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Executives

Mike Hajost – VP and Treasurer, IR

Bill Wulfsohn – President and CEO

Doug Ralph – CFO and SVP, Finance

David L. Strobel - Senior Vice President, Global Operations

Analysts

Edward Marshall – Sidoti & Co.

Brian Yu – Citi

Michael Gambardella - JP Morgan

Steve Levenson – Stifel Nicolaus

Dan Whalen – Capstone Investments

Sanil Daptardar – Sentinel Investments

Timothy Hayes – Davenport & Company

Gautam Khanna – Cowen and Co.

Mark Parr – KeyBanc Capital

Carpenter Technology (CRS) F3Q 2011 Earnings Call April 26, 2011 10:00 AM ET

Operator

Good morning and welcome to Carpenter Technology’s third quarter earnings conference call. [Operator instructions.] I would now like to turn the call over to your host for today, Mr. Mike Hajost, vice president, treasury and investor relations. Please proceed.

Mike Hajost – VP and Treasurer, IR

Thank you operator. Good morning everyone and welcome to Carpenter’s earnings conference call for the third quarter ended March 31, 2011. This call is also being broadcast over the Internet.

With us today are Bill Wulfsohn, president and chief executive officer, and Doug Ralph, senior vice president and chief financial officer, as well as other members of the management team.

Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter’s most recent SEC filings, including the company’s June 30, 2010 10-K, its September 30, and December 31, 2010 10-Q and the exhibits attached to those filings.

I will now turn the call over to Bill.

Bill Wulfsohn – President and CEO

Thank you Mike. Good morning everyone, and thank you for joining us for our fiscal year 2011 third quarter earnings call. We performed very well this quarter, and in a manner consistent with the messages from our prior two calls and our investor day presentation in February.

Operating income and profit per pound were up noticeably from Q2. Revenue growth was up 32% on 16% volume growth. In these results you can clearly see the positive impact of our mix management and pricing actions. As you will recall, we’ve been working on price and mix improvements for the last several quarters but are only now seeing the beginning of their impact due to our long lead times and customer commitments.

Operating performance in the quarter was further bolstered by strong manufacturing performance, especially in the second half of the quarter, good continued focus on cost containment, strong contributions from our Dynamet titanium business, our recent Amega West acquisition, and also our Carpenter powder products business. All three of those businesses really have great growth prospects.

In summary, we delivered $0.64 a share and a 13% operating margin. Looking forward, pricing and mix management remains our top focus since capacity remains tight and we still need to further improvement our profit performance. As such, we are continuing to take actions to further upgrade our product mix and we are announcing new price increases, as we did two weeks ago.

In addition, we expect demand in our end markets to remain strong. We believe the aerospace market is at the beginning of a long and robust up cycle. Aerospace engine demand has been strong for over a year and a half. Demand for titanium fastener materials is nearing its prior peak high of 2008. And finally, we are beginning to see order activity pick up for nickel and stainless aerospace fasteners.

In addition, we continue to view energy as having the potential to be our fastest-growing market. Directional drilling activity remains at a high level, and we are pleased with our diversification in the high-value applications for completions. We are also benefitting by offering a broader range of high-value products to the growing industrial gas turbine segment.

Finally, we are pleased with the initial results of our recent acquisition of Amega West. Note that this acquisition was accretive to Carpenter in its first quarter. As such, we are interested in pursuing similar types of acquisitions and will continue to invest in the business.

With demand so strong, we are evaluating the need for additional capacity. From a demand perspective, a significant part of our existing capacity is booked under long-term agreements for the next four years. And, we expect continued strong growth in demand for premium melted materials in aerospace across all applications – engines, fasteners, and structural components.

All our existing key customers, with whom we have LTAs, are pressing us for significant additional volume. We also expect strong growth in demand for premium melted materials and energy across existing and new applications in oil and gas completions, directional drilling, and gas turbines. As in aerospace, we are receiving requests for higher volumes from current and new customers.

As for supply, the decision to complete capacity expansion in our premium melt area during the downturn is proving successful as we are now using this capacity to support the growing demand for our higher-margin products.

Still, capacity constraints exist in some operations. While we are reducing our lead times and improving our deliver performance, we want to make sure we are well-positioned for significant growth in our key end markets, especially aerospace and energy.

Thus, given the long lead times to complete and qualify new capacity, we’ve begun assessing capacity expansion options. More specifically, we are now looking at building additional premium re-melt and hot working capacity. Note we are also nearly complete with the previously announced capacity expansion of our Florida Dynamet wire facility. Finally, we are evaluating capacity additions in our powder operations and our newly acquired Amega West business.

Lastly, as discussed during our investor day in February, we expect new technology to play a larger role in our future sales. I want to provide a brief update on some recent progress in this important area.

We are pleased to announce that on March 24 the launch of our proprietary new Temper Tough alloy series. This is the air-melted version of our new family of alloys that have a unique combination of high strength and toughness that serves as a lower-cost alternative to high cobalt-containing alloys with similar properties.

We had previously launched the vacuum induction version of this alloy called PremoMet last year and are very pleased with the positive responses we are getting from our customers as they evaluate its use in several applications.

We are also seeing good progress in commercializing our new [drill power] alloy. Early technical marketing indications are positive and we expect to launch this product in the next few months. This is a good example of how our expanded distribution platform with Amega West can support our new product development pipeline. Finally, we expect to update you soon on the status of our stainless landing gear initiative.

