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

Q3 2010 Earnings Call Transcript

November 4, 2010 11:00 am ET

Executives

Usman Ahmed – IR, FD Ashton Partners

Mike Goldberg – President and CEO

Scott Stephens – VP Finance, CFO and Treasurer

Analysts

Edward Marshall – Sidoti & Co.

Tim Hayes – Davenport & Company

Mark Parr – KeyBanc Capital Markets

Operator

Thank you for standing by, and welcome to the A.M. Castle & Co. third quarter 2010 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, Friday, November 5, 2010. I would now like to turn the conference over to Katie Pyra with FD. Please go ahead.

Usman Ahmed

Good morning. Thank you everyone for joining us for A.M. Castle's 2010 third quarter conference call. By now, you should have all received a copy of this morning's press release. If anyone 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 results that will be discussed during today's call may be 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 the 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 Investors tab and in the Form 8-K submitted to the SEC.

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

Mike Goldberg

Thank you. Good morning, everyone, and thanks for joining us on today’s call. I will start with a recap of our third quarter highlights, and comment on the current business environment, share our outlook for the year, fourth quarter and beyond. And after that Scott will speak to our third quarter year-to-date results in greater detail and then we will obviously have the Q&A session.

As you have seen from the press release, third quarter consolidated net sales were $244.9 million, or 33.1% higher than the third quarter of last year. The company reported net income of $0.1 million for a quarter or break even on an earnings per share basis, compared to a net loss of $6.3 million or $0.28 loss per diluted share in the third quarter of 2009.

Third quarter net sales in our metals segment rose by 34.7% to $218 million, compared to $161.8 million for the same period last year, primarily driven by stronger sales volumes as tons sold per day were up 30.5% from the comparable period last year.

The larger sales increase were in our alloy and carbon bar products, primarily reflecting continued improvement in our general industrial and our oil and gas markets. Sequentially, third quarter metals tons sold per day were up 1.6% versus the second quarter.

Net sales for our plastics segment were $26.9 million, an increase of $4.7 million or 21.2% over the third quarter of 2009. So, as we look back upon the third quarter, it was a real study in contrast. As you remember from the last call, we started 2010 with four constitutive months of growth. Then business activity slowed at the end of the second quarter, and we recorded sequential declines in volumes in May and June.

The decline continued in July, and in fact July matched January as the weakest month of 2010 from a volume perspective. After July, we saw business activity pick again. In the metal business daily volumes increased sequentially from July to August, and from August to September, and our September volumes were actually the best that we have recorded thus far in 2010, and the best since February of 2009.

Somewhat difficult to explain all the ups and downs, but we think that the lack of inventory in the manufacturing and supply chain is the likely cause of this variability of demand.

From a product volume perspective, the market for carbon and alloy bar showed the most strength in the third quarter, and lead times from their suppliers continues to extend. The mills are seeing strong order books and most of the key bar markets are also forecasting better results into 2011. Stainless bar has not been as strong, but there are pockets within the specialty grades where lead times are extending as well.

Pricing in the general market place increased slightly in the third quarter, and we saw increases in carbon and alloy bar and low pricing, whereas plate remained stable. Scrap surcharges rose a bit in the third quarter, but we expect it to drop in the fourth. Nickel pricing moved higher throughout the quarter.

The third-quarter gross margins were consistent sequentially with the second quarter. The market remains highly competitive, particularly in aerospace where aluminum heat-treated plate is still in oversupply and will likely remain so for at least the first half of 2011. Our plastics business also saw sequential improvement in volumes in August and September, and in fact our plastics backlog in September was the strongest since late 2008.

In general, customers remain cautiously optimistic. Few customers are predicting rapid or significant mid-term growth, but most expect 2011 to be better than 2010. With that said, we expect our business to grow moderately next year. Destocking has ended except in aerospace, but most customers continue to purchase only to fill immediate needs and not hedge for the future.

Now I will make some specific end-market comments. First, I will talk about our general industrial business. Overall, we saw strong third-quarter pickup for long [ph] products, and a modest recovery for plates compared to the second quarter. Customer inventory seem to be back in balance.

Looking at specific markets, heavy equipment continues to improve. The construction equipment business is stronger, especially in earth moving equipment. Demand from the semiconductor industry is increasing, and so positive impact on stainless aluminum plate consumption for the third quarter. Underlying demand appeared to be improving in the heavy truck and mining end markets. And in the UK, business remained strong in the nuclear [ph] segment. The outlook for crane and lift segment, which serves commercial construction and municipal projects remains weak.

