Carpenter Technology Corp (CRS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Carpenter Technology earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Jaime Vasquez, Vice President and Treasurer. Please proceed.

Thank you. Good morning. Welcome to our conference call for the period ended June 30, 2006, the fourth quarter of Carpenter's fiscal year. This call is also being broadcast over the Internet.

With me today are Bob Torcolini, Chairman, President and Chief Executive Officer, Mike Fitzpatrick, Vice Chairman, Dave Kornblatt, who recently joined us as Senior Vice President, Finance and Chief Financial Officer, and Terry Geremsky, Senior Vice President.

Some of Carpenter's statements will be forward-looking statements, which are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's recent SEC filings, including the Company's June 30, 2005 10-K and subsequent Form 10-Q, and the exhibits attached to those filings.

During this conference call we will be using the abbreviations SAO to represent Specialty Alloys Operations, and EPG to represent our Engineered Products Group. I will now turn the call over to Bob who will start with a brief overview.

Thank you, Jaime, and good morning, everyone. As you read in this morning's press release, we just completed the most profitable quarter and year in Carpenter's 117-year history. We accomplish this through our focus on selling high-value, high-performance materials, reducing complexity and lowering our costs through lean and variation reduction. This focus created additional operating leverage during a quarter when market conditions were very favorable.

Demand from the aerospace market was exceptionally strong and resulted in record sales of almost $200 million to that market. We also experienced solid demand from other end-use markets, including automotive and medical. Strength in these markets helped boost our international sales by 38% from last year's fourth quarter to $147 million. International sales have increased at a double-digit rate for 11 consecutive quarters, and now account for 33% of consolidated sales. Increasing geographic reach is one of the many reasons why we have been able to sustain significant growth.

As a result of these favorable market conditions and international growth, sales reached a quarterly record of $451 million, or 24% greater than last year. As a result, net income increased 42% from last year's record quarter to $68 million.

Now let me provide you with some detail on Carpenter's consolidated fourth-quarter sales, first by product type and then by end-use market. The year-over-year changes in sales that I will reference include surcharges.

Excluding surcharge revenue, sales increased 23% from the fourth quarter a year ago. Sales of special alloys and titanium benefited from robust conditions within the aerospace market. In the fourth quarter, sales of these two products represented almost 60% of total consolidated sales.

Sales of special alloys increased 49% from a year ago to $213 million, a record level for any quarter. The increase was driven by strong demand from the aerospace market for alloys used in the manufacture of aircraft engines and structural components. The increase in special alloys sales also reflected higher sales to the medical, automotive and energy markets.

Sales of our titanium alloys increased 53% from the fourth quarter a year ago, to a record $52 million. The increase in titanium sales reflected the continued strength of the aerospace market, higher sales to the medical market, and higher selling prices.

We expect that our special alloy and titanium sales will continue to enjoy strong demand in fiscal 2007, as a result of favorable conditions in the aerospace market and growth in the domestic and international medical markets.

Stainless steel sales in the fourth quarter of $145 million were 1% higher than the fourth quarter a year ago. Although the increase was negligible, sales were at their highest level in more than six years. More importantly, our stainless sales now are comprised of a richer mix, as we continued to reduce the sale of marginally-profitable products during the past year.

Sales of ceramic and other materials were down 5% compared to the fourth quarter a year ago. The decrease is primarily attributable to reduced sales to the industrial and power generation markets.

By end-use markets, sales to the aerospace market increased 71% from the same quarter a year ago, to a record $193 million. During the last two quarters, we have experienced a significant step-up in our sales to the aerospace market. For fiscal 2006, aerospace accounted for 40% of consolidated sales.

In addition to pricing actions, we believe that this change reflects the strength in the underlying demand for our materials, due to the number and type of aircraft being built. We expect that sales for the aerospace market will be higher in fiscal 2007, despite the delay in the first commercial delivery of the Airbus A380 and some inventory balancing within certain segments of the aerospace supply chain.

Sales to the medical market were $37 million, up 29% from a year ago, and also a quarterly record. The record sales level reflects a richer product mix and increased selling prices.

