Carpenter Technology Corp (CRS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Carpenter Technology's earnings conference call. My name is Angelique. I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Mr. Jaime Vasquez. Please proceed sir.

Good morning. Welcome to our conference call for the period ended September 30, 2007, the first quarter of Carpenter's fiscal year 2008. This call is also being broadcast over the Internet.

With me today are Anne Stevens, Chairman, President and Chief Executive Officer; Doug Ralph, Senior Vice President of Finance and Chief Financial Officer; Rick Simons, Vice President and Corporate Controller; from our operations, Mike Shor, Senior Vice President of our Premium Alloys Operations; and Mark Kamon, Senior Vice President of our Advanced Metals Operations, as well as 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, 2007 10-K and the exhibits attached to these filings.

Before I turn the caller Anne, let me take a moment to mention our recently announced realignment of our reportable business segments. This was done as part of our strategic initiatives that will allow us to focus more effectively on end use markets, customers and operational excellence goals. Historical information by these new segment is available in the 8-K that was filed with the SEC on October 11. If there are any detailed tracking questions, please follow up with me after the call. I will now turn the call over to Anne who will start with a brief overview.

Good morning everyone. Fiscal year 2008 if off to a very good start. We were able to achieve record results in the first fiscal quarter, primarily as a result of our focus on higher value material. Also contributing to the record quarter was a significant increase in pounds shipped of premium alloys to the energy market, which more than doubled from a year ago. Now while I am pleased with the results, I see more opportunity to improve our performance through a greater focus on operational excellence.

We have many of our most talented people focused on improving throughput, yield and waste reduction. I'm convinced the manufacturing efficiencies that we will gain, combined with our renewed customer focus and the projected growth in our key end use markets, will provide strong returns for shareholders.

Now along these lines I am very excited about the joint agreement we signed with TIMET last week. This is a collaborative effort that allows us to better utilize available capacity. Furthermore, it enhances our competitive position in the aerospace and medical markets by allowing us to provide long-term titanium supply to our customers. This agreement with TIMET is an element of our growth plan to develop strategic alliances that leverage our core competencies and provide mutual benefits for us and our partners.

We are continuing to explore these types of arrangements in the United States, in Europe, in Asia and the Middle East. I strongly believe that this industry must find ways to better utilize existing assets and avoid excess investment.

Now let me turn to a review of our end use markets, after which Doug will highlight some of the key financial factors that came into play this quarter. Then we will take your questions. I'm going to talk about results comparing the first quarter of this fiscal year against the same quarter a year ago, excluding surcharge revenue in order to adjust for the impact of changing nickel prices.

Let me start with our fastest-growing market, energy, which generated an 89% increase in sales to $44 million. Sales to the oil and gas sector of the energy market were up 56% to $22 million. Increased oil exploration activity, coupled with more demanding material requirements, has fueled strong growth for our portfolio products, particularly in Europe and Asia. Additionally, strong demand for our nonmagnetic drill collars helped drive the increase.

We also experienced robust growth in the power generation sector of the energy market during the quarter. Power generation sales increased 140% to $22 million due to a solid pick up in demand for industrial gas turbines, particularly from the Middle East. Both of these businesses have very good potential going forward, although due to higher based period comparisons, we don't expect to continue at the 100% plus growth rate.

Our sales to the aerospace market declined approximately 6% from a year ago. As we have been communicating, we were anticipated a pause in growth of our aerospace business through the December quarter. The decline in the first quarter resulted largely from a 24% decrease in sales of titanium coil used to make fasteners. Part of the reason for the large decline is that we had record shipments of titanium coil to the aerospace market in the first quarter a year ago.

Also, the recent quarter was affected by a combination of lean inventory initiatives in the European supply chain, and a rebalancing of inventory levels at several domestic fastener manufacturers. Partially offsetting the decline was a pick up in demand for our nickel-based alloys used in jet engine components, which increased 11% from the same quarter a year ago.

As we mentioned last quarter, and I mention it again with a much higher degree of confidence, we expect our aerospace business for the second half of this fiscal year to be up significantly from the second half of last year. Based on our current backlog and discussions with key customers, we see solid growth for our nickel-based alloys used in engine components.

