ATI Inc (ATI) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Ladish Company, Inc. third-quarter 2007 conference call. Just as a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mr. Wayne Larsen, Vice President of Law and Finance. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to the third-quarter Ladish conference call. I appreciate everybody dialing in this morning.

Before I jump in, I will give, as always, my preface that any of my forward-looking statements that may be made today are going to be subject to provisions of the Securities Litigation Reform Act of '95 and will reflect management's opinion and estimates and you should be accordingly advised.

Jumping into the quarter, it was -- the third quarter was a quarter of mixed results, I guess, at best. There were some things we were obviously pleased with, some things we were less than pleased with, obviously, from where the numbers came in. But let's talk about where the quarter ended up and I'll try to give you some color as we go through as to what actually happened during the course of the quarter.

Obviously, it was a good quarter as far as sales with $105 million, up 15% over last year. All the segments of our business were relatively strong, as far as jet engine, general aerospace and industrial all continue to hold in and demand remains strong out of all of them. The cost of goods crept up in the third quarter to about 85% from 83% last year and correspondingly lowered our gross profit as a percentage of sales to 14.4% from 16.8 a year ago. The significant driver on the jump up of cost of goods, I was estimating going into the quarter that we were going to be flat overall as far as where we were with raw material as a percentage of sales to somewhat I guess to my surprise and everybody else here, raw material continued to climb in the third quarter of '07 and we reached -- ended the quarter with raw material up another couple of percentage points from where it was over '06, so there's 2 percentage points of difference right there as far as what happened. It really would have balanced out, so we would have been pretty close to where we were last year with gross profit numbers. Still not exactly where we wanted to be, but that was a significant factor of what happened in the quarter.

The other -- dropping on down, SG&A continues to be under control, running at about 3.9% for the quarter, which is within our targeted goal of trying to stay at 4% or less so we were pleased with where that came in. That brought operating income in at $11 million for the quarter, about 10.5%, so we narrowed the gap a little from where we wanted to be with the improvement of SG&A, but still not there.

Interest continues to be an improvement over last year with our interest expense down, two fold reasons. One is our debt has been -- continues to be lowered, which is a positive and we've had additional interest capitalized as a result of most of our debt these days is reflecting what we're spending on some of the major capital projects we've got going on across the Company. So that allowed us to reduce the interest expense, which got us down into a pretax number for the quarter of $10.5 million or about a 10% run rate on pretax, which is better on overall dollars from last year, but not the improvement we wanted from a percentage of sales.

One of the other significant factors then that hit the difference in that [left] -- ultimately EPS looking flat was the tax rate where we ended up for the quarter. We ended up with a 37.9% tax rate for the quarter in comparison to last year in the third quarter. We only had about a 32.6% tax rate. That 5% difference in tax rate was significant and ultimately resulted in the net income and the EPS for the quarter looking relatively flat.

Some of the other issues that happened during the course of the quarter, the things we were challenged with and some of the issues that did have an impact on the quarter was our product mix really wasn't where we wanted it to be in the quarter. We ended up with virtually no missile and rocket business in the third quarter of '07 as opposed to what we had in the third quarter of '06 and what we experienced in the second quarter of '07. A lot of the missile and rocket business that we had looking at that typically would have gotten out in the third quarter this year we actually were able to get out earlier and that obviously helped propel the second quarter. The net effect, obviously, was a drag in the third quarter.

Looking forward at our missile and rocket business, it's going to be relatively nonexistent, I don't think for the fourth quarter. We do have some -- there is some work that's in process. I'm not holding my breath that it's going to get out this quarter. Going forward into 2008, it is going to start picking up from what we see from the demands we're seeing both from NASA and from our customers at places like Alliant Tech, and with the Japanese for their H-2A program, so we really see '08 being an improvement on that sector of our business and going stronger into '09 and beyond, so that is definitely a positive looking forward. But it was certainly a drag on product mix this quarter.

The other issue on the product mix where we weren't really pleased with where this quarter was, obviously, we were pleased with the pickup in the sales but the sales wasn't necessarily where we really prefer to have it. Our product coming off our isothermal presses weren't as strong as we would have liked for it to have been in the third quarter. It's really a reflection of we're still not getting the material we need from one of our suppliers, and that's being certainly a negative on our output and clearly it hurts our mix. We are obviously filling in with other work. We are certainly busy enough that we are able to find other work for our people to do. But unfortunately it doesn't have quite the margins that comes out of the isothermal presses, and we'd certainly prefer to have them running more flat out than certainly happened in the third quarter.

The supply of that material has not improved. We keep waiting for it to happen. Certainly our customers are well aware of the situation and are paying attention to it. And it is a situation we are confident that will ultimately be resolved. Whether -- I'm not holding my breath that it gets resolved in the fourth quarter, but I am relatively confident that for '08 and beyond, that it's getting enough attention at the right levels of our customer base that the situation will be resolved and we will start getting the product that we need from one source or another. So again, that's an opportunity going forward. Part of the disappointment for the quarter as far as our earnings side, but it's certainly something that will be addressed going forward and will be an opportunity out there.

One of the other issues as far as difference in year over date, and I should point out that looking over to the balance sheet side, depreciation through the first nine months of '07 is up to about $8.4 million, running about $800,000 ahead of where it was last year at this point in time. Obviously, the pickup in depreciation is just a reflection of all the capital projects we've got going on and have had going on for the past year or two. And, obviously, the net effect is depreciation does start moving up and obviously it is a little bit of a drag on earnings year over year in comparison.