Next 1’ll move to oil and gas, another market where we have seen a pick up from second quarter levels. Customer sentiment continues to be very positive and business activity is the strongest it has been since early 2009. Customer inventory levels are currently long, and lead times have expanded for many products. The prices have risen slightly with more significant price increases expected in ’11.

Now onto aerospace. In the commercial aircraft business, the airlines are seeing a pickup in demand and better conditions to upgrade their fleets. Passenger and cargo traffic has now surpassed the pre-recession levels of early ’08. Numerous production rate increases have been announced over the past several months in response to these improving market conditions. Although we have not yet seen any direct significant impact on activity levels, we believe that our presence across a broad range of commercial platforms will benefit Castle as the aerospace recovery continues.

Business in general aviation sector is improving, but remains slow and severely overstocked. Our defense-related aerospace business remains relatively strong and current projection still call for a slow ramp up of the F-35 Joint Strike Fighter program reaching full-scale production in 2016. Lead time for heat-treated remains short and capacity continues to exceed demand.

Aluminum continues to be overinventoried, and industry sources expect destocking to continue into next year. So as a result the market is extremely competitive and gross margin recovery to historical levels will continue to be a challenge for the near term. Aerospace demand for non-aluminum products, nickel, titanium and alloy is strong, and the supply chain appears in good shape.

Finally, a few words about our plastics business. Activity has been relatively good with particular strength in the office furniture and semiconductor markets. Automotive remained strong. The general industrial markets there are also improving.

Moving on to make a few additional comments on our critical business developments, throughout 2010 we have continued the tight focus on inventory reduction. As of September 30, we are ahead of our plan on our turnover improvement, and our core plate, oil and gas and plastics businesses have returned to historical inventory levels, and aerospace is the one area with a continued overhang. And our team is continuing to make progress in bringing inventories back in line, and by early 2011, we expect the overall DSI number to be approaching historical levels.

Also in the quarter, we are very pleased to report that we have a new contract with the United Steelworkers that covers our Chicago, Cleveland and Kansas City plants. And this contract goes through September of 2014.

We continued to make good progress on safety. Year-to-date through September, we have had just 4 recordable safety incidents resulting in lost time versus 9 for the same period of last year. Activity seems to be picking up on the M&A front. Strong balance sheet, low debt level position positions us well to explore very strategic acquisitions. So we continue to look for those opportunities to increase our investment in the complementary products and services for our targeted end markets on a global basis.

Before I hand things over to Scott, I like to make a few comments about our outlook for the fourth quarter and beyond. The fourth quarter is traditionally our slowest quarter due to fewer shipping days, and various customer shut downs. We expect underlying demand in Q4 to be similar to Q3 levels, but the reduction in total actual shipping days in Q4 will have an impact. So as a result, we expect to see overall sales revenue to decline somewhat for Q4.

As we think about 2011, we and everyone else are still looking for that catalyst that will spark significant revenue growth. In the absence of that catalyst, most experts predict continued slow and modest growth. So looking at the macroeconomic data, GDP is expected to grow 2.9% in 2011, up from 2.4% in 2010, and overall industrial production is expected to grow 4.1% next year.

So while these numbers are not as strong as past recoveries, they do show that the recovery still has a lot to go and a lot of life left in it. Year-to-date through the third quarter, we experienced 12% revenue lift compared to 2009. As we said earlier, we believe that this economic recovery will continue at a modest pace into next year, and at this point we would expect next year’s revenue growth to be similar to what we have seen this year.

In this environment, we will continue to focus on managing our costs, balance sheet and our capital deployment. Longer term, we remain very optimistic about opportunities for growth in our key markets, not only in 2011, but well beyond.

So I will turn things over to Scott now to give you a more detailed review of the numbers.

Scott Stephens

Thank you Mike. Good morning everyone. I'll start with a summary of our third quarter and year-to-date financial comparisons, and then provide some commentary on our balance sheet and cash results through September 30.

Consolidated third quarter sales of $244.9 million, were $60.9 million or 33.1% higher than the third quarter of last year. In the metals segment, we reported third quarter sales of $218 million, which was 56.2% or 34.7% higher than last year. Overall tons sold per day were up 30.5% versus the prior year.

