Carpenter Technology's CEO Discusses F1Q 2012 Results - Earnings Call Transcript

Carpenter Technology Corporation ( CRS)

F1Q 2012 Earnings Conference Call

October 25, 2011 10:00 ET

Executives

Mike Hajost – Vice President, Investor Relations and Treasurer

Bill Wulfsohn – President and Chief Executive Officer

Doug Ralph – Senior Vice President and Chief Financial Officer

Dave Strobel – Senior Vice President, Global Operations

Mark Hayman – Senior Vice President, Specialty Alloys Operations

Analysts

Mark Hokanson – Cowen & Co.

Edward Marshall – Sidoti & Company

Mark Parr – KeyBanc

Tim Hayes – Davenport & Company

Chris Olin – Cleveland Research

Stephen Levenson – Stifel, Nicolaus

Presentation

Operator

Good morning and welcome to Carpenter Technology’s First Quarter Earnings Conference Call. My name is (Katrina) and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. After the speakers’ remarks, you’ll be invited to participate in the question-and-answer session. (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 – Vice President, Investor Relations and Treasurer

Thank you, (Katrina). Good morning, everyone, and welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 2011. 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. Also participating on the call are Dave Strobel, Senior Vice President, Global Operations; Mark Hayman, Senior Vice President, Specialty Alloys 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 filings, including the company’s June 30, 2011 10-K and exhibits attached to that filing.

I will now turn the call over to Bill.

Bill Wulfsohn – President and Chief Executive Officer

Thank you, Mike. Good morning, everyone, and thank you for joining us for our fiscal year 2012 first quarter earnings call. I am pleased to report that we had another great quarter. Equally as important I want to share that we continued to see positive signs that make us optimistic about our business going forward.

I’ll begin with a quick review of the quarter. Our strong quarterly earnings were driven by solid results from our pricing, mix management and operational initiatives.

Sales ex-surcharge were up 19% on 2% lower volumes. This represents a third quarter new rule that revenue growth exceeded volume growth. Note that the average spread between revenue growth and volume growth over the last three quarters has been 18 points. Also contributing to our positive results were strong operating cost performance specifically in cost per tons. We expect these positive trends to continue. We are optimistic that we will exceed our prior peak performance over the next several years as we are still seeing strong demand signals in our key markets. This is especially true in our strategically important aerospace energy and medical market segments. As you aware, these segments are less exposed to short-term economic cyclicality.

The aerospace market continues to be very attractive for Carpenter. In the quarter, we increased our sales by 18% and 12% higher volumes. Engine demand has continued to show strength. We have renewed several significant long-term agreements. We are also experiencing increasing fastener demand. Demand for titanium fasteners is expected to surpass prior peak levels within the fiscal year and double within the next five years. In addition nickel and stainless fasteners have shown significant growth over the last two quarters and this trend is expected to continue.

Finally, we continue to make good progress providing material for structural aerospace applications. We have recently seen increased demand for our custom 465 for flap tracks and slat tracks. We believe (indiscernible) products will help enable us to grow further in this area.

Turning to the energy market, in this market we see sustained demand growth, excluding the impact of the Amega West acquisition. Energy market sales increased 38% on 27% higher volumes. We are clearly benefiting as activity in the industrial gas turbine market is picking up off of lower base. In fact, industrial gas turbines was our fastest growing area within the energy market and a contributor to our positive mix. Including Amega West, revenues without surcharge increased by 108%. The oil and gas segment is continuing to grow due to increases in directional drilling activity. Our acquisition of Amega West and Oilfield Alloys has enabled Carpenter to benefit from this market growth. More specifically, Amega West which we acquired nine months ago continues to rapidly grow at sales.

Compared to the same period last year, Amega West has more than doubled its sales. In addition, the acquisition of Amega West has increased Carpenter’s direct contact with end-use customers in the oil and gas industry. As Amega is a leading supplier to Halliburton and the significantly growing this position with Schlumberger and Baker. This close contact with key customers has enabled Carpenter to increase our sales of materials used for the higher value completions applications. In summary, our growth in this market is only limited by our current capacity constraints.

Turning to the strategically important medical market, let me begin by noting that there has been a lot of press lately about the impact of metal on metal implants. We are seeing some slowdown in orders from materials used in these applications. But our sales in this area represent only 0.2% of our overall company sales. In fact, in total, revenue and growth in our other parts of our medical business remain robust. Overall, medical sales increased 18% on 9% higher volume during the first quarter. This revenue growth was led by 27% increase in Titanium products which contributed to the positive mix and the 10% increase in stainless and CCM products.

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