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Carpenter Technology Corp. (NYSE:CRS)

F2Q10 Earnings Call

January 26, 2010; 10:00 am ET

Executives

Greg Pratt - Chairman and Interim President & Chief Executive Officer

Mike Shor - Executive Vice President for AMO & PAO Operations

Doug Ralph - Senior Vice President & Chief Financial Officer

Mike Hajost - Vice President & Treasurer

Analysts

Edward Marshall - Sidoti & Co.

Michael Gambardella - JP Morgan

Lloyd O’Carroll - Davenport and Co.

John Tumazos - John Tumazos Very Independent Research

Wayne Atwell - Casimir Capital

Gautam Khanna - Cowen and Co.

Dan Whalen - Capstone Investments

Kevin Money - Cleveland Research Co.

Phil Gibbs - KeyBanc

Brian Yu - Citi

Operator

Good morning and welcome to Carpenter Technology’s second quarter 2010 earnings conference call. My name is Ann and I will be your coordinator for today. At this time, all participants will be in 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.

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President and Treasurer; please proceed, sir.

Mike Hajost

Thank you, Ann. Good morning everyone and welcome to Carpenter’s earnings conference call for the second fiscal quarter ended December 31, 2009. This call is also being broadcast over the Internet.

With us today are Greg Pratt, Chairman and Interim President and Chief Executive Officer; Mike Shor, Executive Vice President, AMO & PAO Operations; Doug Ralph, Senior Vice President and Chief Financial 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 those forward-looking statements can be found in Carpenter’s most recent SEC filings, including the company’s June 30, 2009 10-K and its September 30, 2009 10-Q and the exhibits attached to those filings.

I will now turn the call over to Greg.

Greg Pratt

Thank you, Mike and thank you everyone, for joining us on today’s call. Similar to last quarter’s call, I wanted to provide some perspectives on where the business is today and where we see it heading. I will then ask Mike Shor to discuss our end markets and operations.

Finally, Doug will cover the financial results and provide an update on full year expectations. Q-and-A will then follow. Comparing our second quarter results to first quarter and incorporating information we have received from key customers, there are strong indications that our business will continue to improve and we are well positioned as the recovery unfolds.

The second quarter came in with overall shipment volumes, revenues and margins higher than first quarter. In particular, we are seeing encouraging momentum in our aerospace engine business and the return of a pulse in energy. We also improved our market share with a number of key customers helping to accelerate our recovery.

We expect this improvement trend will continue in the second half and we are confident we are on track to achieve our fiscal 2010 financial goals. To ensure longer term growth, we are continuing to focus on new products and new market opportunities beyond our current portfolio of business.

Lastly, I want to mention that the new CEO search is proceeding according to plan. In the meantime, I am actively engaged with all major constituencies, including management, key customers, vendors and shareholders, and the business is executing seamlessly. Finally, we remain committed to our core principles of increasing shareholder value and driving operational excellence.

With that, let me turn the call over to Mike Shor, who will walk you through each of our end markets and discuss our operations. Mike?

Mike Shor

Thank you, Greg and good morning. I’ll review the markets in the order of their contribution to net sales this quarter. Aerospace market sales were $113 million in the second quarter. Excluding surcharge revenue, aerospace sales were down 27% on 26% lower volume. Sequential volumes were flat as we benefited from the tail end of excess supply chain engine inventory, offset by continued inventory destocking in fasteners.

Our fastener business typically lags a range in business by six months. On the engine side, we’re experiencing an increase in shortly time orders, the first sign of a turn in the cycle. We expect strong growth in shipments for engine materials in the second half. We are encouraged by the fact that airline revenue passenger miles are recovering from last year’s slowdown and expect the January airline monitor to maintain its forecasted build schedule.

On the fastener side of our business, supply chain destocking continues, as shipments of nickel based, stainless, and titanium materials for fasteners were all down during the second quarter due to excess material in the supply chain. We expect demand for fasteners to remain flat in the second half, but improving in fiscal 2011.

