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Carpenter Technology Corp. (NYSE:CRS)

F1Q10 Earnings Call

October 27, 2009; 9:00 am ET

Executives

Greg Pratt - Chairman & Interim President & Chief Executive Officer

Doug Ralph - Senior Vice President & Chief Financial Officer

Mike Shor - Executive Vice President for AMO & PAO Operations

Sanjay Guglani - Vice President & Chief Marketing Officer

Dave Christiansen - Vice President of Investor Relations & Business Development

Analysts

Edward Marshall - Sidoti & Co

Gautam Khanna - Cowen & Co

John Tumazos - John Tumazos & Co

Brian Yu - Citigroup

Mark Parr - KeyBank Capital Markets

Wayne Atwell - Casimir Capital

Tim Hayes - Davenport & Co

Operator

Good morning and welcome to Carpenter Technology first quarter 2010 earnings conference call. My name is Katie and I will 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 the 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. Dave Christiansen, Vice President for Investor Relations and Business Development. Please proceed.

Dave Christiansen

Thank you, Katie. Good morning and welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 2009. This call is also being broadcast over the Internet. With me today are Greg Pratt, Chairman and Interim President and Chief Executive Officer; Doug Ralph, Senior Vice President and Chief Financial Officer; and Mike Shor, Executive Vice President, AMO and PAO 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, 2009, 10-K and the exhibits attached to that filing.

I will now turn the call over to Greg.

Greg Pratt

Thank you, Dave. Allow me to extend my personal welcome and thank each of you for participating on this call. A couple of weeks ago, Carpenter announced a leadership change, separating the roles of Chairman of the Board and Chief Executive Officer. The decision to split these roles is very much in keeping with emerging best practice trends for governance of public companies.

In taking these steps, Carpenter will join a growing list of US organizations that have determined this to be the best direction for corporate governance. We believe this change will enable the CEO to focus on growing the business and improving operating results. At the same time, it is a formal recognition of the intensity of a separate commitment of running the Board.

I have been involved on the Board of Carpenter for many years and I look forward to continuing to serve on the Board as the Non-Executive Chair. We are actively searching for a successor to permanently fill the role as CEO. In the interim, we will remain committed to our three core principles, which are improving shareholder value, driving operational excellence and meeting our corporate community responsibilities.

Consistent with last quarter’s call, we believe revenue will begin climbing over the remainder of the fiscal year as the global economy slowly recovers. Achieving positive earnings per share and generating positive cash flow remain our financial goals for the year. We are currently seeing some encouraging signs in our leading indicators and more balanced inventories in the key segments of our business, including materials for aerospace engines, power generation and automotive.

We view these developments as green shoots in an uneven, lumpy economic recovery. Finally, Carpenter is a financially strong company with leading positions in attractive end markets. We remain committed to investing in R&D, key emerging markets and collaborative initiatives to facilitate long term growth and create shareholder value.

Now let me turn the call over to Mike Shor to discuss our end markets.

Mike Shor

Thank you, Greg. Good morning, aerospace market sales were $102.9 million in the first quarter down 35% compared to the same period a year ago. Excluding surcharge revenue, aerospace sales were down 30% on 22% lower volume. The decline reflected lower airplane build levels reductions in inventory in the supply chain and a leaner mix. We are seeing signs that supply chain inventories for jet engine materials are in better balance.

This improved balance should result in more pull through in our second quarter and the remainder of the year, as order activity is more closely tied to usage. Fastener demand continues to be soft, with excess inventory remaining at manufacturers and distributors. Inventory destocking is continuing and we don’t expect to see significant demand improvement in the near term.

This delayed demand typically corresponds with the six month difference in lead times between engine materials and fasteners. We continue to be encouraged by the latest airplane build projections that indicate improvements in the second half of our fiscal year. Furthermore, there is now evidence that revenue passenger miles are increasing in the US, Europe and Asia-Pacific.

Industrial market sales in the first quarter were $50.4 million down 49% compared to the first quarter of fiscal 2009. Excluding surcharge, industrial sales decreased 37% on 27% lower volume. The decline reflects continued weak manufacturing demand. We expect slight improvements in this market. This view is supported by the industrial production index that we use as a gauge for this market, as well as the outlook from our major customers.