Sales to the power generation market increased 5% from a year ago to $14 million. Adjusting for a business divested last year, sales rose 29% from a year ago.

Sales to the automotive and truck markets increased 5% from last year's fourth quarter to $56 million. Sales benefited from increased demand for corrosion-resistant materials used in engine components such as fuel injectors, and high-temperature materials used for engine valves.

Sales to the consumer market were essentially flat with the fourth quarter a year ago. An increase in the sales of materials used in durable goods was offset primarily by reduced sales to the sporting goods market.

Industrial market sales decreased 4% from the fourth quarter a year ago to $94 million. Higher sales to the oil and gas market were offset by reduced sales of marginally-profitable products.

Now I will provide an overview of our business units.

SAO sales increased 28% from the fourth quarter a year ago to $365 million. The increase was driven by higher base prices, a better product mix, and a 6% increase in shipments.

Our forged bar and billet product sales increased 74% from a year ago, driven by a 40% increase in shipments. Strong demand from the aerospace and oil and gas markets contributed to the growth.

Sales of bar products increased 18% from the fourth quarter a year ago. Sales reflected a better product mix due to stronger demand from the aerospace market. Also, increased sales of higher-value materials used in automotive and heavy-duty truck engines contributed to the increases. We expect that demand for corrosion-resistant and high-temperature alloys will continue to grow due to performance, fuel economy and emission requirements in automotive and truck engines.

Coil product sales for the quarter were 11% above a year ago. Sales reflect an increased shipment of higher-value products for the aerospace market for materials used in engine and structural applications. Additionally, coil product sales benefited from increased use of specialty stainless in high-temperature automotive exhaust applications.

At Dynamet, which primarily sells titanium products, fourth-quarter sales increased 49% from a year ago to a quarterly record. The increase primarily reflected higher base prices and the impact on sales from higher raw material costs. Dynamet is well positioned to sustain rapid growth by capitalizing on favorable trends in demand for titanium products in both the commercial aircraft and global medical markets. We expect that Dynamet will have another record year in fiscal 2007.

Sales for the Engineered Products group were $26 million in the fourth quarter, as compared with $33 million a year ago. Last year's fourth quarter included $6 million from a divested business. EPG sales were down due to lower shipments to the industrial and power generation markets. As stated in the earnings release EPG's operating income performance for the quarter and fiscal year were below a year ago. We are addressing the operating performance at these businesses and expect improvement throughout fiscal 2007. Now I would like to turn the call over today's.

Thank you, Bob. As Bob mentioned, sales in the fourth quarter were up 24% to a record $450.5 million from the fourth quarter a year ago. Sales benefited primarily from base pricing action, a richer product mix, as a result of increased sales to several key end-use markets and increased shipments.

Gross profit in the fourth quarter increased to $126.6 million, or 28.1% of sales, from $92.9 million, or 25.6% of sales a year ago. The 250 basis point expansion in gross margin reflected the benefit of pricing actions, a richer product mix, and the reduction in the sale of marginally-profitable products. Margins also benefited from the ongoing lean and variation reduction initiatives.

Selling and administrative expenses in the recent fourth quarter were $35.7 million, or 7.9% of sales, compared to $34.7 million, or 9.6% of sales in the same quarter a year ago.

Our diligent management of selling and administrative expenses, combined with the expansion in gross margin, resulted in a 36% increase in operating income from a year ago. Operating income totaled $90.9 million in the recent fourth quarter, or 20.2% of sales, which compared to $66.9 million, or 18.5% of sales a year ago. Interest expense for the quarter was $5.5 million, compared to $5.4 million in the fourth quarter a year ago.

Other income in the quarter was $6 million, compared to $1.1 million in last year's fourth quarter. The increase in other income is primarily due to increased interest income from higher balances of invested cash and foreign exchange gains.