So let me finish aerospace by saying that with all of the dynamic changes occurring in the industry, we believe we are and will continue to be, well positioned with key market players to grow our business as build rates increase over the next several years. Industrial markets sales were $62 million, excluding surcharge, industrial sales decreased 16% on 19% lower volume.

Sequentially, our industrial volumes increased 4% from the first quarter. We expect steady improvement in our industrial markets over the second half in the face of some favorable signs. For one, the U.S. industrial production index grew about 2% to $99.3 in our second quarter and is projected to rise to $105 in the second half. Another indicator of production trends, the global semiconductor market, is projected to grow about 6% this year.

Historically, improvement in the semiconductor market is the first sign of improvement in our stainless business. Consumer market sales were $24 million, excluding surcharge revenue, sales declined 6% on 3% higher volume. Year-over-year volumes and revenues increased in applications related to sporting goods and housing, while declines occurred in other consumer segments compared to the first quarter, consumer volumes increased nearly 7%.

Automotive market sales were $23 million; excluding surcharge revenue automotive sales were down 8% on a 13% increase in volume. The year-over-year volume increase reflects greater share in stainless valves and fuel injection systems, although with an impact on mix. Carpenter’s volumes in automotive increased sequentially by nearly 20%, reflecting increased build rates among U.S. automakers.

Build rates for the big three bottomed out last year at 930,000 units and are expected to hold steady at the 1.5 million unit level over the next several quarters. We are also seeing benefits from an inventory supply chain that is now in better balance. Largely because of just in time assembly and better balanced inventories, there is virtually no lag time between Carpenter and our automotive customers.

In addition, growth in direct injected gasoline engines is a great fit with Carpenter’s high temp product portfolio and our developmental efforts. Energy market sales were $20 million, excluding surcharge revenue, energy market sales decreased 49% on 54% lower volume. The year-over-year decline reflects excess supply chain inventory in the face of significantly lower activity in oil and gas drilling as well as a steep falloff in demand for high capacity industrial gas turbines.

Volume grew significantly since the first quarter, mainly related to power generation. In terms of current conditions, let’s look at oil and gas first. While we expect to see a steady increase in rig activity over the next several quarters, we also expect to see a lag in demand, as there continues to be significant excess drill collar inventory out there. It could take several quarters to work through this existing inventory.

Within the power generation market, we’re seeing inventories getting back in balance for the material used on high capacity turbines. This contributed to our increased volumes over the first quarter this year. The main constraint in this business right now is a tight commercial financing environment for power generation projects.

Power generation is still a very attractive market for our technology; but because of the high price tag on these projects, sales in this sector maybe lumpy. Therefore, our growth expectations for the power generation market are set more in terms of years, not quarters. For the broader energy market, we are continuing to focus on diversifying our customer base and our product offerings moving forward.

Medical market sales were $20 million in the second quarter. Excluding surcharge revenue, medical market sales declined 23% on 15% lower volume. The year-over-year decline reflected excess customer inventory and materials used in joint replacements and surgical instruments, while the revenue decline primarily reflected lower titanium raw material prices compared to last year.

Sequentially, medical volumes declined 20%, which we view as a temporary blip associated with supply chain inventory adjustments. Titanium prices are stabilizing and distributors are beginning to show signs of restocking. A longer term outlook remains very good with a projected 5% growth rate in the number of medical procedures using our material.

With respect to international, Carpenter’s sales outside the United States in the second quarter were $86 million, a decrease of 34% compared with the second quarter of fiscal 2009. International sales represent 32% of total sales in the second quarter of fiscal ‘10 compared to 36% in the prior year.

The reduction year-over-year reflects declines in energy, aerospace, and automotive demand, especially in Europe and Mexico. International sales grew 19% sequentially as markets improved. We continue to see positive momentum from our recent investments in China where, off a modest base, sales increased 26% over the prior year’s second quarter.

Now let me talk about our operations. We have successfully managed the upward shift in demand in the second quarter. For one thing, we effectively controlled our costs and remain on track to hit our goal of reducing our variable cost per ton, which is key to achieving our margin target for the year. At the low point in our production early last summer, we effectively reduced manufacturing headcount, mostly through voluntary programs.

