ATI Inc (ATI) 2008 Q3 法說會逐字稿

Good day. everyone. and welcome to today's Ladish Company, Inc. third quarter 2008 conference call. Just a reminder, this 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. Welcome everyone to the Ladish Company third quarter 2008 conference call. Before we get started I'll, of course, give my typical disclosure that there's probably going to be some forward-looking statements and comments made today that are going to be subject, obviously, to management opinion and estimates and I ask that you're going to be subject to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995, and with that said let's move on.

There's a lot of information to talk about today. The third quarter of '08 was a pretty monumental quarter for Ladish. A lot of important things happened, along with, obviously, the results, so we'll get into that and then we'll more into -- I'll talk about the results first and then talk a little bit more about some of the material events that happened during the quarter. Obviously on the sale side you've seen the numbers. It was a good quarter for Ladish with $120.8 million in sales, 15% improvement over last year in the third quarter. Part of the obvious improvement was attributable to the acquisitions, but in all honesty, on the top line a relatively small portion, given the limited period of time that we had the acquisitions in the third quarter.

Importantly, in the third quarter we did see a trend, which we were pleased with, with cost of goods coming down to about 85%, which resulted in gross profits up to 15.1% for the quarter, which is an improvement over where we were at last year in the third quarter at 14% and clearly an improvement about where -- from where we started this year with gross profit in the first quarter being about 12.6% that worked itself up to 13% in the second quarter. So a nice quarter-by-quarter improvement as Ladish is getting back to operating more as we expect the business to. We've gotten over some of the learning curve hurdles with some of the new employees, which has certainly helped, and clearly businesses begin to shift with our product mix as we were expecting in the third quarter from the first half of the year that certainly contributed to better gross profits.

SG&A for the quarter spiked up. You indic -- you probably saw in the note that we had a $1 million charge for professional fees in the third quarter related primarily to the significant tax credit we had. But for that charge for professional fees our actual SG&A would have came back in around 4.1%, 4.2%, which is much more in the light of what we want it to. It was actually up a little with the -- some of the experience expenses associated with the two acquisitions. So if you clear the noise out of it, SG&A would have been back in the 3.9%, 4% range where we like to keep it on our ongoing basis. And then our operating income for the quarter come in at 10.1%, obviously down a little from last year because of the accelerated SG&A rate, but again right around where we expected it to be. Interest for the quarter was $338,000. It's really a reflection of a combination of things. Interest was down a little from the prior year, both because of reduced interest rates and also contributed to interest capitalized with all of our capital projects that's going on here. That got us to the pre- tax income for the quarter at about $11.8 million, or 9.8%, similar to last year and then we got down to the tax number.

Obviously we only ha -- we had a significant tax event in the third quarter. We recognized a significant tax credit from prior years of $5.3 million for R&D expenditures in prior years. That tax credit actually flowed through in our return for '07 and we went back and actually did amended returns for '05 and '06 to capture this tax credit, the net effect of which from the P&L perspective is that it flowed through in the third quarter but brought our tax rate down to -- as I indicated to 11.6% and brought it down significantly for the first nine months to about 27%. Obviously it'll be trending back up after this, but it was a significant impact on us, the result of which we ended up with $10.4 million of net income at about 8.8% run rate, which resulted in $0.70 per share EPS compared to $0.45 a share last year. Taking all the tax credit noise out of it and also obviously taking the expense associated with obtaining the tax credit out, if you pro forma that out actually you then come up with about $0.54, $0.55 for the quarter, so it would still have been an excellent quarter for us, all things considered, without the tax credit and the tax credit, obviously, was just some icing on the cake for us so far this year, so we're obviously pleased with that.

Looking out over nine months, obviously sales up 13% over last year at that point in time at $357 million. The gross profit creeping up from where we had been early in the year. We're up to about $13.6 million, $0.13.7 million for the year. Obviously we're working our way out of the hole we dug in the first half of the year on for gross profit side and that translates on down to $31.4 million of pre-tax income. As I indicated we had some tax benefit, obviously, for the nine months that brought our rate down to an applied rate of 27.6% through nine months, which resulted in a net income of $22.6 million, or 6.3% for the year and $1.54 a share. So all in all from an operating perspective, Ladish is back hitting pretty much from our perspective on all cylinders and we expect, obviously, to continue on that route going forward.

Looking at the balance sheet side of the equation we had a couple of things of significance that happened, obviously. Inventory's crept up to about $143 million from $118 million at the start of last year. That's really primarily a result of the two acquisitions that we've done. Overall i think the guys have done a pretty good job with their working capital, going forward and trying to balance that out as the Company continues to grow. Receivables have jumped to $10 million, again a reflection of the increased shipments along with picking up the acquisitions. Dropping down a little as far -- on the balance sheet to the other side of the equation, we did issue -- and I'll talk a little bit more in detail in a few minutes -- we did issue another series of senior notes during the course of the quarter so the senior note line is now up to $90 million with the two subsequent series that were issued. We did pay off the first series during the course of the quarter so that was the result of a $6 million reduction there in debt.

