Carpenter Technology's CEO Discusses F4Q 2011 Results - Earnings Call Transcript

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 |  Includes: CRS
by: SA Transcripts

Carpenter Technology Corporation (NYSE:CRS)

F4Q 2011 Earnings Call

July 28, 2011 9:00 AM ET

Executives

Mike Hajost – VP, Treasury and IR

Bill Wulfson – President and CEO

Doug Ralph – SVP and CFO

Dave Strobel – SVP, Global Operations

Analysts

Chris Olin – Cleveland Research

Gautam Khanna – Cowen and Company

Steve Levenson – Stifel

Edward Marshall – Sidoti & Company

Mark Parr – Keybanc

Brian Yu – Citi

Tim Hayes – Davenport & Company

Operator

Good day ladies and gentlemen and welcome to the Carpenter Technologies fourth quarter earnings conference call. My name is Juanita and I’ll be your coordinator for today. At this time, all participants will be in a listen only mode. After the speaker’s remarks, you’ll be invited to participate in the question-and-answer session towards the end of the call. 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

Thank you Juanita. Good morning everyone and welcome to Carpenter’s earnings conference call for the fourth quarter ended June 30, 2011. This call is also being broadcast over the internet.

With us today are Bill Wulfson, 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 June 30, 2010 10-K and September 30th, December 31st 10-Q’s and its March 31st, 2011 10-K, and the exhibits attached to those filings.

I will now turn the call over to Bill.

Bill Wulfson

Thank you Mike. Good morning everyone and thank you for joining us for our fiscal year 2011 fourth quarter earnings call. About this time last year, I had just joined the Carpenter team in my current role as CEO.

As you will recall, we were coming off of a challenging year, due to weak economic environment. What a difference a year makes. We have benefited from strong, sustained demand across each of our end market segments.

In addition, the Carpenter team has made great progress in several important areas; starting with the customer, we’ve strengthened many of our key customer relationships, we’ve expanded our market share in key segments, and much of these gains have been driven by expanding and extending our long-term agreements.

We have also dramatically increased our profit. Net income is up $69 million versus prior year. Much of this gain has been driven by volume, which increased 25% year over year. We have also made fundamental improvements in our profit per pound from pricing and our mix management actions, and we’ll discuss those more in detail later in this call.

Finally, we took aggressive actions to position the business for continued growth. We took important actions to expand capacity in our titanium, power and premium alloy businesses. We also announced several key acquisitions and joint ventures, which serve to expand our scale and scope.

Even with these investments, we strengthened our capital structure, and we believe these actions were essential to give us the financial flexibility to take full advantage of opportunities during this future and current business cycle to drive continued growth.

I will now speak more specifically about our fourth quarter results. We continue to see strong top line momentum in the business, especially in our strategic growth markets of aerospace and energy. Overall, volume was up 12% in the quarter, driven by 13% volume growth in aerospace and 79% growth in energy.

Perhaps just as importantly, demand in these markets, along with the strategically important medical market, continued to show signs of continued expansion. In addition, much of this demand growth is for our higher value premium products.

As a result, we are fortunate enough to find that in many instances, customers are working with us to extend our long term agreements and expand their volume commitments. As exciting as this is, it puts the onus on us to take additional actions to ensure that we have the necessary capacity to meet our customer’s growing needs.

In the quarter, we saw very positive results from our mix management, pricing and cost initiatives. Looking at price and mix, for the second straight quarter, revenue growth has outpaced volume growth. In aerospace, revenue in the quarter, excluding surcharge, grew 17% on 13% higher volume. In industrial, revenue grew 25% on 11% higher volume.

Our energy revenue grew 189% on 79% higher volume. Consumer revenue was up 10% on 4% higher volume. In automotive, sales were up 13% on 2% higher volume and finally, medical revenue was up 24% on 2% greater volume. So in total, revenue was up 31% on 12% greater volume.

We achieved these results by increasing prices where appropriate. However, most of our margin gains were driven by our mix management efforts, which focused on using our limited capacity for higher value products.

