ATI Inc (ATI) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ladish Company Incorporated second quarter 2008 conference call. Just to reminder, the call is being recorded.

At this time, I would like to turn the call over to Mr. Wayne Larsen, Vice President of Law and Finance. Please go ahead, sir.

Thank you and good morning, everybody. Welcome to the second quarter Ladish call. I'll get going. I know everybody has got probably a lot to do and I know there are a number of other people having calls so we'll move right ahead.

I'll give you my typical forward-looking statement warning. I will be talking about the second half, so some of these statements will contain projections and management assessment, and are protected therefore under the Securities Litigation Reform Act of 1995. With that said, let's talk about the second quarter.

From the sales perspective, we were pleased with where things came in. Had a nice pick-up over last year, but obviously, as Kerry indicated in the press release, we weren't happy with where earnings came in. It was a bit of a disappointment for us, as was the second half as a whole. Sales continued to grow, but a combination of product mix and material content are really holding down the earnings for the quarter and the first half. Without beating a lot of the numbers to death, you've got them in front of you hopefully.

Let's talk about what really went on, then what occurred in the quarter and why we ended up where we did. Probably the biggest thing that happened, as I indicated was again, continual creep up of material content. Material content for the first half increased to -- excuse me, for the second quarter, material increased to about 49%. That's up from 44.2% from last year. That 4.8% increase in material content obviously explains a lot of the differentiation between '07 and '08.

The material content obviously is part of it. The other factor that is driving the material content and certainly in the second quarter and the first half, was really our product mix. When I look at the product mix between '08 and '07, we had a a significant shift away from jet engines and trending into general arrow and a pick up in the general industrial. We went from -- in '08, our jet engine business as a percentage was about 48%. That's down from 58% last year in the same period. Arrow was up to about 29% compared to 23% last year. And in general industrial was up to about 23%, up from 19% last year.

That happened primarily as a result of two things. That was the push out of the 380 by Airbus and Boeing continual delays with the 787. Obviously, when those schedules slipped, we estimated we probably lost about $10 million worth of jet engine schedules in the first half of the year.

Fortunately that wasn't cancelled. It's moved out. It's moved into the second half of this year and moved into the first half of next year where obviously confident we'll ultimately be making that product. But that product is -- obviously, a lot of the price of thermally forged and if some obviously are higher margin product available. Excuse me.

To summarize what happened with that, obviously it's a situation that has gone on in the industry. No big surprise to anybody, but the magnitude of it obviously was a little greater than we thought it was going to be. We think clearly, it is recoverable. Aside from the profitability on the particular product line, it also compounds down further into -- it has an impact on areas such as our scrap and by-product sales.

By-product for the first half, we were off about 3.5 million less than we were last year. That's a combination of reduced material prices and again, another factor of the mix. As we fill in and our sales with the general arrow in particular and industrial, we don't get the by-product content off of that type of material the way we do off of jet engine products. Obviously another significant impact on year-over-year reduction in earning capacity.

Another issue that caught us -- that we've dealt with in the first half of the year is the energy differential. A lot of that hit obviously in the first quarter, but we had some of it again in the second quarter on an overall basis for the first half of the year. Our energy experience was up about $2 million over last year.

Part that have obviously is attributable to additional usage. Part of it attributable to higher prices. We expect that to moderate going forward with gas prices and also as our mix starts shifting back to where we want to be, is a more preferable mix. And fortunately as the mix shifts, it also has a shift on energy usage because it's not the most efficient product. Some of the industrial product is a bigger demand on energy output than the jet engine part. Again as I've said earlier, that entire mix issue compounded out during the course of the year.

Another factor that was out there over the course -- so far over the course of the year, is depreciation expense, up about $1 million so far in '08 over '07. Another somewhat drag on the bottom line. That's not going to go away as our capital expenditures programs continue. It's actually going probably be increasing in '09 going forward. We'll give you some more guidance in that direction later in that year as far as where we expect depreciation to be running at in '09. But it is going to obviously continue to grow as a couple of our major projects come on line later this year and next.

Talking about CapEx, significant expenditure so far this year. So far for the first half, we've spent a little over $22 million. That compares to about $16 million last year in the first half through reflection of the ramp-up of 118, the new isothermal press here in Wisconsin and the expansion in Oregon with our new furnace out there. Projects are both moving along.

118 continues to be assembled as we speak. We are probably a few weeks behind on that project, just because a couple of the really larger components came in and didn't quite mesh the way they should have. We had to have a little additional machining done by the press manufacturer, but the press is being assembled as we speak. We expect it to be operating in this quarter. We are still encourage with that.