Operating cash flow for the first nine months was about -- a little over $22 million, down a little from last year, really a reflection of what happened in the first half. It was a good quarter in operating cash flow and we obviously expect that to continue going forward into next year, and I'll talk a little bit more about what next year looks like in that regard for us also. CapEx through the first nine months of the year is a little over $40 million, which is somewhat of a record pace for Ladish. Between the new isothermal press at the Ladish Forging operation and the new melting furnace and capital expansion out at Pacific Cast, we're obviously burning through a lot of CapEx this year. That will be coming to an abrupt halt pretty much by the end of this current quarter, but we are obviously significantly ahead of where we were last year. So on an overall basis we're going to come in somewhere probably in the low-to-mid 50s for this year on CapEx and, again, that will be dramatically reduced next year.

Depreciation for the first six -- first nine months is about $9.7 million. We're going to come in for the year at about $13 million, $14 million. Next year depreciation number is going to be on an annualized basis, probably at least $3 million or $4 million higher than that for anybody looking that far. We haven't, obviously, finalized our planning for '09 yet, but just to give you a heads-up for where that's heading. On a ratio basis we ended the quarter with a net debt to capitalize ratio of about 29.9%, which is obviously a little higher than we normally like to be, compared for where we were last year at this time at about 19%. That will be coming down as the debt continues to get reduced during the course of the ye -- next year going forward. Another positive for the period, backlog. We ended our backlog -- ended the first nine months with backlog up to almost $673 million, another all-time record for Ladish. That's up from $618 million at the end of June and last year it's up -- it was up $574 million. obviously picking up the two acquisitions certainly helped as far as growing the backlog. Both businesses came with a substantial backlog on their own, which is definitely a positive.

So I guess jumping over to that and looking at where we were and what happened as far as the course of the period as far as material events, really three significant material events, along with, I suppose, the fourth with the tax credit that I already have talked about. The first two events were the -- clearly the two acquisitions that we did in the quarter. We purchased Aerex Manufacturing back in July. Aerex is a highly-regarded precision machining manufacturer of primarily helicopter components, really focusing on serving Sikorsky and their complete line of products. Aerex does an excellent on titan -- precision machiniing of titanium forgings. Aerex's been a long-term customer of the Ladish Forging operation, providing Aerex with vast majority of its starting material, and it happened upon an opportunity for us to acquire the business due to estate planning issues with the prior owner. We moved relatively rapidly, bought them at an extremely attractive multiple for us, and pretty much have not missed a beat going forward as far as the integration with Aerex. They're obviously still using Ladish Forging and will continue to use Ladish Forging.

We obviously like the helicopter business. We think it's a long-term growth opportunity, both on the forging side and the precision machining side for Aerex, both on the military and the commercial application to helicopters, primarily with Sikorsky, so we were really delighted to have the opportunity to pick up Aerex. We've had them now for about two and a half months. They're clearly contributing, both on the sales line and on the bottom line and also on cash flow generation, so it's really been a nice pickup for us.

One thing I will caution people about as far as how you thinking about Aerex, whose annual sales run rate in the mid-teens, you can't real -- you're going to have to a problem double-counting sales out of Aerex because of the inner-company sales that come from the Forging division of Ladish. So you really have to look at it from a top-line perspective, that Aerex is really only adding about half of their top line because the starting material is all coming out of an inner-company relationship. But again a great pickup and we think another nice growth opportunity for Ladish going forward. It's also nicely located only about ten miles from our other mach -- precision machining operation in Connecticut, so we're obviously also going to get some synergy out of that situation with both of them being that close together from a management perspective.

The second and more key acquisition that we did in the third quarter was Chen-Tech Manufacturing. Chen-Tech is a highly-regarded small jet engine forger. Their business is essentially 100% jet engine forgings. It's a closed dye shop with a number of hydraulic presses, a lot of hot dye work. They are primarily a GE and GE partner supplier. They've been their main focus over their existence over the last 15, 20 years. They are an excellent compliment to Ladish. Their real focus is on smaller engine components -- rotating components for bus jets and reg -- smaller regional jets and single aisle planes, which really nicely compliments what Ladish Forging does. Again it was acquired for a great multiple for us.

The management team is staying in place, continuing to run the business, so we are delighted to have them as a part of the Ladish family. Only had them for effectively the last three weeks of September, but already we can see what they bring to the table -- what they brought to the table even in the third quarter, both from a sales and earnings perspective, and again from a cash flow generation. So Chen-Tech was an excellent ap -- acquisition for us. It's a company we've had our eye on for a number of years, and quite candidly had been in discussions with these folks for five, six years and finally the timing became right and we moved when we had the opportunity. So another nice op -- growth opportunity for us. It's really going to further compliment the jet engine piece of our business and the margins that go along with the jet engine piece. With Chen-Tech's prior real focus has been primarily on GE, with Ladish's technology and with Ladish's market position internationally it's going to give a nice other opportunity to grow and expansion Chen-Tech's product offerings and who they can service.

