Carpenter Technology Corp (CRS) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience. Your conference call will begin momentarily.

Good morning and welcome to the Carpenter Technology third-quarter earnings conference call.

My name is Derek and I will be your coordinator for today. At this time, all speakers will be in listen-only mode.

After the speakers' remarks, you will be invited to participate in the question-and-answer session towards the end of this call. (Operator Instructions)

I would now like to turn the call over to your host for today Mr. Mike Hajost, Vice President, Treasury and Investor Relations. Please proceed.

Thank you, Derek. Good morning, everyone, and welcome to Carpenter's earnings conference call for the third quarter ended March 31, 2011. This call is also being broadcast over the Internet.

With us today are Bill Wulfsohn, President and Chief Executive Officer; and Doug Ralph, Senior Vice President and Chief Financial Officer, 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, 2010 10-K, its September 30 and December 31, 2010 10-Q and the exhibits attached to those filings.

I will now turn the call over to Bill.

Thank you, Mike. Good morning, everyone, and thank you for joining us for our fiscal year 2011 third-quarter earnings call.

We performed very well this quarter and in a manner consistent with the messages from our prior two calls and our Investor Day presentation in February. Operating income and profit per pound were up noticeably from Q2. Revenue growth was up 32% on 16% volume growth.

In these results you can clearly see the positive impact of our mix management and pricing actions. As you'll recall, we've been working on price and mix improvements for the last several quarters but are only now seeing the beginning of their impact due to our long lead times and customer commitments.

Operating performance in the quarter was further bolstered by strong manufacturing performance, especially in the second half of the quarter, good continued focus on cost containment, strong contributions from our Dynamet titanium business, our recent Amega West acquisition, and also our Carpenter Powder Products business. All three of those businesses really have great growth prospects.

In summary, we delivered $0.64 per share and a 13% operating margin. Looking forward, pricing and mix management remains our top focus since the capacity remains tight and we still need to further improve our profit performance. As such, we're continuing to take actions to further upgrade our product mix and we are announcing new price increases as we did two weeks ago.

In addition, we expect demand in our end-markets to remain strong. We believe the aerospace market is at the beginning of a long and robust upcycle.

Aerospace engine demand has been strong for over a year and half. Demand for titanium fastener materials is nearing its prior peak high of 2008. And finally, we are beginning to see order activity pick up for nickel and stainless aerospace fasteners.

In addition, we continue to view energy as having the potential to be our fastest growing market. Directional drilling activity remains at a high level and we are pleased with our diversification in the high-value applications for completions. We are also benefiting by offering a broader range of high-value products to the growing industrial gas turbine segment.

Finally, we are pleased with the initial results of our recent acquisition of Amega West. Note that this acquisition was accretive to Carpenter in its first quarter. As such, we are interested in pursuing similar types of acquisitions and we will continue to invest in the business.

With demand so strong, we are evaluating the need for additional capacity. From a demand perspective, a significant part of our existing capacity is booked under long-term agreements for the next four years.

And we expect continued strong growth in demand for premium melted materials in aerospace across all applications; engines, fasteners and structural components. All our existing key customers with whom we have LTAs are pressing us for significant additional volume.

We also expect strong growth in demand for premium melted materials and energy across existing and new applications in the oil and gas completions, directional drilling and gas turbines. As in aerospace, we are receiving requests for higher volumes from current and new customers.

As for supply, the decision to complete capacity expansion in our premium melt area during the downturn is proving successful as we are now using this capacity to support the growing demand for our higher-margin products. Still capacity constraints exist in some operations.

While we are reducing our lead times and improving our delivery performance, we want to make sure we're well positioned for significant growth in our key end-markets especially aerospace and energy. Thus, given the long lead times to complete and qualify new capacity, we have begun assessing capacity expansion options. More specifically, we are now looking at building additional premium re-melt and hot working capacity.

Note, we are also nearly complete with the previously announced capacity expansion of our Florida Dynamet wire facility. Finally, we are evaluating capacity additions in our powder operations and our newly acquired Amega West business.

Lastly, as discussed during our Investor Day in February, we expect new technology to play a larger role in our future sales. I want to provide a brief update on some recent progress in this important area.

We are pleased to announce that on March 24 the launch of our proprietary new Temper Tough alloy series. This is the air melted version of our new family of alloys that have a unique combination of high strength and toughness that serves as a lower cost alternative to high cobalt containing alloys with similar properties.

We had previously launched the vacuum induction version of this alloy called PremoMet last year and are very pleased with the positive responses we are getting from our customers as they evaluate its use in several applications. We are also seeing good progress in commercializing our new drill powder alloy.

Early technical and marketing indications are positive and we expect to launch this product in the next few months. This is a good example of how our expanded distribution platform with Amega West can support our new product development pipeline.