The project out in Oregon with the expansion of our titanium investment casting business is going well. They are scheduled to be completed on project by the end of the year. Both of those obviously are really '09 driven opportunities for us. But again a nice pick up for when we think the demand is going to come back as far as with the 787 and the 380 and some of the newer programs. While we may be a little behind with the isothermal, we don't think it has worked out too bad so far on timing as far as demand.

Our machining expansion over in Poland at ZKM is going on schedule. A couple of the machines are already in. ZKM is bidding as we speak on a couple of long-term arrow structural programs. That looks like they are going to be getting their LTAs over at ZKM. That's going to be obviously follow on orders from some of the initial work that they did, getting into aircraft structural components, particularly some landing gear and breaking system components. Things are progressing well over there.

While we are obviously disappointed with what's happened in the first half with the push outs. Because on the engine side, what has really filled in there is an incredibly robust military helicopter business. That is very dynamic. We expect that only to continue and continue to grow stronger going forward, given our position as -- particularly with new programs at Sikorsky and the market share we gained on those. That's going to be compounded by our recent acquisition of Airex. I'll talk about Airex a little more in a second.

The other area that continues to grow which again is reflected in the product make shift. When the engine business -- when there was a slowing. The mining business continues to boom with Caterpillar. Their heavy truck business and demand for axles and large components for their large earth-moving equipment continues to be extremely strong. That business, we don't see tailing off anytime in the near term either. We continue to be busy with that.

Looking at the second half of the year at this point in time, our schedules are stronger for the second half than they were the first half. Put the big provisional out there, providing Airbus and Boeing don't move schedules again for the 380 and the 787. But providing we don't see some big significant shift on that, our outlook for the second half is certainly stronger than the first. Product mix looks better. And as I outlined earlier, once product mix improves, everything goes hand-in-hand with that going forward. We are encouraged. We remain optimistic.

We ended the quarter with backlog at $618 million, almost $19 million down a little from where the backlog was at the end of the first quarter. As much as anything, that is probably a reflection of the push out of schedules on the -- for the 380 and the 787. If we had had that additional $10 million of sales, we would have had additional $10 million of additional orders that would have filled it, at least two. Again, that goes hand-in-hand.

But obviously, we are not overly concerned with the $618 million backlog. That's up obviously from last year at this time. It was still only $543 million. We are pretty optimistic as far as looking forward from where we are at.

New order activity in the quarter was $106 million. A little less for the quarter than what our shipment rate was. But again, if you look back to last year new order activity -- last year was about $1 million less in the quarter than it was this year. Second quarter often isn't our stronger quarter of the year as far as booking activity. Again, we don't feel it's anything to be overall concerned about. We are confident that a strong demand is out there going forward that will continue to drive this.

On the balance sheet issue, relatively stable. Actually, we were able to bring our inventory down a little in the course of the first half by a couple million dollars. Again, it's just a management of our demands and slide of some of the jet engine schedules. We tried to adjust on a working capital usage also.

Obviously in the first half, we did use some cash because of the capital expenditures program, but not a particular issue that we are overall concerned about. We are still operating under a pretty positive basis and we expect to continue through the rest of the year on that. Looking out for the rest of the year, we are still pretty positive about where things are going.

As I indicated, military helicopter business is very strong. Picking up Airex to add on to Ladish -- relatively small company, but excellent reputation. They are a great finish machiner, primarily of helicopter components and titanium. It's been a long-term partner with Ladish. Again, it was a nice little opportunity for us. We expect it to be accretive in the second half of the year.

And we'll further aligned flattish with -- on the military helicopter side with Sikorsky. Sikorsky was delighted with the acquisition. It solidifies, from their perspective, a key supplier for them with another key supplier of them. Altogether, it's been a very well-received. It's going to be making a nice addition to Ladish out in the Hartford area.

Again looking forward for the rest of the year, pretty up beat and going into '09. We think '09 is going to be another opportunity for another effective break-out year for Ladish. We have a lot of additional capacity coming on line, both on isothermal forging here, additional investment casting capability out in Oregon. And with the ZKM expanding with their machining capability and entering into some long-term LTAs for the aerospace supply chain in Europe for primarily supporting Airbus on the 320, 319.

Overall, we're pretty encouraged. With that, if anybody's got any questions, I'll do my best to answer them.

Thank you Mr. Larsen. We will now begin our question-and-answer session.