In summary, we feel very good about where the company is right now. We expect to finish the year strong and achieve our original growth and earnings targets. We expect these results will be driven by continued progress in improving our average profit per pound and strong Q4 sales demand.

We are also very excited about our prospects for long-term growth and creating shareholder value. And, we continue to expect that we’ll return to our peak EBITDA levels by fiscal year ’13 or ’14 and then go beyond those levels, and we believe we should see good progress against this goal in fiscal year ’12.

Switching gears, I will now review the status of our end markets in the order of their contribution to net sales, beginning with aerospace. Our aerospace sales were $196 million in the quarter. Excluding surcharge revenue, aerospace sales were up 26% on 23%-higher volume. These results reflect the sixth consecutive quarter of strong demand for engine components as the supply chain adjusts to higher build rates.

We have also improved our mix with increased sales of higher value materials used in rotating components. Order activities and shipments for our titanium fastener wire business is nearing prior peak levels as demand for titanium fasteners is picking up in anticipation of significant Boeing 787 needs. Recall the 787 uses eight times more titanium fasteners by weight than the 737.

We are also pleased to see a pickup in order activity for nickel and stainless fasteners. Channel activity indicates demand will continue to accelerate over the remainder of the calendar year.

Sales to the industrial market were $104 million. Excluding surcharge revenue, industrial sales increased 26% on 15%-higher volume. This is a market where our mix management and pricing actions have proven very successful. We have been able to better meet the growing demand for higher value materials for fittings and semiconductor applications while reducing sales of more generic stainless materials.

The global economic recovery is causing an overall increase in demand for industrial products and the supply chain is adjusting to support future growth. Eventually, as restocking comes to an end, we expect demand in this market to better match GDP rates.

Energy market sales were $54 million. Excluding surcharge revenue, energy market sales increased 146% on 72%-higher volume. The year-over-year increase reflects the impact of our Amega West acquisition, sharply higher demand and prices for materials used in oil and gas applications, and a broader product offering of high-value materials used in industrial gas turbines.

Directional drilling activity continues to grow as new rig counts come online. Along with the benefit of higher pricing we’ve also improved our mix in this sector with our expanded participation in completion applications that utilize higher value products.

We are very pleased with the initial impact of our Amega West acquisition, which contributed $0.02 per diluted share in the quarter. We will continue to evaluate alternatives to grow our presence and footprint further in this sector.

We are also seeing a nice rebound in demand for materials used in industrial gas turbines. In addition to the positive impacts caused by low natural gas prices, available financing, and growth in electricity consumption, Carpenter has expanded its product offerings of high-value materials used in industrial gas turbines.

Our volumes in this sector are up 53% year-over-year, but still below prior peak levels. We continue view energy as the market that has the potential to be our fastest growing market overall, and will have a positive impact on growth of our international business.

Consumer market sales were $41 million. Excluding surcharge revenue, sales increased 19% on 8%-higher volume. This is a market that is also showing the benefit of our mix management and pricing actions. Revenue grew faster than volume, as growing demand for higher-value materials used in sporting goods applications outpaced sales of other, lower-value materials.

Automotive market sales were $37 million. Excluding surcharge revenue, automotive sales rose 20% as volumes were flat. The revenue growth rate is a function of mix management efforts aimed at increasing sales of higher-value turbocharger, engine fastener, and fuel system components supporting new technologies with an offsetting decrease in lower-value applications.

Carpenter remains well-positioned to participate in the broader transportation industry’s continual push for fuel efficiency and lower emissions with technologies like PremoMet and Temper Tough.

Sales to the medical market were $33 million. Excluding surcharge revenue, medical market sales increased 10% on 2%-higher volume. Volume growth in total is within the expected range for this market. Revenues grew at a significantly faster rate due to higher titanium prices and increased sales of high-value cobalt materials, which outpaced the growth of stainless products.

With respect to international, Carpenter sales outside the U.S. were $142 million, an increase of 35% over the third quarter a year ago. Sales in Europe were up 40% on 36%-higher volume. This was driven mainly by increased demand in aerospace and energy and positive mix shifts in automotive. Our sales backlog in Europe remains at a three-year high.

We also saw continued momentum related to our Asia-Pacific strategy as revenues increased 31% in that region on 17%-higher volume. This was driven by growth in the aerospace, energy, and automotive markets with positive mix impacts in consumer and industrial markets.

International sales in the third quarter represented 31% of total sales, unchanged from the prior year. We continue to believe that international growth will outpace overall company growth in the coming years.

I’ll now turn the discussion over to Doug, who will walk us through the financials.

Doug Ralph – CFO and SVP, Finance

Thanks Bill. We had a good quarter financially, including continued strong top-line growth and the improvement in operating income, margin, and EPS that we expected from our pricing, mix management and cost control efforts.

Net sales in the quarter were $464 million, or 38% above a year ago. Excluding raw material surcharge, sales were up 32%. The Amega West acquisition, which we are reporting under our new emerging ventures segment, accounted for 2 percentage points of the growth in consolidated net sales after eliminations for intersegment activity.

Overall, pounds shipped increased 16% from a year ago. The gap between the 16% volume growth rate and 32% revenue growth rate reflects our strengthening product mix and price increases. Volume of stainless steel products increased 21%, titanium products were up 12%, and special alloys grew 3%.

