Q1 2007 Carpenter Technology Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the Q1 2007 Carpenter Technology earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. At that time, if you wish to ask a question, (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to turn the presentation over to your host for today's conference, Vice President and Treasurer, Mr. Jaime Vasquez. Please proceed.

JAIME VASQUEZ, VP AND TREASURER: Good morning. Welcome to our conference call for the period ended September 30, 2006, the first quarter of Carpenter's fiscal year. This call is also being broadcast over the Internet. With me today are Bob Torcolini, Chairman, President and Chief Executive Officer; Dave Kornblatt, Senior Vice President Finance and Chief Financial Officer; and Rick Symons, Vice President and Corporate Controller.

Some of Carpenter's statements will be forward-looking statements which 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 recent SEC filings including the Company's June 30, 2006, 10-K in the exhibits attached to those filings. I will now turn the call over to Bob, who will start with a brief overview.

BOB TORCOLINI, CHAIRMAN, PRESIDENT AND CEO: Thank you, Jaime and good morning, everyone. As you read in this morning's news release, we reported record first quarter net income. It was the third highest level of quarterly net income in Carpenter's 117 year history. The record performance was achieved despite significantly higher raw material costs. We estimate the impact primarily from the rise of the cost that nickel added $26 million to our cost of goods sold.

Our performance highlights the benefits of our continued focus on operational excellence through lean and variation reduction and the elimination of marginally profitable products. These actions are the cornerstone of an operating model that will generate returns in excess of our cost of capital through all phases of the cycle.

Now, let me provide you with some detail on Carpenter's consolidated first quarter sales, which increased 17% from a year ago. All references that I make to changes in sales will be based on year-over-year comparisons.

The quarter included a significant increase in surcharge revenue as a result of a rapid escalation in raw material prices. Dave will talk about the impact on margins in a few minutes. Excluding surcharge revenues, sales increased 10%. This level of growth is particularly satisfying, given the strong demand for our materials that we experienced a year ago.

Sales to the aerospace market increased 34% to $158 million, a first quarter record and the third highest level of quarterly sales to that market. We experienced solid demand for our titanium, specialty alloys and ceramic materials, which reflects the projected increase in commercial aircraft deliveries.

Demand for titanium material used in the manufacture of structural fasteners for commercial and military aircraft was particularly robust during the quarter. Shipments to this market were a first quarter record and were primarily responsible for a 33% increase in total titanium sales.

We saw solid demand for our specialty alloys used in the manufacture of aircraft engines and airframe structural components. Sales of our ceramic cores used in the casting of turbine blades for aircraft engines also increased, and was a primary contributor to a 7% growth in first quarter ceramic sales.

There has been a significant step up in our sales to the aerospace market. Over the last four quarters, aerospace revenues totaled nearly $660 million or 40% of total revenues. Our sales to the automotive and truck market increased 23% to $52 million. Sales to this market were near record levels and more importantly, reflect a richer mix of products than in prior years.

Demand for high temperature alloys used in automotive engine components and specialty alloys in stainless steels used in automotive safety devices such as airbag sensors contributed to the increased. Industrial market sales increased 13% to $88 million. Beginning with this quarter, sales to the oil and gas sector are no longer included in industrial market sales. These sales are included in a new category for Carpenter titled Energy, which will also include sales from the Power Generation sector. We are segregating sales in this manner because of our increased focus on the energy market.

Industrial market sales benefited from increased capital expenditures made by manufacturers. The strength of the industrial market was the primary reason for the 13% increase of our stainless steel sales.

Consumer market sales increased 2% to $48 million as a result of higher base prices in surcharges which offset reduced sales to the sporting goods sector. Sales to the energy market of $29 million were relatively flat with a year ago. Our focus on the oil and gas sector helped increase sales by 67% in the recent first quarter from a year ago.

We are excited about the opportunities we are finding among oilfield service companies and the growth we are enjoying with key energy customers. The growth in the oil and gas sector was offset by reduced demand from the power generation sector due to the timing of some shipments to customers.

Medical market sales decreased 7% to $30 million in the first quarter from a year ago. Although the strong growth fundamentals in this market remain unchanged, demand declined due to inventory adjustments taking place within the supply chain.

International sales increased 20% to $123 million or 30% of total sales. International sales benefited from increased sales to the aerospace market.

In terms of sales by product line, sales of titanium materials experienced the largest year-over-year increase. As I mentioned, sales increased 33% to $48 million. Robust demand from the aerospace market was partially offset by reduced demand from the medical market. Sales of our specialty alloys increased 20% to $172 million. Solid demand from aerospace, automotive, and oil and gas markets were the primary contributors to the increase.

Our stainless steel sales increased 13% to $144 million. Solid automotive and industrial market demand resulted in the second highest level of quarterly sales in more than six years. More importantly, our stainless steel sales contain a much greater proportion of higher value materials as a result of our focus on reducing marginally profitable products.

Ceramic sales increased 7% to $27 million in the first quarter compared with a year ago. Strong demand from the aerospace markets benefited sales.

Now I would like to turn the call over to Dave.

DAVE KORNBLATT, CFO AND SVP OF FINANCE: Thank you, Bob. As Bob mentioned, sales in the first quarter were up 17% to a first quarter record $404.5 million. Excluding surcharge, sales increased 10% from a year ago due to higher base prices, increased sales of higher value products, and increased shipments.

Gross profit in the first quarter increased by 13% to $103.9 million from $91.7 million a year ago. This was a first quarter record for gross profit. Gross margins, however, declined by 80 basis points to 25.7% of sales from 26.5% a year ago. The decline was directly attributable to the significant increase in surcharge revenue collected. The increase in surcharge revenue primarily reflected the change in nickel prices, which were 100% higher on average compared to a year ago and had a dilutive effect of 120 basis points on gross margin.

Cost of sales in the first quarter of fiscal 2006 included a charge …