Sequentially, third quarter metals segment sales revenue was 2.2% higher than the second quarter on a 1.6% sequential increase in quarterly volume. On a year-to-date basis, metal sales are now 11.3% through September and tons shipped are up 11%. We talk often about the late cycle nature of most of our customers’ businesses, and the impact that has on Castle’s revenue cycle lagging the trends of the general industrial economy and PMI. This lag cycle is evident in our quarterly year-over-year metals volumes trends for 2010, where Q1 volumes were down 10.9% versus prior year. Q2 volume was up 20.6% over prior year, and now Q3 was up 30.5% over Q3 2009.

On the plastics side, Q3 2010 net sales were 26.9 million, which was 21.2% higher than the third quarter of 2009. The consolidated gross margin rate for the third quarter was 25.7% of sales, as compared to the prior year period at 25.2%, and comparable to the 25.7% in the second quarter of this year. We had anticipated continued recovery for Q3, which would have provided for margin improvement opportunities, but as it turned out Q3 activity was only slightly better than Q2 by 1.6% overall, and as a result our gross margins remain consistent as well.

The company recorded $2 million of LIFO expense in the third quarter, comparable to $2 million recorded in Q1, and 3 million in Q2.

Third quarter consolidated operating expenses were $63.2 million, which was $8.2 million or 14.9% higher than last year, primarily due to higher shipping levels this year. Compared to Q3 2009, warehouse and delivery costs accounted for 4.8 million of the increase, and 3.6 million was due to selling and G&A cost increases. Most of the cost increases we have seen are related to higher shipping volumes as Q3 metals activity was up 30.5% year-over-year.

Other factors contributing to higher costs in 2010 include 401(k) benefit reinstatements and the elimination of furloughs and work restrictions that had existed in Q3 2009. We recently announced the consolidation of facilities in our metals segment. During the fourth quarter this year, we will relocate our Arlington, Texas facility into our Dallas location. We are also in the process of consolidating facilities in the UK.

If all planned moves are completed by year end, we expect to record a Q4 charge to earnings of $1.5 million, which includes non-cash lease extrication costs and moving expenses. These moves will result in annual operating cost savings of approximately $2 million beginning in Q1 2011. Including these facility consolidation charges, Q4 total operating expenses should be comparable to Q3. Consolidated operating loss for the quarter was $0.2 million compared to a prior year loss of $8.7 million. EBITDA was $6.5 million in Q3 compared to an EBITDA loss of $3.3 million in the prior year, and comparable $7.1 million in Q2 of this year.

Joint venture equity income was $1.7 million for the quarter, compared to $0.2 million in the same period last year. Interest expense of $1.4 million for the quarter was $100,000 lower than the prior year period.

Net income for Q3 was $0.1 million or breakeven on an EPS basis compared to a net loss of $6.3 million or $0.28 per share in the prior year quarter.

Now I will briefly go through the nine month comparative results, where consolidated net sales for year-to-date September was $708.1 million, which is 76.8 or 12.2% higher than the first nine months of 2009.

The consolidated gross margin rate for the first nine months was 25.2% of sales compared to 26.4% in the prior year period.

Year-to-date 2010 consolidated operating expenses were $185.5 million, which is $4.6 million or 2.5% higher than last year. Consolidated operating loss for the first nine months of 2010 was 6.9 million versus the prior year operating loss of 14.5 million.

EBITDA was 12.5 million for the first nine months of 2010 versus 1.7 million for the prior year. Joint-venture equity income was $4 million for the first nine months of 2010 versus 100,000 for the same period in 2009. Interest expense is 3.9 million for the first nine months of 2010, or $900,000 lower than the prior year period.

Net loss for the first nine months of 2010 was $4.1 million, or $0.18 per diluted share, compared to a prior year loss of 11.4 million or $0.50 loss per diluted share.

Now onto the balance sheet and working capital, during the third quarter inventory decreased by approximately $7 million and our days sales in inventory remained constant at 142 days at the end of Q3, the same as Q2. Inventory turn rates have returned to near normal in most of our businesses except aerospace. We expect the oversupply situation in heat treated aluminum plate to begin moderating in 2011. Year-to-date September 2010 accounts receivable DSO was 49.2 days compared to 53.8 in the prior year period.