One of the -- I guess the third major item that happened in the course of the third quarter I also alluded to earlier was we did do another $50 million note placement -- private placement. We -- in early september we placed $50 million of notes in the private market at a coupon rate of 6.41%. They're seven-year life notes with a five-year certain, meaning obviously the next two years they're interest only and then they amortize equally over the following five years after that. It was a good opportunity for us, it was done relatively rapidly and with all things considered minimal expense. I was quoted a rate. Fortunately we moved when we did given the current financial market. I was advised yesterday that should we want to go back to the market these days we'd really be looking at a coupon rate of probably about 8% and 10% given what is going on in the private placement market these days, so we're pleased we moved ahead when we did.

Drifting back to what I talked earlier about earlier, the tax credit. It was a $5.3 million total tax credit for prior R&D expenses. As I indicated it was recognized on some prior returns. One point that you should be aware of, because of the accounting pronouncements in FIN 48 we've only realized 90% of the credit so far. There is a 10% reserve that's been set aside under guidance from FIN 48. That additional reserve will be recognized at the point in time that we're convinced that we're not going to have any challenges from the IRS or we have anything within the IRS questions resolved with respect to this credit.

So with that notwithstanding that's some of the highlights of what happened along with, obviously, the results of the third quarter. Looking forward, going out for the fourth quarter obviously everybody's well aware and a lot of attention's being paid to what's going on with the work stoppage with Boeing. To date it's really had a relatively minimal impact on Ladish. We expect that impact is going to expand going forward if they don't get this work stoppage resolved. The initial place where we've been seeing the im -- where we've seen the impact so far has been more on the structural side with the investment titanium castings with our operations out of Pacific Cast in Oregon have got the ini -- really borne the initial brunt of the Boeing strike, but we clearly think it's going to start drifting into the engine side of the business and we're going to see some slowdown on the engine part, which is going to coming if this strike doesn't get resolved soon and we may end up seeing some of that in the fourth quarter regardless.

Obviously we have no better clues than anybody else as to when they're going to get this resolved, but it is going to start impacting our business on a go-forward basis. We do have, obviously, an advantage of -- our focus is both -- is fairly international but split between domestic and international so that does somewhat blunt the impact of the Boeing strike, but I would be remiss if I didn't tell you it is going to have some kind of an impact on us in the fourth quarter. I can't get you any real better guidance of what kind of impact that's going to have, because it's really a day-by-day, week-by-week adjustment of cycles and schedules as we get it from the engine manufacturer. So as Boeing goes and as goes Rolls-Royce and GE and United Technology, we'll see what happens to schedules and where things go in the fourth quarter and beyond.

Looking beyond that situation for the long term we're still pretty bullish about the industry. With the acquisitions we've done we think they are -- both are really going to nicely position us for going forward for future growth. Our backlog is in great shape and has grown. We think we're on the right programs going forward with 787 and the 380 and ultimately with the redesigned 350. We further solidified our position with Aerex on helicopters and we'll further entrench ourselves with Sikorsky, who we think obviously is really the leader on helicopters going forward. On the industrial side of our business I know there's been a lot -- people have a lot of concern. We were relieved last week when Cat announced their earnings. While their earnings were not what they wanted them to be we were certainly encouraged by one of their comments that they've got over a three-year solid backlog booked for mining trunks, which is really the core of Ladish's support of Caterpillar, so that piece of our business is still growing nicely and is really robust.

On the missle and rocket side that business continues to go along. We're still doing R&D work on the Orion and the Aires programs. I guess we're also relieved last week to see both presidential candidates come out when they were campaigning in Florida and both of them have pledged further support and funding for NASA for that program that they don't -- neither one of them is contending that that's a program that needs to go so we are long term convinced that '09, '10 and beyond we are going to back into production on mil -- on space hardware, which is certainly a positive for us, not so much obviously top line, but certainly contributes nicely to the bottom line. Our new capacity projects are coming to a conclusion, fortunately. 118, the new isothermal press at Ladish Forging is up, it's stroked, it is being tweaked right now as far as with final controls and operations in the heating system. so -- but it is going up and down. It does work. We expect to be working on tryout pieces this quarter and have that really well situated for going forward in '09. I guess that is one aspect of the Boeing strike that has actually helped us in that regard. The drag-out on the 787 program has given us time to get the new press up and running and get it qualified and going forward.

The expansion out at Pacific Cast with the new furnace melting equipment and overall expansion out there is on line. They should -- they're expected to be completed by the end of the quarter so that capacity should be up and running for next year also. So both of those projects that are well underway. The machining expansion over in Poland is certainly under way. we've got the first few machining tools in, the facility has been renovated and we're continuing to go forward with that. Poland has -- ZKM has gotten a num -- their first long-term commitments from aerospace manufacturing, so '09 is going to be an opportunity for them to go forward and really start to expand their aerospace offerings, so another positive for us.