A couple of the other things that did happen during the course of the period in comparison to prior periods, one of the significant issues was with the raw material market being as volatile as it is and with some of the spot pricing for raw material drifting down in the third quarter, certainly had a significant negative impact on the market for byproducts for those raw materials. That's obviously a key issue for us. It's an issue we use to factor in as a credit to our cost of goods. It didn't happen to us where it has in the past and we had about a little over $1.5 million, not quite a $2 million swing quarter-to-quarter difference in the third quarter of '07 versus the third quarter of '06. So obviously a material impact from not getting that credit out of the byproducts side.

Another lumpy issue of our business, as always, is the issue of our die and tooling revenue, which again is a credit to our cost.

It was a relatively quiet quarter for us, not a reflection -- not a quiet quarter as far as what we are doing. We are at an all-time record with, at this point in time with new dies, both in the forging side of the business and in the casting side of the business, new tooling there.

But the nature of the way that operates is we incur all the costs until that tooling is actually ready to produce the first article for first article of inspection. At that point in time, we are actually compensated by our customers for that and it effectively it then hits as a direct -- it effectively goes directly to the bottom line when we get that money because we've already incurred all the costs for the material and the labor. So it was a timing issue in the third quarter.

'08 I really expect to see a significant year on that end of our business. There was about a $700,000 swing in the third quarter this year between this year and last year in the third quarter, as far as the miss, so again, another significant contributor year over year as far as what happened.

Now that we've talked about the things that we weren't happy about, there's obviously the issues where we were pleased with the quarter. Again, once again with our somewhat lumpy business, we were really pleased with the order activity in the third quarter this year. It came in very strong, $136 million of new orders. Driven our backlog up to $575 million, the highest it's ever been at Ladish. Again, it gives us a lot of enthusiasm for the future and the opportunities we're going to have in '08 and beyond as there's clearly the significant demand out there and we are driving forward.

Couple other areas of things going on, as far as what's happening, CapEx through the first nine months we're up to about 25, almost $26 million, really being driven by expenditures on the new isothermal press, which is certainly right on schedule and maybe even knock on wood, there's potential that it could be even beginning to get a little ahead of schedule. We're pushing as hard as we can with both what we are doing internally and with our two prime subcontractors on that project. But it's going well. We are excited about that for next year.

The developments and the improvements out of our casting business in Oregon are ahead of schedule and are moving along, as is the adding to the value-added opportunities with the machining and inspection [shelf] in Poland. So all of our capital programs are if not on schedule are ahead of schedule. Obviously it's driving our expense and it's, as I indicated, driving our depreciation dollars up a little. But these are definitely projects that are going to easily pay for themselves as we go forward into the end of '08 and through '09 and into the future. So we are certainly excited about that.

Couple other items. I guess I talked about the backlog and the new orders and CapEx. Again, positive. The business is operating relatively strongly. Operating cash flow through the first three quarters is about $26 million, significant improvement over last year when we were running in the red as we are continuing to build working capital. This year we've done a much better job and obviously it's allowed us to fund the cap projects and what we're doing and to reduce our overall indebtedness, is continuing to come down. So again, the balance sheet I think is being managed nicely and we're moving forward.

Looking out into the fourth quarter, we've got a lot of opportunities. We think certainly sales improvement year over year heading into the fourth quarter from where we were last year. And obviously we are expecting earnings improvement also. The issue as far as where we are out there with this, still out there on the byproduct, it's showing some modest signs of improvement, but what it's going to be in the fourth quarter still remains to be seen. The raw material market is still relatively volatile so we are wrestling with that. And obviously we're still wrestling with where this is going to phase out as far as where raw material is going to come in as a cost -- as a percentage of sales again. We are relatively confident it's not going to increase over where we were in the third quarter to 48%, but if we're going to see any backoff from that at this point in time from the fourth quarter, it's still a little early to see since we are wrestling through the first month right now. But a lot of sales opportunities for the fourth quarter and beyond. We are certainly doing our best to service our customers. Unfortunately, sometimes that entails -- we have been hiring; it also entails some overtime and certainly training of new people, which doesn't necessarily help initially but is certainly is what we need to do for the future to go forward to drive this business with growth for '08 and '09.

Right now is we are working on our business plan for '08. It certainly is looking positive. Nice growth opportunities over '07. And really to get ourselves positioned as the new capacity comes on with most of our projects for really late '08 and for the start of '09. So we remain pretty optimistic and upbeat. A lot of opportunities out there. I know I heard during the course of the last couple weeks, I'd gotten a call from a few of you wanting to know if there was any impact upon us from Boeing's push-out of the 787. We've really seen none whatsoever. Our engine suppliers, Rolls and GG have been pushing right along and Boeing hasn't pushed out anything on the casting side either. So overall basis, we've had absolutely no impact on that. We are obviously pleased to see the 380 fly this week and to see that program heading back into production. That's another upbeat pickup for us with four big engines on there and a lot of big forgings in them. So a lot of positive things happening and again, we're pretty excited about where things are going to head for Ladish going forward.

I guess with that, I will take a break and answer any questions if I can.

Tyler Hojo, Sidoti & Co.

I guess just to start, you mentioned in your prepared remarks that the availability of raw material was an issue. I imagine that's specialty metals. Just wondering if you could maybe give us a little bit more clarification. Has it gotten a bit worse since the second quarter? Or how would you characterize, I guess on a sequential basis, what's happened there?