The industrial production index its low during the fourth quarter and is projected to gradually increase during the remainder of fiscal 2010. Medical market shipments were up 15% in the first quarter, while sales decreased to $25.5 million down 13% from the first quarter of fiscal 2009. Excluding surcharge revenue, medical sales declined 10% from the prior year.

Volume increases reflected higher demand for materials for implant procedures utilizing our CCM Plus products and our improved position in medical instrument applications. These increases more than offset declines in our titanium product volumes. The revenue decline seems from lower titanium raw material costs and a leaner mix of products, as instrumentation growth outpaced growth in implant materials.

Consumer market sales were $23.4 million a decrease of 35% from the first quarter of fiscal 2009. Excluding surcharge revenue, sales declined 25% on 16% lower volume. The decline in revenues reflected lower sales, primarily in the housing and electronic segments. We continue to see evidence in our customer ordering patterns that supply chains may have bottomed up.

Using the US housing starts index as a proxy for consumer market activity, lows were seen in the second half of our last fiscal year and grow is projected for the year ahead. Automotive market sales were $19.4 million a decrease of 49% from a year earlier. Excluding surcharge revenue automotive sector revenues were down 41%, as volumes declined 21% from a year earlier.

Although we have improved our position in select high end applications, we have also increased our participation in some lower value segments. This contributed to the negative mix impact versus the prior year. As expected, order production jumped in the first fiscal quarter, due to the impact of incentive programs and a new model year. Supply chain inventory has been significantly reduced, which should lead to increased demand and strong growth moving forward.

Energy market sales of $12.1 million represented a decline of 77% from the first quarter a year earlier. Excluding surcharge revenue, energy market sales decreased 79% on 81% lower volume. Excess inventories in the oil and gas supply chain continue to drive down already weak demand for materials in oil and gas exploration. We anticipate no significant improvement for several additional quarters.

Inventory levels serving the power generation market have become more stable, which will likely result in increased demand for our products. Carpenter’s international sales in the quarter, including surcharge were $72 million, a 53% decrease over the same period a year ago. International sales represented at 31% of total sales in the first quarter of fiscal 2010 compared to 37% in the prior year.

The reduction reflects declines in energy, aerospace and automotive demand, compounded by continued inventory reductions. This is especially seen in our European customer base. Asia-Pacific continues to be a growth area for Carpenter and we’re beginning to see some results from our focus in that region.

Starting from a small base, pounds shipped in the energy and automotive markets increased 23% and 27%, respectively, over the prior year volumes. Our investment in China has sparked volume growth in that country. Again, on a beginning base that was relatively small, pounds shipped in China alone for the quarter increased 79% and sales increased 32% versus the prior year.

Now, let me shift gears and talk about some exciting developments with our new products that build on Carpenter’s history of developing high value differentiated materials. As we have mentioned during recent calls, Carpenter has continued to invest in research and development with the expectation that it will lead to long term growth and value creation.

I want to discuss three specific developments today that demonstrate that this focus and investment are working. The first is Carpenter’s September announcement of a joint technology agreement with Manhattan Scientifics. Carpenter is using Manhattan Scientifics patented process to develop and commercialize a new class of high strength materials with broad applications in our key markets. We see this as an investment in the next generation of our advanced alloys.

The second development is the new market application for our CTS alloys for use in cutting blades. As we announced in early October, our premium melded stainless steels offer characteristics such as enhanced edge retention, corrosion resistance and consistent surface finish at competitive costs. These attributes make our CTS alloys strong candidates for a variety of blade applications. We are pleased with the customer acceptance of our materials in this market.

Lastly, I want to discuss our upcoming launch this quarter of Permamet, a new type of alloy initially targeted for several applications within the heavy duty engine market. Compared to existing alloys used in these applications, Permamet is stronger, tougher, and has significantly improved fatigue resistance and strength to weight ratio. A patent is pending on this alloy.

In summary, the last 12 months have been very challenging. Significant volume reductions across our key market segments, along with major supply-chain inventory reductions, have caused issues affecting our profitability and our workforce. That being said, I believe we are beginning to see some positive signs.

As we move beyond the bottom of this cycle, we have much to be encouraged about. We’ve recently concluded successful negotiations with key customers in both our stainless and high-temperature product lines. We believe that we are seeing the end of the inventory reduction in the aerospace engine segment, leading to improved ordering activity.

