ATI Inc (ATI) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Ladish Co. Inc. fourth quarter and year-end 2008 results conference call. Just as a reminder, the call is being recorded. At this time, I would like to turn the conference over to Mr. Wayne Larsen, Vice President of Law and Finance.

Good morning, everyone. Welcome to the Ladish call for fourth quarter and year-end '08. We will get going right away. Before I do, as always, I will give the proviso that there is probably going to be some forward-looking statements made today, as far as looking outward, and things will be subject to management opinion, and, of course, protected by the provisions of the Safe Harbor act of the Securities Litigation Reform Act of '95. So with that behind us, let's move on.

We're really going to talk about four different topics this morning -- fourth quarter of '08, full-year '08, 2009 outlook and beyond, and then, obviously, we'll take some questions.

But really, the important factor to focus on today is really three different time periods -- what happened in '08, where we see things going in '09, where we've got some pretty good visibility at the moment, then where we really see Ladish going in the market in '10 and beyond. Really three distinct time periods that we're going to try to focus on this morning.

Starting with '08, going back to the wrap-up for the fourth quarter. The fourth quarter was relatively challenging for Ladish. We were really impacted, obviously, by the Boeing strike. It disrupted schedules across the board for us at virtually all of our operating units.

Probably a couple of our -- the operating units that were probably hit the hardest by the Boeing strike were our investment casting business out in Oregon, and a couple of our machining operations took a pretty significant hit from the schedule disruption also, as a result of the Boeing strike.

Those schedule disruptions obviously hit the fourth quarter. We're still working our way through them right now in the first quarter and I think we're going to see it continuing in the second quarter. Hopefully, we're going to see it a little stronger second half of the year from what we're seeing right now, but we're still working with the OEMs and, obviously, what goes directly to Boeing on -- from us, so we're still working our way through schedule push-outs and adjustments.

That really negated some of the order growth that we were expecting to see in the fourth quarter. The result of this -- us ending up with a year-end, still strong backlog at $629 million, but it was down sequentially from the third quarter of what we had ramped up. So, overall, [not] order cancellations is typically in this industry but we saw an awful lot of schedules move out of the right, further out into '09, and into, more importantly, into '10 and beyond, particularly on a number of the jet engine programs.

In response to that, we didn't sit on our heels. We took some relatively aggressive actions. We had a 5% overall reduction in headcount by the end of the year, corporate-wide. We're still evaluating where we go from that level from here.

It's particularly difficult for us, at this point in time, judging where we go with each individual business unit and what the demand is going to be for personnel and manpower. But we spent an awful lot of time and a big investment in the first half of '08, and in the last of '07, hiring people and training people, positioning ourselves for a ramp-up and taking advantage of all the new capacity we were adding before the market hit the -- tailspin that it did and the Boeing strike, obviously, compounding matters.

So we're being as judicious as possible, in where we go with manpower and what we do. As a result of which, obviously, we've done a number of other things to control our costs. Obviously, overtime has been cut out. Hiring has been cut out, then we're looking at where we can go to manage our costs going forward.

If you look at fourth quarter results overall, sales were up sequentially from fourth quarter of '07, about $112.5 million versus $108 million in '07.

Unfortunately, our cost of sales were up even more sequentially. We ended up getting through the fourth quarter. We saw raw material move up from where it had been in the mid-40s as a percentage of sales. It moved up into the high 40s. We finished the year with raw material being about 49% of sales.

Obviously, that had a significant impact on margins, going forward, and it resulted in our gross profit margin dropping down to about 9.6% from last year when it was about -- in the fourth quarter, it was about 16.9%. Obviously, a big portion of that reflected in the swing -- in the raw material escalation that we had to experience.

A positive in the fourth quarter, as we begin -- continue to get our SG&A back in line, we ended the fourth quarter with SG&A down to about a 3.9% of sales, below the 4% that we typically target, so we were pleased to get that back in line. We put behind us a lot of the expense we had had earlier in the year with some of the hiring and some of the issues we went through, so we were able to bring that back into line.

That resulted in -- obviously, worked its way down to -- a less-than-satisfactory operating income. It dropped down to about 6%, did about half the rate it had been the prior year. Again, all reflected largely in the raw material issue.

Along with raw material increasing as a percentage of cost of sales, the other sideline of that is we saw continuing in the fourth quarter that we'd experienced through most of '08 -- the byproduct market continued to head south, that'll -- close to disappearing, as far as any kind of a favorable return.

We saw a significant decline in the fourth quarter, again, and we're looking at that. That's not correcting itself as we head into '09, at this point in time. So that's another challenge that we're facing.

One of the big issues that you'll see and the variation is where we ended up for the year with -- as far as a tax provision. You'll note we actually ended up the fourth quarter with a tax credit as opposed to a tax charge. That was really a reflection of -- we had a significant overall tax benefit over the course of '08.

