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Executives

Mike Hajost – Vice President, Investor Relations and Treasurer

Bill Wulfsohn – President and Chief Executive Officer

Doug Ralph – Senior Vice President and Chief Financial Officer

Dave Strobel – Senior Vice President, Global Operations

Mark Hayman – Senior Vice President, Specialty Alloys Operations

Analysts

Mark Hokanson – Cowen & Co.

Edward Marshall – Sidoti & Company

Mark Parr – KeyBanc

Tim Hayes – Davenport & Company

Chris Olin – Cleveland Research

Stephen Levenson – Stifel, Nicolaus

Carpenter Technology Corporation (CRS) F1Q 2012 Earnings Conference Call October 25, 2011 10:00 AM ET

Operator

Good morning and welcome to Carpenter Technology’s First Quarter Earnings Conference Call. My name is (Katrina) and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. After the speakers’ remarks, you’ll be invited to participate in the question-and-answer session. (Operator Instructions)

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed.

Mike Hajost – Vice President, Investor Relations and Treasurer

Thank you, (Katrina). Good morning, everyone, and welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 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. Also participating on the call are Dave Strobel, Senior Vice President, Global Operations; Mark Hayman, Senior Vice President, Specialty Alloys Operations 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, 2011 10-K and exhibits attached to that filing.

I will now turn the call over to Bill.

Bill Wulfsohn – President and Chief Executive Officer

Thank you, Mike. Good morning, everyone, and thank you for joining us for our fiscal year 2012 first quarter earnings call. I am pleased to report that we had another great quarter. Equally as important I want to share that we continued to see positive signs that make us optimistic about our business going forward.

I’ll begin with a quick review of the quarter. Our strong quarterly earnings were driven by solid results from our pricing, mix management and operational initiatives.

Sales ex-surcharge were up 19% on 2% lower volumes. This represents a third quarter new rule that revenue growth exceeded volume growth. Note that the average spread between revenue growth and volume growth over the last three quarters has been 18 points. Also contributing to our positive results were strong operating cost performance specifically in cost per tons. We expect these positive trends to continue. We are optimistic that we will exceed our prior peak performance over the next several years as we are still seeing strong demand signals in our key markets. This is especially true in our strategically important aerospace energy and medical market segments. As you aware, these segments are less exposed to short-term economic cyclicality.

The aerospace market continues to be very attractive for Carpenter. In the quarter, we increased our sales by 18% and 12% higher volumes. Engine demand has continued to show strength. We have renewed several significant long-term agreements. We are also experiencing increasing fastener demand. Demand for titanium fasteners is expected to surpass prior peak levels within the fiscal year and double within the next five years. In addition nickel and stainless fasteners have shown significant growth over the last two quarters and this trend is expected to continue.

Finally, we continue to make good progress providing material for structural aerospace applications. We have recently seen increased demand for our custom 465 for flap tracks and slat tracks. We believe (indiscernible) products will help enable us to grow further in this area.

Turning to the energy market, in this market we see sustained demand growth, excluding the impact of the Amega West acquisition. Energy market sales increased 38% on 27% higher volumes. We are clearly benefiting as activity in the industrial gas turbine market is picking up off of lower base. In fact, industrial gas turbines was our fastest growing area within the energy market and a contributor to our positive mix. Including Amega West, revenues without surcharge increased by 108%. The oil and gas segment is continuing to grow due to increases in directional drilling activity. Our acquisition of Amega West and Oilfield Alloys has enabled Carpenter to benefit from this market growth. More specifically, Amega West which we acquired nine months ago continues to rapidly grow at sales.

Compared to the same period last year, Amega West has more than doubled its sales. In addition, the acquisition of Amega West has increased Carpenter’s direct contact with end-use customers in the oil and gas industry. As Amega is a leading supplier to Halliburton and the significantly growing this position with Schlumberger and Baker. This close contact with key customers has enabled Carpenter to increase our sales of materials used for the higher value completions applications. In summary, our growth in this market is only limited by our current capacity constraints.

