Carpenter Technology Corp (CRS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Carpenter Technology's fourth-quarter earnings conference call. My name is Juanita and I will be your coordinator for today. At this time all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in the question-and-answer session towards the end of the call. I would now like to turn the call over to your host for today, Mister Mike Hajost, Vice President of Treasury and Investor Relations. Please proceed.

Thank you. Good morning, everyone, and welcome to Carpenter's earnings conference call for the fourth quarter ended June 30, 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, December 31st 10-Qs and its March 31, 2011 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 fourth quarter earnings call. About this time last year, I had just joined the Carpenter team in my current role as CEO. As you will recall, we were coming off of a challenging year due to weak economic environment.

Well, what a difference a year makes. We have benefited from strong sustained demand across each of our end market segments. In addition, the Carpenter team has made great progress in several important areas.

Starting with the customers, we have strengthened any of our key customer relationships, we've expanded our market share in key segments, and much of these gains have been driven by expanding and extending our long-term agreements. We have also dramatically increased our profit.

Net income is up $69 million versus prior year. Much of this gain has been driven by volume, which increased 25% year over year. We have also made fundamental improvements in our profit per pound from pricing and our mix management action and we will discuss those more in detail later in this call.

Finally, we took progressive actions to position the business for continued growth. We took important actions to expand capacity in our titanium, powder, and premium alloy businesses. We also announced several key acquisitions and joint ventures which served to expand our scale and scope. Even with these investments, we strengthened our capital structure and we believe these actions were essential to give us the financial flexibility to take full advantage of opportunities during this future and current business cycle to drive continued growth.

I will now speak more specifically about our fourth-quarter results.

We continue to see strong topline amend in the business, especially in our strategic growth markets of aerospace and energy. Overall, volume was up 12% in the quarter, driven by 13% volume growth in aerospace and 79% growth in energy.

Perhaps just as importantly, demand in these markets, along with the strategically important medical market, continued to show signs of continued expansion. In addition, much of this demand growth is for our higher value premium products.

As a result, we are fortunate enough to find that in many instances customers are working with us to extend our long-term agreements and expand our volume commitments. As exciting as this is, it puts the onus on us to take additional actions to ensure that we have the necessary capacity to meet our customers' growing needs.

In the corridor, we saw very positive results from our mix management pricing and cost initiatives. Looking at price and mix, for the second straight quarter revenue growth has outpaced volume growth.

In aerospace, revenue in the quarter, excluding surcharge, grew 17% on 13% higher volume. In industrial, revenue grew 25% on 11% higher volume. Our energy revenue grew 189% on 79% higher volume. Consumer revenue was up 10% on 4% higher volume, and automotive sales were up 13% on 2% higher volume and, finally, medical revenue was up 24% on 2% greater volume. So in total, revenue was up 31% on 12% greater volume.

We achieved these results by increasing prices where appropriate. However, most of our margin gains were driven by our mix management efforts, which focused on using our limited capacity for our higher value products. We also exited some products taken on during the downturn that were more commodity in nature and thus had lower margins. While we are pleased with our results to date in this area, we still expect to show more progress in this critical area in fiscal year 2012.

Finally, our strong results in the quarter were driven by strong cost control. This has been a major area of focus for us in the organization and the organization as done a great job both in terms of cost control and achieving production efficiencies.

In addition, while not impacting the quarter, we took the action to close our pension plan to new hires after the end of the calendar year.

Switching gears, as we look forward to the fiscal year 2012, we have three core priorities. Our first core priority is to continue to strengthen our base business. This will require that we expand our output of premium materials, continue price and mix management actions, and control cost while driving further production cost gains.

Our second core priority for fiscal 2012 is to successfully integrate Latrobe and drive anticipated synergies to the bottom line. I want to reiterate that we are very excited about joining with Latrobe. We think Latrobe is a great company. It has great people and it also has a great business. The Latrobe team has done an impressive job over the last few years enhancing their capabilities and business mix. It is well-positioned in attractive end markets, which are also experiencing strong customer demand.