It really hasn't gotten worse, Tyler, but it's not getting any better either and we're getting I guess more and more frustrated on our end. We expect in this kind of a market that as we try to serve our customers, we expect our suppliers to serve us. And that is the area we're having problems with. We are certainly not having problems getting titanium. We're not having problems getting our other nickel products. But getting powdered metal has been a problem and continues to be a problem.

Right. And I believe last quarter's conference call you said that the customers were very aware of this and were essentially working on getting you a new supplier. Has anything moved there or any update?

Well, we think ultimately -- clearly your first point is the customers are well aware of the problem and they're not particularly happy about it either. We really look to them to resolve this issue. We can't qualify a new supplier. Qualification of a new supplier is a timely, expensive process. What they ultimately choose to do there will be their decision because -- that's their call. But I guess we would prefer to see them help our current supplier get back on track and be able to provide us product on a timely basis as they used to be able to do.

Okay. And just finally, just in terms of the pass-through in raw material, has something changed there? I mean you are still able to pass everything through to the end customer? Is that correct?

Yes, we're still able to pass it all through. It's just that with the higher -- as the material -- we're in extreme -- it's kind of a strange environment right now. The spot market for raw materials has come down in the past three or four months, but because of the long-term tie up of contracts and supplies both on our part and on our customers' part, you've got product, material product set at an unusually high level, that obviously we could go out and actually buy material cheaper in the market today than effectively what we're having to pay for it and what we're having to flow it through. And the net effect of it is it's kept escalating raw material as a percentage of our sales. That's the one downside of it and the other obviously downside of it is when the spot market comes down as I alluded to, the byproduct and scrap market goes through the floor and we don't get the benefit of that for our turnings and our short ends. And so it's been a -- and otherwise a bad storm with those two things combining at this point in time.

We think that's going to straighten out. Material prices seem to be strengthening and when they strengthen the raw materials supply, the byproduct side will strengthen correspondingly. So we think that will turn itself around, but the third quarter kind of caught us in between all of it.

Okay, thanks. I'll let somebody else ask.

Steve Levenson, Stifel Nicolaus.

Thanks. Good morning, Wayne. I think I have to stick on the same subject here. Sorry to bomb you with questions about this. Are you getting any push-back from your customers about timing of deliveries? Or are you still the only source for those parts and they're just going to have to wait for them?

No, our customers -- they are not happy, but they would like obviously -- they would like more parts and they would like them faster and we would like to get them more parts and faster. They're not happy with the deliveries, but they understand that we are not the bottleneck. The bottleneck is getting the material to us. We're turning the material as fast as ever and are doing everything we can to get them product as fast as we can. But we can't forge what we don't have.

Right. Now, do you have -- not that I'm suggesting legal action or anything, but do you have any legal recourse against the supplier? Because if it is who I think it is, they had a pretty good quarter.

Yes. You know, it's not something that we would prefer to do. I mean it's an issue; they're not making deliveries. And I guess it's not a terribly big issue to them because it's a real small piece of their business. Whereas it's important to us, it's important to the supply chain, but I don't think they're losing any sleep over what one small plant is doing, but for us it's having a significant impact.

Okay, thanks. And last item over at ZKM, can you give us an update on what's going on there on the aerospace side? And are they also required to get materials from the same source or do they have a European source?

Yes, that's not a problem for them. Material is not a problem for them. They are continuing to work on their initial aerospace orders, which are more proving out orders that they've gotten primarily on the airframe side from the European suppliers and they are going forward. We're in the process of putting -- we're working right now on getting our new processing (technical difficulty) up and going and that will be headed into action next year, which, again, should help them book more aerospace work on top of it.

Terrific. Thanks very much.

Rob Damron, 21st Equity Research.

Could you give us a little color on what your capacity utilization was in the quarter from a corporate perspective? And then, beyond that, talk about the capital projects that you have in place and how much additional capacity that will provide you as we look into '08.

Sure. We were still somewhere in the probably, on a corporate basis, Rob, probably somewhere in the low 80s as far as capacity utilization. There was, clearly, there was some additional capacity we would have liked to utilize. Our current isothermal presses, we would liked to have ratcheted their capacity out a little higher, which we didn't get an opportunity because we didn't have the material to run across them. But overall basis, we're still I think running somewhere in the low 80s.

As far as what the new projects are going to add, the new isothermal press, when it's fully loaded, ought to be capable of putting out 50 to $60 million a year worth of product. The capacity expansions out at Pacific Cast ought to be able to add 15 to $20 million of capacity of additional casting capacity out there. And the ZKM project, it's hard to fully quantify the value added capabilities of what it's going to do, but just the value-added machining portion of it is probably $5+ million a year. What you really hope is that $5+ million a year helps you book an additional -- an equivalent additional amount of work because now you've got the machining capability that you can add so you can get the machining and pick up hopefully another 5 to $10 million of forging work. So between the three of them, obviously, there's significant added capacity coming on with those projects.

And you mentioned CapEx, $26 million for the first nine months. What do you expect for the year and then also for next year?

For the year it's going to come in in the low 30s and for next year, I think CapEx will be down a little. I mean we're going to have the last of the press to pay for, but we're also going to be spending money -- money out at -- more of the project out at Pacific Cast will be going on, so it's probably still going to be close to $30 million next year.

