Carpenter Technology Corp (CRS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 Carpenter Technology earnings call. My name is Danielle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the presentation over to your host for today, Mr. Jaime Vasquez, Vice President and Treasurer. Please proceed.

Thank you. Good morning. Welcome to our conference call for the period ended March 31, 2007, the third 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; David Kornblatt, Senior Vice President of Finance and Chief Financial Officer; Denny 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 Form 10-Q and the exhibits attached to those filings.

I will now turn the call over to Anne who will start with a brief overview.

Thank you, Jamie, and good morning, everyone. Today we announced record earnings, which was particularly satisfying given the continued escalation in the price of nickel and a temporary pause in the upward momentum of the Aerospace market. Now nickel continued its unprecedented climb as it averaged nearly $19 a pound during the recent third quarter and has averaged almost $23 a pound in April.

Now to put that in perspective, our surcharge revenue during the quarter would equal almost $600 million on an annualized basis. The high cost of nickel is having a profound effect on the way many of our customers are doing business, which is partially reflected in some of our end-use markets. Our Aerospace business has not been immune to the effects of high-cost nickel, as many of our products sold into this market contain more than 50% nickel. Demand from Aerospace forgers for nickel-based alloys slowed during the quarter due to the escalation in nickel prices. As a result, many customers became more cautious about inventory balances.

Also our Aerospace business was impacted during the quarter from a temporary pause within the supply chain to bring inventories in better balanced with demand. However, even at the lower level of shipments from a year ago, it was still our third-highest level ever of pounds shipped to the Aerospace market. Despite some of these adverse factors, we were able to produce the highest level of operating income in the Company's history. This is a direct reflection of our people and their ability to continuously work towards operational excellence.

Now let me provide you with some detail on Carpenter's consolidated third-quarter sales by end-use markets. To make the year-over-year comparisons more meaningful, I will speak to changes excluding surcharge revenue, which totaled $154 million in the recent third quarter or 209% more than a year ago.

Let me start with our largest end use market, Aerospace. Sales to this market decreased 7% to $151 million, primarily as a result of an 11% decrease in pounds shipped versus last year's quarterly record. We experienced robust demand for titanium material used in the manufacture of structural fasteners for commercial and military aircraft and for ceramic cores, which are used in the casting of jet engine turbine blades. However, this growth was more than offset by reduced shipments of nickel-based alloys used in jet engine components and structural applications.

Now, as I mentioned, most of the decline in the Aerospace sales was related to the reluctance by customers to replenish safety stocks at record high nickel prices and supply chain adjustments. The lower Aerospace sales during the quarter also reflected reduced shipments to a key customer who is now procuring a majority of its material needs from a subsidiary it recently acquired. All of this lost business has been replaced as a result of our increased focus and dedication of our resources to the energy market.

Overall we remain very excited about the growth prospects of our Aerospace business. We have successfully introduced our patented Custom 465 alloy into the Aerospace market, and we expect it to be a strong contributor to our future sales growth. Also, changing technology and the need to build more fuel efficient aircraft in addition to the number of planes being built should allow us to grow sales to this market by 10 to 15% per annum over the next several years.

Sales to the industrial market increased 28% to $84 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 in capital equipment. Also, contributing to the sales growth was a 34% increase in pounds shipped. Sales to the industrial market should remain strong, although we would expect growth to moderate from these historically high record levels.

Our sales into the distribution market, most of which goes towards industrial applications, should continue to benefit from relatively lean inventories within the service center supply chain. Over the longer-term, we would expect sales to the industrial market to reflect a growth rate just above the GDP.

Our sales to the automotive and truck market increased 12% to $48 million. Higher base prices and a 7% increase in pounds shipped contributed to the growth. This volume increase reflected solid demand in Europe, as well as Asia from materials used in sensor and engine application.

We believe that sales to the automotive market will continue to grow above global production rates over the next few years. We continue to benefit from positive material substitution as changing technology is requiring more sophisticated materials. Additionally we are having growing success in selling our material into all new US automotive manufacturers. Consumer market sales decreased 9% to $37 million, which reflected a 14% decline in pounds shipped. The reduced demand reflected the effect of a slumping US housing market on materials used in appliances, thermostats and other housing applications.