We believe the Latrobe's products and end markets are highly complementary to Carpenter's. While all this is great, we are doing this transaction because we believe it will create shareholder value.

As previously stated, the acquisition is expected to be accretive to Carpenter during its first full year even when one-time costs are factored in. We also expect to see significant synergies over time. While there are some cost synergies in areas such as purchasing, the majority of gains will come from increased output. We believe the output of the combined system will be greater than simply adding each company's current capacities together and this is very important as it will help both companies meet growing demand, especially in the aerospace and energy market.

In addition, and very importantly, the combination of our volumes will create a larger critical mass and thereby help us to justify our next major increment of capacity in premium melt, which will of course be a significant investment.

Finally, we believe their people, [their] knowledge, and assets will help us to accelerate the commercialization of several of Carpenter's high potential products, especially in the areas of stainless, landing gear, PremoMet, and Temper Tough.

I would also like to note that when the transition closed, we will welcome two new Board members, Tom Hicks and Steve Carroll. Having had the personal opportunity to work with these two individuals over the last several months, I believe they will bring great experience and perspective to our Board.

Our third core priority for fiscal year 2012 is to take additional actions to ensure that we sustain future growth. In this area, expanding our capacity is a high strategic priority. As previously mentioned, demand for our premium products is increasing at a greater rate than our ability to currently expand capacity.

To alleviate these constraints, we have already initiated actions. We have focused effort to drive higher output from our existing assets through increased staffing and focus on productivity. We have also announced key capacity expansion at our Dynamet, Florida operations in the strategically important market area of powder and in our premium metals operation in Reading where we have announced the expansions of premium remelt forge finishing and our annealing operations.

Even with these actions, we anticipate the need to add additional premium capacity to adequately meet the strong demand that is growing for our premium products.

Since this is such an important and costly initiative for Carpenter, we are taking time to complete a full assessment of options, but we believe we will be in the position to provide more color on our attended -- intended actions in this area in the near future. In addition, to accelerate growth we continued to invest in new product development. We are particularly excited about market interest in our PremoMet product lines and our stainless steel landing gear initiative.

Lastly, to accelerate growth we will continue to seek accretive acquisitions. As you recall, we have been very active in this area over the last year. Earlier in the year we announced two joint ventures with Sandvik to further advance our strong position in high-value powdered metals. Later we announced the purchase of Amega West, and more recently the follow-on purchase of oil filled alloys, both of which provide us with better downstream visibility to grow in the attractive oil and gas market, and they also serve as a foundation for growing our precision imaging capabilities. And of course we finished the year with our recent announcement to acquire Latrobe Specialty Metals.

As we look forward, our first priority is to integrate these ventures effectively. That said we will continue to prudently look at additional opportunities as they become available this year.

So in summary, from my perspective, it has been a good and busy first year. I am proud to be part of the Carpenter organization. Carpenter has great people. They have worked hard this year and you can see it in the results.

I also believe we are well-positioned for more good things ahead. We have got the right people, the right markets, the right strategy, and the right capital structure. And with that, I'll turn the discussion over to Doug who will walk through the financial results for the quarter.

Okay, thanks, Bill. We are pleased with our fourth-quarter results. Our topline growth rates continue to be very strong and the spread between our volume and revenue growth rates for the past two quarters reflects good execution of our pricing and mix management outlook initiatives as Bill had outlined.

In terms of the bottom line, you will recall that our third quarter was influenced by some positive items including a very low tax rate. Our fourth-quarter earnings exceeded our internal forecasts, driven by volume that was even higher than a very strong third quarter; continued good progress on our pricing and mix management initiatives, leading to further increases in our profit per pound; and good operating performance. This was all during a time when we had a lot on the plate with our announced acquisitions and refinancing initiatives, so a good job by the organization.

With that as background, let me walk you through our fourth-quarter results more specifically.

Net sales in the quarter were $484 million or 33% above a year ago. Excluding raw material surcharge, sales were up 31%. The Amega West acquisition accounted for about 3 percentage points of the year-to-year growth. Overall, pounds shipped increased 12% from a year ago. Volume of special alloy products grew 7%, titanium products increased 15%, and stainless steel products were up 13%.

