ATI Inc (ATI) 2010 Q3 法說會逐字稿

Welcome to the Ladish third quarter results conference call. As a reminder, all lines are on listen-only mode and there will be time for Q&A at the end of the call. (Operator Instructions). At this time I would like to turn the call over to Mr. Wayne Larsen to begin. Please go ahead.

Thank you. Good morning everyone. Welcome to the Ladish third quarter conference call. I am going to, as we have for the past several quarters and throughout this year, I am going to run through the numbers quick and give you some of my commentary, and then Gary will take over and give you some more flavor on what happened in the quarter, and where we are at so far this year, and where the year ends up, and looking out toward 2011 and beyond.

Before we jump into anything obviously we will give you a proviso that our comments are subject to the Private Securities Litigation Reform Act of 1995, and anything we say will be subject to the Safe Harbor Provisions under that Act, particularly with regard to forecasts and opinions of management.

With that behind us let's look at the third quarter. It was another solid quarter for Ladish. We were pleased with where things came in with $100 million of sales it was obviously a pretty easy comparison to last year third quarter that was the real meter of the business when we were down to about $76 million in sales, so the year-over-year 31% pickup is a nice comparison. Most importantly for us it was another solid $100 million quarter for us. Following each of the quarters of the first half. So we were pleased with that. Gross profit for the quarter came in at $16.2 million, which easily works out the math with those sales to about16.2% gross profits.

We were again pleased with where profits have held, it is really a reflection of what is going on with the overall improvement of the business, and where things are headed for Ladish. Again I can't overemphasize the fact that we have seen the leveling of the business quarter after quarter, and we have settled into a nice run rate that we are fairly comfortable with, and I think it reflects a really improved business. When you look at the SG&A rate for the quarter of $4.5 million which comes in at about 4.5%, roughly the area where we want to keep SG&A running, somewhere in the 4%. Obviously a big increase over last year's 7.5% SG&A as a percentage of sales.

Remember last year we did have some extraordinary expenses in there that had to do with some employment reductions. So not entirely a fair year-over-year comparison. But again a reflection of, we are keeping obviously our eye on the ball with respect to SG&A. Resulted in operating income for the quarter of $11.7 million, again, at 11.7%, pretty consistent to where we want to keep the business running.

Interest expense for the quarter of $1.3 million, down a little from last year in the third quarter at $1.4 million. That is really a reflection that we have reduced our overall debt, because we did pay down, have begun paying down our long-term debt in the second quarter of this year, so with our debt down interest expense is coming down, and we are really moving into a period where in prior years you saw a lot of variation in interest expense because of interest being capitalized with some of our major capital projects that were going on in 2007, 2008, and the beginning of 2009. We have moved beyond that, so you are getting a more clear snapshot of where those results really come in at.

We ended up with pretax income for the quarter of $10 million, or 10%. And the tax rate came in a little higher than we normally would have thought. Tax rate came in at about 38.3%. A couple hundred basis points higher than we thought. Really just an adjustment to clean up issues with regard to some state tax issues, and some foreign sales issues. Ultimately it resulted down with net income in the quarter of $6.2 million, 6.2%, for $0.40 a share diluted EPS. Obviously a huge improvement over last year's $0.14 per share loss in the third quarter of last year.

When you look at the nine month numbers, which is a little truer comparison from last year, sales of almost $299 million, up 12% over last year, a nice pickup and gain. Gross profit of $46.6 million or for the nine months 15.6% gross profit numbers. Again a nice pickup and really a reflection of the solid consistent performance of the business.

SG&A so far this year for the entire nine months at a 4.3% of sales, $12.8 million. Again, right where we want to keep SG&A running in the low 4% range. And operating income of 11.3%, $33.8 million. Again, another solid performance throughout the first nine months. Interest expense of $4.2 million, a little higher than last year when you factor in as I referenced earlier in the first half of last year we were capitalizing some interest, so that is why the numbers year-over-year look slightly higher. The actual interest paid year-over-year has actually come down.

