ATI Inc (ATI) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Ladish Company Incorporated first quarter 2009 results conference call. Just a reminder, this 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. Please go ahead, Sir.

Thank you. Good morning, everyone. Welcome to the Ladish first quarter conference call.

As we get started this morning, I will talk about results and what happened and where we see things going. Before I get into any details I will, as always, remind everyone that there is probably going to be some comments made during the course of my presentation or in answers to questions that may involve forward-looking statements and anything that is said in that regard is subject to management's opinions and are made pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act of 1995.

And with that said, let's talk about the first quarter.

Obviously it was certainly a challenging quarter as the results demonstrated. I will quickly run through the results if anybody didn't catch up with all -- everything in the press release.

Sales of a little -- $105.7 million down about 10% from last year in the first quarter which was a little more of a severe drop than we had anticipated. We thought the first quarter was probably going to come in somewhere around 5 to 7% below last year. It ended up being about 10%.

And I would also point out to people that that 10% year over year, the reality is if you compared apples to apples without the addition of the acquisitions last year, it would have been more of about a 17 or 18% drop. So a fairly significant falloff in sales activity in the quarter.

Again as I said, certainly it was more severe than we had anticipated. It was a quarter of [alloted] schedule movement.

Cost of goods for the quarter crept up to 93% from 87% last year with some of the issues. And I will get into more detail as to what happened in the quarter. I certainly alluded to in our last conference call. And it was certainly mentioned in Kerry's press release, but I'll get into some of those issues in more detail in a second. The net effect of which was, it drove our gross income $7.3 million to 6.9%, a significant falloff for us, because of some of the cost pressures we faced in the first quarter.

Positive in the quarter, SG&A came in a little over $4 million, about 3.8% of sales. Percentage wise the same as last year, a $400,000 overall reduction in costs and SG&A as we continued to work on controlling that side of the cost side.

Operating income came in at $3.2 million, with 3.8% down from 7.8% last year for the same reasons that drove gross income down, obviously. Interest expense was a little higher this year and the first quarter was $845,000 up about $400,000 from last year. Both of those numbers obviously do have some impact from capitalized interest, but interest overall was higher this year, because of the additional debt we incurred last year in support of the acquisitions that we did in wrapping up our CapEx program last year.

So overall debt being a little higher, obviously, and lack of interest capitalization is driving our interest expense up.

Pretax income came in right about $2 million, about 2%. Again down from last year for the same driving issues. Our tax -- effective tax rate for the quarter was higher than we had anticipated. It came in at 40.1%. It is up from 37.3% last year in the first quarter.

There was some one-time issues that we had to deal with in the first quarter between some short-term and long-term variances that we had had that related back to prior periods, that ended up driving the tax rate up an additional couple of percentage points. Going forward, I think the tax rate will drop back down to probably around 37% or perhaps a little lower. It certainly won't be this high going forward for the remainder of the year. That resulted in a net income of about $1.2 million. Obviously down again sequentially from last year and an EPS of $0.08 per share.

Looking at what went on in the quarter, obviously, there were a number of challenges on the cost side, but looking at the -- you know, before we get into that, looking at the sales mix for the quarter was actually something that we considered a positive. When you compare where we were at the end of last -- at the end of '08 where our sales mix between our three main categories of sales, between jet engines, general aerospace and industrial was about 51% engines, 26% aerospace and 23% industrial.

For the first quarter, we had a significant shift in that regard which we think is a positive long term. It's partially a reflection of the acquisitions that we've done and where things are going, but for the first quarter our sales shifted to 52% jet engine, 32% general aerospace and 16% industrial.

Getting the industrial down back into the teens is definitely where we want to take the business. You know and continue, obviously, the focus on the aerospace. Obviously because of some of the other things that happened, the income didn't result where we would have wanted it to be.

There is definitely a positive to see our sales mix going in that direction. And that's definitely where we want to take the Company.

