Carpenter Technology Corp (CRS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2007 Carpenter Technology earnings conference call. My name is Tawanda, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Jaime Vasquez, Vice President and Treasurer. Please proceed sir.

Good morning. Welcome to our conference call for the period ended December 31, 2006, the second quarter of Carpenter's fiscal year. This call is also being broadcast over the Internet.

With me today are Anne Stevens, Chairman, President and Chief Executive Officer; Dave Kornblatt, Senior Vice President Finance and Chief Financial Officer; Dennis Oates, Senior Vice President of our Specialty Alloys Operations; Mike Shor, Senior Vice President of our Engineered Products Operations, and other members of the management team.

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, 2006 10-K and subsequent Forms 10-Q and the exhibits attached to those filings. I will now turn the call over to Anne, who'll start with a brief overview.

Good morning to everyone. This is my first quarterly conference call since joining Carpenter last November. Let me begin by saying that I am excited about the opportunities at Carpenter for growth, both organically and through strategic acquisitions. And that is why I'm so pleased to be here.

Carpenter participates in markets that are not only growing significantly, but are also becoming more and more technically challenging for the materials employed in our customers' products. Our Specialty Materials solve customer problems and ensure performance in demanding applications, such as hotter and more corrosive environments, and aerospace and energy.

In the medical field our products are uniquely positioned to extend the active lifestyle of the baby boomers in the U.S. market, while also improving the quality of life for citizens globally in expanding application such as hip and knee replacement.

Understanding the customer applications, having the technical and operational depth to support our growth, while maintaining and continuously improving our lean cost structure, will insure our material usage in some of the most sophisticated products in the world.

We will have the capacity to supply our customers materials for the products they need, while expanding our offering. As our plans are implemented, we will communicate the details to you.

Now let me provide you with some detail on Carpenter's consolidated second quarter sales, which increased 28% from a year ago. All references that I make to changes in sales will be based on a year over year comparison.

The quarter included a dramatic increase in surcharge revenue as a result of the continued escalation in nickel pricing. Dave will talk about the impact on margins in a few minutes. Excluding surcharge revenue, sales increased 14%. This level of growth was particularly impressive given the record level of sales achieved in last year's second quarter.

Let me start with our largest end use market, aerospace. Sales to this market increased 26% to $167 million, a second quarter record, and the third highest level of quarterly sales to that market. Demand for titanium material used in the manufacture of structural fasteners for commercial and military aircraft was particularly robust during the quarter. Equipment shipments of titanium coil increased 15% during the quarter from a year ago.

We also saw solid demand for our specialty alloys used in the manufacture of aircraft engines and airframe structural components. There has been a significant step up in our sales to the aerospace market. Over the last four quarters aerospace revenues totaled just over $700 million, or nearly 41% of total revenue.

Industrial market sales increased 46% to $94 million, a record for any quarter. Sales benefited from strong demand for higher value stainless steel used in the fabrication of fittings and valves for manufacturing facilities, and by capital equipment and semiconductor manufacturers. Industrial market sales were particularly strong in the quarter, and we would expect sales in future quarters to reflect more normalized rates of growth.

Our sales to the automotive and truck market increased 34% to $56 million. Surcharges and higher base prices more than offset reduced shipments, which were negatively affected by lower U.S. automotive production rates. Many of the products sold into this market have high nickel content, and therefore may carry a higher level of surcharge revenue.

We believe that sales to the automotive market will continue to benefit from the need for more advanced material as a result of changing technologies, as well as from growth with key customers and our ability to sell globally.

Consumer market sales increased 20% to $56 million. Higher base prices, surcharges and increased shipments of materials used in consumer electronics more than offset reduced demand from materials that have application in housing.

The sales to the energy market of $36 million were 34% higher. Our greater emphasis on the oil and gas sector helped increase sales by 58% in the recent second quarter from a year ago. Our high-strength corrosion resistant alloys serve many needs in the oil and gas sector. And we're extremely excited about the opportunities that we're developing. We expect that sales to the energy market will continue to grow at a rapid pace.

Medical market sales decreased 5% to $32 million in the second quarter from last year's record quarter. The decline in sales reflected ongoing inventory adjustments taking place within the supply chain. The fundamentals in the medical market are unchanged, and we remain focused on growing this market.