Note that we are also providing volume by reporting segments starting this quarter, which will help you track our progress in improving our profit per pound, which remains one of our top priorities.

Premium alloys, or PAO segment, volume was up 47% and profit per pound improved $0.20 from the prior quarter. AMO segment volume was up 13% and profit per pound was $0.26 higher than the prior quarter.

Continuing down the income statement, gross profit was $73.1 million compared with $46.3 million in last year’s third quarter. The higher gross profit level was driven by higher volume and improvement product mix, the impact of price increases, and better operating performance.

SG&A expenses for the quarter were $37.9 million, compared to $33.5 million in the prior year. About half of the year-to-year difference is due to the addition of Amega West overhead costs.

In addition, we had higher variable compensation expense and headcount compared to last year. As a percentage of sales, SG&A was about 2 percentage points lower than last year’s third quarter.

Operating income for the quarter was $35.2 million compared with $12.8 million in last year’s third quarter. Our operating margin, excluding surcharge and pension earnings, interest, and deferrals, or EID as we always quote it, was 13% versus 8.7% in last year’s third quarter.

Finishing up the income statement, other income was comparable to last year’s level of $1.6 million. On the tax line, we had a couple of positive items in the quarter related to changes in previous tax positions that totaled $4.8 million or $0.11 per share. This resulted in third quarter tax expense of $3.1 million or 10% of pre-tax income, and compares to a tax provision of $7.8 million or 79% of pre-tax income a year ago.

As you’ll recall, last year’s third quarter included a one-time noncash charge associated with the new healthcare reform law. Our fourth quarter tax rate is expected to be about 20%.

Net income was $28.6 million, or $0.64 per diluted share, compared with third quarter net income of $2.1 million, or $0.05 per diluted share a year ago. As Bill mentioned, the Amega West acquisition was accretive in the first quarter and contributed $0.02 to our third quarter result.

We don’t expect EPS in the fourth quarter to be quite as high as the third quarter since we won’t have the same tax impacts. We also had a very strong volume level this quarter due to some carryover customer shipments from our second quarter on top of very strong customer demand for shipments at the end of this past quarter.

Lastly, we reduced inventory in March when nickel prices were near their highest level of the year, which had a positive impact of about $3 million that won’t repeat in Q4.

Free cash flow for the quarter was a negative $14 million. As expected, inventory levels were lower during the quarter, but were more than offset by higher accounts receivable due to strong sales and higher raw material prices.

We expect some further inventory reduction and a positive cash flow performance in the fourth quarter. Overall, we now expect free cash flow for the full year to finish at about negative $100 million, with half of this due to the Amega West acquisition and half due to higher working capital levels related to stronger business growth and higher raw material prices. We still expect capital spending for the year to be in the range of $60-65 million.

Our balance sheet remains strong. Our ending March cash balance of $212 million is depressed a bit due to the high working capital level, but we have nearly $200 million of revolver availability on top of this, for a total liquidity of over $400 million. We expect to be back around $260 million of cash, which is equivalent to current debt, by the end of the fiscal.

We are committed to maintaining strong liquidity and balance sheet position, which will give us the flexibility to fund planned growth initiatives. Toward this end, we are planning to complete a debt refinancing this quarter, which will take advantage of the favorable credit markets and pre-fund the $100 million of debt that matures this August.

We expect to issue a $250 million bond, which will increase our overall debt by $150 million once the August maturity is paid off. This will give us additional near-term liquidity that can be used for growth or earmarked for the next $100 million of debt maturity we have coming due in two years.

Let me close with a few comments about our outlook for next fiscal year. We continue to target a return to our prior peak level of profit over the next two to three years, and expect to close about half the remaining gap next fiscal year.

More specifically, we expect overall revenue growth north of 10%. We expect operating income excluding pension EID to be approximately 50% above this year, as we continue to drive a higher profit per pound from our mix management and pricing actions together with good operating and overhead cost control.

Our full year tax rate is expected to be back to about 32%. Interest expense will be just over $8 million higher with the additional $150 million of debt.

And I want to once again point out for your models that we do not expect to receive CDSOA income in our second quarter as that program has expired.

In our next quarterly call, we’ll also be able to provide you with a pension expense number for the year, but would expect this to be directionally lower than this fiscal year if equity market values hold over the next few months and due to an expected higher discount rate used on the liabilities.

Finally, we have plans to increase capital spending to a level of $150-200 million next fiscal as we invest in projects needed to support the future growth of our business.

With that, let me now turn it back to the operator so that we can open your line for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And our first question is coming from the line of Edward Marshall from Sidoti & Company. Please proceed.

Edward Marshall – Sidoti & Company

Quick question. You’ve obviously had some pretty good performance with the pricing that you had put in place prior. Where are you with the renewals as they’re coming up, the contract renewals on this pricing, and how fast do you expect them to be reset so that we can see continued improvement and kind of across all your business segments?

Bill Wulfsohn – President and CEO

Well, as contracts are coming up for renewal, as you can imagine the dynamic of supply and demand is more favorable now than it was maybe several years ago. We have long-term agreements which are in place. Many of them are not up for renewal for several years. But in general I’d say that pricing opportunities are there. However, a big part of our margin enhancement strategy is really to focus on upgrading the mix as well, and that really allows us to provide more value to our customers beyond just the price itself.