We were much more aggressive in '08 than we've historically been up until -- up and through '07, Ladish had had the benefit of a lot of years of built-up net operating loss carryforwards to utilize, that never really necessitated us being aggressive on the tax front. We became much more aggressive in '08 and as a result of which, obviously, we were able to bring down our incremental tax rate throughout the year, and ultimately even up and to the point that it turned into a tax benefit in the course of the fourth quarter.

The long and short of it is we ended up -- because of the tax benefit -- with net income of about $9.6 million, in comparison to the $9.3 million in the '07. EPS came in at $0.60 a share versus $0.64 last year, the differentiation being largely a fact of additional shares outstanding.

Those additional shares outstanding obviously reflecting, largely, the Chen-Tech and the Aerex acquisitions for the portion of those that the owners did take in Ladish stock.

So overall, the fourth quarter, while it was challenging, decent ended -- we ended up with a decent level as far as earnings. We had some other positives that went on in the fourth quarter. We have, in large part, finished up their number 118. The new isothermal press, it did -- we did run it on tryouts in the fourth quarter, did some initial forging on it, nothing production-wise, but it continues to -- we're working out the kinks of it now.

That project, obviously, was slowed somewhat in '08 as we saw the push-out on the 787, the ultimate demand for that piece of equipment, obviously. As that moved out, we quit expending premium dollars to push that project to completion. But it is largely there and we're wrapping it up here in the first quarter of this year.

The -- obvious other positives that we inventoried the end of the year -- the expansion that we've done at ZKM and Pacific Cast are both also largely completed. Those projects were far enough away. Again, we didn't expend premium dollars wrapping them up because of where the market is headed, but we are continuing those. We're obviously not sitting back and waiting for something to happen. We will have those ready.

Looking over '08 as a whole, obviously, it was a record year in sales for Ladish at $469 million, up 11% from '07. Again, cost of sales were up somewhat. We ended up with cost of sales at about 87% versus 83% in '07. Again, that's really a reflection of about a 3% swing in raw material. Raw material ending the year in '08 at a 49% level versus a 46% level in '07, is largely the differentiation there.

Obviously, that flowed on down through gross profits. SG&A, we were up a little for the year at 4.2%, really a reflection of what happened in the first half of the year with some of the hiring and some of the issues that went on, and some additional expense we incurred in the third quarter with the two acquisitions that hit the SG&A line.

So, on an overall basis, we ended up with SG&A at fourteen -- 4.2% for the year, up a little higher than we want, but as you saw from the fourth quarter, SG&A is trending back down to where we want to be.

One thing we ought to point out, if you look at -- interest expense for the year was about $1.3 million versus about $2.2 million last year. That's largely a reflection of what we have done as far as capitalizing interest expense over the course of '08. With all the major capital projects we had going on, that interest was attributable to those projects.

That's an item, when I talk about '09, that is going to reverse in '09. But it was, obviously, a benefit in '08 for us to lower our total interest expense.

We also had the benefit of some additional interest payments, which you saw in the fourth quarter, which was reflected -- some of the payback we got on some of the interest payments we got from our Polish subsidiary.

Resulted in, overall, a three point -- $38.3 million of pre-tax, obviously down significantly from the prior year. But again, we benefited, when you came to the tax line, with a relatively -- significantly lower tax rate of a 15.4% tax rate for '08, which helped -- certainly helped smooth things out, again, because of the three significant tax credits I talked about earlier -- the R&D tax credit; we ended up with a significant lower state tax rate because of some other apportionment that we had done between various states; and we ended up with a significant tax credit from Poland from the -- as a result of all the investments and the expansion we've put into ZKM, our Polish operation. We got the tax benefit from that in '08.

All things considered, obviously, resulted in us ending up with $32.2 million of net income versus about $32.3 million last year. Again, the higher share count resulted in $2.15 a share this year versus $2.22 last year. But overall, as far as an earnings basis, a relatively flat year.

The -- probably the biggest issue that happened in '08, again, was ultimately the Boeing strike, along with Boeing and Airbus -- some of the production delays that we worked our way through. Those resulted in the bottom line of us having -- for us, a relatively significant product mix swing.

Historically, with our three product categories that we look at -- jet engine, general aerospace, and industrial forgings, what we ended up with, because of the activities that Boeing and Airbus and their scheduling, we saw jet engine drop from -- last year, it was -- in '07, 56% of our sales. It dropped five percentage points to 51%.

General aerospace actually crept up 2% from 24% in '07 to 26% in '08. And probably the biggest issue, as far as impacting profitability, is -- resulted in industrial forgings creeping up from 20% to 23%.

That swing in product mix obviously resulted in a lower margin overall product being sold. We also, obviously, missed out on some incremental sales opportunities, and this also has a further impact on byproduct sales. I have to keep coming back to that.

To give you a better impression on what has happened with overall byproduct sales, byproduct sales in '08 were not quite half of what they were in '07 and, unfortunately, we're looking at further deterioration of that in '09. But overall, those have -- obviously, have had a significant impact on overall margins and profitability.

Some of the other issues that we did deal with and will continue to deal with, as a result of things that happened in '08 -- it's probably no surprise to anyone we saw significant decline in our overall pension assets in '08 as a result of the overall market decline here in the U.S..

