Carpenter Technology Corp (CRS) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2008 Carpenter Technology earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions). I will now turn the call over to Dave Christiansen, Vice President for Investor Relations and Business Development.

Good morning. Welcome to Carpenter's earnings conference call for the fourth quarter and fiscal year ended June 30, 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 and Chief Financial Officer, Tom Cramsey, Vice President and Chief Accounting Officer, and 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.

Statements made by management during this conference call that are forward-looking statements 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 most recent SEC filings, including the Company's June 30, 2007 10-K and the exhibits attached to those filings. I'll now turn the call over to Anne.

Good morning everyone. I want to spend most of my time this morning giving you my perspective on our fiscal 2008 performance, and more importantly looking at the road ahead for fiscal year 2009.

We had a year of record results for fiscal 2008 with positive progress on executing our strategy. More than a year ago I set out a strategy designed to drive profitable growth by capitalizing on the increasing demand for highly specialized alloys among global manufacturers. To fulfill that strategy, I said we would have to expand geographically, invest in new capacity, and enlarge our relationships with key customers and increase our focus on new product development. So let me update you on what we accomplished.

In terms of geographic expansion, international sales accounted for $655.5 million, or 34% of total fiscal year 2008 revenue. Global sales were $535.5 million, or 29% of revenue a year ago. We invested heavily in expanding capacity. Our standard premium melt capacity will be completed by December.

Despite capacity constraints, we spent considerable time and money overhauling major equipment, improving maintenance and upgrading control systems. We also enlarged our relationships with key customers and expanded their knowledge of Carpenter's capability. We hired a Chief Marketing Officer, and we're developing new products through a technology strategy that matches our unique strengths with the current and projected needs of our core business customers.

Underlying all these accomplishments has been a wholesale ongoing transformation of Carpenter's processes, our organization and focus. A top priority internally is a continual improvement in operating excellence that will improve efficiency across our operation for the long-term success of our business. The focus on operating excellence will remain constant to control costs, to improve efficiency, to better service customers, and to enhance our margin. All this must be accomplished as the US faces economic challenges and the world faces escalating energy costs.

So against that background, let's look at the dynamics of our 2008 fiscal year. In addition to growing our international sales we generated very strong results in both energy and aerospace. Energy has become a significant part of our market portfolio.

To give you a sense of the magnitude of this growth, in fiscal year 2006 energy represented 7% of Carpenter's total sales. By the end of fiscal year 2008, energy was 12% of total sales. Most of the growth in energy is global, reflecting the intense search for oil and natural gas and the need for more power generation capacity around the world.

In aerospace, the market demand improved in the second half of the year, as expected. In addition we have expanded our long-term relationships with our key aerospace customer base.

With the long-term growth that we see in our core markets, it is imperative that we increase manufacturing capacity. The expansion of our premium melt capacity and upgrades to our control systems have progressed right on schedule during the year.

We also shed our ceramics and metal shapes businesses, two entities that or not key to our long-term strategic objectives. Ceramics and metal shapes were both profitable, but each was more valuable to others in the long-term. By divesting these businesses we redirected key resources to our premium alloys and advanced metals businesses.

We also expanded our pattern metals business through acquisition and made a promising strategic alliance with Titanium Metals Corporation. Having continued to generate robust cash flow, Carpenter's shareholders have seen the benefit through share repurchases and increased dividends. During fiscal year 2008 we repurchased about 14% of the shares outstanding, and increased our dividend by 20%.

Certainly the economy, especially in the US, warrants some caution with unprecedented increases in oil prices, rising demand for raw materials, and inflationary pressures. But while the economy has imposed hurdles for us, in markets such as automotive, industrial, and consumer, we are well positioned to respond to the challenges.

Even as these markets weaken, we see opportunities to improve our mix to them as they require more high-performance alloys. With our diverse capabilities, we have also been able to respond to reductions in these markets by increasing our shipments of stainless products for use in other industrial applications, such as US infrastructure projects.

And finally it's not enough to recognize opportunity. We also needed a team that can turn those opportunities into profitable growth. We spent considerable time and effort this past year assembling a strong team of managers, metallurgists, technicians and marketing experts that can do just that.

Looking to the full-year 2009 fiscal year, we expect growth momentum in our key aerospace and energy markets to continue. Last airline monitor data indicated a smoothing of builds versus the January projection. The July forecast continues to reflect growth in total builds, and it's projected at 9% in 2009.

