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Ladish Co., Inc. (NASDAQ:LDSH)

Q4 2008 Earnings Call

February 10, 2009 09:00 AM ET

Executives

Wayne E. Larsen - Vice President, Law/Finance and Secretary

Analysts

Stephen Levenson - Stifel Nicolaus & Company, Inc.

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

Tyler Hojo - Sidoti and Company

Eric Hugel - Stephens Inc.

Operator

Good day everyone and welcome to today's Ladish Company, Incorporated Fourth Quarter and Year End 2008 Results Conference Call. Just as a reminder, the call is being recorded.

At this time I would like to turn the conference over to Mr. Wayne Larsen, Vice President of Law and Finance. Please go ahead, sir.

Wayne E. Larsen

Thank you. Good morning everyone. Welcome to the Ladish call for fourth quarter and year end '08. We'll get going right away.

Before I do, as always, I will give the proviso (ph) that there will probably going to be some forward-looking statements made today, as far as looking outward and they will be subject to management opinion and of course protected by the provisions of the Safe Harbor Act of the Securities Litigation Reform Act of 95.

So with that behind us let's move on. We are really going to talk about four different topics this morning. Fourth quarter of '08, full year '08, 2009 outlook and beyond and then obviously we'll take some questions. But really the important factor to focus on today is really three different time periods.

What happened in '08, where we see things going in '09, where we've got some pretty good visibility at the moment and where we really see Ladish going in the market in '010 and beyond. Really three distinct time period that we are going try to focus on this morning.

Starting with '08, going back to the wrap-up for the fourth quarter; the fourth quarter was relatively challenging for Ladish. We were really impacted, obviously by the Boeing strike that disrupted schedules across the board for us at virtually all of our operating units. Probably, couple of our...the operating units that were probably were hit the hardest by the Boeing strike were our investment casting business out in Oregon and a couple of machining operations took a pretty significant hit from the schedule disruption also as a result of the Boeing strike.

Those schedule disruptions obviously hit the fourth quarter. We're still working our way through them right now in the first quarter and I think we are going to see it continuing in the second quarter. Hopefully we are going to see a little stronger second half of the year from what we are seeing right now. But we're still working with the OEMs and then obviously what goes directly to Boeing on from us. So we're still working our way through scheduled push-outs and adjustments. And that really negated some of the order growth that we were expecting to see in the fourth quarter. As a result of this, us (ph) ending up with year end still strong backlog at 629 million, that was down sequentially from the third quarter where we had ramped up.

So overall, there were not a lot of cancellations as typically in this industry but we saw an awful lot of schedules move out to the right, further out into '09 and more importantly into '010 and beyond, particularly on a number of the jet engine programs.

In response to that we didn't sit on our heels. We take some relatively aggressive actions. We had a 5% overall reduction in headcount by the end of the year, corporate wide. We are still evaluating where we go from that level from here. It's particularly difficult for us at this point in time.

We are judging where we go with each individual business unit and what the demand's going to be for personnel and man power. But we spend an awful lot of time and big investment in the first half of '08 and then last of '07 hiring people and training people, positioning ourselves for a ramp up and taking advantage of all the new capacity we're adding before the market hit the tail spin that it did and the Boeing strike obviously compounding matters.

So we're being judicious as possible in where we go with man power and what we do as a result of which obviously we got another... a number of other things, control our costs, obviously overtime's been cut out, hiring's been cut out. Then we're looking at where we can go to manage our costs going forward.

If you look at our fourth quarter results overall, sales were up sequentially from fourth quarter of '07, about 112.5 million versus a 108 million in '07. Unfortunately our cost of sales were up even more sequentially. We ended up getting through the fourth quarter, we saw our raw material move up from where it had been in the mid 40s as a percentage of sales, it moved up into high 40s.

We finished the year with raw material being about 49% of sales. Obviously that had significant impact on margins going forward. And it resulted in our gross profit margin dropping down to about 9.6% from last year, when it was about... in fourth quarter was about 16.9%. obviously a big portion of that reflected in the swing in the raw material escalation that we had to experience.