Turning to the strategically important medical market, let me begin by noting that there has been a lot of press lately about the impact of metal on metal implants. We are seeing some slowdown in orders from materials used in these applications. But our sales in this area represent only 0.2% of our overall company sales. In fact, in total, revenue and growth in our other parts of our medical business remain robust. Overall, medical sales increased 18% on 9% higher volume during the first quarter. This revenue growth was led by 27% increase in Titanium products which contributed to the positive mix and the 10% increase in stainless and CCM products.

Now looking forward, Carpenter is seeing meaningful demand – is not, excuse me not seeing any meaningful demand fall-off in our other markets. In fact we are experiencing at this time record backlogs, long lead times and we have also should note that our business is more concentrated in long products which is currently less exposed to the current economic weakness than flat rolled commodity stainless.

Let me assure you our management team is closely monitoring the overall economic situation and will quickly address any signs of a slowdown if they were here. As a result of strong fundamental demand, our core priority for the company remains expanding our premium melt capacity to meet growing demand from our customers. In support of this effort we are expanding capacity in our existing operations. Work is underway to significantly expand our powder metal manufacturing capacity in Sweden.

We are also on track to complete during the second quarter – excuse me, second half of fiscal year ‘12 to previously announced reading melt premium re-melt and forged finished capacity expansion. This $42 million expansion announced last May includes two additional ESR re-melting furnaces, an increased capacity for forge finishing and annealing operations and will address some current debt bottlenecks in the mill an increase output of premium products.

In addition, we are expanding our Dynamet wire facility in Clearwater facility, Florida. This project is on track for completion in March 2012. It was initiated into anticipation of a projected doubling of demand for Titanium aerospace fasteners and you will note that Titanium fastener growth is tied to increasing airline bill grades and newer model such as the Boeing 787 that use significantly more titanium fasteners.

Amega West is also adding capacity. They are adding capacity at the complex machining facility in Tyler, Texas. We’re also adding new manufacturing capacity in Edmonton, Canada. In addition our service facility was recently started in Casper, Wyoming, and finally a new service center is planned for our Midland, Texas next month.

In addition, we continue to be extremely excited about the opportunity to close on the Latrobe acquisition. We believe this acquisition will enable us to support existing Carpenter and Latrobe customers by expanding output to serve growing customer needs. We’re progressing through the (indiscernible) process and we’ve been doing lot of work to ensure a smooth integration once the transaction closes. We remain optimistic that the deal will close by the end of this quarter.

Finally, we are excited about our recently announced $500 million Greenfield facility aimed at increasing capacity for premium products. As you may have read we recently announced that this new site will be located in Alabama which provided an attractive incentive package and also will allow based on the facility layout a lean production flow and also access to good pool of technical talent. We are moving forward aggressively and have initiated equipment orders. The project remains on track to be operational in April 2014.

The new facility is expected to add an incremental 27,000 tons of premium product capacity which will be a 70% increase over our current premium output. We’re confident of the need for this facility to support the future needs of Carpenter and Latrobe. Note that we will be able to quickly utilize this incremental capacity as we will initially manufacture product that does not require vendor qualifications. The facility also has room to add additional incremental capacity at low incremental cost to support even longer term growth.

In closing, let me finish by reiterating my three core priorities. First, strengthen the base business and we’ll do that by improving customer satisfaction, expanding output of our premium materials, continuing with our mix management actions and controlling our costs by driving further productivity. Our second priority is to close and integrate Latrobe, so we can realize the production capacity synergies. And our third priority is to take additional actions to ensure we sustain future growth, which means commercializing new products and technology, completing the construction of our focus facility and evaluating additional accretive acquisitions specifically in the area of precision finishing and those which might expand our international footprint and distribution capabilities.

Finally, let me reiterate that thus far we have not seen significant changes in customer demand. We’re on track to hit the growth and financial targets that we have set for the year. We have a great team, a strong portfolio of technology, healthy end markets and aggressive growth oriented investments. As such, I and the Carpenter team remained bullish on our future.