International sales increased 13% to $121 million, which was a second quarter record. Higher base prices, surcharges and increased shipments to the aerospace market were the primary contributors to the increase.

Now I would like to talk about sales by productline. In terms of sales by productline, sales of specialty alloys experienced the largest increase in the second quarter. Specialty alloys sales increased 38% from a year ago to $200 million. This was a record for the second quarter and the third-highest quarter ever.

Increased shipments to the aerospace and energy markets, combined with higher based prices and surcharges, drove the increase. Stainless steel sales of $155 million were 29% higher than a year ago, and reached a record level. Strong demand from the industrial market for materials that are used in capital equipment and semiconductor manufacturing aided the sales growth. Also our sales to distributors increased from a year ago due to a better pricing environment.

Our titanium sales increased 18% to $48 million. Robust demand from the aerospace market and higher prices aided the increase. Partially offsetting the gain in sales was reduced shipments of material to the medical market.

Ceramic sales decreased 6% to $24 million in the second quarter compared with a year ago. Increased sales of ceramic components needed in Class 8 truck engines were more than offset by reduced sales of ceramic cores used in the casting of jet engines and industrial gas turbine blades. Now I would like to turn the call over to Dave.

Good morning. As Anne mentioned, sales in the second quarter were up 28% to a second quarter record $441.3 million. Excluding surcharge, sales increased 14% from a year ago due to increased shipments and higher base prices. Gross profit in the second quarter increased to $97.1 million from $93.8 million a year ago. This was a second quarter record for gross profit.

As we said in last quarter's conference call, our surcharge mechanism can protect gross profit dollars; however, margins may be adversely affected in the period of escalating raw material prices. During the quarter nickel prices on the London Metal Exchange averaged $15 versus $5.75 of the second quarter a year ago. This rate of change in nickel prices has a dramatic effect on the amount of surcharge revenue, especially since some of our products contain as much as 80% nickel.

The rapid rise in nickel prices during the quarter resulted in surcharge revenue of $93.8 million, or 128% more than a year ago. The huge jump in surcharge revenue diluted gross margins by 340 basis points versus the second quarter a year ago.

Additionally, the lag effect of our surcharge mechanism on gross margin became more pronounced in this environment of escalating nickel prices. We estimate that the lag effect impacted gross margins by almost 500 basis points in the recent second quarter. Of this 500 basis point impact, approximately 350 will be fully recovered in Q3 via recently renewed annual contracts. When raw materials stabilize this impact will not continue.

Adjusting for the dilutive effect of the surcharge, and the impact of the lag in the surcharge mechanism, gross margins would have improved by an estimated 320 basis points in the second quarter versus a year ago. The underlying improvement reflected higher pricing, increased shipments, and a continued focus on cost controls.

Selling and administrative expenses in the recent second quarter were $34.4 million, or 7.8% of sales, compared to $29.9 million, or 8.6% of sales in the same quarter year ago. The increases in expenses mostly reflected $3.6 million of executive separation cost. This amount was primarily associated with restricted stock that was earned, but not yet vested prior to separation.

Other income in the quarter was $11.6 million compared to $8.7 million in last year's second quarter. The higher level of other income is primarily due to increased interest income from higher balances of invested cash and an increase in the amount of funds received under the Continued Dumping and Subsidy Offset Act of 2000.

The tax provision in the recent second quarter was $20.5 million, or 29.9% of pretax income, versus $23.8 million, or 35.7% in the same quarter a year ago. The tax revision in the recent second quarter was favorably impacted by adjustments due to Congress' retroactive extension of the Federal Research and Development Tax Credit and the favorable settlement of a state tax audit.

Net income for the quarter totaled $48.1 million, or $1.82 per diluted share, as compared with $42.9 million, or $1.65 per diluted share, in the quarter a year ago.

Turning to the balance sheet, Accounts Receivable were $42.2 million higher than a year ago, due to increased sales. However, day sales outstanding remain unchanged from a year ago at 47 days.

Inventories of $258.5 million were $6.3 million lower than at the end of last year's second quarter. The decline in inventory reflects our ongoing efforts to improve manufacturing processes and manage working capital.