As a result of the strong operating performance, Carpenter generated record quarterly net income. For the quarter, net income was $68 million, or $2.58 per diluted share, as compared to net income of $47.8 million, or $1.86 per diluted share in the quarter a year ago. Net income in the fourth quarter a year ago included $0.44 per diluted share from the benefit of favorable tax adjustments and the sale of a subsidiary. The recent fourth quarter included a benefit of $0.19 per diluted share as a result of favorable tax adjustments.

Turning to the balance sheet, accounts receivable were $41.3 million higher than a year ago due to increased sales. However, days sales outstanding were reduced to 43.9 days, from 48 days at the end of the fourth quarter a year ago.

Inventories of $224.3 million were $4.3 million lower than a year ago and $37.8 million lower than at the end of the last quarter. The reduction from last quarter is primarily in work in process and raw materials.

For the quarter, free cash flow was $106.9 million versus $45.1 million in the quarter a year ago. In addition to $20.2 million in higher earnings, fourth-quarter cash flow benefited from the $37.8 million reduction in inventory, versus an $11.1 million increase in inventory a year ago.

Capital expenditures for fiscal 2006 totaled $19.3 million, which was $5.5 million higher than the previous year. We anticipate that total fiscal 2007 capital expenditures will be in the range of 35 to $45 million. Based on our expectations for continued earnings growth and working capital improvements, we estimate that free cash flow will be in excess of $200 million for fiscal 2007.

I will now turn the call back to Bob for concluding remarks.

Thank you, Dave. Let me close by saying that the past fiscal year highlighted the transformation that has taken place at Carpenter. Our focus on producing higher-value materials, combined with our relentless efforts to lower our cost structure, have produced returns that far exceed our cost of capital. We believe that this operating strategy will enable us to sustain returns above our cost of capital, regardless of the business cycle.

We will continue to utilize Carpenter's considerable strengths and competitive advantages to capitalize on the significant growth opportunities available to us. Based on current market conditions, we expect that fiscal 2007 will be another record year for Carpenter.

I would like to thank all of the people at Carpenter for their collective efforts in elevating the performance of the Company. Also, I would like to take this opportunity to thank Terry for his many contributions to our success. Terry will be retiring on August 1st, and we wish him the very best.

[Shanique] will now open the call to analysts' and investors' questions

(OPERATOR INSTRUCTIONS). Mark Parr, KeyBanc Capital.

Congratulations on another great quarter of continued progress. I never cease to be amazed every time I look at your balance sheet, in light of the earnings that you put down, it's quite amazing, what a good job you guys have done on the working capital side over the past couple of years. One thing I wanted to ask -- do you have any expectations as far as what your working capital needs are going to be for fiscal '07?

Fiscal '06 was a pretty interesting year in terms of the escalation of material costs and so on. One of the things you'll note is that throughout the year we've had -- our inventories, as an example, have moved around. And that was very intentional, because we had some issues with continuity of supply; particularly you're aware of some nickel supply issues. We had to make sure that we would have good continuity. And as a result, we had a lot of movement within the year. But as you'll note, we ended the year at about the same place we started. And that is in the face of having the mix change even throughout the year, because we have a lot richer mix of products in the business at the end of the year than we did at the beginning.

So from a working capital standpoint, in the past you've heard me say that that's an area of focus of improvement. Our lean initiatives have really worked a lot on our operations, our process control. We're now really focusing our attention on our cycle time, trying to move these expensive products through our manufacturing operations more expeditiously so that we can reduce our inventory investment.

Also, you heard Dave mention that we've improved our DSO, and that has -- is another area where we're really trying to make sure that we're doing a good job on the receivables. And Dave also mentioned that next year we see some higher levels of capital spending. And what that really surrounds is some of the things we've talked earlier about. We're rebuilding some of our infrastructure capabilities, and so we're going to see a little bit more CapEx. But I thinking that pretty much is it relative to our working capital.

Just to sum up what you're saying, if you look at -- call it dividends, CapEx and working capital, those three things combined, can you see that approximating $100 million in fiscal '07?

You said CapEx --

Working capital and dividends, yes.

I think it would be less than that. (multiple speakers) working capital growth.

