Carpenter Technology Corporation (CRS)
F2Q2011 Earnings Conference Call
January 25, 2011 10:00 a.m. ET
Mike Hajost – VP and Treasurer, IR
Bill Wulfsohn – President and CEO
Doug Ralph – CFO and SVP, Finance
David L. Strobel - Senior Vice President - Global Operations
Chris Olin – Cleveland Research
Edward Marshall – Sidoti & Co.
Brian Yu – Citigroup
Steve Levenson – Stifel Nicolaus
Gautam Khanna – Cowen and Co.
Timothy Hayes – Davenport & Company
Mark Parr – KeyBank Capital Markets
Dan Whalen – Capstone Investments
Previous Statements by CRS
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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 all over to your host for today, to Mr. Mike Hajost, Vice President and Treasurer. Please proceed.
Thank you, Kaitlyn. Good morning everyone and welcome to Carpenter’s earnings conference call for the second quarter ended December 31, 2010. 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, 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 for our fiscal year 2011 second quarter earnings call. During our last call I outlined in some detail my initial priorities. These included, one enhancing operational excellence, two improving product mix and three accelerating growth in the business. These priorities remain unchanged and the Carpenter team is aligned and active in each of these areas.
From an operational perspective we’ve made great strides as we’ve reduced the number of safety incidents and reduced variable cost per ton. However, demand has outpaced our ability to add production shifts and train workers.
Overall we are experiencing significant demand for our materials across all of our end markets. In particular, we’re pleased with the strength of the Aerospace engine market where we have increased our share position, and in the oil and gas sector where we recently announced a downstream acquisition and are seeing rapid growth.
In the short term. this led to tight capacity across some of our critical operations. We are making progress, reducing these bottlenecks and we fully expect greater output in the second half of the fiscal year. Our actions in this area are critical to success, as increasing our capacity will help us to reduce lead times and bring in more profitable transactional volume.
My second key priority is improving our product mix. Let me be very clear, we are not yet achieving the profit margins we expect to see in this business. Stepping back as we discussed last quarter, we took on lower value business during the down turn. With demand recovering, our plan is to increase margins by improving our sales mix and increasing our prices.
You don’t yet see strong evidence of these actions in the second quarter, due to our long lead times. In fact, most of our second quarter shipments were booked before pricing and mix management actions were taken. In addition, due to capacity constraints we have had to turn away profitable transaction volume during the quarter.
With improving operational performance and a fuller realization of the impact of our notes, price increases and mixed management decisions, our margins will steadily improve over the next few quarters. This issue has my full attention and it is also the management team’s number one priority. Success in our margin improvement efforts will also allow us to build the same level of momentum on the bottom line as we are seeing on the top line.
With respect to accelerating Carpenter's growth I am confident we are very well positioned in a very exciting space. Aerospace is clearly one of the most exciting markets we participate in. From a demand perspective, we expect airline monitor to soon release an increased forecast for aircraft build rates. In addition, the 787 supply chain is beginning to gear up as deliveries are scheduled for later this year.
We also see significant opportunities to extend our recent share gains. As a result our backlog in this market continues to increase. We continue to believe that the energy market has the potential to be our fastest growing market.
Directional drilling rigs are already above prior peak levels and projected build rates for power generation plants are increasing. We are well positioned in these, as well as other segments of the energy market.
As we look to the future a consequence of this continued demand growth is the eventual need for us to expand our capacity. As the first step, we are focused on finalizing customer qualifications of our new premium (inaudible) assets.
We are also engaging in lien resources to squeeze more production out of our other existing production assets. Finally, considering the lead time required to put into capacity, we are beginning to evaluate our next capacity expansion investments.