So from a pace standpoint, and where we are in the process, I think as we’ve outlined the recovery program over the next couple of years to get back by fiscal year ’13 or ’14 to the prior year peak EBITDA performance, we would view that pricing is a major driver, pricing mix, and that that is progressing on a trajectory that’s very consistent with that estimate.

Edward Marshall – Sidoti & Company

When you mention long-term agreements, I’m assuming you’re referring more toward the PAO rather than, say, AMO. Would that, first, be a correct assumption?

Bill Wulfsohn – President and CEO

Yes, roughly half of our business is LTAs, but if you go to the premium operations it’s closer to 65-75% of what we do.

Edward Marshall – Sidoti & Company

So we should just continue to – I mean, based on that and knowing that you’ve raised some prices on some of the stainless materials, should we see the continued improvement in the AMO business? And is that going to be a more lockstep kind of one-quarter type thing, like it was this quarter? Or is it going to be more gradual as we progress into next year?

Bill Wulfsohn – President and CEO

Because of multiple customer relationships that we have, and of course different supply agreements that go for different lengths, I would say that it’s our objective to see that continue to move positive. I can’t say that you’ll see it smooth every quarter, but I think you’ll see progression as time goes on.

Edward Marshall – Sidoti & Company

And then we’re seeing some top-line growth and I saw some of the costs not going up with lockstep. Can you kind of comment on what you’re doing from a cost perspective? Kind of rein in costs a little bit as you continue to grow so that you’re not bleeding that out on the cost line? I think you’ve made some comments in the past that you are concentrating pretty heavily on the cost side of the business. Any comments on that would help me.

Bill Wulfsohn – President and CEO

We do have a strong focus on the cost side of the business, both from an overhead as well as an operational standpoint. I’ll let Dave Strobel, in just a moment, talk with you about some of the operational focus areas for targeted productivity improvements, but I can tell you that for budgeting purposes, we are trying to keep the extra investment that we have above inflation levels low. In other words, trying to keep as much volume leverage coming through to the bottom line as is possible. We’re going to continue to invest in R&D and marketing and our commercial and technical capabilities, but again we think the base infrastructure is there to handle at least the majority of the growth that we’re projecting over the next year or so.

So Dave, maybe you want to make a comment about the -

David L. Strobel - Senior Vice President, Global Operations

Sure. From an operations perspective, we’ve put together a very strong operations team that’s been working very effectively with our BUs, and our focus is truly on the details of our operations down at the work center level, and we’ve been driving ongoing improvement. We have a good focus on our OEE initiatives to get more through our current operations with the capacity requirements that we see, the demand from the marketplace. We’re always working to get more. And with capital, reinvesting back into those operations, to further drive performance. And we’ve got a good start, and we’ll continue to focus in that way to get more through and to reduce our costs.

Edward Marshall – Sidoti & Company

Is there any potential way we could quantify maybe the benefit that you could see in fiscal ’12 from some of these operations?

Doug Ralph – CFO and SVP, Finance

I would just say that it’s all within the overall guidance that we gave about the kind of operating income progress that we expect next year, which is about 50% on a revenue increase that would be north of 10%.

Operator

Your next question comes from the line of Brian Yu from Citi. Please proceed.

Brian Yu – Citi

Congrats on a strong quarter. I want to get a better understanding just about the fiscal 3Q. I think Doug, you mentioned that if we look at operating income before EID, that’s $46 million, but $3 million of that had some positive impact from the nickel inventory drawdowns. And can you give us a sense of how much of the business push from second to the third quarter had on operating profits?

Doug Ralph – CFO and SVP, Finance

I don’t think we would want to overplay that, but there was certainly at the end of here as we highlighted in our last call. Some customer-driven volume that moved from the second into the third quarter and that helped us have a particularly strong volume and revenue quarter this quarter.

Brian Yu – Citi

Okay, now I’m looking at your fourth quarter and should we expect operating profits before EID to come in around the $40 million mark? And then I’m using that to try to get a sense of 2012, where you’re guiding for a very impressive 50% increase and it seems like it would get us to a little bit under $200 million operating profit before EID in 2012? Is that the right way to look at it?

Doug Ralph – CFO and SVP, Finance

We disclose our pension EID expense, and if you adjust our operating income level for that and then assume about a 50% growth rate on top of that, that’s in line with our expectation for next year. As it related to the fourth quarter versus the third quarter, we’re very conscious in the items that we’re calling out as relevant for your thinking in the fourth quarter. So we certainly had tax items that influenced our third quarter result. I think we’ll be challenged to maintain the same volume and revenue level just because of some of the strength that we talked about of volume carryovers from the second quarter and then what ended up being a very strong performance at the end of this third quarter, and we had the inventory effect that I mentioned that was about $3 million positive to our operating income in the third quarter.

Brian Yu – Citi

All right. Just my last question, can you detail some of the major spends for next year on the growth side that’s driving the year-on-year increase?

David L. Strobel - Senior Vice President, Global Operations

When you take a look at the capital requirements for next year, again we’re continuing to invest back into our operations to get more product through and at the same time we’re looking at the major capacity constraints that we have downstream from melting. We’re pretty well positioned over the next several years from a melting standpoint, but re-melting and hot working are areas of concern that we’ve talked about in the past and plan to get moving on for this next fiscal year.