(OPERATOR INSTRUCTIONS.) Our first question comes from Tyler Hojo of Sidoti & Company.

Good morning, Wayne.

Hi, Tyler.

I get what you are saying just in regards to the pressure on the sales line. But I remember back to the last conference call, and you were indicating to all of us that a lot of these margin issues would be here in the second quarter. Having said that, did things from a margin perspective come out in line with what you were expecting? Or was it a little bit better? Or was it a little bit worse?

I guess it was fairly what we were expecting, Tyler. Again it's the whole mix issue that is really driving a lot of this with the material content. It wasn't entirely unexpected.

We were hoping we'd get a little better push than we did. We were looking for a little better mix in the second quarter than we got. But candidly as it ended up, the second quarter mix ended ended up being almost identical to the first. We were really -- if anything took us by surprise, it was that in the second quarter.

All right. And just in regards to the $10 million in push out sales that you just referenced, how much of that do you think gets picked up in the back half of the year? Or is it one of those things where maybe you only a little bit and it's more of a '09 story?

It's probably an '09 story. We are going to get -- if schedules don't move again, we are going to see some of it in '08, Tyler, but it's primarily going to be an '09 story.

Okay. And just finally, a couple of quarters back, you were indicating 10% bottom line growth and top-line growth for that matter. Then I think last quarter, you backed off of that in regards to the bottom line guidance. Where do we stand now? Is it a challenge to see a break even earnings year in '08?

As far as '08 compared to '07?

Yes. That's right.

Yes. It's going to be a challenge, given where we are at the moment. But obviously, when we went into the start of the year -- when I told you I was expecting a 10% growth on both lines. We pretty much have seen it on the sales line. It's on the earnings line where things have fallen off. I'd offer up if schedules hadn't moved where they have moved, we would probably be pretty much in line with where we thought we were going to be.

Great. I'll let somebody else ask a question. Thanks a lot, Wayne.

Our next question comes from Steve Levenson of Stifel Nicolaus.

Thanks. Good morning, Wayne.

Hi, Steve.

Just in relation to your getting a second material supplier qualified, how is that going along?

Progress is still being made and that's about all I can say, Steve.

Does that cover both GE and Rolls Royce?

Primary focus is on the latter.

Okay. Thank you. Second, there are quite a few CFM 56 series engines that have been on the wing, pretty much since installation. As those come off, what after-market opportunities does Ladish have?

We think there's a pretty big opportunity building, both on those and with some of the early Trent families also, Steve. That are coming to a point in time where they are getting into a cycle period where -- after market in repair and demand is going to be significant on both of those families in parts.

And is that something pretty isothermal or is that more traditional -- ?

Well, initially it's not -- some of the Trent family parts are what we refer to as isocon. They are formed in a two-step process with isothermal and conventional forging. Most of the CFM 56 parts are all conventionally forged, but there's going to be opportunities with both.

And what lead times do you think they'll need to give you? You are starting to see orders already, or is that something we won't see until next year?

That's probably going to be more of an '09 opportunity to tell you the truth. I think we'll probably start seeing some indication of that as far as pick up and demand hopefully by the second half of this year. As far as actual turning into sales, those will turn into '09 sales.

Okay. Thanks. And last, does Airex give you more of a one-stop-shop? Or do you think there's still capabilities you need to add for the helicopter manufacturers?

We are happy right now with the pick up of Airex. If anybody hasn't looked, they have a nice website that shows the type of product they make. They make -- they do an excellent job. They are -- we like to consider them -- they are considered the go-to shop for Sikorsky for what they do. We were really pleased that it worked out, and in large part because of the long-term relationship between us and the former owner of Airex, that we were able to add them to the Ladish family. We are pretty well satisfied at this point in time with the combination of what Ladish forging does on the helicopter forging side, and then combine that with Airex's finishing capabilities.

Thanks very much.

We'll go next to Rob Damron at 21st Century.

Good morning, Wayne.

Good morning, Rob.

If we look at your sales growth for the quarter up 5%, could you break out for us the volume versus price?

Volume versus price? I will tell you that pieces, it was up significantly. but that's really a reflection, Rob, partly a reflection, Rob, of the mix and shift. When industrial products went from 18% in '07 to 23% in '08, it takes a lot of industrial parts to make up -- for a jet engine part. And correspondingly, jet engine dropped from 55% to 48%.

You have got a lot of high-priced items falling out. They have to be made up with a whole lot more lower priced items. The actual number of products that we are shipping are a lot more which further somewhat compounds the natural gas usage and some of the other issues.