Supported by a strong backlog for more fuel efficient planes, and demand for new wide body aircraft, we remain optimistic that demand for our high-temperature engine alloys, and for titanium and nickel based alloys for fasteners, will remain robust. In energy we're benefiting from the general global expansion, from the increasing use of directional drilling rigs and from the need for more industrial gas turbines.

The first half of our new fiscal year will be supply constrained, but the completion of our expanded premium melt facilities, along with major maintenance and equipment upgrades, will give us much needed additional capacity in the second half of the 2009 fiscal year. We're also placing a strong emphasis on new product development programs that will enable us to capitalize on both new and existing market opportunities. Our strong financial position will allow us to invest in our business and retain the flexibility to grow, should the right acquisition opportunity present itself while continuing to return value to our shareholders.

In summary, fiscal year 2008 was a challenging year in which we again achieved record results, even as we took down major pieces of equipment for upgrading, and dealt with the capacity limitations. For the 2009 fiscal year, we anticipate another year of record results and strong free cash flow. We continue to manage our supply and inventory issues as demand remains strong, and we will bring new capacity online in the second half of the fiscal year.

We're also beginning to turn the corner on the operational excellence, which is very important to our long-term competitive position. Now let me turn things over to Doug.

I will start by providing perspective on our fourth quarter and full-year financial results, and then I will cover a few items that should provide investors with a better understanding of our quarter-to-quarter profit trends and what to expect in our results as we head into fiscal year 2009. Please note that all income statement comparisons are for continuing operations which exclude the sale of our Rathbone metal shapes business and divestiture of the ceramics business earlier in the year.

Net sales in the quarter were 556.3 million, or 4% above a year ago. Backing out the surcharge, sales were up 12%. This strong topline performance was driven by an overall tonnage volume increase of 15%. Our premium alloys segment, which is over 90% aerospace and energy, increased tons sold by 30% versus a year ago. The advanced metals segment had a volume increase of 10%.

Growth was strong in all of our product areas, with special alloys and stainless steel products both up 15%, and titanium products up 25%. All of our end markets except automotive also had strong growth quarters, as you saw in our press release.

Continuing down in the income statement, fourth quarter gross profit was 117.3 million compared with 120.8 million a year ago. A significant component of the gross profit reduction relates to the impact of various LIFO inventory effects, in combination with fluctuating nickel and other raw material prices consistent with what we talked about on last quarter's call.

Let me elaborate more on this given the significance to our recent quarterly earnings comparisons. As a reminder, we typically build inventory in the first half of the year, and reduce inventory in the second half of the year. This can create significant volatility in our quarterly profit trends when coupled with changes in our raw material prices. The impact of this in the second half of our fiscal year has been especially significant, given the difference in nickel price trends is your versus last.

Nickel prices were generally on a declining trend from the first to second half of this fiscal year, which increases second half costs, while nickel prices increased significantly in the second half of fiscal year 2007 which caused a positive profit impact, and therefore difficult base period comparison.

In specific numbers we reported that our third quarter profit comparison was negatively impacted by about $11 million due to this issue. We also said at the time that we expected there to be a similarly large negative impact on our fourth quarter profit comparison, partially offset by an expected $6 million benefit from the liquidation of LIFO inventory layers. While our ending inventory position changed the final numbers, the net of these two items had a $6 million negative impact on our fourth quarter gross profit comparison.

This is a complex subject, so to assist investors' understanding of the issued and the impact it can have on the volatility of our quarterly results, we posted a White Paper summary on the investor relations section of our Cartech.com web site.

Returning to the gross profit comparison, we also experienced other negative impacts from the significant difference between this year and last year's nickel price level, such as lower value from scrap sales. Additionally, our costs are overall higher than last year due to significant equipment upgrade activity, investments to drive operational excellence, and general inflationary effects. Of note, while our overall costs increased year-over-year, we did see an improvement of nearly $3 million in the operating inefficiencies that we discussed in our third quarter call, and we have strong organization focus on these opportunity areas going forward.

Overall fourth quarter gross margin was 21.1% compared to 22.7% in the fourth quarter last year. Adjusted for the dilutive impact of the surcharge, the year-to-year difference in the surcharge lag effect and inventory effects we just discussed, gross margin on a comparable basis would've been an estimated 30% in the fourth quarter versus an estimated 32.5% in the same quarter a year ago.

Operating income was 72.7 million compared with 87.4 million and last year's fourth quarter. The decrease in operating income is due to lower gross profit and 11.2 million in higher selling, general and administrative expenses. The biggest contributor to the SG&A increase is a special reserve for litigation matters. The rest of the higher SG&A spending relates to investments to drive our strategic initiatives and other year-end items.