Pretax income for the first nine months again came in at 10%, $29.9 million. We had a slightly lower tax rate as it leveled out a little for the nine months of $36.2 million, I would think the year is probably going to come in somewhere right around the 36% level. Resulted in $19.1 million of net income, or 6.4%, or from an EPS perspective of $1.21 per sharefor the first nine months. Again a huge improvement over last year where are this point in time last year we had a $0.02 a share loss, that we ultimately obviously reversed by the fourth quarter. but we are obviously off to a much roaring start for the first nine months of this year.

Looking at the balance sheet side of the equation, we ended the quarter with almost $27 million of cash on our books. It is a reflection of so far this year $25 million of operating cash flow, in spite of the fact that we have been growing the business the working capital hasn't grown. We are still generating positive cash, which is certainly a positive. Receivables crept up in the quarter to $77 million, again a reflection just that from the continued growth of the business. Our inventory is up a little. We consider by and large that a positive. We think it is certainly under control. It has grown at a reasonable rate, and just a reflection of our guys being ready to service the industry going forward on a basis.

Obviously I referenced earlier that we have paid off some notes. Our notes are down by $5.7 million as those have begun amortizing. So far for the first nine months CapEx is at about $9.3 million. I think we will probably finish the year at about the pace. We are running about a million a month, might be a tad higher than that over the year. Looking forward to next year, the CapEx is still probably going be in that $12 million to $15 million range for 2011 for those that are looking forward.

Depreciation for the first nine months about $11.7 million. On some of the more positive aspects, new orders in the third quarter were about $115 million, which brings us up to about over $330 million for new orders year-to-date, which results in our backlog is now at about $537 million. Positive side of the backlog it has grown every month this year. Hasn't grown by any astounding rates, but the positive to us is it has been a nice steady progression where it has grown month after month, and we are pleased to see that.

On the softer side we look at, we ended the nine months with about almost 1,700 employees. We are up about 60 people year-to-date to service the growth of the business. If you look at it year-over-year sales are actually up 12%, and employment is up less than 4%. Again it is a reflection of us being able to take advantage of some incremental opportunities. A lot of the efforts that have come from our personnel, the productivity improvements we have seen, so all-in-all it has gone together, and it all helps to produce the results that we have had so far this year. Those are kind of the numbers in a nutshell.

I'm going to kick this over to Gary, and he can give you a little more of the qualitative side of what is going on, and then the two of us will take questions afterwards.

Thanks, Wayne. This time of year in our business cycle is just the perfect time to get a good handle on what 2010 has been, how we think we will finish up this year, and also because we are in the midst of our formal 2011 business planning, we are getting our first real glimpse of what 2011 can be. I really like what I have seen. I like what I am seeing going forward. I am especially pleased with what our Ladish employees have done over the past 15 to 18 months, and feel really good about how well prepared we are for the next few years.

This team of people came through a really tough cycle in really great shape, and that gives us a lot of confidence that we are absolutely ready for what is next. So that is the question that is on everyone's mind, is what is next? And let's face it,we all see each other's press releases, we read the same newspapers, we listen to each other's calls. I can tell you, you are not going to hear anything new or earth shattering from me today. I will be repeating what I believe has become industry consensus which is this. We will hang in there through the balance of this year with relatively steady revenues and earnings, and wait for the air framers and the jet engine builders to ramp up their activities to satisfy this new demand which is coming.

As for when it is going to happen, it going to be some time next year. Whether it is earlier are in the year or toward the middle of the year, it actually doesn't matter to us. It is not necessary to be that precise in the timing prediction. The most important thing is that we are planning on 2011 demand being higher than 2010. And we are planning on 2012 demand being higher than 2011.