Finally, we expect to update you soon on the status of our stainless landing gear initiative. In summary, we feel very good about where the Company is right now.

We expect to finish the year strong and achieve our original growth and earnings targets. We expect these results will be driven by continued progress at improving our average profit per pound and strong Q4 sales demand.

We're also very excited about our prospects for long-term growth and creating shareholder value. And we continue to expect that we will return to our peak EBITDA levels by fiscal year 2013 or 2014 and then go beyond those levels, and we believe we should see good progress against this goal in fiscal year 2012.

Switching gears, I will now review the status of our end-markets in the order of their contribution to net sales, beginning with aerospace. Our aerospace sales were $196 million in the quarter.

Excluding surcharge revenue aerospace sales were up 26% on 23% higher volume. These results reflect the sixth consecutive quarter of strong demand for engine components as the supply chain adjusts to higher build rates.

We've also improved our mix with increased sales of higher value materials used in rotating components. Order activities and shipments for our titanium fastener wire business is nearing prior peak levels as demand for titanium fasteners is picking up in anticipation of significant Boeing 787 needs. Recall the 787 uses eight times more titanium fasteners by weight than the 737.

We are also pleased to see a pickup in order activity for nickel and stainless fasteners. Channel activity indicates demand will continue to accelerate over the remainder of the calendar year.

Sales to the industrial market were $104 million. Excluding surcharge revenue, industrial sales increased 26% on 15% higher volumes.

This is a market where our mix management and pricing actions have proven very successful. We have been able to better meet the growing demand for higher value materials for fittings and semiconductor applications while reducing sales of more generic stainless materials.

The global economic recovery is causing an overall increase in demand for industrial products and the supply chain is adjusting to support future growth. Eventually as restocking comes to an end, we expect demand in this market to better match GDP rates.

Energy market sales were $54 million. Excluding surcharge revenue, energy market sales increased 146% on 72% higher volume.

The year-over-year increase reflects the impact of our Amega West acquisition, sharply higher demand in prices for materials used in oil and gas applications and a broader product offering of high-value materials used in industrial gas turbines. Directional drilling activity continues to grow as new rig counts come online.

Along with the benefit of higher pricing, we've also improved our mix in the sector with our expanded participation in completion applications that utilize higher value products. We are very pleased with the initial impact of our Amega West acquisition which contributed $0.02 per diluted share in the quarter. We will continue to evaluate alternatives to grow our presence and footprint further in the sector.

We are also seeing a nice rebound in demand for materials used in industrial gas turbines. In addition to the positive impacts caused by low natural gas prices, available financing and growth in electricity consumption, Carpenter has expanded its product offerings of high-value materials used in industrial gas turbines.

Our volumes in the sector are up 53% year over year but still below prior peak levels. We continue to view energy as the market that has the potential to be our fastest growing market overall and will have a positive impact on growth of our international business.

Consumer market sales were $41 million. Excluding surcharge revenue, sales increased 19% on 8% higher volume.

This is a market that is also showing the benefits of our mix management and pricing actions. Revenue grew faster than volume as growing demand for higher value materials used in sporting goods application outpaced sales of other lower value materials.

Automotive market sales were $37 million. Excluding surcharge revenues, automotive sales rose 20% as volumes were flat.

The revenue growth rate as a function of mix management efforts aimed at increasing sales of higher value turbocharger engine fastener and fuel system components supporting new technologies with an offsetting decrease and lower value applications. Carpenter remains well-positioned to participate in the broader transportation industry's continual push for fuel efficiency and lower emissions with technologies like PremoMet and Temper Tough.

Sales to the medical market were $33 million. Excluding surcharge revenue, medical market sales increased 10% on 2% higher volume.

Volume growth in total is within the expected range for this market. Revenues grew at a significantly faster rate due to higher titanium prices and increased sales of high-value cobalt materials which outpaced the growth of stainless products.

With respect to international, Carpenter sales outside the US were $142 million, an increase of 35% over the third quarter a year ago. Sales in Europe were up 40% on 36% higher volume.

This was driven mainly by increased demand in aerospace and energy and positive mix shifts in automotive. Our sales backlog in Europe remains at a three-year high.

We also saw continued momentum related to our Asia Pacific strategy as revenues increased 31% in that region on 17% higher volume. This was driven by growth in the aerospace, energy and automotive markets with positive mix impacts in consumer and industrial markets.

International sales in the third quarter represented 31% of total sales, unchanged from the prior year. We continue to believe that international growth will outpace overall Company growth in the coming years. I will now turn the discussion over to Doug who will walk us through the financials.

Thanks, Bill. We had a good quarter financially including continued strong topline growth and the improvement in operating income, margin and EPS that we expected from our pricing, mix management and cost control efforts.