A positive in the fourth quarter is we have again continued to get our SG&A back in line. We ended the fourth quarter with SG&A down to about 3.9% of sales, below the 4% that we typically target. So we were pleased to get that back in line. We put behind this a lot of experience we had earlier in the year with some of the hiring and some of the issues we went through. So we were able to bring that back into line.

That resulted and obviously worked its way down to less than satisfactory operating income, dropped down to about 6%, about the half the rate it had been the prior year. Again, all reflected largely in the raw material issue. Along with raw material increasing as a percentage cost of sales the other side line of that is, we saw continuing in the fourth quarter, we had experienced through most of '08, the by product market continue to head south, they are now close to disappearing as far as any kind of a favorable return.

We saw a significant decline in the fourth quarter again and we are looking at that, that's not correcting itself as we head into '09 at this point in time. So that's another challenge that we're facing. One of the big issues that you see and the variation is where we ended up for the year with as far as the tax provision. You'll note we actually ended up the fourth quarter with a tax credit as opposed to a tax charge. That was really reflection of we had a significant overall tax benefit over the course of '08.

We were much more aggressive in '08 than we've historically been, up until up in 2007 Ladish had the benefit of lot of years of build up net operating loss carry forwards to utilize, that never really necessitated us being aggressive on the tax front. We became much more aggressive in '08 and result of which obviously we were able bring down incremental tax rate throughout the year, and even up until the point that it turns into a tax benefit in the course of the fourth quarter.

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

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

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

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

Obviously there are other positives, inventory at the end of the year, the expansions that we've done in ZKM and pacific cast are both also largely completed so that, those projects were far enough away again we didn't spend premium dollar wrapping them up because of where the market's headed. But we're continuing those, we're obviously not setting back to waiting for something to happen. We will have those ready.

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

But obviously, that flowed down to gross profit. SG&A was up a little for the year, 4.2%, really a reflection of what happened in the first half of the year, with some of the hiring and some of the issues that went on and some additional expense we incurred in the third quarter with the two acquisitions that hit the SG&A line. So, on an overall basis, we ended up with SG&A of 44.2% for the year, up a little higher than we want. But as you saw from the fourth quarter, SG&A is trending back down to where we want it to be.

One thing I'd point out, if you look at interest expense for the year was about 1.3 million, versus about 2.2 last year. That's largely a reflection of what we have done as far as capitalizing interest expense over the course of '08 with all the major capital projects we had going on, that interest was attributable to those projects. That's an item when I talk about '09 that is going to reverse in '09. But, it was obviously a benefit in '08 for us to lower our total interest expense.

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

Lastly, there has also been an overall, a 3... 38.3 million of pre-tax, obviously down significantly from the prior year, but again we benefited, when you came to the tax line with a relatively... we had a significantly lower tax rate, about 15.4% tax rate for '08 which helped, certainly helped smoothed things out.

Again vis-à-vis three significant tax credits I talked about earlier, the R&D tax credit. We ended up with a significant lower State tax rate, because of some other apportionments that we had done between various states. And we ended up with a significant tax credit from Poland from the result of all the investments and the expansion we put into ZKM, our Polish operations. We've got the tax benefit from that in '08.

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

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

Historically with our three product categories that we look at, jet engine, general aerospace and industrial forgings. What we ended up with because of the activities at Boeing and Airbus and their scheduling.

We saw jet engine drop from last year again, '07, 56% of our sales, dropped five percentage points to 51%. General aerospace actually crept up 2% from 24% in '07 to 26% in '08. And probably the biggest issue as far as impacting profitability, resulted in industrial forgings creeping up from 20% to 23%. That swing in our product mix obviously, resulted in lower margin overall product being sold.

We also obviously missed out on some incremental sales opportunities. And this also has a further impact on by-product sales like... you have keep coming back to that. To give you a better impression on what has happened with overall by product sales. By-product sales in '08 were not quite half what they were in '07. And unfortunately, we are looking at further deterioration of that in '09.

But, overall those have obviously had a significant impact on the overall margins and profitability.

Some of the other issues that we did deal with, and will continue to deal as a result of things that happened in '08. Probably no surprise to anyone, we saw a significant decline in our overall pension assets in '08, as result of the overall market decline here in the U.S. While we've historically had a pretty conservative approach to pension investment, as far as our assets with a pretty even split between equities and fixed income.

