Carpenter Technology Corporation (CRS) Q3 2008 Earnings Report, Transcript and Summary

Good day ladies and gentleman and thank you for standing by for our conference call this morning. Welcome to the Third Quarter 2008 Carpenter Technology Earnings Conference Call. My name is Jackie and I will be your operator for today's conference. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call Mr. Dave Christiansen, Vice President of Investor Relation and Business Development. You may proceed, sir.

Thank you Jackie. Good morning everyone. Welcome to Carpenter's earnings conference call for the third fiscal quarter ended March 31, 2008. This call is also being broadcast over the internet. With me today are Anne Stevens, Chairman, President and Chief Executive Officer; Doug Ralph, Senior Vice President and Chief Financial Officer; Tom Cramsey, Vice President and Chief Accounting Officer; and from our operations we have Mike Shor, Senior Vice President of our Premium Alloys Operations and Mark Kamon, Senior Vice President of our Advanced Metals Operations, 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 fillings, including the company's June 30, 2007 10-K or subsequent 10-Qs and the exhibits attached to those fillings. I will now turn the call over to Anne who will start with a brief overview.

Thank you Dave and good morning everyone. Before we get into the quarterly review, I want to notice few changes within the Finance Group. We are pleased to announce that Tom Cramsey has been promoted to Vice President and Chief Accounting Officer. Tom has more than 20 years experience with Carpenter in various accounting and finance roles. Tom takes over the accounting responsibilities from Rick Simons, who recently left Carpenter to become Chief Operating Officer of another manufacturing company. As many of you probably, already know our Vice President and Treasurer Jaime Vasquez has been promoted to President of our Asia Pacific operations and will be relocating to Shanghai later this year. Jaime will be responsible for expanding our operations and footprints in the Asia Pacific regions. Dave Christiansen, who has been with Carpenter for 15 years, has taken on Jaime's responsibility for Investor Relations. Dave is also responsible for business development at Carpenter. Having served as Carpenter's Corporate Council, Dave comes to the IR function with a firm understanding of our business. As we reflect on our third quarter performance, the results we achieved in our continuing operations for the third quarter were not where we wanted to be. As we mentioned on our last call, we knew it would be a challenge to surpass the exceptionally strong result of the third quarter a year ago. In 2007, the third quarter represented the highest operating income of any quarter in Carpenter's history. We did experience strong sales this quarter in energy and in aerospace, both domestically and internationally just as we expected we would. But sales to our economically sensitive domestic market, automotive, industrial and consumer weakened at a rate we had not anticipated. In addition, there were a variety of items that negatively impacted our performance in the third quarter. These items include, implementation of new planning processes and production disciplines to streamline product flow and reduce inventories; and production inefficiencies related to the processing of new products. At the end of the day though, these are necessary investments in improving operating systems for the company, investments that we are confident will deliver future benefits to the business. Looking ahead, we expect current favorable trends in the energy and aerospace to continue to the fourth quarter and beyond. However, we anticipate that automotive, industrial may have some weak soft spots in the U.S. market. On balance, we believe our fourth quarter results should meet or exceed the third quarter. For the 2008 fiscal year, we expect to report record results for the fourth consecutive year. Next, I'll review our end-use markets, and then Doug will cover the financial highlights. After that, we'll take your questions. To provide some insight into our performance, the year-over-year comparisons exclude surcharge with revenue. Aerospace sales were $142.9 million, a 6% increases over a year ago. The aerospace sales momentum, the improvement came from higher sales of specialty alloys, used in jet engines and fasteners as well as titanium coil used in fasteners. We are seeing the rebound in our shipments to both the U.S. and European aerospace markets that we had expected to see during this second half of our fiscal year. Our aerospace volume grew at a double-digit rate this quarter and should continued to grow at least at the rate of airline bills going forward. Energy market sales were $42.5 million, up 38% from last year. The growth in energy reflects strong demand for specialty alloys used in industrial gas turbines for power generation. We again saw increased global demand for high strength corrosion resistant materials in the oil and gas markets. The exploration for oil and gas in ever more difficult drilling environment is driving this demand. Medical market sales increased 3% over a year ago to $29.4 million. This slight improvement in medical occurs at a time when orders for titanium by both medical OEM and by distributors to the medical markets are beginning to show signs of returning to more normal buying patterns. Now, turning to the economically sensitive end markets. Carpenter sales to the industrial market were $70.7 million, a decline of 16% compared with the third quarter last year. Most of the decline in industrial was due to lower domestic demand for materials used in capital goods and valves and fittings. Automotive and truck market sales were down 12% to $38.3 million. The decline reflects the general slowdown in the domestic automotive industry, a trend over the past several quarters. Now on the other hand we are benefiting from a more positive product mix in automotive and from stronger sales outside the U.S. Compared with the third quarter a year ago, Carpenter sales to the consumer market were down 4% to $31.9 million. Again, the factors were the same as in recent quarters; lower demand for materials from the housing and from the consumer durable sectors and the weakening domestic economy. Some of the decline in consumer sales was offsets by increases in the sports and electronics segments and by a richer product mix. Including surcharge, Carpenter's international sales in the third quarter reached a record $178.6 million, now that's a 18% increase over the 2007 third quarter. Most of the gains were in Europe, which was up 26% over a year ago. Overall international sales represented 35% of total sales during the quarter. We are seeing some benefit from the weak dollar, particularly with strip and wire products sold into Europe and Asia. At the end of the third quarter, we closed on the sale of our ceramics businesses to Morgan Crucible. These were strong businesses but not strategic to Carpenter's future growth. Having sold them for $145 million, it will enable us to further concentrate our focus on core operations. Last quarter we also made a small acquisition, but one that is strategic to Carpenter's growth plan. Our Carpenter Powder Products subsidiary acquired UltraFine Powder Technology, a small facility in Rhode Island. UltraFine manufactures and sells, buying gas atomized powders from metal injection molding and other specialty markets. Carpenter remains well positioned in the right end-use market. The outlook for our global aerospace and energy businesses remains strong, and we expect energy and aerospace volume to continue to build in the fourth quarter and to the next fiscal year. We also expect that our international growth will continue to outpace our overall growth. Now, Doug will walk us through the third quarter financial highlights.