Net sales in the quarter were $464 million or 38% above a year ago. Excluding raw material surcharge, sales were up 32%.

The Amega West acquisition which we are reporting under our new emerging ventures segment accounted for 2 percentage points of the growth in consolidated net sales after eliminations for intersegment activity. Overall pounds shipped increased 16% from a year ago.

The gap between the 16% volume growth rate and 32% revenue growth rate reflects our strengthening product mix and price increases. Volume of stainless steel products increased 21%, titanium products were up 12% and special alloys grew 3%.

Note that we are also providing volume by reporting segment starting this quarter which will help you track our progress in improving our profit per pound which remains one of our top priorities. Premium Alloys or PAO's segment volume was up 47% and profit per pound improved $0.20 from the prior quarter. AMO segment volume was up 13% and profit per pound was $0.26 higher than the prior quarter.

Continuing down the income statement, gross profit was $73.1 million compared with $46.3 million in last year's third quarter. The higher gross profit level was driven by higher volume and improved product mix, the impact of price increases and better operating performance.

SG&A expenses for the quarter were $37.9 million compared to $33.5 million in the prior year. About half of the year-to-year difference is due to the addition of Amega West overhead costs.

In addition, we had higher variable compensation expense and headcount compared to last year. As a percentage of sales, SG&A was about 2 percentage points lower than last year's third quarter.

Operating income for the quarter was $35.2 million compared with $12.8 million in last year's third quarter. Our operating margin excluding surcharge and pension earnings interest and deferrals or EID as we always quote it was 13% versus 8.7% in last year's third quarter.

Finishing up the income statement, other income of $1.1 million was comparable to last year's level of $1.6 million. On the tax line, we had a couple of positive items in the quarter related to changes in previous tax positions that totaled $4.8 million or $0.11 per share.

This resulted in third-quarter tax expense of $3.1 million or 10% of pretax income and compares to a tax provision of $7.8 million or 79% of pretax income a year ago. As you will recall, last year's third quarter included a one-time non-cash charge associated with the new health-care reform law.

Our fourth-quarter tax rate is expected to be about 20%. Net income was $28.6 million or $0.64 per diluted share compared with third-quarter net income of $2.1 million or $0.05 per diluted share a year ago.

As Bill mentioned, the Amega West acquisition was accretive in the first quarter and contributed $0.02 to our third-quarter result. We don't expect EPS in the fourth quarter to be quite as high as the third quarter since we won't have the same tax impacts.

We also had a very strong volume level this quarter due to some carryover customer shipments from our second-quarter on top of very strong customer demand for shipments at the end of this past quarter. Lastly, we reduced inventory in March when nickel prices were near their highest level of the year which had a positive impact of about $3 million that won't repeat in Q4.

Free cash flow for the quarter was a negative $14 million. As expected, inventory levels were lower during the quarter but were more than offset by higher Accounts Receivable due to strong sales and higher raw material prices.

We expect some further inventory reduction and a positive flow performance in the fourth quarter. Overall we now expect free cash flow for the full year to finish at about negative $100 million with half of this due to the Amega West acquisition and half due to higher working capital levels related to stronger business growth and higher raw material prices. We still expect capital spending for the year to be in the range of $60 million to $65 million.

Our balance sheet remains strong. Our ending March cash balance of $212 million is depressed a bit due to the high working capital level but we have nearly $200 million of revolver availability on top of this for total liquidity of over $400 million. We expect to be back around $260 million of cash which is equivalent to current debt by the end of the fiscal.

We are committed to maintaining strong liquidity and balance sheet position which will give us the flexibility to fund planned growth initiatives. Toward this end, we are planning to complete a debt refinancing this quarter which will take advantage of the favorable credit markets and pre-fund the $100 million of debt that matures this August.

We expect to issue a $250 million bond which will increase our overall debt by $150 million once the August maturity is paid off. This will give us additional near-term liquidity that can be used for growth or earmarked for the next $100 million of debt maturity we have coming due in two years.

Let me close with a few comments about our outlook for next fiscal year. We continue to target a return to our prior peak level of profit over the next two to three years and expect to close about half the remaining gap next fiscal year.

More specifically we expect overall revenue growth north of 10%. We expect operating income excluding pension EID to be approximately 50% above this year as we continue to drive a higher profit per pound from our mix management and pricing actions together with good operating and overhead cost control. Our full-year tax rate is expected to be back to about 32%.

Interest expense will be just over $8 million higher with the additional $150 million of debt. And I want to once again point out for your models that we do not expect to receive CDSOA income in our second quarter as that program has expired.