Also, sales to the sporting goods market were impacted by customer inventory adjustments. We would expect sales to this market to remain under pressure, due primarily to the conditions in the US housing market and the effect of elevated nickel prices on demand from the sporting goods market.

Sales to the energy market of $33 million were 12% higher. Our increased focus on an oil and gas sector helped increase sales to that market by 70% in the recent third quarter from a year ago. Our high-strength corrosion resistant alloys have allowed us to successfully expand our presence in the oil and gas sector. We're also beginning to see success in penetrating the Asian market with our corrosion resistant alloys, which should further support our growth in the energy market.

Sales to the energy market were partially offset by a decline in sales to the power generation sector due to lower demand. However, we are experiencing increased activity in this sector and, along with the continued success in developing our oil and gas business, expect strong fourth-quarter growth in energy market sales.

Medical market sales decreased 12% to $31 million from a year ago. The decline in sales reflected ongoing inventory adjustments, taking place within that supply chain. We believe that the inventory adjustments will continue at least through our fiscal fourth quarter. Longer-term, though, the fundamentals in the medical market are unchanged, and we remain focused on growing this market.

Our international sales are included in the in-use markets I just mentioned. They increased 16% to $162 million inclusive of surcharge. Continued growth in Asia and increased sales of higher value materials to the automotive sector helped drive the increase.

In terms of sales by productline, sales of stainless-steel experienced the largest increase in the third quarter. Again, excluding surcharge revenue, stainless-steel sales increased 18% to $137 million. Strong demand from the industrial and automotive markets aided the sales growth. Also, our sales to distributors increased from a year ago due to a better pricing environment and leaner inventory.

Specialty alloy sales decreased 8% from a year ago to $159 million. Sales of this productline were largely impacted by reduced demand from the Aerospace and Power Generation markets. Our titanium sales decreased 4% to $45 million. Robust demand from the Aerospace market was more than offset by reduced shipments of material to the medical market. We expect sales of titanium products to the Aerospace market to remain robust, while sales of titanium products to the medical market will remain under pressure. Ceramic sales of $25 million were essentially flat with a year ago. Increased sales of ceramic cores were offset by reduced sales of structural ceramic to the industrial market.

Now I would like to turn the call over to David.

Thank you, Anne, and good morning. Sales in the third quarter were up 26% to $538.4 million. Excluding surcharge, sales increased 2% from a year ago due to increased shipments and higher base prices, which was partially offset by a shift in product mix. Gross profit in the third quarter increased to $127.9 million from $124.1 million a year ago. This was an all-time quarterly 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 a period of escalating raw material prices. During the quarter nickel prices on the London Metal Exchange averaged almost $19 versus $6.70 in the third 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 resulted in an unprecedented level of surcharge revenue collected in the quarter. Surcharge revenue in the recent third quarter was $154 million or equal to an annualized rate of almost $600 million. The 209% increase in surcharge revenue collected during the quarter diluted gross margins by approximately 580 basis points versus the third quarter a year ago.

Gross margins are further impacted in an environment of escalating raw material prices from the lag effect of the surcharge mechanism. We estimate that the lag effect impacted gross margins by approximately 150 basis points in the recent third quarter. We expect that a significant amount of this lag effect will be recovered in subsequent quarters.

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 200 basis points in the third quarter versus a year ago. The underlying improvement reflected a continued focus on cost controls, increased shipments and higher pricing. Selling and administrative expenses in the recent third quarter were $32.2 million or 6% of sales compared to $31.8 million or 7.5% of sales in the same quarter a year ago.

Other income in the quarter was $6 million compared to $4 million in last year's third quarter. The higher level of other income is primarily due to increased interest income from higher balances of invested cash. The tax provision in the recent third quarter was $29.4 million or 30.6% of pre-tax income versus $29.6 million or 32.7% in the same quarter a year ago. The tax provision in the recent third quarter was favorably impacted by the settlement of a state tax audit.

For fiscal 2007 we now expect the tax rate to be approximately 32%. Net income of $66.6 million or $2.53 per diluted share was a third-quarter record and compared with $60.8 million or $2.32 per diluted share in the quarter a year ago.