While we've historically had a pretty conservative approach to pension investments as far as our assets, with a pretty even split between equities and fixed income, obviously the equity portion of our portfolio took a significant hit during the course of '08, which is going to have an, obviously, impact on '09 and beyond from both an earnings perspective and a cash flow perspective.

Looking forward -- or looking back on '08, though, I think -- we'd be remiss if I didn't talk about some of the positives, obviously, that happened in '08. As challenging as '08 was, with what happened in the global economy and particularly in the aerospace industry, we were really pleased with both acquisitions we accomplished in '08.

Picking up Aerex Manufacturing and Chen-Tech were great adds for Ladish. Aerex has really helped us solidify our helicopter business. Because of that, and also Chen-Tech has helped, certainly helped, on the engine side on military, but we saw our military business for '08 actually increase to about 31% of our sales, up from the mid-20s.

We think that's a positive. We're not concerned about the military concentration because we think we're on the right kind of military programs. We don't see helicopters and fighter engines going away. We're not dependent on any one particular program, but we think our overall concentration of where we are set with military is certainly a positive and we see that continuing in '09 and beyond.

Chen-Tech certainly brought a world of things to the table. It certainly is helping us. It will increase our -- we will increase our small jet engine participation on regionals and corporate jets. It's also going to help us with -- build back our overall share with GE, and we'll reduce our overall dependency from where we have been the last few years with Rolls-Royce.

We think that's a positive, to get our business a little better balanced, and we've started to see that already with just having Chen-Tech for a quarter of '08. So those are certainly positives.

Talking about the acquisitions, obviously, there was one minor negative of the acquisitions, obviously was -- in the course of any acquisition, there's always some accounting adjustments and there certainly were in the fourth quarter. We took about a $1.5 million hit in the fourth quarter from purchase accounting adjustments, as far as writing off the profitability and the inventory that we purchased at both Aerex and Chen-Tech.

So again, that's another negative, but that's worked its way through the system and they're both overall certainly accretive transactions and are both contributing both profitability and it'll be -- contributing cash flow also.

One other [obvious] spot in '08 was -- certainly was ZKM getting their first major LTA with Goodrich for an aerospace product. That business is going fine. ZKM is slowly building and the transition of ZKM to -- into aerospace and away from its concentration on industrial is certainly continuing in '09 and beyond, and that's another positive from our perspective.

Looking out beyond where we are at right now, for '09, '09 is going to be a challenging year for us. We really expect -- as we look at things right now, and all of our business unit presidents are looking at '09, I would say right now, with an extremely cautious attitude.

We're looking at sales across the board being down probably 5% to 10%, based on current schedules as they look right now. Obviously, we think there's some -- certainly some potential for some improvement in the second half of the year. We think some of the schedules can certainly solidify and hopefully pull up a little as a result of which.

So sales is going to be a bit of a challenge. That's not as big an issue right now as far as we're looking profitability in '09 and having a lot more headwinds facing it.

Some of the issues that we're going to be faced in '09 from '08 are we're going to be looking at depreciation probably up about $3 million in '09, as a result of all the capital that we've put into the business in the last couple of years. Interest expense is going to be up an additional $2 million to $3 million in '09, not because of additional debt -- in fact, we'll end up -- we'll be going forward with less debt, I'll get to that in a minute.

But it's really a factor of, over the past couple of years, we've been able, because of the capital expenditures we've had, to be able to capitalize interest. And with those projects behind us, that interest is going to be flowing back through on an ordinary basis, so we're going see interest expense up in '09.

I alluded to earlier the pension issue. It's a huge issue right now. I know you've been hearing it from some of our other peers and other people in the aerospace industry and across the board. Obviously, we're looking at a significantly higher pension expense in '09 versus what we've experienced in the past.

At this point in time, we're estimating that pension expense is going to come in somewhere in the neighborhood of $7 million to $8 million higher. That's obviously somewhere in the neighborhood of 30 to 40 -- $0.30 or $0.40 a share cost for '09.

On the pension front, we are going to be relatively aggressively going after refunding our pension plans and building them back up. There's not a particular risk here right now, by any stretch, for Ladish, but it is an issue that we're going to have to address.

Ladish, fortunately, took the step a number of years ago -- most of our pension plans, particularly for the hourly groups, as far as the unions, have been frozen. Those liabilities are fixed, so it's not an issue of the liability increasing. It's really just an issue of market performance of assets.

So, even though, as I indicated, we've been relatively aggressive -- or relatively conservative when it comes to our investment -- approach, we're going to continue with that in the future. And it's just a matter of it's going to be a cash flow demand going forward to get these plans back to where we expect them to be on a funded basis.

But from a P&L perspective, obviously, it's going to be another hit and another challenge to profitability in '09, and probably beyond for the next few years.

One of the other issues that's another challenge for '09 on the profitability front is the overall continual deterioration of the byproduct market. As raw material prices are coming down, certainly the byproduct market continues to deteriorate, and we're looking for another hit to byproduct sales this year, probably comparable to what we experienced last year, but again, that's going to be probably somewhere in the neighborhood of $0.30 to $0.40 of EPS for the course of the year.

