The Gold Economy

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Chris Olin with Cleveland Research. Please proceed.

Chris Olin – Cleveland Research

How are you doing?

Doug Ralph

Good morning Chris.

Chris Olin – Cleveland Research

Wanted to dig a little bit into the commodity stainless market, if you look back the past few months, seem like orders peaked around that April-May time period and June was down substantially, July looks like it’s probably off. I am wondering if that’s kind of what you saw and what are you seeing for August in terms of the momentum, has it stabilized yet?

Mike Shor

Chris, Mike Shor. Good morning. First, from the distributor side, we see inventories seem to be more imbalanced with some fairly positive demand signals. There’s still a tight buying environment out there. And so from lower end distributor side of the business, the remainder of the year, there is cautious now. Coming more to the markets that we serve directly, we see strength in the industrial market continuing. We see some fairly strong backlogs there. Even on the consumer and auto side, we have seen some leveling out, but we certainly haven’t seen any decreases at all. And even on aerospace, obviously as aerospace grows, some of that being stainless, we see some strength there also.

Chris Olin – Cleveland Research

Given what nickel did, the commodity nickel price, would you’ve said that the pause was less severe or more severe than expected?

Mike Shor

We certainly saw a pause, and I would say more again on the distributor side than anywhere else in June, as the surcharge moved around. But we expect that as nickel prices begin to, or at least appear at a level out where they are now, for that to come back.

Chris Olin – Cleveland Research

On the nickel alloy or specialty alloy side, we have been hearing some concerns that maybe certain jet engine channels were disruptive in some sense, were not buying to the level that they were earlier in the second quarter. Have you seen anything changing with the way they are buying right now?

Mike Shor

No, we see on the engine side significant strength. We continue to see that lag we’ve talked about on the fastener side, but we’re very encouraged by what we see on the engine side. We’ve seen nine quarters of growth there. The recent airline monitor has looked very strong and we are seeing plane builds occurring in the types of engines which are much more intensive (inaudible) types of materials. So, still see good. Builds are increasing.

Chris Olin – Cleveland Research

Okay and then lastly, just anything new on the 787 and let’s say the deliveries hold as is, when would you expect to see the fasteners business really tick off in terms of orders, I know you kind of mentioned that, but I missed what you said.

Mike Shor

I am glad you asked the follow-up because I just want to correct one thing. I said we have seen nine months of increased or active engine products. As far as the 787, I think everyone is saying pretty much the same thing which is we are expecting deliveries by the end of 2010. We all know that may slide a little into 2011. The 787 though when you look at the material usage for (arid) types of material on a 787 versus for example the 737, it’s 1.8 times the usage of (arid) types of materials 787 versus 737. So, we all know there is some inventory left that supply chain, but we feel good about what’s coming in the builds that are coming.

Chris Olin – Cleveland Research

Okay thanks.

Operator

Your next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.

Edward Marshall – Sidoti & Company

Good morning everyone. My first question is on the PAO margin. I think going back to previous calls, we discussed that that would see a little bit of a degradation; it did in the quarter. Just looking for basically your comments, I mean, is there anything to do with the fact that energy took a bigger piece of the pie there or did your LIFO expense kind of run through that line as well?

Doug Ralph

Yes, I think our Lean Forward was mainly focused on that PAO business and making sure that we can meet the demand need for the premium melted products and so disproportionately I think that would have been impacted by our Lean Forward.

Edward Marshall – Sidoti & Company

Can you give us kind of an update of the trends through the quarter, was April the strongest and did it ebb down from now or were you seeing steady improvement across most of your markets throughout the quarter?

Doug Ralph

As far as the topline, it was steady through the quarter.

Edward Marshall – Sidoti & Company

What about the order book, though?

Mike Shor

Order book, it’s Mike, order book has continued to increase. Our customers are placing orders as I noted in my comments, lot of our major customers are now booked pretty much two quarters up.

Edward Marshall – Sidoti & Company

And you said – you mentioned the inventory has leaned out on the fasteners side of the business now. Did you say back half of the year you expect that to continue to pick up?

Mike Shor

The quick answer is yes. We are getting a fair number of channels checks now as far as readiness and we do see that, we anticipate that coming back in the back end of the year.

Edward Marshall – Sidoti & Company

Okay. Thank you very much.

Operator

Your next question comes from the line of Steve Levenson with Stifel Nicolaus. Please proceed.

Steve Levenson – Stifel Nicolaus

Thanks. Good morning everybody.

Mike Shor

Good morning.