Turning to the balance sheet, Accounts Receivable were $63.3 million higher than a year ago due to increased surcharge revenue. However, day sales outstanding improved to 44 days from 46 days a year ago. Inventories of $258.3 million were $3.8 million lower than at the end of last year's third quarter. The decline in inventory reflects our ongoing efforts to improve manufacturing processes and manage working capital. For the quarter free cash flow was $20 million versus $53.3 million in the quarter a year ago, and for the first nine months of fiscal 2007, free cash flow totaled $101.2 million versus $95.8 million for the same period a year ago. We believe that free cash flow will be approximately $200 million in fiscal 2007.

Capital expenditures in the quarter totaled $13.2 million as compared to $3.5 million in the previous year's third quarter. During the first nine months of this fiscal year, capital expenditures totaled $27.8 million versus $13.7 million in the same period a year ago. We anticipate the total fiscal 2007 capital expenditures will be in the area of $45 million.

I will now turn the call back to Anne.

Thank you. We are very pleased to be completing what should be another record year of earnings, which largely reflects our ability to continually improve our manufacturing efficiency. Our end-use market diversification is also contributing to this record performance as the temporary inventory adjustments in two of our key end-use markets was more than offset by growth in several others.

In addition, we are further capitalizing on our market opportunities by placing a greater emphasis on surveying customers such as the renewed marketing efforts to the oil and gas sector. And we continue to intensify our research and development on products and processes in order to further our reputation as a leading developer of specialty materials. We are all excited about our new product opportunity such as our patented Custom 465 alloy, which has among the highest strength, fracture resistance and corrosion resistance of all stainless alloys. We feel that this product could have tremendous potential in several end-use markets.

Our announcement on Wednesday, which highlighted the appointment of Dr. Sunil Widge, a Senior Vice President and Chief Technology Officer reporting to me, will ensure that our research and development efforts are maximized and directed towards our customers' needs. I know I'm personally excited about having Sunil in this position that I believe is so key for our Company.

We are also focusing on investing in our business, including a $16 million upgrade of our hot rolling facility which will increase reliability and improve our yields. This investment, in addition to our $115 million expansion of the premium melt capacity, will allow us to better serve our customers and position us for further growth.

Lastly, I want you to know that we remain committed to returning capital to shareholders. Today we announced a 33% dividend increase, which is a reflection in our confidence for the company to continue generating meaningful free cash flow. We also began the repurchasing of shares during the quarter and remain committed to the $250 million authorized by that program.

Also on Wednesday we announced the elections of Dr. Philip Anderson and Robert McMaster to our Board of Directors. Both Phil and Bob have distinguished careers and deep expertise that will be invaluable to Carpenter. I'm very optimistic about our future, and I know that the Carpenter team will continue rewarding shareholders with exceptional returns.

Operator, we will now open the call to questions.

(OPERATOR INSTRUCTIONS). Gregory Macosko, Lord Abbett.

Just with regard to the auto and truck business, what is your expectation there? Is that primarily overseas growth, and do you expect any recovery in the United States?

Well, in terms of the growth, the answer to both your parts of the question are yes. We are experiencing increasing demand both in Europe and Asia, so it is international growth. And there is material substitution as engines have to run hotter to meet the demanding regulations that are here today and are anticipated in the future. So it is a bit of both, and we expect this to continue.

That is just the overall market. Although right now truck is slowing a bit, but overall we just expect the growth to continue.

And then finally, with regard to the medical market, those sales were down and you talked of an inventory adjustment. Can you normalize that and give us a sense of what the core growth might have been without the inventory adjustment?

On the medical side, I think that the markets are continuing to perform well, and we continue to see procedures, which is a good barometer for our product increasing at approximately a 10% rate. In our titanium business, we see the supply chain adjustment probably going out another couple of quarters, whereas in our specialty alloy operation, we believe that may be one more quarter before that starts to correct.

Yes, the other thing for me, as I have gone out and visited with customers, I'm so thrilled and excited about applications that are not only here today, but new applications that are opportunities for the quality of life in the future. So we remained optimistic about the market in the future. To put a more exact number on that right now, I think Dave gave our best estimate.

David MacGregor, Longbow Research.

Congratulations on the record results. As you enter the energy market, the oil and gas market, my guess is there are specific products that you're really focusing the bulk of your resources on. Who are the incumbents in that market? Who are you competing with? Who are the guys that you're trying to displace?