Bill Wulfsohn – President and CEO

In addition, certainly we’re looking at continuing to provide strong capital funding to support the growth of Amega West as it expands its footprint as well as our powder business and our Dynamet business, both of which have a strong sales and strategic momentum right now, so we want to continue to support those. That will be a big part of the capital investment as well.

Brian Yu – Citi

And would all that take place in 2012? Or would you expect additional spending into 2013?

Bill Wulfsohn – President and CEO

Well, depending upon the actions that we take, if we make an investment in a major capacity expansion for hot workings, certainly that would go at least into 2013 as well.

Operator

Your next question comes from the line of Michael Gambardella from JP Morgan. Please proceed.

Michael Gambardella - JP Morgan

Congratulations on the quarter. Just had a question on the titanium fasteners and what you’re seeing there. Are you pretty well satisfied that the inventory on the titanium fasteners is pretty much behind them in terms of the overhang and what are you seeing on some of the recent production build rates related to your fasteners?

Bill Wulfsohn – President and CEO

Well, build rates have been continuing to be strong and go up across really the majority of the fleet. The airline monitor is a reference that we use and they’ve increased their outlook several times. Of course, you’ve got the Paris air show coming up shortly. But when you look at the total backlog numbers I think they’re roughly 3,400 for Airbus and also for Boeing. So a lot of single aisle activity going on right now. That certainly is movement that will affect the demand profile. But from the titanium fastener standpoint, you have the 787, which uses such a substantially larger portion of titanium fasteners than, say, a 737. So you put that all together and the types of projections that we put in our investor presentation, I think back in February, are still consistent with our outlook as we have it today.

Michael Gambardella - JP Morgan

So the delays that Boeing has experienced on the Dreamliner, you feel that whatever backlog there was on some of the fasteners there is long gone?

Bill Wulfsohn – President and CEO

We don’t see that as an issue going forward, and that’s why we’re expanding our capacity in that business as we speak, so we can support the growth that’s going to be coming.

Operator

Your next question comes from the line of Steve Levenson from Stifel Nicolaus. Please proceed.

Steve Levenson – Stifel Nicolaus

Can you give us an idea what the lead times are now, separately for titanium and for nickel alloys?

Bill Wulfsohn – President and CEO

For the nickel alloys, we’re currently receiving orders out towards the end of the calendar year, so our activity levels remain very strong there. On the titanium side, about that same neighborhood.

Steve Levenson – Stifel Nicolaus

Great, thank you. Second, just in terms of markets, can you give us an idea what you’re seeing, or what you’re expecting, in the next couple quarters for industrial gas turbine materials as well as – and I don’t know if you differentiate, but if you do differentiate, between the large commercial jets and business jets, regional jets, what do you see for the business and regional please?

Bill Wulfsohn – President and CEO

Sure, from a power generation standpoint, the inventory’s been depleted. The backlog is growing, but demand I would say overall has been pretty lumpy – is how we’re describing it. It is more spotty, but we are increasingly optimistic about the long-term demand for industrial gas turbines. We reference often General Electric as they’re a large producer, and of course discuss their gas turbine business and they said that their, I think Q1 calendar year ’11 gas turbine business increased by roughly 170%. So from the business jet standpoint, they’re a small percentage of our total demand, both because of the number that are being built and the relative size. So we see that not having a major impact, either plus or minus, on our business.

Operator

Your next question comes from the line of Dan Whalen of Capstone Investments. Please proceed.

Dan Whalen – Capstone Investments

In your opening comments, you mentioned that the quarter seemed to be more heavily weighted to the back end. Thank you for that color, first of all. Second of all, could you give any order of magnitude? I mean, is it one-third, two-third, or any additional color? And then secondarily, as you were going through lightening up on inventories, I would imagine from a margin perspective that the quarter was even more backward loaded from a margin perspective versus a revenue perspective. Is that fair?

Bill Wulfsohn – President and CEO

Yeah. I wouldn’t want to get too specific there, but I think that’s generally fair. I think one indication of that is if you just look at what happened to our receivables quarter to quarter where we were up about $80 million in receivables and our total revenue including the surcharge, which is the more relevant for receivables, was up something like $90 million quarter to quarter. So I think that says that if nothing else we had a very strong March performance.

Dan Whalen – Capstone Investments

Great. And then one clarification and then a follow on. Your EBITDA commentary in terms of returning to prior peak levels over the next two to three years, say, that excludes any potential bullpen acquisitions or unannounced capacity additions, correct?

Bill Wulfsohn – President and CEO

Yeah, that certainly would be a fair expectation.

Dan Whalen – Capstone Investments

Okay. So then given what you’re seeing in the demand picture, where your positioned in terms of your balance sheet being very lean, I mean, 10-20% from either growth through acquisitions or capital expansions? I know timing’s always tough, but is that a realistic or reasonable assumption?

Bill Wulfsohn – President and CEO

Not sure I follow the full question, but you’re just talking about top-line growth expectations?

Dan Whalen – Capstone Investments

Well, in terms of EBITDA, if that assumption is excluding any acquisitions or capacity additions, given the outlook, is it fair, or reasonable, to think that you could add an incremental 10-20% in EBITDA through either acquisitions or internal capital additions?

