ATI Inc (ATI) 2009 Q2 法說會逐字稿

Good morning, and welcome to today's event, the Ladish second quarter results conference call. As a reminder, all lines will be on listen-only mode, and there will be a Q&A session at the end of the call. (Operator instructions).

At this time, I would like to turn the call over to Wayne Larsen, Vice President of Law and Finance, so that we may begin. Go ahead, please, Mr. Larsen.

Thank you. Good morning, everyone. Welcome to Ladish's second quarter conference call. Before I jump in, I will give you my safe harbor warning that there's probably going to be comments made today that will reflect Management's assessment and forward-looking statements. And with that out there, we'll go forward.

Obviously, the second quarter was a challenging quarter and continued tough environment for Ladish. There were certainly some positives along with those challenges. If there was a word for the second quarter, it would probably be the buzzword of the industry these days -- destocking.

We saw pretty well across the board, or all the programs that we face, we saw destocking, program delays, and schedule shifts throughout the quarter for demand, the result of which obviously was a significant decline in sales from last year of about 28%. And really comparing apples to apples from last year, if you don't take into account the acquisitions we did in the second half of last year, a real apples-to-apples comparison, sales were actually down almost 35%. So, a significant challenge going forward in a highly fixed-cost environment that Ladish operates in.

We really focused, with those kind sales demands declining, on working on our -- the cost side of the business. That was a real focus on every -- at every one of our operating units. We saw some unfortunate significant employment reductions across the board through layoffs, temporary plant shutdowns, rotating layoffs, and some early retirement programs, the net effect of which was, through the first half of the year, employment was down from the beginning of the year over 10%.

Actions we've taken subsequently in July have reduced employment by about another 5%, and actions that I'm anticipating probably in September will probably drive another 5% corporate-wide. So, overall, employment's down over 20%, which is a challenge in this kind of an environment with this kind of a fixed base and trying to maintain your engineering talent and your technical skills and the various operating facilities. But that's what we do when we get into these kinds of timeframes and go forward.

As you look at where things come in -- and I won't -- not going to belabor the numbers just today, but I will talk about where some of the fall-off occurred. If you look at our three major product lines, the real area that got decimated in the first half of the year, second quarter -- this is just a continued reflection of the first half -- was on the industrial side. Our industrial sales are down over 55% for the year.

That significantly, obviously, impacted our Polish operations. It's still primarily industrial as we continue to try to shift them into more of an aerospace mode, but they took it on the chin, with industrial sales being down. And the Cudahy forging operation took a portion of that blow too, with the industrial piece of their business with Caterpillar being off significantly.

The other pieces of our business, while down approximately -- both jet engines and aerospace were both down about 9% to 10% for the first half, while a significant decline, is obviously not the overall decimating number. But with the industrial falling off it's a lot of pieces and a lot of fixed-cost absorption that we normally get out of that, so obviously that all contributed to the problems.

Along with that, the overall headwinds we faced both in the second quarter and the first half, we talked about -- I talked about this at the beginning of the year and again after the first half, but obviously we've had significant -- some significant shifts in our structure.

Pension expense in the second quarter was $1 million higher -- $1.1 million higher than last year in the second quarter; interest expense, also about $1.1 million higher; depreciation about $500,000 higher. We incurred about a $500,000 hit in the second quarter for early retirement expenses. And the ultimate elephant in the closet from year-over-year comparison, the second quarter of '09 had $3.4 million less in byproduct revenue than '08.

When you look at that out across the first half, those numbers pretty much double across the board -- pension expense being $2.2 million higher for the first half; interest expense $1.5 million higher; depreciation expense $1.1 million higher; early retirement for the -- so far for the six months expense is up to $1 million; and byproduct production -- or revenue -- after the first -- for the first half compared to last year was about $6.3 million less.

When you cum those numbers up, for the first -- for the second quarter, it was about $6.5 million of added expense compared to last year. So far for the first half, it was about $12.1 million. Obviously, those are significant hurdles to get over. We recognize that they're out there, but those are the issues that we're attacking and trying to get beyond.

On the positive side -- and there certainly was a few positives for the first -- for the second quarter and for the first half and as a whole -- certainly is cash flow. When we get into these kinds of down markets, given Ladish's history, we focus on our cash and focus on generating as much as humanly possible, and I think we did -- the guys did a pretty good job. They've swept every corner in the first and second quarters to do that.