On an adjusted basis and excluding the special litigation reserve, our estimated operating margin on a comparable basis would've been 18.6% in the fourth quarter compared to 22.9% a year ago. Other income in the quarter was 1.9 million compared to 6.6 million in last year's fourth quarter. This primarily reflects lower interest income as a result of lower interest rates and a reduced cash balance.

Our fourth quarter income tax provision was 23.2 million, or 33.1% versus 29.5 million, or 33.4% in the same period last year. The full-year tax rate ended up at 32.9% versus 31% in the prior year.

Overall fourth quarter net income from continuing operations was 46.9 million, or $1.01 per diluted share. Included in this amount was the special reserve for litigation matters of $0.08 per share. The year ago fourth quarter had comparable net income of 58.9 million, or $1.12 per diluted share.

For the full fiscal year our reported net sales were a record 1.95 billion, or 6% above the prior year. Net sales adjusted for surcharge were up 4%. Operating margin, excluding surcharge for the full-year was 22.6% compared to 23.1% in the prior year.

Overall earnings per share for continuing operations was a record $4.31, which is up 5% from last year. We ended the year with free cash flow of $112 million, and within this our capital spending for the year was 119 million. On our ending balance sheet for the year we had total cash and marketable securities of 409 million.

We were aggressive in the fourth quarter in deploying cash to repurchase shares, allocating $174 million to retire 3.1 million shares. For the full-year our share repurchase program retired a total of 7.1 million shares or 14% of the total outstanding at the beginning of the year. We have about $46 million remaining on the current board authorized share repurchase program.

Let me now close by highlighting a few items that will help in your understanding of our up coming fiscal year results. First and most importantly we expect continuing strong topline gross momentum on the business, consistent with what we have been communicating. Our first-half profit comparisons will almost certainly be weaker than the second half of the year. A major reason for this is the significant equipment maintenance and upgrade activity we have underway this quarter.

Product mix is another area that we expect to improve across the year, since we have tight capacity constraints in the first-half and will benefit from our new premium melt capacity coming onstream in the second half. Finally we have a strong cost improvement focus in place and expect to see benefits from these efforts as the year progresses.

While there will be quarter-to-quarter fluctuations in margin as already outlined, over the course of the full year we expect that our overall company operating margin should remain about constant with fiscal year 2008, as positive items such as mix and cost savings gradually compensate for the downward margin pressure we have been experiencing in recent quarters.

One adjustment that we will make when we compare margin performance between years is on the pension line. Due to a lower year end asset balance in our pension plans to as a result of the general weakness in the financial markets, we expect to have a net pension expense in fiscal year 2009 of $28.1 million. This will equate to a roughly $0.28 per share year-to-year reduction in our reported earnings per share, although it is a non-cash item as you know.

The number for fiscal 2009 is already set, and should not change during the year, so can be incorporated into your models as such. We would still anticipate another record year of EPS performance despite the year-to-year difference on the pension line. To be clear, our pension and post-retirement and benefit plans are in very good financial shape. We are well-funded and have not had a required cash contribution to the plans since 1986.

With all that, let me now turn things back to Anne for a few closing remarks.

While there are clearly short-term pressures on our business, on our industry and on the general economy right now, we remain steadfastly focused on the strategies that are important for the long-term success of Carpenter's business. We are unquestionably better positioned for growth in our key end markets as a result of our investment in better marketplace understanding and in strengthening our customer relationships.

We have also made changes in how we approach our international business that will be positive for growth. We're putting resources on the ground in places like China and raising the overall profile of the Company to better capitalize on the strong growth opportunities that exist. We're investing more resources in new product development, so that we maintain industry leadership in an area that is Carpenter's historical strength. This, too, is a key part of our strategy to drive growth.

Finally we're making important and fundamental changes in how we run the business through our focus on operational excellence. The team has plenty of experience implementing this kind of change and it takes time to realize the benefit, especially in a 120-year-old company. However I see clear signs that we're beginning to turn the corner. And [to] our focus in fiscal year 2009, I remain confident that this transformation will be critical in building on our long-term competitive position.

We're really excited about how much more we can achieve in driving growth and operational excellence with the great talent and experience of the people at all levels here at Carpenter. With that, we'll now open the lines for your questions.

(Operator Instructions). Luke Folta, Longbow Research.

Good morning. I want to ask, are you seeing any delay in purchasing from your aerospace customers in regard to the fall off in nickel prices that we've seen, and maybe you could comment on the supply and demand balance there as well in the channel.

