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A. M. Castle & Co. (NYSE:CAS)

Q3 2009 Earnings Call

October 27, 2009 11:00 AM ET

Executives

Usman Ahmed - Analyst, FD Ashton Partners

Michael H. Goldberg - President and Chief Executive Officer

Scott F. Stephens - Vice President, Finance, Chief Financial Officer and Treasurer

Analysts

Nat Kellogg - Next Generation Equity Research

Timothy Hayes - Davenport & Company

Jason Brocious - KeyBanc Capital Markets

Operator

Thank you for standing by. And welcome to the A. M. Castle & Company's Third Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. As a reminder, this conference call is being recorded today, Tuesday October 27th of 2009.

I would now like to turn the conference over to Usman Ahmed with FD. Please go ahead.

Usman Ahmed

Thank you and good morning. Thank you everyone for joining us for A.M. Castle's 2009 Third Quarter Conference Call. By now, you should have all received a copy of this morning's press release. If any one still needs one, please call my office at 312-553-6731 and we'll send you a copy immediately following the conference call.

With us from the management of Castle this morning are Mike Goldberg, President and CEO and Scott Stephens, Vice President of Finance and CFO.

As a reminder, this call is being recorded. Certain information relating to projections of the company's result that will be discussed during today's call, maybe characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

Those statements are based on current expectations and assumptions that are subject to a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the risk factors section of the company's most recent form 10-K and other reports and filings with the SEC. And also in the cautionary statement contained in today's release.

The company does not undertake any duty to update any forward-looking statements. This presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules.

You will find the reconciliation in the financial information attached to today's release which is available on the company's website at www.amcastle.com, under the investor's tab and in the form 8-K submitted to the SEC.

And with that, I'll turn the call over to Mike Goldberg. Please go ahead Mike.

Michael H. Goldberg

Thank you. Good morning everyone and thanks for joining us today's call. In a few minutes, Scott will speak to our third quarter and year-to-date results in greater detail. But first, I'd like to share few highlights with you.

As you've seen from the press release, third quarter consolidated net sales were 184 million or 53% lower than last year's record $388.9 million. The company reported a net loss for the quarter of $6.3 million or $0.28 per diluted share compared to net earnings of $11.5 million or $0.50 per diluted share for the prior year's third quarter.

For the year-to-date, the net loss is $11.4 million or $0.50 per diluted share compared to net earnings of $36.5 million or $1.62 per diluted share in 2008. Although business remained at very depressed levels and we're disappointed by our lack of earnings for the third quarter, we do have a decree of optimism about the future. We saw our daily sales trends improve sequentially throughout the quarter, having bottomed out in June. We would expect to that trend to continue, seasonal factors aside.

There more economic data offers us some encouragement, U.S. industrial production modes and our annual rate of 5.2% in the third quarter. First quarterly gains since the first quarter of 2008 are the largest gains since the first quarter of 2005. And the PMI index improved in July and August finally crossing the 50 threshold and settling at 52.6 in September. I think evidence that the manufacturing sector has begun to expand again.

In the past, we have found our businesses correlated with these two indicators, normally lagging by about six to 12 months. At Castle, after bottoming out in June, business activity has begun to improve. We expected things to be particularly slow in July, given anticipated wide spread cut and shutdowns.

But activity was not as bad as expected and unusually, July was better than June. So further small signs of market improvement in August and September. We attribute this improvement primarily to the de-stocking cycle running its course rather than any underlying increase of demand for finished products.

However, our third quarter volumes were still 6.7% less per day than the second quarter meaning that the rate of increase in the third quarter was less than the rate of decrease experienced in the second quarter.

Year-to-date, our volumes are up 45%, similar to MSCI's latest data which has year-to-date member service center shipments declining 47% through September for representative of mix of Castle products. The MSCI reported a 41.2% overall decline which includes a significant amount of flat role products.

We believe that a significant portion of our decline and the industry's decline is due to de-stocking which should grade itself next year. Exactly how much is difficult to determine. It will vary by customers and by market.

But we believe that the inventory cycle would actually have a bigger impact on our recovery that improves demand in the next few quarters. We aren't improving modestly throughout the third quarter, demand remained weak across almost all end user's markets with a few exceptions.

Military and defense projects were a relative price pub, particularly for aerospace and submarine applications. Automotive was the hardest market, one in which Castle has very little participation. But Kreher Steel, our joint venture reported a significant third quarter increase in demand for automotive related products.