As of the end of the second quarter, we gradually added back a portion of this amount as demand has increased. We have also shown year-over-year improvement in yields, and efficiencies in the supply costs. We balanced our customer needs for shorter product lead times with our need to be disciplined about adding crews and costs back as our business recovers.

Inventory is also being managed very closely by having the appropriate types of buffer inventory on the ground, we are successfully meeting spot demand from our customers. At this point in the economic cycle, we like the position we are in. We have expanded market share in a very difficult operating environment and recently renewed long term agreements with many significant customers. We were also very encouraged about our long term opportunity in China.

In all, our entire organization is doing a very good job of going the extra mile to satisfy our customers’ demands. We were also staying focused on longer term growth and value creation strategies. Through our recent additions of VIM, VAR and ESR melting facilities, we have enough world class premium melt capacity to meet increasing demand. We continue to view aerospace, energy and international as key focus areas for our growth.

In addition, I cannot stress enough the importance that we place on research and development. As a specialty metals producer of high value, high performance products that shipped in pounds rather than in tons, our ability to maintain our position as a technology leader rests in turning out innovations that meet our customers’ toughest performance challenges.

This function is vital, not only to our ability to expand our participation in existing markets, but also in expanding into new markets. Our recent PremoMet launch is just one example of a novel product receiving considerable customer interest from around the world.

With that, let me turn the discussion over to Doug, who walks us through the financial results.

Doug Ralph

Thanks Mike. Overall, our financial results for the quarter and our current projections for the year are tracking with expectations. We reported net income this quarter of $3.5 million, or $0.08 per diluted share, which includes $0.21 of non-cash pension expense. Our earnings also showed good sequential improvement off of our first quarter, driven by higher volume, improved mix, and lower costs.

Moving on to the elements of the income statement, net sales in the quarter were $264 million or 27% below a year ago. Excluding raw material surcharge, sales were down 24%. Overall, pounds shipped decreased 19%, with special alloy products down only 4%, titanium products down 25%, and stainless steel products off 24%. Sequentially, volumes were up 7% from the first quarter.

Second quarter gross profit was $35.6 million compared with $75.9 million a year ago. Excluding surcharge revenue, gross margin in the period was 17.2% versus 27.8% last year. Gross margin continues to be negatively impacted by reduced demand levels and correspondingly higher volume related costs, as well as the portion of higher pension expense that hits our cost of goods sold.

Reported SG&A expenses decreased 7% year-over-year. The decrease was about 14% if you adjust for the impact of non-cash pension expense in both years. Through six months, our SG&A spending, excluding pension is down 12% versus year ago. We are continuing to tightly manage these costs, with salary and benefits costs down 15%, and discretionary items like outside services and travel 17% lower.

Looking ahead to the second half, we will see increased variable compensation accruals, since we expect most of our profit to be made in the back half, compared to no performance bonuses earned last year. As we move past the downturn, we will also need to begin investing in some additional resource capabilities to drive our growth strategy, but plan to add these costs below the rate of top line revenue growth.

For the quarter, we had operating income of $2 million compared with $39.7 million in last year’s second quarter. Our operating margin, excluding both surcharge and pension earnings, interest and deferrals, as we always quoted, was 5.5% down from 14.5% last year. This is up nicely from the negative operating margin in our previous two quarters, and again, is driven by the three levers of higher volumes, improved mix and cost savings.

In order to achieve our goal of a 6% operating margin for the full year, we will need to be at about 10% by the end of the fiscal and we feel confident we are on track for this. Finishing up the income statement, other income was relatively flat to last year at $6.7 million. As with prior years, we received a payment from the Continued Dumping and Subsidy Offset Act, or CDSOA, in the second quarter totaling $5.8 million compared to $6 million in the same quarter last year.