As you'll remember from last quarter, we are providing volume by reporting segment to help you track our progress in improving our profit per pound, which remains a top priority. Premium alloys or PAO segment volume was up 40% and our profit per pound improved $0.52 against the same period last year and was up $0.37 versus the third quarter. AMO segment volume was up 7% and profit per pound was $0.31 higher than a year ago quarter and $0.02 above the third quarter. So for the past two quarters we have seen good progress on this metric.

Continuing down the income statement, gross profit was $77 million compared with $43.7 million in last year's fourth quarter. The higher gross profit level was driven by higher volume and improved product mix, price increases, and better operating performance. SG&A expenses for the quarter were $39.6 million or 11.2% of revenue ex-surcharge compared to $33.5 million or 12.4% in the prior year. The year-to-year difference is primarily due to the addition of Amega West overhead costs and higher compensation-related expenses.

Operating income for the quarter was $35 million compared with $10.2 million in last year's fourth quarter. Our operating margin excluding surcharge and pension earnings interest and deferrals or EID, as we always quote it, was 12.4% and 13.1% if you exclude the Latrobe transaction costs. This compares to 7.3% in last year's fourth quarter.

Finishing up the income statement, other income of $2.8 million compared to $0.9 million last year. The difference is mainly due to residual payments of $1.6 million received under the expired CDSOA anti-dumping subsidy program. The tax line was more straightforward this quarter with tax expense of $7.7 million or 23% of pretax income compared to $0.7 million or 11% of pretax income in the 2010 fourth quarter. Overall reported net income was $25.5 million or $0.57 per diluted share and would have been $0.61 per share excluding the impact of Latrobe transaction costs. This compares with fourth-quarter net income of $5.9 million or $0.13 per diluted share in 2010.

Free cash flow for the quarter was $61.5 million, driven by earnings and working capital improvement. For the full year, free cash flow was negative $88.9 million, a bit better than we had previously predicted with about half of the cash flow result due to the Amega West and Oilfield Alloys acquisitions and half due to higher working capital levels related to stronger business growth.

Overall, capital spending for the year was just under $80 million with $44 million in the fourth quarter. Note that intercompany sales to Amega West for use as rental assets get classified as CapEx on our statements. This accounted for $6 million of the $80 million spend, leaving about $74 million of ordinary capital investment for the year.

We improved our balance sheet and liquidity during the quarter as we issued $250 million of 10 year bonds and increased our credit facility from $200 million to $350 million while extending the maturity out to five years. We feel good about getting these accomplished during the quarter and being able to get the credit markets at a good time.

Our ending June cash and marketable security balance was $523 million. Excluding the bond proceeds, our cash balance was $275 million and above the $260 million level we predicted on our last call. Our net cash position at the end of the quarter was $[15] million.

Our total liquidity grew to nearly $870 million with the increased cash balance in larger available revolver. $100 million of this liquidity will be used to pay off our bond coming due in mid August and $170 million of cash will be used as part of the Latrobe acquisition. The remaining $600 million of liquidity provides flexibility to support future growth initiatives and take care of the next $100 million of debt maturing in less than two years.

Let me close with a few comments on our outlook for the current fiscal year. And the following does not include the additional impact of the Latrobe acquisition. As Bill mentioned, we still expect revenue to grow in excess of 10% this fiscal --. With over half of this in our order backlog already, this looks very solid. If we can succeed in freeing up more capacity through our internal productivity efforts, capacity expansion projects, and utilizing the Latrobe assets post-closing, we have the potential to do better than this, based on strong customer demand.

We also still expect base operating income, excluding pension EID expense to get to a better apples to apples comparison, to be approximately 50% higher than fiscal year 2011. To be clear, we are talking here about our reported operating income with an addback for the pension EID line that you can find on our press release schedule and SEC filings.

The key drivers of this will be continued profit per pound progress from pricing and mix management assets and good growth on our titanium, powder, and Amega West businesses.