Let me try and take a crack at that question. First of all, from the energy standpoint, it is a very strong market as I think you all well know. It is a market that we targeted for long-term growth for Carpenter. It is a global market, which is right up our alloy. We have spent a great deal of time technologically working with the OEMs to get our products approved and we have been successful on that, and we're starting to reap the benefits of that as we move through our third fiscal quarter, and we expect that to continue down the road.

The applications we're talking about are downhole applications in large part. We have more hostile environments and more difficult drilling requirements. Again, that is right in our sweet spot.

As far as our competitors, we're going to this market basically through distribution. Our competitors are the usual cast of characters that we compete against all the time. The special metals would be Allegheny and so forth.

Okay. And then one of those competitors on their recent call had talked about a new alloy that they I guess have had for quite some time and are now beginning to promote as a substitute for 304 and 316. Is that -- you talked about the 465 alloy, I just was not clear. Is that being promoted now as a substitute for 304, 316, or do you have an alloy that you are seeing grow in terms of demand as people try to avoid the cost of higher nickel?

Custom 465 is a premium product for Carpenter. We spent a great deal of time developing that alloy. We're having great success in the market introducing that. It started out as an Aerospace alloy, and we're now transferring that and cross-selling it into other markets. So there are many applications for 465. It is definitely not a replacement for high nickel alloys.

As far as the other discussions on substitution, people moving to the 200 series and so forth that has been discussed a great deal at recent industries get-togethers and I know on other conference calls, that is largely a flatrolled phenomenon from our perspective. We have not seen a significant effort on the part of customers to move to 200 series products within our range of products. Remember we are basically a long products producer, and most of that substitution is going on the flatrolled side.

I will say that there is a lot of activity from customers. We're working with them technically to help them mitigate part of the increase in nickel price increases by moving the different alloys and so forth. But an awful lot of our business goes into critical applications and being able to shift to something with lower nickel just is not practical at tis point in time.

The one area where we have seen some development along those lines, which again is relatively small, is in the stainless rebar market. We have booked some recent orders moving to a lower nickel stainless rebar product, which we have developed and we are in the process of introducing into the marketplace. And we're very positive about the outlook of that product as we go down the road here for bridge applications and so forth.

Is the profitability of that substitute roughly equivalent with the 300 series, or is there a notable difference?

They are on a par.

Sanil Daptardar, Sentinel Asset Management.

Could you just expand on the opening commentary, the temporary pause in the upward cycle of the Aerospace market? Is it something to do with inventories or how long that temporary pause will last?

As far as the Aerospace market goes and the pause we talked about early on, I guess there's two factors really that are impacting this. First of all, let me just underscore that we are very optimistic about the long-term trend in Aerospace.

If you look at the build rates between Boeing and Airbus, if you look at military spending, if you look at load factors on airplanes, revenue passenger miles, all those statistics confirm our long-term view of this market and also confirms our decision to invest in this business through our capital expansion that we announced last quarter. Okay?

As far as the pause that we are seeing currently, if you go back and look at prior Aerospace cycles, in a sense there's nothing new in this cycle. It is a stronger cycle. It is lasting a little bit longer, but typically during the cycle the market kind of stops, pauses and catches its breath. And what has happened is two things.

If you think about the last 18 months, material was scarce, prices were moving up. In that kind of environment, the supply chain in Aerospace basically tends to over order, and you see a billed in inventory. Eventually it gets to a point where there is a better view of what future demand is, and inventories begin to adjust, and we're seeing the effects of that currently, which is nothing different in this cycle than in prior cycles.

The other important issue to keep in mind is the price of nickel. Obviously with nickel up above $20 a pound, our customers throughout the Aerospace supply chain and another supply chains are taking a very careful look at their inventory, their ordering patterns and so forth, and the net result of that is they want to run leaner from an inventory standpoint. They want to order in smaller bites, if you will, and I expect that to continue here over the next quarter.

And you talked about one of the key customers sourcing from a subsidiary. Now this is like a lost business permanently, or do you think you can recover some of the business back from that key customer? And that business you are going to target towards the oil and gas market, if you think that the demand in Aerospace is coming back, are you going to shift that -- shift the shipments from oil and gas market back into the Aerospace market?