As we said last year, this program has expired, so the amounts received in the future will be lower and will eventually end. The income tax provision for the second quarter was $700,000 or 17% compared with an income tax provision of $12.6 million or 29.7% a year ago. There were several onetime items in the period, which were largely offsetting from an earnings standpoint, although one will create a negative cash item of about $6 million in the third quarter.

We expect our effective tax rate for the second half of the fiscal year to be approximately 30%. Our cash flow and balance sheet remain strong. We ended the quarter with $7 million of positive free cash flow; $379 million of cash on the balance sheet and an improved net cash position of $100 million. Through six months, we have generated positive free cash flow of $25 million.

We are particularly doing a good job of managing inventory levels through robust processes that balance our cash objectives with the need to put more inventories on the ground selectively to reduce customer lead times. The more consistent inventory level has also helped to reduce the margin volatility that we used to experience from the LIFO impact of raw material price changes on top of inventory changes.

We do expect to report negative free cash flow in the third quarter, due to the tax item I mentioned earlier and some higher inventory needs to support our second half volume growth. Nonetheless, we remain on track to comfortably achieve our target of positive free cash flow for the year. We have updated our projection of required pension plan cash funding based on estimated plan asset values at the end of calendar 2009 and the latest discount rate assumptions.

At this point, we anticipate making a cash contribution to the pension plan of about $30 million in calendar 2011 versus the $45 million we were estimating previously. About $5 million of this would occur in April 2011 and is the only amount we anticipate falling into our fiscal year 2011. This will be the first cash contribution made to the pension plan since 1986.

During the second quarter, we also successfully renewed our revolving credit facility. This new $200 million, three year facility provides significant liquidity on top of our healthy cash balance. We do not have any other meaningful debt maturities until August of 2011, when a $100 million unsecured note is due.

Looking forward, we believe our revenue and financial metrics will further improve in each of the next quarters. Despite overall revenue for the year, which is still expected to be lower than our fiscal ‘09 level and an overall weaker mix for the year, we continue to target the operating margin for the full year, excluding surcharge and pension EID, to be inline with last year’s level of about 6%, which means we need to be operating near the 10% level by year end.

With that, I will now turn it back to the Operator, so we can open the line for your questions.

Question-and-Answer Session

Operator

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

Edward Marshall - Sidoti & Co.

My first question is on the comments you made on the energy market. You said the pulse that you’re feeling where that coming from in particular is, which markets and if you could comment on that, I’d appreciate it.

Mike Shor

This is Mike Shor. Obviously, exploration remains weak and is still some substantial inventories in the supply chain, but what we’re seeing is rigs, which directional rigs hit all the way down at 830 at the bottom of May ‘09 is 940 now. So, more rigs are coming online, so demand for specific size requirements are starting to come in that we hadn’t seen before.

So, on the oil and gas side, we’re seeing at least the beginning of things starting to improve. On the turbine side, for power generation in the large IDTs, we’re seeing inventories that are becoming better balanced and we’re expecting our shipments to improve in the second half, mainly due to the significant inventory reduction that was out there in the first half of the year. The build schedule for large IDTs is going to decline, but because of that huge inventory reduction, we’re seeing growth going forward.

Edward Marshall - Sidoti & Co.

Two points on those questions. I guess the rig count going up is more of anecdotal information than real demand kind of in the model at this point is that fair?

Mike Shor

Yes, that is true.

Edward Marshall - Sidoti & Co.

Then, similarly, I guess, on the IDT, you’re saying inventory is in better balance, yet we’re seeing decreases in the turbines. I guess kind of reading through, I could probably look at the same side on the aerospace side on the engine. It looks like some of the large OEMs are saying a decrease of about 5% year-over-year, but I guess because of the better balance in the market at this point, does that mean you could see some positive trends in the aerospace engine market throughout the remainder of this year?

Mike Shor

That’s correct. We saw significant inventory reductions at our customers and through the supply chain in the first half of the year and our first signal that things are starting to improve, in particular in the engine side of the business are the requests of our customers for short lead time, when they’re getting desperate for some materials. So, I think because of what was significant inventory reduction, we are expecting to see gains on the engine side in the second half of the year.