Thanks Anne, and good morning everyone. I will now provide some additional perspective on our third quarter financial results. Please note that all income statement comparisons are for continuing operations excluding ceramics. Net sales in the quarter were $509.8 million or 1% below a year ago. Backing out the surcharge, sales from continuing operations were essentially flat. The results reflect lower overall volume of 7% offset by a higher value sales mix. You've heard us just talk about the exceptionally strong third quarter comparison from last year. For perspective we shipped almost 64 million pounds in the third quarter of 2007 which was 13% higher than any other quarter last year. In this year's third quarter we shipped a little over to 59 million pounds, which is almost 20% above our first half run rate, but still 7% below last year. So, we feel our business has good top line momentum that doesn't fully show up due to the tough third quarter comparison. As further evidence of the momentum in the more strategic parts of our portfolio, our Premium Alloys Operations, which is about 90 aerospace and energy, increased pounds shipped by 12% in the quarter. This was offset by a 9% decline in pound shipped by our Advanced Metals Operations which contains the more economically sensitive parts of the business. Returning back to the sales line, I would also point out that our third quarter sales excluding surcharge on specialty alloy products were up 8% from last year. Titanium products were up 6% and stainless steel products experienced all the decline at minus 8%. Continuing down the income statement, third quarter gross profit was $109.3 million compared with $122.4 million a year ago. The decrease in gross profit primarily reflected lower volume as well as higher operating costs in the quarter as Anne has already covered. These areas were partially offset by continued favorable mix improvement. Our second half inventory reduction also has an unusually higher impact on the third quarter profit comparison due to the difference in nickel price trends between this year and last. In both years, our inventory pattern was similar with a build in the first half and reductions in the second half. However, this fiscal nickel prices have declined from over $18 a pound at the beginning of the year to about $13 a pound currently. While in fiscal 2007, prices climbed from about $10 a pound at the beginning of the year to well over $20 a pound by the second half. Normally, our inventory pattern during the year would not have a significant impact on the bottom line, but in combination with the difference in nickel price trends the negative year-to-year profit impact in the third quarter this year amounted to just under $11 million. Note that there would be similarly large negative impact on our fourth quarter profit comparison. However, our expected fourth quarter inventory reduction plans will result in a partially offsetting $6 million benefit from the liquidation of LIFO inventory layers. Overall, third quarter gross margin was 21.4% compared to 23.7% in the third quarter last year. Adjusted for the dilutive impact of the surcharge, the year-to-year difference in the lag effect in our surcharge mechanism and the inventory effect we just discussed, gross margin on a comparable basis would have been an estimated 32.6% in the third quarter versus an estimated 34.3% in the same quarter a year ago. Operating income was $75.3 million compared with $92.5 million in the 2007 third quarter. The decrease in operating income is a function of lower gross profit and $4.1 million in higher selling, general and administrative expenses. As discussed in prior quarters, the higher SG&A expenses this year are largely capability building investments in systems and resources needed to drive our future growth initiatives. Adjusted for the impact of surcharge revenue, the lag in the surcharge and the year-to-year inventory effect, our estimated operating margin on a comparable basis would have been 23.1% in the third quarter compared to 25.9% a year ago. Other income in the quarter was $3.7 million compared to $6 million in last year's third quarter. This primarily reflects lower interest income on our invested cash, as a result of lower interest rates. Our income tax provision on continuing operations was $23.1 million or 31.3% versus $28.5 million or 30.7% for the third quarter last year. We expect an effective income tax rate for the full year of about 33%. Third quarter net income from continuing operations was $50.8 million or $1.5 per diluted share. The record third quarter a year ago had comparable net income of $64.3 million or $1.22 per diluted share. We continue to expect a free cash flow for the fiscal year excluding the cash associated with our third quarter acquisition and divestitures will be about $100 million. Within this, our estimated capital spending for the year remains at $125 million. On our March ending balance sheet, we had a cash and marketable securities balance of $600.6 million which includes the ceramics sale proceeds. Our priorities for deploying this cash remain the same as we have previously communicated. Now I'll turn it over to Anne for some closing thoughts.