Steve Levenson – Stifel Nicolaus

In the commentary, you mentioned that you expect your aerospace related revenue to grow at a faster rate than the overall build rate. Could you give us a percentage, or is that something you are sort of keeping proprietary right now?

Doug Ralph

No the way we’ve talked about that generally is that we would expect it to grow at 50% in excess of the market growth rate due to the mix of the planes in the Carpenter material content in those planes.

Steve Levenson – Stifel Nicolaus

Okay, that’s great. Thank you. In relations to the energy market, do you think the gulf disaster is going to create some new regulations for the metals that go into things that are sent down below the surface that’s going to impact Carpenter?

Doug Ralph

We believe that there is definite – out of this tragedy – potential positives as far as the types of materials that are being used. So, I would say the opportunity there is significant for us.

Steve Levenson – Stifel Nicolaus

Okay thanks, and last, I know you said nickel is leveling out. Do you think there is still some – for the lack of a better term, fish tailing in the pricing as the market finds the appropriate level or do you think you are at a fairly stable level now?

Doug Ralph

Yeah, I am not sure what fish tailing means but the prices have strengthened a bit over the last month. The Vale Inco strike ended recently and so that ought to help on the supply side of things. So, I think the general view of the market from the experts that we talked about is stable to slightly down, but, you know, but that could of course change.

Steve Levenson – Stifel Nicolaus

Great. Thank you very much.

Doug Ralph

You are welcome.

Operator

Your next question comes from the line of Gautam Khanna with Cowen & Co. Please proceed.

Gautam Khanna – Cowen & Co

Yes, could you help me understand where the asset write-off was, was it at premium or AMO?

Doug Ralph

Yes, Gautam, I would just describe it as normal business that towards the year-end you know you step up activities at making sure that you’ve, you know, as we’ve spent capital during the year, taking the right decisions on the asset write-offs, and so it was just a function of that. And if anything would skew a little bit more on the AMO side, but because our premium assets, as you know, are new. So, if anything, it’s skewed towards AMO.

Gautam Khanna – Cowen & Co

Okay, and so, if we just trying to disaggregate the margins that PAO ex the inventory effect and whatever amount of the asset write-off was allocated there, was it flat sequentially? I mean was it around 23%? Is that how we should think about it?

Doug Ralph

Our PAO margin, and we always look at it excluding the revenue surcharge. So, we reported 26% in the quarter and for the full year 29% and last year it was 25%. So, I think there’s been good overall stability on the PAO margin.

Gautam Khanna – Cowen & Co

Okay, and so when you talk about stabilizing – margins relatively stable, is that in the first half of fiscal ‘11 and then increasing from there? Is that what’s the Q4 level?

Doug Ralph

Yes, so that comment in regard to our fiscal ‘11 outlook is really on the corporate operating margin, again excluding revenue surcharge. And what we would expect in terms of stability is over the first half of the year margins to remain at about their current level. And as you know there, we reported 9% in the third quarter, reported 7% in the fourth quarter, which excluding Lean Forward and the asset write-offs would be at 10%. So, we are talking about stability at that level which is mix and cost savings as positives offsetting a bit lower seasonal volume in the first half of the year but this is what we have been running in the second half.

Gautam Khanna – Cowen & Co

Got it. And can you tell us what your sales to Precision Castparts were in the fourth quarter as a percentage of the total, and if you are seeing any sort of impact from their threat of insourcing? Thanks.

Doug Ralph

The number, Gautam and then I will turn it over to Mike for additional perspective. But I don’t have a number in front of me for the fourth quarter, but Precision is a customer that we consistently had to report as above 10% of our overall revenue and we would expect to do that again in our upcoming 10-K for all of fiscal year ‘10. And Mike in terms of trends we are seeing there.

Mike Shor

Gautam, to-date we have seen very little, in fact no volume decrease from Carlton. We do expect obviously, as this moves forward, to see some decrease. Fiscal ‘11 we will see a volume decrease in the range of about 20%. That’s our latest estimate. However, we are securing business elsewhere that obviously is making up for this loss. And I think a key point is we will remain a significant supplier to Carlton and obviously we are eager to continue to find ways to work with PCC not only on their engine side but in the fastener side of their business.

Gautam Khanna – Cowen & Co

Okay.

Operator

Your next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please proceed.

Mark Parr – KeyBanc Capital Markets

Thanks very much. Good morning.

Mike Shor

Good morning.