We also exited some products taken on during the downturn that were more commodity in nature, and thus have lower margins. While we’re pleased with our results to date in this area, we still expect to show more progress in this critical area in fiscal year ‘12.

Finally, our strong results in the quarter were driven by strong cost control. This has been a major area of focus for us in the organization, and the organization has done a great job; both in terms of cost control and achieving production efficiencies.

In addition, while not impacting the quarter, we took the action to close our pension plan to new hires after the end of this calendar year.

Switching gears, as we look forward to fiscal 2012, we have three core priorities. Our first core priority is to continue to strengthen our base business. This will require that we expand our output of premium materials, continue price and mix management actions and control costs while driving further production cost gains.

Our second core priority for fiscal ‘12 is to successfully integrate Latrobe and drive anticipated synergies to the bottom line. I want to reiterate that we are very excited about joining with Latrobe. We think Latrobe is a great company. It has great people, and it also has a great business. The Latrobe team has done an impressive job over the last few years enhancing their capabilities and business mix.

It is well positioned and attractive end markets, which are also experiencing strong customer demand. We believe Latrobe’s products and end markets are highly complementary to Carpenter’s.

While all this is great, we are doing this transaction because we believe it will create shareholder value. As previously stated, the acquisition is expected to be accretive to Carpenter during its first full year, even when one-time costs are factored in.

We also expect to see significant synergies over time. While there are some cost synergies in areas such as purchasing, the majority of gains will come from increased output. We believe the output of the combined system will be greater than simply adding each company’s current capacities together, and this is very important as it will help both company’s meet growing demand, especially in the aerospace and energy market.

In addition, and very importantly, the combination of our volumes will create a larger critical mass and thereby help us to justify our next major increment of capacity in premium melt, which will of course, be a significant investment.

Finally, we believe their people, market knowledge and assets, will help us to accelerate the commercialization of several of Carpenter’s high potential products, especially in the areas of stainless, landing gear, primo net and temper top.

I’d also like to note that when the transition closes, we will welcome two new Board members; Tom Hicks and Steve Carroll. Having had the personal opportunity to work with these two individuals over the last several months, I believe they will bring great experience and perspective to our Board.

Our third core priority for fiscal year 2012 is to take additional actions to ensure that we sustain future growth. In this area, expanding our capacity is a high strategic priority. As previously mentioned, demand for our premium products is increasing at a greater rate than our ability to currently expand capacity.

To alleviate these constraints, we have already initiated actions. We have focused effort to drive higher output from our existing assets through increased staffing and focus on productivity. We have also announced key capacity expansions at our Dynamet Florida operations in the strategically important market area of powder, and in our premium metals operation in Redding, where we’ve announced the expansions of premium re-melt, forge finishing and our knelling operations.

Even with these actions, we anticipate the need to add additional premium capacity to adequately meet the strong demand that’s growing for our premium products.

Since this is such an important and costly initiative for Carpenter, we’re taking time to complete a full assessment of options, but we believe we’ll in a position to provide more color on our intended actions in this area in the near future.

In addition, to accelerate growth, we continue to invest in new product development. We’re particularly excited about market interest in our Primomet product lines and our stainless steel landing gear initiative.

Lastly, to accelerate growth, we will continue to see accretive acquisitions. As you recall, we’ve been very active in this area over the last year. Earlier in the year, we announced two joint ventures with Sandick [ph] to further advance our strong position in high value power metals.

Later, we announced the purchase of Amega West, and more recently the follow on purchase of Oil Field Alloys, both of which provide us with better downstream visibility to grow in the oil and gas market, and they also serve as a foundation for growing our precision finishing capabilities. And of course, we finished the year with our recent announcement to acquire Latrobe Specialty Metals.

As we look forward, our first priority is to integrate these ventures effectively. That said, we will continue to prudently look at additional opportunities as they become available this year.

So in summary, from my perspective, it’s been a good and busy first year. I’m proud to be part of the Carpenter organization. Carpenter has great people. They’ve worked hard this year and you can see it in the results.

I also believe we’re well positioned for more good things ahead. We’ve got the right people, the right markets, the right strategy and the right capital structure.