Bill Wulfsohn – President and CEO

Yeah, I mean, we’re focused on first things first, and getting back to the prior peak. I think we generally characterize that our end markets are strong, and we would expect to be strong for a sustained period of time here. And when you look at our growth rates expected on markets like aerospace and energy, that will grow in excess of GDP and up in the high single digit to double digit type of range, and then the balance of the portfolio that’s growing more at a GDP rate, you’ve got consolidated growth that if all things continue to progress well, with the general economy and these markets, would lead to growth rates that are up in that high single digit range. And we ought to be getting volume efficiencies on top of that. So again, we wouldn’t want to get too far ahead of ourselves. We’re focused on what we’re focused on first here, but I don’t think that’s unreasonable.

Operator

Your next question comes from the line of Sanil Daptardar of Sentinel Investments.

Sanil Daptardar Sentinel Investments

A few clarifications. You initially talked about your existing capacity booked for four years on the long-term contracts. Is it across the board, across all your segments – aerospace, industrial, consumer, [inaudible], medical, or is it in two segments? And secondly, is that like [inaudible] contracts? What kind of contracts are those?

Bill Wulfsohn – President and CEO

Again, roughly, half of our business is through long-term agreements. Much of that in our premium business, and when you look at that a lot of that is concentrated in aerospace and energy. Also, some long-term contracts in the medical area and industrial area. So we have them in all of our markets, but that’s where the primary concentration really – aerospace and energy.

Sanil Daptardar Sentinel Investments

Okay. The second one I had on the backlog, you mentioned about that – it’s a three-year high. Is it a reflection of the European backlog, or is it total backlog?

Bill Wulfsohn – President and CEO

That was specifically referencing the European backlog. The same could be true – we haven’t looked at it, but it could be true for the base business. We’d have to look at that. But certainly our backlog is very strong as our lead times are fairly long at this point in time. So we would describe the demand as robust.

Sanil Daptardar Sentinel Investments

Okay. In case of the earthquake in Japan, are you seeing any positive impact from that earthquake to your business? Because of the disruption there?

Bill Wulfsohn – President and CEO

What a sad tragedy, really unbelievable. And the net impact of our business is at this point there has not been a significant impact. We are seeing some additional interest and activity in industrial gas turbine billet. As you can imagine, there are some energy needs because of the situation there. And in general, over time we may see the focus on natural gas and industrial gas turbines being especially strong, which would help our business. We’ve also gotten inquiries from some customers who’ve been supplied out of Japan and some of those customers their supply of material was disrupted. But we haven’t had a major shift because of the event that took place over there in our business as of today.

Operator

Your next question comes from the line of Tim Hayes from Davenport & Company. Please proceed.

Timothy Hayes – Davenport & Company

A few questions. Starting out, on the volumes, can you run through the six end markets and give the sequential change in volumes?

Bill Wulfsohn – President and CEO

Yeah Tim, the aerospace was up 27% second to third quarter. Our energy business was actually down 1% despite the strong growth. Medical was up 18%. Industrial business was up 8%. Automotive as a function of just some of the mix management activities there down 6%. And the consumer business up 10%. So in all, up 10%.

Timothy Hayes – Davenport & Company

Okay, and then with the volumes that were helped in Q3 a little bit, was there a particular end market where you saw the volumes get pulled from Q2 into Q3?

Bill Wulfsohn – President and CEO

I think you can just see from the aerospace number and the fact that that’s 45% of our total business, that most of those comments would be relative to aerospace as the biggest driver.

Timothy Hayes – Davenport & Company

And then during the prepared remarks, you mentioned a figure – up 53% in terms of volumes I believe in the energy market. Was that specifically to the IGT, and was it year-over-year?

Bill Wulfsohn – President and CEO

It was specific to what we call power generation, and it was the year-to-year growth rate. So power generation, IGT would be the big component of that.

Timothy Hayes – Davenport & Company

Okay. And then last question. Just to get some clarification on the pieces of guidance. The reported number was 64. You back out the tax rate you’re down to 53. The nickel, the $3 million help in the quarter, I’ve got that as about a nickel benefit, so I’m down to a starting point of $0.48 as a takeoff point. Now I have some benefit from volumes that won’t recur, but yet we’re going to have perhaps pricing increases, further cyclical improvements in volumes. How do I think – if my math is correct, if I’m at $0.48, do we up or down from there looking into the fourth quarter?

Bill Wulfsohn – President and CEO

Yeah, we’re not going to give any specific quarterly guidance, but I think you listened well. So we expect to have a good quarter and achieve our original targets for the year. But Q3 was exceptional in a couple ways that I think you’ve picked up.

Timothy Hayes – Davenport & Company

Okay. Then lastly do you think some of these price increases and volumes gains – could those more than offset the health of the volumes that you got in Q3 that again was pulled from Q2?

Bill Wulfsohn – President and CEO

We would expect to see continued evidence of our pricing and mix management actions on the bottom-line. We did have, as you can just tell I’m sure from the numbers, a very strong mix in the third quarter. Just the relationship of our revenue growth rate to our volume growth rate, and some of the per-pound profit improvements Q2 to Q3. It was a strong mix period, and so as mix normalizes but as we see continued benefits from our pricing and mix management actions you’ve got a couple puts and calls there that probably stay in balance in the near term.

Operator

Your next question comes from the line of Gautam Khanna from Cowen and Co. Please proceed.

Gautam Khanna – Cowen and Co.