Thank you, Doug. Before we turn to your questions, I want to briefly comment on how our business is changing. One of the key drivers in Carpenter's growth plan is the pursuit of global growth. We are continuing to strengthen our relationship with strategic customers. In addition, we are following the migration of our customers overseas and we are reaching out to new customers as well. I have been spending a considerable amount of time visiting with current and potential customers overseas, particularly in Europe and Asia. These visits are to ensure that we better understand their needs. I am also here to let them know how Carpenter is able to support them. Our capabilities and technology leadership represent quality sourcing for our customers and good growth opportunities for Carpenter. We are committing more capital and human resources to promote our growth throughout the world. A good example is what we are doing in China to further our growth sales and provide additional technical support to our customers. Carpenter has devoted much time and effort in the past to improving our agility and lowering our fixed cost structure. Moving forward, we are taking the next steps to streamline both our business practices and our manufacturing techniques. We are maintaining our focus on strengthening and growing our core businesses. We have been shutting non-core operations to better utilize our assets and to reduce complexity and we will continue to invest in the lean manufacturing environment, adding people only where necessary and improving systems and processes. I can tell you that the senior management team understands what is required to grow and understands to continuously improve our processes to achieve operational excellence. Now, with that in hand I'd like to open the line to take your questions. Question And Answer

Thank you. [Operator Instructions]. And your first question will come from line of Chris Olin from Citi Research. You may proceed.

Hello.

Yes. We're here.

I guess that's me. It's Chris Olin from Cleveland Research.

Our operator certainly changed your name.

Let me start off with some maintenance questions here. I guess, first, what is the other materials component in your segment breakdown that you are listing now and I guess you planned the setting from the TIMET relationship. Is that anywhere in those numbers?

Yes. TIMET relationship is going well, that was an agreement where we purchased ingots and we processed for them. So we really are satisfied that's a good agreement for us. Just in terms of new products, some of these products are developmental products. Some of them are different ingots but the team had not processed before and along with that the line upset we had put out in the plan were not as efficient as we expected them to be. The problems are behind us and we've learnt from the experiences.

And Chris, the other segment is a small business up in Massachusetts, the wrapbone [ph] business.

Okay, thanks. So you are processing titanium volumes, despite I guess the issues with the 787 et cetera.

Yes. A small amount.

Okay. Can you quantify what the impact has been?

No. At this particular point in time I couldn't do that Chris. But it's a small amount.

Okay. Changing gears here a little bit. Help me understand what your thoughts are on the nickel alloy supply out in the marketplace. Are we concerned that maybe there is too much multi-capacity out there and I guess I get concerned a lot of it maybe targeting the energy market going forward, I mean can you help me with this?

Yes. When we made the decision on the capacity expansions, we looked at putting that and taking into account that there could be some additions in capacity. But overwhelmingly when we look out through the cycle, the growth in both energy and aerospace supported the capacity growth. Now, there are some weaknesses in some of the other markets but that does not change our feelings right now that there is not a significant access capacity out there.

So, you still feel pretty good about the aerospace growth numbers despite some of the changes?

Yes. Aerospace and the energy are growth, and if you look at the results we had a lot of good top-line amount. Now, the volumes are actually up 20% from the first half run rate and we expect that momentum to continue not only into quarter fourth but the next fiscal year.

Okay, thanks.

Thank you, Chris.

Thank you. And your next question will come from the line of Michael Gambardella from JP Morgan. Michael you may proceed.

Good morning, Anne.

Good morning, Michael.

I have a question, could you give us some color around your share repurchase program? You were active in it in this past quarter, how much is left and what is the average of price what you brought back in the previous quarter?

Yes. Doug has the data in front of him. I am going to ask him to comment on that Mike.