And with that, I’ll turn the discussion over to Doug, who will walk through the financial results for the quarter.

Doug Ralph

Okay, thanks Bill. We are pleased with our fourth quarter results. Our top line growth rates continue to be very strong and the spread between our volume and revenue growth rates for the past two quarters reflects good execution of our pricing and mix management initiatives as Bill had outlined.

In terms of the bottom line, you’ll recall that our third quarter was influenced by some positive items, including a very low tax rate. Our fourth quarter earnings exceeded our internal forecast, driven by volume that was even higher than a very strong third quarter, continued good progress on our pricing and mix management initiatives, leading to further increases in our profit per pound, and good operating performance.

This was all during a time when we had a lot on the plate with our announced acquisitions and refinancing initiatives, so a good job by the organization.

With that as background, let me walk you through our fourth quarter results more specifically. Net sales in the quarter were $484 million or 33% above a year ago. Excluding raw material surcharge, sales were up 31%. The Amega West acquisition accounted for about 3% of the year to year growth.

Overall pounds shipped increased 12% from a year ago. Volume of special alloy products grew 7%. Titanium products increased 15% and stainless steel products were up 13%.

As you’ll remember from last quarter, we are providing volume by reporting segment to help you track our progress in improving our profit per pound, which remains a top priority. Premium alloys, or PAO segment volume was up 40% and our profit per pound improved $0.52 against the same period last year and was up $0.37 versus the third quarter.

AMO segment volume was up 7% and profit per pound was $0.31 higher than the year ago quarter and $0.02 above the third quarter. So for the past two quarters, we’ve seen good progress on this metric.

Continuing down the income statement, gross profit was $77 million compared with $43.7 million in last year’s fourth quarter. The higher gross profit level was driven by higher volume, an improved product mix, price increases, and better operating performance.

SG&A expenses for the quarter were $39.6 million or 11.2% of revenue X surcharge, compared to $33.5 million or 12.4% in the prior year. The year to year difference is primarily due to the addition of Amega West overhead costs and higher compensation related expenses.

Operating income for the quarter was $35 million compared with $10.2 million in last year’s fourth quarter. Our operating margin, excluding surcharge and pension interest, earnings and deferrals, or EID as we always quote it, was 12.4% and 13.1% if you exclude the Latrobe transaction costs. This compares to 7.3% in last year’s fourth quarter.

Finishing up the income statement, other income of $2.8 million, compared to $.9 million last year. The difference is mainly due to residual payments of $1.6 million received under the expired CDSOA anti-dumping subsidy program.

The tax line was more straightforward this quarter with tax expense of $7.7 million or 23% of pre-tax income compared to $.7 million or 11% of pre-tax income in the 2010 fourth quarter.

Overall, reported net income was $25.5 million or $0.57 per diluted share, and would have been $0.61 per share excluding the impact of Latrobe transaction costs. This compares with fourth quarter net income of $5.9 million or $0.13 per diluted share in 2010.

Free cash flow for the quarter was $61.5 million, driven by earnings and working capital improvement. For the full year, free cash flow was negative $88.9 million, a bit better than we had previously predicted, with about half of the cash flow result due to the Amega West and Oil Field Alloys acquisitions and half due to higher working capital levels related to stronger business growth.

Overall, capital spending for the year was just under $80 million, with $44 million in the fourth quarter. Note that intercompany sales to Amega West for use as rental assets gets classified as CapEx on our statements. This accounted for $6 million of the $80 million spend, leaving about $74 million of ordinary capital investment for the year.

We improved our balance sheet and liquidity during the quarter as we issued $250 million of ten year bonds and increased our credit facility from $200 million to $350 million, while extending the maturity out to five years. We feel good about getting these accomplished during the quarter and being able to hit the credit markets at a good time.

Our ending June cash and marketable security balance was $523 million. Excluding the bond proceeds, our cash balance was $275 million and above the $260 million level we predicted on our last call. Our net cash position at the end of the quarter was $15 million.