For the quarter free cash flow was $30.4 million versus $41.4 million in the quarter a year ago. And for the first 6 months of fiscal 2007 free cash flow totaled $81.2 million versus $42.1 million for the same period a year ago. We remain committed to our free cash flow target of greater than $200 million in fiscal 2007.

Capital expenditures in the quarter totaled $7.3 million as compared to $4.5 million in the previous year second quarter. In the first 6 months of this fiscal year capital expenditures totaled $14.6 million versus $10.2 million in the same period a year ago. We anticipate that total fiscal 2007 capital expenditures will be in the range of $35 million to $45 million, including expenditures related to the premium melt project announced today.

I will now turn the call back to Anne.

Before we take questions, I would like to provide a few closing thoughts. With our leading position in niche markets, our technological and metallurgical expertise, and sound financial condition, Carpenter is positioned to create even more value for our shareholders.

Since joining the Company, I have spent a significant amount of time reviewing our strategic plan and measuring that plan against the Company's core competencies. The key to our competencies is the skill and the capability of our people. I have visited several sites and I'm very impressed with the knowledge and the commitment of our employees. So I'm extremely confident in the plan, and along with my team, will act upon it.

The first step in executing this plan was announced today with the expansion of our premium melt capacity. This investment, which will total about $115 million over the next 18 to 24 months, will allow us to capture the growth that we see in our key end use market.

The premium melt expansion complements our efforts to focus on the sale of higher value products and reduce the sale of marginally profitable product. We will also bolster our research and development effort by expanding our staff of metallurgists and engineers in order to place an even greater focus on new product development. The cornerstone of Carpenter's success has been our ability to innovate. We will continue with this heritage at an accelerated pace.

Now looking at the balance of this fiscal year, I expect our performance to be strong. Based on current market conditions and my confidence in our operating performance, Carpenter should achieve record results for fiscal 2007. Additionally, as we have previously stated, free cash flow should be in excess of $200 million in the current fiscal year.

I'm very optimistic about our future. And I know that the Carpenter team will continue rewarding shareholders with exceptional returns.

Operator, I would now like to open the call to questions.

(OPERATOR INSTRUCTIONS). Chris Olin, Cleveland Research.

My first question is for Anne. I am just wondered in light of -- it looks like maybe three consecutive earnings misses, is it time to start looking at possibly giving the Street a little more guidance in terms of what you're expecting for the year and/or quarter?

I appreciate the question. This is something that has come up in discussions with several of you during my last couple of months. All I can say is I understand your input. We have current policies which for this quarter are continued with. But it is something I'm just evaluating input and taking into consideration as I go into our next fiscal year.

It seems to me that something like that would probably help in terms of valuation. I think the visibility in earnings is one of the concerns out there.

But my second question would be regarding the nickel-based alloys marketplace, there seems to be a number of supply increase announcements out there. And I guess I'm also looking at the possibility of Thyssen-Krupp entering the marketplace further as well. Do you have any concern maybe that supply is coming on too fast?

On that one, that is something that we as a team have studied. And I would like to ask Denny Oates to comment on that.

Our view on that would be we have studied these markets very intensively as a part of our strategic planning activities here at Carpenter. We are very confidence in the growth rates in aerospace, medical, and oil and gas, and some of the other markets that we have talked to you about in the past. Obviously, we have -- that confidence is driving us to invest further.

Based upon the supply we see in the marketplace today, what we anticipate in terms of increasing capacity, balancing that against demand levels, we do not see an excess of capacity coming into the marketplace.

As to the contracts, there are some longer-term contracts that have been publicized recently. We're working with all of our customers in the aerospace supply chain -- in fact, all of our markets. And to the degree our customers want to modify how we do business, we're working with them. And we would expect to continue to grow with those markets.

I'm not sure if I missed it, but can you comment on how your backlogs are in light of the new capacity coming on throughout '06?

Our backlogs are in good shape year-on-year. They are approximately the same, maybe up a little bit, but the flow of business that we've seen over the last month clearly supports a good second half for us.

My last question would just be on the titanium side. Do you have an outlook for titanium costs in 2007? I am just wondering if we are likely to see some pressure come off on the upstream sponge and scrap areas?