If I could ask just a follow-up question -- and I apologize; there was quite a queue, I guess, getting into the call, so I missed some of the early comments. I don't know if you gave any additional color on the outlook for your aerospace revenues, given the delays in the A380 production, and also some resulting supply chain issues. But if there's any additional color you could give there, I would really appreciate it. Thank you very much.

I will just comment, referring back to our last conference call and our press release, at that time we talked about erratic supply chain behavior. And I just want to maybe clarify that a bit.

When you have a relatively tight market, particularly for things like titanium and nickel-based alloys, and you also have on top of that escalating material costs -- titanium costs, nickel costs -- it's not uncommon to see ordering patterns that can be erratic, because in some cases you have people making sure that they don't run out of material, and other people who are saying in this escalating environment I don't want to have too much on hand. And so those types of things occur. And I would say that they will continue to occur because the market is still very tight, the prices are still -- the raw material prices -- just reference nickel, reference titanium -- are at high levels. And what you have seen, what we've seen, is that there can be some corrections by certain customers, and then oftentimes takeup by others. So oftentimes, we're able to essentially redivert or redirect some of that.

Arguably, you might even say that if you take that all the way up to an Airbus level with the A380, obviously, there's other strong demand from other aircraft, other models, both Airbus and Boeing planes. And so from the standpoint of the outlook that we have for demand for these products, it's still, in our view, rather strong.

Congratulations, and thanks again.

Matt McGeary, Sentinel Asset.

I think I ask you this question every quarter, but just any update on your strategy program, where we stand on that?

What we're going to do is we're going -- in a few weeks we're going to have another press release and conference call exclusively dedicated to that. And I think that would -- I would just prefer to really focus on those questions at that call. So why don't we stay tuned for that.

Is that going to be -- if I could just ask one question -- is that going to be an action plan, or is that just going to be an update on sort of where we stand in the planning process?

We're just putting the planning final touches on the planning process right now. We have had some discussions with our board of directors in June, so it's really more an action plan that we'll be talking about in a few weeks.

That's hopefully good news. And I guess, will you also save the conversation about use of cash and -- we now have got $500 million on the balance sheet in cash, and with [tons] of net cash. Is that all going to be part of that discussion as well?

It sure will.

Michael Gambardella, JP Morgan.

Congratulations on the quarter, despite the 15, 16 point drop in your stock today. I just have a question; maybe it's just a follow-up on some of the other questions. With the net cash -- you have excess cash here over debt of about $163 million, and you get a reaction like this in the marketplace, that you guys clearly would, I think, think is way overdone on the negative side. And you don't even have a share buyback program authorized; not that you could do anything with it today, but at least you could do it when the window opens up. I don't understand. What's the rationale of not even having a program authorized, just in case you get something like this happening?

I would say that our focus -- and this really references the prior question -- our focus is really on what can we do to really create long-term shareholder value? And that gets into what's the best use of the cash that we have. And obviously, our focus is really on trying to redeploy that cash in a way where it's going to generate the kinds of returns that we expect to achieve in this business.

So in terms of a share buyback, it's certainly one of the things that is a consideration that we would have for that cash. But we've got other priorities and other things that we really want to make sure that we're focusing on for the long-term growth of Carpenter, and also for the benefit of shareholders.

Maybe this last question on the operations. I also came into the call, because of the queuing, kind of late, and I don't know if you touched on this or not. Could you maybe touch on all the news stories about some of the delays in some of the aerospace programs, and how it affects you?

I think I tried to touch on that with Mark Parr's question, and that is there's been a lot of -- we called it erratic ordering in the last few quarters actually, and that's really related to the fact that a tight supply, you typically have some people over-ordering, almost hoarding material, others really going very lean because of a belief that prices and demand are going to ease. And so what we've seen is that there's just certain players are taking a breather while others are pulling up. So as a result of that, it hasn't been very erratic. It hasn't -- the demand patterns have -- the ordering patterns have changed a lot for individual customers, but what's happened is we've been able to really shift our capacity to others. So that's the near-term issue.