With respect to the lost customer, we do believe that the majority of the business that we lost will be permanent. They do intend to procure that material from their recently acquired affiliate, and while we will continue to supply them and they are a very valued customer, we do view that the loss will be somewhat permanent. So I think that is a permanent loss. On the energy side, we believe that the opportunities there will more than offset that. And, as we said in the call, we have already offset the loss that we suffered.

And I would like to add to that, last quarter we announced increase in our capacity of premium melt. So we will support customers both on the energy side, as well as the growing Aerospace part of the business. Denny, did you want to add something?

Yes I just wanted to underscore what Anne just said. We're totally committed to the oil and gas business for the long-term. We have planned our capital spending program around that commitment, and there will be no decision -- we're not going to be trading back and forth between markets going down the road.

Okay. And just a follow-up on both of those, basically in terms of the margins, if you look at the Aerospace and oil and gas business, where do you think it can make higher margins? Is it in the oil and gas business?

Both of those product lines, both of those markets are at the top of our margin chain, and the margin differences are nominal, but both are very high and well above corporate average.

Anthony Rizzuto, Bear Stearns.

I was wondering, you made reference to Asia on several occasions. I'm wondering if we should read from the moves on the dividend and the modest share buyback but a more major share repurchase program, does this imply that you guys are not finding any attractively priced acquisition candidates right now?

No, you cannot imply that. As we have said before, when we announced back in September that this Company is going to grow and acquisitions are a part of the strategy, there are quite a few opportunities that we are studying and that we will continue to study, but right now we're not at the point that we can announce anything. So you really cannot read anything into that.

The other thing is that I want to just stress once again that we have the resources in our Company to grow. We have the resources, and we're investing in the resources to grow organically, and we do have the talent in this Company to go forward with acquisitions when we identify the right ones for our customers and our business.

And by those comments, is it possible that Carpenter maybe will look at a greenfield facility perhaps in Asia or somewhere else internationally?

At this particular point in time, I'm not prepared to give any more details. When we have these fully finalized, we will come out and add some more specificity to our plans. I'm just not prepared to do that today.

All right. I can appreciate that. The other question on the nickel-related side, are you guys seeing any delays in major projects because of the nickel price impact? I want to hear a little bit more about some of your commercial successes. I know you guys are working with nitrogen injection, some other things in your melt capacities. But can you give us an idea of what you're seeing in terms of effects on maybe longer range projects?

Okay. I'm going to let Dave or Denny address nickel because that is something that you can understand we have had many conversations and phone calls on.

I don't think the price of nickel at this point is delaying projects. I think that it is more having an impact that when customers are developing those projects or increasing the scope, they are really keeping their inventories of nickel as lean as possible. But we don't see people saying we're not going to build this plant, we're not going to build this engine because of the price of nickel, nor are we seeing people canceling orders because of that impact.

And then with respect to the other issue about what you guys -- I want to hear more about some commercial successes and what you may be doing internally to reduce the amount of nickel in your alloys.

Let me talk about commercial successes first. As you take a look through the comments we have made or just think about those for a minute, the oil and gas business, the fact that we targeted that market in reaction to what we saw developing in the Aerospace market and our overall plans to grow the business, I would rank as one of the top areas, okay?

When you look at new products, our commitment to new products that Anne indicated, is certainly at the top of the list. We have spent money to reinvest in our R&D function. We're also improving our resources, our human resources in that function, not just with Sunil's promotion but also with what we're doing within that whole technology organization to build really for the future with new products and the introduction of new technologies.

As far as the introduction of new technologies, when you look at nickel usage within our facilities, obviously as a buyer of nickel, a big buyer of nickel, and our raw material costs going up that rapidly, we're working very diligently to try and reduce the impact on our Company from those increase costs.

So there's a lot of money being spent and a lot of technology going into heat mix adjustments that we are making, the whole operations of our hot end, the products we're taking, our marketing efforts and so forth, all to reduce the impact of these rising nickel costs, which we think over the long-term will stay high by historical levels.

If you look at our capital spending program, a lot of the capital we're spending has been designed around technological advancements to reduce the impact of nickel going forward and to enhance the quality of our products as well. Does that get at your question, Tony?