Our bad debt write-offs remained at low levels, under 300,000 for Q3, and approximately 900,000 for year-to-date September 2010. Net debt for Q3 2010 remained unchanged from the end of Q2 at 59.4 million, which represents total debt outstanding of 87.6 million, less cash and cash equivalents of 28.2 million. This results in a net debt to capital ratio of 15.8% at September 30, 2010.

Capital expenditures in the third quarter were $1.9 million, and year-to-date capital expenditures through September were $5.1 million. We anticipate full year 2010 capital spending to be approximately 6 million to 7 million, which will be down from 8.7 million incurred in 2009.

And lastly before we open up the call for questions, I like to summarize our outlook for the balance of 2010, as Mike discussed earlier, we anticipate end market demand for Q4 to be consistent with Q3. However, as usual in Q4 the reduction in total effective shipping days, which is estimated to be approximately 5% to 9% lower than Q3 will impact total sales for the fourth quarter. We would expect margins to remain constant at Q3 levels, if overall demand remains consistent, which is what we anticipate at this point.

However, the final year end LIFO calculation will be a sensitive factor to our final net profit results for Q4. And in addition, we expect the facility consolidation charges to impact Q4 as we discussed earlier. So with all that said, at this point, we would expect to report a small net loss for the fourth quarter of 2010.

And now operator, we will open up the call for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) And our first question comes from the line of Edward Marshall with Sidoti & Co. Please go ahead.

Edward Marshall - Sidoti & Co.

Good morning and thanks for taking the call.

Mike Goldberg

Good morning.

Edward Marshall - Sidoti & Co.

The first question is that just a clarification on the fourth quarter guidance, does it include the small net loss that you said – does that include the $1.5 million charge in moving expenses that you're going to be recording?

Scott Stephens

It does, yes.

Edward Marshall - Sidoti & Co.

Okay. So on an adjusted basis, you could be slightly – okay. That's fine. The September – you discussed September being your strongest month of the year as far as volumes, I believe is what you said in your prepared remarks. Is there a particular end market that recovered – that wasn't as strong, say the first six months of the year, and now has stepped up in maybe one of your later cycle markets or is it just kind of across the board broad-based improvement?

Mike Goldberg

We – certainly the oil and gas market was significantly stronger at the end of the period than it was at the beginning. That market is one which is – has significantly turned around through the year. Otherwise, I would say there was just the general industrial markets, where we saw a substantial amount of carbon, alloy bar and tubing have certainly been the stronger markets that was experienced, and then maintained that strength, but the market, which I will say has changed the most kind of if you look at say Q1 to Q3 would be the oil and gas markets.

Edward Marshall - Sidoti & Co.

And what do you think might be driving that? Obviously, what might be driving that? Have you done anything different? Is there any market share gains? Obviously, there's a recovery a little bit in that market, but could you talk to that a little bit?

Mike Goldberg

I think we had market share gains. Very tough to know what – if that is the case. I think the market corrected inventory position. So that made a big difference. We have seen rig counts go up. We have seen the shale drilling go up. We have – in the early part of the year we opened up our facility in Lafayette, Louisiana. That's what helped us improve our service to that market.

Edward Marshall - Sidoti & Co.

Okay. That's good news. The trends that you saw in September, the volume trends, how does it look for October? Or at least how did you trend through October? Was it equally as strong?

Mike Goldberg

Yes, we kind of we can’t pretend not to look what October looks like since it's November. Yes, October looked pretty similar to September, which is kind of a good thing.

Edward Marshall - Sidoti & Co.

Right. And then finally, the number of base-pricing increases across a lot of the mills, and I'm just wondering what kind of inventory is still left, maybe some of the higher-priced inventory what that can probably do to some of the leverage that you may see in the model, from a margin perspective as we progress it to the end of the year? And then I guess relating to the LIFO catch ups that you talked about in the prepared remarks as well, will that have any impact there? Thanks.

Scott Stephens

Okay. Well, two things, on the inventory position, as we have continued to improve and moderate our inventory, we have seen less of a margin headwind throughout this year. So, with the exception of aerospace, which we have talked about, our inventory is relatively normal. It is never perfect in terms of aged items, but there is less of a drag today, and a margin headwind on our inventory position than there have been throughout this year. So, yes, there will be more leverage anticipated forward-looking than back as far as the inventory position goes.

And in terms of LIFO, at this point, we anticipate our Q4 LIFO charge to be consistent with the balance of the quarters this year. It would look like Q3 at this point, and that is our best guess. As we said, the year end inventory mix and final inflation numbers that go into LIFO are pretty tricky. But on balance right now, we expect a similar LIFO environment in Q4 to what we experienced in Q3. And that is what is reflected in our outlook comment at this point.