Okay. And then if we look -- typically I believe your September quarter has a greater mix of missile business. What is that expectation this year?

There should be some missile product in the third quarter of this year, too. I mean it's not going to be huge. We are still in the R&D phase on the area in the Orion programs, but we should have some missile business in the third quarter that has been relatively lacking in the first half of the year.

You seem a bit more optimistic about the second half than the first half, but the second half usually is seasonally softer due to fewer selling days. Did you have the typical week shut down in the first week of July that you typically have every year. Do you think the strength of the backlog more than offsets the fewer shipping days that you typically have in the second half?

At this stage I do, Rob. Normally I would be on this call warning everybody that the second half of the year is considerably slower than the first half. '08 at this point in time, is shaping up to be somewhat an anomaly in that regard. That based on schedules and demand, the second half of the year is still looking incredibly strong.

We did have a one week shut down in July, so July will not be our strongest month of the year obviously with effectively three operating weeks, but the demand for August, September and October is very strong. Our guys are working hard. You heard me talk about in the first -- after the first quarter about new hires and getting people up to speed. The productivity is starting to improve. Our new employees are starting to become much more efficient. Our learning curve on our labor side is certainly improving, and we expect obviously that to pick up and improve in the second half also.

And lastly just the mix, would you expect the mix to also improve in the second half?

Absolutely. Based on the schedules, the mix should be shifting back to a more normalized basis in the second half.

That's all I have. Thank you.

Sure.

We'll take our next question from Eric Hugel at Stephens, Inc.

Hi guys. It's actually Barbara Duncan for Eric. How are you?

Hi Barbara for Eric.

Quick question for you. You said the isothermal press, there's a couple week delaying that. Are we still looking at about $5 million to $7 million, let's say in revenues for the remainder of '08 for that new press?

That would remain to be seen. If it happens, Barbara, it will be in the fourth quarter obviously.

Right.

Don't expect any pick up on -- from the new press in the third quarter. I would certainly expect we are going to be getting some productivity out of the new press in the fourth quarter. The exact amount, I wouldn't want to venture to guess right now. Obviously, we need to get it up and running and we need to obviously let schedules stay where they are at right now. If schedule hang in there, and we get the press up and running. we'll certainly have some decent revenue out of it in the fourth quarter.

Okay. And you mentioned about the new hires and that they are getting up to speed and working up the learning curve. Given that and the make shift and everything else that you are anticipating in the second half, what gross margins are we looking at for the second half? Is it still about, let's say about 16%?

I would like to think -- to see the second half moving back more into the -- toward the 16% level on a more normalized basis for us. I don't see any reason from what I'm looking right now, why they shouldn't start moving back in that direction.

Okay. And then I guess on a -- the business, there's been some one-time things that you guys see, so year-over-year isn't necessarily a great way to look at the business right now as you discussed. On a sequential basis, what are we seeing in terms of raw material prices, mix, scrap? You said that everything works together. What do you see in terms of sequentially?

Well, sequentially obviously, we expect continued improvement. Obviously the second quarter was a little better than the first. And we expect the third quarter to be better than the second at this point in time. It's really -- you are absolutely right, Barbara.

It's going to be driven by mix. If we can get the mix back to where we want it to be in the engine portion of our business, closer to hight 50s, 60% of our business, it really drives the whole train. By-product will then pick up, because we will be machining higher value materials so we get a better by-product pick up. And we should be seeing material content of the product coming down on an overall basis. All of those things should continue to happen based on the schedules we have right now. We are expecting sequential improvement clearly.

Okay. Great. Thank you.

Our next question comes from Frank [Hafflich] at AMN.

Can you give us just a little more detail on the progress of your Mexican project? When do you think you'll complete site selection. And if so, problems getting site selection, is that serious? Do you have any alternative plan?

I'll answer your second question first. Do we have alternative plans? And the answer is yes. The selection issue has been -- somewhat of a disappointment for us.

It's turned into much more complicated than we originally anticipated. We have gotten more push back from local authorities, regarding the nature of the process. Not that we consider the process that onerous, but it's not something they are familiar with. That's presented a -- much more of a set back than we had originally thought.

We are absolutely committed to the concept of establishing a second titanium investment casting facility in a more cost effective region to really take advantage of our material technology coming out of Oregon. But there are other alternatives other than Mexico that we certainly are considering. We are still looking at Mexico and looking at a couple of different spots, and continuing to try to work out our issues with local authorities, but if that doesn't go, there are other possibilities.