Mark Parr – KeyBanc Capital Markets

And Bill, I haven’t had a chance to say welcome, so but anyway welcome.

Bill Wulfsohn

Oh, thank you. Start to working with you.

Mark Parr – KeyBanc Capital Markets

I have, hopefully you can join us in September. I have a couple of questions. It looks like you have raised your revenue guidance for fiscal ‘11. And I guess I would like to get here some color on the especially given what’s happened with nickel. You know, nickel has come off in the last 90 days from where it was. And I think Doug said that your thought process is just over the near term, nickel is flat to down a little more. And what’s the mix in fiscal ‘11 revenue guidance in terms of volume versus pricing?

Doug Ralph

We would expect, Mark, our mix to continue to modestly improve. So, it improved between third and quarter and we would expect to see that trend continuing into fiscal ‘11.

Mark Parr – KeyBanc Capital Markets

Talk about the change, I mean, let’s just say if the revenue guidance for fiscal ‘11 and just pick a number, let’s just say it’s 17%, I mean how much of that is volume and how of much of that is related to underlying price momentum?

Doug Ralph

It’s predominantly volume and there would be some contribution from the price increases that we have implemented and would contemplate implementing going forward. But most of that revenue growth is going to come out of volume.

Mark Parr – KeyBanc Capital Markets

Okay, all right. I guess and again, I would like to, you had started talking about mix, you know, that mix has been improving modestly. Do you think it’s going to improve some more? I really like to get some more color around that. You know, you guys have done a great job, you have been enhancing your high-end manufacturing with a new VIM furnace and some other things that you have done. And could you talk about specifically how you see the mix improving over the course of 2011? And then maybe you did some of that already with the talk about the power gen and the aero fasteners and maybe that’s what I need to be focusing on then. Is there anything else that you can add to that discussion?

Mike Shor

Yes, I would break that into two stories really. And part of the story is the return of all of our premium melted products during the course of the year. So, aerospace engines is very strong right now and as aerospace fasteners picks up in the second half of our fiscal year, and power generation coming back a little bit, it’s the return of the premium melted products back to normal market growth rates, that’s part of our mix story during fiscal ‘11. And then the other part that’s driving our mix is that, you know, we made some choices and some right choices in the short term to meet customer demand in some of the lower value applications on the stainless side. So, auto valve steel, some of the other commodities, stainless applications in consumer and industrial. And some part of those decisions is based on the belief that as we work with those customers it’s going to open up opportunities for higher end higher value stainless products and we would expect to see that also unfold during the course of fiscal year ‘11.

Mark Parr – KeyBanc Capital Markets

Okay, terrific. Can you hear me okay, because I have put you on speakerphone?

Mike Shor

Yeah we can hear you fine.

Mark Parr – KeyBanc Capital Markets

Okay fine. I had one other question if I could. I don’t want to monopolize this. But when you talk about the first half margins being in line with the June quarter, is that on an adjusted basis, adjusted for LIFO and for the asset write-offs, or is that on an as reported basis?

Doug Ralph

Yes, those adjustments come up during the periods. So I would always have to – it’s our rough expectation, subject to some of the inherent volatility that we have on mix and elements like LIFO, but incorporating our best current knowledge of all those, it’s the kind of margin that we would expect to report for the period.

Mark Parr – KeyBanc Capital Markets

So, what’s you are saying is if, you know, the margin guidance that you are giving for the first half, I mean to just to kind of – to make sure I have got this right. The margin guidance would be comparable to the June quarter excluding LIFO or excluding the asset write-offs?

Doug Ralph

Right, as I mentioned in response to Gautam’s question, we reported 9% in the third quarter, reported 7% that would have 10% without the Lean Forward and asset write-offs in the fourth quarter. So, continuing forward at that near 10% level for the first half of the year.

Mark Parr – KeyBanc Capital Markets

Okay perfect. I just wanted to make sure I heard that right, so that’s really helpful. Thank you very much.

Doug Ralph

You are welcome.

Mark Parr – KeyBanc Capital Markets

And good luck.

Doug Ralph

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Chris Olin with Cleveland Research. Please proceed.

Chris Olin – Cleveland Research

Just wanted to circle back. One of the expectations I had was there were a number of special alloy contracts that could be won this year. Specifically I was hearing something about a power generation contract in India and some other deals on the energy side. Can you give us an update on the deals out there? Can you win them? Do you have the capacity to service that? I just want an update on what you are thinking.