Edward Marshall - Sidoti & Co.

Excellent. Thank you guys very much.

Scott Stephens

Okay. Thanks.

Operator

(Operator instructions) And our next question comes from the line of Tim Hayes with Davenport & Company. Please go ahead.

Tim Hayes - Davenport & Company

Good morning.

Scott Stephens

Good morning Tim.

Tim Hayes - Davenport & Company

Just two quick questions. On the revenue guidance that you provided for 2011, for that growth, how would that split between say volume and pricing? Do you have a feel for that? Or in your assumptions what are you thinking on that?

Scott Stephens

It is predominantly volume Tim. There is we will call it a small single digit price inflation expected at this point. And that is not consistent with what we have seen really this year, including mix, for us by the way. So it is mostly volume. There is a small element of price.

Tim Hayes - Davenport & Company

Okay. And I missed the LIFO in Q3, you said was $2 million. Was that charge or income? I just couldn't quite jot that down fast enough.

Scott Stephens

Expense. That is LIFO charge expense in Q3, $2 million.

Tim Hayes - Davenport & Company

Okay. Thank you.

Scott Stephens

Thank you.

Operator

Thank you. (Operator instructions) And our next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Mark Parr - KeyBanc Capital Markets

Hey. Thank you very much. Good morning, guys.

Scott Stephens

Good morning Mark.

Mark Parr - KeyBanc Capital Markets

I was wondering if you could help us a little. I don't think you've given much color on what you expect for gross profit margins in the fourth quarter. Could you talk to us directionally about whether you think they may move up or down on a FIFO basis from the third quarter?

Mike Goldberg

We think that will be fairly consistent with the third quarter. As we said, the third quarter was about the same as the second, and so at this stage our thoughts are about the same level.

Mark Parr - KeyBanc Capital Markets

All right. If you were going to handicap a bias in an upward or downward direction, which way would you be leaning right now?

Mike Goldberg

It depends who I am talking to. If I’m talking to our employees, I would say it was going to be upwards, and you know, I think any bias is going to be relatively small. I think it could be a few hundred points here and there, but I think the range of likely results on a pre-LIFO basis is relatively small. I think the bias for ’11 is upwards, as we continue to see the markets improve, our industry situation, the customers inventory situation, the whole supply chain being very lean, I think I would say that 2011 opportunities is enhanced kind of pre-LIFO margins for next year.

Mark Parr - KeyBanc Capital Markets

Okay. Do you think – again I'm just trying to put this in perspective, and your – most of your base business seems to be fairly normalized at this point. The price costs mismatch is pretty okay, with the exception of the aerospace aluminum. And if that was normalized, would it be fair to think about the third quarter as 100 basis points higher from a gross margin perspective or 150? How would you normalize things if you normalized the aerospace business?

Mike Goldberg

Okay. The easy answer said, the aerospace business is never normal. It is either kind of down or up, but those numbers you gave would be pretty consistent with what we would say. We would – that is exactly what I would say about a 1.5 point for the company, would be normal. And if you put that in that gets us right in that normal range. So, we are reporting 25.7, we get 1.5 point, it gets us to 27.2, and that would be right in the middle of the range the company has traded at for a decade.

So that kind of gives us, as we’ve kind of gone through the same thinking, that has given us the kind of some degree of comfort that the balance of the business is running on a kind of normal kind of commercial basis. We know that the aerospace, aluminum side is lagging, and the number that you suggested is a number that we think is the impact, and that kind to reconcile to pre-recession type of numbers on that basis.

Mark Parr - KeyBanc Capital Markets

Okay. That's really helpful. I just had one final question. You've talked about October being in line with September from a – I think you're talking about from a daily sales or daily sales perspective. And could you give us a little bit of sense of what does October look like compared to the whole third quarter?

Mike Goldberg

The comments I made in the third quarter, after the quarter was kind of pretty strange in that July.

Mark Parr - KeyBanc Capital Markets

It started of weak and got stronger, right?

Mike Goldberg

Right. The summer months, kind of June, July, early August period were surprisingly weak. And then the kind of the middle of August and September came along, they were kind of surprisingly strong. And so it really ends up, the average for the third quarter ends up 1.5 point more then the second quarter in terms of volumes. The way that we are thinking about the fourth quarter is a bit of a mirror image. So, October or September and then there was the perennial question of the strength of the business as you go through into the holiday season.