Yes.Just a couple of questions here Michael that I need to clarify what we are doing on the share buyback, up until this recent blackout period we had 10b5-1 program in place that directed our share buyback activities. So, during the third quarter we deployed $25 million of capital against share buyback, $29 million in total if you look at the start of the new program and the average price that we paid which was at the beginning at the quarter was just under $70 share on that small allotment of capital, and I hope that answers your questions at all.

Andhow much is left?

So, what we have left is about $220 million dollars as of the end of the third quarter against the new authorizations in the Board back in December.

Okay. And when does the blackout period end after today's release?

Basically 48 hours after the release.

Okay. Thank you very much.

Okay.

Thank you. And your next question will come from line of Gautam Khanna from Cowen & Company. You may proceed. Gautam Khanna - Cowen & Company: Hi, it's Gautam Khanna, Cowen. I just wanted to ask on the margin side, kind of what's your expectation going forward beyond Q4. It sounds like some of these kind onetime issues you are going to persist for a quarter but looking at fiscal '09 where do you see kind of margins of premium and then advanced, we are going to be moving up or we're going to be moving down on the year-over-year basis?

Margins as I think you know is a complicated subject because of the mixed component of the margins. But generally the mixed on our business has been positive. Certainly in the short-term some of the increases in our operating cost have hit us from a margin standpoint, but going forward margins there are positive elements and margins and other things that you may pull down on margins. And as it relates to mix one of the things that we would just make clear is that when I kind of walk away from good business opportunities, they are right to do, even though they may have a negative effect on margins. So, one time in the company's history you can maximize and we can certainly do that today, maximize the margin by reducing 30% of the product portfolio. But there are opportunities that are growth opportunities that could have a negative effect on our margin and we are more and more inclined going forward to look at our business in terms of growth in dollars of operating income versus operating margin, although we would still saying that expect our margins to remain at a high level. Gautam Khanna - Cowen & Company: May I ask you in a different way. I think you have now guided the Q4 that the at or above Q3, and I don't know if this is a new asked point but I thought previously you said it would exceed Q3. Is there any reason why heading into the net fiscal year, we are going to see year-over-year compares coming down? Is there anything that gives you possum, I mean you are talking about the economically sensitive business in which you made us aware for a while, now you have some operating issues? I think the question I have is, when you are talking about operating income, let's talk about operating income. Operating income can be growing at fiscal amount, we know the share counts shirking on a year-over-year basis, but I am trying to get earnings growth.

Yes, what I would say there without providing specific earnings guidance, which is something that we don't intend to do but as it relates to operating income, we expect our fourth quarter operating income to be above our third quarter operating income, and we've got good top line momentum in the business and we also expect that's to carry through on the bottom line, I have been clear and transparent about the toughest thing to predict honestly in our fourth quarter results is the year ending inventory position and the impact that has on the LIFO inventory balance. Right now we are expecting a reduction in total pounds at the end of this year versus the end of last, which would cut into a LIFO layer and generate about $6 million of positive profit in the fourth quarter. We feel good as Anne had mentioned about the top-line growth momentum that we have in the business carried into fiscal '09, and particularly on our strategic parts of our portfolio in aerospace and energy. So I believe that gives you enough to characterize how we feel going in to the fourth quarter and then continuing on into fiscal '09. Gautam Khanna - Cowen & Company: And last question housekeeping, excluding the surcharge what were the power gen sales and what with the on growing gases? That's it.

Excluding these surcharge, power gen was up in sales terms in the third quarter 63%, $15 million and oil and gas excluding surcharge was $27.5 million and up 28% versus the prior third quarter. Gautam Khanna - Cowen & Company: Okay.

Operator, can we now move to the next question please.

Okay. And your next question will come from the line of Mark Parr for KeyBanc Capital. You may precede Mark.

Yes, thanks very much. Hey good morning Anne.

Good morning Mark.

Hi guys. I have a couple of questions. First, in your commentary you talked about your free cash flow outlook for the year of continuing to be more than $100 million I believe. And is that including or excluding the cash input from the sale of the ceramics business?

Excluding Mark.

Okay. So, then you look at $100 million of free cash flow plus about $100 million or whatever of book games on the ceramics business.

That's right

Okay, terrific. Well, it's good that even in the economic slowdown you are seeing a party of your business that your free cash flow outlook is being maintained. I think that's every critical and very important from a value creation standpoint. Couple of other questions if I could just regarding current business conditions, as far as the VIM furnace is concerned, the new furnace could you talk a little bit about the and give us an update on the timing of the start of that furnace and also could you talk a little bit about the amount of P&L expense that you are incurring from that furnace and when you are expected to peak?

Yes.First, I'll comment. Obviously, in investments this large is something that the full team reviews. We just had had a deep review of the project about a week ago. I am extremely pleased with the work this team has done, but I'll ask Mike Shor since he is close to it on a day-to-day basis to give you a bit more specifics and color to the project.

Hi Mark.