Another issue we're going to have, while we're going to be aggressive, and in fact, I've got a meeting when I get off of here today on how aggressive and where we can go on the tax issue, taxes are clearly going to be higher in '09 than where we ended up in '08. I'd love to have another 15% tax rate. I don't think that's, obviously, in the cards.

We are right now planning on a more typical 37% tax rate, but obviously, we will be looking at anything we can do to lower that going forward.

Looking out at '09 -- some more on the positive side, there are some positives out there. Raw material as a percentage of sales is heading back down. That's certainly a big positive for us that is going hopefully help to offset some of the impact we get on the lack of byproduct sales.

So, with raw material heading back down as a percentage of sales, will certainly, overall, will give us some benefit.

Another certain -- certainly a positive for '09 is energy prices coming down. Obviously, as most of you know, we're a big natural gas user, and with natural gas coming down, we're looking at some -- certainly some help there. It's not quite the panacea that you would love it to be, given the fact that we do buy forward as far as our natural gas, so my guys have bought forward, so we are not exactly benefiting totally from the relatively low spot market pricing that you're seeing today.

But on overall basis, raw material -- or energy prices will be less in '09 than they certainly were in '08. So we are going to get some benefit out of that. They have bought forward at lower prices, and what we don't cover in the spot -- in the long-term purchases, obviously, we're getting the advantage of in the spot market. So that's definitely a positive.

One of the other positives that lead into the real drive for '09 is capital expenditures. Last year, we ended capital expenditures at almost $50 million, I think yet another all-time high for Ladish, as we were wrapping up the 118 press, along with the capacity expansion and the new furnace at Pacific Cast, and the machining and inspection expansion in Poland.

We expect CapEx this year to be somewhere in the ballpark of $20 million depending on what happens, maybe a little less than that. Certainly, probably most of you have heard, that's not a bare bones, absolute maintenance CapEx number. A maintenance CapEx number for us is probably somewhere $8 million to $10 million. There's still some productivity enhancements in that next $10 billion, and that will be a decision, ultimately, that will be made between the management teams, Kerry Woody, and ultimately up to our Board of Directors as far as just how far we're going to push and where can we shake things on the capital side for '09.

Because, really, the focus for '09, given what the headwinds that we're facing and the uncertainties in the market, our real focus in '09 is truly going to be getting back to what Ladish has excelled at for years, which has been a big cash flow producer. We expect '09 to be a significant cash flow year for us, with CapEx down -- costs under control.

We fully expect to generate a fair amount of cash this year. We're going to use that cash. We're going to pay down our short-term debt during the course of the year. We're going to continue to, obviously, to fund our pensions, as I talked about earlier. It's an obligation we have that we're going take care of.

And the other issue, as far as excess cash that we certainly have not ruled out and we're going to be evaluating as the year goes by, is whether or not to reinstitute our stock buyback program. We had a pretty aggressive stock buyback program in the '98, '99, 2000 timeframe, the last time the stock was at -- what we consider unreasonably low levels, so we're certainly going to reevaluate that and see where we go with that, depending on what happens, what the market -- and where our stock goes.

The other issue as far as application of cash, obviously, is always on the acquisition side. At this point in time, I wouldn't say that we are out -- we are not out of the market. We're very selective, I'd say, at this point in time, mainly due to the multiples out there. When Ladish has been beaten down to the level of where our price is, it's hard to find something that's a lot cheaper than we are today.

So -- but if there's something strategic happens along and we have the opportunity to really improve the business, obviously we'll be back into the market, looking at that. So it's going to be on a case-by-case basis as we go forward during the course of the year.

One of the things we're really focusing on this year, again, try to squeeze as much as possible out as we can out of the business, given what's going on, is the interaction between our operating units, to make sure that we're getting the absolute best synergies out of our various operating units, from Chen-Tech to Stowe, from Ladish Forging to Aerex, across the board, to make sure that the best application is being made of what we can do internally, effectively.

Obviously, it saves dollars going out of here, as far as sub-contracting, and gets us in a position where we can really maximize earnings and cash flow.

Some of the other actions, obviously, we've talked about. As far as minimizing our costs, I mentioned that we had had a 5% employment reduction. We're continuing, obviously, to look at that and evaluate on a unit-by-unit basis whether further actions need to be taken, based on schedules and demand.

We cut out all overtime within the Company. We also have scheduled an additional, for the Ladish Forging, for our main forging operation here in Wisconsin, they've scheduled a second week of shutdown in the month of April, along with their traditional one week later in the summer.

So they have now scheduled two weeks of shutdown to try to balance out schedules. They're certainly seeing indication of schedules being much stronger in the second half of the year. I think, in large part, with the assumption that Boeing is going to need support on the 787 going forward, so we are trying to best allocate our manpower to the time periods where we can really maximize the opportunity.