We're also beginning to see evidence that there is a better balance of supply and demand for the materials used in structural components. Now we do not believe the delay in the Boeing 787 Dreamliner will have any significant impact on our business in the second half of our fiscal year.

Industrial market sales were $70 million or 3% lower than a year ago. The decrease primarily reflected a reduction in shipments of lower-priced stainless products sold through distribution channels. About 10 to 15% of our products goes through distributors. The reduction in pounds shipped through distribution channels accounted for almost two-thirds of the 9% line in total Carpenter volume during the quarter.

Sales to the automotive market increased 3% to $40 million from a year ago. The increase was due primarily to demand for higher value material that customers need for technology changes in engine and exhaust systems. This was offset by lower automotive production levels and by our decision not to participate in certain marginally profitable businesses.

Our sales to the automotive market are a good example of the type of mix change we experienced during the quarter. As an example, we had a reduction in pounds shipped of rods used in exhaust system hangars, which sell for about $1.25 a pound. In its place we sold high-temp wire used for automotive fasteners, which sell for about $5 to the $6 a pound, although the pounds shipped were less than the lost rod business.

Consumer market sales were $29 million or 7% lower than a year ago. The lower sales for materials used in appliances, thermostats, and other housing applications are indicative of the downturn in the U.S. housing market. Additionally, we sold less 300 series stainless products, which was partially offset by increased sales of higher value material sold into the sporting goods, electronics and non-U.S. housing market.

Sales to the medical market were up 5% to $28 million. The gain reflected a pick up in demand in Europe, which was partially offset by continuing inventory corrections in the U.S. Now we still expect our medical market sales to be challenged over the next few quarters as the supply chain continues to work down inventory.

Finally, Carpenter's reported sales outside the United States increased 28% to $157 million in the first quarter compared with $123 million a year ago. The increase reflected gains in the energy, industrial and medical markets. We remain focused on our key initiative of growing the business internationally by carefully and thoroughly exploring new market opportunities. Let me turn the call over to Doug who will review the financial performance.

Before I review the financial results for the quarter, I would like to cover one subject more generally. This is the impact of nickel and other raw material prices on some of our reported numbers and results overall. This might be complex to understand outside the Company, as we're reporting LIFO income in the first quarter of $14.5 million compared to a LIFO expense of $26.2 million in the year ago period.

In addition, the impact of current nickel and other raw material prices results in surcharge revenue of $137.5 million this quarter, which is substantially up from a year ago period, but below where this was in the fourth quarter of last year.

These impacts are mostly a function of nickel prices, which averaged $13.70 per pound based on the LME prices for this year's first quarter versus $13.23 per pound in the year ago period, and $21.80 per pound in the fourth quarter of last year. As most of you know, we have a surcharge mechanism in our customer pricing that in general offsets any change in nickel costs with a one month lag effect.

The points I would like to emphasize from this are the following. First and foremost, except for the usually modest impact of the lag effect, our total dollar gross profit or operating profit will not be affected by either changes in nickel prices, the amount of the surcharge, or by the LIFO entry that we record on our books.

In addition, we will continue to quote our revenue results, both including and excluding the surcharge impact, since this will give investors a clearer picture of what is going on with our business. Along the same lines we will also focus our discussion of margin performance on the numbers excluding surcharge impact, since this is the most meaningful and consistent measure of our performance in that regard.

With all that as backgrounds let me now turn to our results starting with the income statement. First quarter sales were up 17% to $475 million. Excluding surcharge, sales were up 3% from a year ago. Overall pounds shipped were down 9% from a year ago, so the uptick in revenue is primarily due to increased sales of higher value materials.

Gross profit improved to a first quarter record of $121.4 million, which is up 17% from a year ago level of $103.9 million. The higher gross profit reflected a richer sales mix, the benefit from the lag effect in our surcharge mechanism, pricing actions and cost containment.

As you saw from our press release, one offset to this was a $4.6 million dollar reserve we established in the first quarter for potential duty drawback claims. This stems from issues that we and others in the industry have had with a licensed broker we used to handle this activity, and involve the inadequate documentation of claims, much of which is housed at our suppliers. We're cooperating with U.S. Customs and have engaged a new broker to review all individual claims and assemble the appropriate documentation where available.