I’ll now turn the discussion over to Doug, who will walk you through the financial results.

Doug Ralph – Senior Vice President and Chief Financial Officer

Thanks, Bill. We are pleased with the trend in our quarterly results. This is the third quarter in a row that we have seen a sequential increase in our operating profit margin and profit per pound, as well as a strong positive spread between our volume growth rate and revenue growth rate and revenue growth rate. These results are driven – being driven primarily by our pricing and mix management initiatives. Specifically, we are making good progress on our two-pronged effort to grow volume in the higher value premium product PAO segment while improving profitability in the AMO segment.

You can see this in our AMO, PAO results for the quarter. The more premium-oriented PAO volumes increased 8% while AMO volumes decreased by 5% overall as a result of (indiscernible) actions to improve our product mix. Also, while PAO’s operating margin has remained relatively stable at a high level, our AMO operating margin has nearly tripled from 4.5% a year ago to 12.1% this quarter. Our average profit per pound in both segments was also higher for the third consecutive quarter.

We’ve also been pleased with the revenue growth and EBITDA contribution from Amega West as Bill highlighted earlier. And we are doing a good job on the cost side as well. We had very good operating cost performance in the quarter even with the impact to summer maintenance shutdowns. We are benefiting from efficiencies as more real-time performance data is being made available at the work center and the many new employees brought on board get up to proficiency levels. We also continued to improve our overhead costs as a percentage of revenue.

With that as background, let me take you through our first quarter results. Net sales in the quarter were $414 million or 18% about a year ago. Excluding raw material surcharge, sales were up 19%. The Amega West acquisition accounted for 6 percentage points of the year-to-year growth. Overall, pound shift decreased 2% from a year ago. This number is somewhat misleading until you look at the internals. As already mentioned our premium PAO business volume was up 8% in the quarter and we could be shipping more if we had the available capacity. We also saw positive growth in titanium and powdered metal products in the quarter, and the balance of stainless and alloy steels were down in volume due to our mix improvement program.

We’d expect to see continued modest overall volume growth with positive internals and strong double-digit revenue growth over the balance of the year. Continuing down the income statement, gross profit was $81.1 million compared with $49.8 million in last year’s first quarter. The higher gross profit level was driven by improved product mix, higher prices better operating performance, good profit contributions from our Titanium and Amega West businesses and positive LIFO and other benefits from the combination of increased inventories and lower raw material prices.

SG&A expenses for the quarter were $35.7 million or 11.4% of revenue ex-surcharge, which was flat in dollars and down 2.1 percentage points from last year. If you take lower year-over-year net pension costs out of the equation overall SG&A spending was 3% higher than last year’s first quarter do entirely to the inclusion of Amega West overhead cost while SG&A is a percentage of revenue was 1.6 percentage points lower consistent with our strategy to control overhead cost growth to well below the rate of revenue growth. We had 1.4 million of literal transaction costs in the quarter which we are showing as a separate line on the income statement.

Operating income for the quarter was $44 million compared with $14.1 million in last year’s first quarter. Our operating margin excluding surcharge and pension earnings interest and deferrals or EID as we always quoted was 15.2% or 15.6% excluding the Latrobe costs compared to 8.7% in last year’s first quarter. Interest expense in the quarter was $7 million compared to $4.2 million in the year ago period due to our recent refinancing activities. For the full year, we continue to expect interest expense will be about $7 million higher than last year. We saw a larger portion of this increase this period, since we had about half the quarter’s overlap between our new 250 million bond and the 100 million note that we paid off in mid-August.

Finishing up the income statement, other expense of $700,000 compared to other income of $1.6 million last year, the difference is almost entirely due to the reduction this quarter in the market value of assets that fund certain non-qualified retirement plan obligations compared to an increase in the market value of these assets in last year’s first quarter. The provision for income tax was $12.6 million or 34.7% of pre-tax income compared to $3.9 million or 33.9% of pre-tax income in last year’s first quarter. We expect our full-year tax rate will be about 34%, up from 33% previously due to the impact of non-deductible costs like Latrobe transaction fees.

