ATI Inc (ATI) 2009 Q3 法說會逐字稿

Hello and welcome to the Ladish third-quarter results conference call. (Operator Instructions). At this time I would like to turn the call over to Mr. Wayne Larsen, Vice President Law and Finance, to begin. Please go ahead.

Thank you. Good morning, everybody. Welcome to Ladish's third-quarter conference call. Before we get going, I will give you as always the proviso that the comments that are going to be made today there very well may be forward-looking statements that will be made pursuant to the Securities Litigation Reform Act of 55, and as such, they are subject to management's opinion and best guesses as to where things go.

With that out of the way and before I jump right into the conference call, I do want to let you know we are going to have a little different approach today in going forward on conference calls. With me today is Gary Vroman, Ladish's new President and CEO. Gary is new to that position, but he has hardly new to Ladish. He has been here over 28 years. We have worked together. Gary is an engineer by education from the University of Illinois with his Masters in Engineering from the Milwaukee School of Engineering. Gary -- for the last two or three years before this promotion, Gary was running the Ladish forging division, our biggest operating unit here in Cudahy. So he is pretty well obviously familiar with the business and with what is going on, and Gary will be participating today after I go through the general results and will be participating in future calls going forward.

So with that behind us, let's talk about the third quarter. Obviously it was a challenging quarter for us. Sales were off significantly with the overall continuous slowdown in our markets. Sales dropped from $120 million last year in the third quarter, down to about $76 million this year. Obviously a significant drop of about 37%. It is hard to clearly make up for that kind of lack of volume across the board. I think by and large most of our operating units did, but it was obviously a challenging quarter just from lack of volume for the fixed cost absorption.

While sales were down that far overall, if you look at our three main markets where we look at, jet engine was down not as much, was down about 33%, 34%. General aerospace was probably the shining star of the quarter. Aerospace only dropped off about 10% from last year. And the really difficult market that we've faced in the third quarter was on the industrial side. The industrial side of our business was down about 70% year over year in the quarter. So really a reflection domestically of the continued slowness with Cat and the mining and heavy earth moving equipment, but even more so the operation over in Poland was down significantly because overall their industrial markets were incredibly slow in the third quarter, and they just don't have the aerospace business over there built up to compensate for that at that point in time.

While obviously we did have significant downturn in the quarter volume-wise, I guess from an operation side, while collectively we were not where we wanted to be but our domestic operations remained profitable through the third quarter, and we were pleased with that. Unfortunately there were not quite profitable enough to offset the loss we experienced with our foreign operations. So somewhat offset it, but again the domestic operations have all taken a number of steps to get their fix down and to deal with their variable, and they were able to remain in the black. The unfortunate problem is dealing with European operations. They just are not nimble, and you just cannot move as fast over there with some of the issues you have on headcount and other challenges you experience over there.

That obviously explains, and I will talk a little bit further, while we had somewhat of a strange looking tax provision for year-to-date, while it showed an operating loss, we did have a tax provision. The tax provision is really related to the domestic operations as opposed to the foreign losses. They don't necessarily totally offset.

Going through the third quarter and year-to-date, we are continuing to experience some significant headwinds in the third quarter versus last year. In the third quarter this year in the weeks versus last year, we experienced about an additional $600,000 of depreciation over an additional $1 million and recognized interest expense in the third quarter of '09 versus '08. Not that our total interest expense was significantly higher this year. Our interest is actually starting to work its way down with lower level of debt. But last year with capital projects, we were still capitalizing a great deal of interest. So that is the variance you are seeing here over year in that area.

Pension expense in the third quarter was up again about $1.1 million, the same as you saw in the first two quarters of this year. One of the other factors again that we dealt with in the third quarter with the year over year differentiation was byproduct was down from year over year about $1.7 million.

I guess the one positive I can say out on that front is the difference year over year quarter by quarter is continuing to diminish, and we think we are going to continue to see less of an impact from the lack of byproduct in the fourth quarter and going forward as we work our way through this.

We also incurred in the third quarter about a $1.5 million special charge regarding a reduction of employment levels. We are hopeful that we now have most of that behind us as we move forward. But again, it was a significant challenge.

