Castle (A.M.) & Co. (CAS)

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Castle & Co. (CAS)

Q3 2008 Earnings Call

October 27, 2008 11:00 am

Executives

Michael H. Goldberg - President & Chief Executive Officer

Scott F. Stephens - Vice President - Finance, CFO & Treasurer

Katie Pyra - Ashton Partners

Analysts

Lloyd O'Carroll - Davenport & Company Llc

Timothy Hayes - Davenport & Company Llc

Nat Kellog - Next Generation Equity Research

Mark Parr - Keybanc Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, thank you so much for standing by and welcome to A.M. Castle & Company’s third quarter 2008 earning conference call. (Operation instructions)

I would now like to turn the conference over to Miss Katie Pyra with Ashton Partners. Please go ahead.

Katie Pyra

Good morning. Thank you, everyone, for joining us for A.M. Castle’s 2008 third quarter conference call. By now you should have all received a copy of this morning’s press release. If anyone still needs one, please call my office at (312) 553-6717, and we will send you a copy immediately following the conference call.

With us from the management of Castle this morning are Mike Goldberg, President and CEO, and Scott Stephens, Vice President of Finance and CFO.

Before we begin, as usual, we would ask that everyone take note of precautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in this morning’s conference call.

We will begin the call with an overview of the quarter and the year and then—I am sorry, of the quarter—and then we will open up the line for questions.

And now I will turn the call over to Mike Goldberg. Go ahead, Mike.

Michael Goldberg

Thank you, Katie. Good morning and thank you for joining us today on the call. In a few minutes, Scott will speak to our third quarter results in greater detail, but first I would like to share some of the highlights with you.

As we all know, the business environment and commodity pricing has changed substantially since the second quarter. We are dealing with reduced amounts of product, a lower pricing environment, and certainly uncertain economic times. However, our strategy of focusing the business on markets that have strong fundamentals and good long-term growth prospects should serve us well, irrespective of the short-term uncertainty.

For the third quarter, business activity continued at a reasonable pace, albeit slower as the quarter went on. Demand remained steady in aerospace and oil and gas end markets, and weakened in our heavy equipment and general industrial markets. Compared to the prior year quarter, sales volumes were 2.6% higher. In addition, selling prices were also higher than a year ago, chiefly due to higher carbon scrap surcharges.

As a result, our consolidated net sales were a record $388.9 million, an 11% increase over the same period in 2007. Net income for the quarter was $11.5 million or $0.50 per diluted share, as compared to $12.9 million or $0.57 per diluted share for the third quarter of 2007.

This year’s third quarters numbers were impacted by a $0.04 per share charge for legal costs in a settlement related to our 2006 acquisition of Transtar Metals. Year-to-date, net income was $36.5 million, or $1.62 per diluted share, as compared to $45.5 million, or $2.14 per diluted share through the third quarter of 2007. Overall, metal segment volumes were weaker in the third quarter than in the first half of the year.

As we have mentioned in the past, we typically experience some slowdown during the summer months due to typical seasonal factors of fewer shipping days and customer shutdowns. However, this year, after what we considered a normal July, we experienced increasingly weaker demand in the following two months, with third quarter volumes being down 11% compared to the second quarter. Nonetheless, through September 2008, our year-to-date volumes were 5% higher and revenues were 7% higher than the prior year period.

On the pricing front, our average prices were higher as we saw carbon and alloy surcharges rise through the summer, reaching historic highs in August, before falling back in September. These increases were partially offset by declines in pricing for nickel and aluminum. We achieved a meaningful gross margin improvement in the third quarter, with margins rising to 26.0% versus 25.2% in the second quarter.

If you will remember, our second quarter margins were negatively impacted by rapidly-increasing surcharges. We worked diligently in the third quarter to remediate the surcharge impact and more effectively manage our pricing. Our inventory has flattened our over the course of the quarter and we plan to significantly cut back our purchases in the fourth quarter.

Now I would like to give you a bit more color on our business activity by segment and across our end markets. In our metal segments, sales for the third quarter were $360.1 million, which was $39.2 million or 12.2% higher than the third quarter of 2007. Volumes year-over-year were 2.6% higher than the same period in 2007, and 11% lower than the second quarter of 2008.

Our oil and gas business remained strong, driven by global demand for nickel, stainless, and alloy products. Revenues were impacted only slightly by the hurricanes, and our Houston facility escaped significant damage.

The majority of the hurricane impact was felt directly by our employees and some of our customers, many of whom were without power for several weeks. Our oil and gas customers are continuing to outsource the manufacturing processes, which fits favorably with our overall market strategy.

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