I think it's a couple different views. If you look at the aerospace customers as nickel prices have lowered, what we're seeing is that customers are really locking in at the prices, and so that's really a positive impact as we look at our backlog. But as you look at distributors or customers that are vying for some of the more industrial consumer type markets, what we see there is they wait and they try to look at what could be potentially the lowest nickel price to minimize the surcharge impact.

So on the long-term stuff we see customers locking in as positive, with some of the more distributor type -- we see some waiting.

On the titanium side, can you talk about what you expect the impacts of a slowing titanium market to be on your Dynamet business, and also the conversion agreement you have with [Time-In].

Two different questions. Just in terms of the titanium that goes into the fastener end of the business, as you know heavily consumed by 787 and A380, we're not seeing a slowdown. And in effect what we're hearing from our customers is there is some sigh of relief as they're making up and filling the pipeline.

So for those push outs, particularly the 787, we really haven't seen any major impact on that right now. In terms of the Time-In agreement, it's a great agreement for both companies. We are processing some material for them, and we look to a long-term mutually continued benefit relationship as we go out.

One more if I could on the lawsuit with Allegheny Technologies. Does this -- are you currently producing 718 in these sizes? Is this something that could impact the justification for some of the capacity you're bringing on next year?

I don't see this impacting the capacity that we're bringing on at all. And just in terms of specifics with litigation, we really don't comment on that.

Thanks a lot.

[Matt McGeary, Sentimental Asset Management].

Good morning. If you mentioned -- you just mentioned your sort of industrial distributor-type customers maybe being more sensitive to nickel prices and maybe trying to bottom-tick that a little bit. Do you have any sense of what inventory levels look like in that channel? And I know we saw from GDP numbers this morning across the economy that seems to be what's going on, not just in your business. Just curious if you have any insight there at all.

I can tell you what I see, and this is with the exception of domestic auto. Because I think we still haven't seen the end of the impact on that supply chain. But in terms of the rest of the markets that we participate in, the inventory picture for us right now really looks pretty stable.

So in talking to the customers, they seem to have their inventories under control, and what we're basically seeing is that the [whole] is fairly consistent with the demand. And at this point we're not seeing inventory corrections, with the exception of domestic auto.

And you did mention the medical business within (technical difficulty) [nice] quarter, you did mention in the press release maybe that channel's worked itself out. Anymore color you can add there?

The only thing we're basically seeing is a pickup in that the supply chain is in balance. Obviously as I talked before on the phone, it is a very sensitive industry with the high cost of medical. And it's not saying they would not do something further in trying to reduce the inventory, but as of right now we're not seeing it. It looks like it's in balance.

Lastly, any thoughts on CapEx in fiscal '09, and what -- maybe some cash flow impacts there?

In terms of CapEx, what we're seeing is we still have some expenditures to complete on the premium melt project. But basically at this point in time total, and that is with spending completion on the premium melt, some of the other upgrades that we're doing, and some new projects coming on we're expecting a level of roughly plus/minus 125 million.

Great, best of luck in year '09.

Tim Hayes, Davenport & Co.

Good morning. First question, on the year-over-year volume increases by your six end markets, do you have those please?

Yes, I do. I think I'm going to give Doug to a minute to pull the paper out (multiple speakers)

You want the year-on-year, Tim?

Do you have the sequential as well?

I've got the fourth quarter and the fiscal year. Which numbers are you looking for?

Fourth quarter please.

Fourth quarter aerospace, up 12%. Energy up 48%, our industrial business up 21%, consumer business up 4%, automotive down 2% and medical down 1%.

And then the next question on the -- I just wanted to reconcile between reported EPS and what you show for continuing operations. We have reported EPS of $1.15, continued ops as $1.01, could you walk me through the pieces to reconcile that?

Sure. The difference is going to come in the reported gain on our Rathbone metal shapes business, as well as the quarter's worth of operating profit on that business since we closed on June 30th.

(multiple speakers) $0.09 and the rest was just the profitability?

Correct. Yes. There's a chart in our press release that lays out the reconciliation between one and the other.

The litigation I would consider a nonrecurring charge. Would that be fair to treat it that way?

Yes, I think we characterize that as a special item.

Very good, thank you.

[Sunil Gaspard, Centaur Asset Management].

You talked about the first half 2009 comparable to be weaker than the second half. Is it possible to elaborate that, are there any other items other than just equipment and maintenance?