Our total liquidity grew to nearly $870 million with the increased cash balance and larger available revolver. $100 million of this liquidity will be used to pay off our bond coming due in mid-August and $170 million of cash will be used as part of the Latrobe acquisition. The remaining $600 million of liquidity provides flexibility to support future growth initiatives and take care of the next $100 million of debt maturing in less than two years.

Let me close with a few comments on our outlook for the current fiscal year, and the following does not include the eventual impact of the Latrobe acquisition. As Bill mentioned, we still expect revenue to grow in excess of 10% this fiscal year. With over half of this in our order backlog already, this looks very solid.

If we can succeed in bringing up more capacity through our internal productivity efforts, capacity expansion projects and utilizing the Latrobe assets post-closing, we have the potential to do better than this based on strong customer demand.

We also still expect base operating income, excluding pension EID expense to get to a better apples to apples comparison, to be approximately 50% higher than fiscal year ‘11. To be clear, we are talking here about our reported operating income with an add back for the pension EID line that you can find on our press release schedule and SEC filings.

The key drivers of this will be continued profit per pound progress from pricing and mix management actions and good growth on our titanium, powder and Amega West businesses.

EPS gets a little more complicated, so it’s worthwhile to go through a couple of the pieces. We finished fiscal year ‘11 at $1.59 per share with a run rate of $2.42 per share in the second half of the year. We just finished work with our actuary on our non-cash pension expense for fiscal year ‘12.

Due to higher asset values and a higher interest rate used to calculate liabilities, our fiscal year ‘12 pension expense will be $0.55 a share this year compared to $0.84 in fiscal year 2011.

We expect our effective tax rate for fiscal year ‘12 to be back to a normal level of 33%, so that will be a negative in the EPS comparison, since the fiscal year ‘11 tax rate was only 18%, so that’s a big impact item on our fiscal year ‘12 EPS.

Interest expense will be about $7 million or $0.10 per share higher than in fiscal year ‘11 as a result of our higher debt level. We also expect the CDSOA income to end, which takes out $2 million or about $0.03 a share from fiscal year ‘11.

While we are well positioned for a good year results, we expect our first quarter EPS will be impacted by the normal business seasonality and plant shutdowns we have experienced over the years in the first quarter. In addition, earnings in the quarter will be impacted by a much higher tax rate and Latrobe transaction costs of about $3 million or $0.06 a share assuming we close in the quarter.

On Latrobe, if we close sometime before the end of the first quarter, we still expect to be slightly accretive in fiscal year ‘12, including the transaction related costs. We also expect the transaction to be strongly accretive in the out years including $25 million in net annual pre-tax synergies.

Latrobe will also result in changes to our external segment reporting when it closes. We are working to finalize the new structure and will be proactive in helping you make the transition when this happens.

Finally, with respect to cash flow, excluding the Latrobe acquisition, we expect to have modestly negative free cash flow this year as stronger earnings are offset by a higher level of CapEx to expand capacity and some minor expected working capital increase to support growth.

We also have an estimated $28 million in cash funding requirements for the pension fund this year. Our total CapEx investment, including Latrobe is still expected to be around $200 million.

So to sum it up, it’s been a good year of financial results and strengthening of our capital structure. We continue on track to achieve our target of returning to our prior peak level of profit and then beyond and we are well positioned financially to fund the growth investments that are needed to execute our strategy.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) Our first question comes from Chris Olin from Cleveland Research. Please go ahead.

Chris Olin – Cleveland Research

Good morning.

Bill Wulfson

Morning.

Chris Olin – Cleveland Research

Curious on the stainless steel and some of your special alloy markets. Do you anticipate any impact in the first quarter associated with buyer pauses or any kind of pull back in activity since the surcharge started falling or is most of that been already kind of absorbed through the system?

Bill Wulfson

Well we have some normal seasonal demand as Doug referenced due to customer shutdowns and the like. And we’ve been focusing extensively on our mix management efforts to take our available capacity and make sure it’s directed where we can get the greatest value. So we’re not seeing any significant pause as it relates overall to the demand other than just related to the normal seasonal activities.