In the second quarter, we had operating cash flow of about $23.5 million. Combined with what we did in the first quarter, it gave us about $37.2 million of operating cash flow for the first half. We obviously took that operating cash flow and paid down our short-term debt. We totally retired our short-term bank debt in the second quarter. We started the year with $28.9 million of short-term debt. That's totally been retired. We also retired about $1.7 million of operating leases that we had inherited when we purchased ChenTech last year, and those have all been retired also.

So, and at this stage, we ended the second quarter, as far as cash on hand, somewhere where we were at at the start of the year. But, that position continues to improve going forward, and we expect that to continue throughout the rest of the year. Cash will be our primary focus going forward as we try to continue to strengthen Ladish's overall balance sheet.

That really leaves us with $90 million of long-term debt outstanding, which is not a problem. We fully expect that to remain in place. That doesn't start amortizing until next year, and we don't see any issues regarding that long-term debt.

If you look at our balance sheet across the board, the guys did a nice job managing their inventory down. They brought inventory down from the beginning of the year by more than $21 million. Receivables have come down by about $20 million also, and we've also used some of that operating cash to pay off -- bring our payables down by almost $12 million. So, all in all, I think the guys across the board throughout the organization have done a great job really focusing on some of the things that are controllable. We can't control our customers' schedules, and we can't control our customers' demand, but we can control our internal costs and how we generate cash, and that obviously is we focus on what we can control.

Another issue in comparison to last year, and one of the reasons why our cash continues to be positive, is, as we've indicated from the beginning of the year on, capital expenditures have come down dramatically with the major projects behind us. CapEx for the first half of the year was about $8.4 million. That compares to about $23 million last year during the first half, and you'll see a similar reduction in the second half of '09 going forward. The second half probably will be slightly reduced from the first half.

Depreciation over the -- as I indicated, it's worked -- it's ratcheted its way up a little over $1 million. Depreciation for the first half was about $7.6 million when compared to $6.4 million last year. So, again, another issue that we're faced, but we knew that was coming based on some of the cap- -- obvious projects we had last year and where some of the things are going.

What else? I guess one of the other things that's not a positive, order activity, while it was relatively flat in the first quarter in comparison to scheduled push-outs, it actually was -- it was a bit -- it was more positive in the second quarter, but still relatively anemic. We ended the quarter with about four -- the second quarter with about $488 million in backlog, which obviously is down significantly from where we were at last year and where we were at at the end of the year. It's really a reflection of schedule push-outs. We've seen schedules slide to the right, and obviously, with every program that moves that way, it's happening.

I started this call talking about the destocking going on. We're clearly seeing that across the board. In spite of what we're -- what's being reported as build rates among the air framers, we're not seeing the demand for the product going into that. At this point in time, we're relatively convinced that that's not a reflection of loss of market share.

I say that for two reasons. One, there's a number of products where we're sole source, that quite candidly, they can't be building these parts -- these planes if they don't have our parts. And second of all, I guess I have -- do listen to what our competition has to say. I heard the same report coming out of our competition at Precision Cast Parts, out of their call last week, that I think they're seeing some of the same things we are as far as the demand is just not out there to support the purported build rates as far as what we're shipping.

So, I guess one of the positives, I guess, looking out, that destocking program cannot go on forever. Sooner or later, they have to start filling the pipeline again, and I guess we will stand ready for when that happens.

Looking out as far as somewhat of a forward projection, we don't see particular improvement in the near term. The third quarter is going to be challenging, the result of which we're continuing with some of our workforce reductions, plant shutdowns and other activities to try to balance off demand versus capacity.

The fourth quarter we have some hope is going to show some improvement. Certainly, it should show some improvement over the third quarter. We see some potential pickup in some isolated sectors. We are beginning to get some indication on the industrial side, that they see some pickup coming in the fourth quarter and heading into next year as some of those markets for mining and commodities start to improve.

So, I guess the overall outlook is the remainder of this year is going to remain challenging. We're certainly not pollyanish, but we have some expectations that '010 is going to show some improvement. '010 may end up being the inverse of this year, with a stronger second half of '010 versus a weaker first half, but at this point in time, it's still a little soon to call and to tell.

In the meantime, we're obviously going to continue to focus on doing what we do well, and that's obviously controlling what we can.