Obviously, the equity portion of our portfolio took a significant hit during the course of '08, which is going to have the obviously impact on '09 and beyond from both an earnings perspective and a cash flow perspective.

Looking forward or looking back on '08, though I think would be remiss if I didn't talk about some of the progress' obviously, that happened in '08. As challenging as '08 was, what happened in the global economy, and in particularly in the aerospace industry, we were really pleased with both acquisitions we accomplished in '08, picking up Aerex Manufacturing and Chen-Tech, it really adds to Ladish.

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

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

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

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

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

So again, that's another negative. But that's worked its way through the system. And those are... they are both overall certainly very accretive transactions, and are both contributing both profitability, or will be contributing cash flow also.

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

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

We're looking at sales across the board being down probably 5 to 10%, based on current schedules as they look right now.

Obviously, we think there are some certainly, some potential for some improvement in the second half of the year. We think some of the schedules can certainly solidify and hopefully, pull up a little, as a result of which.

So, sales is going to be a bit of challenge. That's not as big an issue right now, as far as we're looking at profitability in '09. And having a lot more headwind spacing yet. Some of the issues that we're going to be facing in '09 from '08 are we will be looking at depreciation probably up about $3 million in '09 as a result of both the capital that we put into the business in last couple of years.

Interest expense is going to be up an additional 2 to 3 million in '09, not because of additional debt or bank loan that we'll be going forward with less debt, I'll get to that in a minute. But it's really a factor of over the past couple of years, we've been able because of the capital expenditures we've had, we've been able to capitalize their interest. And with those projects behind us net interest is going to be full and back on an ordinary basis. So, we are going to see interest expense up in '09.

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

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

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

Ladish fortunately took the step a number of years ago, most of our pensions plans, particularly with the ROE Groups as far as the unions have been frozen, those liabilities are fixed. So it's not an issue of the liability increasing. It's really just an issue of market performance of assets.

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

But from a P&L perspective obviously, it's going to be another hit another challenge to profitability in '09 and probably beyond for the next few years. One of the other issues, that's another challenge for '09 on the profitability front is the overall continual deterioration of the by product market.

As raw material prices are coming down, certainly the by product market continues to deteriorate and we are looking for another hit to by product sales this year, probably comparable with what we experienced last year. But again that's going to be probably somewhere in the neighborhood of 30 to $0.40 of EPS through the course of the year.

Another issue we are going to have, while we are going to be aggressive, in fact I've got a meeting when I get off here today on how aggressive and where we can go on the tax issue, taxes are clearly going to be higher in '09 than where ended up in '08.

I'd love to have another 15% tax rate. I don't think that's obviously on the cards. We are right now planning on 30, more typical 37% tax rate and obviously we will be looking at anything we can do to lower that going forward.

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

So, with raw material heading back down as a percentage of sales will certainly overall will give some benefit. And another thing that's positively positive for '09 is energy prices coming down

As most of you know we are big natural gas user and with natural gas coming down we are looking at certainly some help there. It's not product dependency, you would love it to be given the fact that we do buy forward as far as our natural gas. So my guys have brought forward. So we are not exactly benefiting totally from the relatively low spot market pricing that your seeing today but in an overall basis energy prices will be less in '09 than they certainly were in '08.

So we are going to get some benefit out of that. They have brought forward to lower prices and what we don't cover in the spot in the long-term approach is obviously we are getting the advantage of in the spot market, so that's definitely positively.

One of the other positives that read into a real drive for '09 is capital expenditures. Last year we ended capital expenditure at almost $50 million, yet another all time high for Ladish as we are wrapping up 118 press along with the capacity expansion and new furnace at Pacific Cast.

And the machining and inspection expansion in Poland. We expect CapEx this year to be somewhere in the ballpark of $20 million, depending on what happens maybe a little less than that. Certainly probably most of you have heard that's not a bare bones absolute maintenance CapEx number. Our maintenance CapEx number for us is probably somewhere 8 to $10 million.