So on an overall basis, obviously the Boeing strike and the current credit situation not withstanding, the future looks pretty good for us. We think we're where we need to be. The Company is well positioned. The people that we had to hire and start training at the beginning of the year are in place at this point in time, so the head =count isn't a particular issue right now. It'll be an issue, obviously, if we don't have work, but our guys will adjust to that. So on an overall basis we're pretty optimistic and pretty up beat and we think '09's going to be a good year for Ladish, with '10 and beyond continued growth opportunity. So overall we're pretty upbeat.

And on that note I'll take any questions anybody has.

(OPERATOR INSTRUCTIONS) our first question today is from Steve Levenson from Stifel Nicolaus

Thanks. Good morning, Wayne.

Morning steve.

i think some of your problems may be solved. It looks like from the news like Boeing and the union have a tentative agreement.

Oh excellent, I haven't had the opportunity to -- I've been getting ready for that call, Steve, I haven't --

I figured that's what it was. One of the questions that comes up still -- you didn't mention it this time -- but a second source of powdered metal and wondering where you are in that process?

That's still progressing. We're not getting anything yet. Ican't say that we have a second source officially on line yet, but it's really old Rolls-Royce driven and it's going to -- and it clearly is going to happen.

Okay, thanks. And do you think that's something that will be ready when the press is qualified so that you'll be able to really start cranking out parts right out of the box?

The press is going to be up and running before that second source is fully qualified, but I think in '09 it's going to be a source of material for us, Steve.

Okay, thanks. I know there's been a fair amount of talk, certainly there's plenty of backlog even if it was to be scrubbed on the large commercial jet side, but now that you have Chen-Tech in there what are you hearing on the business jet and regional jet side, because I guess that's the market that they primarily serve?

Yes, they serve that and they also serve the single aisle side of the business, too, on the smaller end of that. Right now their business is pretty robust. They're not seeing any push back or any struggle as far as their order activity. And in fact we've seen a lot of -- since -- once we bought them we've seen a lot of additional opportunity for customers that have never been -- perspective new customers for them, people they've never serviced before, but because of relationships with Ladish would now certainly like to take advantage of Chen-Tech's capabilities,.so we think Chen-Tech's ability to grow is going to be constrained by their capacity.

Great, on last item on scrap sales. What's the situation where your -- has your pricing on the raw material versus scrap, is this helping or still hurting a little bit?

It's not particularly helping. I wouldn't say it's gotten a lot -- gotten worse in the second quarter, but it's still far from robust. We're still moving it , it's still -- we're still turning parts. I guess the one positive thing say is our product mix starts to shift with more jet engines obviously it's an opportunity because we're turn -- we're machining and forging more expensive material so we are getting a pickup from that, but it's still obviously no where near where it was last

Okay, thanks very much.

Sure.

And moving on we'll hear from Eric Hugel from Stephens.

Hey, good morning, Wayne. Wayne, can you talk about -- I guess last quarter you talked about product mix and you broke it out between jet engine, aero and then industrial, can you update us on where that is?

I took a snapshot at really looking at it this morning and the -- it is starting to trend back to the jet engine side, Eric, which is a positive for us, so obviously -- and aero's picked up a little to with the acquisition of Aerex. Chen-Tech and Aerex obviously have started shifting the the total product mix. So it's going to take a little time for that all to blend through, but I kind -- I took a quick snapshot this morning and kind of pro forma'd back as if we had had both of those businesses at the start of the year and it certainly would have shifted -- the jet engine side would have been up three or four percentage points, aero probably would have held pretty close to where they were, maybe up a percentage point, and industrial would have been down three or four points. So I think that's kind of the direction we're going to be trending for the remainder of this year and certainly going into '09 as far as the total mix, which is obviously a positive to us as far as long-term profitability.

With regards to the isothermal press try-out production and all that fun stuff is that revenue producing? Are you going to generate revenues off of the press in the fourth quarter or that's really as we get through Q1?

I really think that's going to drif -- actually the revenue side's going to drift into Q1, Eric. We're going to be making try-outs and we're going to be making parts in this quarter, but as far as real revenue you're not going to see it until Q1.

Okay. And can you give us an update with regards to -- I guess the plan was in the third quarter to start to see A380 beginning to kick in, in terms of production and that was going to drive some of the shift, as well as we get to the back of the year 787. I know things are in flux with Boeing, but based on a production schedule as you guys have it, is that still the plan? Is that still -- have there been pushouts A380?

380 has -- there hasn't had been a lot of more pushouts but we haven't had pull-ins on 380 either. 380 was not a real significant contributor in the third quarter. Clearly it's a program we think that it's going to go forward and will contribute, but it's been slow coming back. It's been hard to figure out entirely on our end what inventory levels are with the engine guys, so they haven't been overly aggressive as far as bring the product in to date. But clearly we think long term it's going to pick back up, Eric.