I guess overall, our '010 outlook is we really expect there's going to be some kind of industrial rebound that needs to occur in '010. I guess we're, again, somewhat optimistic sooner or later, the 787 is going to fly and Boeing is going to get moving on that and schedules will get pulled in for that. There's some -- we're seeing some indication and some improvement with Rolls Royce in particular, on the 350 XWB program. That should certainly help going forward into next year.

And I guess overall, as I indicated, the destocking on program -- the supply on programs like the 737 and the A320 and some of these single-aisle aircraft has got to some to an end. And when that happens, across the board, a number of our businesses will pick up, from Ladish Forging to Chen-Tech to Pacific Cast. All of those businesses will benefit when that destocking ends.

So again, overall, pretty challenging quarter, but I think the guys have stepped up and have done what they can. They're relatively relentless on their cost reductions. They're continuing to work them. We're not done. We obviously have taken probably the initial lion's share out of our working capital, but they're still continuing to work those issues. Our guys are squeezing where they can. It's just part of our culture and how we run things at Ladish.

So, that's kind of it in a nutshell. I'll be happy to take questions now if anybody's got anything specific I can answer for them.

At this time, I would like to open up the call for questions and answers. (Operator instructions). Our first question today is from Tyler. Go ahead, please.

Hey, good morning, Wayne. Can you hear me?

Yes, Tyler. Can you hear me okay?

Yes, yes. So, I guess first of all, I was just wondering if you could break out the general industrial jet engine and aero for the quarter.

As far as sales level in the -- ?

Yes, just percent of sales for each of those.

All I can -- I can certainly tell you what -- as I indicated, what they were off from last year each quarter, Tyler. Industrial was off about 55%. Aerospace and jet engines were both off about 9%.

Okay. But, directionally, general industrial was down sequentially quite a bit, correct?

Oh, yes. Yes, it was down -- percentage-wise, it was down huge. It's still obviously the smallest piece of our business, Tyler, but it was down dramatically. And in fairness in looking at things, jet engine was somewhat propped up by the Chen-Tech acquisition, and aerospace was propped up by the Aerex acquisition. So, comparing apples to apples, those numbers would have been a worse decline than the 9% I'm giving you, but that's what it is in hard numbers.

Okay, that's helpful. And then just on the byproduct issue, I know you're basically stocking this stuff in your facilities there, but I mean, just -- let's just say, for example, if you were to sell all the byproduct that you had today at the current market price, I mean, what do you think that adds to your numbers?

It's probably low seven figures, Tyler. I mean, we're not holding onto that much. We have, obviously, some. Some have sold just because our guys don't see any relief in sight in the near -- anywhere in the near term on byproduct because of where it is right now. So sooner or later -- obviously, our guys have been parceling it out here and there and depending on the alloy.

So, it's like if market prices rebound any time soon, then there's some incremental upside to kind of how you see the year? Is that fair?

Well, I mean, there's some, but it's not a huge number.

Okay, that's fair. And just lastly for me, could you just remind us in terms of lead times on, say, the 8-7 and the 380, just in terms of what your lead time is on some of those engines?

Our lead-time for producing product or our time -- I don't guess I fully understand your question. Which lead-time are you looking for, Tyler?

When you ship one of your casting or forging products, how much lead-time is there between when that actual plane is delivered?

Probably a year.

Okay, great. Thanks a lot, Wayne.

Our next question is from Steve Levenson. Go ahead, please.

Thanks. Good morning, Wayne.

Hey, Steve.

Despite the challenges, you seem to be doing well on the cost cutting and cash flow. Do you think you can remain profitable through this?

For the year? Yes. It certainly is our intention, Steve. Kerry in particular and I obviously second -- we don't intend to run this business at a loss. There may be some interim, periodic blips because of schedule adjustments and timing, but we certainly don't intend to lose money. And we've been driving that message home to the best extent possible with all of our operating units. There's no excuse for it.

Okay, thanks. Destocking obviously, as you said, is the word. We're hearing from some of your peers that they believe there's been overcompensation by other guys in the supply chain. Do you want to render an opinion on build rates and what you think about overcompensation? And if you get a spike in orders, will you be able to meet that demand?