Chris Olin – Cleveland Research

Have you seen on the titanium side, the impact from 787 production ramp or inventory draw down yet? I’m just wondering how much the growth is directly tied to that platform as opposed to medical or other areas.

Bill Wulfson

Right. In that area, we have seen very strong demand for titanium fasteners. We don’t see that there is any inventory effect that’s per se driving that, so the inherent demand is strong and frankly, we only see upside associated with increased build of the 787 in the future.

Chris Olin – Cleveland Research

Do you have a utilization number that you could give the Dynamet operations?

Dave Strobel

This is Dave Strobel. The utilization right now is 80% to 85% for the finished operations, which is why we’ve announced a capital investment there to expand our finish operations down there in Florida.

Chris Olin – Cleveland Research

Okay. Thank you.

Operator

Thank you for your question.

Dave Strobel

I would just note though, just to add that we have announced an expansion which will add significantly to our capacity and so as the market grows, we think we’re very well positioned to support the industry.

Bill Wulfson

Operator next question.

Operator

Thank you. Next question comes from Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company

Hi. Could you provide some clarity around the fastener comments? You know we saw Precision Cast Parts reported flat sequential fastener sales today and I know you guys have sort of indicated previously that you’re shipping more and so I’m wondering, do you have any sort of line of site as to whether the stuff is actually flowing through the end customer or is this kind of an inventory build by the fastener OEM’s. And then relatedly, if you could just update us on what your lead times are for the various fastener stock; you know, for titanium bar, titanium coil and then nickel and stainless pieces as well.

Bill Wulfson

From a nickel based fastener viewpoint, we think that inventories in the chain downstream are declining. We did see higher demand in the second half of fiscal year ‘11 versus the first half. Right now, overall the demand is probably 75% to 85% of the previous peak and we expect that that will continue to increase when the excess supply and distribution channel begins to work its way through the system.

Again, from a titanium fastener standpoint, we’re seeing record demand and we only expect that to increase further. And from a lead time standpoint, Dave Strobel will speak to that.

Dave Strobel

Yeah, the titanium side new fastener orders on forecast would be looking at very late this calendar year as far as delivery, so we have very good demand there. On the nickel base side, we’re actually booking new orders out into our third quarter or the approximately the February time frame of next year.

Gautam Khanna – Cowen and Company

Okay. And is that – when you mention that, that’s for both titanium and bar, is that right? So you have about six month lead times, five month lead times?

Dave Strobel

That’d be correct.

Gautam Khanna – Cowen and Company

And is that an aerospace phenomenon or is it also driven by the metal market, which apparently has been strong too.

Dave Strobel

The medical market has been strong for us and that is one of the markets where we’ve had some good success in terms of expanding our long term agreements and picking up some additional share as a result.

Gautam Khanna – Cowen and Company

Okay, because what I’m trying to isolate is, do you think that this lead time extension is due kind of primarily to the aerospace demand or could it just be because medical is sort of leading the way as well? Which is kind of the greater influence on this lead time? Where is the order book stronger?

Dave Strobel

I think it’s strong in really in both of those areas.

Gautam Khanna – Cowen and Company

Okay. Thank you guys.

Operator

Thank you for your question. Next question comes from Steve Levenson from Stifel. Please go ahead.

Steve Levenson – Stifel

Thanks. Good morning everybody.

Bill Wulfson

Morning.

Doug Ralph

Morning.

Steve Levenson – Stifel

Could you give us an idea what sort of gains you think you could get by shifting production from your vim over to Latrobe’s vim? How much additional aerospace material could you deliver?

Bill Wulfson

Let me comment in general and then I think Dave can give you more specific answer. Of course we have some unique production capabilities. Also, Latrobe has different unique production capabilities and we believe that they’ll be able to produce some of the materials we produce in Redding today more efficiently and vice versa.

And that’s great because of course, as we mentioned, demand is high. So Dave can speak maybe more specifically on an equipment basis, but that’s really the basis of expecting to get greater output and from that, some significant synergies.