Most positive news for us came from TPI, our plastics business which we regard as an early indicator of general business activity. In September, TPI reported its best monthly sales in the year by significant amount. On average, resell prices have helped steady through the third quarter, scrap surcharges have increased, commodity prices have been volatile but generally higher and we saw increases in based prices in stainless, aluminum and carbon and alloy tubing.

Lead times have been steady but most mills are very flexible is in order to place. There's still a significant inventory overhand in the oil and gas market and in aerospace which we will expect it will take sometime to work through. Given the challenging environment, we spend a lot time this year focusing on expense levels and working capital.

Early this year, we set a 2009 operating expense reduction growth of $65 million. And as of September, our year-over-year expense operating expenses are down 26.7% and we've exceeded our $65 million goal. We also asked earlier this year to reduce our 2009 capital expenditures. Through September, total capital expenditures were 6.2 million compared to 18.8 million for the same period a year ago.

We're tracking as expected, against our revised capital expenditure ties of $7 million for 2009. During the third quarter, we executed well on our key working capital priorities, achieving a three day reduction in our receivable DSO, reducing inventory by over $19 million compared to the second quarter.

There is still plenty more to do in getting our inventory levels down. And Scott will provide more details in both our cost reductions and working capital results later in the call. Also in the third quarter, we are pleased to report that we converted all of the locations that remained on the Castle legacy system to our new Oracle ERP system.

This was by far the largest, the most complex conversion we've undertaken and it represents a very significant milestone for the company, putting us close to our goal of operating our entire metals business on one fully integrated global system. We believe that such a platform will be a significant competitive advantage for the Castle for years to come.

As expected, the conversion was not without paying, they never are. Our past experience in the case that's about a 15% impact on converted parts which again was through this time, representing approximately 4 to 5% of total revenue for September.

Overall, considering the scale and complexity of the conversion, we're very pleased and proud of our organizations performance as we moved to Oracle. This is a significant investment in the company's future especially as it relates to IMPI management and supply chain services.

Our people work very hard in the implementation in tough economic conditions and I'd like to recognize them again and thank them very much. I'm sure they are happy to have this behind them.

Following the conversion, we were able to decommission the Castle legacy system that has served us for nearly 25 years. This would generate an immediate savings of about a million dollars per year. Our next six months, our work will be centered around on improving customer service levels and improving our processes. We'll look to complete our ERP migration late in next year when we convert the international operations.

I'll spend a few minutes now on business activity across our end-markets. First, I'll talk about oil and gas. After a relatively stable first two months with 2009, our oil and gas business dropped off precipitously starting in March and continued to decline through June. Since then, business has stabilized.

Castles say that their inventory levels are starting to fall but the supply chain remains over inventory. Industry opinion is that the significant over supply is not largely to correct until mid 2010. So, we expect our demand to be flat in the fourth quarter and then improve throughout 2010.

Two, resin and bright spot for Castle are the U.S. Gulf Coast and in Asia. Earlier this year, we opened up an office in Louisiana to build our business in the Gulf Coast region. And business activity for Castle in that area is holding strong. Many Gulf Coast customers are servicing offshore rigs. So they have high service demands and use a lot of process paths.

In another words, it's a great fit with our strategy. Now that oil and gas price bought a shift where earlier this year, we also opened up an office in Singapore. Their business activity is more tied to oil rather than natural gas. And financing has been less of an issue than in the U.S.

Now, I move on to aerospace. In the third quarter, most of our aerospace customers continued to de-stock, buying only what was absolutely required. Metal remains in over supply and mills continue to have excess capacity. So pricing for heat treated aluminum plates remain soft and margins depressed.

Our commercial aerospace business continued to be relatively stable in the third quarter but the business jet market has been devastated by the lack of available credit and recovery is not expected anytime soon.

One bright spot aerospace continues to be the military and the defense market which represents about 20% of our total aerospace business. The F-35 Joint Strike Fighter program is strong. We look for a significant growth in that program next year. Third quarter activity levels for our plate business was stable when compared to the second quarter.

Customers in heavy equipments, mining, fluid handling and earth moving equipments remained depressed. Semiconductor and infrastructure markets picked up during the third quarter and the wind and solar power generation markets are also expected to improve as government's stimulus money, loans and funding becomes widely available.