Longer-term, obviously, the A380 has garnered a lot of press. But if you really look at the number of airplanes, the A380 basically -- there's 9 -- there are 9 planes scheduled to be delivered in 2007. There's a lot of other activity other than the A380 out there in the commercial aviation space. So I think a lot of times that gets sort of overplayed.

Andy O'Connor, Wells Capital Management.

I wanted to know what sales revenue is commensurate with your free cash flow guidance of more than 200 million for fiscal '07.

We don't provide any kind of guidance on revenues, earnings. The only thing that we typically have talked about is that the coming quarter, like our Q1 fiscal '07, is going to be better than Q1 fiscal '06. And we stand by that.

In terms of the free cash flow guidance given in excess of 200 million, is it possible to say, you know, how the free cash flow would be generated throughout the course of the year? Is it perhaps evenly distributed or more back-end loaded?

Again, we just stick with the 200 million. And as this year would have evidenced, particularly with movement in inventory and things like that, it's really not something that we would accurately predict or even wish to do.

[Lou Pimbleton], Axion Capital.

Looked like great numbers. A question. With respect to the availability of titanium and nickel, do you all consider this a high-risk area of your financial planning, or have you been at it so long that it doesn't -- it's not too much of a challenge?

I would say -- no, I would not say that it's a risk. Markets get tight, but you just have to make sure that you are taking the adequate preparations. The thing I referenced earlier was that there was a threat of a labor disruption -- a labor issue and a potential shutdown of one of the major suppliers of nickel. So oftentimes people in the industry that broadly use nickel are going to take positions so that they will protect the continuity of their supply. That turned out to be sort of a false alarm, and so there really isn't an issue.

I said earlier that nickel demand and supply is in a relative balance right now. There's not a lot of excess supply, and I believe that's why we're seeing some of the prices that we're seeing on nickel today. Similarly on the titanium side, the demand is high, the supply is meeting that demand. There is some new capacity coming online. But as far as risk related to the availability of it, we don't consider that to be a big issue.

Similarly, comments about margins going forward. You pretty much have that under control. In other words, the price effect on your own margins.

I think in the past what we've said is that we, obviously -- these types of globally traded commodities, we need to make sure that we are able to pass along those costs through the mechanisms of either base pricing actions or surcharges.

Michael Gura, Munder Capital.

I just had a general question. I might have missed this. On the revenue growth of 24%, did you break out how much was surcharge, pricing mix and volume?

I think there was a 1% difference.

1% was the surcharge.

Any idea how much volume increased during the quarter? Is it 50-50, or is it more pricing?

It's primarily pricing. Volume was relatively flat.

Bob Fetch, Lord Abbott.

In regards to acquisitions, have they moved up on the priory list?

I would like to defer the answer to that question for a few weeks when we're going to have a separate press release and conference call regarding strategy.

Clearly, the last few years you've had a focus on cost reduction, productivity improvement. Where are we in terms of having picked the fruit off the tree, in terms of how much more margin or sustainable profitability at any better level than current are we looking at?

In the past I've been asked the question of where are we, and I consider some of the things that we're doing on lean a journey, and it will take us many, many, many, many years, as it has taken people like Toyota 50 years. I've said in the past, on a scale of one to 10, we're probably somewhere in the three range. And although we are making improvement and it is driving bottom-line savings, which, obviously, are reflected in our margins, we're still on the low-end of that. So we are in that three, four category. But we're pushing hard to really do new and different things, not only on the manufacturing side of our business but also on the transactional side as well. We have much more to go.

You've often talked also of pricing for value. In an environment where some of your input or material costs have risen as much as they have, is it tougher to price for value with your customers?

I think that when we say price for value, what we're meaning is that some of the products that we're making are very, very unique, in terms of the characteristics, capability, the numbers of people who make them globally. And we want to make sure that specialization is effectively reflected in the price of those products.

We continue to focus on that. We develop new products with that in mind, that we want to really be able to solve very unique problems that applications deliver. So we're going to continue to price for value.