And we have already committed to the heating equipment for that facility for a new furnace. We are trying not to get behind the curve on going forward. We are trying to continue to advance the project on an overall basis,. But if that furnace doesn't end up in Mexico, it will end up someplace else.

One question. Also on the Pacific Cast Parts, one of their isothermal presses went down and they are a supplier of raw material I believe for you. Does that free up any material for you?

You are referring to Precision Castparts?

Yes, Precision Cast Parts. I'm sorry.

We've heard that in their conference call last week that they've had a problem with their new isothermal press. Arguably, it could free up some material for us. Really it's been less of an issue for us in the more recent times getting material from them. It's not -- while the material is similar, it's not the same material that their isothermal forging that we are.

Sometimes has similar names, but the chemistry occasionally is a little different. They tend to get most of their material out of their facility in Brighton, Michigan. We get most of our material out of their other facility that they got from Special Metals, that's in Princeton, Kentucky.

The material issue is one side of it. The other issue is how long their press is going to be down, and what that does as far as the dynamics of demand within the industry. There really isn't any place else for customers to go for the product, but here.

Is it still a problem to get material for the isothermal press?

I wouldn't characterize it as a problem. Their performance has improved certainly from where it was at last year this time. Not necessarily where we would love it for it to be, but I wouldn't characterize it as a problem.

Thank you.

Our next question comes from David Fondrie at Heartland.

Good morning, Wayne.

Dave. In your comments earlier, I think in response to a question from Tyler, you said that you were pretty much on target growth on the sales line, but missed on the bottom line. And yet, if you were $10 million short with aerospace, I would have thought that you -- yes, you might be on target, but had the $10 million come in, you would have been above your expected guidance. Would that be a fair characterization? You could characterize it that way, Dave. You can also look at it if we had had that additional $10 million of engine parts, it might not have been totally additive. It might have been supplementing some of the other sales.

You might not have been able to complete some of the other sales -- ?

You might have had some capacity constraints. It might not have been a total $10 million of additive sales. Part of it would have been, but sales would have been a little higher. Clearly, if we'd had that $10 million for those programs of engine sales for those programs, earnings would have been significantly higher.

And then, can you give us some idea -- if we were to look out a year from now and what would your expected run rate be for those two programs, the 787 and the 320? 380. I'm sorry.

Right. Well, obviously, we missed $10 million in the first half of this year. It's hard to -- I don't know off the top of my head why our projected -- period-by-period run rates are for those particular programs, Dave. But it's probably in that ballpark.

It wouldn't be higher than that? If you just had -- $5 million per quarter -- ? (multiple

As the 787 starts ramping up, obviously it's going to accelerate.

You might expect something like -- potentially between the two programs, something like $10 million per quarter if we are out a year and you are running at their normal delivery rates?

That is probably reasonable. Again, I don't have that right in front of me, but that's logical.

Okay. Great. Thank you very much.

J.B. Groh from D.A. Davidson, your line is open.

Good morning, Wayne. Is there anything that you are doing on the cost side that helps improve the margins? I notice that SG&A was up quite a bit from last year. It's not a huge number in the whole scheme of things, but what's the driver there? Maybe you can outline some stuff you are doing around the plant to help improve margins.

Sure. SG&A crept up in the second quarter. That was a combination of a number of things. One of which was -- we've expensed some areas on the, shall we say, the Mexican adventure. Some of the costs associated with trying to get that program up and going. We've been expensing, not capitalizing so that's hit SG&A.

The other factors that have hit SG&A have been -- somewhat the increased headcount year-over-year. Year-over-year, we are up a hundred people. What we are doing beyond that is I wouldn't say we are in -- I would say, we are in a hiring freeze at the moment. We are not adding any more people.

As the people continue to get more productive, it will certainly -- they'll begin to contribute more. And we'll get from underneath some of these start-up issues with the people. But if you look at it on a first half-to-first half basis, J.B., the SG&A was 3.9 versus last year it was 3.8. It's certainly not out of control.

But looking at that mid-4s is probably a good run rate? High 4s?

4%? No. I wouldn't look at high 4s.

No. I'm talking about -- I'm sorry. $4.8 million versus --

Yes. That's fair.

Okay. You gave us some good info on the operations of the new press, but the furnace in Oregon, is that slated for -- operational in Q4 revenue generation?

No. The expansion at Albany down the road from you, it's never been scheduled for anything but the first quarter of next year.