Four of the wager industries served by our core Castle metals business has been hard hit as well. Power generation, light and heavy construction, mining, heavy truck, farm equipment. But we believe that the supply chain for these markets is in better shape and it's here that we see the greatest up tick in activity in the third quarter. Inventory in the supply chain continues to diminish and the de-stocking cycle appears to be nearing an end.

Although no pricing has been stabled, service enterprising environment remains very competitive. As I mentioned earlier, we believe our plastics business is in early indicator of general business activity. And like in our metal segment, heavy industry served by our plastics business has been negatively impacted by the recession, most notably, the marine sector.

We've seen signs in the first half that the business was stabilizing albeit at very low levels. And in September, CBI had its best month in a year with sale nearly 20% higher than the average for 2009. This increase was across the entire customer base. And we believe the best indication for us that the industrial world potentially has begun its long roads of recovery.

Before I hand things over to Scott, I'd like to make a few comments about our outlook for the fourth quarter and beyond. Unlike many companies who are orientate the flat rope, last year, the outflow of quarter volumes were very strong. We started to see a decline in our business in the fourth quarter of 2008, decline we saw accelerate all the way through June of this year.

Since then, we've seen our activity levels improve. And as we look ahead, we know that the fourth quarter is traditionally our slowest quarter due to a fewer shipping days and customer shut downs. We then anticipate some pick up in demand and also benefit from the restocking cycle in 2010.

As I said earlier, we believe the inventory cycle can have a much bigger impact on our business than absolute real demand. Irrespective but we will continue to focus on managing our costs, our balance sheet and our capital deployment for 2010 in this kind of unique environment.

Some of our customers recently have announced of [Author ID1: at Sun Nov 8 12:06:00 2009

]a 10 to 25% annual top line improvement in 2010. This is consistent with our expectations at this time, providing there is an increase in real demand and a return to more normal inventory cycle. We believe that no pricing will hold up but the service center market place will continue to be very competitive.

So, looking across our aero end markets for 2010 outlook for aerospace, it's not much different than current conditions. From the commercial side, Boeing and Airbus will continue to work off their back logs but till we see a wide body builds projecting to increase. Its both [Author ID1: at Sun Nov 8 12:07:00 2009

]bo[Author ID1: at Sun Nov 8 12:07:00 2009

]des[Author ID1: at Sun Nov 8 12:07:00 2009

] [Author ID1: at Sun Nov 8 12:07:00 2009

]well for '10 and into'11.

We expect the military and defense aerospace market to continue to be a bright spot. But business jets will remain depressed. We expect oil and gas to recover, the extent will depend on the inventory over hang but nobody expects the next year to return to 2008 levels.

Our core business should benefit from restocking and we expect continued improvement there. And we believe our flight business would generally lag in this environment with a possible exception of solar power, semiconductors and infrastructure.

That we're right about our plastics market, we expect to see some good growth there. From an operational perspective, we will be helped by the fact that we have the domestic ERP system implementation behind us. And our full focus can be directed at servicing our customers and growing our business.

At this time, I'll turn things over to Scott to give you a more detailed review of the numbers.

Scott F. Stephens

Thank you Mike. Good morning everyone. I'll start with the summary of our third quarter financial comparisons. Then, provide some commentary on our balance sheet and cash results through September.

Consolidated third quarter sales of $184 million were 204.9 million or 53% lower than the third quarter of last year. Metal segment sales were $161.8 million for the quarter compared to 360.1 million last year, a 55% decline. Ton’s[Author ID1: at Sun Nov 8 12:07:00 2009

] shipped declined 49% in the third quarter, compared to the prior year. Sequentially, third quarter sales revenue was $11 million or 5.6% lower than the second quarter of 2009 on a 6.7% sequential decrease in quarterly volume per day.

On a year-to-date basis, metal sales are now down 48% through September and ton shipped are down 45%. Pricing overall in 2009 is lower than 2008 but a favorable change in sales mix has somewhat mitigated the lower price levels of 2009 when compared to the prior year.

For Castle, sales of aluminum, nickel and stainless products have represented a higher proportion of our sales mix in 2009 than it did in 2008. We've experienced year-to-date September pricing declines of approximately 10 to 20% across most carbon based products but the change in mix to a higher proportion of non-carbon products has somewhat mitigated those price decline in our overall average selling price.

We expect our sales mix as of the end of September to remain reasonably constant for the balance of 2009. Sales for the plastic segment were $22.2 million which is 6.6 million or 23% lower than the third quarter of 2008. We've seen some signs of stability in our plastic business in 2009, multi-sales levels have remained consistent all year. And Mike earlier mentioned the September improvement in TPI sales.