So the shift that you're seeing or that you saw in the first half versus what you're going to see in the second half, it isn't necessarily related to new, sort of like A387 coming into the mix., it's more just normal currently in-production programs just sort of timing?

Yes, it's been more of that rather than the new business picking up to date. We really haven't had the -- that boost that we've really been looking from from the new business kicking in to date.

And just final and I'll get back into queue. What was the percentage of metal as a percentage of cost sold in the quarter? I know it was like 49% last quarter.

It's still in the high 40s, Eric. It hasn't come down yet, although raw material prices are starting to drift downward. We're still caught up in what OEMs have committed to mills for long-term contracts, so those are still drifting through there. That's going to start working its way out and it certainly will work its way down in '09, but in Q3 we were still caught up in what a number of the OEMs had dictated we would pay for raw material.

So that will have a negative impact on the top line but a positive impact to margins but net-net zero?

Yes.

Okay, great. Thanks.

And moving on we'll take our next question from Tyler Hojo from Sidoti & Company.

Hey, good morning, Wayne.

Hi, Tyler.

Did you sa -- could you just comment on what exactly was the impact ballpark from Boeing in the quarter? I thought I said it was nominal, but I'm sure you did see somewhat of an impact.

It was relatively nominal. As I indicated it primarily hit our investment casting business in the third quarter. It didn't have a real significant impact on the rest of the business. Precisely what it is, Tyler, it'd be tough to say and I don't want to get you into segment reporting on -- it certainly impacted that -- it impacted that in our -- our investment casting business didn't have the quarter that we expected them to because of what got pushed out. For them primarily on existing Boeing programs, like the 777 and some of the other programs where they had to have some nice content, but those -- obviously those orders got pushed out as far as delivery dates.

And the investment casting is for the heat shields for the 777, is that correct?

Right.

Okay. So from an engine impact, you really didn't see any sort of pushout?

No, there wasn't any horrendous pushout. Obviously nobody was pulling in 787 schedules with Boeing on strike, but we didn't see a lot of additional pushout.

So is it -- I guess what I'm trying to get at, is it possible with -- even if the strike is over today is it still possible that you feel some of that impact in the fourth quarter as you see some of that lag effect?

Right. Yes, it's certainly possible, delighted to -- Tyler, I was delighted to hear Steve's comment that it looks like they're re -- the machinists and Boeing have reached an agreement, but --

Yes, right.

-- how much time it takes for schedules to get ramped up, and once those guys -- the bargaining committee reaches an agreement they've still go to schedule votes and they've still got to get membership and they've got to get people back to work. It'll easily be another two to three weeks before Boeing is back up and what that means to the schedule to the rest of the supply chain it's probably going to be a relatively uncertain fourth quarter.

Okay, all right. Having said that, is your general expectation -- I guess maybe with the acquisitions that you continue to see improvement from third quarter levels, or is it just too difficult to tell?

It's really difficult to tell, Tyler. If we could -- quite candidly with all the noise from Boeing and what's going on out there and between that and the credit markets, repeating third quarter would be a nice up-swing for us, quite candidly.

Okay. All right, that's fair. And just one more here. To your point I guess really nice improvement in the backlog. I was wondering what that backlog would have looked like net of the two acquisitions?

Net of the two acquisitions it probably would have been done a little sequentially in the third quarter, which isn't entirely unusual for us given what's gone on in the marketplace and with the Boeing strike. But no, both of the acquisitions came in with a nice backlog of their own, which certainly added to the total.

Okay, and just a follow up to that. Would you think that backlog has peaked here?

Has it peaked here? Well, it may have peaked for '08. I don't think -- it certainly hasn't peaked going forward. think it certainly hasn't peaked going forward. I think there's' we have got a lot of opportunities coming up in '09 with new problems over in Poland with ZKM, we think Chen-Tech's going to have an opportunity to book additional business with nontraditional customers. So long term we certainly don't think that we've reached our ultimate peak. But period -- quarter over quarter obviously there can be a little fluctuation, but obviously we think it's at a pretty strong level for a company that's never shipped over $500 million in year -- Sure, no, I -- -- so with over $670 million in backlog it was pretty encouraging for us.

I would agree.But just to circle back to one thing you said. What do you mean by nontraditional work for Chen-Tech?

Their business has been -- up until this point it has been really focusing at servicing GE and GE's offset partners. They've got certainly an opportunities to service other customers. With their equipment capabilities combined with Ladish's technology and material technology they've got opportunities to expand beyond their traditional GE base.

I see, okay. All right great, thanks a lot, Wayne.

Sure.

(OPERATOR INSTRUCTIONS) Our next question comes from [Frank Hazlik] from AMM.