Edward Marshall - Sidoti & Co.

Was there any LIFO effects that impacted gross margin at all?

Doug Ralph

Nothing material, Ed.

Edward Marshall - Sidoti & Co.

You had mentioned that you have quite a bit of liquidity with the revolver now. You have a net cash balance. Can you discuss your uses of cash going forward, what where your focus is?

Doug Ralph

Uses of cash would be consistent, as we’ve communicated before; so our capital expending needs will always get our top priority, although we’ve been able to historically fund that within our operating cash generation. We’ve maintained our dividend rate through the downturn and while that’s not a major consumer of cash, that’s been an important part of our shareholder return strategy. At some point in time, we expect to use our financial strength to external growth, but that’s not on the near term horizon and we no longer have an active share repurchase program.

Operator

Your next question comes from Michael Gambardella - JP Morgan

Michael Gambardella - JP Morgan

I have a question on the raw materials side. Are you seeing any change in your purchases of stainless scrap versus virgin material?

Doug Ralph

Mike, I think availability has been an issue, so in certain alloys, not only in the stainless side but in the high temp side, there’s been a need to move between alloy and scrap based on availability that’s out there.

Michael Gambardella - JP Morgan

So you’re going to more virgin material then?

Doug Ralph

Not necessarily. It really depends on what scrap we are able to bring in and what we’re dealing with internally as far as our revert material. Some alloys more on the high temp side, the potential exists, but I don’t think it’s a major issue for us right now.

Operator

Your next question comes from Lloyd O’Carroll - Davenport and Co.

Lloyd O’Carroll - Davenport and Co.

Could you please give us sales, etc., surcharge, by the market segments?

Doug Ralph

Sure. So this is etc., surcharge $87 million for aerospace, $49 million for industrial, $19 million for automotive, $17 million for energy or for medical and also energy, $17 million, and then $19 million for consumer.

Operator

Your next question comes from John Tumazos - John Tumazos Very Independent Research.

John Tumazos - John Tumazos Very Independent Research

Congratulations on getting into the profit. In terms of looking forward a couple years as free cash flow returns, given the prognosis for 787 and 838 and joint strike fighter deliveries, and recoveries in various end markets domestically and abroad, having gone through the past tough year or to what are your likely applications of money when money rolls and in a couple of years?

Doug Ralph

Right I think the question was asked earlier about our cash deployment priorities. It would be consistent with that and so I think we’ll always be watchful beyond our organic capital investment needs for the right external growth opportunity and it will always be important for the company to preserve the financial strength and flexibility to be able to act along those lines when the right opportunity comes up.

John Tumazos - John Tumazos Very Independent Research

When a new CEO is appointed in coming months, will the new CEO have significant latitude in redirecting the company’s priorities or perhaps identifying opportunities from that perspective CEO’s range of experiences and are you targeting a CEO from a particular background, such as aerospace, energy, foreign sales, etc.,?

Greg Pratt

This is Greg Pratt speaking. The answer is yes, the CEO will have an opportunity to input and merge his or her ideas in terms of, what they believe is necessary for Carpenter’s future growth and no, we don’t have a specific industry in mind. We have an open field at this point and are looking for the best possible candidate we can find. We are on track and expect it will close within our guidance that we gave you previously, which was six to nine months.

Operator

Your next question comes from Wayne Atwell - Casimir Capital.

Wayne Atwell - Casimir Capital

Could you outline the inventory levels at your customers at this point?

Mike Shor

What we have seen it certainly varies by market, but we have seen that our customers mainly in the aero engine, the power generation, and the automotive markets have worked through their inventories and we’re seeing the beginnings of some strong pull there, but on the aero fastener side and on the oil and gas side for us, drill collars, we still see fairly heavy levels of inventory in those particular areas.

Wayne Atwell - Casimir Capital

Could you outline that some products you’re developing that you’re excited about that could have an impact within the next maybe six to 12 months?