Given the early cycle nature of this business, we're optimistic that this trend is consistent with other macro economic data, to point toward potential stability in certain industrial markets. Consolidated gross margin on product sales for Q3 was 25.2% of sales as compare to 26% for the same period, one year ago and 25.6% in the second quarter.

Gross margins in the third quarter were pressured by heavy competition in the market place and our drive to reduce inventory. Changes in LIFO did not have a significant impact on third quarter gross margin results as the gross margin impact was less than $500,000 of LIFO income.

We do not anticipate a significant change in our LIFO reserve through the end of 2009 and therefore, do not anticipate any significant LIFO income or expense to affect our gross margins for the fourth quarter.

Course year-end LIFO accounting is always tricky to predict, given the sensitivity to mix issues and final inventory balances. At this point, we expect our fourth quarter gross margins will be comparable to what we've reported for Q3. As our inventory levels and market conditions normalized into 2010, we'd expect our reported gross margins in 2010 to return to more normal levels in the 26 to 27% range.

Third quarter consolidated operating expenses were 54.9 million which is 29.6 million or 35% lower than last year, reflecting the impact of the workforce reductions and many other actions taken earlier this year to align the cost structure with activity levels.

During the third quarter, we exceeded our 2009 annual cost reduction goal of 65 million and we now expect our 2009 operating costs to be at least $75 million lower than the prior year.

Third quarter operating expenses included approximately $0.5 million related to the new ERP system implementation. And I'll comment a bit more on operating expenses later. Interest expenses $1.5 million for the quarter which is a $1.2 million reduction from the prior year period, primarily due to lower borrowing rates.

Joint venture equity income was 0.2 million for the quarter, compared to 3.3 million in the prior year period. Consolidated EBITDA for the third quarter of 2009 was a loss of 3.3 million compared to 25.6 million or 6.6% of net sales for the third quarter of 2008. We recorded a net loss of $6.3 million in the third quarter of 2009 or $0.28 loss per diluted share compared to net income of $0.50 per diluted share in the same period, last year.

Now, I'll briefly go through our nine month comparative results. Consolidated sale through September 2009 were $631.3 million which is 548.2 million or 46.5% lower than the record first nine months of last year. Consolidated gross margin rate for the first nine months of 2009 was 26.4% of sales as compared to 25.7%, the prior period.

Nine month consolidated operating expenses were $180.9 million, 65.8 million or 26.7% lower than last year.

As I mention, we've achieved our operating expense reductions primarily through lower people cost and our effective work force reductions are now approximately 30% lower than 2008 peak levels. Year-to-date September operating expenses also include $1.4 million related to the ERP system implementation.

Although a portion of these ERP conversion expenses will be retained in the business into 2010 for system enhancement and business process improvements, we expect the overall expense associated with future ERP conversions to be the minimum.

In addition, third quarter ERP conversions allowed us to retire our legacy I.T. system early in Q4, resulting in more than $1 million in annual cost savings which will began to occur at the start of the fourth quarter of this year. Consolidated operating profit for the first nine months of 2009 was a loss of 14.5 million versus prior year profit of 56.5 million.

Joint venture equity income was approximately breakeven for the first nine months of 2009 compared to $8 million in the comparable period 2008. Interest expense of $4.8 million for the first nine months of 2009 was 2.2 million lower than the prior year period, again, due primarily to lower interest rates.

Consolidated EBITDA was 1.7 million for the first nine months compared to 82.1 million for the same period in 2008. Net loss for the first nine months of 2009 was $11.4 million or $0.50 per diluted share compared to net income of $1.62 per diluted share for the first nine months of 2008.

Now, on to balance sheet and cash activities. In the third quarter, we continue to tighten[Author ID1: at Sun Nov 8 12:11:00 2009

] focus on inventory reduction efforts. And by the end of September our year-to-date inventory reductions reached $50 million, including a $19 million reduction during third quarter.

As a result of these inventory reductions, day sales and inventory or DSI declined by four days during Q3 from 204 at the end of Q2 to 200 at the end of Q3 which remains well above Castle's historically normal DSI level of approximately 125.

We expect to return to those more normal DSI levels in 2010. As inventory levels returned to normal, we should point out that the anticipated cash generation effect from this reduction will be significant. As for the more near term, we'll continue to reduce our inventories and manage our gross margins for a meeting to $80 million annual reduction goal for 2010.