In our next quarterly call, we will also be able to provide you with a pension expense number for the year but would expect this to be directionally lower than this fiscal year if equity market values hold over the next few months and due to an expected higher discount rate used on the liabilities. Finally, we have plans to increase capital spending to a level of $150 million to $200 million next fiscal as we invest in projects needed to support the future growth of our business.

With that, let me now turn it back to the operator so we can open your line for questions.

(Operator Instructions) Edward Marshall, Sidoti & Co.

Quick question. You've obviously had some pretty good performance with the pricing that you had put in place prior.

Where are you kind of with the renewals as they are coming up, the contract renewals on this pricing? And how fast do you expect them to be reset so that we can see continued improvement and kind of across all your businesses segments?

Well, as contracts are coming up for rental renewal as you can imagine, the dynamic of supply and demand is more favorable now than it was maybe several years ago. We have long-term agreements which are in place, many of them are not up for renewal for several years.

But in general, I would say that pricing opportunities are there, however, a big part of our margin enhancement strategy is really the focus on upgrading the mix as well. And that really allows us to provide more value to our customers beyond just the price itself.

So from a pace standpoint, where we are in the process, I think as we have outlined the recovery program over the next couple of years to get back by fiscal year 13 to 14 to the prior year peak EBITDA performance, we would view that pricing is a major driver, pricing to mix and that that is progressing on a trajectory that is very consistent with that estimate.

When you mention the long-term agreements, I am assuming you are referring more towards the PAO rather than say AMO. Would that first be a correct assumption? Or is that a (multiple speakers)

Yes, roughly half of our business is LTAs but when you go to the premium operations, it's closer to 70 -- 65 to 75% of what we do.

So we should continue to -- based on that and knowing that you've raised some prices on some of the stainless materials, should we see the continued improvement in the AMO business? And is that going to be more of a lockstep kind of one-quarter type thing like it was this quarter or is it going to be more gradual as we progress into next year?

Well, because of the multiple customer relationships that we have and of course different supply agreements that go for different lengths, I would say that that it's our objective to see that continue to move positive. I can't say that it will be -- you'll see it smooth every quarter, but I think you'll see a progression as time goes on.

And then we're seeing some topline growth and I saw some of the cost not going up with lockstep. Can you kind of comment on what you're doing from a cost perspective to kind of rein in costs a little bit as you continue to grow so that you're not bleeding that out in the cost line? I think you have made some comments in the past that you are concentrating pretty heavily on the cost side of the business. Any comments on that would help me.

Yes, we do have a strong focus on the cost side of the business both from an overhead as well as an operational standpoint. I will let Dave Strobel in just a moment talk with you about some of the operational focus areas for targeted productivity improvement.

But I can tell you that for budgeting purposes, we are trying to keep the extra investment that we have above inflation levels low, in other words, trying to keep as much volume leverage coming through to the bottom line as is possible. We are going to continue to invest in R&D and marketing and our commercial and technical capabilities.

But again, we think the base infrastructure is there to handle at least the majority of the growth that we are projecting over the next year or so. So, Dave, maybe you want to make a comment about the --

Sure, good morning, folks, this is Dave Strobel. From an operations perspective, we've put together a very strong operations team that has been working very effectively with our BUs.

And our focus is truly on the details of our operations down at the workcenter level and we've been driving ongoing improvement. We have a good focus on our OEE initiatives to get more through our current operations with the capacity requirements that we see, the demand from the marketplace.

We are always working to get more and along with capital, reinvesting back into those operations to further drive performance. And we've got a good start and we will continue to focus in that way to get more through and to reduce our costs.

Is there any potential way we could quantify maybe the benefit you could see in fiscal 12 in some of these operations?

Yes, I would just say that it was all within the overall guidance we gave about the kind of operating income progress that we expect next year which is about 50% on a revenue increase that would be north of 10%.

Great, thanks, guys.

Brian Yu, Citi.

Thanks and congrats on a strong quarter.

Thank you.

I wanted to get a better understanding just about the fiscal Q3. Doug, you mentioned that if we look at operating income before EID, it's 46 but $3 million of that had some positive impact from the nickel inventory drawdowns. And can you give us a sense of how much of the business push from second to the third quarter had on operating profits?

Yes, I don't think we would want to overplay that, but there was certainly at the end of last year as we highlighted in our last call some customer-driven volume that moved from the second into the third quarter and that helped us have a particularly strong volume and revenue quarter this quarter.

I'm just -- now I'm looking at your fourth quarter, and should we expect operating profits before EID to come in at around the $40 million mark? And then using that to try to get a sense for 2012 where you're guiding for a very impressive 50% increase, and it seems like it would get us to a little bit under $200 million operating profit before EID in 2012. Is that the right way to look at it?