EPS gets a little more complicated so it is worthwhile to go through a couple of the pieces. We finished fiscal year 2011 at $1.59 per share with a run rate of $2.42 per share in the second half of the year. We just finished work with our actuary on our non-cash pension expense for fiscal year 2012. Due to higher asset values and a higher interest rate used to calculate liabilities, our fiscal year 2012 pension expense will be $0.55 a share this year compared to $0.84 in fiscal 2011.

We expect our effective tax rate for fiscal year 2012 to be back to a normal level of 33% so that will be a negative in the EPS comparison since the fiscal year 2011 tax rate was only 18%. So that is a big impact item on our fiscal year 2012 EPS.

Interest expense will be about $7 million or $0.10 per share higher than in fiscal year 2011 as a result of our higher debt level. We also expect the CDSOA income to end which takes out $2 million or about $0.03 a share from fiscal year 2011. While we are well-positioned for a good year of results, we expect our first quarter EPS will be impacted by the normal business seasonality and plant shutdowns we have experienced over the years in the first quarter.

In addition, earnings in the quarter will be impacted by a much higher tax rate and Latrobe transaction costs of about $3 million or $0.06 a share assuming we close in the quarter.

On Latrobe, if we close sometime before the end of the first quarter, we still expect to be slightly accretive in fiscal year 2012, including the transaction-related costs. We also expect that transaction be strongly accretive in the out years including $25 million in net annual pretax synergies. Latrobe will also result in changes to our external segment reporting when it closes. We are working to finalize the new structure and will be proactive in helping you make the transition when this happens.

Finally, with respect to cash flow, excluding the Latrobe acquisition, we expect to have modestly negative free cash flow this year as stronger earnings are all set by a higher level of CapEx to expand capacity and some minor expected working capital increase to support growth. We also have an estimated $28 million in cash funding requirements for the pension fund this year. Our total CapEx investment including Latrobe is still expected to be around $200 million.

So to sum it up, it has been a good year of financial results and strengthening of our capital structure. We continue on track to achieve our target of returning to our prior peak level of profit and then beyond. And we are well-positioned financially to fund the growth investments that are needed to execute our strategy.

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

(Operator Instructions). Chris Olin from Cleveland Research.

Good morning. Curious on the stainless steel and some of your special alloy markets. Do you anticipate any impact in the first quarter associated with buyer pauses or any kind of pullback in activity since the surcharge started falling or is most of that -- most of that been already kind of absorbed through the system?

Well, we have some normal seasonal demand as Doug referenced, due to customer shutdowns and the like. And we've been focusing extensively on our mix management efforts to take our available capacity and make sure it is directed where we can get the greatest value. So we are not seeing any significant pause as it relates overall to the demand other than just related to the normal seasonal activities.

Have you seen on the titanium side the impact from 787 production ramp or inventory drawdown yet? I'm just wondering how much the growth is directly tied to that platform, just as opposed to medical or other areas?

Right and in that area, we have seen very strong demand for our titanium fasteners. We don't see that there is any inventory effect that's per se driving that. So the inherent demand is strong and frankly we only see upside associated with increased build of the 787 in the future.

Do you have a utilization number that you could give for the Dynamet [effort] operations?

This is Dave Strobel. The utilization right now is 80% to 85% for the finished operations there which is why we've announced a capital investment there to expand our finish operations down in Florida.

Okay. Thank you.

Thank you for your question. (multiple speakers).

I would just note thought, just to add that we have announced an expansion which will add significantly to our capacity and so as the market grows, we think we are very well-positioned to support the industry.

Okay, Operator, next question.

Thank you. Gautam Khanna from Cowen and Company.

Could you provide some clarity around the fastener comments? You know, we saw precision cast parts reported flat sequential fastener sales today. And I know that you guys have indicated previously that you are shipping more. And so I am wondering, do you have any sort of line of sight as to whether this stuff is actually flowing through to the end customer or is this kind of an inventory build by the fastener OEM? And then relatedly, if you could just update us on what your lead times are for the various fastener stock? You know for titanium bar, titanium coil, and the nickel and then in stainless pieces as well?

