Carpenter Technology Corporation (CRS)

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Carpenter Technology (CRS)

F3Q 2011 Earnings Call

April 26, 2011 10:00 a.m. ET

Executives

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

Analysts

Edward Marshall – Sidoti & Co.

Brian Yu – Citi

Michael Gambardella - JP Morgan

Steve Levenson – Stifel Nicolaus

Dan Whalen – Capstone Investments

Sanil Daptardar – Sentinel Investments

Timothy Hayes – Davenport & Company

Gautam Khanna – Cowen and Co.

Mark Parr – KeyBanc Capital

Presentation

Operator

Good morning and welcome to Carpenter Technology’s third quarter earnings conference 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.

Mike Hajost – VP and Treasurer, IR

Thank you operator. 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.

Bill Wulfsohn – President and CEO

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 will 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 a share and a 13% operating margin. Looking forward, pricing and mix management remains our top focus since capacity remains tight and we still need to further improvement our profit performance. As such, we are 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 up cycle. Aerospace engine demand has been strong for over a year and a 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 benefitting 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 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 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 deliver performance, we want to make sure we are 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’ve 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.

Read the rest of this transcript for free on seekingalpha.com