All of our business units, I'm happy to say, were at least marginally profitable in the quarter. Everybody was pretty much affected across the board by the overall economic slowdown, some business units affected more than others. There are businesses out on the West Coast, Pacific Cast and [Shintek] West Coast forging operation. Probably more impacted by the continual slowdown, but Boeing, they certainly felt it in the fourth quarter from the Boeing strike. And the lack of recovery of Boeing's schedule certainly hurt both of those business is in the first quarter.

But again as I indicated, they both remain profitable as do all of our other operating businesses. [Positive] one single signing that wasn't significantly impacted in the first quarter by the slowdown was our [Airex] business. Small piece of the business that they are so focused on the helicopter side of our business, their business was strong throughout the quarter and continues going strong.

Looking -- as I indicated some of the unfortunate negatives in the quarter of what happened, probably the biggest one that was out there which was, we had anticipated certainly at least a portion of it not to this level was the negative impact on byproduct sales for the Company in the quarter. We were down $2.9 million from where we were last in '08 in the first quarter. Obviously a significant reduction since that is a erect credit to cost of goods and effectively that flows directly to the bottom line.

The byproduct market right now continues to be anemic. Our operating units are, to an extent, have certainly curtailed a fair amount of their byproduct sales because the product -- the pricing has been so poor. That is a decision that will continue to be made on a month-to-month quarter-by-quarter basis going forward as far as to how long we held onto this material.

Obviously just from a cash flow perspective, we are not going to sit on it forever. But our guys are trying to assess right now where the pricing is going to be and what that future outlook for it will be.

Unfortunately before the byproduct market actually probably comes back the overall market is probably going to have to turn first, prompting increased demands for raw material, which will increase demand for raw material that will support the byproduct market. So I'd like to tell you that that is going to be an omen where things are turning but things are going to probably turn before the byproduct market actually turns.

So again we are going to assess it as we go forward and make our best judgment, based on where it is going to be best for the Company from cost of money and a cash flow perspective.

One of the other challenges we experienced in the first quarter and we certainly alluded to it after at the -- in our call after at the end of '08 was our pension expense was up about $1.1 million for the quarter. Again that's a P&L charge not cash, but it's just a reflection of what has happened obviously across the board to pension assets across this country with the market downturn.

So pension expense being up obviously significantly. What were the other areas where expenses were up, depreciation was up about $600,000 in the quarter? That is going to continue going forward. We ended the quarter with about $3.8 million and depreciation up from about $3.2 million last year.

That again will continue throughout the year. We have not officially started fully depreciating the new 118 press. That is probably a second half or third quarter factor, but that is going to continue to have a negative impact as far as the depreciation rate going forward.

As I indicated when I was talking about the results, interest expense was up about $400,000 in the quarter, just really a reflection of the additional debt we incurred last year when we did the $50 million long-term note placement back in the fall of last year.

One one-time expense that we didn't expect going into the quarter and hadn't obviously budgeted and planned on that we incurred, about an $800,000 expense associated with the reduction of employment levels because of the level of business. That was really a reflection of an early retirement program we put into place at one of our operations, along with some severance costs we incurred at a couple of the other place -- a couple of the other operations.

We have been certainly cognizant of the decreasing demand levels trying to balance our workforce. It has been somewhat of a juggling act at various locations. And it hasn't obviously been done evenly across corporations. It's been really trying to react with what the demand has been at each operating unit.

Some units have reduced employment considerably more than others because of the demands that has hit upon them. Some of the other units have joined other options of trying to shorten work weeks. You know, rotating layoff, other options to try to get their implement cost more in line with the demand and where we see things going forward.

Going positive on a forward-looking basis with some of these issues we have put some obviously bad expense behind us. We will get some benefit going forward from some of the early retirement programs at some of the facilities.

Also some of the operations have got some additional obviously items planned that they are going to be doing in the next -- in this quarter and next quarter, which is going to include some plant wide shutdowns which will be effectively plant wide layoffs for everybody and the facility at various facilities to try to control unemployment cost and try to balance manpower levels with scheduling requirements.