Our cost focus is showing positive results and our momentum is increasing. Our new VIM, VAR and ESR furnaces are now online, and we are well positioned as the economy improves. Our new China distribution facility is now beginning operation. The manufacturing units across Carpenter have significantly improved their collective safety performance.

Finally as just stated, we are beginning to see the results of our research and developing and marketing initiatives, with new products being introduced in the marketplace. Overall, I feel good about our talented workforce and our ability to produce high value, differentiated products to our customers around the world.

At this point, let me turn the call over to Doug, so he can walk you through our financial results.

Doug Ralph

Thanks Mike. Overall, our financial results for the quarter and our current financial projections for the year, are shaping up as expected. We are reporting a first quarter net loss of $9.3 million or $0.21 per diluted share. For perspective, the quarter would have been right around breakeven, without the $0.21 of non-cash pension expense in the period.

Our earnings result reflects production volume efficiencies versus the second half of last year, and our strong focus on cost reduction, which has offset lower revenue in the quarter and a weaker product mix.

Moving on to the elements of the income statement, net sales in the quarter were $234 million, or 44% below a year ago. Excluding raw-material surcharge, sales were down 38%. Overall tonnage volume decreased 30% in the quarter, with special alloy products down 27%, titanium products also off 27%, and stainless steel products down 32%.

First quarter gross profit was $19.2 million, compared with $73.7 million a year ago. Excluding surcharge revenue, our gross margin in the period was 10.2%, versus 24.4% last year. The lower gross margin is primarily due to reduced volume and correspondingly higher volume related costs. The margin was also adversely affected by a leaner mix of products, including lower demand for premium alloys for energy and aerospace, as well as the portion of higher pension expense that hits our cost of sales.

Reported SG&A expenses decreased 3% year-over-year. The decrease was 10% if you adjust out the impact of non-cash pension expense in both years. The lower SG&A continues to reflect the actions we have taken to reduce headcount and spending across the business beginning last fall.

For the quarter we had an operating loss of $13.3 million, compared with income of $40.3 million in last year’s first quarter. Our operating margin excluding surcharge, was a negative 7.1%, down from a positive 13.3% last year. Excluding the increased pension expense, operating margin would have been a negative 2%, which is not a surprise given the low volume level.

Finishing up the income statement, other income was lower by $2.4 million, primarily driven by lower interest income. Cash investment rates have significantly declined since the prior year, especially in the conservative sectors in which we invest. Our first quarter tax provision was a benefit of $6.8 million or 42.2% of the pre-tax loss, compared with an income tax expense of $13.9 million or 35% of pre-tax income in the same period last year.

Despite difficult market conditions, we continue to maintain a strong and conservative balance sheet. We ended the quarter with $18 million of positive free cash flow, $375 million of cash on the balance sheet, and an improved net cash position of $96 million. Note that the positive cash flow result in the quarter, would have been essentially flat without the receipt of a tax refund from overpayments last fiscal.

We continue to tightly manage all aspects of our cash forecast, and expect to achieve our goal of positive free cash flow for the year. Due to strong inventory performance in the first quarter, and the need to build some inventory to replenish stocks and support the increase in second half demand, our second quarter cash flow will likely be negative, but we are doing all the right things to achieve our target over the full year.

There have been changes to our required pension plan funding since our last call that we want to make you aware of. Based on recent changes in pension funding rules regarding interest rates, we are no longer required to make the $7 million contribution to the plan this fiscal that we previously communicated.

In addition, the overall cash contribution to the plan that we were anticipating for calendar year 2010 of about $45 million, will effectively be pushed out a year. Also, the level of those future cash contributions will be recalculated at the end of December, based on the change in plan asset levels, which have improved with equity markets over the last year, as well as other assumptions.

Net, we will almost certainly still be in an under-funded position at the end of the calendar year, but the required cash contribution amount, which will be the first for us since 1986, will be lower and will not begin until calendar year 2011.

We continue to have plenty of liquidity and cushion within our credit facility covenants. As part of this, we are on track to renew our unsecured credit facility before the end of the calendar year. Looking forward, we believe our revenue level hit bottom in the first quarter of this year and will gradually improve off that level quarter-to-quarter during the fiscal.