Overall reported net income was $23.8 million or $0.53 per diluted share and would have been $0.56 per share excluding the impact of Latrobe transaction costs. This compares with first quarter net income last year of $7.6 million or $0.17 per diluted share.

Free cash flow for the quarter was a negative $109 million. This was driven by increased inventory, the $21.8 million Boarhead Farms environmental litigations settlement payment and $11.6 million of required cash contributions to the pension plan. We continue to expect to make additional required pension contributions of $16 million over the balance of the fiscal year.

With respect to inventory, a large part of the increase relates to plan build ahead of summer equipment shutdowns to support strong demand for premium products over the balance of the year. The value of our inventory is also higher due to our retro product mix. Much of this material is towards the end of the production cycle so we would expect inventory levels to decline each quarter over the balance of the year as shipments occur. There are also areas of inventory management where we need to tighten performance and we are addressing these.

For the full year, we expect overall free cash flow to be about negative $50 million primarily due to anticipated full year capital spending of $200 million along with the other impacts we’ve talked about. This is consistent with the assumptions made in our recent refinancings. Our ending September cash and marketable security balance was $315 million which was down from the $523 million level at the end of last year. The difference is mainly due to the pay down of $100 million of debt, increased inventory levels, Boarhead Farms settlement and the pension contribution. Our total debt level at the end of the quarter was $408 million and within our target range of no more than three times EBITDA.

Our total liquidity including $346 million of availability under our revolving credit agreement remains solid at $661 million. $170 million of this will be used to pay-off Latrobe debt at closing and the remaining $491 million of liquidity provides flexibility to support future growth initiatives and take care of the next $100 million of debt maturing in less two years.

Finally, let me close with a few comments about our forward outlook. We continue to be on track to achieve our target of 50% increase in operating income excluding non-cash pension EID expense this fiscal year versus last. This will require further increases in our operating income over the balance of the year. Note that our first quarter results did benefit from building inventory at relatively low raw material costs and we will see some of this reverse in the second quarter as we bring inventories down. This will likely cause our operating margin to dip a bit in the second quarter before rebounding in the second half of the year.

We hope to be able to close the Latrobe acquisition in the second quarter which will obviously impact our reported results. We are still encouraged that we have a transaction that will be accretive to EPS in the first full year and strongly accretive with at least $25 million in net pre-tax synergies by year three. Once we close Latrobe, we will make changes in our segment reporting and other supplemental reporting. We will issue an 8-K before this takes effect, so you have the before and after data to help you make absolute transition. Beyond this year, we are still tracking well against our near term goal to return to our prior peak EBITDA level of $350 million to $360 million before fiscal year 2014. Note that this call does not include the incremental benefits expected from the Latrobe acquisition in synergies, our major capacity expansion project in Alabama, and the continued growth of our Megawest and Precision Finishing downstream companies.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Mark Hokanson representing Cowen & Co. Please proceed.

Mark Hokanson – Cowen & Co.

Hey guys, this is Mark pitching for Gautam this morning. Thanks for taking the call. I guess first, if we recall correctly, you guys have some re-completes of significance next year. One with the forge and one with engine OEM, can you tell us whether you expect to gain share on these contracts and whether or not ATI Ladish poses a new worry on these or is the customer looking for more integrated supplier? And how long might these contracts extend once on?

Bill Wulfsohn

Hi, I’m not sure specifically which contracts you’re referencing. Of course, every year we have number of contracts that come up for renewal. I would say thus far we have been proactively working with our customers to renew long-term agreements. I think we’ve been able to find neutrally beneficial approaches to doing that that enable our customers to get the supply. There may be under terms which are reasonable from our perspective as well. We are taking a different strategy than the vertically integrated manufacturers like ATI as you mentioned. Their strategy is their own. Ours, we’re seeking to be more of an independent supplier that can service any or all of the needs of the industry. So thus far I would say lack of forward integration has been as we view it as an advantage not a disadvantage.

Mark Hokanson – Cowen & Co.