From a nickel-based fastener viewpoint, we think that inventories and chain downstream are declining. We did see higher demand in this second half of fiscal year 2011 versus the first half. Right now overall, the demand is probably around 75% to 85% of the previous peak and we expect that that will continue to increase when the excess supply and the distribution channel begins to work its way through the system.

Again from a titanium fastener standpoint, we are seeing record demand and we only expect that to increase further. And from a lead time standpoint, Dave Strobel will speak to that.

Yes, on the titanium side, new fastener orders on forecast would be looking at very late this calendar year, as far as delivery. So we have very good demand there. On the nickel-based side, we are actually booking new orders out into our third quarter or the -- approximately the February timeframe of next year.

And is that -- when you mention that, that's for both titanium coil and bar, is that right? So you have about six-month lead times, five-month lead times? Is that the comparison?

Yes, that would be correct.

And is that an aerospace phenomenon, or is this also driven by the medical market, which apparently has been strong too?

The medical market has been strong for us and that is one of the markets where we have had some good success in terms of expanding our long-term agreements and picking up some additional shares as a result.

Because what I am trying to isolate is do you think that this lead time extension is due to kind of primarily to the aerospace demand, or could it just be because medical is sort of leading the way as well? (multiple speakers) which is kind of the greater influence on this lead time? Where is the order book stronger?

I think it is strong in, really, in both of those areas.

Okay. Thank you.

Steve Levenson from Stifel.

Thanks. Good morning, everybody. Could you give us an idea of what sort of gains you think you could get by shifting production from your VIM over to Latrobe's VIM? How much additional aerospace material could you deliver?

Let me comment in general and then I think Dave can give you a more specific answer. Of course we have some unique production capabilities. Also, Latrobe has different unique production capabilities and we believe that they will be able to reduce some of the materials we produce in Reading today more efficiently and vice versa. And that is great because of course, as we mentioned, demand is high. So, Dave can speak maybe more specifically on an equipment basis, but that is really the basis of expecting to get greater output and, from that, some significant synergies.

From a total premium melt capacity standpoint, we are really excited to be working with their folks in taking a look at the VIM operation. As Bill mentioned, when we start to work our way through the integration process with them in detail, we will look at the opportunities as far as moving some of our grades to them and taking advantage of that capacity and perhaps at the same time the ability to improve yields and reduce costs. That's our goal with the integration effort.

They also have a nice remelt facility there and, of course, will be working with him to expand that as well. But we need to go through the integration details to really be able to answer that question in more detail.

Got it. Thanks.

And in terms of dimensionalizing that, Steve, I think that is among the reasons why the deal has such an attractive financial profile. So when we talk about accretive in the first year, you know even including transaction costs and $25 million of annual pretax synergies, those are all the kinds of things that are leading to those numbers.

Secondly, with the new models 737 and A320, now on in backlog for Boeing and Airbus, or their opportunities for you to increase your content with either more of the same materials, or different materials?

Well, certainly, we have strong supply positions today and as an aircraft goes through additional redesign, some of those details are being worked through and we are working aggressively for ultimately 2015 when the new A320 will be moving forward to ensure that we have at least the same level of demand and hopefully increase our participation. But those decisions, if you will, in many cases are ongoing right now just because of the timing of the delivery of the aircraft.

Got it. Thanks very much.

Edward Marshall from Sidoti & Company.

Yes, I was wondering if you could complete the thought that you started on EPS? You started talking about some of the tax situations as well as EID, but you also had some pretty decent guidance for the operating line. So can you kind of helpless complete that thought? Or could you give more detail?

I think I've given a lot of detail. We did provide good guidance on the operating income line and because there is a lot of puts and calls on the EPS line, we just really wanted to help you by calling out some of those significant puts and calls.

What would be the breakdown of the pension expense as it would run through EID and which would run through the segments? Can you give us a little bit more color on that, then?

Sure. Do we have that, Tom?

So the EID portion that we are looking at for fiscal year 2012 is about $14.5 million and the balance would be in the service cost.

Okay. And then if you could just quickly, I'm assuming that $2.4 million for Latrobe was, say, lower fees or other closing fees, one-time expenses, so to speak.