For the quarter year over year, we had about $6 million versus added costs in this quarter versus last year. So combined that additional $6 million of costs versus a relatively significant reduction in sales, I think, by and large, the guys have done a pretty good job of trying to get their businesses rightsized and trying to do a lot of the right things to offset the downturn in the business. Year-to-date those numbers just accentuate across the board, and we ultimately end up with about -- so far year over your about $18 million of additional costs that we were again challenged with for this year versus what we experienced in '08.

One of the areas where we at least on the face of it where we appear to be a little out of line from how we typically go into the business is SG&A. If you look at it year-to-date, SG&A is up to about 5.3% of sales versus last year where we are typically running more in our more common area of about 4.3% of sales. Obviously part of the problem is just the lack of volume to apply the SG&A against. A good portion of that unfortunately is in the fixed category.

But the other factor is we had about $2.7 million of charges running through SG&A year-to-date for employment reductions. When you back those numbers out -- as you back that number out, it brings the SG&A factor right back down to about 4.3% of sales. So when you consider that versus the significantly reduced sales level, I think it again reflects that the guys have done a pretty good job of getting their business in line where where they want it to be.

Over on the balance sheet, again, I think one of the more positive aspects of where we are at right now our guys have continued to do an excellent job of managing through a pretty significant downturn with their balance sheet. Cash flow continues to be positive. We had about a little over $11 million of positive cash flow for the quarter, which brings us up to over $48 million year-to-date of positive operating cash flow. Again, we paid off all our short-term debt, all of our capital leases, and we ended the quarter with over $12 million in the bank. So that is definitely a positive.

The guys have done a nice job of managing their inventories down. The inventories are down from $129 million at the start of the year, down to about $102 million. Obviously with sales down significantly, they have managed receivables have come down, but they have also done a nice job of bringing payables down, too. They brought payables down and used $12 million of cash to do that.

So again, a lot of positives on the balance sheet side. CapEx year-to-date we are at about $10.9 million versus last year at this point in time. With all the projects we had going on, we are at about $40.9 million. The year is probably going to come in somewhere around $15 million I would think at this point in time, and I would guess looking forward into 2010 that is probably about the run-rate we will be at for 2010 also at this point. There are no major capital projects that are online as far as any multimillion dollar things we are going to have to do next year.

Looking over at the backlog numbers, backlog did decline in the quarter. So we ended up with at about $475 million, which was down a little from where we were at in June. The positive I can take out of it we actually hit the low point as far as backlog that we have seen. We hit that early in July. We had excellent booking months in August and September, and I have not got obviously the full numbers yet for October. But it looks like October was probably a good booking month, too. So backlog is starting to trend back up, which is definitely a positive. Gary will talk more about the overall outlook and where we are going when he jumps on.

But, by and large, it looks like things are heading back in the right direction. So we are pleased with that.

Looking out from my perspective, obviously we had to do a lot of things so far this year as far as we have incurred a fair amount of costs. We are trying to get the business rightsized and get ourselves to a position where we need to be. I think those we have done and are largely behind us. That gives us, I guess, some optimism for having those costs behind us that we are not going to be incurring again going forward. And overall I think the general tenor around here is again fairly positive.

As I indicated, right now one of the biggest challenges we have to deal with is our European operation. We are dealing with that. We will find a way to fix it. And going forward it won't be a continuing drag on the Company.

So that is kind of it in a nutshell from my perspective on the financials. I'm going to turn the call over to Gary Vroman now and let Gary talk about where he sees things, and then we're going to open things up for questions. So I obviously will still be here if there are financial questions or people have specifics they want to get into.

So with that, here is Gary.

Thank you. Looking back on the third quarter as Wayne said, you're going to see in the Q that that backlog is around that $475 million point. But the low point actually being in July makes us think that since it stepped up in August and September, that the recovery has actually begun for us, which is good to see.

Now that being said, the fourth quarter of 2009 will still have its challenges. Because in addition to still recovering from these long depressed markets that we have all been living through, fourth quarters are typically tough anyway. You wonder what folks are going with do schedules. You have fewer workdays. Energy costs trend higher and so on and so forth.