Yes, we disclosed our pension EID expense, and if you adjust our operating income level for that and then assume about a 50% growth rate on top of that, that's in line with our expectation for next year. As it relates to the fourth quarter versus the third quarter, I mean we're very conscious in kind of the items we're calling out as relevant for your thinking in the fourth quarter.

So we certainly had tax items that influenced our third-quarter result. I think we will be challenged to maintain the same volume and revenue level just because of some of the strength we talked about of volume carryovers in the second quarter and then what ended up being a very strong performance at the end of this third quarter. And we had the inventory effect that I mentioned that was about $3 million positive to our operating income in the third quarter.

Just my last question. Can you detail some of the major spend for next year on the growth side that is driving the year-on-year increase?

This is Dave. When you take a look at the capital requirements for next year, again we're continuing to invest back into our operations to get more product through and at the same time, we're looking at the major capacity constraints that we have downstream for melting. We're pretty well positioned over the next several years from a melting standpoint, but remelting and hot working are areas of concern that we've talked about in the past and plan to get moving on for this next fiscal year.

In addition, this is Bill, in addition, certainly we're looking at continuing to provide strong capital funding to support the growth of Amega West as it expands its footprint as well as our powder business and our Dynamet business, both of which have a strong sales and strategic momentum right now and so we want to continue to support those. That will be a big part of the capital investment as well.

Would all that take place in 2012 or would you expect additional spending into 2013?

Well depending upon the actions that we take, if we make an investment in a major capacity expansion for hot working, certainly that would go at least into 2013 as well.

Michael Gambardella, JPMorgan.

Yes, good morning and congratulations on the quarter. Just have a question on the titanium fasteners and what you are seeing there.

Are you pretty well satisfied that the inventory on the titanium fasteners is pretty much behind them in terms of the overhang? And what are you seeing on some of the recent production build rates related to your fasteners?

Well, build rates have been continuing to be strong and go up across really the majority of fleet. The airline monitor is the reference that we use and they've increased their outlook several times. Of course you have got the Paris Air Show coming up shortly.

But when you look at the total backlog numbers, I think they were roughly 3400 for Airbus and also for Boeing. So a lot of single-aisle activity going on right now. That certainly is movement that will affect the demand profile.

But from a titanium fastener standpoint you have the 787 which uses such a substantially larger portion of titanium fasteners than say a 737. So you put that all together and the types of protections that we put in our investor presentation I think back in February are still consistent with our outlook as we have it today.

So the delay -- the delays Boeing has experienced on the Dreamliner, you feel that the -- whatever backlog there was on some of the fasteners there is long gone?

We don't see that as an issue going forward and that's why we are expanding our capacity in that business as we speak, so we can support the growth that's going to be coming.

Steve Levenson, Stifel Nicolaus.

Thanks, good morning, everybody. Can you give us an idea of what the lead times are separately for titanium and for nickel alloys?

For the nickel alloys, we're currently placing -- or receiving orders out towards the end of the calendar year. So our activity levels remain very strong there. On the titanium side, about that same neighborhood.

Great, thank you. Second, just in terms of markets. Can you give us an idea of what you are seeing or what you are expecting in the next couple of quarters for industrial gas turbine materials as well as -- and I don't know if you differentiate, but if you do differentiate between the large commercial jets and business jets, regional jets, what do you see for the business in regional, please?

Sure, from a power generation standpoint, the inventory has been depleted. The backlog is growing but demand I would say overall has been pretty lumpy is how we are describing it.

It is more spotty but we are increasingly optimistic about the long-term demand for industrial gas turbines. We reference often General Electric as they are large producer and of course discuss their gas turbine business, and they said that their I think Q1 calendar year 2011 gas turbine business increased by roughly 170%.

So, from the business jet standpoint, they are a small percentage of our total demand both because of the number that are being built and the relative size. So we see that not having a major impact either plus or minus on our business.

Dan Whalen, CapStone Investments.

In your opening comments, you mentioned that the quarter seemed to be more heavily weighted to the back end. Thank you for that color first of all.

Second of all, Dave, can you give any order of magnitude? I mean is it one-third/two-third or any additional color? And then secondarily, as you're going through lightening up on inventories, I would imagine from a margin perspective that the quarter was even more backward loaded from a margin perspective versus revenue perspective. Is that fair?

Yes, I wouldn't want to get too specific there, but I think that's generally fair, Dan. I think one indication of that is if you just look at what happened to our receivables quarter to quarter where we're up about $80 million in receivables and our total revenue including the surcharge which is the more relevant for receivables was up something like $90 million quarter to quarter. So I think that says that if nothing else, we had a very strong March performance.

Great, and then one clarification. In terms of -- and then a follow-on -- your EBITDA commentary in terms of returning to prior peak levels over the next two to three years, say, that excludes any potential bolt-on acquisitions or unannounced capacity additions, correct?