Q1. Right. Okay. And how much of the backlog is associated with those two capital expansion projects? Is there some backlog that's already going to be browning those presses?

Some of the backlog probably will be run through that new capacity, but I wouldn't say that we went out at this point in time, and wildly booked a lot of additional backlog on the expectation of that capacity expansion. To an extent, it's more of a if-you-build-it-they-will-come mentality. The OEMs to an extent aren't going to place a lot of work in some areas where they know at the moment we are capacity constrained until they are convinced we have got the additional capacity.

It's not going to immediately run up to the capacity, but you could see an acceleration of orders based on that new capability that you didn't have before?

Yes.

Okay. Thank you, Wayne.

Our next question comes from Jim Kitzinger at Kitzinger Lautmann.

Good morning, guys.

Good morning.

Wayne, can you put more color around the cost of the start up people and how that's going to work its way out over time?

The cost of the start up of the new people; it's really two-fold. One, you have got additional people so you have to add to your head count. And then two, you have the fact that not only are they certainly don't start out terribly productive, but it's also somewhat of a distraction to the people that they're working with that are productive, because they are effectively the people who are training them. It's really a twofold issue with them. We are beginning to see some pick up in productivity, certainly in the forge shop at the forging operation.

Also we've added significantly to the headcount out in Oregon with the ramp up and the growth out there, both from the wax room on forward to try to have people in place that can go forward. The real problem is these are not unskilled positions. It takes some time to learn how to do some of these jobs from doing the initial wax work for investment casting to knowing how to operate equipment in a forge shop.

There's a learning curve, and it takes people months, if not for some skills a year or more to get sufficient time in the job before they know what they are doing. We are beginning to get over that hurdle. Again, from what we are seeing already, the people are getting better and they'll just continue to improve. We are expecting continued productivity improvements throughout the rest of this year and on into '09.

What I'm trying to do is get some quantification of that. Is that possible? Or you are not comfortable doing that?

I have a real hard time putting a precise number on what it is. Obviously when you add -- when we add 100 people, that's obviously -- has a significance expense.

Okay. CapEx, can you give me a general idea of what you would consider maintenance CapEx this year? And what you expect it to be next year? And then given that you have the furnace coming out next year, how does CapEx in general look like in '09?

CapEx in '09 is going to be significantly diminished from where it's going to end up for '08, and where it was in '07. With the two main projects completed this year, I expect CapEx next year to drop back down into probably the mid to high-teens. As far as what we consider pure maintenance CapEx, and I look at maintenance CapEx in two different buckets.

What's pure maintenance CapEx, I consider what do we absolutely have to do to keep the place from falling -- the facilities from falling apart. That's probably $5 million, $6 million a year. There's probably another $10 million on that that gets lumped into what I call the second category of maintenance which is there's machine tools that need to be replaced, burners and furnaces, articles of equipment that need to be upgraded and replaced. But with those replacements with that next $10 million, we are expecting some productivity improvement come our of that. Because we are putting in more efficient burners or better machine tools, better cutting tools.

We are getting something out of that investment as opposed to -- that first 5 is making sure the roof doesn't fall in and the floors are maintained and that sort of thing.

Given that, how do you look at your capital structure, not this year, but maybe into '09 and '10? What do you look at from a free cash flow standpoint what do you want to do with it? You've made some small bolt-ons. Is there anything else out there that would make sense to add to the portfolio? Or does the free cash flow used for other purposes?

We certainly expect free cash flow to go back to a much more positive state in '09 and '10 and beyond, when we get over these projects. As far as capital application, obviously there's always that reduction and we are continuing to look. Airex came up and we moved rapidly and acquired them.

There are other smaller bolt-on-type acquisitions that we are continuing to look for. We are continuing to look for other areas where we can expand our investment casting capabilities with different alloys. There are still other small forging opportunities with say low-cost basing or niche opportunities that we would certainly look at. Along with obviously, the value-added situations just -- they pop up when they are available. Yes. We'll continue to look and we'll continue to add.

Okay. Thank you.

We'll go next to Gerry Heffernan with Lord Abbett.

Thanks a lot, Wayne. How are you doing today?

Good, Jerry. And you?

Good. First topic I would like to go over is natural gas/energy usage. Certainly, it was a big negative impact in the first quarter. But being up in Wisconsin where you are, it's going to get cold again pretty soon. What are you doing differently this year in regards to natural gas if at all, anything that you can do differently?

Kerry was thinking everybody wear stocking hats this year.