It is in the equipment maintenance. And as we have reported in the past, with completing premium melt projects and bringing the premium melt project online, as our premium end of the business has been capacity constrained. So that factor is in there, we're not demand constrained. We're supply constrained.

The other thing as we had taken some major maintenance on some of our hot working equipment, and we are totally replacing and upgrading the control system on our major hotrolling mill. So in effect, what that does is constrain capacity, and that's the effect that we have in the first half of the year.

(multiple speakers) Just to build on Anne's comments, one of the other consequences of the constrained capacity, especially on the premium melt side, is that we would expect our mix to be less positive than what it's been in prior periods as a result of that.

Okay. And this constraint will not cause any kind of market share loss to your competitors or anything -- or --

No. No.

The second question was on the stainless-steel market, of course nickel prices are still hovering around [9, 10]. Do you think -- have you seen any pickup by the distributors, by the supply chain that they're looking to restock the stainless-steel products, or are they still on hold?

It's in balance. I think they took the levels down. That's what we saw, and now as the material is being pulled from their system they're replacing I am not at this point in time seeing any rebuild of the inventory.

If you look two quarters out, do you think that they might be giving any kind of signs that two quarters out they might be looking to rebuild inventory? Or you still don't think that might be the case?

I don't know. I am not hearing anything like that, but I can't comment any further than that.

Last question on the aerospace. You just said about 787 and A380, you're not seeing any kind of slowdown for the titanium fasteners. But you haven't seen any kind of pickup either, right? Are you seeing any kind of pickup in that build plans, or -- that's any kind of signs you're getting that those things might be accelerating there?

We've seen about a 10% pickup.

Okay. Great, thanks.

Robert Kirkpatrick, Cardinal Capital.

Good morning, congratulations. Just making sure, you're guiding to higher EPS or to higher net earnings for the coming year despite the pension headwind?

EPS is the comment I made.

And the base that you're doing that for is the $4.31 in the diluted EPS from operations on your sheet?

Right. Our continuing operations, that's correct.

Great. And you have been wonderfully aggressive on the share repurchase in the quarter. And I note that there is about 45 million or so left in the buyback program, and was wondering what management opinion was on either a reauthorization or further authorization once that expires.

I think we would certainly assess our cash deployment plans with the board and our strategy and priorities there would remain the same. So in terms of priorities, our organic growth needs will come first. We always want to maintain the cash and financial flexibility for bigger acquisitions if the right opportunity arises. Share repurchase has been an active part of our cash deployment plans, and we want to be a continuing consistent dividend payor. So we would make those decisions based on that strategy and those priorities.

Could you and Anne speak at a very high-level to the M&A environment that's out there, not (inaudible) being specific, but just generally in terms of willingness of sellers to discuss or take meetings, opportunities that are generally out there? Are there more or less -- competition for deals is more or less?

The way I would characterize that is -- we know that acquisition is going to be an important part of our growth strategy. We have an active program in place against that.

In terms of specifics beyond that I wouldn't comment, other than our judgment right now is that our organization focus is best placed on the kinds of actions Anne described about driving growth and operational excellence. But we're very active in considering other opportunities, but they would have to be the right opportunities.

Let me just give a comment on that. The one thing I feel very good about is we put a very disciplined process in place, and we have trained a team. The thing that we successfully did this year was divested three good but not core businesses, two of the ceramics businesses and the metal shapes business, and made the acquisition in powder.

So in order to pursue an acquisition you have to have the internal capability to do it. And through that effort we built a capability. So the process is in place. We listen and look at entities and when the right one comes along, we will move.

And then Doug, could you give us a little more of a breakdown of the 125 million in CapEx expenditure (inaudible) (technical difficulty) in other words how much that is going to be the premium melt project? How much of that is kind of your ongoing maintenance and how much is these new projects that you're coming up with?

The most significant component of that is the completion of our premium melt expansion. Beyond that we have your typical maintenance CapEx needs, capital that's necessary to drive our operational excellence focus, as well as different IT projects. So those are some of the significant components. But the major piece of that is the completion of our premium melt.

That would be kind of in the $40 million range?

A bit more.

It's a major piece.

And finally, could you give us the volume numbers broken down for the fiscal year by your industry sectors?

So for the full fiscal year, aerospace up 3%, energy up 56%, our medical business up 8%, industrial down 9, consumer down 14 and automotive down 16.

Thank you so much, appreciate it. Keep up the good work.

Gautam Khanna, Cowen & Co.

