Good day, ladies and gentlemen, and welcome to the second quarter 2009 Carpenter Technology earnings conference call. My name is Becky and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call Mr. Dave Christiansen, Vice President for Investor Relations and Business Development. Please proceed.

Thank you, Becky and good morning everyone. Welcome to the Carpenter’s earnings conference call for the second quarter ended December 31, 2008. This call is also been broadcast over the internet. With me today are Anne Stevens, Chairman, President and Chief Executive Officer, Doug Ralph, Senior Vice President Finance and Chief Financial Officer, and Sanjay Guglani, Vice President and Chief Marketing 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 30th, 2008, 10K, September 30, 2008 10Q and the exhibits attached to those filings. I will now turn the call over to Anne.

Thank you, Dave and good morning everyone. Our second quarter performance reflected difficult market conditions during the last three months. But our financial results demonstrate that Carpenter is capable of operating profitably in this downturn. Demand in most of our global market has weakened considerably. We expect to slowdown to last for several quarter. Our leadership team is focused on managing through it, you’ve seen the numbers on the earnings release, but I am sure your focus like our, is on what is happening right now. If I had to characterize current business conditions; I'd have to say that there seems to be a continuing uncertainty that's hanging over the end market. What I am seeing across the dashboard are several factors that combined, make it difficult to predict anything approaching a recovery. Our consumer automotive and industrial businesses are seeing the effects of dramatically lower consumer spending. Manufactures are reducing inventory. Consumer spending tends to attract unemployment and that’s not giving anyone much comfort right now with U.S. unemployment at highest level in 26 years. Energy is slowing; the dramatic decline in oil prices has reduced to near term urgency of exploration. In the phase of declining economic activity around the globe our aerospace business has held up pretty well through the first half despite softening market conditions ever since the Boeing strike. Faster demand has remained stable, as jet engine requirements have come down. Market conditions in the second half will probably get tougher, although the long-term build rates are very promising for Carpenter. Finally the medical market is relatively stable and growing moderately. We are seeing improved demand as we successfully pursue new customer initiatives. During this downturn we benefit from a strong and growing presence with key customers particularly in aerospace. And we have a healthy…

Thanks Anne. I will start by reviewing our second quarter results and then I want to comment on our cash flow status and the steps we are taking to manage cash in the current economic environment. Net sales in the quarter were $361.8 million, or 18% below a year ago. Excluding raw material surcharge sales were down 13% compared to a 3% decline in the first quarter, so the downturn is having an increasing affect on our top line results as you would expect. Overall tonnage volume decreased 10% in the quarter. In terms of product forms, titanium products grew 10% which was more than offset by special alloys down 14% and stainless steel products down 9%. Second quarter gross profit was $75.9 million compared with $116.1 million a year ago. Excluding surcharge revenue our gross margin in the period was 27.8% versus 36.9% last year. The biggest contributor to the profit reduction is our shipment volumes. Our manufacturing cost were higher than the prior year period but improved versus our first quarter performance as we have worked through the equipment start-up issues that we were experiencing a few months ago. As with the prior quarter; we also experienced the timing impact associated with hedge contracts as well as other negatives in the current low price of nickel. Moving down to the income statement, our SG&A expenses decreased 1% year-over-year and would have been down 5% if you adjust out the impact of higher pension expense. This is the result of actions we have taken to control headcount and reduce spending. Overall, operating income for the quarter was $39.7 million compared with $79.5 million in last year's second quarter. Our operating margin excluding surcharge was 14.5% for the quarter, down from 25.3% last year. Other income in the quarter was…

Thank you, Doug. We are all experiencing the weakening of the global economy and we expect it to stay weak at least through the rest of fiscal year 2009. As demand softens, management is focused on the actions necessary to generate healthy earnings and to protect our cash flow. As Doug noticed the start-up problems with our rolling behind us, the organization is concentrating on aligning our operational activities to slower demand. Our objective remains to generate positive free cash flow for this year. To manage our cash, we will lower our inventory, improve other working capital and reduce capital expenditures. Even with these efforts, we expect our business will be 20% to 25% lower in the second half of our fiscal year, compared to the same period last year. Long-term prospects for our markets remain strong. We remain committed to our customers and to our strategic investments in R&D marketing and international growth. The company intends to complete our premium melting expansion project by the end of our fiscal year. We know it will be needed in the future. We are still seeking the right acquisition that will add product, geographic scope and new capabilities to accelerate our growth. With that, we will now open the line to question.

(Operator Instructions). And your first question comes from the line of David MacGregor of Longbow Research. Please proceed.

Yes, Good morning everyone.

Good morning, David.