That's all I have. Thanks.

J.B. Groh, D.A. Davidson.

I just want to put a little finer point on this byproduct sales. When I look at spot nickel prices for the third quarter, it looks like they were relatively flat, but for the second quarter, they came down pretty significantly. So is this a case of like buying forward and having to sell spot and so you have some older costs and then when you sold the byproducts, you're just getting a lot lower price; that's sort of the impact we should look at?

Yes. I mean --

Is it about a (multiple speakers)

Our guys are fairly, obviously, aggressively with their how they handle their byproduct and they, I think, do a pretty good job of it. And when they anticipate things are moving one direction or another, they will get the byproduct out of here, obviously, as fast as they can.

They kept looking in the third quarter for an opportunity and for the market to strengthen or firm up and it just never did in the third quarter. And ultimately, at the end of the day, by the end of September, we ended up selling what we had for less than favorable pricing.

In the second quarter, there was still favorable pricing certainly in the first part of the second quarter that we were able to take advantage of. And it's just it faded into the third and there was never really an opportunity in the third to recover.

But in terms of your product costs, they are maybe 90 days prior, right? Because you're buying forward?

Well, they are not really tied together. The product cost is where the product -- the raw material cost is where our raw material is locked in at. And that gets locked in well in advance. That's why I alluded to earlier where we are locked in now, we're locked in at a raw material price that's certainly above the market price for both nickel and titanium right now. That was both -- it was in large part driven by our customers from Boeing on down locked up raw material pricing and we are all living with it. We are -- it flows through and the engine guys did the same thing. GE, Rolls and UTC all did the same thing. And the guys down at our level, at the forging and casting side, we are somewhat pawns in their game.

Okay. And then I think in the past couple of quarters, you mentioned that backlog was probably going to be flat for the year and obviously you put up a pretty good order number this quarter. What changed? If you get nothing more, you're going to be up $74 million from the end of last year. Is there anything that changed significantly in the last 90 days or so on the order front?

It's been really across the board. I guess it's partially a reflection of I think we're getting certainly our share of the orders that are out there and maybe more than our share. Customers seem more than happy to place work and we are the proud recipient of what their -- of their demands and the programs we are on. I think our guys have done a good job of getting on the right programs and being in the right place at the right time. So it's always a little lumpy around here as far as when orders actually arrive. And I was phenomenally surprised. I mean again, it's -- you're just never quite for sure when the order demand is going to come.

And I look back -- I went back and looked at the quarter. The month of July was pretty much a normal month. The month of September was a pretty normal month. Order activity in August was off the charts. Why? I don't have a good answer for you and my guys don't either. It's a myriad of a bunch of different stories. And the perception of lead-times and people wanting to get in queue.

And would you say that the RFQ activity is higher now than it was in the first six months of the year?

It's probably actually -- the converse of that, J.B. -- the quoting activity was really high at the first -- was high at the first part, and I guess the winds started coming in the third quarter.

So you're going from orders -- from quotes to orders?

So we were quoting a lot in the first half and the orders were coming in and started coming in in the third quarter. So people are still wanting to get in line and are still effectively booking capacity.

And then the last thing -- obviously your SG&A is down over last year and it's been pretty consistent this year. What are the variables there that have caused it to come down and is the current level a good sustainable run rate to use?

Yes, I think the current level is a sustainable run rate. That's certainly where we want to be at, is to try to stay at that 4% of sales level or obviously try to improve it.

It's a combination of a lot of things. We changed our international sales approach from last year. Certainly helped. And beyond that, it's just been a lot of small issues that address the SG&A side.

We are relatively relentless on costs. We actually changed our auditors over the course of the year. That was a cost savings for us. We are always trying to fare it out where we can save a nickel. On the SG&A side, that's where we save it. It's $1 here and $1 there, but it does add up.

Okay. Thanks, Wayne.

Vincent Damasco, The Colony Group.

I guess two clean up questions. One on the rocket and missile side of the business. What was the profit loss, sales or profit loss year over year or sequentially if you can give us some color on that.

I'm sorry you faded out there.

Sure. Just looking for the rocket missile profit or sales loss that you noted in the call.

The year-over-year differentiation?

Yes.

In the third quarter of this year, we had virtually zero and the third quarter of last year we probably had a million to 1.5 million of shipments in the third quarter of last year.

Okay. And jumping with regards to kind of the supplier issue with Special Metals, what's the split between Special and maybe one other provider that you may source powder from, either ATI or someone else?

Well, unfortunately, there isn't anybody else to source powder from. Special isn't that big of a supplier to us otherwise. We're getting the vast majority of our other nickel products, the nickel rock products, we're giving from ATI or from Carpenter. We've shifted our business primarily to them, obviously, away from Special given Special's inability to deliver. But on the powder side, at this point in time anyway, there isn't another source for the powder, and that's the problem.

So how long will it take UTC or Rolls or GE to qualify a new customer for you, (multiple speakers) buyer?

It could easily take a year. If they have to find a source and there's clearly other people out there who can make this product. They just have to put the time and effort into it to get them qualified and go forward and that or put significant pressure on the incumbent supplier to get their act cleaned up and start making quality product. I mean nobody in the supply chain is particularly happy with that situation right now. I assure you our customers aren't.

Considering PCP supplies GE, you would think that GE would weigh on them to kind of serve you as well so that they don't -- impair the whole supply chain.