Mike Shor

The product that we’ve talked about most in the past month or so has been an alloy called PremoMet for engine applications. It’s an alloy that has a patent pending unique thing about this alloy is it’s a very strong yet very tough alloy that has very high fracture toughness all of which is good when you’re worried about strength to weigh and we believe that can have significant benefit in the automotive market, in particular, the heavy duty engine applications.

So we’re doing a lot now of promotion and discussion related to that alloy. One of the other items we’re working on that we’ve begun to talk about is specialty blades we have great capabilities for narrow strip and we believe we have a series of applications that can grow to some fairly significant revenue because of the alloys we’re making having superior edge retention and corrosion resistance. So there are two of the most recent we’ve got some longer term activities we’ve worked on, but that we continue to work on; but they’re the two shortest term items and the most recent.

Wayne Atwell - Casimir Capital

Anything in aerospace that’s exciting?

Mike Shor

Well, I think what’s exciting in aerospace is some existing alloys that we are not currently, for a variety of reasons, in that we feel very strongly will allow us to get into some supply chains we’ve not been in before. We’re in the middle of developmental efforts on that. So, that is a real positive for us and obviously, the return of the engine business also is significant, as is the fact that we feel very good about some contracts that we’ve recently negotiated, including some share gain.

Operator

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

Gautam Khanna - Cowen and Co.

Yes. Could you characterize for us what you expect your pension expense would be in fiscal ‘11? I know it’s early, but assuming the returns that you have in your plans that you know about, and if discount rates don’t change from your prior expectations.

Doug Ralph

Yes, it is early, Gautam, as you say if we were to taking estimate right now; it’d probably be around $0.70 a share, but, of course, there’s a lot that can change between now and then.

Gautam Khanna - Cowen and Co.

So, in $0.11 plus year-over-year or whatever, $0.14, better?

Doug Ralph

We’re at $0.83 this year so it’d be $0.13 better. That’s just a preliminary calculation based on today’s reality.

Gautam Khanna - Cowen and Co.

The PAO margins were actually quite strong sequentially. Could you talk about I mean, was this mostly can you characterize the strength sequentially? I mean, you had over 50% incremental margins. Was it purely a function of mix? I mean marginally higher volume? Can you walk through kind of what we can expect going forward? Is there something unusual about Q2? Thanks.

Doug Ralph

Well, mix was particularly strong in the quarter in that part of the business. There was a modest positive effect, just that some of the timing of our raw material hedges when there were push outs that created some timing effects earlier, that then created some positives as that volume is being taken in the current quarter, but that is our most profitable business, as the volume returns and we see good growth in that business, particularly in the aerospace engine side that’s positive for mix.

Gautam Khanna - Cowen and Co.

I guess what I’m trying to get at is considering the second half, you’re expecting this abating destock at the engine side at PAO. Should we expect kind of 25% as sort of the baseline going forward?

Doug Ralph

I think if you look at our fiscal year-to-date performance on PAO and use that as a proxy going forward, that be a fair way to look at it.

Operator

Your next question comes from Dan Whalen - Capstone Investments.

Dan Whalen - Capstone Investments

With Carlton being purchased by a competitor, can you provide an update on how market share gains are offsetting potential loss sales from the acquisition and if you could provide any color in terms of the impact that had on the quarter.

Mike Shor

Sure. Yes, this is Mike again, Dan. I’ll make a variety of points on this first; our position with Carlton is in place and will be in place for, in rough terms, about another two years. So beyond that timeframe, there are also a number of products that we supply to Carlton that we believe have very high value to them and we would expect to continue to purchase in the future.

We have plans in place obviously; we can’t get into details beyond that two year timeframe to offset potential loss at Carlton via aggressively pursuing share gain elsewhere. So, our focus has been, continues to be we understand the reality of what’s going on we feel good for a relatively short period of time. There are products we believe they will continue to buy and elsewhere, we’re looking at gaining share and we have a lot of work in progress on that right now.