But overall on a total basis when you look at the negative in things that will (inaudible) Company face in the first quarter, it's about $5.8 million worth of challenges, which works out to about -- even if accelerated -- tax rate works out to about $0.22 of EPS for the quarter for the issues that we did face going forward.

Looking across, it wasn't all negative in the quarter. There were a number of positive things that happened in the quarter. One of the first positive things that had -- little hesitant to point out, we did, I think, a pretty good job working our working capital down by about $12 million in the quarter.

We ultimately generated about a little over about $11 million of free cash flow in the quarter. That resulted in us being able to reduce our short-term debt by $11 million. Our debt is now -- short-term debt is now certainly under control and it is our main focus for this year is to reduce and get rid of that short-term debt.

Obviously the long-term notes are going to be out there which was part of our -- certainly a part of our long-term fiscal planning. But we would just like to get rid of the short-term obligations as we forward and we are continuing to work on that into this quarter and for the remainder of the year.

So that is one of our goals as far as getting it down. Came down nicely. We also -- short-term debt doesn't present a problem. We did renew our bank agreement during the course of this month, which we issued an 8K about earlier in April. Got an excellent relationship with our two banks.

Fortunately our two banks, US Bank and JPMorgan Chase are obviously two of the healthier banks around. So that isn't a problem for us going forward. We are certainly happy that we have those two institutions to work with.

Other positives that happened in the course of the quarter, as I indicated when I mentioned AirX. The helicopter business remains strong not just with AirX, but the forging business is supporting the helicopter -- certainly the rotation business is a positive.

The overall defense side of our business remains relatively strong, certainly helping to offset the overall weakness we are seeing obviously on the commercial side with Boeing and Airbus shipping schedules around.

Another positive that occurred in the quarter was raw material as a total percent of sales is finally starting to come down. We have anticipated it would this year and it is starting to work its way through.

It is a slow process. It took it a while to build up, but it is going to take a while to come down. But it dropped 100 base -- approximately 100 basis points during the course of the quarter from where it was in the fourth quarter last year. So we dropped from about 49% to about 48%. And we think that trend should continue going forward.

Total, as I indicated on the balance sheet, was the positive side of the business. Receivables and inventory, both coming down nicely. Our CapEx for the first quarter was about $4.5 million. That compares to last year, was about $7.8 million in the first quarter. The -- probably this is probably our biggest quarter of the year as far as CapEx.

Some of the issues that rolled into the CapEx expenditure in the first quarter were some carryovers from the end of last year, and wrapping up 118 press and a couple other major projects we had done. We still think For the year is going to be somewhere in the low teens.

And, obviously, we are -- given the process we are in we are obviously watching every dollar right now. Because every dollar that we don't have to spend clearly we aren't going to spend and we will apply it to reducing debt and going forward.

Employment levels for the quarter from the end of the year were down about 6%, about 124 people. That would continue to be balanced going forward. Obviously there is going to continue to be attrition and there will continue to be adjustments where needed at our various operations as far as employment level.

Those are kind of the highlights. And low -- obviously and unfortunately some low lights of the quarter. If you -- we look forward for the rest of the year. Schedules are still relatively weak. We are -- continue to dealt with our customers on a day-to-day basis with demand and the balancing, there's been generally an overall, I would -- I guess it's been characterized as destocking across the sector.

The OEMs seem to be go -- trying to reduce their working capital and burning through as much inventory as they can and we certainly -- we saw some of that in the fourth quarter. We saw a lot of it in the first quarter.

The order activity in the first quarter was a constant give-and-take with new orders versus schedules being pushed around. The net effect of it was the schedules adjustments pretty well cancelled out new order activity in the first quarter and -- the net effect of it was -- that is the orders that we shipped in the first quarter effectively had a negative impact on our backlog.