Right. Well that's what we've tried to push this back to. Obviously, we're not going to have -- we are not having any particular impact on our supplier.

So if it's going to be a year longer, are we expecting to see this kind of lumpiness in margins in kind of the visibility in the business going forward?

I'd like to tell you no, but at this point in time, in the short term, I don't have a better answer for you until we can start getting a better supply there and a couple of these other things start working their way out. Looking out into '08, I think there's a lot of other -- there's some other opportunities that we can hopefully make up some difference with. But it's going to be a challenge going forward until the OEMs effectively straighten out the situation.

So if I understand this correctly, there's currently -- there's no other powder or supply contract that you have in the mix, but can ATI or Carpenter or Titanium Materials provide any of that powder to you?

They can't at this point in time. Some of -- there's other -- some of the other nickel providers out there I think arguably could ultimately -- could become powder suppliers. And it will remain to be seen what the OEMs ultimately do as far as qualifying another supplier because that's the way it works -- we can't qualify a supplier. They have to qualify the supplier because everything is on a fixed process sheet with the engine manufacturers. They effectively tell us who is qualified to make the material. So it's truly up to them. We will clearly -- certainly will help them technically to do so, but they have to take the lead initiative.

Thanks for the color.

[John Zable], [Brentridge] Capital.

Thanks for taking the question. Just one more thing on the byproduct sales --

I'm sorry, you are totally fading out.

Just one more question on the byproduct sales. Could you give us an idea of what that credit is versus the cost of goods sold? Is it 5%, 10%, just sort of ballpark?

Well, last year, as I indicated we were over $1.5 million short the third quarter this year from where we were last year.

Right, that's the swing but I guess I was looking for the base.

That's not a number that we've particularly ever gotten into as far as breaking out our cost -- our total cost down to that level. And I'm, at this point in time, really not comfortable getting into that.

Not even a ballpark? Is it less than 50%?

It's way less than 50%.

Okay. And I guess as it related to an earlier question, if you look at your inventory turns, isn't some of this a bit of a sort of a first in, first-out accounting situation, where you've got that higher cost inventory going against a lower scrap price? And if you your scrap is turning at the same rate as the overall inventory, this should sort of correct itself in about a quarter and change. Would that be a good way of looking at it or am I missing something there?

Well, they're not quite tied together. The byproduct is really separate and distinct from the purchasing. The byproduct doesn't get generated at the same level or at the same time frame, so our byproduct really is a reflection of what comes off of our machine processes and here at the main forging operation and at our machining operation over in western Wisconsin and out in Connecticut. And it's also a reflection of the forging -- the byproduct that comes off of the forging site, short ends and things of that nature. So they're not really tied together from a timing perspective.

I understand your question, but they really just -- they don't tie together. The only tie together is the fact that when we do sell byproduct, it comes back in effectively as a credit to cost of goods and against the cost of the material. But the timing wise -- timing can be succinctly different as opposed to our inventory turns.

Okay. So what you're saying then is that the underlying sort of accounting cost on the byproduct could be very different than the inventory that's flowing through on --

Yes. The byproduct is really a factor of -- it's really driven by what the spot market is doing and our guys trying to time when they can get the maximum return in the spot market for it versus weighing out obviously -- we're not going to hold it forever versus the cash flow from selling the product. So it's a separate and distinct part of the process and not tied with when we are out buying raw material.

Okay. And then is it fair to say that the unit -- units of byproduct I guess would be the best way to say it -- is that fairly consistent quarter to quarter and year over year or does that vary as well?

That pounds don't -- I mean the pounds are only going to vary on the basis of our a function of our volume of product. And as our volume has been creeping up, obviously our volume of byproduct has crept up. But there's not a huge swing there period over period, so it's relatively constant.

Okay and then --

What we're generating. The variation is the spot market for the pricing.

Okay, so when you talk about that 1.5 to 2 million, it's almost entirely on the spot pricing?

Yes. It was more on the spot pricing. It wasn't on our volume was down or anything. We were still generating obviously a fair amount of byproduct through our machining and our forging process. It's just the market was down significantly.

Right. And then would the metals be roughly the same as your mix between titanium and nickel and --?

Pretty similar. There's not a huge differentiation as far as what generates as far as machining turnings and short ends of forgings. Titanium might be a little higher just because of the volume and pounds but nickel tends to be higher in price. So you end up with more pounds in titanium, but in less pounds than nickel, but total dollars, they still end up pretty similar just like sales of product, so it's pretty close.

Okay, so I'm sorry, this is the last question on this, but was the issue more that the nickel pricing than the titanium pricing?

They were both down.

Both down, okay. Thanks very much.

Scott Blumenthal, Emerald Advisers.

Wayne, from what we hear with the 5500 so odd aircraft on order from Boeing and Airbus and the fact that you are having such a problem with your supplier, the cycle appears to be pretty clear out there, 20, mid 2011, 2012, and if it only takes one year to qualify a new supplier, what do you think it's going to take for some of your customers to kind of throw their hands up and get the process started if we're right now in 2007, we could have somebody qualify it by early 2009? Is there anything preventing them from doing that? Is the economics of powdered nickel metal just such that maybe others don't want to get in that business? Can you give us any clarification on that?

There isn't really anything specifically preventing them from doing it. And I guess from where I'm at right now, I don't really -- I'm not really in a position that I can talk about that a whole lot more.

Okay. Would it be something that you might make an announcement if that started or if that's in process or I guess eventually when something like that happens?