As difficult as '09 and the current economic environment may look, I guess one thing I'd remind everybody on the phone, that the Ladish management team has come through a lot of difficult cycles before. This management team was here through the '82 to '84 cycle. We were here through the '92 to '94 cycle. We got through the '02 to '04 cycle after 9-11, and there's no doubt that we will get through the cycle.

While it's challenging, it's not nearly the level of challenge that we've seen in some prior periods.

The Company, obviously, is still profitable. We're still going forward, still generating significant cash flow. The Company has no liquidity issues. We are in an excellent position to go forward.

And looking at going forward, I guess we will go to there and then I'll open it up for questions. On a long-term basis, we're still incredibly optimistic about where Ladish's opportunities lie. Looking out beyond '09 and '10 and '11 and beyond, it's clear to us -- the 787s are going to be built.

We've got great content on the 787 already. We've increased our content on the 787 with the Chen-Tech acquisition because Chen-Tech's got a nice additional content, [got it] along than what Ladish has on the Gen X program, so that's definitely a positive.

Airbus and the 350 XYV is definitely going to be built, Ladish has got a great position on that. We're sole source with Rolls-Royce on the first -- on the only engine that's been approved for that plane, and we're the only forger approved for the parts on that engine.

Product mix is going to swing back. Obviously, I talked earlier about product mix dropping down to 51% jet engine. If you look back to '06, our product mix was 62% jet engine. We think, out in the '10 timeframe, we're going to be heading back to that direction. Chen-Tech will be ramping back up, as will Ladish Forging.

As we swing back into the jet engine side of our business, we certainly pick up on the incremental side with much more profitable product and a lot more opportunities.

I also talked about ZKM is only going to continue to improve. They are into aerospace. That aerospace content is going to grow for them.

Our new isothermal press here in Cudahy is going to get more -- it will be more fully utilized in '10 and beyond, when the new engine programs come online.

And we do have the advantage, while we bit the bullet in '08 training new employees and bringing people online to replace the aging workforce we've got in a number of our facilities, we're going to have the availability of not having to go back through that learning curve with those employees as the business ramps back up in '10.

The other opportunity that's out there, obviously, with Chen-Tech, we expect -- Chen-Tech has some significant growth opportunities. Historically, they've really been focused on servicing GE and GE's offset partners. They get technical capabilities that will certainly -- we're going to try to utilize and capture some additional, obviously, small-engine capability for Chen-Tech at some of the other small engine manufacturers.

So, again, it's another nice growth opportunity.

We, as I said, are very optimistic about where this business goes and where our opportunities are. We think we're well positioned with how the whole Ladish family of companies have come together. '09 is going to be a challenging year profitability-wise, but certainly we think, going out into '10 and beyond, Ladish will be back doing what Ladish does best.

So with that, I'll stop talking and I'll take questions.

(Operator Instructions). Steve Levenson, Stifel, Nicolaus & Company.

Thanks, good morning. A few questions -- on the military programs, you mentioned fighter jet engines and helicopters. Does that also include space or is space still pretty much a zero right now?

Space is still relatively low right now, as far as dollar volume of sales. But as far as content, we are in a great position on the Orion Ares program, the shuttle replacement. We've got 23-some pieces on that program, not counting the cylinders.

It's really an issue of -- with all the money the government has thrown around, are they going to throw some at NASA and keep the program -- keep going and get this program ramped up? We, obviously, have every reason to believe that they will. The President said he was going to, in the course of the campaign, so -- and they don't really have a whole lot of options. The shuttle is going to have to be retired one of these days.

So, we're relatively confident, but that's not something that we've got stuck in our numbers at the moment. That's an '10 and probably beyond number for us. Again, nice profitability, but really low volume at the moment.

Thanks. On 787, do you have any hint of when the production ramp might begin and what sort of rates you're hearing about?

Unfortunately, we're no brighter than anybody else. We don't have any access line into Boeing, or for that matter, into the engine OEMs, as far as to give us a better line. We're only as smart as everybody else in what we read in the paper and what Boeing says.

And on A380, it sounds like that one is picking up. Maybe you can give us some detail on what's going on there.

It's starting to. Right now, our main content on the 380 is via Rolls-Royce. I think Rolls is working right now through some inventory that they had built up before -- when the A380 got put on hold. But I said we expect some -- hope for some ramp-up in the second half of the year and that's one of the programs that certainly should pick up in the second half.

Back -- in relation to that, on materials availability. What's the latest news there?

We've got all the material we need right now. We're not having --

So you don't need to second source, or you're getting it from the second source?

The second source isn't fully qualified yet, but it's going -- but will be. And quite candidly, with what's happened in the marketplace, that whole program, as far as qualifying the second source, has not been put on anybody's front burner, either.

It's still processing along, but because of what's happened with Boeing and Airbus scheduling, the engine guys haven't been that keen about doing it. They're still working it, but -- it will ultimately come to pass.

In terms of byproducts, are you actually holding inventory or are you just sending it at whatever the spot is?