Again, that is another one the team has looked at. I would like to invite Mike Shor, who is responsible for that business, to comment.

Obviously we're watching that very carefully, and there has been significant expansion both in the sponge and on the melting side related to titanium. As supply increases then our outlook is that most likely the prices will begin to slightly decline.

Anne, let me wish you good luck. Take care.

Thank you so much. I appreciate that.

David MacGregor, Longbow Research.

Congratulations on record revenues and record net income. Anne, let me just welcome you to the basic materials business. You may have missed, but your stock is up over $2, so I guess it is not all bad.

I wanted to just get your feel on the strength in the industrial demand portion of your business. If you could just dig in a little further on that and elaborate. You talked about strengthening capital goods, strengthening semiconductor capital goods segments. Is there some seasonality at play here? Is there a little bit of budget flush working in the December quarter, or are you winning market share? Maybe just elaborate on that for us please.

This is Denny Oates. Let me take that one. We did have a very good quarter in industrial. As we said in our press release, we do think that will be reduced somewhat as we go through our third fiscal quarter, but nevertheless will stay relatively strong. We have several customers in that space who had an outstanding quarter fueled by capital spending in general, specifically rebuilding infrastructure associated with the Katrina catastrophe. And that was the main driver of that 46% increase in revenues that we alluded to earlier.

That is helpful. Thank you. On the export volumes, or the export sales I guess you said were up, can you give us some sense on what the volume increase was under that number?

Volume was up nominally in the international market. There was higher base prices. They were particularly -- some of the markets are strong like aerospace. Other markets like power gen, which is very lumpy, was down. And also consumer sporting goods was also down, which is mainly an Asian business. But we do see that our international sales should return to their normal 30, 33% in the second half of the year.

You break out in your press release your six different end market segments. I guess imports would make seven -- or exports would make seven. Is there any way you could just walk through and give us a little bit of brief color in terms of what you're expecting over the next three to six months from each of those end markets?

On the aerospace side, we will continue to see good growth continuing, what we have seen in the first half, both on the titanium and nickel-based side. On the energy side I think we will continue to see very good results in oil and gas. And we do see power gen coming back a little bit, but again they tend to be a small number of large orders, so the exact timing is not always easy to predict.

Medical, we're not sure. There clearly are supply chain issues out there. There are some signs of recovery there, but nothing that we would call very bullish at this point. And certain parts of automotive remain good; however, clearly the Big Three in the U.S. are cutting production rates. We do have a global business there, and our business with others outside the U.S. is good. But I think that auto will be on the flattish side the rest of the year.

Industrial I think will remain good. But long-term that is a GDP-type growth business for us. And I think consumer will also be more long-term GDP-type play.

Within the energy business what is the breakdown between oil and gas and power gen? What is your volume breakdown? Can you give me --?

It is about 50-50. But energy clearly is escalating, as we have dedicated a lot more resources to that business and have been having some real good success there.

Sure. Just on the reporting issue, I don't have so much of an issue with you're not offering guidance. That is kind of our job. But you've got 95% of your revenues under one business segment, which make makes it a little bit difficult to get granularity. My two bits for what is worth would be to try and create a little more visibility around the segments. Thanks.

Thank you for the comment.

Point taken.

Tony Rizzuto, Bear Stearns.

Welcome aboard, Anne, too. Congrats to you on your move. I have got a number of questions. First of all, if there were a strike on the nickel side at Sudbury, would you be concerned about your physical metal supply?

At this point in time, there is a labor situation there. The contract expires January 31. We're relatively comfortable for three months. If that strike were to drag on for two or three months we would have some issues. We do not anticipate that happening. Our intelligence tells us that if there is a work stoppage it will be relatively short. And we have prepared for that.

What percent of your nickel do you currently source from Xstrata/Falconbridge today versus say CVRD-Inco?

I think that is a subject that we would rather not get into for obvious reasons. We source from all the typical players that you would expect. So I would rather not breakdown the percentage publicly.

Denny, what about perhaps cathode versus scrap, if you will? Can you give us some kind of idea for that?

Could you repeat that again?