Okay, great. And then second can you talk a little bit about pricing trends in your fastener business over the next few years especially know that Boeing has moved to sign long-term agreements with some of the fastener OEMs as they say lower price contracts to Boeing. Does this pose any pricing risk to Carpenter?

Bill Wulfsohn

I think in general as we’ve renewed our contracts, we’ve tried to find again neutrally beneficial approaches with the customers. There is a strong need for the supply at the same point it’s important that we would be supportive of our customers. We know the kind of pressures they are under and we’ve been able to find what we think good resolution to that which through efficiencies and volume gains -- excuse me -- has also allowed us to at least sustain our profitability which is of course a core priority for us.

Mark Hokanson – Cowen & Co.

And then lastly do you have the sequential sales numbers for your aerospace fastener business in the quarter?

Bill Wulfsohn

Not for aerospace fasteners, but for overall aerospace, our volume like across all of our end-market segments just because we have the seasonality effects in our first quarter, our volume was down 10% from the fourth quarter and overall revenue excluding surcharge was down 9%.

Mark Hokanson – Cowen & Co.

Right, thanks a lot guys.

Bill Wulfsohn

You’re welcome.

Operator

Your next question comes from the line of Edward Marshall representing Sidoti & Company. Please proceed.

Edward Marshall – Sidoti & Company

Good morning and congrats on the AMO profitability, it’s sizable increase there. Is that the new baseline or was there is something one-time in particular business line? Can you kind of talk about the puts and takes for AMO what you kind of expect? I think you mentioned a little bit of that in your prepared remarks? Can you kind of add to that if you will?

Bill Wulfsohn

Yet another I would call it the new baseline. And when you go back to our peak, we were making in the high-teens in our AMO business and it’s been running about half of the PAO margin level. And so, I think there is room for further upside I think like all of our business, there were some benefits in the first quarter related to our inventory build and more raw material prices are. And so, we do expect a bit of this in the second quarter before margins rebound again in the back half of the year. And the margin growth that we’ve seen is driven a lot of ways by growth of the fasteners business and growth of our titanium including the fasteners business within that period-to-period.

Edward Marshall – Sidoti & Company

Did you quantify the LIFO benefit? I think you mentioned that there was one in the release, what was the – can you quantify that?

Bill Wulfsohn

Yeah, quarter-to-quarter, it was about $4 million, first quarter versus last year’s first quarter.

Edward Marshall – Sidoti & Company

And you mentioned some PAO, you could ship more PAO - Premium Alloys depending upon the capacity. Now, we are just kind of curious if you can kind of talk to the total capacity utilization and what kind of utilization that may – what kind of capacity they might be able to add for you?

Bill Wulfsohn

This is still – there as we understand quite busy as well. They’ve been very successful with their business development efforts and as we look at it, this is an opportunity for one plus one to equal more than two. Their equipment profile is different than our equipment profile and by us deploying some of our production onto their system and vice versa. We think we’ll get uplift in productivity, which will essentially debottleneck both operations and allow us to get more product out to the customers.

Edward Marshall – Sidoti & Company

You are saying they are running at similar utilization rates that you are?

Bill Wulfsohn

I just know they are very busy. We don’t have the full visibility to know their exact operation rates, but they’ve done a good job and their customer base is strong as well.

Edward Marshall – Sidoti & Company

Excellent. Thanks guys.

Bill Wulfsohn

Welcome.

Operator

The next question comes from the line of Mark Parr representing KeyBanc. Please proceed.

Mark Parr – KeyBanc

Thanks very much. Congratulations on the quarter.

Bill Wulfsohn

Thanks, Mark. How are you?

Mark Parr – KeyBanc

Not too bad. At least it’s – at least it’s sort of out sunny today. As usually you get the rain after lunch. I don’t want to beat this life-full thing to death, but I think that was bit of a positive surprise relative to the expectation and I’m just trying to look here in the model in terms of what we are looking for, for LIFO but did you have any commentary on LIFO on your last quarter?

Bill Wulfsohn

Not relative to what we expected in the first quarter Mark.