We have had good success overall recently with contract negotiations and we have wrapped up a fair amount of negotiations recently in the aero fastener, the industrial, the automotive, and the engine world, all with positive results. We did not lose share and, in fact, over the last three to six months, we’ve seen gains in engine, gains in implant, and gains in auto and our push is not only the quality of our products, but it’s a service package that we offer. So, we’ll continue to push out there we know there are some roadblocks we face and we’ll tackle them.

Operator

Your next question comes from Kevin Money - Cleveland Research Co.

Kevin Money - Cleveland Research Co.

Just touching on the CEO search again is it necessarily an outside candidate that you’re considering? Or is there an opportunity for an internal candidate?

Greg Pratt

There is an opportunity for an internal candidate.

Operator

Your next question comes from Phil Gibbs - KeyBanc.

Phil Gibbs - KeyBanc

Yes, I had a question on the LIFO impacts in the quarter. Were there any?

Doug Ralph

As I answered previously, very, very modest what will trigger LIFO effects in any period is changes in inventory on top of changes in raw material costs and while raw material costs were different year-over-year, our inventory was relatively flat from where we started the year. So any time we do a good job of managing to a level inventory position, that’s going to minimize any LIFO impacts; and as I commented in the script, minimize any margin volatility that we see.

Phil Gibbs - KeyBanc

I just have a quick housekeeping question on the other income. How should we think about that and you compared it year-over-year in your release and that’s been lumpy. Should we continue to think that will be the case?

Doug Ralph

Yes, I mean one exceptional item in other income, and it has been for the last number of years always in the second quarter, is the CDSOA that I mentioned. So, that’s a $5.8 million item that will just be a second quarter item.

Phil Gibbs - KeyBanc

Lastly, what are you seeing in the titanium markets as far as the raw material supply chain I mean, we’ve seen a little bit of bounce off the bottom on the scrap side? Would you echo that as far as what you’re seeing there?

Doug Ralph

We’re certainly seeing the fact that prices had been low and we’re seeing some indications that there is a little bit of recovery there. As, we’re not a titanium melted, so we acquire material to go into our Dynamet titanium operations. So we’re seeing fairly stable pricing and we are seeing inventory in general out there being in slightly better balance.

Operator

Your final question comes from Brian Yu - Citi.

Brian Yu - Citi

A question regarding your capacity if I recall, all this added capacity, it was supposed to boost it by about 40% in 2009. So, I’m arriving at a figure in excess of 300 million pounds per year. Is that correct?

Doug Ralph

No, I think your volume that well, let me tell you what we said publicly. I’ll first talk about our premium melt expansion. Premium melt is obviously critical for us it goes in aerospace, energy; a lot of the industrial customers that we have go through our premium melt facilities.

We’ve put in a new VIM, which has started up along with four VAR furnaces and two ESR furnaces and what we’ve said in our premium melt capacity, that it will improve our capacity by about 40%, which equates, as it fills up to about $150 million in additional revenues in some of our top products in the company. So, significant capacity available and it’s about 40% to about $150 million.

Brian Yu - Citi

So with the additional capacity you have, how are you operating your portfolio of mills? Any ones that you’re leaving idled or are they flexible enough where you can operate them all at relatively low utilizations, and therefore ramp it up fairly quickly too?

Doug Ralph

The answer is yes to both of your last questions. Our stainless facilities, which are mainly our air melt product, are in the 65% range of utilization and our premium melt facilities are about 50% and our hot working is about 60%. So, all it takes is, as we improve our forecast, getting the right manpower in place; but we’ve got significant capacity to handle growth.

Operator

And there are no further questions at this time.

Greg Pratt

Okay. Thank you very much. I would like to thank everyone for taking time to join us today. Thank you for your continued interest in Carpenter. I would just like to leave you with the notion that we are not waiting for the new CEO to do what’s right for the business.

We see our key markets strengthening, there’s good overall momentum in our business and we are pleased with the progress of the company and we feel are confident in our ability to execute against our growth plan and finally, we look forward to speaking with you next quarter. Thank you and good bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a wonderful day.

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Source: Carpenter Technology Corp. F2Q10 (Qtr End 12/31/09) Earnings Call Transcript
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