It's -- in large part, we've been sending it out where the spot is. We had a meeting yesterday, and Kerry and I had a long discussion about whether or not it's time to start thinking about holding it. The prices have gotten so bad that it's almost why do you even send it out, other than to get it out of your shop. And fortunately, most of the places, we've got plenty of room. So we're making a decision these days, as we speak, about whether or not to start holding it.

Thanks very much.

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

I had a question on your -- you mentioned the sales -- you mentioned sales down a little bit. Is that from the '08 number or is that an organic number, or how should we think about that relative to the acquisitions you made? I think you said sales down 5% to 10%. Is that year over year, '08 to '09?

Yes, pretty much so. Unfortunately, our acquisitions, while we are very happy with them, they're getting the same hits that our other business units are, too.

Right, okay. So core would be down a bit more, but you get a little bit of a break from having the acquisitions in there.

And then, is there any way to -- I know this is a hard thing to do, but quantify the impact of that Boeing strike? It would seem to me that the impact was greater than I thought it would be, just given your leverage to Rolls-Royce versus GE. I wouldn't have thought that the impact wouldn't have been as large, but is there a way to do that? It sounds like they're working through inventory, but how should we approach that, or frame that?

It's not something that I've tried to even put a pencil to, quite candidly. And yes, the Ladish Forging business is more ingrained with Rolls-Royce, keep in mind there is a lot of Rolls-Royce engines that go on Boeing product.

And Chen-Tech, on the other hand, is almost totally focused at GE. So they took a significant hit from the push-outs on the 737 and some of the single-aisle aircraft that obviously were not new development delays but just turned into production delays on GE -- on Boeing's recovery plan. So we've seen it across the board, and our casting business got hit on every program from the 777 on down, with the Boeing problems.

And then, on the interest expense, you mentioned up a couple million bucks. That's from the full-year $1.3 million for 2008, so -- is that correct? You had a little bit of a weird thing going on with Q4, so I'm trying to figure out if $2 million to $3 million is (multiple speakers) more normalized rate?

Don't focus on Q4. Interest expense is probably going to be in the $3.5 million range or so.

Okay. And then, lastly, you mentioned a stock buyback, which is something I hadn't heard from you in the past. What sort of capital do you think you guys would -- what's the range of capital you would commit to something like that?

We haven't pulled the trigger on that yet. And I don't want to get out in front of my Board of Directors or my boss.

Sure, sure.

But it's certainly something we've started kicking around. Back in '98, '99, we bought back a couple million shares during that timeframe.

Okay.

So, I'm not projecting what we're going to do, but if the stock values don't improve, and stay where they're at, and we're continuing to generate a lot of free cash flow, there's no sense in putting it at the bank at overnight investment rates.

Right. Okay, thanks for your time.

Tyler Hojo, Sidoti & Company.

Good morning. I was hoping maybe we could talk a little bit about capacity utilization and, with all the new capacity coming online, what your expectation is for utilization rates in 2009, and maybe even going into 2010.

For '09, it certainly is going to be down from -- a little from '08, virtually across the board. We've got a couple business units that are still relatively busy. Our Aerex business is busy, but that's because of their focus on helicopters. But virtually every one of our other businesses, the capacity utilization is probably going to be down 10 percentage points or so in '09.

We expect that to ramp back up in '10, so we would expect, in '10, heading back to our more typical 75%, 80% capacity. It's always a rough guess when you're dealing with -- every one of our businesses, obviously, are job shops -- with various pieces of equipment, so it's not a production line, so it's not a smooth, easy calculation.

But I'd say we're probably going to drop down somewhere into the -- probably the mid-60s this year, between 60% and 70%. And next year, we should be back up, heading back toward 75% to 80% in '10.

Just in regards to 118, you gave us some pretty decent color there. But I mean -- is this press basically just going to sit idle until 787 comes (multiple speakers) for you?

No, absolutely not. One of the advantages of doing 118 -- our other large isothermal press, 110, is still pretty busy and we're running it more than we should. So having 118 come on, we're going to be balancing out work between 118 and 110, which will lower our maintenance costs and lower our downtime on 110.

So we will definitely be using 118. It's just, obviously, the overall capacity demand is not going to be there until Boeing gets going and further ramps up production for the 787.

I guess that makes sense. And just -- if you wouldn't mind, could you repeat the sales breakdown that you mentioned earlier? I missed it, for jet engine, aerospace, and general industrial.

Sure. For -- in '08, it was 51%, 26%, and 23%.

If you had to guess, based on all the big picture stuff you mentioned, where do you think that tracks in 2009?

Probably going to be pretty similar.

Really? Even on the general industrial side, with the CAT work?

That side of our -- that side of the CAT business is still busy. We're still relatively busy with CAT, but that's making axles for their large earth-moving trucks. They are still selling those and still building them. So --

Great. Thanks very much.

Frank Haflich, AMM.

When you mention byproducts, you're talking about scrap, is that correct?

Yes, it's scrap, it's short ends off of forgings, it's machining turnings.