Adjusted for the surcharge effect on revenue, the positive lag effect from the surcharge mechanism, and the duty drawback reserve, our estimated gross margin would have been 35.7% in the first quarter compared to 33.6% in the year ago quarter.

A major contributor to this margin improvement is mix. Our more strategic and higher profit markets of aerospace, energy and medical accounted for a higher percentage of shipments, almost 60% in the quarter, so we are focusing our growth in the right places.

In addition, within some of the other end markets we are focusing on the higher performing, higher margin segments of the business and less so on the lower profit, more commodity, market segments.

The one comment I need to make about the margin contribution from mix is that this is a complex area. We produce hundreds of grades of materials with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers. And there are also times where it makes financial sense for us to take on certain lower margin volumes where we have the available capacity.

We do expect to see positive contribution from improved mix in our margin performance over time, but the impact by quarter will fluctuate, and the year to year comparison will not always be as high as we saw in the first quarter.

Continuing down the income statement, our selling and administrative expenses were $4.9 million higher than the same quarter a year ago. We have been investing in filling certain key positions and other initiatives to support our growth goals. In addition, there is a higher variable compensation accrual in the first quarter this year, which reflects our expected earnings results and the impact of a higher stock price.

Operating income of $85.7 million was a first quarter record and compared to $73.1 million a year ago. Adjusted for the impact of a higher surcharge, the lag effect, and the duty drawback reserve, estimated operating income as a percentage of sales would have been 25.2% in the quarter compared to 24.1% a year ago.

Our income tax provision in the first quarter was $28.8 million or 33.3% versus $22 million or 30.1% in the same quarter a year ago. Note that the year ago rate was favorably impacted by the reversal of certain deferred tax valuations allowances. We expect that our full year tax rate will be about the same level as the 2008 first quarter.

Finally, net income of $57.7 million or $2.24 per share compares to net income of $51.2 million or $1.94 per share in last year's first quarter. The per share numbers, of course, are prior to the two-for-one stock split that we recently announced, which will be effective on November 15.

Anne has already taken you through the result results by end market, but let me just quickly review our sales and operating income performance for our two major operating segments. In our Advanced Metals business sales, excluding surcharge of $225.7 million, were down 2% versus the same quarter a year ago on 14% lower volume, primarily in automotive and industrial. Operating income for the segment of $48.9 million was 20% higher than last year. The results are reflective of our continued focus on sales of higher value materials.

In the Premium Alloys business, which as we have said is almost 90% aerospace and energy, sales excluding surcharge of $88.6 million were 30% higher compared to the same quarter last year on 27% higher volume. Operating income for the segment of $36.5 million was 17% better than a year ago. The higher sales and operating income largely reflect the strong growth achieved in the energy market.

Let me also give you a few numbers on our first quarter sales results by major pipeline. Special Alloys, which our high temp and high nickel products, had sales in the first quarter of $252.3 million, which is up 49% including surcharge and up 16% excluding surcharge.

Our stainless steel products had sales in the first quarter of $136.6 million, which is down 5% including surcharge and down 3% excluding surcharge. Finally, our titanium products had sales in the first quarter of $42.5 million, which is down 11% both including and excluding surcharge.

Moving on to a few comments on some of our other financial measures. Free cash flow for the quarter was $24 million versus $51 million a year ago. The main driver of the year to year change is higher networking capital due to higher inventory levels. Some of the increase in inventory will help support expected sales increases in the second half of our fiscal year. And there's a higher value on our inventory because of the mix of product we're selling. But there are also actions we can take to manage our inventory better, which you should see reflected in future periods.

Capital expenditures of $18 million were higher than the same quarter a year ago due primarily to the expansion of our premium melt operations. We still expect capital spending for the year to be in the range of $150 million, and overall free cash flow for the year to be approximately $100 million.

Our cash and marketable securities balances at the end of the first quarter was $538 million, down from $674 million at the end of last year. This primarily reflects our aggressive share repurchase activity during the quarter. Specifically we repurchased $158 million, or 1.3 million shares, of our common stock in the first quarter at an average price of $117.51. As of September 30, 2007 we have repurchased a total of $187 million of our common shares against the current Board authorized $250 million buyback program.