Yes, if we get a spike in orders, I guess to your last question, Steve, we'll meet the demand. We've been trying to be judicious as possible. You notice, obviously, we haven't built inventory, but we do have sufficient inventory on hand that we think where the orders are going to come back from first, we'll be ready to respond to them.

Okay, thanks. And again, would you hazard a guess on where you think things are headed build rate-wise?

We tend to think probably build rates are going to come down marginally. I don't think they're going to come down at a huge level, but given what has happened with this destocking that's occurred, Steve, our -- we've already been put into an anemic build -- the equivalent of a really anemic build rate. I don't think they're going to go down -- take the build rate down to the level that they've been buying from -- that we've been supplying to. So, I guess from our perspective, there's an upside for the supply chain, even if they've reduced build rates.

Great. Thanks very much.

Our next question is from Eric Hugel. Go ahead, please.

Hey, good morning, Wayne.

Morning, Eric.

In the quarter, I was actually pretty impressed, given the level of sales volume, that you were actually profitable in the quarter. That's, I think, pretty impressive. But, I'm just trying to sort of figure out -- you mentioned last quarter -- getting back, I think it was Tyler's question -- that you hadn't sold any scrap in almost a year, really. Were there any significant scrap sales in the year that were sort of be in the cost of goods sold line?

There was --.

In the quarter. I'm sorry.

Yes, there was some, but obviously we were down significantly from last year, Eric.

I'm just trying to figure out going forward if there was a lump of profit in the quarter that maybe we shouldn't expect going forward.

No, there wasn't a sudden pickup that we dumped a bunch of scrap in the quarter. We certainly got -- we certainly sold some, Eric, but we sold on pretty well -- pretty comparable levels to what we've been selling -- sold in the first and sold in the second. There wasn't a huge pickup in the second.

Understood. Can you talk about -- you paid off all your bank debt. How does that work, though -- okay, so the line is still open and you still -- I guess technically, you still have the three times debt-to-EBITDA covenant, even though nothing's outstanding.

Technically, we do until tomorrow.

Okay. Okay.

We're in the process of amending our revolving credit facility so there isn't a covenant issue.

Okay, good. And with regards to the $90 million private placement, I was looking through the document yesterday, and maybe I read it wrong, but it looks like there's a four-time debt-to-EBITDA covenant in there?

Yes, there is.

Okay. If you're going to be doing -- potentially have losses in the quarter, is there any sort of thought on maybe sort of amending that? How easy or difficult could that be?

Right at this point in time, Eric, none of our forecasts have us violating any covenants in the long-term debt.

Okay, fair enough. And I mean, obviously, given the environment, would you expect in terms of sales volume -- I mean, it looks like things are going to be relatively flat going forward here, at least in the third quarter, but in terms of revenue dollars, should we be thinking that this sort of $85 million, sort of as we go into Q3 and maybe a little pickup in Q4 -- is that sort of how we should be thinking about it? Or is that more of a mix profitability thing?

It's really more of a mix profitability thing. We think, as I indicated, Eric, the third quarter is probably going to be our biggest challenge as far as sales volume for the year. Just a combination of schedules, and we are -- in reaction to those lighter schedules, we are shutting down various facilities at various time periods for a week here and a week there in response to that.

So, we think sales volume is going to continue to be a challenge, certainly in the third quarter, hopefully with some pickup in the fourth. But, the offset to that is some of the things we've done in the first half of the year as far as get our expenses down, we didn't get the full benefit of some of those actions in the first half of the year that will be feeding in more in the third and fourth quarter. So our cost structure is coming down in correlation to the offset of those lower sales that we're -- that we think is probably going to happen in the third quarter.

Understood. And last, then I'll get back in the queue. Any updates as to sort of what's going on with the new iso press and the melting furnace at Albany?

The new isothermal press is -- we're effectively just running it through debugging and certification at this point, Eric. The demand is not such that there's really a huge reason to effectively turn it on. It also allows us to avoid a significant incremental step up in depreciation expense by doing so.

How long can you do that for? During the timeframe?

Certainly, through the third quarter and potentially into the fourth.

Okay. And the melting furnace? That's up and running, or is that still just sort of keeping it on the sideline?

They're -- it's being certified as we speak. I mean, the work is done. They're certifying it. The one area of our business where there has been some pickup has been on the investment casting side, so they're moving forward with their -- with the things that they put in as far as the new furnace and their activity, because they have seen some initial pickup on their side.