So our backlog dropped to $523 million as we characterize it. Again it is a step -- it's a certainly a stable backlog for us. More than a year's worth of business sitting there, but obviously down sequentially year over year from where we were because of all of the schedule pushouts we've same. And that's been pretty much across the board with virtually every customer we have.

Really accentuated by the engine guys on some of the newer programs as they keep shifting demands around.

An offset to that is, certainly, we are beginning to see and we have seen it at a number of our business units are now starting in the last week or so -- are starting to get a lot of inquiries in from some OEMs that are -- we think is a reflection of what has happened with a lot of the prior destocking program with people running their inventories down. We are now starting to get a lot of inquiries from OEMs asking how fast can we respond in the second half of the year if they have the demand, how fast can we respond in the first half of '10.

So people are certainly beginning at least to look at having demand picking up. I would like to say that we are ramping up for it. It hasn't quite got to that level yet but certainly at least the initial indications are that it's coming, and that the demand will come because if nothing else given by the lack of inventory in the supply chain.

As I indicated, the helicopter business remains strong across the board as overall military business. So we are seeing there is some -- certainly some opportunities there.

Obviously there's a lot of noise in the supply chain in the system. We heard Boeing's announcements yesterday which were, I guess, relatively optimistic for they think things are going. They are still counting on obviously a large backlog that is going to carry through and people are going to honor that backlog.

We are obviously taking our cues from Boeing and obviously not being overly optimistic, but we are certainly not putting our head in the sand either as far as going forward. I think everybody is waiting right now to see what kind of general tenor comes out in the month of June from the [Paris] Air Show. Where people go from there, it will give us some indications obviously is what the general indications are of where Boeing and Airbus are going to go build schedules going forward.

So on an overall basis, obviously, a challenging quarter. We are ready for a further challenge throughout the rest of the year. It's not -- certainly not an exciting fun filled period. But it's certainly not one that people are jumping off window ledges either. Certainly not here anyway.

We have seen tougher times at Ladish and we have managed through tougher times and we will certainly manage through this one. Our goal obviously is to remain profitable and generate as much cash as we can, minimize our debt obligation and go forward and run the business on the best basis that we can. Obviously be prepared for going forward.

Obviously one of the things we're trying to do with all of the money and effort we put in the last couple of years and hiring new people and restructuring the business. One of the obvious issues that we tried to do is, we have tried to be even across the board as far as trying to hang onto our people, and try to do the right things with our people as we go through this kind of a downturn.

So there can be some criticism that we haven't taken a machete to implement levels. That is not how we run and that is not historically what we've done. Obviously we are trying to surgically run this business and do the right things as far as our various staffing levels. We are obvious -- obviously trying to control our cost every direction we can, whether it's through obviously hiring freezes, wage freezes, things of that nature. Obviously we will continue to watch every nickel going forward.

So again, it is going to be a challenging next couple quarters probably, but we think certainly we are up to it. And we come through this and Ladish as Kerry indicated in his press release we have been through these things before. We always come out stronger on the other side because of how we get through them. And we will on this one too.

So at that point, if anybody has any questions, I will be happy to try to answer them.

(Operator Instructions). Eric Hugel. Stephens, Inc.

Can you talk about on the free cash flow front of the business, obviously looked pretty good this quarter. Would you expect to be able to generate free cash flow at these levels going forward? Of is this sort of a --?

-- an initial bump in the first quarter Eric from probably some low hanging fruit as far as working the -- getting the working capital down. But we are certainly projecting to be free cash flow positive every quarter.

So it might not -- it probably won't be like the level of the first quarter, but we will be free cash flow positive every quarter and we will continue to -- we will use that cash to reduce our debt.

Great. Can you also walk us through --? You mentioned and I looked at the renewed bank covenants. Can you walk us through sort of how those covenants look what sort of -- how much head room you have?

And I guess the concern that I have is that I mean the most of the covenants are on a trailing four-quarter basis and as you roll through this year, as you get into the back half of the year if earnings are at these levels, you are going to blow them.

Certainly it's a consideration and an issue we looked at when we were renewing our bank agreement. I guess I'll start and jump over that, Eric.