Despite that, we still expect that our fourth quarter is going to be better than the third quarter. We really think we have seen the bottom of this cycle. It is not to say that we won't go sideways for a while, but we trust that we are not going to be going any lower.

As we look ahead to 2010, we see that first half as a period of stabilization, if you will. There are going to be some modest improvements over the last half of 2009, but it's in the second half of next year that we think there might be a better chance for growth.

The key, of course, to all of this lies in the rate of recovery that we see and the type of recovery that we are going to see. Will it be gentle? Is it going to be abrupt as it has been in the past? How much inventory is really left at various levels and supply chain? Are people going to believe in this recovery? Are they going to act accordingly? I think these are all questions that we have asked ourselves before. We have all lived through it before, and as we go forward, we will see what happens.

The other thing that makes the situation interesting is we have three major markets we serve, and each of them is going to behave a little bit differently. Let's start with our engine market.

As you know, we sell to both the military and commercial part business, but the big driver is commercial. We are waiting along with everyone else to see what Airbus and Boeing are going to do with build rates. And folks talk all the time about individual programs -- take the 787, for example. I mean we look forward to that program getting going too, but the industry recovery has got to be a lot more broad-based than just one program. As eager as we are to ship, Trent 1000 GEnx parts along with everyone else, it is the overall financial health of the airlines that is going to be the key. That will put more planes back in the air. That will improve the outlook for both spares and new build. When you get the spares and the new build going, that drives our engine business again, and then when the engine business starts to drive, you are going to deal with the destocking that has gone on.

The destocking that has gone on in these engine markets, as well as other markets that we are in, but especially in the engine markets, has been unprecedented. So something has got to give when people start building more planes and people start building more jet engines again.

As for the aerospace side of our business, a lot of our aerospace sales are for the helicopter business for both Boeing and Sikorsky. And based on the fact that we find ourselves in military conflicts that are mainly helicopter wars, it looks like this business is going to be steady for the foreseeable future.

With regard to industrial, and Wayne touched on this, there's two categories here. There is what we are seeing here in the states and what we are seeing overseas.

We are seeing some early signs of recovery in heavy construction and mining. If you noted Caterpillar's Q3 comments, they were fairly positive. We think that bodes well for Ladish forging business here in Cudahy in 2010. The foreign operations, though, were driven by industrial customers that are -- it's a different customer base than what we have in the states. So their outlook for 2010 is not going to show the same level of growth. And again, as Wayne said, there is work to be done there and we know it, and we will get it done.

But no matter how these markets go, the Ladish businesses have really put improvements in place across the entire operation. We have all gone through a period of self-analysis. We have made positive changes. We believe that the pain is behind us, and we are ready to take on 2010. In fact, we are looking forward to 2010.

So with that, Wayne and Eric, I think we can open it up for questions.

(Operator Instructions). Eric Hugel.

Gary, thank you for being on the call. Can you give us a sense as we look into Q4 -- I guess the question mark, is should Q4 look somewhat similar to Q3 in terms of volumes and sort of mix and sort of how should we be thinking about Q4 I guess in terms of one of the things that you guys have been doing to manage the volume weakness has been shutting plants for a period of time? Where do you stand in terms of how did that look in Q3 and how does that look in Q4?

Eric, actually the schedules look stronger for Q4 than they did for Q3. We did have a week in October we have already shut down the Cudahy forging operation. And so some of the other businesses have balanced off. I think we have probably got that behind us at this point in time. I know we do as far as the Cudahy forging operation. Pacific Cast's business is pretty solid right now. Their schedules have improved. Chen-Tech looks better for the end of the year, and their machine businesses, by and large, are picking up.

So I think the schedules look better for the fourth quarter and with the other positive being that we have got a lot of these one-time charges behind us. So while total sales may be flat to slightly improved, I think we have got an opportunity for better results, barring any thing that hits us in December that we don't anticipate at this point.

Okay. You talked about in your press release the $2.7 million charge is for employee reduction. That is cumulative year-to-date, right?

Yes, it is.

And you said what one point -- how much of it was in the quarter, $1.5 million?