Mark Parr – KeyBanc

Okay, so maybe in terms of a full year number, was the LIFO perhaps a bit more than that, I think basically we’re looking for flat and you said the LIFO was up $4 million from last year so that you had about $4 million credit, is that right.

Bill Wulfsohn

Quarter-to-quarter, if you look at our first quarter results compared to last year first quarter there was about $4 million benefit due to the LIFO benefit. And for the year our expectation would always be that the quarterly impacts would tend to neutralize for the year so it would not be a major impact in our year-to-year comparison.

Mark Parr – KeyBanc

So for the full year of fiscal ‘12 you look for LIFO to be relatively flat, is that would –I’m interpreting which you are saying, is that right or relatively…?

Bill Wulfsohn

Yes, that would be our general expectation including this year and so benefit that we got in the first quarter we would start to see some of that come off of inventories reducing the second quarter and a bit more in the second half of the year.

Mark Parr – KeyBanc

Okay. All right, that’s helpful. And then just one last thing again, I (indiscernible) but I know I’m going get asked but what was the LIFO plus or minus in the June quarter? Was it a minus or was it a plus?

Doug Ralph

Just one second, it would have been a modest negative in our fourth quarter.

Mark Parr – KeyBanc

Okay. All right terrific. Thanks very much. I’ll get back in queue, but it really is – I think it’s you really had a solid quarter and with all the macro negativity, the later cycle momentum that you are achieving is really coming through, so congratulations on that, I’ll get back in the queue.

Bill Wulfsohn

Thank you.

Doug Ralph

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Tim Hayes representing Davenport & Company. Please proceed.

Tim Hayes – Davenport & Company

Hi, good morning.

Bill Wulfsohn

Good morning, Tim.

Tim Hayes – Davenport & Company

Just two questions. On the premium alloy side, what kind of utilization rate did you run at in the first quarter?

Dave Strobel

Good morning. This is Dave Strobel. The utilization on the premium alloy side is really gated by our remelt operations and our (indiscernible) operations and we’re running 95% levels in those areas.

Tim Hayes – Davenport & Company

Okay. And then that’s for the first quarter?

Dave Strobel

Yes, with the exception of what will ahead from a shutdown perspective.

Tim Hayes – Davenport & Company

I guess I want to (indiscernible) something maybe little lower given that volumes in the previous two quarters were between £13 million and £14 million, am I missing something there?

Bill Wulfsohn

We’ve got two factors, one you have a shutdown and two as you saw from the announcement, we also didn’t have quite a bit of an inventory build over the course to quarter. So some of that premium equipment we ran material through in its final stages if you will and so be shipping it in future quarters.

Tim Hayes – Davenport & Company

Okay. And then also could you give the sequential volume change by the end markets, I think a previous question you answered that what happened on the aerospace, but the other five markets please?

Bill Wulfsohn

Sure, Tim. So, again I’ll just point out all of them were down because it’s just normal seasonality in our business, but aerospace was down minus 10 as I mentioned previously, energy down 15%, our medical business down 7%, industrial down 28%, automotive down 17% and consumer business down 18%. So, overall for the company volume Q4 to Q1 and again I’ll point out reflecting the normal seasonality of our shutdowns and customer plant shutdowns were down 19%.

Tim Hayes – Davenport & Company

Thank you.

Bill Wulfsohn

You’re welcome.

Operator

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

Brian Yu – Citi

Hey, thank you and congrats on pretty good results for the quarter, all things considered. The first question is just on this new facility, Bill, maybe you can sort of provide us with either some milestones of when you would expect to break ground first equipment installation leading up to that April 2014 start date?

Dave Strobel

This is Dave. From a breaking ground standpoint, overall process where we’ve got a letter of intent with the forge manufacturer, we have got to say large hydraulic radio forge, will be the largest in the world. So we’ve got that into way, we’ve got the memorandum of understanding with the State of Alabama, few details to work there, but we hope to break ground within about 60 days. The forge itself is the keystone if you will of this new facility and we expect to have that up and running April 2014.