The bank agreement has got one set of covenants. Our long-term debt has another set of covenants. The covenants on the long-term debt are certainly, I wouldn't say looser but they are not as restrictive as the shorter term debt.

So that I had no concern about whatsoever. Any modeling that I'd done -- period -- we remain in compliance with our -- with the $90 million long-term debt covenants, which is my biggest concern.

The short-term debt covenants with the bank, obviously, it's a concern. There's really only two covenants and probably the biggest concerning covenant is the EBITDA to debt, which can only be three times. The easiest issue for us to deal with that, obviously aside from trying to generate as much EBITDA as we can obviously, is to pay down the debt as quickly as we can. So we've got two ways of going about it. So I don't -- you know.

Yes, but you are still going to have the $90 million outstanding.

Right.

So I mean you're still -- it still looks like I mean that's to be the bank debt is a relatively small portion of your overall debt.

Right. But I guess the bottom line of it is if we pay off the bank debt if we blow the bank debt covenant it won't really matter then.

Yes but then, you are not going to have liquidity. You are not going to be able to draw down on your revolver, right?

I think if we don't have -- I think I can resolve that with the banks, Eric, if we don't owe them any money. So I think -- that's certainly a manageable situation.

And at this point in time, I'm not projecting that we are going to blow any covenants. I think we've got some other things we can do then but it will remain to be seen whether or not we actually have a covenant problem either toward the end of the year.

You're right. It is on a trailing 12-months and we are dropping off stronger quarters as we go along.

I mean is it a fairly -- I mean, based on your commentary are you sort of thinking that on a going forward basis that the quarterly sales and margin numbers are relatively in line, maybe a little better, maybe a little worse than what we saw here in the first quarter?

While some of the issues that we've had in the first quarter obviously will repeat themselves, but some of the other issues -- the employment reductions and some of the other -- some issues that we took in the first quarter aren't going to come back and won't repeat themselves in subsequent quarters.

In fact, we will actually be getting the benefit out of those out of doing that here so that you get a double bump from that. So we are not -- I'm not losing sleep right now about bank covenants.

One last one and I'll get back in the queue. When you said your backlog, did you say it was down to $520 million or down $520 million?

(multiple speakers) down to $523 million.

So it was down about $100 million?

Right. It was effectively if you just -- if you subtract where we were about 628 and you subtract we -- 105 that we shipped, that the order activity that we had in the quarter was negated by the schedule pushout. So it kind of balances out.

Fair enough. Thanks.

Steve Levenson with Stifel Nicolaus.

Good morning. In respect to the $5.8 million that you ran into, can you give us some detail on what will likely recur and what won't? Obviously the 800,000 headcount reduction severance stuff I guess comes out but what about the rest?

As I look, that comes out obviously depreciation is still going to be there and pension expense is still going to be there. Interest expense should start balancing out. Number one, because we are paying debt down and number two, because by the summer of last year, we had incurred the additional debt.

So, period over period, the interest expense will start balancing out. The real -- I guess, tough one to call is the byproduct. Obviously we are not projecting byproduct is going to get a lot better soon, but by the second half of last year we were not exactly rolling in byproduct sales anyway.

So we -- there is some potential pickup there. There's also not a -- I wouldn't say a stock pile, but there is some previous period buildup of some byproduct that at some point in time we are going to get rid of even at these anemic prices. So there are some opportunities there.

Steve Levenson; Okay. Thanks very much.

Last, in respect to the programs you talked about where you're beginning to hear some interest. Can you break things out by programs? Is this mostly trend engines? Or is it other stuff?

Yes, we are seeing some interest on the trend side, Steve. We are also beginning to see some indications that people have -- ran their inventories down on the 737 side with (inaudible), MG and the CFM56. So there does seem to be some indications of potential pickup on that program too.

And is there any way you can break it out between new builds and aftermarket?