It wouldn't be for us to make the announcement. Either the OEM will make the announcement or the new metal provider would make an announcement.

Okay.

So we will be the happy recipient of their product, but they will -- they will be the ones to make the announcement, not us.

Okay. Then along that same vein, you mentioned you gave us -- and I appreciate the color, the amount of volume that you'd be able to get through the new ISO once you have that up. If you're having so much trouble with getting powdered nickel, are you going to be able to use it? You mentioned this quarter we had -- you would have liked to put more material through the isothermal. When the new one comes on, is it going to be useful? Are you going to be able to fill it?

I think ultimately we will. Keep in mind we do forge other material in that isothermal press other than powder. There's other nickel alloys and some titanium alloys that we forge isothermally also. So we think -- we think we will be able to fill it. We think the current raw material powder issue is a temporary issue. It's going to have a resolution. It's going to have a resolution or Rolls-Royce and General Electric aren't going to build engines and Boeing is not going to -- and Airbus aren't going to fly planes. So it's a lot bigger than us. It will get resolved.

Can you give us any idea what portion of the overall sales volume is kind of dependent on powdered nickel? Kind of what you're held hostage for at this point?

It's hard to put a precise number on that. In an otherwise perfect world, it's less -- it's probably less -- it's less than 25%. But it's more than 10. I mean it's somewhere in that, probably in that mid-teens -- that teens range, the impact it's having on our business. And obviously it is showing up because it does hurt our product mix for the time being.

Yes. Yes. And how about the percentage that's coming from byproduct sales?

Byproduct sales doesn't hit our sales. Byproduct just flows back through as a credit to cost of goods. So we don't look at byproduct sales as a sale. It's something that we do to move the product out of here and we take advantage of it and then use it as an income to offset our costs.

Right.

So it's not -- so you guys -- so outside, no one is ever going to see the level as far as where it's at because it just flows back in as a credit.

That makes sense. Thank you. And I noticed inventory year-over-year, you've got about 11.5, 12% increase. Can you talk about, do you have the same amounts or more material on hand or do you have less material that's more costly right now? (multiple speakers)

It's really -- our inventory as far as pounds, it's relatively flat. I think we've done a pretty decent job. Obviously, total dollars, it has crept up because of the value of the raw material. So most of what you're seeing in the increase in inventory values is really just higher pricing. But the inventory itself as far as poundage, I think our guys have done a pretty good job of keeping it relatively flat and still being able to service the customer.

Very good. Thank you. And you mentioned tool die -- die and tooling projects that you have in process. Can you give us some color as to how much of that is going on now compared to what you had maybe last quarter and then maybe the same quarter last year?

Sure. In comparison, I've got the numbers for you. Year over year, from the third quarter, that activity as far as on the revenue side in the third quarter of '07, was -- revenue on that side of the business was less than $100,000. Last year in the third quarter it was about three-quarters of $1 million. And again, that doesn't hit the sales line. It comes back in as another credit -- cost of goods. The converse of that is we are busier right now than I think we've been in the foreseeable past, as far as the activity we've got going on with new dies in work and new tooling in work. But we're not going to see the revenue from that until probably starting in the first quarter of next year. We are incurring -- certainly incurring the cost right now, but we've got a phenomenal number of new dies, forging dies that are at work right now and some new programs here in Wisconsin. And our casting business has got a record number of new tooling for new parts for them for '08. So both sides of the business are incredibly busy on that front, but we're not going to see the revenue until next year. (multiple speakers) costs.

That's very good color. Thank you. And I guess my last one is can you give us an idea of some of the things that you are able to do or that you might be doing to prepare for the record energy costs that we are supposed to be seeing going into the wintertime?

Fortunately, energy has been a positive for us this year as far as, we are running well below our forecast. Our guys are fairly aggressive. Our biggest driver on energy is natural gas and fortunately natural gas hasn't had the volatility that obviously oil and heating oil has. We don't use any heating oil. So our energy costs have been relatively -- we've been able to keep them in check. And our guys do enough buying forward for supplies that we're pretty well covered through the winter.

Okay, great.

And we've also, fortunately, we've had an extremely warm fall so far this year in Wisconsin. So a lot of years past, if it was cold in September and October, we were already heating the plant and heating the offices. And fortunately to date, we haven't turned the boilers on. So we are just one more of those little cost savings, but we've been able to avoid that to date because it's been -- we've had such a warm fall.

Okay, very good. Thank you. I appreciate all the color and for your answers.

Eric Hugel, Stephens.

Just -- you talked about the step-up in terms of metal pricing, in terms of I guess impact in terms of gross profit margins being around 200 basis points. Now, that being said, that should basically be a function -- you should have, as a result of that, your revenue should have stepped up and there would be no associated cost of goods sold with that, correct? Is that how to think about it? You should have higher revenues but no margin on that.

Correct. Correct. There was no margin. It was just pure pass-through of raw material.

Okay. With regard to scrap pricing you said, now, you said that that was about 100 -- about $1.5 to $2 million, so roughly another 150 to 200 basis points of impact?

Yes -- in that ballpark.

Okay. With regard to I guess maybe moving on to a different topic, with regards to ZKM, you talked about metal impact, but can you talk about what's going on there in terms of winning new business opportunities?