Just a question with respect to the press release, you said that revenue and volumes are expected to be down 25%, should we infer from that that you are expecting a relatively stable pricing environment?

No, that would assume our current outlook of pricing conditions which are becoming more aggressive in the market place, especially on a lower-end more commodity part of the business.

Okay, you just said revenue and volume down 20% to 25%. It seems like most of the downturn that you will scribe to volume as opposed to price.

Well the pricing pressure we're experienced is in the lower end of the market. So there is pricing pressure out there, we have moved our business to about 40% long-term contract and obviously we have had some push outs, but we do expect our customers to meet the terms of the agreement.

Okay. I realize you got some higher cost inventory coming through and you are probably working down some of your fixed costs, what you would be thinking about these days in terms of fixed cost, variable cost proportion, once upon a time it was a 75:25, is it closer to an 80:20 now?

We have been focused on maintaining our fixed cost and trending at a rate that’s in dollars below the level that we were at last year and we've taken a number of actions on the both the headcount area as well as other areas of that spending. And then in variable cost our objective has been to truly make those variable with production and so based on that the percentage of fixed cost is going to increase slightly in percentage terms but it’s not a big percentage amount.

From that normalized 75:25 relationship?

Just by nature of top line and then specially for the second half being down 20% to 25% fixed cost would probably increase 2% to 3% of the total part something of that magnitude.

Okay that’s helpful. Thank you. And a final question just has to do with your hedges, nickel hedges and other hedges, what would be the impact over the next couple of quarters, cam you quantify that for us?

They are not significant numbers, but just to provide some background we take out raw material hedges at the customer's request under our long-term agreements which account for about 40% of overall sales. And so as some volumes under those agreements have been pushed out as the hedge contracts comes due and given the decline in nickel, comes to at a negative or at a cost, we offset to that as the customer takes the volume. And so for the first quarter it was about a $5 million impact in our results and a similar number in the second quarter. During the second half for the year we would actually expect that to turn slightly positive due to the timing effect of customers and taking volume on hedge contracts that have expired during the first half of the year.

Great. Thank you very much.

Thanks David.

And your next question comes from the line of Edward Marshal of Sidoti & Company. Please proceed. Edward Marshall - Sidoti & Company: Good morning everyone.

Good morning. Edward Marshall - Sidoti & Company: Is it out of the real possibilities that if this demand trend continues, that longer than we anticipate that the capacity expansion that is slated I guess now for the end of the year to delayed further?

Let me answer that we have some smaller furnaces that we can [idol]. And so the plan still is to slow down but to start up those furnaces. The reason for that in some of the furnaces, the product is triple belted and it takes a while to get the qualification and approvals. So what we would do is [idol] some less efficient furnaces, start them and then work on qualifying the material. So that one demand returns and materials are qualified and we can produce it in the furnaces. So, we have the kinds of things that we obviously did when we looked at the project, is took out any overtime to deliver the project on time, when we needed the capacity that was scheduled in there, to improve the timing that has been removed. Obviously we won't be operating any overtime on those furnaces but what we will do is qualify the new materials. Edward Marshall - Sidoti & Company: I see. And the recent decline of moly and cobalt and that effect on its businesses could have the same impact that nickels had to the overall business in the industry?

Nickel for us is a much greater impact and when we do on cobalt, hedge cobalt, we don’t hedge moly. So we hedge nickel and cobalt but the nickel numbers are much greater than any of the other materials. Edward Marshall - Sidoti & Company: Right. Okay. And then the cost of the cost cuts that you guys discussed today or further reduction cost. Do you care to quantify that in any way to help us, kind of project the future did I miss that?

On our last call we had talked about actions that we were taking on the fixed cost line. Edward Marshall - Sidoti & Company: The 2% that you discussed.

Then the 2% and so that as we explain you that time is our targeted reduction versus the approved budgets that we had coming in to this year and we’ve rolled that commitments in to all new budget departments our new budget targets for all departments we track against that on a monthly basis and we are on track to at least achieve those numbers. Edward Marshall - Sidoti & Company: I see. And as far as from the classification the segments specialty alloys, stainless steels. In that can I have a sales number without surcharge? If you have that available?

Yes for special alloys our second quarter sales excluding surcharge was down 22%, 27% when you include surcharge for stainless products down 3% and 9% when you include surcharge and for titanium products down 9% on both measures. Edward Marshall - Sidoti & Company: Okay, thank you very much. Have a great day guys.

Thank you.

And your next question comes from the line of Gautam Khanna of Cowen & Company. Please proceed. Gautam Khanna - Cowen & Company: Hi can you talk about the PAO operating margins this quarter. Modest sequential decline in sales ex-surcharge yet a pretty pronounced one in terms of operating profits specifically kind of what is driving that?