I just want to ask on base prices, are you seeing any erosion in base prices, given what's happening to nickel? And if you could talk about all of your metal products, titanium, etc., if you're seeing any -- what the trend is in base price.

Let me give you some general comments. When I look at it, pricing in our key markets is really holding up pretty well considering the economic environment. And you always have the dual effect of customers trying to work down prices while we continue to show the value of our products and increased pricing. But in balance, on the premium product side we continue to be able to capture the premium pricing.

When we get to the lower end of our mix, I would basically say that what we can capture is much of the inflationary pushes. But along with that, there are balances. Now what's really important for us is along with the pricing actions that we have announced, we have a very intense focus on reducing our costs to not only resist the inflationary pressures, but to just constantly drive health in our operating margins.

One of the comments I think by Alcoa, which make a lot of these fasteners, was the second half calendar year demand was going to be a little bit lighter. What kind of visibility do you have? How far out do you have visibility on some of the feedstock for titanium fasteners?

We haven't seen it yet in the pull on the demand from our material. I can give you that comment.

In terms of where we are, depending on the product, if you look at a product like fasteners, we're approximately six months before the fastener will go on the plane, six to nine months. If you look at something like engine components, it's a year. And so we're a bit back in the supply chain. So our visibility is sometimes not exactly what you're going to see or what you're going to hear from customer that's closer to the OEM. But I can't tell you that I have seen yet what Alcoa has announced.

Okay. By the way, could you give me a surcharge by segment for the fourth quarter?

We would have to do some math here, but --

Could I ask my next question while you guys -- (multiple speakers) looking forward, are you guys expecting the subsidy in Q3 of fiscal '09 now, or are you still modeling that out?

You're talking [TDSO], yes.

The program has ended. There may be some small remnant distributions as the program ends, but we had $8 million basically that was in our fiscal second quarter last year and we don't anticipate anything of that magnitude.

Okay. When you talk about your directional guidance for '09, EPS being up, can you comment on net income? Obviously the share count is down. Is net income going to be up?

I wouldn't go beyond what I said in terms of EPS. Obviously all elements in our strategy including our cash deployment strategy are part of our planning process. But I won't go beyond what I said, which I think was already sufficient in terms of what we expect to happen in our fiscal '09 results.

Just to reiterate, what you said was EPS will be up, but no comment on net income. Is that fair?

We expect to have a record EPS here in fiscal 2009 despite the $0.28 reduction on the pension line.

And lastly, given the balance sheet is pretty strong, can you characterize maybe the size of some of the acquisitions you're looking at right now?

I think at any given point in time we want to have the flexibility to do something of greater size. But I wouldn't be any more specific than that.

The only thing that I would say, we do look at different size acquisitions, from small to large. But what we look at is something that is key and core to our strategy. So it could be product, technology, it could be strengthening access to international markets, but it would be close to the core.

Could you guys provide a breakdown of power generation versus oil and gas? If you have not, could you please do so in Q4?

Revenue or volume?

Revenue please. With and without surcharge if you have it.

For revenue, this is excluding surcharge, overall energy was 56 million, fourth quarter. And oil and gas was 33, and power generation 23.

Okay. Thanks (multiple speakers)

You asked about the amount of surcharge, was that by market or reported business segments?

Business segments please.

Business segments it was, for our premium alloys business, in the fourth quarter, $52 million. And for our advance metals, $113 million.

Thank you, I appreciate it.

[Dari Lenhoff], Ironworks Capital.

Thank you. You've answered most of my questions. Can you just comment, what is your estimate of your maintenance CapEx going forward for the next several years?

Our depreciation level is around 50 million, and I think a lot of companies look at maintenance CapEx and depreciation as similar amounts.

So around depreciation going forward for the next few years would be a good estimate?

I think that's a good proxy for most companies.

Thank you, great.

Chris Olin, Cleveland Research.

Good morning. I just want to make sure I am clear on exactly how this Dynamet business works. I guess to start off with, the titanium quote out there, if you believe it, $15, $16 per pound for that ingot type of product, is that close to what you're paying? Are you buying on the spot or how does it work in terms of your cost realization?

I'm going to pass this on to Mark Kamon, who was President of Dynamet, and who is now head of AMO, since he has very intimate real-time experience. I can give you high-level comments, then I'll let him comment on some of the detail you've asked.

The price you quoted of $15 or $16 is typically what the ingot prices are now on the spot market. And we have -- we acquire material on a longer-term basis in some respects, spot basis in others, and through directed by us through some of the major aerospace companies.

So --

Three different places.