Yes, they continue to work with some of the suppliers. They have won some orders for some braking systems on torque tubes. They continue to work with the guys at Honeywell in some of the structural airframe and landing gear guys, and they are continuing to gain added exposure and additional business. Those orders are still on a proving out basis and there's not hard -- there's not big volumes there yet, Eric. But for us it's key to get them qualified with as many of the European suppliers as we can, so that as those orders come around and there's new LTAs come up in '08 and '09, we will be in a position to be continuing to win big volume and begin to get that business situated to where we want it to be.

Okay. With regards to the powdered nickel issue, I mean yes, the Rolls and GE, I guess they say they are not happy with the situation and all that stuff. But I mean the way I look at the dynamics of the market in that you have TCC out there just added a new iso press. They don't seem to have any problems getting powdered nickel because they're getting it from a different facility inside of them. They probably have more than enough capacity internally to supply whatever GE and Rolls needs now. Are we going to see maybe a permanent market shift in terms of you guys are going to be using your iso press to build these sort of lower margin issues while PCC, who has no problem getting the powder, will build sort of the higher margin? Is that sort of something that can happen?

I don't think so. First of all, by the basis of what I heard somebody else's conference call earlier this week is they're totally out of capacity even on their new press. And from what we are being told by what some of the OEMs are trying to move work to us, they are not getting product from them either. So we -- I don't think you're going to see that shift.

The other thing you have to keep in mind, particularly with Rolls-Royce, on Rolls's new powdered material, R1000, we're the only qualified source. Precision is not qualified. They can't make those parts. We do. So for Rolls and for powdered metal, it's Ladish. It's not Precision.

So it's, unfortunately, the starting material starts with Precision, but Precision can't make that material in Brighton, either. That material has got to come out of the facility in Kentucky. So one way or another, either the material is going to come out of that facility in Kentucky or it will come out of somebody else's facility, would be my forecast for where things go, Eric. But no, you're not going to see a shift of Ladish out of the high end of ISO thermal forging. It's a, I think a temporary setback of where we are at right now and a setback that some of us foresaw a year ago. But we're not going to lose our share and I think ultimately this will get resolved one way or another. As I said, they will either get the Princeton, Kentucky facility straightened out or somebody else will get qualified to make this material.

And most of this product is going on what A380 and 787?

Yes.

And so what --?

On the commercial side. That material is still being used on the military side too. So the military is ultimately going to have a stake in this too because a lot of the material going to GE is going onto the military side into the F110 and some of those engines. And there's people unhappy about the situation throughout the supply chain, I assure you.

Well in terms of sort of thinking about the supply chain, I know Rolls had said that they are restarting up production of A380 engines. Where -- I mean I guess the question is what kind of inventories they have and when do you get turned back on for this -- this is a nice noodle mover for you. When -- do you start to see that in the fourth quarter or is that more of a next year type of thing? And also sort of when do you start seem 787 products shift towards -- for production?

I think the answer to both of those questions is going to be more of an '08 number and an '08 timeframe, Eric. But yes, we're certainly seeing Rolls-Royce getting ramped back up for the 380. And the production numbers for the 87 are really going to be in '08 and beyond.

Is there a way to quantify maybe in terms of profit margin the impact of these mix issues that you are having? Is it 200 basis points? Is it more or less -- how should we be the thinking about that?

It's very hard to quantify. It's hard for us to deal with internally. Because it's virtually impossible to forecast and quantify the impact on it. Clearly, it's got an impact, probably somewhere in the ballpark that you are talking about, Eric, but it's a constant moving circus here as far as product mix and the impact it has on the business from a day-to-day, week-to-week period-to-period process. We try to get through here as much material obviously as possible and try to optimize what we can. But you've still got customers to satisfy and commitments to meet and you can't always make the product you'd absolutely prefer to.

Is the fact that you are seeing a step-up in the percentage of I guess step-up in metal as a percentage of cost of goods sold, is that a function of rising prices or is that mix of more titanium versus nickel or is it both?

It's both.

And you just don't -- you have pretty good visibility in terms of what you are going to be building. At least going out to next quarter or for next couple of quarters. But you don't -- you can't sort of see that changing any? That doesn't follow sort of spot prices with the nickel?

Well, we think that there's going to be probably a trend next year, I think. There's certainly the potential for next year for raw material to be trending down based on where the spot market has been, if it stays down. But nickel started moving back up already and the issue we're going to have is because of the way this pricing gets locked up on raw material for definitive periods of time, we may have this interim period in '07 when the material came down, but the price won't get reset again until we get into '08. And if price moves back up, then effectively nobody is going to get the benefit of that material having come down from the OEMs on down to us.

Right. But at the end of the day, though, I mean yes, it plays with your margins, but it doesn't really have any impact to EPS because that should be an offset to top line, right?

Yes. I mean that in and of itself doesn't have a big impact upon EPS. Obviously, the downside of the spot market and impact on the byproduct side had a much bigger impact on EPS.

Right, so the real EPS impact seems to the scrap, seems to be mix, and it seems to be this tooling and die stuff you're talking about?

Yes, those things all had an impact. And don't forget, as I indicated, depreciation is creeping up and --

Depreciation. And it doesn't seem like mix is going to -- I mean mix, I mean yes, is mix really all this powered nickel or is there other real mix issues also, I guess that are going to resolve -- I mean yes, I guess you talked about the rocket business. I guess I'm trying to sort of look at it going forward into Q4 and maybe into the beginning of '08 and sort of trying to figure out how this mix shifts either positively or negatively or does it stay flat?