Hey hi.

Today we have spent little over $50 million on our premium products expansion project. We actually have hot metal running through our first furnace, first of our four new VAR furnaces is operating and has been operating since March. We have two VSR furnaces which are coming online the first of one will be in august in the Cornerstone of the project which is our new 20 ton, VIM will be melting by the end of the calendar year. We feel good about all the markets and the products that go into that furnace but on the aero and energy side what we are seeing double-digit growth, we feel real good about that furnace coming in and what we are going to do with it.

Okay. I guess I was just curious about the P&L impact of the commissioning of these new assets. And I am guessing that why you are capitalizing most of that $50 million, if not all of it there is also been a P&L impact. Could you talk a little about how much that's affecting current reported earnings and when you would expect the negative effects of the commissioning process to begin easing off and as the productivity of these new assets begins ramping up.

Yes, it is tough to dimensionalize [ph] in specific terms. Mark, this is Doug. The 50 million as say is product is being capitalized. I think it's inevitable then you take on a project of this scale that there are some inefficiencies that are created throughout the balance of the operation but --.

Yes. Absolutely. I mean, I am just trying to get to get some clarity around that, that's all.

We don't believe that its been material to our results, otherwise we would have identified that as such but its inevitable that there are some of those still over inefficiencies.

Okay. Right, if I could just go in and ask a couple of other questions. It looks like the vast majority of your demand weakness is on the stainless steel side based on your commentary. Is that correct?

That's correct.

Okay. Could you talk a little bit about what's been happening with stainless lead times and backlog. Do you think things are stabilizing here, do you think that there is ... based on what your seeing is there potential for some worsening of the stainless business in the next six months?

I'll comment on a high level and if we're at the bottom or not. I don't know. I gave in my statement I'm not going to say bullishly we're at the bottom when its over with because I still believe that the domestic economy is soft and sensitive markets like the industrial and consumer particularly when you look at things like housing is soft and I can't see it strengthening the next quarter to any significant level, but the guy that is responsible for a lot of the products is Mark Kamon and I know he has a couple of additional comments he would like to share on this one.

Yes, Mark. How are you?

Hey Mark. Good.

The one comment I would make is when we compare year-over-year, as Doug mentioned earlier, we had very strong third quarter last year. You look at how this stainless business is evolving, over the first half of the year, inventories in most of our supply chains have been leaned out.

Right.

The cost that we deal with, in response to the nickel volatility that occurred earlier in 2007. So, we've actually seen growth in our stainless business from second quarter to third quarter and frankly, we see stability going forward because the inventories are in pretty good shape within the supply chains.

Okay. I heard similar kinds of commentary from Helly ATI [ph] which is on the flat roll will side and I think they had indicated that their stainless business looked like it did. They didn't say much as far as demand was concerned but the supply chain issue as far as the excess inventories that needed to be worked out of the system, it probably actually got overdone on the down side. Would you say that the similar thing... would say that the inventories of your customers are below normal in stainless right now or normal, or I mean, how would you characterize it.

Well, I think there is a lot of market uncertainty right now but I think that the customers have their inventories where they want them to be and I don't think inventory movement within the supply chains is going to be a major fact, going forward how the economy develops and ...

Okay. So, at least you won't have the inventory de-stocking issue, you'll the economic issue but the inventory de-stocking issue appears to be paired behind you for the time being. Is that fair?

From a checkpoint that we have done and from the conversations that we had with customers, that's how we see right now. However, there are some consumer segments that are weak and domestic quarter remains weak.

Right.

Absolutely. Okay, if you could just ask one more question. Could you talk a little bit about lead times and backlog momentum in your nickel, alloy and the titanium business and then I will pass it on. And thanks very much for all the color.

Well, we don't really look at our backlog in terms of projecting the health of the next quarter, but I can give a general comment that the backlog is up over 10% from where it was last year.

Okay. That's terrific. Thanks very much Anne.

Thanks Mark.

Thank you very much and your next question will come from line of Brian Yu from Citi. You may proceed sir.

Great, thank you. And I think if I recall correctly, earlier you said that aerospace volumes were up about double-digits year-on-year.

Yes, aerospace volumes were up 15% in quarter three.

Okay, but then the core revenues, ex-surcharge is only up 6%. Is this a mixed issue or you are seeing greater competition in the aerospace industry.

It would be mixed brand.

Okay. And this... you will expect that... so you would expect core revenue growth that attract volume growth going forward or we are going to see this type of lag for a bit longer.

Yes again mix is one of these complicated areas but... 9 point spread I would just comment is unusually high in terms of the mix effect and so we expect to see closer relationships going forward.

Okay. And Doug I think store you guys have always broken out the gross margin impact as a result of surcharge lag by itself and I noticed, this time when I was lumped in. do you have that number available or is it not material.