During the quarter we announced that we have entered into 10b5-1 training program which allows us to be active in the market through routine blackout periods.

With that I will now turn the call back to Anne.

I have to say I am pleased about how we began our fiscal year. Although our results were good, I'm also mindful of the opportunities ahead, most especially in driving operational excellence. What I am most impressed by in my first year at Carpenter is the drive and the enthusiasm that people at all levels are bringing to the effort. And that sense of participation extends to the Board of Directors. The Board recently formed a Science and Technology Committee comprised of Dr. Jeffrey Wadsworth, Dr. Philip Anderson, and myself. We all recognize that technology, innovation and our people are the keys to the long-term growth of this Company.

To help drive our strategic growth we brought Sanjay Guglani onto the team as Vice President and Chief Marketing Officer. Now this is a newly created position focusing on strengthening customer relationships and our market understanding, as well as helping us to expand Carpenter's sales and business operations globally.

Sanjay most recently served as Vice President of Marketing, Business Development and Strategy at Textron's Flue & Power subsidiary. At his role at Textron Sanjay was responsible for delivering growth, accelerating innovation in a complex business with substantial global operations.

In summary, we have room for continued improvement in operational excellence. We have momentum in our energy market, and we expect to see solid growth in our aerospace business in the second half of the fiscal year. That is why I believe we are well on the way to another year of record performance for our shareholders.

Operator, we will now open the call to questions.

(OPERATOR INSTRUCTIONS). Chris Olin, Cleveland.

First question, are you seeing anything different in terms of the Airbus supply channel buying more material, or maybe driving the jet engine purchasing? I am just wondering if that is getting any better yet?

Yes. The best thing that I can say is just looking at our backlogs and some conversations that I have had and my team have had with some of the suppliers in the chain, we're more optimistic that it is working its way down the system. And that the second half of our fiscal year will deliver the numbers that we said -- the growth with the back end of the year. We're going to start seeing our growth around the same level as the industry growth.

Second question. Is there too much titanium fastener feedstock inventory within the channel? I know there is some issues with ingot and other finished products, and I am just wondering what about your specific category, how is that looking right now?

I think some of that is -- there had been some constraints with the titanium fastener manufacturers as they were adjusting to more and different fasteners that they were producing through the new model. So until they were up and running, and they worked through some of the launch effects that they had, there was a backlog and the order pull was less than expected.

But with Airbus building the A380, and with going -- even though they have delayed the Dreamliner, overall the number of planes being built this really will give the titanium fastener producers a chance to balance and adjust to Dreamliner. So I believe from what we are seeing, both with conversations and backlog orders, it is beginning to flow.

I guess the last question I have is on the Dreamliner. I know you said you don't have really any concerns about that right now, but I guess there is definitely, I sense a growing nervousness out in the marketplace. I'm just wondering where does your confidence come from? Is it from talking to the suppliers? Are they still buying the metal for that jet? Can you give me a little more color on that?

When you look at the Dreamliner, first over the 787 volume is only 35 of the 1037 planes being built. The second thing from everything that I have heard with conversations, overall Boeing is going is going to be producing the same volume of planes. Once they get through the launch cycle and they are up and running, they are optimistic, as our their customers, for the demand of the product.

Coming from a past life in auto, I have experienced these types of launch issues. And the product is great. And the buying patterns of the customers and the orders are there. I just think it is a transitional launch period, and we will get through that really quickly. They are very confident of that as well.

Fair enough. That answers my questions. Let me just comment, thanks for providing the product category breakout. That was something I worried about and that is some helpful data out there. I would get back in the queue. Thanks a lot.

Thank you so much for pointing that out to us. We do appreciate that.

Timothy Hayes.

I would also like to thank you for the additional disclosure on the volumes and other sales. I guess on that note, we got spoiled in getting some volume -- year-over-year volume changes by your major markets, aerospace, industrial, etc. Could you give those for the September quarter please?

Just hold on one second. Doug is getting the information.

Bear with us here.

I could tee up a second question, if you would like.

Yes, why that you tee up a second question.

We are looking at it up for you. Thank you. What is your second question?

I just want to -- I am curious on your thoughts on seasonality heading into the December quarter versus the September quarter. What should we be looking for there on slower seasonal volumes because of the calendar?