There is still some productivity enhancement in that next 10 million and that will be a decision ultimately that will be made between the management teams Kerry Woody and ultimately up to our Board of Directors as far as, just how far we are going to hit or push and the important thing we shape things on the capital side for '09

That's really the focus for '09 given what the headwinds that we are facing and the uncertainties in the market our real focus in '09 has truly going to be getting back with what Ladish's excelled at for years, which has been a big cash flow producer.

We expect '09 to be a significant cash flow year for us, with CapEx down, costs under control, we fully expect to generate a fair amount of cash this year. And we're going to use that cash, we're going to pay down our short-term debt during the course of the year. We're going to continue obviously to fund our pensions as I talked about earlier. It's an obligation we have, and we're going to take care of.

And the other issue as far as that excess cash that, we've certainly have not ruled out and we're going to be evaluating as the year goes by is whether or not to reinstitute our stock buyback program.

We had a pretty aggressive stock buyback program in the '98-'99-2000 timeframe. The last time the stock was at what we consider unreasonably low levels. So, we're certainly going to revaluate that and to where we go with that depending on what happens, what the market where our stock goes.

The other issue is as far as application of cash obviously, is always on the acquisition side. At this point in time, I am forced to say that we are not out of the market. We are very selectively I'd say at this point of time, mainly due to the multiples out there.

And Ladish is been beaten down to the level of where our price is, it's hard to do find something that's a lot cheaper than we are today. So, but if something strategic happens along, where we have the opportunity to really improve the business, obviously, we'll be back into the market, looking at that. So, it's going to be on case by case basis, as we go forward during the course of the year.

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

Obviously, it saves dollars going out of here, as far as subcontracting, and gets us into position where we can really maximize earnings and cash flow.

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

We've cut out our overtime within the company. We've also scheduled an additional for Ladish Forgings, for our main forging operation here at Wisconsin. It's scheduled the second week of shutdown in the month of April along, along with their traditional one week later in the summer. So they are down schedule two week of shutdown to try to balance out schedules. They are certainly seeing indication of schedules being much stronger in the second half of the year.

I think in large part was the assumption that Boeing is going to need support on the 787 going forward. So, we are trying to best allocate our manpower to the time periods, where we can really maximize the opportunity.

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

It's for us challenging, it's not nearly the level of challenge that we've seen in some prior periods. The company obviously is still profitable. We're still going forwards, still generating significant cash flow. The company has no liquidity issues. We are in an excellent position to go forward.

And looking at going forward I guess, we'll go to there and now open it up for questions. On a long-term basis, we're still incredibly optimistic about where Ladish's opportunities lie. Looking out beyond '09 and '010 and '11 and beyond, it's clear to us, the 787s are going to be built. We've got great content on 787 already. We've increased our content on the 787 with the Chen-Tech acquisition. So Chen-Tech's got a nice additional content, along with Ladish has on the GEN-X program. So that definitely a positive.

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

Product mix is going to swing back. Obviously, I talked earlier about product mix dropping down to 51% in jet engines. If you look back to '06, our product mix was 62% jet engines. We think out in the '010 timeframe, we're going to be heading back to that direction.

Chen-Tech will be ramping back up as will Ladish Forging. As we swing back into the jet engine side of our business, we certainly pick up on the incremental side with much more profitable product and a lot more opportunities.

I also talked about ZKM is going to continue to improve their aerospace... at aerospace content is going to grow for them. Our new isothermal press here in Cudahy is going to get more... it will be more fully utilized in '010 and beyond, when the new engine programs come on line. And we do have the advantage while we bit in bullet in '08 training new employees and bringing people online to replace the ageing workforce we've got in a number of our facilities. We are going to have the availability without having to go back through that learning curve with those employees as the business ramps back up in '010.

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

So again, it's another nice growth opportunity. So, we as I said are very optimistic about where this business goes, and where our opportunities are. We think we are well-positioned, we have the whole life family of companies have come together.

'09 is going to be a challenging year profitability wise. But certainly, we think going out into '010 and beyond, Ladish will be back, doing what Ladish does before (ph) that. So, with that, I'll stop talking and I'll take questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question today will come from Steve Levenson with Stifel Nicolaus.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Thanks. Good morning, Wayne.