Not particularly. But I tend to think it is going to primarily be new builds. Certainly on the trend side, it's going to be new builds and with the 737 probably 60/40 70/30 new builds to spare, pretty much similar to what we would expect normally.

J.B. Groh with D.A. Davidson.

Good morning. You mentioned byproduct sales down $2.9 million in the quarter and looking -- I mean, I have guesses at what they were last year. It seems like byproduct sales would almost be nil in the quarter. Is that a safe assumption?

It's pretty close.

J.B. Groh. Okay. Close to zero. And then maybe you could -- I'm going about this a different way. I think this question has been asked a couple of times, but I might as well get my shot in.

What's your sense in what the inventory levels are at customers and how soon do you think they ramp up? It sounds like there is some queries as to how fast it can ramp up and that kind of thing.

When you have those conversations, what was the timing in those conversations?

It varied a little from customer to customer. Certainly one customer was asking about the second half of this year. The other customer was talking about fourth quarter, first quarter of '10. So I guess we at least take it -- are taking this as a positive because it's the first done deal and probably since the third quarter of last year that we've seen any kind of anything positive coming out of the OEMs as far as what they are talking about ramping up their demands.

But your sense is that there is still some destocking to go on in the second quarter? Or did it start to pick up near the end of the first quarter?

I think hopefully that from what we are seeing, the destocking is -- hopefully it's pretty well done. It's just the question is, how fast do they ramp up their demand for new product. I would tend to think they burn through most of their inventory.

Okay. And then, maybe you could give us an update on 118? How's that? Running product test product through there, what is the status update there?

We've ran some test product through there. We ran a piece on Friday. It came out perfect. So we were really pleased with how things went, but with the relative anemic demand right now, we are not pushing at this point in time to run any product through that press at this point.

So that -- you are done with the CapEx for the most part on that?

Yes.

Tom Lewis with [Highroad Value Research].

The main thing I had in mind got answered, but just one thing on this -- just sort of your gut sense when we talk about the destocking that is gone, the effect to which destocking has affected sales in the last two quarters.

Would you think of that as a -- can we kind of maybe put some perspective on that as a couple million dollars kind of delta, $10 million or would you go higher?

Over a couple quarters I'd go higher than that. (Multiple speakers). Our projections, even though we knew business was going to be down, our projections for the quarter would have been probably $10 million $15 million higher in the first quarter.

So is that a way to think about the delta between the customer's actual requirement in this present state and what what they are taking from you?

It's -- it's put another way or maybe you just don't have that clear by what -- idea what their requirements actually is.

We really don't. I would love to tell you we had a much better feel for what their requirements are but they don't communicate to that level with us. And in a lot of these areas it's a continual guessing game with these guys as far as what they really need and when they are going to need. They are less than clear.

One other little thing. In looking at the nice -- the way you were able to bring your SG&A expense down, but at that $4 million level was there anything in there that was kind of discretionary and non repeatable in terms of being able to keep it down at that level or is (multiple speakers)?

Well, there certainly was a little of the severance that flowed through it. Most of that $800,000 flow-through cost of goods, but there was an SG&A impact in there. And as we continue to ratchet our costs, obviously, SG&A, we will keep it certainly at that 4% of sales or below. It's -- I mean that's how one of the drivers of this business and we have no intention of ratcheting it up. So it will stay at a relatively low level.

[Alan Roxine] with [AB Analytical Service].

I understand why it's one of your highest priorities to get the short-term debt down but I would like to find out if there is any other steps you guys can take besides relying on this one-year revolver? Because with your stock trading below tangible book value, it seems like repurchasing stock might be a better use of your capital, other than dealing with short-term debt issues.

Is there any way to lock in longer-term debt even if it is expensive right now?

You can always lock in longer-term debt if you want to pay the price. I mean I'm not terribly interested in where right now longer-term debt is priced at. When we did -- the last long-term debt we did was last fall with the $50 million note issuance that came in at about 300 basis points over treasuries at that point in time. Everything I have seen going in the most recently for somebody our size and our borrowing capability, interest rates are going to be 600 or 700 times over basis points over treasuries.