Great. Thanks a lot, Wayne.

Our next question is from [Jim Mackery]. Go ahead, please.

Hey, good morning, gentlemen. I wanted to get two things. One, the cash generation's been very impressive in the first half, so I wanted to get your thoughts, if you could give us a little more color as to what you think you might be able to generate in cash in the second half of the year at these pretty depressed volume levels.

We certainly think cash generation in the second half is -- will remain positive. It won't be to the level of the first half, because obviously there's not the -- as much to wring out of working capital as there was in the first half. But, we expect the operations of the business to remain positive on a cash flow basis, and we will continue to work working capital every place we can. So, it should -- I don't have a hard number for you to forecast for that at this point, but we definitely will be cash positive in the second half of the year.

Okay. And then just if you could maybe step back and maybe compare, contrast what you think are some of the interesting points between kind of this downturn compared to the industry downturn following 9/11 and what activity the Company took that's been effective, that sort of thing.

The two periods -- and I really was hoping I wasn't going to have to go through two downturns in the same decade, but here we are. The real differentiation has clearly been after 9/11, there was the huge initial shock of people parking planes, and people quit flying for an extended period of time, and things came to an abrupt halt. This has been, I guess, more gradual. We really started seeing it obviously in the second half of last year, kind of triggered by the Boeing strike, and then it just kind of sped on from there.

And that, I guess, gave, I think, the supply chain some cover to start their whole destocking program of everybody trying to wring every nickel they can out of their working capital, and because of the credit crisis and what the -- what we've been experiencing.

So, obviously there's some difference to it. What's -- our reaction to each has been somewhat similar. I mean, we focus on getting our costs down and working -- and doing what we can on our working capital. The unfortunate part is, being a large job shop, there's minimal that we can do to create markets. We can only respond to what our customer's demand is and what our customers tell us their demand is.

I guess the one continued -- I think one thing we can differentiate between the two is the -- international fleet aircraft isn't getting any younger. It's still gotten older, going down. The one, I guess, detriment to that, which remains to be seen, is what's going to happen? As the market starts to pick up, is there going to be sufficient -- is there going to be a sufficient credit market out there to support it and to support the demand for the aircraft?

I guess, again, not being over optimistic, we tend to think there's going to be one way or other they're going to find a way to finance these aircraft so the demand can be serviced. But, it's this -- two different, obviously, issues that started each of these downturns, but the net effect upon us has been pretty similar, and we hope that the recovery is actually similar.

The one issue has been -- I guess certainly coming out of the last one, the recovery happened a lot faster than people thought it was going to. And we think that because of the destocking program that's gone across the industry, the recovery in this one actually could end up being a lot faster too because there's not going to be -- there's just not the inventory and the supply chain to suddenly -- to take care of any kind of significant pickup. So, all things considered, we may end up seeing the exact same recovery pattern after this one that we saw after the last one.

Okay. Thanks, guys.

Our next question is from J.B. Groh. Go ahead, please.

Hey, Wayne. Can you hear me okay?

Yes, J.B.

Wayne, is there any way to quantify kind of push-out? You know it's obviously had a revenue impact, but is there any way to put a number on it? Maybe you don't want to do that for competitive reasons, but just out of curiosity, how big of an impact do you think that was in the first half or the second quarter?

The push-out?

Yes, just the schedule push-out and the revenue impact just from the destocking alone.

In the second quarter, J.B., it's -- and this is a really rough order of magnitude, but I'm guessing it's somewhere -- was somewhere in the $20 million range, I'm guessing.

Okay.

I mean, obviously it had a significant impact. It was across the board. Really, on the jet engine side in particular was where it really moved -- schedules moved all over the place. And that's from single-aisle up to double-aisle planes. There wasn't any sector where you could hide.

Okay. Great. And then -- that's about all I have. Thanks, Wayne. Everything else got answered.

Okay. Thanks, J.B.

Our next question is from Alan Brochstein. Go ahead, please.

Yes, Wayne. As usual, thank you for taking my call. I just had a question about -- well, a follow up. Is the credit -- is the revolver going to be with US Bank, or are you replacing the lender?

No, no, we're staying with US Bank and JPMorgan Chase. Those are the two banks that are in our revolver, and we're staying certainly with the two of those. We've been banking with those banks and their predecessors for pretty much Ladish's 100-year history, and we're not changing.