I don't see any seasonal affect on our volumes in the second quarter. Where we -- it is more market demand pluses and minuses from inventory adjustments and different build rates and things going on. In the second quarter I see aero improving, but in effect what we have said is the back and the second half of the year is where we're really going to see all the corrections come off.

In terms of some of the other markets like consumer, yes, the U.S. housing market is down. But that is not necessarily a seasonal effect, it is housing starts, and that has other impacts going on in the financial markets, as well as the automotive. But our business is global. You realize over one-third of our business is international. And so affects going on in the U.S. are not necessarily the same thing that we are seeing in the other global markets.

Okay.

Doug, do you have volume numbers?

Yes, I do. For the first quarter our energy total tonnage volume was up 115% versus year ago, so consistent with the strong growth that Anne had mentioned. Medical was up a couple of percentage points. Aerospace was down double-digit. And the Other categories, automotive, consumer and industrial, were also in the mid double-digit decline range.

Last question. On the -- within your energy market we have heard some recent anecdotal information about the ethanol market starting to come off its boil rather quickly. Any comments on how that market is progressing?

From a past life I can talk about the ethanol market, but from this life I really can't comment. Does anybody else, team, have anything that they want to comment on ethanol? Mike?

It is Mike Shor. It is mainly flat-rolling again on our energy market. Where we focus in on and where the bulk of our volume is, is both on the power plant-based gas turbine power generation and on the oil and gas side, both exploration and then completion.

On the fuel system side some of the shift in automotive to use ethanol, as well as higher potential contents of ethanol, that plays to our strength because as you go more corrosive or higher in temperature then there is more of the need for our components. So from the automotive perspective it is a plus. From the energy production perspective, it will not impact us.

Michael Gambardella, JPMorgan.

You want to correct your name, Michael?

It is Michael Gambardella. I have a question on your contracts where you have a base price or a fixed base price or maybe indexed to some things. What percent of your sales will be up for renewal in terms of getting an opportunity to reprice the products at or around year-end?

Mike, do you have an estimate of -- I know this is something that you have been working on. Do you have a later estimate of how much is coming up?

Typically, not all, but typically our contracts have been one year contracts, and typically they come up quarter by quarter. It is not usually at the end of the year, but every quarter we have more contracts which are coming up, so we're doing those pretty much on a quarterly basis, not a onetime event.

Because I had thought that a lot of the aerospace contracts were on a calendar kind of basis.

We really leave that up to the customers. Some are but there are a fair amount that are not.

You are saying that the contract renewals are pretty much evenly spread out over the four quarters?

I don't have that in front of me. There are definitely some within each quarter, but I really couldn't give you an estimate as to how many come through each quarter.

Mark Parr, KeyBanc Capital Markets.

Congratulations. That's a great quarter.

Thank you. The team worked hard.

The market likes it too. I was wondering if you could give us an update on growth-related capital spending initiatives, an update on the new VIM Furnace and any other additional opportunities you have identified in the past several months?

Be the project in Reading, which is where we are investing 40% more capacity on VIM premium melting is tracking on time as reported. When I looked at the capital expenditures, as well as the physical construction on the site and equipment order rate, everything was tracking onetime. And as we said before, it is on track and it is on budget. And we expect startup and launch at the end of calendar year '08. So on time, on budget as reported.

Anything new or additional beyond the new VIM Furnace that you can talk about at this point?

Not at this point in time. When we did announce the addition in premium melt we had also announced the addition of the remelting, both in VAR and ESR. And we announced some control upgrades. In terms of other things, yes, there's a lot of things that we are looking at, still evaluating, but no major announcement.

Let me just tell you some of that has been around the drive on operational excellence. As we have gotten into some of our major facilities that were perceived as constrained and started driving overall equipment effectiveness, we have freed up some capacity. And that is always the first thing that you do is just to be sure that you have eliminated waste and don't over-facilitize. I would say I haven't paid money for additional capacity, but I have found additional capacity through the work of the OE teams on the floor.

I would like to ask another question, if I could. And this relates to the ongoing mix shift that you have been achieving. I think this is a trend that has been occurring for a number of years.