About $1.5 million was in the quarter.

Does that include any payments to Kerry on his retirement, or is that still to come?

No, that is behind us.

Okay. That is behind you. Good. And, Wayne, just one last question, and I will get back into the queue. With regards to need to go through goodwill impairment tests, where are you? When is the last time you did one, and when would be the next one that you would he required to do?

We do it -- on a formal basis, we do it every year. But we do it. We actually do it on a quarterly snapshot we look at, and right now I don't see any goodwill impairment issues by any stretch. As I indicated all of our domestic businesses are actually making money, and that is where all the goodwill is. We don't have any goodwill on any of our foreign operation. So I don't see that there is any impairment issue at all for us at this point.

J.B. Groh.

I have got a question, a couple. One housekeeping thing. All these charges related to headcount reduction, that is all cash?

No, it is not. There is a fair portion of it that is just what we had to accrue that it's going to either be paid at a later date or -- so it is not off-cash by any stretch.

So that shows up on your balance sheet somewhere and at some point comes off?

Right.

Okay. In terms of your headcount, when things return, how do you feel about getting these people back and how is productivity going to be when you have to rehire? I mean I know you have been put through the ringer with some of these program delays in gearing up and then having to tune back. What is going to happen when things get better? I mean do you feel like you are in a better position when you have to rehire in terms of productivity?

Well, some of the headcount reductions we have gone through have actually been through some really retirement programs. So those people are not coming back. So I think it wants -- we will not automatically have to bring back up from employment levels where we were before when the business bounces back. So I think there is some obviously productivity opportunities and some -- which will add obviously some incremental profitability opportunities.

Gary, do you want to --?

Yes, I will add to that. The thing is remember before I said that it depends on the rate of recovery and the type of recovery that we see. As we were right-sizing businesses, if you will, we talked about when it got better, not if, how we would bring people back, and if it happens in a more orderly fashion, we think that we are going to be fine. If it happens in the typical explosion that we have had in the past in our markets, then it might be a little more difficult. And, of course, with the big changes that we have seen in mix and the big volume changes and the jumping around the schedules, we have not had a lot of confidence over the course of the last year in the schedules that we see. So we have a little confidence before we start reemploying people that what we are seeing is real, and I think the whole supply chain is going to go through that. It is going to be interesting to see what the rate of recovery is, and that will answer your question.

Yes, I don't blame you. In terms of -- and also on that rightsizing theme, what are your options in Poland? I mean what can you do there? I mean are you just sort of backed into a corner? There is not much you can -- all you can do is really wait for the recovery to occur?

Well, there is, you know, you can slowly but surely try rightsizing your business over there to certain levels. But the notice provisions and the steps you have to jump through and how you go about doing it over there is significantly more restrictive, and it is just very hard to react on a timely basis. That is reflective in the results we are seeing out of that operation right now.

And remember when Wayne went through those results and talked about the industrial business being down 70%, it is tough for anybody to handle 70% drops.

Right. So you have had a 70% drop in revenue there and no ability to really do anything on the cost front because everything is basically fixed there, correct?

Well, we have done some but clearly not enough.

Right, okay. And then one last thing, Wayne, what shows up in the other line on your income statement, that $632,000?

It is some bad debts we had to write off with our European operation. Not only are they not doing well, their customers are not doing well either.

Okay. So that could be viewed as kind of a one-time thing. And then one last thing I think you mentioned some of the -- is all the $1.5 million workforce reduction cost, is that all in SG&A, or is some of it also in cost of sales?

The vast majority of it flows through SG&A.

Tom Lewis.

First off, with respect to what is going on or not going on in Poland, can you tell us much about the extent to which you have gotten qualified for aerospace business over there and the extent to which a recovery in aerospace volumes might be a part of the solution there over the next couple of years?

Until you said that last thing at the end about the next couple of years, I was ready with my answer, Tom. The aerospace business is picking up and the aerospace penetration that we have from those Polish operations is getting better. But it is a slow path. It is not a fast path.

I guess the best thing to say is we are not going to quantify what portion of the business over there is industrial and what portion has becoming aerospace, but I will say qualitatively that the aerospace portion is growing and we are becoming less dependent on the industrial. It just does not happen as quickly as you would like or as we would like.