Dave Strobel

From a total premium capacity standpoint, we’re really excited to be working with their folks. In taking a look at the rim operation, as Bill mentioned, when we start to work our way through the integration process with them in detail, we’ll look at the opportunities as far as moving some of our grades to them and taking advantage of that capacity, and perhaps at the same time, the ability to improve yields and reduce costs. That’s our goal with the integration effort.

We also have a nice re-melt facility there and of course we’ll be working with them to expand that as well. But we need to go through the integration details to really be able to answer that question in more detail.

Steve Levenson – Stifel

Got it. Thanks.

Bill Wulfson

And in terms of dimensionalizing Steve, I think that’s one of the reasons why the deal has such an attractive financial profile, so when we talk about accretive in the first year, even including transactions costs and $25 million of annual pre-tax synergies, those are all the kinds of things that are leading to those numbers.

Steve Levenson – Stifel

Got it. Thanks. Secondly, with the new models of 737 and A320 now in backlog for Boeing and Airbus, are there opportunities for you to increase your content with either the same materials or different materials?

Bill Wulfson

Well certainly we have strong supply positions today and as the aircraft goes through additional re-design, some of those details are being worked through and we’re working aggressively for ultimately, 2015, when the new A320 will be moving forward to ensure that we have at least the same level of demand and hopefully increase our participation.

But those decisions if you will, in many cases, are ongoing right now just because of the timing of the delivery of the aircraft.

Steve Levenson – Stifel

Got it. Thanks very much.

Operator

Thank you. Next question comes from Edward Marshall from Sidoti & Company. Please go ahead.

Edward Marshall – Sidoti & Company

Yes, I’m wondering if you could complete the thought that you started on EPS. You started talking about some of the tax situations as well as the EID, but you’ve also had some pretty decent guidance for the operating lines. So can you kind of help us complete that thought or give more detail?

Doug Ralph

I think I’ve given a lot of detail. We did provide good guidance on the operating income line and because there is a lot of puts and calls on the EPS line, we just really wanted to help you by calling out some of those significant puts and calls.

Edward Marshall – Sidoti & Company

What would be the breakdown of the pension expense as it would run through EID and what would run through the segments? Can you give us a little bit more color on that then?

Doug Ralph

Sure, do we have that Tom? So the EID portion Ed, that we’re looking at for fiscal year ‘12 is about $14.5 million and the balance would be in the service costs.

Edward Marshall – Sidoti & Company

Okay. And then if you could just quickly – I’m assuming that $2.4 million for Latrobe was say lower fees or other closing fees, onetime expenses so to speak?

Doug Ralph

Yeah. So we had investment banking fees. You have legal fees. We had some third party fees associated with our due diligence process and then looking ahead into the current quarter and what we would anticipate there, you’d have the remainder of investment banking fees, some additional legal fees, some asset appraisal fees. Those are the things that are making up that cost.

Edward Marshall – Sidoti & Company

Do you have estimates on the intangible write off or the inventory write ups yet?

Doug Ralph

They are estimates because they were developed as part of our due diligence but once we get closer to closing we can refine those. But we estimate that we would have total write-ups in the magnitude of $135 million that would then be taken over a number of years and then we would also have a onetime write up in inventory of about $10 million that would be written off over one inventory turn cycle.

Edward Marshall – Sidoti & Company

Okay. Thank you guys.

Doug Ralph

You’re welcome.

Operator

Thank you. Next question comes from Mark Parr from Keybanc. Please go ahead.

Mark Parr – Keybanc

Thank you kind operator. Good morning.

Doug Ralph

Morning.

Mark Parr – Keybanc

Hey, I was curious about your 2012 commentary a bit. You know the base business X Latrobe and two what extent may the 10% growth that you’re looking as kind of a base line. Is there any pricing in that or is that all volume? Is that an equivalent mix? Anything in that 10% growth that might enrich Carpenter’s mix or maybe lower it a bit?

Bill Wulfson

Yeah, we just characterize Mark that we think much of that is going to be revenue growth and I think the key of getting volume...

Mark Parr – Keybanc

Do you mean by volume instead of pricing? Is that what you’re meaning?