I think there are certain kinds of products that are within the myriad of things that we make at Carpenter here that are more generic and are more widely available. And those types of products tend to -- we tend to find more resistance because there's just more options. But on some of the more specialized products, obviously, that's where the value pricing really is realized.

Getting back to the lean a moment, are there any specific parts of the operation where your yields are not at what you would characterize as satisfactory levels?

The short answer, yes. There's many opportunities; that kind of is back to the three to four out of 10.

Your discussion update on the segments, in the corrosion materials for engines, where would you characterize the penetration is for those products in that market?

What we referenced there was that -- two specific examples we referenced was fuel injectors. Today's cars are running methanol/ethanol blended fuel. [There's] also the advent of the E85, the high-ethanol fuels; they're much more corrosion-prone in the fuel system, so they require different materials. And typically the materials that we make are a combination of corrosion and also magnetic properties. So they're kind of very specialized stainless steel. So those are developments applications that are happening as a result of what I referred to as emissions, performance and fuel economy applications that sort of bring these kinds of products into being.

Also, cars are running -- cars and trucks run a lot hotter in order to meet those emission requirements. So there's a lot of what we call positive substitution, because the former materials are not able to withstand those high temperatures. And as a result, we are making more and more products that maybe at one time were made for aircraft engines that are now being made for automotive engines.

So this transformation there, or requirements, ought to drive what sort of growth in that auto segment, or auto-related market?

It's an applications-driven growth, and it's also you need to look at the industry as a whole. The U.S. here -- yes, there's been somewhat of a retrenchment, particularly with the big three. But overall there's still a very healthy number of cars being produced here in the U.S. And also some of the things that I'm referring to, the applications, we are able to actually export these products globally. So they are on a lot of the European cars, and even on some of the transplant cars as well.

In regards to industrial, you had pointed out that oil and gas was one of the areas of strength in a segment that was down 4%. But I recall that's less than 20% of the business there, and capital equipment was closer to two-thirds. So can you comment on some areas of capital equipment where you've seen some maybe downshifting?

On the capital equipment side, there's a lot of -- I think this is the way we would look at this. Many companies -- and we're no exception -- are going to probably increase the capital spending for a variety of reasons -- more cash on the balance sheet, perhaps a lack of spending over a period of years, and an opportunity to really fund some organic growth capability. That's what we're seeing.

Having said that, there are also some instances where certain portions of the market will be spending less than others. Major projects are -- around the world have been very good, and hopefully they're going to stay there. I think what we're seeing here in the U.S. is we're seeing more capital spending. So people that we sell to that are selling into those capital goods kind of markets, they're forecasting some pretty good times in the year ahead.

So are we talking more in the machine tool area, or where would some of your principle customers serve?

Some would be machine tools. Some could be plant and equipment, facilities. Some would be general large capital plants like chemical plants. A lot of those are global. Desalinization. Things of that nature.

And in the area of aerospace, do you have a better sense that, as we're going towards more composites more definitively, what the uptake might be on the newer aircraft when you're looking at the 787, A380, etcetera?

Before I answer that question, I think I just want to also ask that after I answer this, I think we're going to need to move on, because we've got a long list of people waiting to call in, too.

The thing I will say on composites is composites on airplanes have some very positive substitution effects, particularly for titanium. Because the corrosion environment that's set up with composites, in conjunction with other materials, you really need the strength and corrosion resistance of titanium. So, as the 787, as an example, is a high utilization of composite, it also has a very high percent of titanium, not only for its weight and strength, but also for its compatibility with those composites.

[Eric Mentz], Eagle Asset.

Nice quarter. Just curious -- do you guys ever disclose a LIFO reserve charge? In an environment where we had parabolic nickel prices, did that work against you?

As we've said previously, we aren't going to make any excuses. We are on LIFO. Obviously, we expense these materials as they come in. They are reflected in our margins and our P&L. But we don't talk about what the LIFO charge or what that expense has been.

Just on pricing for you guys, I know you work off of two different customer books, so to speak. One resets on December 31, and one resets on June 30th. What is the percent of customers that are on the new price book now?