So, will the term be extended too? I understand you're amending the covenants to be more favorable, but will the term be extended as well, or is this something you're going to continue to go through on an annual basis?

No, we're going to stay with the 364-day revolving facility. By and large, it works well for us, and it's easier for the banks to manage. They don't have the capital requirements that they have to reserve for a long-term facility, and it works fine for us for a working capital line of credit.

Okay. And then in terms of -- I have to wait for the filing, but are you able to comment on any sort of changes in your reserves for either inventory or AR during the quarter?

No, there was no real change in any of our reserves for the quarter, for inventory or our AR. Our receivables are in pretty good shape given the nature of our customers. They could pay a little faster, but they ultimately pay, and we're on a FIFO basis for our inventory, so there's nothing changed.

Okay. And then my last question -- on the last call, you alluded to potentially favorable contract changes with your suppliers, I guess, on titanium. Has there been any progress there or any -- do you still continue to expect to get more favorable terms on your future purchases?

We're certainly working through some of those right now. We're getting close to resolution with a couple of those contracts, and we think we should get -- we should see some benefit out of that. That benefit continues to be somewhat muted, though, because of -- in a lot of cases, we're still dealing with our customers setting the para- -- setting [raw] material guarantees that we have to live with.

Right. Okay. Well, thanks a lot, and good luck.

Thank you.

Our next question is from Tom [Lewis]. Go ahead, please.

Hey, good morning, Wayne.

Hey, Tom.

First off, thanks for the -- your thoughts comparing with the last time we were in the soup like this. But I was wondering, would you add to that that perhaps the tone of the pricing conversation with your customers, is it a bit less brutal place than it was, say, seven years ago?

At this stage, I would say that's true, Tom. We didn't get the immediate drubbing that we got after 9/11, when a number of the customers came out and just announced they were renegotiating contracts, they weren't going to honor contracts. We haven't seen that in this cycle. They've obviously pushed schedules all over creation, but we haven't had the ball bat drubbing that we got last time.

Right. Right. Okay. And as far as your industrial business goes, can you flesh out the extent to which if the customers out there that need forgings and the machining that goes with it -- to the extent that they see a pickup, you'd see a pickup pretty much right away? Let me put it another way. That when they need a forging, they come to you as opposed to -- I can imagine that maybe there's a situation where maybe they meet most of their -- they've got to fill up some internal capability or something before they come to you.

No, that's not -- I mean, that's clearly not the situation as far as they don't have internal capabilities, Tom. So, when they need product, they will be to us. And we have gotten some indications from -- certainly here domestically that -- from Cat, that they expect things to start picking up in the fourth quarter, particularly in their mining and earth moving equipment, large part fueled out of, again, the demand that's starting to come out of China again.

Okay. And can you tell us what kind of markets the Polish operation serves? Is it pretty general? Or is there --

They serve mining business, coal mining, over there. It's -- they do -- they're serving the rail business, both over there and here domestically to GE Locomotive. They're got some trucking business that they serve into Germany. And then, obviously, we've started trying to build up the aerospace business there, where we've gotten some nice initial orders, but with the overall anemic demand in aerospace, it hasn't turned into significant volumes yet for Poland.

All right. And last question. Last quarter, you sort of singled out Aerex is hanging in there pretty strong by virtue of their presence in helicopter programs and all that. Is that still more or less the case, or has the anemia gotten there too?

Oh, no, they had a good second quarter also. Demand for them -- for their product on the helicopter side continues. So they're the one -- our one business right now that is -- for the first half, is continuing along. The casting business is starting to pick up also, but Aerex continues to be the shining star at the moment.

By pick up, you mean in terms of schedules or just inquiries, or can you -- ?

Schedules. Their schedules have started to improve.

All right. Okay. Well, hang in there, Wayne.

Thanks, Tom.

Next, we have another question from Eric Hugel. Go ahead, please.

Hey, Wayne. You talked about the industrial schedules firming up in the fourth quarter. Can you give some commentary as to, based on what you have right now, when sort of the jet engine and sort of aerospace build schedules start to pick up?

I wish I knew for sure, Eric.

It's just too fluid?