Anne, based on your understanding of the process, can you give us some color on where are you in the mix paradigm as far as how much richer could your mix get based on what your end market understanding is? And also is it conceivable that you could shift back into a lower mix arena if you chose to? Could you give us a little more -- but I'm more interested on the potential to further enhance the mix over the next 12 to 18 months.

I think the best thing to look at there is one of the first things that I did when I came on board was took a good look at the market opportunity, the growth in the markets we participate in and the availability for growth internationally. And we invested in the VIM, VAR and ESR. So obviously with that increased capacity, which produces the premium alloy type material, that in itself physically gives the opportunity for mix shift.

Now as I said before, just on VIM capacity it is a 40% increase. So that adds to the mix shift. However, when I look at some of the other products that we have, we have got some customers that had been with us for a long time that buy products that are necessarily the high nickel alloys and we do have available capacity. And we participate in that where we are competitive, where the margins are satisfactory to us. Obviously, they are lower margins than would be on the premium VIM remelting side of the product, but they are good business and they are good customers.

There are some opportunities in that area that we're looking at. In fact, stainless is a great business, particularly in the niches we participate in. And I think there is opportunity for us to grow in high value stainless applications as well.

We've got a team going on led by Mark Kamon looking at that just as we speak. Bottom line of it to come up with numbers, Doug made the comment that we have to be careful on the impact of mix because it is really the customer demand and which businesses we take quarter to quarter. The big shift in premium will happen when the new capacity is on board. However, I will say we have freed up some premium capacity just through the OE effort that could potentially hit us the back end of this fiscal year.

Thanks very much for that color, and look forward to the next quarterly conference call. Things look really good.

Sanil Daptardar, Sentinel Asset Management.

You had mentioned last quarter some inventory slows in the supply chain. How do you see those things working out? You said that probably it might take possibly until the year end for those things to work out. Do you think that it has been worked out or do you think that there might be some issues still left that can carry into the first quarter of 2008?

I will comment, and I will comment on two of them. One is aerospace. And on aerospace we really believe just from our backlog orders and from conversations with customers that we're at the end of the inventory corrections in that chain. As I said before, on the Dreamliner, on that titanium coil side, I think on that one it is going to allow the fastener suppliers a chance to catch up. I believe on aerospace the second half of the 2008 fiscal year we're going to see the end of that inventory correction.

On the medical market, if we look at that one, I can give an example. When I looked at the data from fiscal year 2006, we were seeing over 50% increase in sales in that market when the medical market procedures and so forth that our products going into was only growing at 10%. If you take a look that we have a 50% increase, yet the fundamentals of the market were growing 10%, there had to be an inventory correction in play.

On the medical side of the business, as I look at fiscal year '08, there still could be some inventory corrections in that market. Although the fundamentals of the market are sound, and our materials are amongst many product portfolios that I see as I talk to hospital administrators and different suppliers along the chain in that marketplace.

How about in the stainless steel area, are there any things that we should worry about, or there are none in fact? Because you posted very strong numbers in the energy segment, so obviously we might not be seeing anything on that.

I'm sorry. Could you repeat the first half of the question?

In the stainless steel market are you seeing any kind of inventory accumulated out there in the supply chain or anything in the quarter. For the energy market you posted very strong number so --.

I think there are two things. One is on the stainless side of the business, the stainless sales were down a bit, if we look at the distributor sector of the market, some of which does go into energy. However, even though as the volume went down, we had a plus in mix. So it was a mix of the product. Some of the products going into that sector are very strong, and some of it on the lower value distribution end are weaker. However, we do have high nickel-based allies that go into the energy sector. And as the downhole drilling environment become harsher, we are seeing more demand for those products in the energy sector. So that market is strong and remains a very strong growth international segment.

The other thing that helps us frankly too is our international sales and our focus on international growth.

Just a question on the gross margin. I think in the presentation it was said probably the gross margin comparisons going forward on a year to year basis will start to moderate. You had particularly very strong gross margins due to product mix in the first quarter. Going forward you don't seem to be seeing that kind of an expansion in the gross margin, is that the way to put it?

