Carpenter Technology Corporation (CRS)

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Carpenter Technology Corp. (CRS)

F1Q2013 Results Earnings Call

October 23, 2012 10:00 AM ET


Mike Hajost - Vice President, IR and Treasurer

Bill Wulfsohn - President and CEO

Doug Ralph - Senior Vice President and CFO


Ed Marshall - Sidoti & Company

Gautam Khanna - Cowen & Company

Jonathan Sullivan - Citi

Josh Sullivan - Sterne, Agee

Dan Whalen - Topeka Capital Markets

Arun Viswanathan - Longbow Research

Steve Levenson - Stifel Nicolaus

Phil Gibbs - KeyBanc Capital Markets



Good morning. And welcome to Carpenter Technology’s First Quarter Earnings Conference Call. My name is Tony, and I’ll be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session towards the end of this call. (Operator Instructions)

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed.

Mike Hajost

Thank you, Tony. Good morning, everyone. And welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 2012. 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, 2012 10-K and the exhibits attached to that filing.

I will now turn the call over to Bill.

Bill Wulfsohn

Thank you, Mike, and good morning, everyone. I’m pleased to share that we had a strong first quarter. In addition, our results demonstrate that we are executing well against our long-term strategy, which we detailed during our September 7th Investor Day.

I would like to personally thank those investors and analysts who participated in our Investor conference and are on this call. For those of you, who are not with us in New York, but would like to learn more, the replay of our presentation is still available on our website.

During our Investor Day, we provided clarity on why we believe we are a true specialty materials company and not a commodity steel company. More specifically, we explained that our strategy is to focus our technical and capital resources on long products and what we call the premium and ultra premium segments within the specialty steel market.

By targeting these specialty steel segments, we are focused on the top 1% of the 1.5 billion ton steel market. Note these target segments required differential technology, high levels of technical qualifications and a strong focus on customer satisfaction excellence.

There are very few companies that can service these segments and that is why our business is less impacted by some of the macro-economic factors, which are currently affecting the broader steel industry.

In addition, our targeted niche segments are quite profitable. This is due to the associated barriers to entry by new competitors and limited available capacity. We are also fortunate that the end markets for our products are concentrated in aerospace and energy, where long-term demand is expected to remain strong and continue to outpace existing capacity.

Our first quarter results show this strategy to target the specialty end of the market is continuing to progress well and yielding positive results. More specifically, we achieved topline growth of 41% in the quarter versus prior year. In addition, revenue growth outpaced volume growth by 5%, which reflects a further improvement in mix as we shipped more ultra premium and premium products.

In summary, our strong sales growth, improved mix, combined with strong manufacturing performance enabled us to achieve operating income of roughly $70 million, which is up 46% from prior year and operating margin of 15.8%, and EBITDA of $104 million in the quarter.

To augment and accelerate our focus on premium and ultra premium products. We also discussed at our Investor Day our commitment to quickly integrate Latrobe. I’m happy to report that after seven months of ownership, Latrobe results are tracking ahead of our deal economics. We continue to be very encouraged by progress to date on achieving our targeted operational synergies.

I was walking the Latrobe floor just a few weeks ago and was very excited to see that there is a mutual respect between the Latrobe and Carpenter teams. And this is leading to knowledge sharing and best practice implementation.

This team work and knowledge sharing is enabling us to produce more premium products and achieve higher yields. In some cases, yields and productivity have improved by more than 30%.

Finally, I was able to see one of our three new VARs installed with one already in operation. All three of these VAR furnaces will be in operation this quarter. This additional capacity along with actions taken in Reading is critical for us as we work to meet growing demand for our premium products.

Looking forward, we are tracking well against our target for Latrobe to be at least 10% accretive to earnings per share in fiscal year ‘13 and we continue to believe we can meet or beat the targeted $25 million of net pre-tax synergies by year three.

Switching gears to another critical component of our strategy, we are working hard to put in place required ultra premium and premium capacity to meet mid-decade customer demand.

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