Wayne Larsen

Hi, Steve.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

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

Wayne Larsen

Space is still relatively low right now, Steve, as far as dollar volume and sales. I mean, that is far as content, we are in a great position on the Orion Aerex program, the shuttle replacement. We've got 23 firm pieces on that program, not counting the cylinders.

So, it's really an issue of with all the money the government's throwing around and they're going to still throw some at NASA and keep going, and get this program ramped up. I mean we obviously have every reason to believe that they will. The President said he was going to. And of course, the campaign so. And they don't really have a whole lot of options. The shuttle is going to have to be retired one of these days.

So, we are relatively confident. But, that's not something that we've got stuck in our numbers at the moment. That's an '010 and probably beyond number for us. And again, nice profitability but really low volume at the moment.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

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

Wayne Larsen

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

Stephen Levenson - Stifel Nicolaus & Company, Inc.

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

Wayne Larsen

It's starting to. I mean, right now, I think our main content on 380 is via Rolls Royce. And I think Rolls is working right now through some inventory that they had build up before even the A380 got put on hold. But, I'd say, we expect some... hopefully, some ramp up in on the second half of the year. And that's one of the programs that certainly should pick up in the second half.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay. And back in relation to that on materials availability, what's the latest news there?

Wayne Larsen

We got all the material we need right now.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay. So, you don't need the second source or you are getting it from the second source?

Wayne Larsen

The second source isn't fully qualified yet but will be and I mean quite candidly with what's happened in the market place that whole program as far as the qualifying the second source is not been put already on the front burner either, its still processing along but because of what's happened with Boeing and Airbus scheduling the engines guys haven't been that keen about doing it. I mean they are still working it, but it will ultimately come to pass.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay. And in terms of by products are you actually are you actually holding inventory or you just sending it out where ever the spot is?

Wayne Larsen

Its,,, in large part we have been sending out where the start is Steve I mean we had a meeting yesterday and Kerry and I had a long discussion about whether or not its time to start thinking about holding it. With market the prices have gotten so bad that, it's almost slightly even incented out. The other thing to get it out of your shop and fortunately most of the place we've got plenty of rooms, So we are a making decision these days as we speak about whether or not we start holding it.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay thanks very much.

Wayne Larsen

Sure.

Operator

And next quarter will comes from J B Groh with D. A. Davidson.

J Groh - D.A. Davidson & Co.

Hi, good morning Wayne.

Wayne Larsen

Hey J B.

J Groh - D.A. Davidson & Co.

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

Wayne Larsen

Yeah, pretty much so J. B. it's... unfortunately our acquisitions while we are happy with them, they are getting the same hits that our other business units are too.

J Groh - D.A. Davidson & Co.

Right, Okay, so core would be down a bit more, but you get a little bit of a break from having the acquisitions in there?

Wayne Larsen

Yes.

J Groh - D.A. Davidson & Co.

And then is there any way to, I know this is a hard thing to do to quantify the impact where Boeing strike at, it seems to me that the impact was greater than I thought it would be just doing their leverage to Rolls-Royce versus GE I wouldn't thought the impact wouldn't have been as large but is there way to do that, it sounds like there working through inventory but just how should we approach that or find that?

Wayne Larsen

It not something that I try to even put a pencil to J.B. quite candidly and well yeah me, Ladish forging business is more ingrained with Rolls Royce, keep in mind that lot of Rolls-Royce engines are program Boeing product and Chen-Tech on the other hand is so... is almost totally focused at GE. So they took a significant hit from push-outs on the 737 and some of the single aisle planes that obviously weren't due to development delays. They were just coming into to production delays and Boeing's recovery plan. So we've seen it across the board and the our casting business got hit on every program from the 777 on down with the Boeing problems.

J Groh - D.A. Davidson & Co.

And then on the interest expense you mentioned up a couple of million bucks, that's from the full year 1.03 for 2008 so. Is that correct, it had little bit of weird thing going on with Q4, so I am trying to figure out, 3 million is also on a normalized rate?

Wayne Larsen

Yeah, don't focus on Q4; interest expense is probably going to be in the $3.5 million range as well.

J Groh - D.A. Davidson & Co.

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

Wayne Larsen

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

J Groh - D.A. Davidson & Co.