Overall revenue for the year is still expected to be lower than our fiscal year 2009 level. We continue to target operating margin for the full year, excluding pension, to be in line with last year’s level of about 6%, despite the lower revenue and weaker product mix. This is a good challenge for the company and requires that we are successful with our continuing cost management efforts.

We have established cost targets throughout the operation. that will yield a net reduction in our cost per-ton this fiscal. In addition, we will also leverage our strength in internal processes, to ensure we add labor back prudently as volume recovers.

With that, we will now open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Marshall - Sidoti & Company.

Edward Marshall - Sidoti & Co

My first question has to do with the months of supply and the energy channel. Is there any way for you to quantify, in particular in the oil and gas, as to what the months of supply and how long it will take to kind of work through.

Mike Shor

Ed, this is Mike Shor, good morning. A couple of things; number one, we are seeing that rigs or the count of rigs are off the bottom with oil prices recovering. Even as more directional rigs come online it will be several quarters before the growth resumes. We’ve seen some significant over buying there for inventory in the supply chain, which will lead to at least a couple of quarters before we see something coming back.

Edward Marshall - Sidoti & Co

Okay, and then from an inventory level, as you are holding on the balance sheet here, do you kind of expect that to remain somewhat stable for the remainder of the year?

Mike Shor

Relatively stable; we’d expect to end the year at about the same position that we started the year.

Operator

Your next question comes from the line of Gautam Khanna - Cowen & Co.

Gautam Khanna - Cowen & Co

One of your customers was acquired by Precision Castparts recently, and there’s been talk about potentially enforcing some of the nickel you provide. How long do your contracts extend with Carlton Forge and what is your exposure there?

Mike Shor

Gautam, it’s Mike Shor, a couple of points related to that. On the PCC acquisition of Carlton, we are comfortable about the commitments we have from Carlton for the next year or two. Beyond that timeframe, there is still a number of products that we supply to Carlton that we believe have very high value to them, and that we would expect for them to purchase from us.

Really the summary is, we believe that we can more than offset the loss of the Carlton business as it occurs. A couple of other points that I think are worthwhile; we have continued to aggressively pursue share gain opportunities beyond Carlton, both short and long term in our aerospace business, and we have been successful in gaining share that will result in some near term growth, and beyond that, we are looking at products new to Carpenter and some long term share initiatives also.

Gautam Khanna - Cowen & Co

Can you quantify how much of Carlton’s nickel you feel that you actually supply, and perhaps whether SMC’s special metals growth can actually make the number of these alloys that you provide for Carlton.

Mike Shor

I think it’s fair to say that we’ve had majority share, not certainly all share, but majority share there, and I think on the higher volume products, certainly Special is capable of manufacturing those products, and we believe there is significant value still seen in some of the other products that we supply.

Gautam Khanna - Cowen & Co

And when you said next year or two, I mean can you tell us, is it half the business that was under contract for one year and half for another year. Is there any sort of duration you can apply to this?

Mike Shor

We have a variety of different documentation with them. So it really varies based on who their customer is and the specific product. That’s really as far as we can go on that one.

Gautam Khanna - Cowen & Co

And just a follow-up; you mentioned the jet engine slightly appears to be more in balance. Now that your PCP and ATI mentioned that they have a destocking that’s pretty heavy this quarter, and that they don’t expect it to abate until sometime in the first calendar quarter of next year, are you guys seeing anything differently or can we interpret your comments to be consistent with those?

Mike Shor

Two points that I think are worth noting; number one, we are receiving feedback from some of our major customers about the destocking coming to an end, and I guess the key sign, as we look at when this type of inventory reduction ends, is when our customers begin coming to us for short lead times; meaning that they are out of inventory and they need something rather quickly. We’re beginning to see those types of requests coming in, which is what gives us some confidence.

Operator

(Operator Instructions) Your next question comes from John Tumazos - John Tumazos & Co.

John Tumazos - John Tumazos & Co

To the new VIM and VAR furnaces, how much is the incremental depreciation? Had there been any interest capitalized during their construction? Are there older furnaces you are taking offline, given the low current levels of business as the new machines come on?