First, for Doug, I just want to understand the guidance fiscal ’12. So it looks like you’re implying something of around $100 million of operating income this year, fiscal ’11. You add back the $61 million – just rough numbers here - $161 million ex pension EID. And so the gain next year will be 50% of that. So we’re talking somewhere in the 240 range prior to pension. Is that a fair characterization?

Bill Wulfsohn – President and CEO

Maybe in a follow up call we could just help you through that, but I’m not sure where you get your starting point from.

Gautam Khanna – Cowen and Co.

The $100 million you mean?

Bill Wulfsohn – President and CEO

Yeah. Why don’t we work through all that in a follow up call.

Gautam Khanna – Cowen and Co.

Okay. I’m looking after corporate costs. Is that how you’re talking about operating income?

Bill Wulfsohn – President and CEO

No, it’s just simply our operating income reported on the income statement adjusted for the pension EID line.

Gautam Khanna – Cowen and Co.

Got it. Okay. So the second question is, on pension, could you remind me what your smoothing period is?

Bill Wulfsohn – President and CEO

Our smoothing period?

Gautam Khanna – Cowen and Co.

Yeah, so the amortized losses and gains, outside the corridor or what have you. How long does that run? Because your actual service cost is somewhere in the $20-25 million range, right? Yet the expense is $61 million. I just want to understand how many years of losses are we – does the ’08 loss come out of the number this fiscal?

Bill Wulfsohn – President and CEO

It’s a very long tail, so on the EID portion specifically, you’re talking about a period of 13 years that that gets amortized over. And then each year obviously that would get adjusted for what happens in the current year.

Gautam Khanna – Cowen and Co.

Okay, so in other words it’s not going to drop dramatically year on year, pension in 2012?

Bill Wulfsohn – President and CEO

You know, the assumptions that go into first of all the total asset balance in the plan, which if markets hang in there at their current levels would be certainly a positive year-to-year. The assumed rate of return on those assets, which doesn’t change a whole lot year-to-year, but then the discount rate on the liability side, which was at a very low level last year for us and every company that has a defined benefit plan we would expect to see an increase in that underlying discount rate assumption, which would also help in terms of the earnings impact next year. So this year we had about $0.85 a share in pension expense, and we would expect something, assuming interest rates and equity markets and all that hold in, at directionally a chunk lower than that.

Gautam Khanna – Cowen and Co.

If you were to shut the plant at market today do you have a sense of what that would be?

Bill Wulfsohn – President and CEO

Not really. I would just encourage you, with our next call as we typically do at that time of year we’ll fully lay out the assumption, which at that point in time unless there’s a major change in the underlying enrollment in the plan would be a fixed number for the full year.

Gautam Khanna – Cowen and Co.

Okay. And your comment on the titanium fasteners, I may have missed what someone else had asked, but are you seeing this stuff actually flow through? In other words, are your customers actually shipping the fasteners, or are they just pre-positioning inventory in advance of anticipated orders down the road? How much visibility do you really have as to this being a sustained trend?

Bill Wulfsohn – President and CEO

We don’t have complete visibility to that as you can imagine. We think it’s really, both we think the consumption, the actual consumption is up, and is the primary draw, but there may be some inventory build in anticipation of the 787 moving into a higher production level.

Gautam Khanna – Cowen and Co.

And as you guys know, Boeing Commercial’s trying to aggregate the demand of its Tier 1 and 2 suppliers with respect to fasteners, and go direct to the fastener OEMs and sort of disintermediate the distribution relationships. How does that affect you guys?

Bill Wulfsohn – President and CEO

Well, we won’t comment specifically on the specific negotiations or supply relationships, but I can tell you we value very much the relationship we have with the people who immediately process our material and want to make sure we do a good job of supplying them. And of course, we recognize that the OEMs are the ultimate customers, so we do our best to try to not politicize that and to really service both of those needs and not create a conflict in the process. So I don’t think it will either help us or leave us disadvantaged.

Operator

Your next question comes from the line of Mark Parr with KeyBanc Capital. Please proceed.

Mark Parr – KeyBanc Capital

So Bill, it was nice to see that number you printed this morning. Great job. And I know there’s been a lot of discussion about all the takeaways out of the number, but any way you cut this it was really a breakout quarter for you guys and congratulations on tremendous execution. And in the face of this recovering demand situation, you really are kind of getting it both ways. The market’s reacting very nicely to your stock today and congratulations on that.

Bill Wulfsohn – President and CEO

Well thank you. A lot of people worked very hard in the quarter.

Mark Parr – KeyBanc Capital

I believe it. I honestly believe it. One of the things, Bill, you have been mentioning is the mix enhancement and that certainly is something that’s not new to Carpenter, but it’s something you and your team have been working on aggressively. Could you talk a little bit about how much more you have to go in that regard? And maybe how much more is there, and how long does it take to get there? Can you give us some more color along those lines?

Bill Wulfsohn – President and CEO

Well, I think you have both short- and long-term impact. It is our number one priority without question. You have the short-term impact, which is as we see more demand than our real supply capabilities, it gives us the opportunities to price up some materials, which were lower value, and sometimes we find that the customer finds enough value to continue to have a supply. Other times, they’ll seek an alternative because it’s more of a commodity material. But that gives us mix management opportunity in the short run. And then the new technology areas that we’re focusing on are so fundamental to our future. I really believe that as the company has reinvented itself in the past we need to continue to reinvent ourselves for the future so we stay out ahead of those who are always trying to encroach upon the markets that we’re in today.