Yes, one question is, what is the status please of your Mexican opera -- casting operation project?

It's -- it certainly has been pushed to the right as far as scheduling. We're still exploring opportunities down there. We're -- we have -- we're in a position where we've got perspective equipment for the facility being readied, but we haven't set on a specific site yet and we're still working our way through it. It's a situation going into that kind of a greenfield development is -- we want to make sure we don't make any mistakes and we have every "I" dotted and every "T" crossed, so it's really more of a '10 reality at this point in time as far as any kind of -- anything being in place and operating. We'll be continuing to explore our operations into the fourth quarter and into '09.

Is your -- with the first site you picked there, is that -- are you going to have to have another site?

We've looked at a number of different sites, and we still -- we've been going back and forth with local authorities trying to determine where's the best -- where's ultimately the best site for us in between transportation issues and local incentive issues.

So that won't be an operation in '09 then?

No, not at this point, no.

Anything further, Mr. Hazlik?

Thank you.

And we'll move on to J. B. Groh from D. A. Davidson.

Good morning, Wayne.

Hey, J. B.

A couple questions on the 118 press, are we going to see an immediate impact to profitability or how long do you think it'll be before that gets fine-tuned to a point where its running at an optimal rate? Does that take a couple of quarters or how are you looking at that?

Well, I think we're going to start -- I think we'll start seeing -- at least internally we're going to see an impact from when it starts running, but it's really an issue, J. B., of when we get it more fully loaded to when you're actually going to see it from a financial result that you guys will actually see it as far as the investing public. But it's clearly going to be a contributor in '09. If it's not a material contributor in the first quarter certainly it will continue to pick up and build going forward. It's really an issue, in all honesty, of Boeing getting going on the 787 (inaudible) and starting ramping up for the product which has to flow across that press.

But do you shift work that's allocated to the older press to the new press to fill it up sooner, because it's probably more efficient that one that was built several years ago?

There's going to be some shifting based on size and complexity of product, J.B., as we go forward with it. It should be more efficient so clearly there will be an inclination, obviously, to use that as much as possible. And also try to avoid what we have historically experienced with our current two presses with some of the maintenance downtime and opportunities we miss because of that. So with having the other press, that should be -- really present us with some opportunities to run a little -- certainly more efficiently and a little more continuously rather than some of the periods where we have to go down -- where we have shutdown for long weekends or four or five days to do major maintenance on the current presses. It gives op -- and it's going to give the operations and production guys at Ladish Forging a really opportunity to start capitalizing on that with better productivity and better availability in a piece of equipment.

Do you have an estimate for what your average gas price was during the quarter? Obviously those prices have come down pretty significantly, when do you start benefit -- really benefit from the drop in energy prices?

Well, we're going to benefit going forward, I think we'll start seeing some benefit. We probably didn't see much in the third quarter, I think we're going to start seeing some benefit in the fourth quarter. Our guys with their intelli -- with their intent to do their forward buying, unfortunately our guys have bought forward at somewhat, shall we say, higher than current market price, but it's certainly less than where it was last year. So we aren't going to get the immediate full impact of you know, where -- where the spot price is gone for natural gas at this time. But we will get the immediate full impact of where the spot price has gone for natural gas at this point in time, but we will get the immediate impact because we do only buy forward for the 60% to 70% of our projected demand so we're get -- certainly get the impact on the spot side for that other 30%, 40%. And our guys have bought at lesser rates than where we were last year, so we are going to have certainly a benefit of that in the third quarter and going into /09 and beyond.

So it doesn't happen as fast as you see the spot price move but there will be some benefit in the future?

Yes, absolutely. And then if I -- I know you don't like to give guidance, but if I look at a case base for top-line growth, is it going to be roughly what we'd see production changes at Boeing and Airbus and maybe a little higher because you've more content on 87, is that a fair way to look at it? Yes, that's -- I guess it certainly is one way to look at it. We're obviously expecting some decent growth next year. Chen-Tech is certainly going to help that with what's going to happen organically with our additional organic capabilities. and Aerex will contribute, too, but as I indicated earlier you have to be -- don't double-count Aerex.

Then Chen-Tech you -- you've given us a (inaudible) number there around $50 million or something like that?

Actually in the $50 million ballpark as far as annual sales.

Got you, okay. Hey, thanks for your time, Wayne.

Sure.

And moving on our next question comes from [Mark Zinski] with 21st Century Equities.

Hi, good morning, Wayne.

Good morning.

Just had a question about Chen-Tech. Do they do anything with turbo props?

No, not really. They're real focus is -- they are a smaller version of Ladish Forging, but their real focus is on rotating engines for jets.

Okay. And just to confirm, SG&A should be coming back down into the historical ranges?

Yes, yes, it should be. We don't have -- without the fees associated with the tax rebate and some additional expenses obviously we incurred in the third quarter with the two acquisitions and the private placement of debt, when you take that noise out of there we'll be back in the 4% range.