Bill Wulfson

Well through pricing and mix management efforts. And so revenue growth in excess of 10% will be driven largely by revenue and excessive volume growth and in order to move the needle up on that overall revenue growth, it’s going to be getting more volume out through our efforts on internal productivity improvements, some of the capacity increases and then ultimately when we close, the benefits of the Latrobe acquisition.

Mark Parr – Keybanc

Okay. In terms of – again this is – I appreciate that. Another question I had is, as you look to combining Latrobe and Carpenter from a marketing perspective, and yeah you kind of look at Latrobe’s kind of outsized aerospace and defense exposure. I’m just curious. Would you anticipate some of the early revenue synergies to be coming more from aerospace or more from energy markets or industrial? I mean is there something in particular that really excites you that you think could create some better revenue momentum sooner as opposed to later?

Bill Wulfson

Well the good news is we do see a demand really across all of our end market segments and they’ve done a nice job to build up an attractive business mix for their base businesses as we have. And so I think once we’re to the point where we can share greater details with each other, we’ll be looking really to see if we can’t raise the overall ability to meet all of the end market output, and it won’t necessarily be disproportionally focused on any particular segment.

Mark Parr – Keybanc

Okay. Well congratulations on the results and good luck with this exciting period you’re embarking on.

Bill Wulfson

Thank you.

Operator

Next question comes from Brian Yu from Citi. Please go ahead.

Brian Yu – Citi

Great. Thanks and congratulations on a solid quarter. Bill, if I look at volumes that you’re accomplishing right now and you’re pretty close to capacity and compare it to where you were the last cycle, you have more melt capacity. The profits obviously haven’t returned to where they are, and you guys are making good progress along the way. When you look at your competitors out there, do you think that they’re operating at as high of a rate as where you are? And then follow up question on that would be at what point do you think we could see everyone within the industry start to get more pricing power. Basically the market is really tightening up not just for yourself but for the whole industry.

Bill Wulfson

Sure. In that respect, we do perceive overall that capacity is pretty tight, especially in the nickel based alloy area, which is why we’ve really focused so much of our attention, focused not just on mix management; and by mix management we mean moving more and more of our nickel based capacity to produce nickel based product, but in addition to that, to expanding our capacity.

And we believe that that’s the right solution for us and it will help alleviate some of the supply demand pressures that exist in the industry today. That’s a very important move. So you get some pricing leverage in that respect, but our real goal is to enhance our mix and to increase our output.

Brian Yu – Citi

Okay. Do you think the rest of the industry is operating at as high of a rate where you’re at today?

Bill Wulfson

Well, it would depend upon which area. Again, in the nickel based area, I think that you would tend to find that things are overall tighter than in the general stainless arena.

Brian Yu – Citi

Okay. And if you look at your guidance for next year, it seems like you’re probably looking at a number close to $200 million operating profit before EID expenses and that’s not too far for where you’re running at today. When you look at your guidance relative to the range of probability – I know I’m trying to pin you down a little bit – would that be on the lower end of what you would expect to achieve or is that right in the middle?

Doug Ralph

Brian, I think that’s a realistic estimate and as you know, we’re focused on return to our prior peak and I think that would represent a significant step in closing that gap to prior peak.

Brian Yu – Citi

All right. Thank you.

Operator

Next question comes from Tim Hayes from Davenport & Company. Please go ahead.

Tim Hayes – Davenport & Company

Good morning. Could you give the sequential change in volumes in the June quarter for your six end markets please?

Doug Ralph

Sure Tim. Aerospace was actually down 5%, energy up 22%, our medical business up 8%; industrial down 1%, automotive plus 3%, consumer minus 3%, so overall we were essentially flat across the corporation quarter to quarter volume.

Tim Hayes – Davenport & Company

All right. Thank you.

Doug Ralph

You’re welcome.

Operator

Your next question in the queue from Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company

Yes, just a couple follow ups. I wanted to ask about that fastener order pattern during the quarter. Did you see a pick up through the quarter, June quarter is better than May and April or could you comment on kind of the flow and how they’re trending in July. And I have another one as well.