I understand. You guys have got great execution, but I'm seeing other companies. There's a perceptual issue in terms of you don't have that much short-term debt, but it's a real concern for investors out there and I'm [long] on your stock. I'm concerned about it. To the extent that even if it is expensive to put your --.

I mean you guys have done a great job of taking your long-term debt and spreading out the maturities over time. There's no huge payments coming up anytime soon.

I just think that rather than rolling over your debt and wasting management time worrying about whether your EBITDA for this year is going to end up being more than three times what's left on your bank debt, if you guys were willing to eat it and just get that fixed, it would be a better signal for the whole Company and I guess that's just my two cents.

I understand. I understand your approach. It's -- I guess we are a conservative group. Kerry and I have both been here 30 years and we have been through a lot of up-and-down cycles. And when we get into these kinds of cycles, our focus tends to be generate as much cash as we can. Get rid of the debt and get ourselves and [make sure] that we are positioned for when the market turns.

And we have in the past, gone through share buybacks programs. We had a pretty aggressive one around the year 2000 and I have to quite candidly it didn't help the share price.

I'm not suggesting that you necessarily repurchase stock, but that is a real signal that your stock is trading so far below tangible book value. I think that the reason is this concern over the short-term debt, but that's my view.

I have similar questions. Your equity actually was down quarter to quarter? Can you explain that?

Yes. That's just an impact of accounting having to account for the reduction in the pension asset.

And then also, as you look out over the rest of the year, can you highlight the chances of running operating losses this year? In your view as you look at the rest of the year, I know things are uncertain, but are you willing to at least handicap (multiple speakers)?

I don't see that as a -- as any kind of a likelihood that we are going to be running operating losses.

I didn't think so either. I just wanted to hear that from you. And my last question is, your suppliers of raw materials in general, they are pretty troubled, much worse shape I would say than downstream. Is there any talk about reviewing your contracts with them? Adjusting any sort of prices? They all have very good balance sheets, but in terms of debt and all that, but I'm just wondering they are in pretty good decision, is that something that you could pursue?

Certainly it is something that goes on on a regular basis. In fact, we are -- right now we are in the process of renegotiating new long-term agreements for all of our titanium supply.

That's great to hear. Good luck. Thank you.

[Frank Hefflick] with [8MM].

You just noted, of course, that you are renegotiating new long-term agreements through all of your titanium supplies. Now is that renegotiating ongoing agreements? Or are they ending right now and you are renegotiating new ones?

Well, yes. Effectively one of them -- one of our long-term agreements is coming to an end. So we are negotiating new agreement and the other one we are reviewing as far as where we are going on an annualized basis with that supplier.

Can you actually reduce -- are they related to index -- indexes etc.?

When some of the alloying elements obviously have an impact on (inaudible) the pricing goes for this material and then as the alloying elements go down, the price of the material goes down.

Do you expect your price -- when will these new prices come into effect? (multiple speakers).

One of them expires in June and I believe the other one is in September.

And when do you expect your cost to go down then, as a result of these these negotiations?

Well certainly that would be our preference. I don't think that's the -- that's the suppliers' preference here. It's certainly our preference is that the price goes down.

I mean do market conditions indicate that you will be able to get them down?

I think raw material prices are working their way down. This in large part because of the lack of the -- the demand has come down. So --.

Right. Is titanium your single largest raw material procurement?

It's really pretty well balanced between titanium and nickel-based products. It's really pretty much -- they are pretty evenly split. More pounds in titanium because the price is less.

But as far as total dollars, it is pretty well split between titanium and nickel-based.

Right. How if at all are they different right now in terms of their pricing outlook?

You know, it's really all over the map and it just depends on the particular grade and alloy and the material you're dealing with, and the number -- one of the big factors that impacts all of this is we are going through our negotiations is, how many qualified suppliers there are for the various alloys.