Not a bad idea. I imagine they would have a big green G on them, but go ahead.

Obviously we do buy our natural gas forward. Our guys that handle that try to be as aggressive as they can. We don't hedge per say, we do buy firm commitments for gas. They are continuing obviously. They do that now with gas when there's opportunities, when the pricing cycle is down, they're pretty aggressive about trying to lock up supply going forward. We'll continue to do that.

The other thing is to try to make sure we get absolute productivity out of the gas we burn. There's been an ongoing aggressive program here, as far as replacing burners and heat-treat furnaces, and rebuilding heat-treat furnaces with better insulation and trying to -- where we can, cut back on our usage. To give you an example, the new isothermal press -- the heating systems that are going into the isothermal press will be more sufficiently more efficient than what are in our other two isothermal presses.

Once that presses up and working, there should be a lower utilization level. The new one is going to be used full out before the older ones are used, and that would be a net reduction?

Absolutely.

When you say being aggressive with the forward purchases, understanding that you are talking about actual fiscal forward purchase. As part of this thinking, okay, what did we use last year. And instead of saying we are going to -- because the weather can be such a great variable as to how much you use, instead of buying 75% of anticipated need, we push it up to 85% of anticipated need. Or something like that?

We are certainly looking at that, Gerry, to determine should we be a little more aggressive and try to buy a little more. We're taking a look at that. The other thing we are trying to balance out besides -- none of us can guess what the weather is going to be. Hopefully, we don't have a winter like last year. But the other factor -- it goes back -- and I hate to keep harping on the same issue, but this whole product mix issue has a significant energy content, too.

The industrial product that we make has a higher energy factor to that than jet engine parts typically do. They are bigger components. They take longer to heat. The nature of it is it's a bigger energy usage. Again, partially why that product line doesn't have quite the margins that the engine parts do.

In regards to that, at what point is it necessary to go back to the customer and say, times have changed. Energy requirement here is higher, we have to talk about either energy pass through or higher prices?

Our guys have done that and are continuing to work on that.

Okay. Next topic. I apologize. I got distracted for a second. In regards to the new people and you are talking about the time to train and the -- of the total number of people that you will need to be fully manned when the new press is ready and running at a normalized level, how many of those people have you already hired?

I'd like to think all of them. I think it's partially both for the new people, for the new press and for the new melting capacity out in Oregon. It was a decision we had to make was --

You had to get the people in here and start getting them trained before the capacity was ever ready to be utilized. We've made that decision, and obviously we have somewhat paid the price for it in the first half of this year.

How long ago -- at what point in the calendar, do you believe you were at 100% hire -- 100% headcount level for anticipated assets that we know are coming on later?

Well, I'd say sometime -- at some point in time in the second quarter, Gerry. I don't know. Maybe in May. It's hard to give you a precise date, but I certainly think we've reached that point by the end of June.

Okay. The SG&A expense of the present quarter shows a -- to a large extent the headcount burden of assets yet to produce any revenue?

True. Yes.

Okay. In regards to the orders for the new assets, I want to make sure I understand. You really have not taken many orders for that yet?

I wouldn't say we've seen any big incremental pick up in orders for the new capacity at this point.

Okay. Is that -- I want to understand. Is that hesitancy upon the customer to say, yes, I'll give you the order. I know that's going to be ready. Or is it the way you've decided to manage the process? To say, you know what, too many things can happen. I am not going to put myself on the hook for something here until I absolutely know I have things up and running?

It's a combination of both. There are both factors in there. There's certainly from the OEM's perspective, they are not going to overload with a lot of additional work if they're not convinced that you have got the capacity to take care of it. And there's still obviously some -- I wouldn't say reluctance, but some caution on our guys' part as far as taking a lot of business if they are not confident they can get it delivered. Our guys are really sensitive about not liking to disappoint the customer without being able to deliver the product.

Is this new business, additional business, sitting out there in the wings, what would be happening with that business if you were not building this press?

Certainly on the isothermal side, you would see push outs with everything from the 787 and the 380 and on into with Airbus with the new 350. The engine guys pretty much came to us years ago when we made the decision to build the new press, absolutely convinced that there wasn't enough isothermal capacity in the world for their new programs if we didn't go forward. In fairness, if precision didn't go forward with theirs, too.

All right. Thank you very much for your time.

Sure.

We'll go next to Bill Ford at Rhinehart.