Well, it's really fluid right now. I mean, again, we think it's got to happen certainly in '010, but I can't tell you for sure in '010. If they're going to continue to build planes between Airbus and Boeing, these schedules have got to start picking up, because we're not making enough product to support their build schedules and I don't think our competition has suddenly got 100% of the share. So, something -- there's a big disconnect out there right now between build schedules and the supply chain.

Right. Basically, you think that the supply chain has already cut, effectively, 737 production rates probably into the high 20s anyway, even though Boeing has it. Is that what you're sort of thinking?

I would say -- I mean, if the air framers are going to build 800-some aircraft this year, I'd offer up that the supply chain is only supplying about 70%, 75% of that demand.

All right. The layoffs at Cudahy -- is that going to be a meaningful P&L impact in Q3?

It's going to be -- it's continuing to keep our cost structure down, yes. I mean, you didn't see the benefit in the first half from that, but we took out effectively about 85 people out of the Ladish Forging operation here in Cudahy this month.

Right. Is there going to be a P&L impact in Q3 as a result of any severance or anything with -- regarding that?

Relatively minimal.

Minimal, okay. And finally, the tax rate was pretty low in the quarter. Anything going on there? And what should we be looking for going forward?

Really, the main reason the tax rate was down to what it is -- it's continual for our guys to try to come up with an annualized tax rate. We certainly were higher than we probably should have been in the first quarter based on where the year has ended up. We didn't quite have that visibility in the first quarter. So, we had over a 40% tax rate in the first quarter, Eric, so the second quarter rate was really a reflection of trying to bring that down, and it got us down -- for the first half, down to about 35%, so you can probably use that going forward.

Great. Thanks a lot, Wayne.

Sure.

We also have another question from J.B. Go ahead, please.

Hey, Wayne, just a follow up. I know you mentioned that you do your kind of seasonal maintenance and shutdown and you mentioned some other shutdowns during the third quarter. Is this in addition to what you normally do on a regular maintenance basis, or is it just routine?

There's not -- a lot of that maintenance we actually got done in the second quarter, J.B., but we do have further plant shutdowns scheduled in the third quarter and in the fourth quarter. And that's just -- at this point in time, it's really just trying to, again, balance capacity off of versus the schedules as they now exist. So, we will be shutting down the Ladish Forging facility in the third quarter and in the fourth. We're shutting down the Polish facility probably in both quarters. The other operations are kind of responding as they go with reduced workweeks and dropping down to four-day weeks and three-day weeks and just trying to really balance out, again, capacity versus demand.

And then this fire that occurred there in Cudahy -- obviously, not in your plant, but I understand it was pretty big. Did you lose any shipping days from that?

We lost a day.

Okay, so nothing big. Okay.

Yes. There was, obviously, a significant fire at the Patrick Cudahy plant next door to us that effectively forced an evacuation of the entire community, so we didn't exactly get rolling too well on that Monday, so we lost a day.

(Operator instructions). Our next question is from [David Landry]. Go ahead, please.

Good morning, Wayne.

Hi, Dave.

Can you talk a little bit about what you've done in terms of hedging natural gas as we go into the colder winter months, particularly there in Cudahy?

Natural gas is a continual challenge, Dave, with where the market's gone at this point, as steep as it's fallen. We're actually, unfortunately, paying a lit- -- over market right now for gas because of where we've hedged -- where we had hedged a year ago. But, long term, our guys are still committed, and I think it's the right answer that we do buy forward and try to balance out where we're going to be versus getting continually caught up in the spot market. So, it's a little bit of a challenge right now.

I think in the long haul, if you look at it over -- going forward, obviously we do benefit from natural gas prices coming down and being where they are.

So, can you give us some idea, if we were to compare as you go into 2010, what your natural gas prices might be versus what they were in 2009?

Well, they're certainly coming down.

Okay. Order of magnitude? 15%?

Maybe 10%, 15% I would guess off the top of my head, Dave, without doing a lot of calculation.

Great. Thank you.

We have no more questions from the phone at this time.

All right. Thanks, everybody. I appreciate you calling in. Obviously, it remains a continued challenge out there, but Ladish has been through a lot of challenges before, and we'll get through this one and again come out on the other side, where we think there will be a lot of opportunities once again for incremental gain going forward. So, if anybody has any follow-ups, obviously, give me a call. If not, we'll talk to you after the third quarter. Thanks.

Thank you, everyone, for attending. This call is concluded. Have a great day.