Yeah I think the single answer Gautam is inventory impacts. I think if you have looked at our fiscal year-to-date numbers and margins the advance materials and premium alloys business, you have a more normal relationship there between the two. But its really inventory effects between the two businesses. Gautam Khanna - Cowen & Company: And should that persist, I mean is that something we are going to see as an overhang through the second half of the year?

I'd consider our fiscal year-to-date numbers representative over the kind of difference in margins between the two businesses. Gautam Khanna - Cowen & Company: Okay and the premium melt expansion that I thought was slated for this quarter the December quarter?

It was. You are right, you have a good memory. What we did is in order, when we needed the capacity to deliver this quarter we had our contractor and Carpenter maintenance over time. And when we looked at it, we obviously don’t need the capacity. So I cancelled that all overtime and that is the only reason for the delay. There was no delay in the preparation side, no delay in equipment arrival. It was strictly the cancellation of overtime that pushed out the timeline. Gautam Khanna - Cowen & Company: Okay. You mentioned a couple of quarters of inventory overhang on the jet engine supply chain. How much is visible, I mean do you guys have production schedules looking out six months from the likes of GE and Rolls and the others?

It’s a great question; we’ve done a lot of work on that. What I am going to ask is Sanjay Guglani took comment on that one.

So, the inventory.

The visibility that we have in the engine supply chain.

Okay. What’s going on the aerospace supply chain is that the jet engines are behaving differently than the fasteners. Because of several reasons, there is an excess inventory in the supply chain; one of them is the Boeing supply reduction due to the strike and push outs of both the 787 and the A380. And also there is forecast that the build schedule for both Airbus and Boeing will get reduced in the near future and that is based on some of the forecast we have seen in the industry. That is causing the excess inventory in the engine supply chain. As we see it today, it will take a few quarters for that excess inventory to get worked out through the system.

Answer the question and just add on what Sanjay is saying here. We look at the data from the airline monitor and then the second thing that we obviously have is very close relationships with the forgers that are a step closer to the OEMs in the supply chain. So between the external data and then the demand patterns from the forgers that’s the visibility that we have. Gautam Khanna - Cowen & Company: Good. And do you have like a production schedule looking out six, nine months or is this just your lead times are actually very -- the order the production times are actually quite low?

Our lead times for engines is about nine to twelve months before the aircraft is actually built. So when we shift the material our customers are actually forecasting based on the previous build schedules and that build schedule we expect to come down and we have seen some push outs in the demand from our forgers.

So there is lag in the time that the consumption of the engines either by airlines or rebuilds or replacements and builds of Airbus and Boeing there is a lag before our schedule. Gautam Khanna - Cowen & Company: Okay. And I think on the last call Anne you mentioned about a quarter of your jet engine sales or for after market applications?

Yeah. Gautam Khanna - Cowen & Company: Are you seeing weakness in that part of the marketplace and do you expect that to get weaker?

No. It’s a good question but honestly when we supply the material to the forger it's invisible to us whether it goes to a replacement engine or for new builds. But, the type of data that we look at are things like revenue passenger miles both in U.S., Europe and Asia Pacific and there is a correlation obviously with revenue passenger miles and the need for replacement parts or replacement engines. So when we are looking at that, it's weaker; so based on interpolating the data we would say it's had an impact quantifying if any more than that I really can't do; we don’t have the visibility. Gautam Khanna - Cowen & Company: Okay, thank you.

And your next question comes from the line of Mark Parr of Keybanc Capital Markets. Please proceed.

Hey, thanks very much. Hey good morning.

Good morning, Mark.

I had a couple of questions. First I wanted to clarify and I didn’t hear everything that you guys said but when you were talking about a second half revenue outlook were down 20% to 25%. Does that include surcharges or is that excluding surcharges?

Excluding surcharges the way that we would apples-to-apples working our business.

Okay. Right. Any sense that you can give us for the March quarter including the surcharges. I mean how much incremental impact could that be?

I think the difference between our, you had about a five point difference in the second quarter between our sales excluding surcharge and surcharge and that number would be at least that five point gap just given what’s happen to nickel prices but not materially different than that but high single digits would be I would say the difference between revenue ex-surcharge and revenue including surcharge.

Okay. Alright and did you make any comments either specifically or anecdotally regarding backlog momentum?

No we did not although we have seen I think it’s about a 10% reduction in the backlog market the latest number I looked at.

Okay and is that excluding surcharges?

That’s on tons that we would look at that.

That’s on tons okay about 10% in terms of volume.

Yes.

Okay. All right. And then help me to understand your position on jet engines, is your material more focused on the fixed portions of the engines or the rotating portions?