I think we have talked a little bit about the mix component, and where I would leave that is that it is just a very complex equation. We have a wide range of products with different pricing and margin levels, and any number of other customer order patterns. And a lot of times it does make sense for us to take on lower margins business. So I don't think that we can say anything more on mix other than mix is an area that, with what we're doing strategically, we do expect to be a positive contributor to margins in a general way over time. We just felt it was appropriate to just caution on the year-to-year benefit that we saw in the first quarter, which was exceptional.

But at the same time there's other things that are going to impact our margins, like we are just scratching the surface on operational excellence benefits. And as our topline growth picks up there should be fixed cost benefits that impact our margins. Hopefully that gives you a little bit more color on some of the puts and calls that are going to be impacting margin going forward.

Any kind of quantification of any kind of impact -- quantitative impact on the operating margins over time, about 5200 business points or --?

Nothing that we would be prepared to quantify.

Tony Rizzuto, Bear Stearns.

I just have got a couple of questions. The first one is if you could provide a little bit further color on the TIMET agreement? In addition to the favorable impact on plant utilization and the opportunities for enhancements in terms of long-term contracts, is there a conversion fee or a tolling fee that you'll also receive from this?

Obviously, I can't go into details of the contract. First off, what I'm really pleased with is TIMET is a great company, and we've got a great relationship, and it is just one of the strategic collaborations that we have successfully pursued. There are more there.

Just to get a bit more into it, obviously it is going to depend on the amount of material we buy and the amount of conversion that they use. I think the best way to look at it, without assigning numbers, which is something that we would not do, it is an agreement that benefits both companies and benefits our customers as well.

It looks like a very favorable agreement. We agree with you on that. The other question I have is in regards to a statement by a competitor, Precision Castparts, they indicated their desire to pursue opportunities in the smaller diameter rounds market, which they have not I guess historically been in from a special metals point of view. Do you see this as a tangible competitive threat?

I am going to let Mike talk about that one because this is something that we have talked about. And I'm going to let Mike comment.

It is Mike Shor. I think companies out there have the equipment capability to make these types of products, but our customers quality expectations are extremely high. These are very, very difficult products to manufacture. The possibility is there, but that is why we continue to find ways to get closer to our customers, to truly understand their needs, and to, quite frankly, be better than anyone else out there.

We are constantly looking at innovation in our processes. When I talk about operational excellence with the teams, I basically not only talk about operational excellence in our own mills, but also operational excellence in the customers' mills. We have a lot of work going on on product and process development so that our materials perform better and add value in the customers' processes as well.

I would say bottom line, as it is you're always going to have competitors coming in business and leaving businesses. And we are clearly focused on innovation within our products and processes to be the supplier of choice to our customers.

I apologize for the noise in the background. It sounds like there's a fire alarm going on here, but hopefully it is nothing too serious. Just to follow up there. In terms of the capabilities to further enhance, it sounds like you believe, Anne, strongly that there's a lot of opportunities to improve your cost competitiveness there and go a lot further in terms of what you have already achieved in those markets to make yourself more competitive. Would that be fair?

Absolutely. We have invested in the infrastructure, and a lot of it is developing people and training people to see waste in different ways. And when you talk about cost, there is value-added cost, there is non-value-added cost, and it is teaching people to see the non-value-added cost. There's a lot of waste in time. If you are just looking at cost on the income statement, you may not really see the value of time. And those are the things that we're talking to our people and teaching our people. In terms of time benefit to the customers are our leadtime. And that is something that we're working on. If it takes you less time to produce it, it takes you less cost as well.

One quick follow-up while it is on my mind. Just going back to the agreement, which is obviously very positive with TIMET that you announced. It sounds like you are looking overseas. Should we assume that these collaborative efforts would be a combination, particularly overseas, of manufacturing as well as distribution?

There is nothing that I would ask you to assume at this point in time. When we have something to announce, we will. We are looking at a lot of things, both domestically and internationally, so I would ask you not to assume anything at this point in time.

All right, Anne. Thank you very much.

But when we have something to announce, we will announce it.

I know you will. Thank you.

There are no further audio questions. I would like to turn the presentation back over to Ms. Stevens for closing remarks. Please proceed, ma'am.

I would really like to thank all of you on the call today. And we look forward to talking with you at our next quarterly call. And Angelique, thanks to you as well.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Have a great day.