What Is a Ramp Up?
Ramp up is a significant increase in the level of output of a company's products or services. A ramp-up typically occurs in anticipation of an imminent increase in demand. While it is generally a feature of smaller companies at an early stage of development, a ramp up can also be undertaken by large companies that are rolling out new products or expanding in new geographies.
- The term ramp up refers to when a company substantially increases its output in response to increased demand or an expected increase in the near-term.
- Start-up companies also ramp up once they leave the prototype stage and begin regular production for the market.
- Ramping up is costly and requires large capital investments in equipment and capacity. If demand does not last or is smaller than expected, a firm may be left with excess capacity.
How Ramping Up Works
Sometimes a company needs to increase its capacity utilization to meet a surge in demand or expected demand in the near term. A ramp up typically entails substantial outlays of capital expenditures, which are large amounts of spending by a company on physical assets, such as property, buildings, and manufacturing equipment. A ramp up in spending can also involve funds being used for technology upgrades as well as investments in hiring staff for an expected increase in sales or production.
As a result, a company will usually only consider a ramp up once it has a reasonable degree of certainty about additional demand. Otherwise, if the anticipated demand does not materialize or is below projected levels, the company will be saddled with excess inventory and surplus capacity.
The term ramp up can also be applied to a larger-than-normal increase in expenses. Alluding to the foregoing, if a company states that it will ramp up production of goods, it could also say that it will ramp up the purchase of automation equipment to support the planned capacity expansion.
When "ramp up" comes up in press releases or on conference calls, it typically signals management confidence in the future of the business; however, the prudent investor should be on the watch for too much exuberance.
Examples of Ramp Ups
The term ramp up also rolls off the lips of confident executives who expect favorable economic conditions overall leading to brisk demand for their products. Rarely will a company publicly state that it is ramping down. On Allegheny Technologies' (ATI) Q4 2017 earnings conference call, an executive VP begins his section of the call with the following comments:
The high-performance materials and components segment continues to benefit from the ongoing next-generation jet engine production ramps by all of the engine OEMs. These production ramps result in both sales and margin growth for ATI due to improved product mix, volume growth, and increased asset utilization. We are still in the early phases of this industry-wide production expansion, and we expect the benefits to ATI to continue in 2018 and through the end of the decade."
The ramps the executive is speaking of are certainly not incremental in nature.
As another example, on the Constellation Brands' 3Q 2017 earnings conference call, the CFO explains that "Q4 operating margin is expected to moderate, primarily due to lower seasonal production volume combined with the continued ramp up in depreciation, line commissioning costs, and headcount additions."