Mike Shor

Chris this is Mike. First as far as the capacity is serviced, I think the great news for us is investment that we have made in VIM VAR and ESR. We’ve expanded our VIM capacity by 25,000 tons with our new furnace. That furnace is up and running. It’s running a couple of weeks a month now. We are actually adding another crew for utilizing the (inaudible) VAR. So the whole purpose for that expansion was to be able to take on more and more premium products, which we have done. As far as contracts in general, we’ve had good success with negotiations with our top customers who obviously stand very close to Carlton and the issues there. But we continue to wrap up our agreements with our customers, whether it’s fasteners, it’s in the industrial side, automotive, the engines, and we’ve done well there. So, we think things are going very well on the contract side.

Chris Olin – Cleveland Research

Okay, is there any big global deals out there to be won?

Mike Shor

There are engine manufacturing deals which are coming up – engine deals which are coming up but they are couple of years or a year to two years out. But we are pursuing those items that are out there to fill this capacity.

Chris Olin – Cleveland Research

And Mike, did you give out an operating rate that you are running at currently?

Mike Shor

No, and with us being both on the stainless side and on the super alloy side in a variety of different work centers, let me give you a – I see in general if you are looking for one number, be in terms of about 75%, (inaudible) capacity is probably closer to 80%, our VIM is little less than 75% probably 65%. Our remount furnaces are filling up that’s good. There’s plenty of opportunity to put in more as needed. And our finishing I see again is in that 75%.

Chris Olin – Cleveland Research

Is there a number you are using in terms of the long term outlook, how much of the business has already been contracted out in terms of the capacity, how much is still available?

Mike Shor

Well, from an availability standpoint, given our available capacity, our key is getting, as Greg mentioned in his comments, is getting the manpower in here, which we are doing to make sure that we are able to handle the increased demand that comes at us. So, theirs is open capacity available. It’s not necessarily demand and that’s why we’ve got as part of Lean Forward is bringing the people in here to man any open shifts we have.

Chris Olin – Cleveland Research

Okay and then just switching gears quickly. Titanium scrap seems to moving very quickly. I guess I am surprised by the six plus quote out there I am seeing for some the (64) products. What are you seeing on the (e-Gate) right now. And I just want to make sure there is – is it a full passthrough for the fabrication business or is there some margin risks?

Mike Shor

We incorporate the price of our (inaudible) to the pricing of our product obviously and spot prices and as you know Dynamet is not a melter, so we do acquire spot prices for Dynamet right now in the range of $9.50 to $10. I would say it’s closer to 10 than 9.50. We are seeing prices published that are in a $10.50 to $11.50 and in general, they probably been up about $0.50 or less amount or so.

Chris Olin – Cleveland Research

Do you think it’s seasonal. Can it hit $13 type of a number by year end.

Mike Shor

I don’t know. I could not – that’s one that I really couldn’t even comment on.

Chris Olin – Cleveland Research

Okay. Good. Great effort. Thanks a lot.

Operator

Your next question comes from the line of Dan Valine (ph) with Capstone Investments. Please proceed.

Dan Valine – Capstone Investments

Good morning.

Mike Shor

Good morning.

Dan Valine – Capstone Investments

As the broader market fundamentals continue to improve, is your appetite for acquisitions increasing at all? Are potential sellers more willing to chat?

Bill Wulfsohn

This is Bill and certainly we have the financial flexibility to consider and move forward on strategic acquisitions which could help to broaden our offering in the marketplace, and we of course will be looking with an keen eye in the future to grow, and to grow in this area would be a great dimension to add to Carpenter.

Dan Valine – Capstone Investments

If there has been any real change in the past quarter or so or you are focused more on your internal expansions?

Bill Wulfsohn

I think it’s quite balanced actually. We have a very disciplined process pursuing acquisitions and I think the one thing that maybe has changed is just in general, we see a strengthening, stabilization and strengthening of the core market demand. Obviously that gives us some more confidence to also look outside as well as inside.

Dan Valine – Capstone Investments

Okay great. Thanks.

Operator

And at this time, I would like to turn the presentation back to you, Mr. Greg Pratt for closing remarks.

Greg Pratt

Thank you very much Stacey. Ladies and gentlemen, as you know, my combined role as Chairman and Interim President and CEO changed effectively July 1. I would like to share with you that the on-boarding process for Bill is progressing seamlessly. And over the next few weeks, my daily presence at the company will end. Appropriately, this will be last direct participation on these calls. Bill and the team look forward to speaking with you next quarter. Thanks again for your continued interest and support of Carpenter Technology Corporation. Good bye.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!