Yes, that certainly would be a fair expectation.

Okay, so then given what you are seeing in the demand picture where you're positioned in terms of your balance sheet being very lean, is it fair to -- I mean, 10 to 20% from either growth through acquisitions or capacity expansions, I mean, I know that timing is always tough but is that a realistic or a reasonable assumption?

I'm trying to follow the full question, but you are just talking about topline growth expectations?

Well in terms of EBITDA, if that assumption is excluding any acquisitions or capacity additions, given the outlook, is it fair or reasonable to think that you could add an incremental 10 to 20% in EBITDA through either acquisitions or internal capacity additions?

Yes, I mean, we're focused on first things first and getting back to the prior peak. I think we have generally characterized that our end-markets are strong and we would expect to be strong for a sustained period of time here. And when you look at our growth rates expected on markets like aerospace and energy, that will grow in excess of GDP and up in the high-single digit to double-digit type of range.

And then the balance of the portfolio that's growing more to GDP rate, you've got consolidated growth that if all things continue to progress well with the general economy in these markets would lead to growth rates that are often up in that high-single digit range and we ought to be getting volume efficiencies on top of that. So, again, we wouldn't want to get too far ahead of ourselves. We're focused on what we're focused on first here, but I don't think that is unreasonable.

Fair enough, thank you very much for the color.

Sanil Daptardar, Sentinel Investments.

Two clarifications. You initially talked about your existing capacity book for full year is under long-term contract. Is it across the board across all of your segments of aerospace industry, consumers, auto and medical or is it in a few segments? And secondly, is it like pay or take contracts or what kind of contracts are those?

Well again, roughly half of our business is through long-term agreements, much of that in our premium business. And when you look at that, a lot of that is concentrated in aerospace and energy, also some long-term contracts in the medical area and industrial area. So we have them in all of our markets but that's where the primary concentration -- really aerospace and energy.

The second one I had on the backlog, you mentioned about that it's a two-year high. Is it a reflection of the European backlog or it's total backlog?

Well that was specifically referencing the European backlog. The same could be true. We haven't I don't think looked at it but it could be true for the base business.

We would have to look at that, but certainly our backlog is very strong as our lead times are fairly long at this point in time. So we would describe the demand as robust.

Okay, are you -- in the case of the earthquake in Japan, are you seeing any positive impact from that earthquake to your business because of the disruption there?

What a sad tragedy, really unbelievable. And the net impact of our business is at this point there has not been a significant impact. We are seeing some additional interest in industrial activity, in industrial gas turbine billet.

As you can imagine, there are some energy needs because of the situation there. And in general over time, we may see the focus on natural gas and industrial gas turbines being especially strong which would help our business.

We also have gotten inquiries from some customers who have been supplied out of Japan and some of those customers, their supply of material is disrupted. But we haven't had a major shift because of the events that took place over there in our business as of today.

Tim Hayes, Davenport & Co.

A few questions, starting out on the volumes, can you run through the six end-markets and give the sequential change in volumes?

Yes, Tim, the aerospace was up 27% second to third quarter. Our energy business was actually down 1% despite the strong growth.

Medical was up 18%. Industrial business was up 8%. Automotive is a function of just some of the mix management activities there, down 6%, and the consumer business up 10%. So in all, up 10%.

And then with the volumes that were helped in Q3 a little bit, was there a particular end-market where you saw the volumes get pulled from Q2 into Q3?

I think you can just see from the aerospace number and the fact that that's 45%-ish of our total business is that most of those comments would be relative to aerospace as the biggest driver.

And then during the prepared remarks, you mentioned a figure of up 53% in terms of volumes I believe in the energy market. Was that specifically to the IDT and was it year over year?

It was specific to what we call power generation and it was the year-to-year growth rate. So power generation is -- the IGT would be a big component of that.

Right. And then last question, just to get some clarification on the pieces of guidance, if we have -- the reported number was, whatever, 64. You back out the tax rate down to 53, the nickel -- $3 million help in the quarter, I've got that as about a $0.05 benefit. So I'm down to a starting point of $0.48 as a takeoff point.

Now I have some benefit from volumes that won't recur but yet we're going to have perhaps pricing increases, further cyclical improvements in volumes. How do I think -- if my math is correct, if I'm at $0.48, do we go up or down from there looking into the fourth quarter?

We're not going to give any given a specific quarterly guidance, but I think you listen well. We expect to have a good quarter and achieve our original targets for the year. But Q3 was exceptional in a couple of ways that I think you picked up.

Then lastly, do you think some of these price increases and volumes gains could have more than offset the health of the volumes that you got in Q3 that again was pulled from Q2?