Production activity on our receivables for the third quarter improved as expected, resulting in a 3.1 day decline in DSO from 56.9 at the end of Q2 to 53.8 days at the end of Q3 are trailing three month basis.

Sales for Q4 typically are seasonally weaker than Q3 which may create some pressure on Q4, DSO. But at this point, we expect DSO to remain relatively consistent in Q4. Receivable write-offs for the third quarter remained within normal levels. For 2009, our quarterly receivable bad debt write-off experience has improved from 600,000 in Q1 to 400,000 in Q2 and 300,000 in Q3.

Overall, the impact of the recession and tighter credit markets has not yet manifested in higher write-off levels for us but we're cautious in this area and we'll maintain a conservative approach to our credit management.

Our allowance for doubtful accounts has increased from $3.3 million at the end of 2008 to 3.9 million at the end of September 2009. Our debt-to-capital ratio at the end of September was 22.5%, compared to 26.6% in the prior year period. Total debt at September 30th was 98.3 million compared to 114 million at the end of the second quarter.

Company was incompliance with all of its set covenants as of September 30th. And in addition to the 41.3 million of outstanding short-term revolver debt at the end of third quarter, the company had $57 million of insurance notes outstanding debt maturity ratability through 2015.

We believe this company has ample liquidity and flexibility for its operating and strategic objectives including approximately $100 million of additional borrowing capacity on our revolver as of the end of the quarter.

Our 2009 capital expenditure target of $7 million is much lower than the amount spent the last several years but we believe this amount is sufficient to support our initiatives and our operations over the next year.

In the first nine months of 2009, we generated cash flow from operations of $31.1 million compared to a cash use of 15.6 million in the 2008 period. In the third quarter of 2009, our cash flow from operations was 14.6 million.

As Mike said, we're starting to see signs that the overall economy is improving but we know that our recovery were lagged out of the early metal cycle segment by 6 to 12 months. We anticipate fourth quarter activity levels to be comparable to Q3, the seasonal weakness in the holiday periods may dampen some of the improvements that we have seen in the underlying activity over the past few months.

Within that environment, we plan on maintaining our focus on serving our customers and gaining market share while improving our liquidity and strong balance sheet.

Now I'd like to turn the things back over to Mike.

Michael H. Goldberg

Thanks Scott. Before we open up the call for questions, I just want to say that A. M. Castle remains focused on our goals of becoming the industry's leading global provider of specialty metal products and supply chain services.

We believe that our business model is sound and our company is financially strong. We're focused on very promising end use markets and we continue to make excellent progress on our strategic initiatives even in today's challenging business environment.

Firmly believe that Castle will come out of these tough times a stronger company and better positioned to take advantage of improving market conditions and ready to prosper once again. So with that, let's open up the call for any questions that you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Okay. The first question comes from Nat Kellogg. Please state your company name followed by your question.

Nat Kellogg - Next Generation Equity Research

Yeah. Nat Kellogg calling from Next Generation Equity Research. How you doing this morning guys?

Michael Goldberg

Good. How are you?

Scott Stephens

Good morning.

Nat Kellogg - Next Generation Equity Research

Just -- you guys mentioned a little bit about gross margins getting better next year. And I know some people sort of talked about now that couple other guys in the service that have come out recently, just talking about -- now that inventories are little bit more inline with shipment levels that folks are focused little bit more closely on, getting value for the products versus just trying to generate the cash by liquidating inventory.

And so, just curious if that's what you're seeing and that's why you are a little bit more optimistic about 2010 margin side or whether there is something else as far as pricing or volume that gives[Author ID1: at Sun Nov 8 12:14:00 2009

] you that confidence?

Michael Goldberg

I think it's more the less than that we see the environment for 2010 being better than 2009. So, both in demand and in pricing through the first, certainly, through the first half of this year, we've seen pretty significant pricing declines.

Those have kind of stabilized now and we start to see those pick up. So in that environment, we just think the environment would be different next year than this.

And typically in that environment, we should see some sort of pick up in some gross margins and the de-stocking part of that is a component of that as well.

Nat Kellogg - Next Generation Equity Research

Okay. And on inventory side, I mean you guys don't have had some projects that you have mentioned but do you guys still feel like you have a little more to go here in the fourth quarter or are you pretty much comfortable with where the inventory level side?