During my latest visits as we went around to various Ladish facilities, and walking around and talking with the people, I can see that the people are ready and the equipment is ready, everybody wants to go. I think we are all just collectively waiting for whatever that kick start to these world economies is going to be, and then we ought to be off to the races which I know that we are really looking forward to. As we look through our major product lines and starting with jet engine, which historically has been our number one market served as I said in earlier calls this year, it hasn't been the real stellar category, even though it is still our largest. Compared to the first nine months of last year, our engine product line sales are only up a couple of percent.

The backlog for this product line, though is, finally growing a bit and we can see is growing in both forging and casting in some of the preliminary 2011 forecasts. In new build and in spares, we see it coming on both fronts. Again, as I said earlier, it is just a matter of when. Certainly by the middle of next year we expect this segment to show significantly increased activity.

Historically our second largest market served is Aerospace, and this has been more of a shining star for us this year, especially as our helicopter business and other air frame structural work is up about 24% over last year. The backlog is solid, we expect it to stay that way throughout this year. I will say that because 2010 has been really strong with some new program and some exceptional spares activity, we might see this product line soften a little bit in the early months of next year, as it settles into a more routine run rate. If there is in fact any overall 2011 softness in the aerospace product line, it will be more than offset by the higher jet engine sales. So the total Aerospace and Jet Engine business together. we do expect to be up next year.

And finally on the Industrial side our third major product area it does appear as if the restocking is essentially complete in this sector. Sale in that area are up around 23% versus one year ago. This is another segment just like jet engines where we expect 2011 to be bigger than 2010, as the mining and infrastructure programs we support look solid going forward. As I have said, we are confident that the upturn is real, it is just that the pace is slower than we have experienced in the past. We have prepared for more sales volume, because we believe this recovery is going to quicken next year. The press release says we are ready to teak advantage of the uptick as it occurs, Wayne talked earlier about our steady performance this year, and I agree the steady nature of our business has been really reassuring.

The financial statistics that I really like are the net sales and operating income numbers through the first nine months. Just take a look at the numbers. We made $29 million more last year on $32 million in sales. I don't want all of you to hold to us that ratio going forward. It is not something we can necessarily sustain through the next $30 million, $60 million, or $90 million in sales growth, but it is a sign coming through these tough times of just how productive our people have been, and that is what makes or breaks a business. It is all about the people. Combine that productivity with a good product mix and you post some pretty good results. Add in the $27 million in cash that Wayne talked about, you know you can handle the production ramp, and top it off with $537 million in backlog is paints a pretty healthy picture. That is how we see it.

Eric, let's open it up to the callers and see what is on their mind.

Thank you, sir. (Operator Instructions). First up is Steve Levinson. Go ahead.

Thanks, good morning everybody.

Good morning, Steve.

Hi Steve.

Great to see the progress. I was going to ask based on your anticipated, or the anticipation of a ramp-up on the jet engine side, what do you see going on with nickel pricing, and do you plan to accelerate any of your metals purchases?

Well, as you know, Steve, in our contracts we have protection on material pricing, and it is very typically virtually all of the time metal pass-through. There has also been a considerable amount of work within the supply chain, working between customers and suppliers, and then us as forgers and casters in between, to work together on these materials prices. The short answer is no, it is not the sort of thing where we would necessarily stockpile. We have worked with our suppliers and customers to protect ourselves contractually.

Okay. Thank you. In relation to the 60 people that you have added, are these new people that require training, or are these some of the form early formerly furloughed employees?

It as little bit of both. Many of them are the formerly furloughed employees. Some in fact are in fact new people that we will be training, and we are going to have opportunities I believe as business grows next year, to bring in even some more people in order to support what we expect is going be improved demand.

Okay, thanks. The last one is I don't you don't want us to hold you to the operating leverage you got on the sales year-over-year. Would you want to take on what the operating leverage might be going forward?

We are still sticking with we ought to be able to get to leverage of 25% to 30% on our incremental sales. We still believe that. As Gary indicated, this year obviously has been a little bit of an anomaly with the phenomenal leverage we have been able to extract out of the business, but we expect going forward we can still do well in growth with the incremental increases we see for next year.

