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

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A.M. Castle & Co. (CAS)

Q2 2008 Earnings Call Transcript

July 29, 2008 11:00 am ET

Executives

Katie Pyra – IR, Ashton Partners

Mike Goldberg – President and CEO

Scott Stephens – VP of Finance, CFO and Treasurer

Analysts

Nat Kellogg – Next Generation Equity Research

Tim Hayes – Davenport & Company

Jason Brocious – KeyBanc Capital Partners

Heath Ritchie – Delphi Management

David Fondrie – Heartland Funds

Tim Chatard – Sterling Capital

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the A.M. Castle & Co. second quarter 2008 earnings conference call. (Operator instructions) At this time, I would now like to turn the conference over to our host, Ms. Katie Pyra. Ma'am, you may now begin the call.

Katie Pyra

Thank you. Good morning and thank you, everyone, for joining us for A.M. Castle's second quarter 2008 conference call. By now, you should have all received a copy of this morning's press release. If anyone still needs a copy, please call my office at 312-553-6717, and we'll 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'll begin the call with an overview of the quarter, and then we'll open up the line for questions. And now, I would like to turn the call over to Mike Goldberg. Go ahead, Mike.

Mike Goldberg

Thanks, Katie. Good morning, everyone, and thanks for joining us today. I'm pleased to have Scott Stephens, our new Chief Financial Officer with me on today's call. In a few minutes, Scott will speak about second quarter results in greater detail. But first, I'd like to share some highlights with you.

In the second quarter, business activity remained firm and we reported strong revenues. Our consolidated net sales were $397.1 million, up 6.6% from the same quarter in 2007. However, compressed gross profit margins led to softer earnings.

Net income was $11.3 million, or $0.49 per diluted share, compared to $16 million, or $0.78 per diluted share in the prior year. Earnings for the second quarter of 2008 included an $0.08 per diluted share impact from the May 2007 secondary equity offering of 5 million shares.

Our end use markets held up well in the second quarter. In particular, we experienced continued healthy demand from our heavy equipment and oil and gas markets. Revenues were strong due to high sales volumes and higher seller [ph] prices driven by continuing significant price increases on carbon-related products. The aerospace market remains unchanged from the prior quarter.

Volumes in the Metals segment on a same-store basis were 9.3% higher than the corresponding quarter last year and 1.5% higher than the first quarter of 2008. Activity increased every month through May and we anticipate business levels to remain reasonably firm in the third quarter. However, as you know, in the summer months, we experience some slow down due to seasonal factors of less shipping days and customer shutdowns.

Year-to-date volumes in the Metals segment are 5.2% ahead of last year primarily driven by our carbon and alloy bar and plate products as a result of strengthening in the heavy equipment and general capital goods markets.

Our earnings in the second quarter were impacted by gross margin compression. Gross margins defined as sales less cost of materials for the second quarter were 25.2% compared to 27.5% last year and 26% in the preceding quarter. Gross margins were impacted most by changes in product mix and escalating metal costs.

In addition, in the second quarter, we recognized a change in LIFO reserves of $29.8 million, compared to $3.5 million in the first quarter and $18.6 million in the second quarter of last year. We will discuss these items in more detail later in the webcast.

Now, I'd like to give you a little bit more color on our business activity across our end use markets. Our carbon and alloy plate business continues to be very strong. Supply remains tight especially in high strength carbon and in quench and tempered products.

Demand from manufacturers of mining equipment and industrial cranes remained very firm with backlog stretching into 2009 and 2010. Customers exposed to the residential construction industry, such as aerial lift truck manufacturers, have been negatively impacted by the slow housing starts, and we have also seen a slowdown in demand from customers who make equipment for the non-residential construction market.

Activity in our oil and gas market continues to be brisk. With oil pricing hovering at record levels we expect continued strong growth within the industry through the balance of this year and into the foreseeable future.

Customer demand within our traditional bar and tubing business also remained solid through the quarter. In fact, stronger than anticipated, given the current economic climate. These products go into a number of different industrial applications which could generally be described as producer durable goods. We believe the weak dollar and the increased ability of our customers to compete on a worldwide basis is fueling this activity despite the current domestic economic sentiment.

As I mentioned earlier, the aerospace market remains generally unchanged from the previous quarter. Since late last year, we've been talking about an existing supply imbalance in heat-treated aluminum plate and saying that we expected our aerospace margins to be relatively flat until the oversupply resolved itself, which we expected to happen in the second half of this year.

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