Michael Goldberg

No. We got a long a way to go. I think Scott mentioned it that we're at 200 days of our inventory. We're targeting to get our inventory back into initially into, into at our historical levels of about 120 days. And then, the targets have improved beyond that as well. So, we've got a way to go on our own inventory levels.

Nat Kellogg - Next Generation Equity Research

And any particular product line that's particularly have you[Author ID1: at Sun Nov 8 12:15:00 2009

]heavy[Author ID1: at Sun Nov 8 12:15:00 2009

] there or is it pretty standard crisis report[Author ID1: at Sun Nov 8 12:15:00 2009

]across the board[Author ID1: at Sun Nov 8 12:15:00 2009

]?

Michael Goldberg

No. It's in the two areas where I mentioned that there's a general over supply in the whole market.

Nat Kellogg - Next Generation Equity Research

Okay.

Michael Goldberg

The oil and gas area is one where we need to work down our own inventories and there is to -- set in the market and aerospace as well. So those are the -- nobody's immune but those are the two major areas, both for us and I think the whole marketplace.

Nat Kellogg - Next Generation Equity Research

Okay. And then, I just this last question and I'll hop in the queue. Just got on a -- if we look at SG&A going forward, I mean obviously, you guys have trimmed pretty material this year and my guess is that on the whole with wage freezes and people sort of are going[Author ID1: at Sun Nov 8 12:16:00 2009

]foregoing[Author ID1: at Sun Nov 8 12:16:00 2009

] bonuses and we're [Author ID1: at Sun Nov 8 12:16:00 2009

]w[Author ID1: at Sun Nov 8 12:16:00 2009

]hat[Author ID1: at Sun Nov 8 12:16:00 2009

] [Author ID1: at Sun Nov 8 12:16:00 2009

]not.

Just kind of, if you could give us a little bit of sense of if things get better next years sort of how much that comes back and adds to the SG&A line?

Michael Goldberg

Want to go on that?

Scott Stephens

Yeah. Well, as I mentioned at least for the near term in the quarter, the fourth quarter we expect expenses to be consistent with the third quarter. We've talked before about a $10 million run-rate benefit to 2010 from what we've done in 2009.

So we haven't quite captured all of the fiscal benefits of this year's reductions in the numbers. So we expect that will largely offset some of those put backs that we expect to occur. So in the terms of the reported numbers or the going in numbers for 10, we think we would be able to accommodate that and see something like the last two to three quarters of this year would be approximately the rate we would expect to be at early in 2010.

Nat Kellogg - Next Generation Equity Research

Okay. That's really helpful. All right. That's all I got for now. I'll hop back in the queue. Thanks guys.

Operator

(Operator Instructions). Okay. Our next question comes from Tim Hayes. Please state your company name followed by your questions.

Timothy Hayes - Davenport & Company

Hi, good morning. It's Tim Hayes at Davenport and Company.

Michael Goldberg

Hi Tim.

Scott Stephens

Hey Tim.

Timothy Hayes - Davenport & Company

Some of the numbers you gave about the Oracle system and what the impact in Q3 and then, in September? Could you just go through again, I wasn't I just want a sort of clarification on what those figures were? Were those like lost sales in the quarter?

Michael Goldberg

Yeah. Let me try and make sure you understand. What we're seeing that what we have found -- this our fourth ways of implementing Oracle. And what we've seen in the prior implementation is a, on average about a 15% hit to the converted plants in revenue for the month of implementation.

And then that kind of diminishes over a couple of months to non-meaningful number. And so, when we kind of plan this, we actually factored that number in and that was around the impact or that we experienced.

So it's reduced relative of what we do. We compare the converted parts to non-converted parts to see what that kind of differences in. And we see it's about 15% delta, let me[Author ID1: at Sun Nov 8 12:18:00 2009

]when we[Author ID1: at Sun Nov 8 12:18:00 2009

] do these conversions.

And so, when you look at the impact of September as a whole, it impacted about 4, 4.5% of total revenues for the quarter, most probably, not a particularly significant number. But you can't avoid these impacts and we're very pleased with the way that the implementation went even though there is a struggle to actually do these things.

Timothy Hayes - Davenport & Company

Great, okay.

Michael Goldberg[Author ID1: at Sun Nov 8 12:19:00 2009

]

[Author ID0: at Thu Nov 30 00:00:00 1899

]

Kind of plastic.[Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID1: at Sun Nov 8 12:19:00 2009

]

Timothy Hayes - Davenport & Company

Given that 4 to 4.5%, was that, was total sales just for the month of September or for the fourth quarter?