That is great. I appreciate it.

Okay. I would just add one thing to Dave's comment then as far as the projects and so forth because you and I talked a few weeks ago on this subject out in Pittsburgh, and I did indicate there were some projects that were being reduced. Just to clarify, at that point I was speaking as an industry representative, not a Carpenter representative.

Alright. The one part of Carpenter that I would comment on, and it is a relatively small part of our business, is that stainless rebar business. And there is some bridge activity, which has certainly been postponed, and there are some engineers who are relooking at stainless because of the current cost. Recognizing that that is another example of what I would characterize as a commercial success. We have developed a lower nickel-containing stainless alloy in rebar form, which we are very actively marketing and which we have had success during the third quarter in booking business.

[Fran Osanuskie], [Fresch Associates].

I would like to just follow-up on the Aerospace commentary. Is this pause as you say more of an effect of OEM demand from a certain OEM having some demand issues of their own? I can appreciate and I understand the frenzy ordering activity a year or so ago and the nickel commentary you gave, but I'm just trying to dig into this a little bit deeper.

It is Dave and perhaps Denny can comment. I don't know if you're referring to is it an A380 Airbus issue. I think --

Well, Airbus and perhaps some of their suppliers on the engine side.

The A380 clearly has had an impact on part of our business, but we see this to all with a lot of our customers whether it is jet engine, structural. Fasteners are up, in particular on the titanium side, but this is not a one airplane, one OEM issue. It is pretty across the board. All our customers are seeing it.

I think Boeing on a recent call actually mentioned that fasteners were in very tight and short supply.

Yes, there have been articles. They have mentioned that. There is an article on the front page of the Journal when they were concerned about the fastener industry's ability to ramp up for their needs long-term. And there was a lot of commentary by the fastener guys as to whether they were prepared to do that. But that is not our -- but that was not directed to the mills and to the metals companies. We're prepared and have the capacity in place to meet the demand that we see on the backlog of planes.

Where does your demand exactly come from? Does it come more from the OEM, or does it come from the distribution channel? And does that make a difference in terms of any sort of pause?

No, I don't see it as a big difference between distributors and OEMs. Most of our demand would go through the supply chain basically from the mills. On the engine side, this is from the mills to the forgers to the engine makers to the commercial airplane builders essentially. I'm simplifying a little bit, but that is fundamentally the way that would work.

And on the fastener side, again from the mills to the fastener manufacturers and on up to the builders. Mike, do you want to say anything about titanium on fasteners there?

Yes, this is Mike Shor. Good morning. We are seeing very good growth in our Aerospace fastener business. As the 787 and A380 move forward, even if the A380 is pushed back somewhat, the titanium intensity of those airplanes is significant. So not only are there aircraft builds going on, but the intensity for titanium within the new aircraft is significant, which obviously will help us both now and into the future.

(multiple speakers). Just to close that out, when I look at the Aerospace supply chain on all the various tracks, this inventory correction we are talking about is not something that is singularly at the OEM level. It is pretty much throughout the supply chain. I think it relates to the overheated buying over the last 12 to 18 months coupled with where nickel prices are today.

Would we be seeing this so-called pause if some of the OEMs, Airbus, Rolls-Royce were not seeing some demand issues? If they were hitting on all cylinders much like Boeing, ramping production, what kind of environment would we be in?

I think we would still be seeing the same phenomenon. It might be slightly lesser impact, but I think we are not -- again, this is not just an Airbus A380 issue. I think this is pretty widespread.

Keep in mind, we are at record levels. We are coming off of a record year, and so a little bit of stability at this level before the next acceleration is not all that troubling to us.

Right. No, just sort of given that, what is your best view or your forecast? When do we cease any kind of resumption of demand, if you will, from this pause, if you will? When does that start to take place?

I think you would see that in the beginning of our next fiscal year. (multiple speakers) -- Q3, Q4 of the calendar year.

Dhaval Patel, Columbus Hill.

I just wanted to clear up, because I thought the initial comments were you seeing some kind of inventory adjustment in nickel in Aerospace. So it is also in the titanium side as well?

No.