Okay. And in terms of your defense-related products, I know you touched on the missile product, but assuming -- I guess not a -- assuming there's more dovish defense spending is that really going to impact you or a lot of these programs replacement equipment-type programs?

I don't think we get a more dovish administration. I don't think it is going to kill us on the defense side for two reasons, one being a lot is the replacement issue. Where we're really strong on the defense side is a combination of helicopters and military engines. I don't think -- they're not going to stop replacing and maintaining the jet engines and the helicopter engines and I would tend to think given where the application of the helicopters are, I don't see helicopter spending going down.

Fortunately we're not subject to waiting to find out if they're going to appropriate the next destroyer to be built or some huge program like that that's going to make or break or budget. Our bus -- the military side of our business is much more maintenance, and as far as the only really new program is the new jet fighter and we are on that engine for that 35 and we'll be on that going forward and that's just a matter of you know funding for that. So I guess our general take is, given the international contribution to that program that's most likely going to go forward. We're not in a real great position to not go forward with that about given the European funding that helps go into fund the joint strike fighter, so we're not --

And are you hearing -- are you getting any feedback from the OEMs about the Asian market in terms of how that's progressing?

Not at this point in time. We don't know really anymore than what you're reading in the papers is the same thing we are.

Okay. And then just lastly, again, circling back to raw materials. Nickle and titanium have been going down but you don't think you'll see any benefit from that until fiscal '09, is that right?

I think really that's when that's going to happen because of the commitments the OEMs made from Boeing to the engine guys that made to the smelters as far as what they were willing to pay for material for the rest of '08.

Okay, very good. Thank you very much.

Sure.

We'll go next to Tom Spiro from Spiro Capital.

Tom Spiro, Spiro Capital. Good morning, Wayne.

Good morning Tom.

You mentioned today in your commentary that the debt to total cap now is something like 29%, a little higher than you'd like?

Right.

What's your target? What is the range you're comfortable with?

Literally Kerry and I like to keep it in the low to mid 20s.

And do you expect to be able to pay down debt in Q4?

Yes, we certainly expect to be paying down short-term debt. We've got a little short-term bank debt right now and we'e going to be paying that down in '09.

Are you still hiring or or have you got the workforce you want?

I think we pretty well have the workforce we want at this point in time and I'd say that's pretty much across the board. 'Obviously there is always a few spots where there's some specialist needed in some area, but I'd say on an overall basis our hiring's pretty well taken care of.

And are the new folks now fully well employed?

Let's hope so, yes. It's much better than it was in first half of the year with bringing all the new people on so I think people are getting much more up to speed in their positions.

Thanks much.

Thank you.

And our next question is from Robert Hoffman with Princeton Capital.

Good morning. Just one follow up on the isothermal Q4 plan. Will that negatively affect fourth quarter? Will there be a signicant amount cost in doing all the testing, or has that been going on in the third quarter and it's just going to flow through?

It's just going to throw through. You're not going to see the costs that we're going incur in the fourth quarter on the new press.

And in the past you've talked a little bit about capacity utilization over at ZKM, can you flesh that out a little? I know you said you've gotten certified for some aerospace jobs but there was also a fair amount of industrial activity that was going on. Is that holding up so that you're capacity of utilization is going up or is it --?

Yes, it should be a little better capacity utilization for ZKM combined with shifting some of the work away from the -- some of the industrial work over to aerospace. There's still some industrial work there that we would like to start phasing out and moving into obviously better margin business on the aerospace side. So it'll be a combination of both.

Yes, because as I recall you obviously would look to be 100% aerospace, but there was enough capacity that you could keep the industrial going and then just add incrementally on the aerospace side?

Right. And most of the industrial work at ZKM side we will be maintaining because we've got to point where we're by-and-large happy with the total of -- or the majority of the industrial work we have, so i'ill be supplementing the aerospace work and obviously trying to get a better utilization along with, obviously, along with some higher margin opportunities.

And then finally, acquisitions do you still see them going forward, or given the current environment here and what you've already accomplished, do you think you'll step back and take a deep breath?

Well, I guess on a -- we're certainly going to continue to look. I think given where we're at in this kind marketplace obviously we have to be a little judicious on where we look and what we do, but I will tell you if the right opportunities come along we're not going to turn away from them at this point in time. There is -- we think there's still going to be some nice op -- some nice chances as far as some businesses that are going to turn over. I think you're going to continue to see people being a little leery about long-term estate planning with some of the smaller, privately held businesses that may come to the market and if they come to the market we're going to be in a position to go forward. I did speak with -- yesterday with our lead commercial bank and they were assuring us that they're ready, in spite of everything that's going with the acquisitions and where we're at this point in time that they're still out there ready to stand behind us, and if we need capital, we certainly have ready access to capital. So if the opportunity comes up and it's right and we can buy it for the right multiple, we're certainly going to move.