Let me just clarify, I think -- just what you -- I only want to say this. I think you're saying there's a proportion of our business that is transactional and a portion of our business that's under contract. About 35% of our overall business is under contract, and the typical renewal periods for those contracts -- not exclusive, but typical -- is the end of the year and the middle of the year. So there is -- there's January 1 and, let's say, a July 1 phenomena where those contracts typically get renegotiated and revised.

What's the percent of the 35% that's on June 30th?

I don't know that we have an exact percent of that. Probably equal distribution. Probably half and half.

One last follow-up. On Dynamet, in light of your CapEx plans -- I don't know if you said what you would put into Dynamet -- but what kind of capacity increase are we going to see there in fiscal '07?

In the past we've talked about Dynamet has very, very good capacity relative to what we see in the future market demand for the kinds of products that they make for both aerospace and medical. We have been incrementally increasing their capacity. It isn't very, very substantial capital dollars relative to what metals industries think of. So I guess the Cliff Notes are Dynamet is in good shape. We have been spending some capital at Dynamet. We will spend some additional capital at Dynamet, but we're in good stead for the increasing demand in the next three to four years ahead.

[Chris Olan], Cleveland Research.

Can you talk a little bit more about Dynamet here? I'm curious in terms of the contract structure within this business alone, does it tend to be more of a contract business under longer duration?

One thing I will say is that as a percentage, Dynamet probably -- when we talk about our overall being 35, Dynamet is probably a little higher than that. Because it's got some relatively -- it's got a lot of aerospace and some medical. So Dynamet has more contract business. But in relation to -- I'm sorry; would you repeat the second part of your question?

I think you actually answered it, in terms of the contract structure. But with that business, does it provide or allow for surcharges to pass on the higher titanium costs?

Yes. I think the other thing you asked -- I'm sorry I didn't answer -- is the duration. They could be anywhere from three months to two years.

In terms of your procurement, are you buying titanium on contracts? And what's your outlook in terms of the cost going forward?

I guess I'd probably -- I would rather not discuss that, because it's not the kind of information that I would want to comment on publicly because of competitive reasons. And as far as the outlook on titanium, I think we all probably can look at all of the published information that's out there by the people who produce titanium. I said earlier that titanium is in relative tight supply in terms of the demand versus the supply. That generally indicates that prices are either going to rise or remain at a high level, and that's certainly what we are reading about, and I think that's probably what the general consensus is.

Does it make sense to get into the melting business?

I would say that thus far we haven't seen the need to do that, but that's not to say that we would never do that. I would only say that we haven't seen a need to do that at this time.

Lastly, can you help me -- I missed the front of the call, too. What's going on with the ceramic demand or overall sales within EPG?

Let me preface that by saying that our ceramic business in total is a small percentage of our overall, and therefore, when you look at the individual ceramic businesses, there can be some supply chain adjustments. And in one case in particular, there was a particular application where the application got very highly overstocked, because an end customer decided to really buy quite a bit of material. And then that customer stopped buying that material, and that affects our quarter-on-quarter performance when we do comparisons to relatively small numbers. But actually that application has not gone away. It will actually come back. So it's not a case where there's a long-term issue, a dislocation issue there; it's just really a correction against a relatively small base.

What sector is that in, or what end market?

It actually -- the end market is actually in the bio and pharma analytical equipment area.

(OPERATOR INSTRUCTIONS). Matt McGeary, Sentinel Asset.

I guess more of a comment than a question, just circling back to Mike Gambardella on the repurchase issue. I understand you have capital needs and other uses for that, but I would just venture to say that today you could buy your stock at nine to 10 times earnings, 10, 11 times free cash flow, six or seven times EBITDA. That's a pretty good return on capital. So I guess I would just say I look forward to your press release in a few weeks to hear about what other things you have that might provide better returns than that.

There are no additional questions at this time. I would now like to turn the call back over to Mr. Bob Torcolini.

We would like to thank all of you for your interest in Carpenter, and we look forward to talking with you at our next quarterly conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.