somewhere the feeling of the ebb and flow that’s going on here?

Sure. The, that’s clearly as we look at the third quarter, that’s the biggest year-over-year change you’re going to see from ’05 to ’06, is just the absence of that missile and rocket business in the third quarter. Other than that, probably the other thing where you’re going to see and we’re--on a corporate basis, the industrial side of our business is actually growing, and it’s growing as a result of the ZKM acquisition, along with, in all fairness, our Caterpillar business is incredibly robust today, with Cat’s demands, particularly on large earth-moving equipment for their mining support. So the industrial side of our business, actually as a percentage of total sales, is growing, but the remaining aerospace and engine side of the business, obviously, both are still very strong, and it’s just partially why our business is growing at the rate that it is, at 30+%, year over year. So nothing’s really tailing off with the exception of missile and rocket. Everything else is pretty much holding its own, so if I had to hazard a guess, you’re going to see at the end of the year, you’re going to see jet engines stay pretty close to where it typically is for us, somewhere in the high 70, low 70 percentile, you’re going to see probably general aerospace is going to be down a little because of the absence of missile and rocket that flows through there, and coming up a little will be the industrial side of the business, which will be probably taking a couple percentage points of business, filling in for the absence of missile and rocket.

Thank you. And as a follow-up, could you expand a little bit and give us a sense of how your energy costs—your big one is natural gas, and maybe give us some parameters on how much of this you’re buying, to what extent you can hedge it, or do you just have a market base contract with your suppliers?

We don’t really hedge. We buy forward our natural gas demands, so I get that out there for the SEC if they’re listening and anybody else why we don’t have a lot of description about our hedging liability, because we don’t hedge. But we do buy forward 70+% of our energy demands. And while natural gas has continued to come down significantly, and where it’s really helped this last quarter or so, for that other 30% of our business our demand for natural gas that we don’t buy for, we fill in off of the spot market, and with gas being as relatively cheap as it’s been in the last few months, that certainly has helped our gas exposure. Looking out, it’s staying relatively constant, the forward contracts out into the winter of ’07 are certainly higher than, obviously, where they’re at right now, but we think there’s at least somewhat of a tendency that natural gas has been tending down, and I don’t begin to suggest that I ever understand all of the energy markets and why things are, particularly with where oil bounces around, but natural gas seems to have taken on somewhat a life of its own, and we’re pleased with where it’s trended at the moment. So it certainly has helped, and hopefully if it stays at a reasonable level, it will continue to help when we fill in what we have to on the spot market.

Terrific. Thank you.

Thank you. [Operator Instructions]. At this time, Mr. Larson, there seems to be no further questions.

Okay, great. Well, thanks, everybody, for dialing in this morning. If anybody has any follow-up or has anything, obviously, don’t hesitate to give me a call. We’ll continue to push forward, and we’ll be talking to you in, probably in October. So enjoy the rest of your summer, and thanks for calling in.

This concludes the Ladish Company, Incorporated, second quarter 2006 conference call. Thank you, everyone, for joining. You may now disconnect.