Sure, sure

Wayne Larsen

But it's certainly something we started kicking around, back in 98-99 we bought back couple of million shares during that timeframe. So, I am not projecting what we are going to do. But if the stock values don't improve and stay where they are at and we're continuing lot of free cash flow, there is no sense in putting the bank at overnight investment rate.

J Groh - D.A. Davidson & Co.

Right okay. Thanks for your time Wayne.

Wayne Larsen

Sure.

Operator

Our next question comes from Tyler Hojo with Sidoti and Company.

Tyler Hojo - Sidoti and Company

Hey, good morning Wayne.

Wayne Larsen

Good morning Tyler.

Tyler Hojo - Sidoti and Company

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

Wayne Larsen

For '09, it's certainly is going to be down from a little from '08 Tyler virtually across the board, we got a couple of business units that are still relatively busy, our Aerex business is busy that's because they are focus on helicopters. But virtually everyone of our other business is the capacity utilization probably going to be down, 10 percentage points or so in '09.

We expect that to ramp back up in '010. So we would expect an '010 heading back to our more typically 75 to 80% capacity, I mean it's always a rough guess when you are dealing with everyone of our business is obviously our job shops, with various pieces of equipment. So its not a production line, so it's a not smooth easy calculation, but I'd say we are probably going to drop down, somewhere into the probably the mid-60s this year between 60 and 70 and next year we should be back up heading back towards 75 to 80 in '010.

Tyler Hojo - Sidoti and Company

Okay and just in regards to 118 I mean you gave us some pretty decent color there. But I mean is this press basically just going to sit idle until kind of 787 comes up...

Wayne Larsen

No, absolutely not, I mean one of the advantage is doing 118, our other large isothermal press 110 is still pretty busy and we are running it more than we should. So, having with 118 come on we are going to bouncing out work between 118 and 110, which will lower our maintenance costs and lower our downtime on 110.

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

Tyler Hojo - Sidoti and Company

Okay, I guess that make senses and just if you wouldn't mind, could you repeat the sales breakdown that you mentioned earlier I missed it for jet engine, aero and general industrial?

Wayne Larsen

In '08 it was 51%, 26% and 23%.

Tyler Hojo - Sidoti and Company

Okay. And I mean if you had the gas just based on all those big picture stuff you mentioned, where do you think that tracks in 2009?

Wayne Larsen

Probably going to be pretty similar.

Tyler Hojo - Sidoti and Company

Really even on the general industrial side with the CAT work?

Wayne Larsen

That side of our CAT, that side of the cap business is still busy. We are still relatively busy with CAT. But that's may be actuals for their larger moving it across and they are still selling those and still building them so.

Tyler Hojo - Sidoti and Company

Okay. All right, great. Thanks very much Wayne.

Wayne Larsen

Sure.

Operator

Moving on we'll hear from Fred Hadlick with ANS (ph).

Unidentified Analyst

Yes, when you mentioned by products are you talking about scrap is that correct?

Wayne Larsen

Yeah scrap, with short end type of forgings that machine in turning.

Unidentified Analyst

Right and what kind of scrap is that Wayne? nickel, titanium or what, how is that breakdown...

Wayne Larsen

All of the above. It's obviously nickel, all for the engine parts titanium not only the engine parts and titanium also, titanium structural component and there is carbon steel sector of it too which is obviously the worst as far as market but it's across the board its all for virtually every product we make.

Unidentified Analyst

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

Wayne Larsen

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

Unidentified Analyst

Okay. And so you are thinking about possibly deciding stock piling, scrap rather than selling it?

Wayne Larsen

Certainly, one of the options that available to us that we are considering and the assumption is the market improves some later day it obviously it's a time, value of money calculation.

Unidentified Analyst

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

Wayne Larsen

We are still convinced long-term that it makes sense for us to have an additional investment casting facility in a more lower cost environment. As far as Mexico itself right now it would say kind of on hold to the moment, than we are looking further out. We don't have any commitments as far as doing anything in '09, at this point.

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

Unidentified Analyst

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

Wayne Larsen

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

Unidentified Analyst

Okay. Thank you.

Wayne Larsen

Sure.

Operator

Our next question will come from Tom Willis of High Growth Value (ph).