That is great. Thanks very much.

Next up is Tyler Hojo. Please go ahead.

Hi, good morning. So just on the sales split between Jet Engine, Aerospace and General Industrial, could you give us the split just in terms of percentage of sales for the quarter?

Sure, Tyler. It was for the quarter Jet Engines were 50%. Aerospace was 36%, and industrial was 14%.

Okay. Got it. And I was hoping that you could perhaps talk about plant shutdowns if any occurred in the quarter, and perhaps if any are going to occur in the quarter ahead here?

We are looking, it is typically a good opportunity between Christmas and New Years to talk about some shutdowns in plants. We haven't finalized our fourth quarter planning, and in the third quarter there were the remnants of the 4th of July shutdowns that we did have at some plants but there was nothing significant. Nothing, Tyler, like last year when we had shutdowns of a week or more, and furloughed workers in order to handle the reduced demand.

Great. On the new isothermal press 118, is that up and running? And perhaps an update there. I know that is going to be tied to the Rolls Royce trend, and maybe as an add-on that engine hasn't been doing all that well lately, perhaps you could comment on Ladish's role there, and how you guys are looking?

I will take the last part of that question first. I don't think it is right to characterize Rolls' brand new engine as not working all that well lately. It is typical in start-up programs that people go through learning curves. We go through them here, Rolls goes through them, everyone in our business goes through them. I am very confident that Rolls has their act together, they are very good at what they do, and we are looking forward to that engine, and the 787, and everything taking off next year. What was the first part of your question?

Good question. I don't even remember. Maybe if you could just talk about capacity utilization, where are you going?

You asked about 118 press.

That is right.

118 press is up and running. We are into the full depreciation cycle. Everything is going just fine. I even looked this morning because I was curious before I got on this call to see if we were making production on that press today, and we are, so we are pleased with where we are on 118 press.

Great. I will hop back in the queue, thanks.

Next up is Eric Hugel. Please go ahead.

Good morning, guys.

Hi, Eric.

Hey, Eric.

I know next year is a bit of a crap shoot as far as timing, when the top line starts to step up with 787. First, PCP talked about a quarter's worth of delay because of all the stuff going on with the 787. Are you seeing the same schedule push-outs?

And two, maybe we can look maybe a little longer term at the ramp-up here, if we are looking let's say over the next three years, not just one year, but I mean in the ballpark, should we be thinking about sort of like mid-teens top line growth is that sort of a reasonable type of ramp to expect given what you are seeing?

It is so program dependent and I am going to stop short of putting a number on it, but the ramp-up is definitely coming in jet engine. Yes, to answer your question about whether we saw the same thing as PCP, in terms of a bit of a delay, we did in fact. I don't know if it was exactly the same period. We did see some softening in those schedules, and a little bit of a slide to the right.

The real step-up in our business is something that by the middle of next year we ought to be feeling, and in 2012 I expect we are going to be going very strong. I don't want to put percentages on it in the out years. But if you just look at what is going to happen in terms of revenue passenger miles, and what is going to happen in terms of new build, and all of the new engine and airframe programs that are out there, your assumption is probably not very far off.

You talked in your press release about sort of new growth opportunities for 2011. Can you maybe be more specific? Are you just talking about the new rolls, the new trend, and are you talking sort of new sort of new sort of businesses that you haven't been doing that you are sort of bringing new products online?

We are talking about both. And I don't want to get specific about the new opportunities that we have, because in some cases those new opportunities will be at the expense of some people that we are competing against, but the growth is split pretty evenly between new business on new programs with existing customers, and new business on new programs with new customers for these businesses. We have been very happy with what each of the businesses has done in bringing new opportunities into the mix.

And can you give us an update as to on ZKM, sort of where profitability is, and sort of the move towards aerospace, sort of what kind of progress are you making there?