Yes, so we had -- you have investment banking fees, you have legal fees. We had some third-party fees associated with our due diligence process and then looking ahead into the current quarter and what we would anticipate there, you would have the remainder of investment banking fees. Some additional legal fees. Some asset appraisal fees. Those are the things that were making up that cost.

Do you have estimates on the intangible write ups or the inventory write ups yet?

They are estimates because they were developed as part of our due diligence, but once we get closer to closing, we can refine those. But we estimate that we would have total writeups in the magnitude of $135 million that would then be taken over a number of years and then we would also have a one-time write up in inventory of about $10 million that would be written off over one inventory turn cycle.

Okay. Thank you.

Mark Parr from KeyBanc.

Thank you. Good morning. I was curious about your 2012 commentary a bit, you know, the base business ex-Latrobe. And to what extent you made -- the 10% growth that you are looking is kind of a baseline, is there any pricing in that, or is that all volume? Is that an equivalent mix? Anything in that 10% growth that might enrich Carpenter's mix or maybe lower it a bit?

Yes, I would just characterize that we think much of that is going to be revenue growth and I think the key on getting more of a volume growth -- (multiple speakers)

You mean by volume instead of pricing? Is that what you are meaning?

Well, through pricing and mix management efforts and so you know revenue growth in excess of 10% will be driven largely by revenue in excess of volume growth. And in order to move the needle up on that overall revenue growth, it's going to be getting more volume out through our efforts on internal productivity improvements, some of the capacity increases and then, ultimately, when we close the benefits of the Latrobe acquisition.

Okay, in terms of -- again, this is -- I appreciate that, Doug, thanks. Another question I had, as you look to combining Latrobe and Carpenter from a marketing perspective, and you look at Latrobe's outsized aerospace and defense exposure.

I'm just curious. Would you anticipate some of the early revenue synergies to be coming more from aerospace or more from energy markets, or industrial? I mean, is there something in particular that really excites you, you think could create some better revenue momentum sooner as opposed to later?

Well, the good news is we do see demand really across all of our end market segments and they have done a nice job to build up an attractive business mix for their base businesses, as we have. And so I think once we are to the point where we can share greater details with each other, we will be looking really to see if we can't raise the overall ability to meet all of the end market output, and it won't necessarily be disproportionally focused on any particular segment.

Okay. Well, congratulations on the results and good luck with this exciting period you are embarking on.

Thank you.

Brian Yu from Citi.

Great, thanks, and congratulations on a solid quarter. Bill, if I look at volumes that you are accomplishing right now and you are pretty close to capacity and compared to where you were in the last cycle, you have more melt capacity and your profits, obviously, have a return to where they are and you guys are making good progress along the way. When you look at your competitors out there, do you think they are operating as high of a rate as where you are?

And then a follow-up question on that would be at what point do you think we could see -- everyone within the industry is starting to get more pricing power. Basically the markets really tightening up, not just for yourself but for the whole industry.

Sure. In that respect, we do perceive overall that capacity is pretty tight, especially in the nickel-based alloy area, which is why we really focus so much of our attention, focus not just on mix management -- and by mix management we mean moving more and more of our nickel-based capacity to produce database product, but in addition to that to expanding our capacity. And we believe that that's the right solution for us and it will help alleviate some of the supply demand pressure that exists in the industry today.

That is a very important move. So you get some pricing leverage in that, in that respect, but our real goal is to enhance our mix and to increase our output.

And do you think the rest of the industry is operating as high of a rate as where you are at today?

Well it would depend upon which area, again. In the nickel-based area, I think, that you would tend to find that things are overall tighter than in the general stainless arena.

Okay. And if you look at your guidance for next year, it seems like you're probably looking at a number closer to $200 million in operating profit before EID expenses and that's not too far for where you are running at today. When you look at your guidance relative to the range of probability, I know I'm trying to pin you down a little bit, would that be kind of on the lower end of what you would expect to achieve, or is that kind of right in the middle?

I think that is a realistic estimate and, as you know, we are focused on returning to our prior peak and I think that would represent a significant step in closing that gap to prior peak.

