Carpenter Technology Corporation (CRS)

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Carpenter Technology Corporation (CRS)

F4Q 2011 Earnings Call

July 28, 2011 9:00 AM ET

Executives

Mike Hajost – VP, Treasury and IR

Bill Wulfson – President and CEO

Doug Ralph – SVP and CFO

Dave Strobel – SVP, Global Operations

Analysts

Chris Olin – Cleveland Research

Gautam Khanna – Cowen and Company

Steve Levenson – Stifel

Edward Marshall – Sidoti & Company

Mark Parr – Keybanc

Brian Yu – Citi

Tim Hayes – Davenport & Company

Presentation

Operator

Good day ladies and gentlemen and welcome to the Carpenter Technologies fourth quarter earnings conference call. My name is Juanita and I’ll be your coordinator for today. At this time, all participants will be in a listen only mode. After the speaker’s 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, Mr. Mike Hajost, Vice President, Treasury and Investor Relations. Please proceed.

Mike Hajost

Thank you Juanita. 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 Wulfson, 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 June 30, 2010 10-K and September 30th, December 31st 10-Q’s and its March 31st, 2011 10-K, and the exhibits attached to those filings.

I will now turn the call over to Bill.

Bill Wulfson

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. 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 customer, we’ve strengthened many 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 actions, and we’ll discuss those more in detail later in this call.

Finally, we took aggressive actions to position the business for continued growth. We took important actions to expand capacity in our titanium, power and premium alloy businesses. We also announced several key acquisitions and joint ventures, which serve 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 top line momentum 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 their 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 customer’s growing needs.

In the quarter, 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. In 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 higher value products.

We also exited some products taken on during the downturn that were more commodity in nature, and thus have lower margins. While we’re pleased with our results to date in this area, we still expect to show more progress in this critical area in fiscal year ‘12.

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 has done a great job; both in terms of cost control and achieving production efficiencies.

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