Brian Yu – Citi

Okay, great. That’s helpful. And then secondly on stainless I know the long product size has been holding up a lot better than flat rolled, one thing that we noticed from kind of our tracking of pricing is bar products fell pretty hard in the month of October and I was wondering if you guys are seeing that purely as reflection of nickel prices coming in or are you seeing that margin pressure starting to spill over into long products too?

Mark Kamon

This is Mark Kamon. Brian, no, we really haven’t seen major reductions in pricing. Of course our markets are not typical of what you would see in the long or the flat product stainless business. Our business tends to be more high performance niche applications and we have not seen that drop off which you’re talking about from our customer base from our mix of products.

Brian Yu – Citi

Great, thank you.

Operator

Your next question comes as a follow-up from the line of Mark Hokanson representing Cowen & Co. Please proceed.

Mark Hokanson – Cowen & Co.

Hey guys, thanks for the follow-up. Can you just give us a quick update on your lead times for the various fasteners stocks, titanium bar and coil, nickel and stainless fasteners and then nickel engine bullet?

Mark Kamon

I guess, this is Mark Kamon again. Mark, I would say that the lead times, if we were to quote somebody who we are not doing business today would be six to nine months for those products that you referenced in that range. I will say that we worked very closely with our customers and we reserve capacity based on the forecast for our customers and which we deal with all of the major fastener manufactures and engine producers for the most part, component producers.

Mark Hokanson – Cowen & Co.

Okay.

Mark Kamon

So, we have capacities that we work off of and that we are committed to and our customers are committed to us.

Mark Hokanson – Cowen & Co.

Okay. And then maybe if I can ask specifically I think last quarter you had mentioned titanium bar and coil, it was about five to six month lead time at that point, has that changed at all in the past there months?

Mark Kamon

It’s pretty much in the same area.

Mark Hokanson – Cowen & Co.

Okay.

Mark Kamon

Pretty much the same thing for the nickel billet. We are actually accepting orders now for our Q4.

Mark Hokanson – Cowen & Co.

Okay, great. Thanks guys.

Operator

Your next question also comes as a follow-up on the line of Mark Parr representing KeyBanc. Please proceed.

Mark Parr – KeyBanc

Thanks very much. If I could just follow onto some of the lead time commentary, I think Bill, you had mentioned in your comments that backlogs remained at record levels, can you give us some sense of directionally where the backlogs stood at the end of September versus the end of June?

Bill Wulfsohn

I don’t have the chart in front of me. We do track it on a week-by-week basis and I can just tell you that it’s actually been increasing and it’s roughly 10% higher than it was in June, I mean, the trajectory has been increasing, it hasn’t been falling off, so that’s and encouraging sign.

Mark Parr – KeyBanc

Yeah that’s really – it is really encouraging and thanks for that color. Just one other thing if I could, I know that you’ve been talking about growth in structural aerospace applications. I think the 465 alloy is a key component of that. Could you give us an update on potential new applications or how the backlog as growing there for some of these structural opportunities you’ve been exploring?

Mark Kamon

Yeah, this is Mark Kamon again. I would say that our structural applications are growing in that we are have more participation in some of the newer platforms like the 787 that is coming online. And our focus has been to expand into various other components within the aerospace structural array of products. And most recently we are evaluating potential replacement products for landing gear using some of our proprietary alloys as well, which is an area we don’t participate in today, but of course (indiscernible) player in the landing gear market.

Mark Parr – KeyBanc

Is that an opportunity where your metallurgical capabilities will create some synergies with Latrobe’s manufacturing capabilities?

Bill Wulfsohn

Yeah, there is no question about that and that’s another value. We think we will be able to provide to our customers and I’d like to point out this is two-way street here. They produce some alloys that we don’t produce and we produce some that they don’t producing when we can have a broader basket that we can go to our customers, we can offer a wider range of products to hopefully be a more significant part of their needs and support them as they are trying to refine their products. So this is just one of those examples and there are many of them.

Mark Parr – KeyBanc

All right. So and these kinds of things you’re talking about, Bill, would be in addition to the 25 million in synergies?