Both we supply materials that are used in the hot end of the engines, so we supply materials that are used for disk that is rotating and we also supply similar material but different specifications for rings and the rings are stationary they don’t rotate but as I said earlier they are both used in the hot sections so they both have very high nickel which is extremely profitable for us.

Okay alright terrific and then the last question I know I think that MacGregor had asked this question earlier but I was just wanted to get some clarifications. Can you give us a sense of what’s the difference in the actual fixed costs for the second half could be relative to the first half?

I'd position it relative to year ago we’ve been running slightly below year-ago through the first half of the year and about five point stand when you exclude the effects of pension expense and I think it we'll continue to track at the rates that's below a year ago spending level given the actions that we taken.

Would you think, it might accelerate? In the second half, given the incrementally impaired economic outlook that we’re seeing?

We have been on fixed cost hold all year, so we've had a higher increase in place since the beginning of the fiscal year. We’ve been clapping down on all of our discretionary costs since the beginning of the year. So, and that's true, I would expect to see that rate, accelerate. I think it will continue to be manage it sideways; we managed it over the first half of the year.

Okay. I had just one last question, just looking at the inventory build that’s occurred in the first half of the year. And this is something that you are talking about a scenario focus for the second half. It seems somewhat uncharacteristic for you guys and I guess, I’ve just really be curious kind of like what happened or may what was the disconnect between the purchasing activities and the manufacturing activities or could you give me a little color about that process?

I think, what happened. I mean if you look back at last year, we had a similar trend on inventories first half to second half for different reasons. This year, what happened, I think the biggest what happened is the rapidity at which demand forecast changed really was until the first week of September we started to see the evidence of the downturn that was timed for us with the Boeing strike and given that we are in a business where we melt three months ahead and you have initiatives underway to improve the granularity of some of our systems for scheduling and production planning in those type of things, I think we’ve been doing our best efforts to, we act to the rapidly changing demand in the business where we did have an order book and we are melting ahead of that order book and we have certainly been implementing corrective actions as its been clear that our demand forecast is down.

Okay.

One other aspect I would just highlight of inventory is that it is connected to customer service and it's important a priority for us to maintain good strong levels of customer service. And so as a we have been managing inventory there is areas of way certainly that we need to be managing down and there is other areas where we needed to put more inventory on the ground in order to do the right things from a customer service standpoint.

Okay, all right. And just last. Was there a LIFO impact in the quarter that you can identify for us? Or did you say, I don’t know if you said that already but?

For LIFO we will report in our [QA] number of $42 million, I don't view that as particularly relevant number. Our LIFO expense our current cost to raw materials as we go and so we don’t view that there is much of a mismatch between our raw material cost and the raw material value that’s in our pricing just given the way that we handle our transaction of business and our long-term agreements.

Okay, terrific. Thanks very much for all the cover, I appreciate it.

Okay.

And your next question comes from the line of Eugene Fox of Cardinal Capital Management. Please proceed.

Thanks. Just a couple of questions related to inventory as well as production. In your volume and revenue guidance for the second half of the year, how much of that is based on a reduction of inventories to more normal levels?

Our inventory reduction efforts are internal. So those are externally reported, our expectation for externally reported top line revenues are going to be of 20% to 25% and the impact that would have on our production schedules will be more than that because of our efforts to reduce our inventory in the second half. I don’t know that answer your question Eugene?

Okay, all right. I think I understand. How much of your inventory is really associated with the build of jet engines that you were discussing earlier?

We really don’t have anything internally that would help us identify the inventory to jet engines. It's certainly a factor, that’s a business that’s down, that’s a high value business to us and so the rapidity at which that demand has moved down, because of what's happening in that industry is certainly a key factor in our inventory.

Are there any other products which you might identify, I mean particularly what [you've done] which would have been difficult for you to manage inventory level during the quarter?

Some of the products testing for energy as well. We had very good business in the drill collar sector but that has dropped off considerably and that’s another factor that’s impacted inventory.

Okay. The other comment that was made on the call was relative to this dumping subsidy of $6 million that you got in the quarter down from eight in your guidance for the second half of the year are you seeing you get any subsidy in the second half?

First that’s been our item that's always occurred in our second quarter or at least for the last several years has occurred in our second quarter and so there is nothing that we would expect on that line for the balance of the year and we'd expect a much reduced number in the second quarter of next fiscal year.

Okay. Thank you very much.

You are welcome.

And you have no further questions at this time. I would now like to turn the call back over to Anne Stevens.

Thank you very much Becky. For all participants thank you so much for your interest in Carpenter. We look forward talking to you again to discuss our third quarter results in our conference call. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.