Yes, Eric, we continue to be encouraged with ZKM with continued improvement. They remain profitable and the Aerospace opportunities there, they are continuing to grow. Some of the improvement things, opportunities that we have taken there with expanding them into finished machining, and with some NDT inspection capabilities are moving forward on a positive pace.

We have got business booked for there for 2011 and 2012 and beyond, so they are shaping up to be what we had hoped it for from the beginning, which is a solid low cost European-based aerospace supplier, and they are finally getting there. Again, it has been much slower than we would have preferred, but we are pleased with the progress. They have made some phenomenal progress this year. Clearly one of the reasons for the year-over-year improvement that we have had is the drag that they were last year is not. They obviously still are not contributing at the same level as some of Ladish's other operating units are, but they certainly aren't the drag that they have been in the past.

I guess is Sikorsky is building Blackhawks in Poland now. Give your relationship that would seem like a perfect opportunity for them. Is that sort of in the mix there?

We had conversations for years now with Sikorsky about how ZKM might help their efforts in Poland. It all starts with simpler more straightforward cabin-related product, and then eventually moves to the rotor product, where we are historically strong in our business with Sikorsky. The short answer is yes, we have talked with Sikorsky, and yes, that is in the mix. It is not just Sikorsky though, the entire aviation valley over in Poland has all sorts of opportunities for our business. There are many US-based aerospace manufacturers who are active over in that region.

Great. And just one quick, just a follow-up to you sort of said 25% to 30% incremental margins. Are you talking gross or are you talking on the operating line, Wayne?

Gross, Eric.

Gross, okay. Thanks a lot.

Next up is J.B. Groh, please go ahead.

Good morning, guys.

Good morning, J.B.

On the growth rates looking out into 2011 and 2012, I know you don't want to get specific, but just in terms of the different markets, jet engine, aero and industrial, is it a safe bet that jet engine is the fastest growing of the those three, followed by aerospace and then industrial?

Definitely jet engine is going have the fastest rate of growth without question. The only reason I hesitate to say whether or not aerospace which would typically be our second fastest growing would be second, is that aerospace business has been strong for us because of some new program activity and spares activities, and I don't know how year-over-year how it will compare. It will still be at a very healthy rate, but on a percentage basis if you talk about growth off of today's existing base, I am not certain that this won't just go neck and neck with the industrial. So I can only really separate jet engine from the other two, but I am afraid to order the other two.

Good. In aero it is just a tougher comp because of the good year you had this year?

That is exactly right J.B.

Gary was talking about percentages J.B. Aerospace obviously will still remain much larger than industrial, but just the percentage growth rates may not work out at the same level.

And I would guess that the margins in jet engine and aerospace are pretty similar is that safe?

It is safe. It is so mix dependent and one with of the things that we are pleased with in our businesses there used to be some pretty big diversity in those margins, and we have done a nice job throughout all of the Ladish businesses of leveling that out a little bit, and making certain that we have return on all of our businesses for our customers. So there is not as big a differential as there has been maybe five years ago.

Got you. And then looking at this wave of business, obviously you have put in a lot of capital a couple of years ago expecting things to be a little different. Talk about sort of your capacity utilization, and when the next big incremental step in CapEx would be if things keep going well?

I would say in all honesty, J.B., I think capacity-wise we are still probably in the high-60s moving towards 70% of capacity. We have got a lot of capacity, and at this point in time we don't have a next wave of major capital in front of us that we can see. I mean all of our facilities obviously there are continual issues and continual improvement that we will be doing at those facilities, but nothing like we experienced in the 2007/2008 timeframe. The next large capital, well not even those kind of dollars, but even anything extraordinary as far as dollars invested will be done outside of Ladish that exists, it is not that we have any businesses that require it at this point.

Great. Did you give an operating cash flow number for the nine months or for the quarter?

Yes, the operating cash flow for nine months is about $25 million, J.B.