I would say. it certainly has the potential to improve going forward as far as the mix. We're obviously trying to do what we can to selectively optimize what product we're running through here. And our guys are constantly working on that to try to make sure we get the best product through here. We're going to continue to wrestle with the powdered metal issue until there is an ultimate resolution beyond us with that.

We are going to get the benefit of -- and it probably isn't going to happen in the fourth quarter but it certainly will start in the first quarter moving forward next year -- with starting to pick up on the missile and rocket side of the business, will certainly help. That has, more than anything, that has the biggest impact on our -- a positive impact on our mix. Just because of the margins associated with that business versus the other.

So I guess on an overall basis, I'm relatively optimistic that the mix is going to continue to improve. And obviously our guys will do everything they can to try to improve that. We just got into a challenging quarter with a lot of product getting out of here that wasn't the absolute most profitable product that we ship out of the business, and that happens. This is a lumpy business and it's unfortunate -- we weren't pleased with it but we do have customer commitments and we met them. So going forward obviously we will be trying to optimize what we can do with that going forward.

So you would expect -- you said that next quarter in terms of earnings, would be better than third quarter. Are we talking materially or sort of about the margin?

It's still October, Eric. I wish I could give you an answer to that. I don't know. We certainly are expecting it to be better. From what I've seen through our opportunities, it should be better, but at this point in time, I can't give you that forecast.

Fair enough, Wayne. Thanks a lot.

Kent Mortensen, Thrivent Asset Management.

My questions have been answered. Thank you.

Chris McDonald, Kennedy Capital.

Could you just ballpark for us what the revenue capacity is on the two isothermals that you have in place right now? You mentioned a new one will add 50 to 60 million of capacity. Could you just give us a rough guess of what they might be, what you've got up and running right now?

The two current?

Yes.

Are probably in that ballpark -- maybe a little higher given that there's two of them. The one smaller one though is -- there's limits to what size product you can run across the 4500 -- the first one. So we're probably at -- it's probably total capacity is a little above that number I gave you for the new one. The new one won't be a total 100% add to capacity. It's probably 40% or so additional isothermal capacity.

Okay. So from a product mix standpoint, does that equate to similar mix of titanium and nickel alloy versus powdered nickel as well when you look at what's going to be required in the new isothermal?

Powder should actually continue to rise in the new one.

Okay. So you -- it sounds like once that's up and running, you are going to need your supplier to up capacity by 50+% in order to get good utilization on that new isothermal. Is that kind of a fair way to think about it?

Certainly, if we're going to be able to support Rolls with the R1000 product, they're absolutely going to have to ratchet up capacity.

Do you know, are they doing that right now? Is their big CapEx going on going down there in Kentucky just to prepare for your demand in [particular]?

They purport to be preparing themselves to do that. I mean as frustrating as this continues to be for us, keep in mind that the two customers that are most frustrated are their two biggest corporate customers too. So they can -- we can be obviously somewhat jerked around and not serviced by that supplier, but that supplier at the end of the day is not servicing their two biggest customers either, and obviously for a lot of other products. So it's an interesting approach at best.

Okay. Thanks, Wayne. I appreciate it.

J.B. Groh, D.A. Davidson.

Wayne, maybe you could help us out on this byproduct issue. Is byproduct maybe -- given your scrap rate is at a couple of percentage points of the total material cost, would that be normal, 5%, something like that?

It's hard to look at it from that perspective, J.B. It's not -- I don't look at it what our scrap -- what comes to us. And because it varies product by product from what your yield is to what your ultimate -- what ultimately comes out in the way of byproduct, there's huge variations. Some of the aerospace product tends to put out a lot more byproduct a lot of times than engine product does, per pounds, per piece, just because of the nature of how the parts are configured and what you end up with, with cutoffs and turnings. So it's really hard to put a percentage on it.

Okay. And then you had your normal shutdown in the beginning of the quarter, correct?

Yes, we did.

Any issues pop out of that that we should be aware of?

We probably had -- we definitely had higher than expected maintenance and repairs in the third quarter. We weren't terribly excited about that when all the bills came in, but there's obviously -- projects come up when you are in that kind of situation that items need to be fixed. And probably one of the big projects we had in the course of the quarter was we replaced our natural gas, our main natural gas feedline, which comes in from -- you can envision out toward the parking lot on the west side of the building toward the airport. From all the way underneath the parking lot there's a big pipeline that had to be torn out, all the way underneath the parking lot that feeds the main forge shop. And that was a significant cost that we incurred during the course of the quarter. And again, it was one of those things -- our guys inspected it. It was a pipe that was 40 years old. It was the thing to do and we replaced it.

That gets capitalized; I mean can you put a number on that? That doesn't go into cost of goods sold, does it?

No, most -- a lot of that project got capitalized. There was part of it that hit expense also though, you know. So it's -- it was just -- it was an inordinately high quarter for maintenance expense, but occasionally that happens.

Okay. And then it also looks like you had your normal July debt payment, correct?

Yes, we did. We paid down another $6 million of long-term debt in July.

Okay, thank you.

Mr. Larsen, there appears to be no further questions in the queue.

All right, thanks. Thanks, everybody, for dialing in. As always if anybody has got any other questions or anything to follow up, just give me a call. I will be around. If not, we will keep at it and try to produce a better fourth quarter and we will talk to you in January. Thanks a lot.

Thank you, ladies and gentlemen, for your participation on today's call. You may disconnect at any time.