The lag effect itself difference quarter-to-quarter was about $3 million and so, you can do the math there but if you just look at that decent specific, the difference quarter-to-quarter was $3 million.

$3 million, okay.

Positive to this year's third quarter versus last year's third quarter.

Got it. And then the production inefficiency I think you said that this is pretty much behind the company now. Anyway you can try to quantify the impact in the third quarter as a result of these productions inefficiency so we can try figure out where more normalized operating EPS might be.

Yes. the answer to your question is I can basically tell you nearly panting but...trust me. I was talking to the team about it this morning, I'll let Doug comment on the amount. What I will comment on is the inefficiencies that we had experienced, the bulk of them are behind us. The type of things that are still out there are to a smaller affect, are some of the investments that we are making in the lean manufacturing area as well as some additions of people that we have in the training associated with them for growth. So there are still some of these investments I will carry forward but the bulk of the inefficiency due to lower yield and processing issues are behind us.

Yes, the only other thing I guess I would add is that we had a better March than we did January and February and so, that's an indication that the number of areas are being addressed.

Okay. Thank you.

Thank you very much and your next question will come from the line of Phenal Debtidar [ph] from Sentinel Asset Management. You may proceed.

Thanks. On the titanium side, could you just give us some color on how your product pricing is basically. Is it linked to a certain kind of an index or it's basically on a contract basis?

This is Mark Kamon. The titanium, about 65%-75% of our business is linked to formulas and the remainder is sold through distribution on a spot basis, as you know spot prices in titanium over the last year have declined and that's what I would comment on that, I think.

And that 65% to 70% on the formula is based on cost plus kind of thing or it's basically again devoted to that index, partially?

Well, its really tied to material movements. So those material movements are neutral.

Okay. On that inventory, you were talking, question basically at that previous one, you have talked about, are you seeing that you distributed chain or the supply chain looking to restock or there is kind of sign that they might to be willing to restart with the inventories coming down now with the de-stocking over or you see that may not happen with the soft economies?

I'll give you my view. My view is the inventory levels are where the distributors want them to be and they will be restocking as demand pulls material.. I do not see, based on the conversations that I've had that there is movement out there to stop at a significant level above where they are.

Okay. On the international markets, you talked about Europe grew 26% year-over-year, in fact, Europe generally lagged the U.S. in terms of the economic softness. Are you seeing any kind of early signs that the demand might start to weaken in the European market and possibly below integration markets and aerospace?

No.At this point and from all the conversations in traveling that I have done, I see no signs in the market that we purchases.

Okay. If I may just ask last question on the fiscal '09, do you think that the aerospace and the energy markets trend and in terms of the values may be able to offset any kind of demand softness, continued demand softness in industrial toes and consumers?

Yes. I think what we said there in general is that energy and aerospace are too more strategic markets that we would expect growth rate on both of those to be in the high single-digits going forward and that we would expect the balance of the businesses to model of GDP type growth rate which is impacted right now by recession. But aerospace and energy you've got 50% of our total business mix there between those two markets and the balance is 50%. So, the wild card is really what happens in the general economy. But we do expect to see strong growth in aerospace and energy.

And the high single-digits is in revenue terms, right it's not in volumes? The volumes might be much more than that.

Correct.

Okay, thanks.

Thank you.

Thank you gentleman. And your next question will come from the line of Tim Hayes from Davenport. You may proceed. Timothy Hayes - Davenport & Company: Hi, good morning.

Good morning Tim. Timothy Hayes - Davenport & Company: Just a numbers question. I miss the aerospace sales that surcharge, what was that figure again please.

Itwas up 6%. Timothy Hayes - Davenport & Company: To then what's the level of that?

I am sorry. Timothy Hayes - Davenport & Company: What the level of sales?

Thetotal dollar sales, just a second.

We are looking back to give you the international number.

$143 million. Timothy Hayes - Davenport & Company: And you gave the year-over-year change in volume for aerospace. Could you also run through each of their five to end markets?

Sure. We are up 29% in energy, 18% medical and then on the economically sensitive businesses as you would expect down 15% in industrial, down 23% in automotive and down 24% in consumer. Timothy Hayes - Davenport & Company: Okay. And then my last question is on this LIFO layer benefit of $6 million that you expect in Q4, is that embedded into your guidance of that you see Q4 at or above Q3 levels?

Sure. Because that's consistent with how we are managing the inventories. Now it's also embedded in there is the year-to-year effect from this confluence of inventory build, de-build and Nickel price trends between the year which is of the magnitude that we saw in the third quarter or $11 million. So that's also when there is a negative. Timothy Hayes - Davenport & Company: Right. And the LIFO liquidity in the $6 million, that's a pre-tax figure?