Right. And what kind of scrap is that? Nickel, titanium, or what? How does that break down --

All of the above. It's obviously nickel off of engine parts, titanium off of engine parts, and titanium off of titanium structural components. Then there's a carbon steel sector of it, too, which is obviously even worse as far as a market. But it's across the board. It's off of every -- virtually every product we make.

How much were they down last year, would you estimate? Prices in general?

I don't know, percentage-wise. I know, dollar-wise, as far as what we saw, we saw about a $7 million, $8 million falloff.

Okay. And so, you're thinking about possibly deciding -- stockpiling scrap rather than selling it?

It's certainly one of the options that is available to us that we are considering. And if the assumption is the market improves at some later date, obviously it's a time value of money calculation.

And what is the status now of your Mexican project, and are you still pursuing this project in Mexico or somewhere else?

We're still convinced, long term, that it makes sense for us to have -- an additional investment casting facility in a more lower-cost environment.

As far as Mexico itself right now, I would say it's kind of on hold for the moment than we're looking further out. We don't have any commitments as far as doing anything in '09 at this point.

The theory is still right, but given where the market is right now it's hard to justify another expansion for us.

Right. So -- so an additional operation, either in Mexico or anywhere else, that's on hold for this year.

Yes. With the exception, as I indicated, if some existing business comes along, as far as on the acquisition front, that makes sense for us, we would certainly wouldn't turn that down. But we don't have any other expansion plans at this point.

Thank you.

Tom Lewis, [Hybrid] Value.

I need a little -- maybe it's overly basic, but this issue with the byproduct. Do you treat that as a sale and run it through your topline, or is that something that you just credit against your raw material expense?

It's the latter. It all runs back through as a credit to cost of goods.

So that's a part -- that coming -- that opportunity going away for a while, or that is a part of why that percentage of raw material is up as much as it is, or -- would you say?

No, it's really an issue if raw material is up because of some of the long-term pricing. It's -- really the big impact on the byproduct is effectively -- it's a direct credit to the bottom line. So it really hurts our overall profitability.

I should understand it as something that is there in your cost of goods?

Yes.

Okay. So if I understand correctly, that was something that was working very much to your favor last year, a little bit to your detriment first half -- by last year, I meant '07 -- a little bit to your detriment early on in '08, and significantly so starting in third quarter or starting in fourth quarter? Or is that accurate depiction?

Relatively accurate. Certainly it was a big plus in '07, it was a big plus in '06, first half -- and it started deteriorating into '08. And it just continued to compound as '08 went on. It probably got worse quarter by quarter.

All right. This industrial volume, you've got CAT still in need of your services, but just how is the visibility in that business? How confident are you to get through what's in the shop today, and -- how confident are you that -- this business that goes away in a major way, say, out in the second half?

Obviously, we're as confident as what we're hearing from CAT. You also have to remember we have -- there's a significant piece in the industrial business over in Poland, too.

Right.

That's supporting coal mining and other activity over there. So I guess we're as confident as we can be in that. One thing about the industrial side is we never have the long-term visibility on the industrial side that we have on aerospace as far as orders. So the orders we tend to have on the industrial side tend to be pretty firm as opposed to -- aerospace is great. You get a long-term visibility, and then, of course, you have customers who move schedules around. So it's -- take your pick.

Last question, I'm sorry if you mentioned this. Did you say what you projected your D&A expense to be this year? In '09?

I think depreciation is probably going to be up about $3 million in '09 over '08 levels.

Up $3 million. Okay, I'll work with that. Thanks a lot.

Eric Hugel, Stephens Inc..

Good morning. I just want to get an understanding of, when you talk about your 2010, 2011 outlook being much brighter, what are you assuming, I guess ex-787 ramping up? Is that dependent upon -- upon -- sort of production levels remaining steady, continuing to ramp up, how do you view that?

Well, obviously, 787 is a big issue for us in '10 and beyond. But we fully -- also fully expect, based on what we're doing with Rolls on the 350, we expect that program to start moving forward in that timeframe, and we also expect the 380 to continue during that period. It's probably a combination of all three, and I guess the other factor is literally getting some -- shall we say, normalcy back to regular production lines, for the 777, the other aircraft that are out there.

I guess what I'm trying to figure out, is the content that you have on the 787 and things like the A380 -- because I assume you'll be doing work on the A350, but it will be minimal because it's not going to be in production until 2013, 2014 at best case. Are the unit content values that you have on these aircraft significant enough to outweigh potential production cuts on sort of narrow-body aircraft?

Yes, pretty much so. I think from where we're at, you're dealing with -- the advantage with the new aircraft, obviously, you're dealing with bigger engines, bigger product, more expensive material, less competition, and we've got a better, I would say, market share on those programs than obviously we do on a lot of others, because of the material and because of the processing.

Would it be maybe a good guesstimate to say your content on, let's say, a seven eight or a A350, obviously, depending upon what engine type, is maybe four to five times what would be on, let's say, a three seven?

It's hard to say, particularly now with Chen-Tech. Chen-Tech's got some great content on the 777. So I would say -- you might have made -- you probably would have been closer pre-purchase at Chen-Tech, as far as where Ladish's traditional forging business in Wisconsin is. You would have been closer with that, but Chen-Tech has kind of colored that.