If it were nickel cathode versus scrap generally. You buy a lot of scrap, I'm sure.

I don't know how we would break that -- I would rather not get into the percentage that we breakdown. That is something that obviously is a competitive strength that we have in terms of how we buy and how we make charge mixes in our furnaces and so forth and so on. That is something we would rather keep internal.

I know it is going to be all over the place. I have got a question also about -- if the nickel price were to stabilize at the current level, what would the impact -- could you give us any guidance on what the impact on LIFO charge would be in the fiscal third quarter? And also along with that, could you give us a little bit of a breakdown as to the other components in the LIFO, as you guys look at it at a rough percentage, perhaps of that composition?

Sure. I think if nickel were to stay at today's, what we hope, are elevated levels, if they're not going up from here, I think the LIFO charge in Q3 would be somewhat less, but not dramatically less than what we have seen in Q2. And at least in the current environment, most -- almost all of that is nickel. There has been some inflation in cobalt. There is also been some deflation in moly. But really for us it is almost all nickel at this point.

Excellent. I don't want to beat a dead horse, but again coming out of the blocks here with a new CEO, it would be very helpful, I can't stress enough, to provide some level of volumetric and pricing data. Again, you guys are obviously gaining more following, a lot of interest, and I think it would clearly help your multiple.

Thank you for the input.

Thanks.

Mark Parr, KeyBanc Capital Markets.

I which is like to add my welcome to you, Anne. You picked a wild ride to get on.

I'm used to wild rides.

I would just make some comments just about the -- I also would concur that there's an opportunity to enhance valuation to the extent you can feel comfortable increasing the disclosure on a quarterly basis. But someone misspoke and said your stock was up $2 on an earnings miss. I think your stock is up to $5.40 right now. So it is clear that the market recognizes a true underlying operating performance, excluding LIFO. That is very encouraging.

I would like to -- I had one question that I would like to ask, just to get into the LIFO situation, the outlook a little more. One of your comparable companies, Allegheny, had indicated a much more dramatic reduction in the LIFO outlook for the March quarter relative to the December quarter.

I am just wondering -- if they're -- if you can provide any color on why there might be such a difference? I know you guys aren't at Allegheny, so you don't know all their -- don't know the situation, but I think nickel is the biggest issue for them as well.

It is Dave. A couple of things. One, I can't get into what is driving their inflation or their deflation. Perhaps their long-term contracts has enabled them to hedge differently. They have a much bigger portion of their business that is long-term contracts. Also, perhaps, as their titanium production comes online, and they're more self-sufficient there, that could driving some level.

But I think the big point they made on the call when I listened to it the other day, was that this is the end of their calendar year, and that they tend -- there is two methods you can use on LIFO, and they use the method where they project full year inflation and then spread that evenly over the course of the year.

His point was that at the end they must have projected logically in Q3 that it would stay flat, and then it spiked. They had a huge catch-up adjustment in Q4. And I think they're saying that there's no way that would happen again in Q1, because it is the start of the year and the spreading just starts.

We use a method where we tend to calculate LIFO each quarter. And the actual results are the full impact of LIFO. There's no anticipation of further increases or further decreases in commodity costs. We use a different method. Both are permissible. I think just the fact that it was their year-end and there was a catch-up give them the confidence to say it will be much less.

In your case though if you're looking at the full impact of your purchasing activity in the December quarter in your LIFO charge, if nickel prices were flat in the third quarter, wouldn't that imply a more significant reduction in the LIFO charge for the March quarter?

We will have to get technical to get into that, which I'm willing to do, but you have to look at how often we turn our inventory. And really what you are testing in LIFO is it is not your cost, it is your LIFO FIFO difference. So what you're really talking about in Q3, given that we turn our inventory 2, 3 times on average, you're comparing that really to our Q1 costs. So really you need six months of stability before that LIFO FIFO difference comes into balance.

That is helpful. Anyway, that is helpful, I appreciate that. Congratulations on the results. And I look forward to more good news.

Leo Larkin, Standard & Poor's Equity.

Could you give us DD&A for 2007? And also would it be possible to get any sense of where CapEx will go for 2008?