Scott Stephens

Yes. Yes. For the, just for the month of September. So..

Timothy Hayes - Davenport & Company

Okay.

Scott Stephens

Yeah.

Timothy Hayes - Davenport & Company

All right, very good. Thank you.

Operator

(Operator Instructions) Next question comes from Jason Brocious. Please state your question by company name.

Jason Brocious - KeyBanc Capital Markets

Hi, good morning guys. This is Jason Brocious of KeyBanc. How are you?

Michael Goldberg

Good.

Scott Stephens

Hey Jason.

Jason Brocious - KeyBanc Capital Markets

I just had a quick question on 4Q. You mentioned the activity should be fairly flat from 3Q. Could you give any detail around pricing versus volume there?

Scott Stephens

Generally, we see pricing stronger in fourth quarter than in third. There is an some announced price increases in some of the carbon and alloy bar products, surcharges kind of what, [Author ID1: at Sun Nov 8 12:19:00 2009

]peaked in some of the carbon surcharges.

So, will peak and come that back down. But on average, they might be higher in the fourth quarter. So generally, the pricing environment from the from the [Author ID1: at Sun Nov 8 12:20:00 2009

]mill pricing environment is generally kind of firmer.

Nickel was as kind of recovered. So that will have a kind of a positive impact as well.

So, in general, we see the pricing environment being okay for the fourth quarter. And can we see volumes being our activity level in volumes being certainly improved.

What we don't know, I don't think but anybody has a feel for it is kind of what the impact over the December will be in terms of effective shipping days. That's still very unclear and that will impact our volume one way or another, fairly significantly.

Jason Brocious - KeyBanc Capital Markets

Okay. Well, that takes care of me. Thank you.

Scott Stephens

Thanks.

Operator

Next question comes from Joe White. Please state your company name followed by your question.

Unidentified Analyst

Good morning. This is Joe White from Greys and White (ph). I'd like to ask about the segments specifically. It's a little high since you don't publish the segment date and so. The plastic segment, what's in your place in third quarter versus the second? Does that mean, do I have a positive operating [Author ID1: at Sun Nov 8 12:21:00 2009

]n operator up I said about [Author ID1: at Sun Nov 8 12:21:00 2009

]generating income for the third quarter?

Michael Goldberg

Think Scott is just is just to try to find that number for you. He's got the graph too in front of him.

Unidentified Analyst

Part of that question is the gross margin in the second quarter were actually up from the previous year. I'm wondering if that continued this third quarter gross margins were down last year compared to the second.

Scott Stephens

Your first question on plastics is that yes Third quarter plastics at operating income approximately 700,000 for the third quarter of '09.

Unidentified Analyst

That's terrific.

Scott Stephens

That compared to 500,000 for third quarter of '08.

Michael Goldberg

And the second question, the second quarter and third quarter of last year was when we started to see this tremendous surge in carbons, scraps, surcharges. So we saw -- remember other year, I think that was the biggest impact in the third quarter. And that had a negative impact on our reported gross margins in the middle of last year.

So that was a kind of major influencing factor, last year in the second quarter and in the third quarter.

Unidentified Analyst

But on the steel side?

Michael Goldberg

Yeah. On the steel side, yeah.

Unidentified Analyst

So, okay. Sticking to the steel side, so the operating income, third quarter is down from the second quarter. Is some of that gross margin or is it all just lack of absorption of operating expenses?

Scott Stephens

Well, it's a little bit of top-line and gross margin as well because expenses were down but gross margins were down a little bit and sales were down quarter-on-quarter as well.

Michael Goldberg

Alloy was down 6.7 but the revenue was down what, 5%.

Scott Stephens

Right.

Michael Goldberg

So, we had a revenue decline quarter-over-quarter of about 5%.

Unidentified Analyst

Right.

Michael Goldberg

And then, a little bit of degradation of margin and then lower expenses to offset that.

Unidentified Analyst

Okay. Thank you.

Operator

(Operator Instructions).

Michael Goldberg

Is there anybody out there operator?

Operator

Okay. At this time, we have no further questions.

Michael Goldberg

Okay. Well, I appreciate everybody's interest and thank you for being on the call. And we'll speak to you over the phone at least, early next year. Thank you.

Operator

This concludes the A.M. Castle & Company third quarter 2009 conference call. Thank you for participating. You may now disconnect.

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