Doug Ralph

Yes, of the new investment, specifically it was around $120 million CapEx project, so we are looking at $3 million to $4 million of annual depreciation against that. There are no parts of the operation that are being decommissioned as part of that, and I don’t know whether we covered all your questions there, John.

John Tumazos - John Tumazos & Co

Are there any new orders that you are getting because of the new furnaces?

Mike Shor

John, it’s Mike. I would say that the majority, not all of what goes into those furnaces are through our aerospace and energy businesses, and as you can see by the results, we are down in both of those businesses. So I would say at this point the answer is, no.

The key for us is being able to have the capacity as these markets recover, because we are truly bumping up against our maximum capacity in the past. So as we look at these markets, these growth markets going forward, really these things are for filling the demand as we move out of the current business that we’re in.

Operator

Your next question comes from Brian Yu - Citigroup.

Brian Yu - Citigroup

With respect to your aerospace business, you said your engine market looks like it’s turned around a little bit; airframe, still perhaps a bit more destocking to go. Can you give us a sense of how your business splits between those two markets currently?

Mike Shor

I think we’ve traditionally said that engines is a majority of our aerospace business, and fasteners is the second biggest component.

Brian Yu - Citigroup

Okay, and that still holds true given the changes in the order rates?

Doug Ralph

Yes.

Brian Yu - Citigroup

Like 75/ 25 or…?

Doug Ralph

I wouldn’t go beyond what we said. The engine parts are a majority of our business, and then fasteners would be the second biggest component, and fasteners would consist of both nickel and titanium based fasteners.

Brian Yu - Citigroup

Okay, and with your expanded capacity, where would you peg your maximum annual pounds that you could do; would it be close to $300 million?

Doug Ralph

I think I prefer to express that in revenue terms, and so if you looked at where we were pre-downturn fiscal 2008, and we’ve consistently said that the new capacity would give us something in the order of $150 million incremental revenue potential. Mike is going to add a couple…

Mike Shor

Just one other comment for some color on that, if you look at our new furnace being online in vacuum induction melting, including the new furnace, we are probably operating at 50% to 55% of capacity on that; in rough numbers, about 70% on re-melting. So we’ve got significant available capacity in those areas to grow.

Operator

Your next question comes from Mark Parr - KeyBank Capital Markets.

Mark Parr - KeyBank Capital Markets

One thing, I was curious if you could give us some color on the new VIM capacity at Latrobe. Does that create any additional competitive, potentially competitive issues for you guys over the next several years?

Mike Shor

Mark, it’s Mike. Two points on that; number one, when you look at what’s in VIM furnaces, the first piece is the critical rotating product that goes into our high temperature alloy blip, and there are very, very, very long approvals on that, and very few people in the world are approved. So on the true high end, of our high end I would say that, no, at this point there are not concerns.

When you get into some of the other alloys, for example the stainless steels that are VIM melted of course there, and even some of the alloy steels that are VIM melted, there certainly would be an impact as another VIM comes on, but on the high end and our top products, I believe the answer is no.

Mark Parr - KeyBank Capital Markets

Okay. I guess another question, given that your new capacity is perhaps lower cost capacity and more state-of-the-art, I’m wondering if you’re seeing any or pursuing any increase in export opportunities, or maybe even from a semi finished standpoint if there are opportunities there you are seeing outside of the U.S.

Doug Ralph

I’d say with the expanded capacity we have, we are absolutely pursuing opportunities, both within and outside the U.S.. We utilize this furnace; it’s a large furnace, so we can utilize this very cost effectively obviously. On the high end products, we are going through our approval processes, so we are looking at what we can creatively do to fill a furnace as we hit the low in the business that we’re at now.

Mark Parr - KeyBank Capital Markets

I apologize for missing the first several minutes of the call and I don’t know if you had made any comments related to the change in executive leadership, if there is any update there or if you said anything. I’d just like to get some color on that if you could share anything at this point that’s incremental.

Greg Pratt

This is Greg Pratt speaking. We did start off with commenting on the change, and just to summarize what we talked about, we indicated that the change was something that we did, because we believed that it was certainly in keeping with the growing list of U.S. organizations that have determined that splitting this chairman role and chief executive role, is the best direction for corporate governance.