We would expect to see continued evidence of our pricing and mix management actions on the bottom line. We did have as you could just tell from the numbers a very strong mix in the third quarter just for the relationship of our revenue growth rate to our volume growth rate and some of the per pound profit improvements Q2 to Q3. It was a strong mix period and so as mix normalizes but as we see continued benefits from our pricing and mix management actions, you've got a couple puts and calls there that probably stay in balance in the near term.

Thank you, and also, we appreciate all the extra volume detail in this release. So, thanks.

Gautam Khanna, Cowen and Company.

First for Doug, I just want to understand the guidance for fiscal 2012. So it looks like you are implying something of around $100 million of operating income this year fiscal 2011.

You add back the $61 million, so you're at -- I'm just rough numbers here -- $161 million ex pension EID. And so the gain next year will be 50% of that. So we're talking somewhere in the 240 range prior to pension. Is that a fair characterization?

Maybe in a follow-up call we could just help you through that, but I'm not sure where you get your starting point from.

$100 million you mean?

Yes. But why don't we work through all that in a follow-up call?

I'm looking after corporate costs. Is that how you're talking about operating income?

No, it's just simply our operating income reported on the income statement adjusted for the pension EID line.

Got it, okay, well, I think that's -- anyway, so the second question is on pension, could you remind me what your smoothing period is?

Our smoothing period.

Yes, so the amortized losses and gains outside the core or what have you. How long does that run? Because your actual service costs are somewhere in the $20 million to $25 million range right? If the expense is $61 million. I just want to understand how many years of losses are we -- does the 08 loss come out of the number this fiscal --

It's a very long tail, so on the EID portion specifically, I mean you're talking about a period of 13 years that gets amortized over and then each year that will get adjusted for what happens in the current year.

Okay, so in other words, it's not going to drop dramatically year on year? Pension in 2012?

The assumptions that go into what first of all the total asset balance in the plan which if markets hang in there at their current levels would be certainly a positive year to year. It assumes the rate of return on those assets which doesn't change a whole lot year to year.

But then the discount rate on the liability side which was at a very low level last year and for us and every company that has a defined benefit plan, we would expect to see an increase in that underlying discount rate assumption which would also help in terms of the earnings impact next year. And this year we had about $0.85 per share in pension expense and we would expect something assuming interest rates and equity markets and all that hold in at directionally a chunk lower than that.

If you were to shut the [planned market] today, do you have a sense for what that would be?

Not really, I would just encourage you with our next call as we typically do at that time of year, we will fully lay out the assumption which at that point in time unless there is a major change in the underlying enrollment in the plan would be a fixed number for the full year.

Okay, and your comment on the titanium fasteners, I may have missed what someone else had asked, but are you seeing the stuff actually flow through or is this -- in other words, are your customers actually shipping the fasteners or are they just pre-positioning inventory in advance of anticipated orders down the road? How much visibility do you really have as to this being a sustained trend?

We don't have complete visibility to that as you can imagine. We think it's really both.

We think that consumption, the actual consumption is up and and is the primary draw. But there may be some inventory build in anticipation of a 787 moving into a higher production level.

Okay and as you guys know, Boeing Commercial is trying to aggregate the demand of its Tier 1 and 2 suppliers with respect to fasteners and go direct to the faster OEMs and sort of disintermediate the distribution relationships. How does that affect you guys?

Well, we won't comment specifically on the specific negotiations or supply relationships, but I can tell you, we value very much the relationship we have with the people who immediately process our material, want to make sure we're doing a good job of supplying them. And of course we recognize that the OEMs are the ultimate customers.

So we do our best to try to not politicize that and to really service both of their needs and not create a conflict in the process. So I don't think it will either help us or leave us disadvantaged.

Mark Parr, KeyBanc Capital.

It was nice to see that number you printed this morning, great job. And I really don't want to take -- I know there's been a lot of discussion about all of the kind of the takeaways out of the number, but anyway you cut this, it was really a breakout quarter for you guys, and congratulations on tremendous execution. And in the face of this recovering demand situation, you really are kind of getting it both ways. The market is reacting very nicely to your stock today and congratulations on that.

Well, thank you. A lot of people worked very hard in the quarter.

I believe it, I honestly believe it. One of the things, Bill, you have been mentioning is the mix enhancement, and that certainly is something that is not new to Carpenter.

But it's something that you and your team have been working on aggressively. Could you talk a little bit about how much more you have to go in that regard?

And maybe is it -- how much more is there and how long does it take to get there? Can you give us more color along those lines?

Well, I think you have both short- and long-term impact. It is our number one priority without question.

You have the short-term impact which is as we see more demand than our real supply capabilities. It gives us the opportunities to price up some materials which were lower value and sometimes we find the customer finds enough value to continue to have a supply. Other times they'll seek an alternative because it's more of a commodity material.