Yes. Timothy Hayes - Davenport & Company: Okay. Thank you.

Thank you gentlemen. And your next question will come from the line of Bob Fetch from Lord Abbett. You may proceed.

Hi, good morning.

Good morning, Bob.

Andtouching base upon the industrial, who your principal customers in mortgage sale? When you are talking about capital goods and valves and fittings and so forth. Are we talking products that are housing related there or not because otherwise many companies and kind of related areas have being doing particularly well, partly due to strong exports?

Well, our industrial products are spread across million of customers. And I would say certainly our international business is strong. When you look at the year-to-year comparison versus last year, we had some very unusual sales in the third quarter of last year which won't duplicate this year. So, the comparison year-over-year is a little distorted but our experience from standpoint of exports has been very good overall as our numbers within UK.

So that's very unusual sales, were they too a customer or two who you no longer have or what?

No. Obviously we can't say anything specifically about our customer but we did have a customer position for international growth that did build from stock last year. And when we look at a year-over-year comparison some of that's reflected in the numbers.

And maybe what might be works providing for perspective here is if you look back at last year's third quarter and the dynamics of what was going on in the nickel market, the reason it was such an exceptionally strong overall volume quarter is because nickel is trending significantly up at that time. And so you had new motives in our customers to buy in anticipation of what they were seeing going on and nickel at that time. So, there are several customers in industrial but also in other parts of our business where the numbers in last year's third quarter were very high because of that nickel impact.

So you commensurate earlier are consistent industrial there did you see growth quarter-to-quarter from second third quarter event? And de-stocking kind of behind you?

Yes.

Okay. In the automotive, is that more heavy duty truck sensitive as opposed to automotive or not?

No. It's just the overall domestic automotive.

The run rates in build in U.S. auto producers have continued to decline and are forecast to be $15 million or less at this point for this year. So that's a pretty substantial reduction in run rate, you have the interferences of the noise in the auto strikes and labor situations that are causing people to be very sensitive about there inventory positions.

And is that more tier one supplier you are supplying and which particular product types are you the most exposed to?

I would say its all customers are very sensitive right and it's probably the area where there is the most uncertainty in inventory projecting. So, I would kind of leave it at that.

Do you know to what extent it's a mix issue and do you have more or less exposure to SUVs?

No. I think it's fairly balanced.

Okay. In the medical area, can you tell us what you think the inventories are, your customers there and whether you picked up any new customers or have penetrated some new product categories?

With the medical toll, we are beginning to see what we think is that the inventory correction overall is more in balance then it was last year. So, I think both from the OEM's and the distributors we're returning to more normal buying pattern. Now, we all know that the medical industry is under pressure so to say it's over with or not we're receiving signs that it is. Beyond that I can't comment. In terms of specific customers, I can't comment on that one either.

What about products?

I guess I would say we are seeing a return to something more normal on the titanium side and the nickel based side, I would say is stable to up a little bit relative to returning to more normal buying patterns.

So would you expect then based on those comments that your sales should improve from the low single-digit level?

I would say in general, things will continue to improve as the de-stocking activities that have taken place over the last year or so continue to get more balanced.

And in regards to the conversation on international, which end markets would you say that at this point in time are closest in view and that you might be supporting and the principle applications that are being targeted, that are closer at hand?

Aerospace and energy are the two main markets of growth in international, although we participate in all the products, those are the two big ones.

And is that at this time then principally following existing customers?

Existing customers plus we have got a lot of contracts with new and strategic customers as well.

Okay, so if you look out the next say 2 to 3 years, if you could prioritize the two or three principle areas you would expect to get the best incremental growth from?

Yes, Mike has been a lot of work in this area, so I ask Mike to comment with a bit more color.

Two areas that we continue to feel will lead to significant growth force are aerospace and that's not only the engine and structural side, but the fastener side and also energy and energy is both power generation and oil exploration and we have seen both ourselves and our customers move more to an international footprint hitting new geographies with some of these products. So we feel very, very good about both operating them.

And on energy, what's the mix between and power gen and other energy related products?

Strong growth on both. I gave the numbers earlier in the you want me to repeat those.

I think in energy you had a sub about 25%, was it?

Overall in sales terms we were up 38% in the third quarter and big numbers on both oil and gas and power gen.

And then lastly, how important are the titanium fasteners at this stage? We have been hearing that s been of the bottlenecks all along for the use of composites and some of these obviously big backlogs for these variants.

There is no constraint on our part. We have got the ability to meet all of the demands from Boeing in airspace for titanium fasteners.

Okay and what's the current run rate about today?

Can you explain what you mean by run rate?

Say sales in that division.

We don't break our sales anything below our gain market or the reportable segments that we provide.

Okay thank you.

Thank you.