D&A for 2007 should be about $48 million. And we committed to $200 million over the next four years. A big chunk of that of what we announced today will be spent next year, about $76 million just on that. I would think we would be probably double this year's level in 2008. We haven't yet put our total plans together, but that is the impact of the premium melt, just the premium melt project. It will be much higher next year.

Jack Franke, Duquesne Capital.

Could you guys just talk a little bit more about the expansion that you're doing, what type of products, what type of alloys, what end markets the products are destined for?

Denny, would you --?

Yes, let me take that one. As far as the products we're talking about, this would be premium products or high-end products. As far as the actual investments we will be spending money on a 22 metric ton vacuum induction melting furnace -- four vacuum remelting furnaces, two electroslag remelting furnaces, a bank of related annealing and reheat furnaces, and a series of processing equipment investments as well. There's also some building expansions to house these various pieces of equipment.

As far as the markets these products are destined to go to, it would be aerospace, oil and gas, medical, and specialty automotive.

Just the general product mix for the Company.

No, it is the upper end.

Upper end of it. (multiple speakers).

The higher price, the higher margin end of the business.

Is that mainly nickel alloys?

Yes. Well, it is super alloys.

What have been the historical margins on those products?

The margin on those products is well above corporate average. And we anticipate that the profitability on this new capacity would also be above corporate average.

Any sort of return on capital metrics you guys can give, or anything like that?

This is clearly well above our cost of capital is what we see in this project. It is actually equal to, or possibly slightly better than, the overall Company.

Matt McGeary, Sentinel Asset Management.

Most of my questions have been answered. But first of all, welcome Anne. I almost always asked your predecessor about stock buybacks, so I'm going to ask you as well what your thinking is there, just given your balance sheet and cash flow generation.

When we announced a strategic initiatives in September, it was clearly one of the elements of the four items that we had listed. It is something that we do intend to do. At this point in time we have no plans to announce when we will do it. But I would just reaffirm that clearly it is still part of our strategic plan.

Super. Any insight on the current M&A outlook? I imagine things have not gotten any better from an evaluation perspective, but just sort of (multiple speakers).

I think it is an exciting time. And it is something that obviously I have spent a considerable amount of time on. At this time we don't have any details to announce, but I believe there's opportunity for Carpenter in that space.

Great. Thanks. Good job.

Sanil Daptardar, Sentinel Asset Management.

The first question is basically on housekeeping on the favorable tax settlement. Could you just give the amount on that? What was absolute amount?

Could you repeat the question?

Favorable tax settlement from a state, could you just give what was the absolute amount on that?

Tax?

It was the settlement of a long-standing state tax audit. It was not material in and of itself.

Okay. The second question is on the ceramic business. You thought that there was a decline in the ceramic business. If I remember correctly in your presentation at Bear Stearns conference you said ceramics would grow because there is an increased demand of ceramics in the aerospace industry. And if the aerospace industry is in a long cycle, I would assume it would have been logical to assume that ceramics would have grown. Could you talk about what you're seeing in that business? Why the decline? And do you think that increased demand will flow through in the next few quarters or in the future years?

This is Mike Shor. Good morning. As far as the ceramic business, a large majority of that goes towards both aerospace and power generation. We had a large customer who had a fairly significant inventory reduction in the ceramics they used in their process in the end of the quarter, therefore the drop. But we feel we will continue to grow along with the market, which is in that close to double-digit range moving forward in these markets.

You expect the growth to begin -- pick up again in the third quarter or --?

Yes, it has. January has started out very strong.

In terms of the medical market, when do you think that the inventory destocking would end? And if it is possible to talk about who your customers are in the medical market?

At this point, it has been a couple of quarters now, and we -- all I can say is we don't see that happening this quarter. We would hope that that is done and completed by the end of our fiscal year. But at this point I don't think we're in a position to predict exactly when that is going to stop. And at this point we sell to both the major medical equipment guys, as well as some small people, as well as people in the middle of that supply chain. I think we're pretty well covered throughout that market.

One last question on the energy markets. You said just a while ago that the international energy markets are lumpy. If there is a demand -- because if you look at the energy market, I think most of the demand is coming from the international markets. So why would you characterize that as lumpy in that case? Could you just give us --?