In terms of how your product is priced, is that -- you have a base price component then the surcharge reflects what the spot price would be on the market place?

We do not have surcharges on titanium.

So you --

Titanium is either quoted by -- on a spot basis or on a long-term agreement with material price taken into account in the contract.

So are the finished products holding up better because the demand is holding pretty well, I guess, for 787 fastener type of marketplace? I'm trying to get to how the margins go in there. With titanium falling is there a big opportunity to get some nice margins?

I think margins are a function of sales prices and material acquisition prices, etc. And they're all moving -- they move at different times, but -- or related. So I would say the margins typically might move when there is significant inflections, but generally you won't see some advantageous long period of time.

So there wasn't a big margin pick up this quarter because ingot was so low and there could've been some hangover from the customer, what they're paying for.

No.

I guess my last question is how low do you think -- do you have any kind of thoughts on where titanium bottoms out in terms of your cost? The price?

I think if you ask ten questions around the marketplace you'll probably get 10 different answers. But it has dropped from -- as you know, prices near $30 a pound for spot ingot material to roughly $15 a pound, let's say, in round numbers. That's a pretty substantial drop in one year and I don't see that kind of accelerating at all.

I guess I've heard there's some concern it could go $8 to $10 again. That's not something you see?

It's all speculation.

And last question, has there been any new fabricator capacity coming on over the last few months? I know it was you and somebody else that really owned this marketplace. I'm just wondering, how about competition?

I have not seen it. As you know, over the years, several of our competitors have tried to make the product but have been unsuccessful. I have heard nothing that anyone has successfully qualified. I have not heard a new source qualified.

Does it still make sense to look at potentially growing the capacity of this business, given the longer-term view?

Absolutely. I think it's a good business. I think the demand for alternate structures in aircraft would be the pressure on fuel prices. Anytime you use the composite material, then what you're using is the titanium fasteners, so I think the better one (technical difficulty) to ask question in terms of future product programs are Boeing and Airbus. But I certainly see that the applications for it are strong now with the two planes that we have, and will continue to be strong in the future.

Sounds good. Let me just congratulate you on not investing on the melting side in titanium as well. I guess I'll leave it at that.

Thank you very much, I appreciate that.

(Operator Instructions). Mark Parr, KeyBanc.

[Jason Brocius] for Mark Parr. I was just wondering if you could speak to your backlogs relative to maybe this time last year.

We don't necessarily say that there is a super strong correlation with backlogs. It's an indicator. But what I can say is backlogs this year are stronger than last year, say 15 to 20% stronger.

Okay, thank you. And can you talk about maybe some of your new marketing initiatives and where they are aimed?

Yes, I will. And I have my Chief Marketing Officer sitting at the table. And I can comment on this, but I don't think anyone on the call has heard from him yet. So I'd like to turn that question over to Sanjay.

The marketing initiatives are targeted at certainly growing our core markets and key markets, by getting to [trying] to find new opportunities we would like to invest and certainly trying to grow our share with our existing customers by better understanding their needs, to see where the trends are going in the market.

Some of the things that Sanjay and the team are working on is broad energy. We're very strong in oil and gas. We're very strong with IGT, very strong in the exploration side of it. But it is also important to look at sources of energy as you go out in the future. Some of the places where our material can be applied, and in some cases is applied, are bearings of windmills.

If we look at clean coal, if we look at nuclear, even though the US right now is sort of idling on nuclear, nuclear is strong in other parts of the world. And we can participate even more in that market, not only with the equipment producing the power, but also in assisting in the storage of spent material.

Some of the other things we're looking at are steam generation. These are areas where there is current technology, but everything today wants to run hotter to be more efficient. So anytime you have energy generation running hotter, then it requires more specially alloyed metals, and that plays into our strength.

The last comment I think Sanjay and his team has been very aggressive in, is we're extremely strong in the domestic auto market. We do have some global suppliers, but as we know, growth in auto is more in Asia-Pacific and Eastern Europe, and we have intensified our understanding of the supply chain in those markets to more participate in global auto. Those are just two of the examples.

Okay. I think that takes care of me, thank you.

Leo Larkin, Standard Import Equity Research.

Good morning. Could you give us any guidance for the tax rate for fiscal 2009, also DD&A for 2009?

D&A we would expect somewhere around $55 million. And for our tax rate right now, our assumption as we head into the year would be about 34%.

And I just want to make certain I understand what the after-tax impact was of the litigation reserve. What was that?

$0.08 a share in our fourth quarter was the special litigation reserves.