But you said Chen-Tech also added 787 work, too, right?

They are, because of their participation on Gen X. But it's not as large, obviously, as where Ladish is on the trend -- and more -- and also what Ladish has on the Gen X itself.

Can you talk about, maybe, sort of more high-level sort of strategy, working through the downturn here, where you see opportunities to -- obviously, you're going to have excess capacity -- to pick up market share gain?

I don't think there's probably going to be a lot of great market share gain opportunities out there, quite candidly. I think there's some market share gain with Chen-Tech, getting them introduced into -- beyond the GE focus. There's some opportunities for Chen-Tech with both UTC and with Rolls-Royce, but some of the other areas, quite honestly, we're not big on going out and trying to steal market share. Because the only way, with the LTAs that are in place, the only way you're going to steal market share is go out and -- is price your way into it. And I'm not interested in starting a price war with our main competitor. I don't think it's productive for either one of us.

With regards to ZKM, I know you have been making that big focus on getting them more into the aerospace work. Do you see, or do you get any sense, that, obviously, the downturn that we're going to see, or flattening out of production rates, however you want to view it, is going to make that a lot harder for them to sort of win work? Because there's going to be less additional, incremental work to be had?

It's going to initially be, probably, a challenge in '09, but on the air structural business, there's some LTAs that are now -- they're starting to come up for longer-term agreements for structural components. Up until this point in time, what ZKM has been able to win, it effectively been some incremental demand.

You're absolutely right, with the demand softening in '09, there aren't going to be a whole lot of those opportunities. But new LTAs coming available in '09, ZKM has got a cost structure and now a proven reliability that's going to put them in an excellent position to continue to win work. Fortunately, the timing isn't bad for them. They've got -- they've got work right now and I think there's going to be newer opportunities for them that they will be able to get into.

If you want, say, an LTA in '09, you wouldn't expect to get that benefit in terms of volume until 2010, correct?

Correct.

Was there any severance costs in the quarter associated with your laying off 5% of your workforce?

There were. We took a few hits, certainly out in Oregon. We had a significant reduction in Oregon and we had a significant reduction in Poland.

In terms of what we're looking at in the Q4 P&L, could you quantify that?

It was less than $1 million.

Okay, so it's $1 million. And I assume that was in SG&A?

Yes, in large part.

Can you maybe just -- a little more detail with regards to -- you mentioned interest and other, the number was actually positive. You did have some interest expense, albeit minimal, maybe $500,000, probably, or less. But sort of that positive number. What was that you said -- mentioned -- something about Poland?

Poland actually ended up paying us back a significant -- we'd advanced Poland -- ZKM -- money and effectively, we had it structured as a loan to them. That, because of their profitability and cash generation, they were able to pay a large portion of that interest back. So we got the interest benefit in the fourth quarter from that.

Okay. And with regards to the tax rate for the quarter, was that -- is that sort of a onetime -- you went back and you resolved your 2000 whatever to taxes, or is this more reflective of your initial sort of -- you were overaccrued for the year and you found out, hey, our real tax rate is going to be much less, and thus we just have to even it out?

There was certainly some evening out in the fourth quarter, because we always start out the year on a very conservative basis, reserving at about 37%. And when we get into the second half of the year, we saw what we were going to be able to accomplish with the R&D tax credit and some state apportionment, and then with the credit we ended up getting in Poland, it brought it down -- it brought it all down and we ultimately -- obviously had to balance it out in the fourth quarter.

So there was, obviously, a big benefit to the fourth quarter that, had we known during the course of the year, obviously we would have had a smoother number during the course of the year.

So there wasn't any onetime refund or something like that that you got in Q4, you were just catching up to, hey, we've got updated estimates and we need to resolve this.

Right. There was no one huge thing in the fourth quarter. It was a large part catch-up. We did have, obviously, the one big issue during the course of the year, which was catching up on the R&D credit, but that will be an R&D credit that we will be recognizing going forward. It just won't obviously be to the level that we recognized in '08, because in '08, we were able to go back and recapture for a number of prior years.

The R&D tax credit benefit -- was that all in Q4? The retroactive, or was that in Q3? Remind me.

We recognized it in Q3, but then, your point -- (multiple speakers)

Then there was going to be a lower tax rate, going forward.

Right. So we had to balance it out in '04.

I understand. Thanks a lot.

It does appear at this time we have no further questions. Mr. Larsen, I'm turning the call back over to you for additional or closing remarks.

Thank you. Appreciate everybody dialing in this morning. Obviously, it's -- these are interesting times, but interesting times generally bring opportunity -- the broader perspective bring opportunities for improvement and going forward. So, as I said, we remain optimistic. We still think Ladish has got a lot of great run in front of it, and we're going to continue to drive the Company in that direction.

So if anybody has any follow-up questions, I think most of you probably have my direct line. Give me a call. If not, we'll talk to you in April after the first quarter. Thanks, everybody.

That does conclude today's conference. Thank you for your participation and have a wonderful day.