But that gives us mix management opportunity in the short run. And then the new technology areas that we are focusing on are so fundamental to our future, I really believe that as the Company has reinvented itself in the past, we need to continue to reinvent ourselves for the future so we stay out ahead of those who are always trying to encroach upon the markets that we are in today.

Between you and Latrobe, you both added good sized VIM furnaces in the last downturn. I'm just curious, what sort of utilization rates are you seeing out of your VIM capacity as you look into your existing backlog over the next couple of quarters?

Dave can speak more specifically, but the good news is that with the investment that was made, it is enabling us to support the market demand that we are seeing today. And as we discussed, while we may need to expand some remelt or hot working capabilities, we think that we have got a really solid foundation from a melt standpoint. So that's not likely to be our bottleneck for at least a few years to come.

That's why I was just curious what the capacity utilization rates were for that given that's where you've really focused in the last downturn.

Just to add a couple comments there, Mark, this is Dave. Our sales in Latrobe are different key products that we are producing. When you you add a VIM furnace like we have added, it's a big chunk of capacity and the new furnace is running really well for us.

Overall from a VIM standpoint to hang a number on it, I would say we're probably around 85% or so. We have been receiving qualifications for that new furnace, so that gives us a lot of additional flexibility as far as mixing and matching and what products we're melting in what furnace to further optimize our yield performance and downstream cost picture as well. So again, short-term focus from capacity adds will really be focused on the remelting and hot working parts of the equation.

So by hot working, I mean is it fair to assume you're thinking about a rotating forge or is it just more of a forge press or --?

Press or forge we are looking at.

Okay, if you made that decision today and signed a contract, how long would it take to begin commissioning on one of those new major pieces of equipment?

Just ballparking it, I would say about two years before we would have a hot commission.

So really that's something that really is -- is the utilization rate of that equipment, your hot working equipment, meaningfully higher than 85% right now?

Absolutely, it's high 90s, Mark.

Wow. Is there -- again one last question, I don't want to beat this to death, but is there other call it non-legacy capacity? Is there capacity outside of you that you could outsource to continue to satisfy customer growth needs?

Good question. There's actually two aspects.

One is to take a look at again from an OEE standpoint or taking a look at the availability, performance and quality of the performance of our current units and how do we improve that, we're working very hard on that and there are some opportunities that we are exploring and working with others on as far as taking some products and getting some assistance outside.

Okay, appreciate that. Well, look, I won't tie up the phone here, but just congratulations on the great results and look forward to next quarter.

Just for Gautam's benefit and really everybody's benefit in terms of the operating income ex pension base that we are talking about, maybe take some specific numbers off of our financial statements that are attached to the press release, our operating income just on its own fiscal year to date is $61.4 million. And then if you refer back to one of our supporting schedules on the pension EID number for fiscal year to date, it is $26.4 million. So in total, it's about an $88 million run rate on our operating income ex pension EID through nine months of the year.

Sanil Daptardar, Sentinel Investments.

You did present a 2013 or 2014 view going to pre-EBITDA levels. Do we just say that your operating margins can go back to 17, 18% from the 13% that you are currently? And the cause of it might be price and the mix. How would your mix tend to be? What kind of volumes would be driven by the higher-margin businesses?

Well, Doug, can probably give you -- this is Bill -- a more specific answer from a quantitative perspective. I would just say that as you know, the investment that was made in the downcycle was in the premium melt capacity supporting primarily aerospace and energy.

We made the Amega acquisition, we are expanding the titanium business, we're talking about remelting and hot working capabilities which are primarily focused on those more premium areas that are related to aerospace and energy. So of course we have other parts of the business which over time will become more commodity in nature and that will offset that.

Some of that we are trying to crowd out of the portfolio but some of it will be there to baseload what we do. Certainly the types of objective that you said are very much the types of objectives that we have for the business.

And what I would add to that is I think directionally that would be right, so during our peak when we're earning $350 million to $360 million of EBITDA, our margins were up in the 20% range. So directionally our business would move back toward that.

I will say though as a qualifier that margins can be a tricky way to look at the business because we do have low value products that have a good margin. And so profit per pound is increasingly the way that I think it's better to look at our business.

That's why we are disclosing segment volumes, to enable you and all investors to be able to follow our progress there. I think both will move in an upward direction but margins would not be the best way I would look at that.

Okay, I appreciate the color, thanks.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Bill Wulfsohn for any closing remarks.

Well, thank you all for participating in the call. We're obviously pleased with the results of the quarter but we know we have a lot more work to do, so we're continuing to push on the price and mix management, also cost.

We're continuing to focus on expanding our capacity to meeting the demands for the high-value products as we talked about and we're looking forward to giving you further updates on our initiatives during our fourth-quarter call at the end of July. So thank you and good bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.