No, we're seeing significant demand on the titanium Aerospace fasteners for structural applications. Again, it is both the plans are being built, and it is the titanium intensity of those planes.

Exactly. I just want to clear up what was just said. Then the inventory adjustment that you're referring to is more on the nickel side, the nickel product side going into engines?

Correct.

And also I would think that the A380 would have already flowed through in terms of all the delays. In fact, you should probably actually start seeing a pickup from them eventually getting their act together and starting to produce some more airplanes. Because the delays have been announced for some time now. So I would have thought that the impact from the delays would have already been through your numbers for the past few quarters.

Yes, I was pointing out that what we are seeing on the nickel base side is not A380 related. I think when they do start to build -- now they pushed the schedule out, and they then decreased the numbers per year, so that not only do they start later, it's going to be less intense earlier. And there were a lot of products being supplied into the supply chain in advance of that. So I think the acceleration that we will see from the A380 is going to take a little while to come through.

[Greg Coolis], [Brentcord Advisers].

The question I had sort of generally, a competitor or someone in your space recently on their call had talked about the significant amounts of capital expenditures and capital projects that they are doing to ensure that they have the requisite supply to prepare them for the tremendous amount of demand coming out of the Aerospace market and also conversely the large amount of continuing demand in oil and gas.

And the question I have is, can you elaborate a little bit about how you are preparing Carpenter for the tremendous amount of demand that is expected to come from commercial Aerospace? Do you have that? Is it something that you will have to acquisitively acquire, or do you have -- I guess just basically talk about how you are positioning the Company to deal with that as it comes so you will be able to exploit it?

We will not need to acquire anyone to meet the demand that we see coming from Aerospace. The announcement we made last quarter of our significant expansion in premium melt here in Reading goes a long way to making sure that we have the capacity in place to get our fair share of the growth in that market. There will be other capital additions we will need to make over the next three to four years to support that growth. Those are being worked on and developed as we speak, but we see ourselves well-positioned from a capacity perspective to enjoy that growth.

And do you foresee needing to on the supply side in terms of titanium either sponge or ingots titanium scrap, do you foresee that being at all an issue and any of your other products as well?

This is Mike Shor speaking on the titanium side. We're not the melter. Therefore, at this point, we don't have need for sponge. We acquire our ingot out in the market, and as you know, the A380 pullback has led to more supply being available, and we watch that very carefully to determine as we move forward whether we continue to acquire on the market or whether we would invest in facilities. We watch that very carefully. As you know, sponge and melting investment has been significant in the industry, so we are monitoring closely.

Okay. And then finally, you had talked a lot about oil and gas. Do you foresee -- the current mix of your business, roughly 41% or so of your revenue, is exposed to the Aerospace market. Do you foresee at all a mix shift whereby Carpenter would be more heavily weighted towards oil and gas to Aerospace, or do you see the percentage exposed to Aerospace increasing? Just sort of your mix shift and how you foresee the revenue depiction of the Company going forward.

Yes, I think Aerospace will continue to be our largest market and will probably increase as a percentage as will energy. We see those two markets growing much faster than the overall portfolio. So I think that we will become more Aerospace and more energy focused, which is where the premium products are, and that is what we're investing to produce.

Michael Gambardella, JPMorgan.

It is actually Nathan Zimbalist for Michael. I have a question regarding LIFO. What can we expect with the June quarter being your fiscal fourth quarter? Can we anticipate any sort of year-end catchup or true-up with LIFO, assuming nickel remains around $22 a pound?

On LIFO there would be no catchup for Carpenter. We use the method that really all the effects of the inflation in the quarter are in our numbers. So there would be no catchup. That is different than one of our largest competitors who uses a different method.

What we can say is that, as high as nickel was in our third quarter, it is already up $3.00 to $4.00 from that level. It is at 22.75 this morning. So that we would expect if that were to continue, that there would be another significant LIFO/FIFO difference in our fourth quarter. But that would only reflect the inflation in the fourth quarter versus the prior quarters; it would not be a catchup.

Okay. And something along the magnitude of this $50 million this quarter, 53?

If nickel were to stay right at 22.75 and the other materials were to stay where they are at, cobalt, moly and, of course, titanium, we would expect that number to be in the approximate same area.

Anthony Rizzuto, Bear Stearns.