Well, obviously, high multiple deals are probably the thing of the past, so you'll probably have more realistic sellers.

Well, we hope so.

Yes, great. Thank you. Good quarter.

And we have a follow-up question from Eric Hugel from Stephens. Mr. Hugel, your line is open, please go ahead with your question.

Wayne, hey, how you doing?

Good.

With regard to your recently-hired employee I guess you hired back in Q1, you said you're with where they're climbing up the learning curve. If you had to say, look, where are they on the process? They're still significant -- you're happy. but is there still a significant amount more of efficiency that you can get out of them that will translate on the margin?

Yes, it's going to be a continual ramp-up, Eric. We're pleased that they're contributing at this point in time, but they're not fully there and they'll continue to get better as we go forward, primarily at -- with the forging operations in Wisconsin and out at the casting facility in Oregon, Some of those job skills take six, nine, 12 months to learn, so they're able obviously to start doing jobs now but they'll get better as time progresses and we expect to see continued improvement out of them.

Okay. With regards to the missile work, was there any in Q3 that boosted the margins?

No, not really.

And is there an expectation in Q4 or is that '09?

I think it's going to be more of an '09 event, Eric.

Okay. With regards -- the 15.1% margin, the gross margin, pretty respectable, but the way I think about there are a lot of puts and takes here with regard to -- obviously you have some unknowns with regard to the Boeing strike but you have Chen-Tech that was only in there for a short time and I'm thinking that's probably nicely higher than average gross margin potential here and that's going to be going forward. Is it your expectation that even with the Boeing strike -- although there's some question marks -- that you may be able to hold at least that 15% margin, and then going forward as we get past the Boeing strike into next year that with the new capacity coming on line and so on and so forth that we should be looking at growth to that?

Well, we certainly aren't happy. In all honest I'm not happy with a 15% margin, but I'm happy that it's improved and gotten back to there. But I think long term going forward as we meld all of these businesses and they all are contributing we certainly expect Ladish as a whole to start drifting back north of 15%. Another 100, 200 basis points long term is where we want to be.

Okay. When do we get to the point -- I remember we've had these conversations in the past of looking back at the historic incremental margin, and all that fun stuff, which hasn't really panned out for the last couple of -- year or so for various reasons. When do you think we get to the point where that side of the story starts to come back in?

The real issue is -- it's a multi-part answer to that question, Eric. Chen-Tech is certainly going to help that side in the equation, Aerex will also, tweaking the mix over at ZKM and getting them back and getting their profitability heading up with a better mix is going to help, and having raw materials starting to trend done. All of those things will come together and it will help us on the margin side.

In terms of scrap pricing, given that nickel and titanium prices have come down, are you -- like when you sell your scrap -- I'm just trying to figure out if there's more of a headwind here. I know there's the mix issue and all that fun stuff, with how rich the metal is in terms of what you're doing, but in terms of pricing is the price of scrap that you're selling now reflective of the price of spot now or is there some kind of trailing? How should we think of that?

It's more reflective in the price of spot. Scrap is always going to be more reflective of what's going on in the spot market.

Okay. So if we assume that -- let's say on a sequential basis that once Boeing starts producing again and 787 and A380 starts to kick in, maybe you're starting to get some more demand for these metals in terms of some of these aerospace alloys, pricing should be at least hopefully flat and so that should be able to start contributing as mix starts to improve. Would that be a reasonable thought here?

Yes, that is probably not unreasonable.

And finally, when do you start to see actual notable ramp-up in F-35 production revenue?

Good question. It's not going -- obviously we certainly hoped in '09 that that program gets ramped up, but it's still relatively slow at the moment, so we haven't seen a big push to date.

And is that a lot of isothermal work?

Certainly it's some, yes. Part of the core of the engine is both isothermal and there's some conventional forging and some casting also. But there's definitely some iso work associated with that.

Did you get any benefit from -- I guess Precision had one of their iso presses go down last quarter, was there any work shifted, or is that just a nonevent for you?

It's hard to say if the work moved over, obviously. Our iso presses have been busy, so I'm sure there's probably some of that that drifted our direction because they didn't have any place else to go.

All right, thanks a lot, guys.

Sure.

(OPERATOR INSTRUCTIONS) And it appears there are no further questions today. Mr. Larsen, I'll turn the conference back over to you for any additional or closing remarks.

Okay. Well thanks everybody for dialing in this morning. As I indicated at the start it was a pretty monumental quarter for Ladish from a lot of reasons. We think this really has well positioned for going forward. It was a good quarter results wise and a good quarter strategically for us to get the Company for us headed and continuing the direction of where we want to take it. So we'll work through the noise of the Boeing situation and the fourth quarter of any inventory adjustments or otherwise and have ourselves well positioned for going forward in '09 and '10. So thanks for your questions. As always, if anybody has specific questions most people have got my phone call -- phone number, just give me a call. Thanks.

And that does conclude our conference call today. Thank you all for your participation.