Unidentified Analyst

Yeah. Hi Wayne.

Wayne Larsen

Hi, Tom. Long time no hear.

Unidentified Analyst

Yeah. Well, I'm back. So I need a little, maybe it's overly basic. But this issue with the by-product. Do you treat that as a sale, and run up to your top-line or is that something that you just credit against your raw material expense?

Wayne Larsen

It's the later, Tom. That's runs back through the credit to cost of goods.

Unidentified Analyst

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

Wayne Larsen

No. It's really an issue. Raw material was up because of long-term pricing. It's really the big impact on the by-product, Tom. It's a... effectively it's a direct credit to the bottom line. So, it's really hurts our overall profitability.

Unidentified Analyst

Okay. But I should understand that there is something that's there in you cost of goods?

Wayne Larsen

Yes.

Unidentified Analyst

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

Wayne Larsen

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

Unidentified Analyst

Yeah, all right. Now this industrial volume, I mean, you've got cap still in need of your services. But, just how is the visibility in that business. How confident are you that they get through what's in the shop today, and how confident are you that I mean, this business that goes away in a major way out (ph) in the second half?

Wayne Larsen

We're obviously... we are as confident as what we are hearing from cap. You also have to remember we have a significant piece of industrial business over in Poland too.

Unidentified Analyst

Yeah, right.

Wayne Larsen

That's supporting coal mining and other activity over there. So, I guess, we are as confident as we can be in that. One thing about the industrial side is we had never the long-term visibility on the industrial side that we have on aerospace, as far as orders.

So, the orders we tend to have on industrial side tend to be pretty firm, as opposed to aerospace is great, we get a long-term visibility and then, of course, when we have customers in the schedules around, OUS, so you can take your pick.

Unidentified Analyst

Well, okay. Last question, I am sorry if you mentioned this, but did you say what you projected your D&A expense would be this year in '09?

Wayne Larsen

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

Unidentified Analyst

Up 3 million. Okay, I'll work with that. Thanks, Wayne.

Wayne Larsen

Sure.

Operator

(Operator Instructions). Our next question will come from Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

Hey, good morning, Wayne.

Wayne Larsen

Hi Eric.

Eric Hugel - Stephens Inc.

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

Wayne Larsen

Well obviously, 787 is a big issue for us in '010 and beyond. But we also fully expect based on what we're doing with Rolls on the 350. We expect that program to start moving forward in that timeframe. And we also expect the 380 to continue during that period. So probably, a combination of all three, Eric. And I guess, the other factor is literally getting some normalcy back in your regular production lines, where you know 737 the 777, if you know the other jet aircraft that are out there so.

Eric Hugel - Stephens Inc.

I guess, what I am trying to figure out, I mean, is the content that you have on the 787 and things like the A380, so I assume here you will be doing work on the A350 but it will be minimal because and we're talking to be in production until 2013, 2014 best case, are the unit content values that you have on these aircraft significant enough to out weigh potential production cuts on sort of narrow body aircraft?

Wayne Larsen

Yes, pretty much so, I think from where we are at, you are dealing the advantage with the new aircraft obviously you are dealing with bigger engines, bigger products, more expensive material, less competition and we got a better I would say market share on those programs and obviously we are doing a lot others, because of the material, and cause of the processing.

Eric Hugel - Stephens Inc.

Would it be maybe a good guesstimate to so to say your content on let's say 78 (ph) or A350 obviously depending upon what engine type but it maybe 4 to 5 times sort of what would be on lets say 37?

Wayne Larsen

It's hard to say particularly now with Chen-Tech mean Chen-Tech's got some great countdowns on 37s. So I would say you might have made that, you might have made you been probably closer pre-purchase at Chen-Tech as far as where Ladish is traditional forging business in Wisconsin is you had been. closer with that Chen-Tech kind of color that..

Eric Hugel - Stephens Inc.

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

Wayne Larsen

They are. They are because of their participation on Gen X. But its as large obviously as where Ladish is on the trend and also what Ladish has on Gen X itself so.

Eric Hugel - Stephens Inc.