Mark Parr – KeyBanc Capital

Between you and Latrobe, you both added good sized VIM furnaces in the last downturn. And I’m just curious what sort of utilization rates are you seeing out of your VIM capacity as you look into your existing backlog over the next couple of quarters?

Bill Wulfsohn – President and CEO

Well, Dave can speak more specifically, but the good news is that with the investment that was made, it is enabling us to support the market demand that we are seeing today, and as we discussed, while we may need to expand some re-melt or hot-working capabilities, we think that we’ve got a really solid foundation from a melt standpoint, so that’s not likely to be our bottleneck for at least a few years to come.

Mark Parr – KeyBanc Capital

That’s why I was just curious what the capacity utilization rates were for that, given that’s where you really focused in the last downturn.

David L. Strobel - Senior Vice President, Global Operations

Just to add a couple comments there Mark. Our sales and Latrobe are different key products that we’re producing. When you add a VIM furnace like we’ve added, it’s a big chunk of capacity and the new furnace is running really well for us overall from a VIM standpoint. To hang a number on it, I’d say we’re probably around 85% or so. We have been receiving qualifications for that new furnace, so that gives us a lot of additional flexibility as far as mixing and matching and what products we’re melting in what furnace, to further optimize our yield performance and downstream cost picture as well. So again, the short-term focus from capacity adds will really be focused on the re-melting and hot-working parts of the equation.

Mark Parr – KeyBanc Capital

All right, so by hot-working, is it fair to assume that you’re thinking about a rotating forge or is it just more of a forge press?

Bill Wulfsohn – President and CEO

Press or forge we’re looking at.

Mark Parr – KeyBanc Capital

If you made that decision today, and signed a contract, how long would it take to begin commissioning on one of those new major pieces of equipment?

Bill Wulfsohn – President and CEO

Just ballparking it, I’d say about two years before we’d have hot commission.

Mark Parr – KeyBanc Capital

Is the utilization rate of that equipment, your hot-working equipment, meaningfully higher than 85% right now?

David L. Strobel - Senior Vice President, Global Operations

Absolutely. It’s high 90s, Mark.

Mark Parr – KeyBanc Capital

Wow. And again, one last question. I don’t want to beat this to death, but is there other call it non-legacy capacity, is there capacity outside of you that you could outsource to continue to satisfy customer growth needs?

David L. Strobel - Senior Vice President, Global Operations

Good question. There’s actually two aspects. One is to take a look at, again, from an OEE standpoint, or take a look at the availability, performance, and quality of the performance of our current units and how do we improve that. We’re working very hard on that and there are some opportunities that we’re exploring and we’re working with others on as far as taking some products and getting some assistance outside.

Bill Wulfsohn – President and CEO

Just for Gautam’s benefit and really everybody’s benefit, in terms of the operating income ex pension base that we’re talking about, if you take some specific numbers off our financial statements that are attached to the press release, our operating income just on its own, fiscal year to date, is $61.4 million. And then if you refer back to one of our supporting schedules on the pension EID number for fiscal year to date is $26.4 million. So in total it’s about an $88 million run rate on our operating income ex pension EID through nine months of the year.

Operator

I do have a followup question coming from the line of Sanil Daptardar from Sentinel Investments. Please proceed.

Sanil Daptardar Sentinel Investments

You did present a 2013 or 2014 view going to the pre-EBITDA levels, did you just say that your operating margins can go back to 17-18% from the 13% that you are currently? And the cause of it might be price and the mix. How would your mix stand to be? What kind of volumes would be driven by the higher-margin businesses?

Bill Wulfsohn – President and CEO

Doug can probably give you a more specific answer from a quantitative perspective. I would just say that as you know, the investment that was made in the down cycle was in premium melt capacity, supporting primarily aerospace and energy. We’ve made the Amega acquisition. We’re expanding the titanium business. We’re talking about re-melting and hot-working capabilities, which are primarily focused on those more premium areas that are related to aerospace and energy. So of course we have other parts of the business which, over time, will become more commodity in nature, and that will offset that. Some of that we’re trying to crowd out of the portfolio, but some of it will be there to baseload what we do. Certainly the types of objective that you said are very much the types of objectives that we have for the business.

Doug Ralph – CFO and SVP, Finance

And what I’d add to that is I think directionally that would be right. So during our peak, when we were earning $350-360 million of EBIT, our margins were up in the 20% range, and so directionally our business would move back toward that. I will say though, as a qualifier, that margins can be a tricky way to look at the business because we do have low-value products that have a good margin and so profit per pound is increasingly the way that I think it’s better to look at our business. That’s why we’re disclosing segment volumes, to enable you and all investors to be able to follow our progress there. I think both will move in an upward direction, but margins would not be the best way I’d look at that.

Operator

At this time I’m showing no further questions in queue. I would like to turn the call back over to Mr. Bill Wulfsohn for any closing remarks.

Bill Wulfsohn – President and CEO

Okay. Well, thank you all for participating in the call. We’re obviously pleased with the results of the quarter, but we know we have a lot more work to do, so we’re continuing to push on the price and mix management, also cost. We’re continuing to focus on expanding our capacity to meet the demands for the high-value products as we’ve talked about, and we’re looking forward to giving you further updates on our initiatives during our fourth quarter call at the end of July. So thank you, and goodbye.

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