Just a couple of housecleaning items just for our model. From SG&A standpoint, I saw that come down nicely in the quarter, 6% of sales. Was there any kind of onetime item in there, and is this sustainable that we should use or assume that level?

And the second question regarding the tax benefit seemed to be -- I know that you have readjusted the tax rate guidance, but there seemed to be a tax benefit in the quarter if you can quantify it.

The tax benefit was a couple of million dollars, and that was from a state tax audit that was successfully resolved. So I think 32 is the number you should put into your model for the full year, Tony.

On the SG&A, I would direct you to dollars. With what is going on with our revenue, I would be cautious to give you any metric as a percent of sales. So you see that we typically clip along in that 120 to $130 million on that line. We have great discipline in how we spend money. There's a little bit of moving pieces. We have lower compensation this year, a little bit more growth-oriented investments. But that number is -- I would focus on the dollars, not the percent at this point. Because if nickel goes to 30, that percentage is going to drop again. Okay?

Leo Larkin, Standard & Poor's.

Could you give us any guidance for CapEx and DD&A in fiscal 2008?

Well, I can give you D&A. That should be right around $50 million or so, which is not too much higher than this year.

What I can say about '08 CapEx is it will be substantially higher than what we are spending this year principally because of our announcement last quarter on our premium melt project. We're in the process of finalizing our annual plan for 08, as well as our strategic plan, and I think we will be able to give you a little more color on CapEx for '08 early in next year, next fiscal year.

David MacGregor, Longbow Research.

Just a question regarding titanium. You had indicated with the A380 pullback that you were seeing an increased supply of titanium ingots. I am just wondering if you're starting to see -- what kind of pullback you're seeing in pricing on those ingots and if that is going to benefit the profitability of that business line for you?

David, spot ingot prices certainly are drawing down from the peak. We've had the pullback in the A380's. I said also there is significant investment in sponge and melting. The bottom line, though, is we all know with 787 coming online and the A380 coming online that the potential is it could move either way.

So again, we watch it very carefully and really cannot determine exactly where that is going to be.

I can tell you the average prices at September '06 for titanium ingot were $31 versus December '06, $29.75, and the average for March of '07 was $27.

Sanil Daptardar, Sentinel Asset Management

Yes, just on the industrial market, you had a very strong quarter in the industrial market. Obviously there is some talk going on, and we see that the manufacturing activity is declining. How do you see -- can you give any color how you see the market shaping up?

The industrial market for us is very strong. As we have said for two quarters now, that is being led by some Katrina rebuilds, and that long-term we do not see the rate of growth that we have seen in the last few quarters as being sustainable. And so we do think Q4 will be another good quarter for us, but long-term we do believe that goes down to closer to slightly above GDP.

Matt McGeary, Sentinel Asset Management,

When you're looking at your expansion plans, particularly for '08, obviously there is a lot of tightness in many of the metals markets. It is tough to get qualified machinists. Are you seeing the equipment that you need to purchase? Any delays from your suppliers on that front? Do you see any delays in getting your expanded capacity up and running in the timeframess you were anticipating?

At this point in time, we are not seeing any significant delays in our capital projects. We expect to bring them on essentially in the original timeline and within the budget that we established for them.

Dhaval Patel, Columbus Hill.

It looks like everybody has a follow-up with you guys. I just had a follow-up on the ingot pricing going back to it. Has the decline in ingot been related to just more ingot availability, or do you think it's more related to the general market of sponge and scrap coming down?

I think it is both. I think supply and demand are more in balance than they were in before, and I also think there is significant investment in sponge capacity in the world that makes not necessarily right now but as we move forward the availability in the future there. So I think it is current dynamics and future investment.

Okay. And do you have special contracts with your customers that -- I mean your suppliers -- that as the sponge and scrap comes down, it should benefit you? How is that determined, or is it just based on market price?

It is a combination of all of the above. We have both long-term business and transactional business, and we utilize both to understand how we best serve the needs of the customers as we are giving them the product.

I would now like to turn the call back to Ms. Anne Stevens for any closing remarks.

Thank you, operator. We would like to thank all of you today who participated in the call and extend our wishes for a great weekend for all of you, and look forward to talking with you at our next quarterly conference call.

Ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.