Thank you gentlemen and the next question will come from the line Leo Larkin from Standard and Poor's. You may proceed.

Hey, good morning. Could you give us any preliminary guidance for CapEx and D&A for fiscal 09?

For fiscal 09. No, other than this year we would be expect to spend about a $125 million in CapEx as I mentioned and next year we anticipate a continued healthy level of CapEx just given the needs of the business. So I won't be any more specific than that. In terms of D&A, we were at $37 millions through nine months, we'd estimate this fiscal year at about $50 million, it will a bit higher than that next year because you'll begin to have some of the depreciation on the major premium melt expansion project.

Okay. Would $125 million be save to model and it's just the I mean every cents that we are speaking for '09?

This is the period of the year where we are right in the throws of our specific planning for next year. So I don't have a specific number to give you next year other than we expect that the business still has some healthy CapEx needs looking forward.

Okay, thank you.

Thank you gentleman and your next question will come from the line of Jean Fox from Cardinal Capital Management. You may proceed.

Just a couple of questions. In the $4.1 million of incremental spending that you referenced in Q3, can you talk about is this a run rate we should expect going forward and when should we start to see the benefits from them?

Yes. There are two pieces of spending. I can give you the one piece of the spending is investment and technology marketing and customer support. That's a little hard to see when you get to benefit from it. Obviously, there is a time lag on both, so that one's a bit more difficult to quantify the when. In terms of the other investments that we are making in lead manufacturing, typically and this is something that's going to want a lot in over the years, typically you make the investments and you start seeing the benefit in three to five years. Now, we make starting a little benefit before then but significant benefit is a couple of years out and in terms of the lean investment, we are just finishing up the beginning of the first year.

So it's really fair to think about those for the time being as just incremental ongoing expenses that we should model in but where we'll ultimately get some payback on them.

Yes. Because on course anytime you drive a lot of change in organization like we are in these areas, some of it are the things that I talked about. But some of the investments that we are making is recovering some of the things from the cost cutbacks that the company needed to do from a four to five year period. In an area where you'll see quicker benefit is obviously investments that we have made in systems. So efficiency and effectiveness you are going to see from that. But just overall, we are continuing to invest where we see is appropriate to drive the business for growth in the future.

Couple of other question. When I look at a high level of your Q3 versus your Q4 on the positive side I think you outlined this LIFO benefit that you put it about $6 million as well as the absence of an unquantified production inefficiency in Q3 that's not going to be there in Q4. On the minus side we are really talking about macro economic issues and whatever conservatism you want to build in to your forecast for your economically sensitive businesses. Is there something else that I am missing when I think about how you are thinking about the business at least as to Q4?

No. I think that's a fair characterization and I guess one of the other areas that's missing in that macro construction that one of the other previous callers asked about was just the impact some of the difference in lag effect so to speak, one quarter to another and in the fourth quarter, if we look at what was happening in nickel at that point in time, prices were trending down in the fourth quarter and so I think there will be some negative comparison in the fourth quarter due to that lag effect. But otherwise I think you've got the construct right.

And you are talking about that relative to Q3?

I am talking about that both relative to Q3, yes, and relative to last year.

How should we think about that impact separate from the $11 million number that you discussed that will impact both Q3 and Q4?

The numbers on the lag effect are just not big number, so they are not comparable to the $11 million; the $11 million is the big number.

Okay, in terms of the $11 million, is there some as well as the LIFO charges, is there any way to think about how those would impact '09 going forward, is there something structurally that would make them relevant to your business in 2009?

Yes, and I think as you would look ahead on that, there's just a confluence of events that are affecting this third quarter and the fourth quarter as it related to inventory patterns and nickel patterns, they just aren't normal, I mean, so looking forward but also looking backward there was some volatility in nickel pricing, that's been unusual over the last 15 months to 18 months and so I guess what would say in as it relates to any period looking ahead including fiscal '09 that inventory is constant, there would be no impact from what I just talked about regardless of what happens to nickel prices, if nickel prices are constant, there would no impact from any changes in the inventory levels. Its really when you dealing with the combination of the two in a different way across the fiscal years that you get any numbers that are anything like that magnitudes. So, looking ahead I think things remain as stable as they have been, should be and might have been.

So, to rephrase what you said, the $11 million shouldn't be something we should necessarily build in to models going forward?

Right we've highlighted the third quarter effect and there'll be a similar fourth quarter effect but beyond that it won't be something that we would anticipate.

Thank you very much.

Okay.

Thank you.

Thank you and at time we have further questions. So I'd like to turn the call back over to Dave for closing remarks

Okay. Thank you very much. I want to thank all of you for joining us on the call today and we look forward to talking with all of you next quarter.

Thank you ladies and gentlemen for your participation in today's presentation. You may now disconnect and have a wonderful day.