We made this change because we believe that this will enable the CEO to focus on growing the business and improving operating results. At the same time, for us it’s a formal recognition of the intensity of the separate commitment to running the Board, and finally, I commented on the fact that I have been with the Board for over seven years and once we have completed our search process, I look forward to continuing to serve on the Board as a non-executive chair.

Mark Parr - KeyBank Capital Markets

Then, just lastly if I could, just to kind of summarize your update on the 2010 guidance, did I hear you say that you expect about a 6% EBIT margin and positive free-cash flow? Did you make any comments on the revenues? Again, I apologize if I missed that.

Doug Ralph

Comment on the revenue Mark, and all of this is consistent with where we were last quarter, but on the revenue, we expect the first quarter to be a bottom, and then we’d expect to see quarter-to-quarter improvement over the course of the fiscal year.

As far as the financial results, we do expect an overall operating margin, and for us we always exclude pension EID from that, but an overall operating margin that’s in line with last year’s level, which is about 6%, and also do expect to achieve our goal of positive free cash flow.

Operator

(Operator Instructions) Your next question comes from Wayne Atwell - Casimir Capital.

Wayne Atwell - Casimir Capital

Could you give us an update on your thinking about capital spending for this year?

Doug Ralph

We’d expect about $50 million in total capital spending, which is similar to also what we’ve been talking about all along.

Wayne Atwell - Casimir Capital

And when your sales get back to what you would consider a more normal level, how much working capital will that chew up, because I assume you are working off working capital now, and you’ll have to rebuild that.

Doug Ralph

I think if you look at fiscal 2009, there was about $70 million of net working capital benefit that we got as the volume was reduced. Quite a bit bigger number in the receivables area, and so I think certainly as the business grows, we would anticipate working capital needs to increase, and in part, that’s one of the reasons why we are managing CapEx tightly to the $50 million level, versus what was about $119 million that we spent in CapEx last year.

Wayne Atwell - Casimir Capital

So we might see you chew up $50 million to $70 million when you get inventories, when you get your business level back to a more normal level?

Doug Ralph

I wouldn’t say all during the course of fiscal year 2010, because the business won’t be recovered to that previous level by the end of fiscal year 2010, but moving in that direction.

Wayne Atwell - Casimir Capital

Lastly, you obviously have a very strong balance sheet. Could you sort of give us an update on what you plan to do with that?

Doug Ralph

Yes, I think our cash deployment priorities would remain the same as what they have been, which is first and foremost, make sure that we’re taking care of the organic CapEx investment needs of the business.

We do have the cash resources for external growth, if and when the right opportunity comes along there, and we’re going to be disciplined and strategic about what we go about there. Then dividend has been something that’s also been a cash priority. We’ve got certainly the financial flexibility to continue the dividend if it’s the right shareholder strategy for deploying the cash.

So share buyback a couple of years ago was something that we were devoting cash to. We don’t have an active share buyback program right now, and that’s not on the horizon for discussion, and so I think between CapEx, external growth, and continued dividend, that’s where we are going to invest our cash.

Operator

Your next question comes from Tim Hayes - Davenport & Co.

Tim Hayes - Davenport & Co

Just a question on corporate costs; do you expect more decline in the upcoming quarters as we get sort of the full effect of the cost cuts that have been made?

Doug Ralph

If you’re talking about our reported SG&A, a lot of those cost actions were initiated in the fall when the downturn began. So I would anticipate there, that the year-to-year improvement is going to narrow as that’s more reflected in our base, but I still think we are going to have a good, strong cost year in the overhead area, and that the actions that we’ve taken will enable us to achieve targets. Especially when you take the pension out of the comparison numbers this year that are below where we experienced last year.

Tim Hayes - Davenport & Co

What about specific to corporate expense, the $9 million that was incurred in the fiscal quarter? A little bit more decline there for the upcoming quarter?

Doug Ralph

I think if you look year on year at our corporate cost line item, it will be I would say about the same as it was last fiscal year, for the full year.

Operator

Your next question comes from Gautam Khanna - Cowen & Co.

Gautam Khanna - Cowen & Co

The name distortion gets worse and worse each time. Anyway, I just wanted to ask, you mentioned Mike, some of the share gains that you are making to offset potential loss over at Carlton. Could you characterize what they are? I mean, have you had some agreements you haven’t announced yet or is this something that’s still in process, and if so, in which side of the business? Also, if you could also give us the ex-surcharge sales by end markets?