Okay. Can you talk about maybe sort about more high level sort of strategy working through the downturn here? Where you see opportunities to, obviously you are going to have excess capacity to pickup market share gain?

Wayne Larsen

I don't think there is probably gong to be a lot great market share gain opportunities out there, quite candidly, Eric. I mean I think there is some market share gain, with Chen-Tech getting them introduced into beyond GE focus, there is some opportunities for Chen-Tech with both UTC and with Rolls-Royce. But some of the other areas quite honestly we are not being on going out and trying to steal market share, because with the LTA that are in place the only way going to steal market share is price your way into it, and I am not interested in starting a price war with our main competitor. I don't think its productive for either one of us.

Eric Hugel - Stephens Inc.

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

Wayne Larsen

Well, it's going to initial be probably a challenge in '09, Eric but on the aerostructural business there are some LTAs that are now starting to come up for longer-term agreements, restructural components. We're at a diverse point in time what ZKM has been able to win it effectively been some incremental demand and you are absolutely right with the demand softening in '09, there aren't going to be a whole lot of those opportunities but with new LTAs coming available in '09, ZKM has got a cost structure and its been now proven reliability that's going to put them into an excellent position to continue to win work.

So fortunately their timing isn't bad for them. They got work right now and I think there is going to be newer opportunities for them that they will be able to get into.

Eric Hugel - Stephens Inc.

And, if you won like you say in LTA in '09 you wouldn't expect really to get that benefit in terms of volume till 2010, correct?

Wayne Larsen

Correct.

Eric Hugel - Stephens Inc.

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

Wayne Larsen

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

Eric Hugel - Stephens Inc.

But in terms of what we are looking at in Q4 P&L can you could you quantify that?

Wayne Larsen

It was less than a million dollar.

Eric Hugel - Stephens Inc.

Okay so its million, and I assume that was in SG&A?

Wayne Larsen

Yeah in large part.

Eric Hugel - Stephens Inc.

Okay. And can you may be just give a little more detail with regards to you mentioned interest in other the number was actually positive, I mean you did have some interest expense, albeit minimum maybe half a million bucks, probably or less but as you sort of a positive number. what is that, you said you mentioned something about Poland?

Wayne Larsen

Poland actually ended up paying us back a significant. We had an advance poll on ZKM money, and effectively we had a structure of the loan to them. But, because of the profitability in cash generation they were able to pay a large portion of that interest back. But so we get the interest benefit in the fourth quarter from that.

Eric Hugel - Stephens Inc.

Okay. And with regards to the tax rate for the quarter, was that I mean, is that sort of a one-time sort of you went back and you resolved your 2,000 whatever taxes, or is this more reflective of your initial, sort of your over accrued for the year, and you found out your real tax rate is going to be much less and thus we just have to even it out.

Wayne Larsen

Well there is, certainly, some evening out in the fourth quarter. Because we always start out the year, we are on a real, a very conservative basis reserving at about 37%. And when we get into the second half of the year, and we saw what we were going to be able to accomplish with the R&D tax credit, and since state portion meant, and then with the credit we ended up getting in Poland, it brought it down... it brought it all down. And we are untimely at, obviously had to balance it out in the fourth quarter.

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

Eric Hugel - Stephens Inc.

So there wasn't any like one-time refund, or something like that you got in Q4. You were just catching up to Hey we've got updated estimates, and we need to resolve this?

Wayne Larsen

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

Eric Hugel - Stephens Inc.

For the R&D tax credit benefit, was that all in Q4, the retroactive, or was that in Q3, remind me.

Wayne Larsen

We recognized it in Q3. But then your point...

Eric Hugel - Stephens Inc.

Who knows there is going to be a lower tax rate going forward?

Wayne Larsen

Right. And so, we had to balance that in '04.

Eric Hugel - Stephens Inc.

I understand. Thanks a lot, Wayne.

Wayne Larsen

Sure.

Operator

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

Wayne Larsen

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

So, anybody has any follow-up questions. I think, most of you probably have my direct line, give me a call. Now, we'll talk to you in April after the first quarter. Thanks everybody.

Operator

Once again that does conclude today's conference. Thank you for your participation, and have a wonderful day.

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Source: Ladish Co. Q4 2008 Earnings Call Transcript
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