Perhaps I wasn't clear. The energy market for us is made up of two pieces, oil and gas, which is going very well, and we would not characterize that as lumpy. It is the power generation business, the land-based gas turbines, that are lumpy as really the investment in those has slowed in the last two years. A lot of that is now being driven by replacements. So oil and gas is on a nice trajectory for us and is not lumpy. It is the power gen side that I was referring to.

In case of the power gen market, if the volumes decrease, would oil and gas offset the decrease in volume in that case? Or you don't expect that to be (indiscernible)?

I would expect that, regardless of what happens in power gen, we will see growth in our energy business going forward.

Bud Zaino, Royce & Associates.

Your stated forecast for over $200 million free cash flow for this year necessarily implies $120 million plus free cash flow for the second half of the year, given $81 million in the first half. Is all that coming from net income? Is there lower capital expenditures? Is there lower inventories, or is it strictly higher income?

We wouldn't think that working capital would have a big impact. There will be slightly higher capital expenditures than what you would have seen in the first half of the year. But we don't see working capital being a major source or use of cash in the second half.

It is something -- I'm sure it is too early for you to think of, but just in terms of corporate valuation, your Company sells at ten times, low teens multiples of earnings. The titanium industry and companies involved sell at closer to twice that multiple. Was there any possibility in the future of spinning off Dynamet to the shareholders?

I don't think we would want to comment on that at this point. There is certainly no intention to do that at this time.

Dhaval Patel, Columbus Hill.

I just wanted to know if you could give us some more color on the expansion. You mentioned the end markets that it will be serving, but if you could give some more color in terms of what percentage -- or like isn't the majority aerospace, is the majority energy? Just -- obviously the markets you stated were almost all the markets that you participate in.

In our planning activities, we have repeatedly said there are four markets that we feel will grow over the next three to five years that are targets of opportunity for Carpenter, aerospace, medical, oil and gas and specialty automotive. In terms of breaking down the incremental capacity and where that is going, the majority of that is dedicated to aerospace just by volume. But we expect all four of those markets to grow over the next three to five years.

Just when did the spending for that project start, and is that being accounted for in your free cash flow statement -- estimates?

A portion will be spent this year. And that is included in our $35 million to $45 million guidance for that. The bulk will be spent next year. And then there will still be a little bit more the following year. It is consistent with the $200 million we announced in our September 21 press release.

Mark Parr, KeyBanc Capital Markets.

Just a quick housekeeping issue. Could you give some guidance on tax rate outlook for the balance of the year?

I think the full year will come in between 33 and 35.

David MacGregor, Longbow Research.

You talk about the expansion representing about $150 million of incremental revenue by fiscal year 2010. I was just wondering if you give us some help in terms of how you ramped that number? How much in say '08, how much '09, and then obviously the $150 million in '10?

The revenue really starts in '09. It is really -- the furnace will not be fully installed until that year. And we will get some incremental revenue in earnings in '09. We picked '10 as the year that we would be sort of at a reasonable level of activity in the furnace for the $150 million. It will go up above that in future years as the markets continue to develop. I would think it is maybe half of that in the prior year.

So it is $75 million revenue in '09 and no revenue in '08?

Correct.

Chris Olin, Cleveland Research.

I just want to make sure I am clear on the titanium segment in terms of the sales coming a little light from what I was expecting. Is most of that related to the medical segment? And is there anything else slowing within that as well?

It is Mike Shor. Medical segment is, as Dave and Anne had previously said, are weaker. Aerospace segment is still very strong. And what we see moving forward with both the single aisle and double aisle planes say that this will continue to be strong as these planes become more titanium intensive. We feel very good about the future.

Will you have any leverage to the military market, and maybe specifically in the Joint Strike Fighter?

Sure. Fasteners are the business that we're in, and obviously they will also be part of that as we move forward.

But there is no contract or deal set up as of yet?

Not at this time.

At this time there are no further questions. I would now like to turn the call over to Ms. Anne Stevens for closing remarks.

I would like to thank all of you who have called in today and participated in today's call. And to just express our confidence in the team and Carpenter, and how much we all look forward to talking with you at our next quarterly conference call.

Ladies and gentlemen, that concludes the presentation. You may now disconnect. Have a good day.