Okay, thank you.

Tony Rizzuto, Dahlman Rose & Company.

Thank you very much, good morning everyone. Got a couple questions here. First of all could you quantify the impact of the equipment downtime and the facilities downtime in fiscal '08?

That's a really good question. And it's something that I think Mike Shor can give a range to, but to give a full estimate would be difficult. But let me let Mike talk to that one.

There are two major pieces of equipment that we dealt with. First is the largest piece of hotrolling equipment we have, which is a real cornerstone for us, it's a 1980s mill. We have been in essence taking that mill down for weekends in an attempt to fully replace the mill control system.

Obviously as you take that down and interrupt your flow and come back up on a regular basis causes us some issues, but we're working through that and we're in the midst of a final piece of that, which is -- will occur for the next 2.5 weeks. That is ongoing right now.

And a rotary forge was down for a period of approximately three weeks for a full mechanical rebuild, which was planned, and also not an automation replacement. So two large pieces of equipment, two cornerstones for Carpenter, and two very unusual shutdowns for us to get this thing back to world-class levels.

But to quantify it, that is a bit more difficult. You saw some of the inefficiencies that we reported out last quarter. Some of those inefficiencies were directed to this [five mill] up and down. But just in terms to quantify, some of it is on operating side where the costs are higher and you saw some of that last quarter, although we worked on it and reduced the impact of it this quarter.

The other part of it that is hard to quantify is topline. Because we do have demand for the product, there could've been more volumes sold if we could've gotten more product through the forge and the five mill. So that's why -- I can tell you what it did, what I can't dollarize for you is the impact both on the top line and the inefficiency cost side of it.

It's got to be difficult, and obviously it probably also had an impact, too, not only -- had an impact on mix as well, I'm sure. If you could just -- keep that in mind, but thinking about the magnitude of the impact in '09, first-half compared to kind of that '08 impact, should it be less? It's going to be more?

This quarter, obviously the equipment is down, but the rotary forge is in the process of coming back up. But the five mill is still down. What we did is took it down every weekend, and replaced different bits of control. You have seen the five mill and it's 16 different sections that you're looking at.

So what we did on weekends, we took separate sections down, which made losses at the beginning of the week, where we lost some throughput in it. But it is down now. It will be down for approximately a few weeks but will be coming back at some point in August. So there clearly is an impact this quarter, because it's down with the shutdown, as well as some other equipment that we're upgrading as well, like our cleaning line.

But as we look at the next quarter, it's a matter of launch curve. There will be some accelerating loss, but as we finish out the first-half, we will be up full speed in all of the equipment, including the premium melt coming online.

That's very insightful, I appreciate that. Another question I have is -- I think in your comments if I heard correctly you referenced -- due to some softness in the premium alloy areas that you're able to shift more into US infrastructure projects. I wonder, did you -- (multiple speakers)

There wasn't demand, that was -- because of supply constraints, that (multiple speakers) affected the mix. That wasn't demand signal, it was just the fact that we were running full out and we couldn't make any more. So that was supply constraint, not demand.

That clarifies that. And the final question I have is given your current commercial mix on the arrow side, can you kind of break out your mix right now between Boeing and Airbus, and how that might be changing? And also on the engine side, that relative breakout, OEM versus spares -- ?

On Boeing, Airbus, plus/minus with different minor swings year-to-year, it still remains about 50/50. So one year it may be 45/55, then slip the next year, but it's still around 50/50 for us.

The question -- the second question that you asked, compared to the -- our overall aerospace business, the spares for us still represents a pretty small percentage because most of the spares are going to be obviously in the engine component, and we have taken a rough -- I will say guesstimate, because it's not even an estimate. It's probably at best 25%, but Tony, actually that's a guesstimate.

That's a pretty good guesstimate. I appreciate that. Thanks for the insights.

Thank you.

Tim Hayes, Davenport & Company.

Do you have the surcharges by the end markets please?

Yes we do. For the fourth quarter?

Yes.

Aerospace was 63 million, energy 20 million, industrial 38 million, automotive 19 million, consumer 17 million and our medical business 7 million. That should all about add up.

Thank you.

There are no more questions at this time. I'll turn the call back over to Anne Stevens for closing remarks.

I want to thank all of you for joining us today on the call. Thank you for the great questions. It's good to hear your voices, and we all sincerely appreciate your interest in Carpenter. As always, look forward to talking with you next quarter. Thanks a lot.

Thank you for your participation in today's conference. This concludes our presentation, and you may now disconnect. Have a great day.