Hey, Wayne. I was hoping you could talk a little bit -- I know in previous quarters, you've had issues with the price of raw material that was running through your income statement versus the prices you were getting in scrap prices when nickel and titanium have been showing a lot of volatility. Can you give us an idea if we've closer to those things being a little more matched and not paying the same volatility and mis-matches that you see last year?

We saw some of that -- continue to see some of that in the second quarter ago, Bill. We are still working our way through some of that. We think that also should begin to continue to improve in the second half of this year. That we are going to be getting out of some of the unnatural high pricing programs that we got into, because of what the OEMs did as far as guaranteeing pricing to the melters. That should be continuing to moderate into the second half of the year; but we had that impacting us again in the second quarter.

The other question is -- we'll talk about the arrow engine demand and the $10 million that got pushed out. I know that the nickel powder wasn't an issue for you this quarter, but I'm trying to look at if this arrow demand was there. It does show up in the second half and ramps up, is that going to start to rear its head again as a constraint on production?

Hopefully not. And Precision is in the process of increasing their capacity at their facility in Princeton, Kentucky. They have got a pretty aggressive program down there to increase their capacity and their melt capacity down there. Obviously that is pretty well directed at us. They are not using that go material, we are.

We don't think -- at this point that shouldn't be a problem. Obviously, that will also be moderated -- second source comes on line. Both of those should help to ease that issue.

Okay. Do you feel like the second source is proceeding fast enough? Now that the OEM aren't feeling quite as much of a pinch from not having a second source? Or are they still trying to proceed with that at the same rate? Or have they backed off of that now that it's not hurting them as directly?

I wouldn't say they've backed off. They still perceive that a needed element out there for them. It's just -- it's not good planning for them to be -- particular Rolls Royce to be dependent on one facility for its soaring raw material. We will see another source ultimately.

All right. Thanks, Wayne.

And we have a follow-up question from J.B. Groh of D.A. Davidson.

Hey, Wayne. Back when you announced the Airex acquisition, you said it's a mix of cash and stock. I wonder if maybe you could give us some more details, what you expect the interest line to be in the second half based on that?

Sure. The official breakdown, it was primarily cash. It was about $13 million in cash and about $1 million in stock.

Okay.

It was really a reflection that -- the guy who owned the business wanted to retain an ownership interest in Ladish overall. And obviously, where his company had gone. He's still working with us. He's still running the business.

We didn't have a problem with that -- with where he wanted to be. Obviously, interest hasn't been an over burden for us at this point in time. I don't expect it to be going forward either. It's certainly at a manageable level for us.

The close date there is July 10?

Actually we closed on July 9.

And then that $13 million portion is pure cash? And then some of it is financed at your credit line which is like what 7%, something like that?

Actually our credit line at this point in time -- that's our long-term debt. Our short-term line with our senior lenders is obviously significantly less. It's about 4%.

4%. Okay. Thanks Wayne.

Sure.

And we have a follow-up question from Tyler Hojo.

Hey, Wayne, just really quick. The CapEx -- what is your CapEx expectation for 2008? I got it for 2009, but I don't know if you said for '08.

For '08, it's probably going to be in the low 40s at this point, Tyler.

Okay. One more follow up here. In regards to your backlog, can you just remind me what -- one, how far out does that stretch? And two, if you had to break down the backlog into jet engines, other aerospace, and industrial, how do you think that would break?

The backlog stretches for about 18 months. We don't put anything on the backlog beyond 18 months out. And the backlog is certainly over-weighted toward jet engine. Because the backlog is in large part driven by material lead times and material availability. And we have obviously greater visibility from the engine guys as far as what their needs are going to be because of that material availability and lead time. I'd say -- and the industrial guys don't give us more than really about six months lead time as far -- in backlog. It's clearly skewed to the engine side and to a little less to the arrow side with a minimum component of industrial in there.

Would you say that the jet engine piece of the backlog has gone up as you've seen some of these revenues pushed?

Yes. It's probably -- it sat there and we obviously ran off other work. If I had to guess right now, Tyler, I'd say the backlog is probably 65%, 70% jet engine, 30% -- 25% to 30% arrow, and probably 5% to 10% industrial. It's that big of a differentiation.

I see. Very helpful. Thanks a lot, Wayne.

And Mr. Larsen, we don't have any other questions. I'll turn the call back to you for any closing remarks.

Okay. Great. Thanks, everybody, for calling in. We are right at about at the hour, so we'll call it a day. If anybody has any follow-up questions, give me a call. I'll try to help you on that. We'll talk to you with hopefully some more encouraging news after the end of the quarter. Thanks .