Okay. And on the byproducts front, I am assuming that you were talking about it getting less onerous quarter over quarter. I'm assuming that is mainly about just easier comps. But listening to a lot of companies talk about having had advantageous raw material situations lately, it sounds like this is one of those markets where the bottom dropped out of anybody being interested in buying much of anything, but it is kind of getting better. What are your thoughts there? Is the bottom still dropped out of your byproduct market, or is that coming around?

I think we began to see some improvement in the third quarter in that market, and we are, I guess, guardedly optimistic it is going to continue to work its way back.

Yes, to your comment, yes, the comps obviously become much easier going forward because of when the problem started in that market late last year. But we are starting to see some improvement certainly on the nickel side, and we are hopeful that the titanium side starts picking up too.

Alright. And the last thing, I don't know maybe it has been a quarter or two since I heard much about this, but we built a new press there and it sounded like -- correct me, if I'm wrong here -- but we were kind of in the mode of the customer interested to develop for you to start it up. Is that about a program or specific programs, or is the decision for that to start to contribute more about just general volumes?

Well, the press that has been put in place in the Ladish forging business here in Cudahy is going to go across many different programs. It will serve many different programs. The pace at which we had to qualify that press changed once these markets fell apart. The press qualification is actually ongoing. It is going well. We have had some real good progress out there. That isothermal press is in place to support primarily nickel-based alloys and powder alloys for the jet engine market, and that jet engine market needs to come back to really get that press active again.

So we feel that the market situation has set itself up that the press is going to be online at exactly the right time for the markets to recover, but we have to wait and see how the airline financial health goes. They have to start flying planes again, and we have got to wait and see what Airbus and Boeing do on builds, and that will tell us what the rates are for building the jet engines.

So that sounds I don't know possible but not probable for next year?

That press will be manufacturing hardware for jet engine programs next year. I just don't know how much engine hardware next year.

Steve Levenson.

Gary, welcome. Thanks for being on the call. In terms of the the destocking that has been going on out there, do you think it is overdone? Do you see any potential for catchup, and if you do, when do you think that could begin?

The answer is yes. The destocking has been overdone. The question is, Steve, exactly on what programs and in what markets that we are serving. This mix issue -- and somebody brought it up earlier; I think it was in Eric's first questions earlier on the call -- this mix issue is something that is difficult to keep a handle on.

The destocking in the aerospace side of the business and especially the jet engine side of the business is real. The destocking in the Caterpillar side of the business is very real. There is going to be a pickup, and people have been talking about the fact that they feel that it's going to be a little more gentle and a little more U-shaped instead of V-shaped next year. We are hoping it is going to be gentle, but this supply chain has never done a recovery gently.

On the Trent XWB, do you have any idea of the timing on when you start producing parts, or are you already doing things for prototypes?

We are already doing things on prototypes. We have several orders on the books for the XWB, and there will be some parts made next year. But, as you well know, the build on that is going to be a ways out. So the parts that are going to be made next year are going to be for proving out the engines and that technology.

I know you mentioned what the furloughs were expected to be for the coming quarter. How many weeks were you actually furloughed in the third quarter?

In the third quarter, there was one week of furlough here at Ladish forging. There were also at the other Ladish businesses some reductions and some shutdowns that were not as dramatic. It was not that full one week furlough. What we have really done throughout the year is once we realized we had this type of tough year ahead of us, we had a furlough week in the second quarter, one in the third quarter, one in the fourth quarter. So we have been on a once a quarter type of program.

Some of the other businesses, Steve, have been doing it on reduced work weeks. Chen-Tech, for instance, moved some of their crews down to four-day weeks rather than shut down for an entire week. It was more palatable for them and with their workforce to go to four-day weeks instead of one week at a time. We ultimately end up getting the same cost reduction and savings. Pacific Cast has done some similar things, and the machining guys have done it -- have been balancing similarly with whatever they can.

And, of course, there will be some plant shutdowns around the holiday period as well.

Right. That is traditional, though, right?

Correct.