The material that we buy is impacted by who of our OEMs agree that can actually make the product. So it does take some of the leverage out of the buyers' hands if there's some particular alloy that effectively -- there's only one or maybe two suppliers can actually make that grade of material.

Right. But you did say that as a percentage of your sales in the first quarter, your raw material costs have gone down first time in a while?

Right, they did go down in the first quarter which is the first time I would say that has happened. That has gone that direction since probably '07.

And do you look for that to continue?

Yes.

Just one more question. Your Mexican Casting project, earlier you were indicating of course that it wasn't going as fast as you wanted to.

Where does that stand now? Is the project -- do you still plan to build that plant, number one, and do you still plan to build it in Mexico?

That project is on hold certainly at this point in time. We indicated that late last year that we had put that project on hold, because of the perceived level of demand that we could even see at that point in time didn't justify the expansion.

Long-term, we are we will be looking for an alternative site which has appropriate cost, a more appropriate cost base. But whether that is Mexico or Southwest US or someplace else, we don't know at this point in time. But we are not in an expansion mode certainly at this point with our businesses contracting.

[Robert Hoffman] with [Princeton Capital Market].

Good morning. Clarify a couple of things. On the byproduct sales, it doesn't -- does it sit anywhere in your balance sheet? Or is it effectively looked at as kind of scrapped so it's nowhere, it's not in inventory, it's not --?

No, it's not in inventory. It is effectively (inaudible) it is off sitting in a warehouse.

So if you sell it for a lot it -- or you sell it for anything, it is a bonus and if it never turns out to be anything, you have already kind of eaten that cash flow?

Right we have eaten the cash flow and we already accounted for it. So it's not -- it won't have any impact. The only impact it can have is a positive and the question just is how big of a positive.

Right and when we were talking about cost of goods sold and titanium pricing. Most of that is passed through, anyway, is it not?

Yes it is.

So how -- can you kind of walk me through it? It's probably a simple question, but -- or I shouldn't be asking the question -- but how -- if it's a pass-through how does your cost of goods sold go down then as a percentage?

Well it becomes a lesser -- if it's a -- if the price comes down it's a smaller pass-through. So (multiple speakers).

-- denominator effect sort of thing?

Yes right, yes, I mean it's a smaller number going through. So it helps on a percentage basis.

(operator instructions). Eric Hugel with Stephens, Inc.

Two quick follow-ups. Can you give us an update as to where Airbus is standing in terms of demand for the A380 in terms of that ramping up?

We haven't seen a big ramp up. For us, that is going to flow back through roles and we have gotten some indication on that program from -- on the Casting side for some case -- engine cases through [Volvo]. That they are talking about ramping up.

Demand and their demand being certainly more significant in the second half of this year. But they haven't exactly put their orders where their words are quite yet. So (multiple speakers) the direct engine side, obviously, we are assuming that if they are going to have any cases they are going to need engine -- or they're going to need engine parts, but we haven't seen -- Rolls hasn't jumped to the table quite yet.

Okay. Finally any update on the second source for [ROO] 1000? Or has that just sort of slipped out as demand has sort of dropped by the wayside?

The demand issue has really tempered that. The project is still working. It's still going on. They are still working with the second source. They are still working on qualifying the second source. And we are still involved in the project, but the urgency that we were experiencing last year isn't exactly around at the moment.

At this time, we have no further questions in the queue. I will turn the conference back over to Mr. Larsen for any additional or closing remarks.

Thank you. I appreciate everybody dialing in and listening this morning. It's a -- obviously it's not the greatest market any of us have ever seen but we are obviously confident that it will change and it will improve. And certainly there seems to be some glimmers of that at least at this point in time.

So we will continue to push forward and do what we do at Ladish and we will talk to everybody after the end of the second quarter. If anybody has any follow-up or has any calls, obviously, feel free to give me a call in my office. I think most of you have my direct line. So we will talk to you then. Thanks.

That concludes today's conference. You may disconnect at this time. We do appreciate your participation.