Bill Wulfson

From my standpoint, on the operations side, what we’re seeing right now is very similar to what we had reported on during the call last quarter. We’re seeing the customer lead times for new orders out in that six to eight month time frame. But channel checks have been strong and I think the right way to look at this is that there has been a gradual and continual increase in the overall demand pattern. I wouldn’t describe it as a spike. And our forecast going forward is that we expect that that pattern will continue.

Gautam Khanna – Cowen and Company

Okay. I guess the question is at some point during the quarter, I thought you remarked that titanium coil lead times were six to eight weeks. They weren’t as long as the bar lead times. I was wondering if that’s changed.

Bill Wulfson

Let me just comment a little bit further on that. When I’m giving you these lead times in regards to the six to eight months, that type of thing, that’s for a new unforecasted demand that we have coming in from a customer. So our shops as far as new orders coming in would be busy out to that time frame.

From a manufacturing lead time perspective, as far as once we have an order and have it in process, that’s very much different versus new orders coming in to the order books. Do you follow that?

Gautam Khanna – Cowen and Company

Yes I do and has that metric changed through the quarter, the manufacturing lead time.

Bill Wulfson

The manufacturing lead times, I’d say that with some of the work that was done from an execution standpoint on the nickel based side, and I know that titanium side we’re working on the same thing, and with the additional capacity we’ll be putting in there, those manufacturing lead times, our goal is to bring that down. A couple days there helps a lot.

Gautam Khanna – Cowen and Company

Okay. Sure. Two other quick ones. Just if you could comment – you mentioned about working on customer relationships since you’ve been there Bill and you obviously have done a great job. I just wondered if you could comment on the relationship at Carlton Forge and if you’ve seen any drop in business year on year. Any risk of kind of future drops in business at that customer?

Bill Wulfson

Speaking generally to PCC as a customer and as a company, it’s impressive what they’ve done and their growth pattern that they’ve had both organically as well as through acquisition and as I’ve mentioned before, our goal is to be their best external supplier.

I know they have an internal supply and because their business is growing, we’ve actually seen opportunities to grow with them as their demand patterns have increased. So that’s a good question probably for your 10:00 o’clock call, which I know is coming up here with PCC and so forth, but I think what we’re seeing is that we’re working on the assumption that Carlton volume will be in a similar range year over year, but there is opportunity that we could see some growth.

Gautam Khanna – Cowen and Company

Okay. And you guys have been telegraphing some landing gear opportunity that you’ve been pursuing for a while. Could you update us on the status and when we might have something more formal to announce?

Bill Wulfson

Sure. There is as you know, a general interest in moving to alternative materials which don’t required cadmium coatings because of concerns that exist, specifically in Europe with (inaudible) legislation. And with that, we’ve been focusing on trying to provide a stainless solution which not only would meet the corrosion and performance needs, but would allow the landing gear not to have to be redesigned, but essentially be dropped into existing models.

And with that, there of course, is a long and extended testing period required on both the OEM part as well as on our part and we’re as frequent flyers, very happy about that. So we continue to see positive indications and signs coming from our customers in terms of their interest and the results of our tests.

But in terms of when they’re prepared to make a comment or commitment to put it into flight, while we think it’s a great idea and we’re pushing to see that move forward to certain degree, that’s really in their court. So I can just tell you that we continue to see positive signs and are very encouraged and we hope that over the course of this fiscal year, we’ll have some very – some more specifics that we share with you on that front. But it’s a little bit difficult to predict just because of dynamic I mentioned.

Gautam Khanna – Cowen and Company

Thank you.

Operator

Thank you. We have no further questions coming through.

Bill Wulfson

Okay. Well thank you again for participating in today’s call. It’s been a great year for Carpenter, but we recognize we’ve got a lot more work to do and we look forward to speaking with you again next quarter. Thank you and goodbye.

Operator

Thank you. Ladies and gentlemen that completes your conference call for today. You may now disconnect. Thank you for joining and have a great day. Thank you.

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