Okay. Last question. I have not mentioned anything to do with space for a while. Any commentary on space?

Well, we were encouraged that there was a successful launch on Aries, and the question is, what does the Augustine Commission really -- what is the Augustine Commission really recommending? On one hand, they say that that is a good thing that we should have a program like that, but on the other hand, they say that there's not really enough funding to do the program right.

So even though I have read that report, I'm not certain whether or not they are really pressing as hard as I would like them to for that whole Aries and constellation program. If that were to occur and that program is to be funded and we have activity, it is not really the type of activity that is going to be so significant that it is going to make a huge difference to our 2010 outlook. There are other space things that we participate in, including satellite hardware, that continue to go along steadily. But no real big news on the heavy launcher front that is going to be a market mover for 2010.

Eric Hugel.

Stephens. Just a follow-up, Gary, for you. Just in terms of inventory destocking, just sort of your gut in terms of what is coming out of guys like Rolls and GE? Do you get the sense that if Boeing and Airbus were to cut narrowbody production rates, sort of, let's say, generally people are thinking in that 15% rate, is that sort of where we are right now in terms of rates? What I'm getting a sense is, if production rates did come down to those levels, would you necessarily see another round of inventory destocking, or were you already there? Has it already been built in?

Well, that's an excellent question, and I appreciate the fact that you are asking me to speak for Airbus, Boeing, Rolls-Royce, GE and United Technologies. But I will try and answer it.

You are right. I think most of the cutbacks are in place. I think people are presuming that there is going to be a bit of a slowdown, and I think that is why they are being careful with their schedules and why some of the destocking has gone on. So if there is a small change to Airbus and Boeing build rates, I don't think we are going to see that same change, that same rate of change in our engine business. I think our engine business is already down to a level that would reflect what next year would be even if Airbus and Boeing cut.

Right, okay. And, Wayne, just a quick one. With the new presses and the furnace coming online, as we look into next year, how should we be thinking in terms of depreciation and amortization stepping up as you have to start depreciating the new equipment?

And also, in terms of the pension, what kind of headwind -- I know you don't finalize it until year-end -- but maybe if you just assume at the end of the quarter, sort of discount rate and return, would you be expecting to see a sizable step-up in pension expense again?

Well, with the first one, my guess is, on the depreciation side, it is probably going to be a couple of million for next year. It would be like right now a snapshot is where I would guess.

Pension numbers, we don't have yet, but I would expect that we are probably you are going to see some kind of an increase for next year. This really depends on we are still waiting for some regulation to come down out of Washington and some direction on some -- on issues that impact the actuarial calculations. So we don't have a final number yet. Although I guess I would be guarded to think that it certainly is unlikely to come down. But I don't know just how much it is going to go up at this point.

Are there any significant funding requirements?

No, nothing out of the ordinary as far as what we're going to have to do. Obviously we will be making pension payments next year. I'm guessing probably it will be somewhere in the $5 million, $6 million, $7 million range as far as what we will be paying next year. We've got a fair number of credits that we have not even used as far as our pension situation.

So I'm not anticipating there being a cash problem next year either. This business will continue to generate plenty of cash, and the only real issue we have next year as far as cash demands is going to be we've got one tranche of debt to pay off next year of a little under $6 million, but -- and an ongoing obviously interest expense. But I'm not expecting any cash issues for next year.

Alright. And lastly to Gary. With regards to the current schedule for the 787, if it were to hit its milestones in terms of flight and delivery, when do your production schedules show volumes on your end starting to pick up?

The second half of next year.

Okay. Great. That is what I thought.

(Operator Instructions). Gentleman, that appears to be all of the feedback for today.

Okay. Well, thanks, everybody, for dialing in bright and early on a Monday morning. If anybody obviously comes up with any other questions, obviously don't hesitate to give me a call. I think most of you have got my number. And just for everybody's point of reference, Gary and I both will be out in December at the Credit Suisse Aviation Week Aerospace Conference in early December. So we will be there if you get a chance to stop by.

So other than that, thanks for calling in, and we will talk to you at the end of the year.

Thank you, ladies and gentlemen. This conference is concluded.