All right. Thank you.

Tim Hayes from Davenport & Company.

Good morning. Could you give the sequential change in volumes in the June quarter for your six end markets, please?

Sure. Aerospace was actually down 5 percentage points, energy up 22 percentage points, our medical business up 8 percentage points, industrial down 1%, automotive plus 3%, consumer minus 3%. So overall we were essentially flat across the corporation quarter-to-quarter volume.

I thank you.

Gautam Khanna from Cowen & Company.

Just a couple of follow-ups. I wanted to ask about that fastener order pattern during the quarter. Did you see a pickup through the quarter, June quarter is better than May and April, or could you comment on the flow and how they are trending in July? And then I have another one on flow.

From my standpoint on the operations side, what we are seeing right now is very similar to what we had reported on during the call last quarter. We are seeing the customer lead times for new orders out in that six- to eight-month timeframe.

And the channel checks have been strong. I mean I think the right way to look at this is that there has been a gradual and continual increase in the overall demand pattern. I wouldn't describe it as a spike and our forecast going forward is that we expect that that pattern will continue.

I guess the question is, at some point during the quarter, I thought you remarked that titanium coil lead times were six to eight weeks. They were as long as the [bar lead] times. I was wondering if that has changed?

Let me just comment a little further on that. When I am giving you these lead times in regards to the six to eight months, that type of thing, that is for the new unforecasted demand that we have coming in from a customer. So our shops, as far as new orders coming in, would be busy after that timeframe.

From a manufacturing lead time perspective, as far as once we have an order and have it in process, that is very much different versus new orders coming into the order books. You follow that?

Yes I do, and has that metric changed through the quarter? The manufacturing lead time.

Manufacturing lead times. I would say yes. As with some of the work that was done from an execution standpoint on the nickel-based side, and I know that titanium side we are working on the same thing and with the additional capacity that we will be putting in there, those manufacturing lead times, our goal is to bring that down.

Okay.

A couple of days there helps a lot.

Sure. Two other quick once. Just if you could comment, you mentioned about working on customer relationships, since you have been there, Bill, and you obviously have done a great job. I just wondered if you could comment on the relationship at Carleton Forge and if you have seen any drop in business year on year? Any risk of kind of future drops in business at that customer?

In speaking generally to PCC as a customer and as a company, it is impressive what they've done and their growth pattern that they have had both organically as well as through acquisition. And as I've mentioned before, our goal is to be their best external supplier. I know they have an internal supply and because their business is growing, we have actually seen opportunities to grow with them as their demand patterns have increased.

So, that is a good question probably for your 10 o'clock call which I know is coming up here with PCC and so forth. But I think what we're seeing is that we are working on the assumption that Carleton volume will be in a similar range year over year, but there is opportunity that we could see some growth.

Okay and you guys have been telegraphing some landing gear opportunity you have been pursuing for a while. Could you update us on the status and when we might have something more formal to announce?

Sure. There is, as you know, a general interest in moving to alternative materials which don't require cadmium coatings because of concerns that exist, specifically in Europe with [reach] legislation. And with that we've been focusing on trying to provide a stainless solution which not only would meet the corrosion and performance needs, but would allow the landing gear not have to be redesigned but essentially be dropped into existing models.

And with that, there of course is a long and extended testing period required on both the OEM part as well as on our part. We are, as frequent fliers, very happy about that. So we continue to see positive indications and signs coming from our customers in terms of their interest and the results of our test, but in terms of when they are prepared to make a comment or commitment to put it into flight, while we think it is a great idea and we are pushing to see that move toward to a certain degree, that is really in their court.

So I can just tell you that we continue to see positive signs and are very encouraged; and we hope that over the course of this fiscal year we will have some very -- some more specifics that we can share with you on that front, but it is a little bit difficult to predict just because of the dynamic I mentioned.

Thank you.

We have no further questions coming through.

Thank you again for participating in today's call. It has been a great year for Carpenter, but we recognize we have got a lot more work to do and we look forward to speaking with you again next quarter. Thank you and goodbye.

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining and have a great day. Thank you.