First two weeks in November is no reason why that shouldn’t be good. And then once you get, once you get towards Thanksgiving and then into December, it is always a bit of crapshoot. I mean, last year we were surprised by the strength of that period, relative strength compared to what preceded it. And it is kind of a tough one to know about how long business keeps going, whether people take extended shutdowns in the end of December.

But kind of most probably our expected case would be that the fourth quarter looks a bit like the third but in reverse, starting off strong and then weakening because of the holidays, and then there is no reason why the new year shouldn’t start out kind of back on a strength, relatively say strong basis, relatively kind of strong basis, more like the October, November levels than the December levels. This is typically what you would see.

Mark Parr - KeyBanc Capital Markets

Okay. If I could just ask a follow-up here, do you think – I mean if you think about your visibility today versus 30 days ago, are things any better than they were 30 days or 60 days ago?

Mike Goldberg

They are. I can’t see them. I think things have – I wouldn’t say that. I don’t think they are any worse. But I can’t think materially that it is better today than it was at the beginning of September or middle of September. I would say at this stage it is pretty much the same.

Mark Parr - KeyBanc Capital Markets

Okay. All right. So, at least we have a fourth quarter that's starting off stronger than the average for the third quarter, and then depending on how the seasonality plays out we'll just have to see. Okay.

Mike Goldberg

Yes, that is – you have got it.

Mark Parr - KeyBanc Capital Markets

All right, Michael, thank you very much. And hey, congratulations on getting the inventories in shape and the margins really were encouraging. So that's a good sign for your business and for your execution momentum.

Mike Goldberg

Yes, thanks, and there has been a lot of hard work done by everybody to do that and I think that is going to position us well as we move into the new year here. So, it is a lot of hard work and we’re pleased with what we have done and still more to do.

Mark Parr - KeyBanc Capital Markets

Okay. Terrific. Thank you.

Scott Stephens

Thanks Mark.

Operator

Our next question is a follow up question from the line of Edward Marshall with Sidoti & Co. Please go ahead.

Edward Marshall - Sidoti & Co.

Thanks again. You made some comments to top line growth next year. And in your prepared remarks, you discussed the industrial drivers that might be behind it. But I was hoping maybe you could dig a little bit deeper and talk about maybe the bigger variable for the business next year, or maybe your assumptions for aerospace, and with its respect to the inventory with the heat-treated plate and it's in the market right now. And then what is your assumptions for either the sharpness, or lack thereof, of recovery in aerospace next year that could add up side or down side to that estimate that you made?

Mike Goldberg

I will kind of look to my CFO to make sure that he doesn’t disagree with me here. I would say there is no downside on the aerospace side. There would be something which we hadn’t anticipated. So, I think there is an upside. I think it is cautious. The market dynamics themselves are good. I think that is reflected by, I mentioned in my remarks about the non-aluminum participation that we have in titanium, kind of stainless and nickel. That has been going very strongly for us over the last 3 to 5, 6 months.

And so, it all goes in planes whether it's kind of engines, or engine mounts, or landing gears, things like that. And so to me that kind of gives us a reflection that the market itself is relatively strong, and what is holding us back is the relative weakness in the air framing part and the oversupply of product, which we have been talking now for at least two years.

And we also speak to a lot of people and get a lot of input on this. And as much as we would like to hope and think that that market is correcting itself, there is ways to go. And it should get better, but at this stage we are not anticipating that it is going to get substantially better in the first half of next year and then our visibility kind of gets a bit foggy after that.

So, just to kind of summarize these thoughts, cautiously optimistic about aerospace. The market itself is relatively strong. We participate on multiple platforms with multiple products. And as that aluminum business does correct itself, there is some real good margin upside, and there is some real good volume upside, whether we see that substantially in 2011, tough to say. I would say, I would be more confident about 2012 than I would in the total year of 2011. It will get better, and it is very difficult to know the timing of that.

Edward Marshall - Sidoti & Co.

Okay. Thank you guys.

Operator

Thank you. And I show no further questions in the queue at this time. I like to turn the conference back to management for closing remarks.

Mike Goldberg

Well, once again, thanks for everybody’s time and attention. We look forward to a nice holiday season. Good business and we will speak to you early in the new year with our year-end results. So, thanks very much.

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