Mike Shor

Gautam, as far as share gain, typically we have not in the past announced specifics when we have gained some share. In the high temperature alloy blip business, we have been successful obviously around the Carlton in some other areas where we have over the last year, and continue to gain share at some major customers, so that’s what’s happened and is happening.

As we move forward, we know there are some alloys that are being manufactured today that Carpenter has not participated in; that we have spent probably the last year working through attempts to do that, to enter into some supply chains that we’ve not been in before.

Then longer term, looking at the three, four year out horizon in working to determine, both with the engine builders and with our forging customers, what else we can do for share gains. So we know we’ve had some short term. We believe there is an opportunity from the alloy perspective in the medium term and some more share gain in the long term. It’s something which we’ve focused on for quite a while and obviously it’s critical, given what has happened in the market in the past and what’s recently happened with Carlton.

Greg Pratt

Then Gautam, to your other question of the sales ex-surcharge by end market, our total for the corporation was $188 million in the period, and that broke down into $81 million of aerospace, $42 million for industrial, $16 million for automotive, $21 million for medical, $9 million for energy, and $18 million for consumer.

Gautam Khanna - Cowen & Co

Doug, I know you’ve given us direct kind of notional guidance of positive EPS for the year, and sequential builds, but is there anything you can give us for the magnitude, because you’re starting out in the whole $0.21. Do you have a view on what Q2 is likely to be if it’s near flat, and how should we think about kind of the exit rate in Q4?

Also, I know you mentioned pensions will be modest at 12, 31, but what is the recurring piece of the pension expense in fiscal 2011 that you can speak to now? If there’s anything outside the quarter, the amortized gains and losses outside the corridor?

Doug Ralph

Let’s see if I remember all of that. So I think we’ve already given, without giving any specific quarterly or fiscal year guidance, a fair amount of direction with where we would expect our operating income to be for the year, and etc.. So I think that’s hopefully helpful in that context.

As far as the EPS pattern that we expect over the year, since we expect our revenue to increase quarter-to-quarter and since we expect to be vigilant with our cost management efforts, I think it’s fair to assume that our earnings-per-share are going to get better quarter-to-quarter as well. As to the pension, our ongoing pension service costs so to speak, somewhere just in excess of $20 million annually.

Operator

Your next question comes from John Tumazos - John Tumazos & Co.

John Tumazos - John Tumazos & Co

I wanted to just follow up with the same clarification. When you made the projection earlier, the 6% operating margin positive, excluding pension, and free cash flow for the year, were you predicting a net profit for each of the successive quarters?

Doug Ralph

We didn’t talk anything about net profit in the subsequent quarters. We would expect it sequentially better, and when I look at the current analyst estimates, they are right around the breakeven points in the second quarter. So it’s not anything that we would want to make a specific comment about for the second quarter.

Operator

Your next question comes from Mark Parr - KeyBanc Capital Markets.

Mark Parr - KeyBank Capital Markets

Just to follow-up, Doug can you talk a little bit about LIFO impacts in the September quarter, and what your thoughts are about LIFO for the full year?

Doug Ralph

Very minimal. I think the LIFO impacts that we’ve had historically have been triggered by build and de-build of inventory levels, and have also been triggered by the slope of nickel costs. While nickel costs have I would say, trickled up since the beginning of the year, we have been managing our inventories on a much more level basis, and so that in itself just significantly mitigates any quarterly LIFO impacts. So we do not, as we look ahead, anticipate any significant LIFO accounting impacts on a quarterly or annual basis.

Operator

At this time, I am showing you have no further questions. I would like to now hand the call back over to Mr. Greg Pratt for closing remarks.

Greg Pratt

Thank you very much. Again, I want to thank you for participating on today’s call. I just want to reiterate that Carpenter is an excellent company, that has successfully managed through downturns in the past, and that we are very well positioned in the marketplace as conditions improve. Our capabilities, coupled with our strong financial position, make this a very exciting time to be at Carpenter, and we look forward to talking with you again next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect. Have a wonderful day.

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Source: Carpenter Technology Corp. F1Q10 (Qtr End 30/09/09) Earnings Call Transcript
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