Okay. And then that depreciation number you gave, that was depreciation and amortization for the nine month period of $11.7 million?

Yes.

Okay. Thanks a lot. Good job on the quarter.

Thanks.

Next up is Tom Lewis. Go ahead.

Hey, good morning.

Hi, Tom.

Good morning.

Looks like most of the good questions have been asked here, but first off is there anything in your mix of business or in your order discussions that give you any kind of look as to where we are, in terms of finding a bottom in business jet demand?

No. If you figure out where the business jet demand has been and is going, give me a call.

So you haven't seen anything that would point to, okay. Fair enough. The only other thing a question or so ago you referenced strength in spares demand. Can you tell us was that, I am assuming that was pretty much on the defense side, or it was more across the board over into commercial aftermarkets, in describing the recent strength of your aerospace segment?

Actually what I was referring to was the commercial markets. There is, in fact, always defense spares activity going on, and there has been some of that that has been very strong, again program specific. But the commercial spares activity is bound to pick up as well, as they fly more routes, and people start putting some planes back into service.

Okay. But you were talking about what has carried you year-to-date, and what I was hearing was that the spares portion of demand in aerospace had been relatively strong, and I was just looking for a distinction between defense and commercial there, that is all?

What carried us through the aerospace, the spares reference that I was making was in fact very defense related.

Great, thanks a lot.

You are welcome.

Next up is Eric Hugel. Go ahead.

Hey, Gary. Just wanted to clarify a comment you made when you were talking about the jet engine business and the backlog. Did you say you are starting to see backlog growth in the jet business now, or you expected to see it in 2011?

We have seen backlog growth now it exists now. That is what tells us that we expect to have sales growth in 2011.

Great. Can you talk about, Wayne, you used to give sort of a percentage of sort of metal in I guess the gross in the COGS, a way to sort of think about how much is the underlying sales growth versus metal price inflation. Can you talk about what we are seeing today? Metal prices kind of look like they are rising. How much of a boost to the top line is really just coming from pass through?

At this point, Eric, I wouldn't say it is large. You are absolutely right, we are starting to see some drifting higher of metal prices, but those higher metal prices haven't really started flowing through our sales yet.

Okay. Maybe next year, beginning of next year? What is the sort of timing on when you would start to think they would flow through?

We will start to see some of that next year. Clearly we will start to see it next year.

Okay. Can you talk about this quarter versus last quarter, it looks like nickel pricing is up, titanium pricing is up, could you talk about I guess third quarter versus second quarter sort of the benefit, was third quarter better in terms of the scrap pricing or scrap contribution to earnings third quarter versus second quarter?

There wasn't a significant difference between second and third quarter.

And I guess lastly in terms of ATI being the second source of powdered nickel alloy, I guess specifically for the RR1000 is the alloy wheel we used to talk about, can you sort of talk about are they providing product to you currently, or sort of where do we stand there?

Clearly it makes sense for us to work closely with ATI for powder, as everyone knows with PCP being aligned with special metals for powders, that makes a lot of sense, and yes they have provided product and we are working with them closely, to make sure that we can both benefit from that market.

And the product that I remember like PCP was providing you product, but there were issues with the product, the specs. Is ATI consistently the product that they are giving you up to spec, or there still kind of like learning curve issues there?

Everybody provides spec product to us, Eric.

I know they provide spec product but the quantity was an issue, in terms of getting what you needed. Are you, everything is sort of you are not having problems here?

Everything is fine, Eric. Remember the part of the call where I mentioned that everybody listens to everybody's calls?

Fair enough. Have a good one, guys. Good quarter.

Thanks, Eric.

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

Alright, great. Well, thanks everybody for dialing in. Stay tuned, we will keep at it for a third quarter, and we will be talking to you probably late January/early February and we will talk about what happened in the fourth quarter and year-to-date. As always, if anybody has anything specific give me a call direct, and we will talk to you after the first of the year. Thank you.

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