Bill Wulfsohn

Yeah, they would be. We really didn’t put much in at all in terms of revenue synergy. Our expectation was most of it would in fact come from kind of the capacity related benefits that we would get.

Mark Parr – KeyBanc

Yeah, okay, all right, terrific. Thanks again for all the color. Congratulations on the continued growth in the backlog and look forward to talking with you soon.

Bill Wulfsohn

Thank you.

Operator

Your next question comes from the line of Chris Olin representing Cleveland Research. Please proceed.

Chris Olin – Cleveland Research

Good morning.

Bill Wulfsohn

Good morning.

Dave Strobel

Good morning, Chris.

Chris Olin – Cleveland Research

Hi. I’ve heard your comments about end markets holding up pretty well. I just had a quick follow-up. We heard that there could be some possible overbuilding of material inventories within the jet engine channel and I was just curious if you saw anything like that or any kind of indications that maybe somewhere in the channels there need to be worked down into 2012?

Bill Wulfsohn

We don’t have any indication of that at this point both in terms of order take as well as new orders coming in, so that would be news to us.

Chris Olin – Cleveland Research

Okay, thanks.

Operator

Your next question comes as a follow-up from the line of Brian Yu representing Citi. Please proceed.

Brian Yu – Citi

Thanks. What’s the European exposure can you give us a rough breakout of how much of it is aero-related versus non-aero, industrial or other end-markets?

Mark Kamon

Brian, this is Mark Kamon. The aero and energy what I would call our high-temp specialty business is well over 70% of our overall volume in Europe.

Brian Yu – Citi

Okay. And then the remainder end of 130% what’s happening there? Are you seeing any slowdown in those businesses?

Mark Kamon

No, at this point, we have the strongest backlog we’ve had ever in our European operations. So I’d echo the comments Bill made earlier about backlogs, we are seeing that in Europe. And you got to understand that we are positioned in the niche applications, specialty applications so as for example automotive which is a different product as car has moved to smaller engines, turbocharged engines, things like that that placed our strength.

Brian Yu – Citi

Okay. And then secondly in just – I think this was addressed little bit earlier, but from the Investor Day earlier in the year you had set up $350 million to $360 million EBITDA target excluding some of these ongoing acquisitions and that was set for fiscal year 2013 and 2014. Is there a way you help us in that (indiscernible)? What would be some of the industry drivers that would allow you to hit that number in ‘13 versus ‘14?

Mark Kamon

I think, Brian, we are making good progress already. Our EBITDA run-rate if you look in the last four quarters is over $250 million and so we are on our way there. I think the main lever is still going to be our pricing and mix management actions that are going to drive proper propound higher. And I think the trend in the AMO business with what we are seeing in overall fasteners as well as our titanium and powdered metals business and how they will contribute to that is also an encouraging sign, so we feel like we’ve made good progress and are well on track to hit that goal.

Brian Yu – Citi

The annual results were definitely impressive. Can you give us a sense of how far you are along in terms of the mixed management i.e., like working off all those lower priced backlog and what percentage complete if there is a way that define it that way?

Mark Kamon

Yeah, I think we’ve characterized that in the recent past as in the middle innings and I still think we feel comfortable with that characterization.

Brian Yu – Citi

Okay. So you do have still a lower priced backlog that’s on the books as you may take a couple more few more quarters to work off?

Bill Wulfsohn

Well, the way I – this is Bill, the way I would describe it is we do see that we will be able to get some more premium output as we mentioned in the quarter and it was not at as high of rate because of the inventory builds and the shutdown. So, that’s one part of the path and the other is just as we continued to sell a higher and higher value mix working with customers, some of the technology that we’ve been working on helping the customers, that technology will help us to use that available capacity to get more rich mix and that will help to drive us to the goals we’ve set.

Brian Yu – Citi

All right. Thank you.

Operator

Your next question comes from the line of Stephen Levenson representing Stifel, Nicolaus. Please proceed.

Stephen Levenson – Stifel, Nicolaus

Thanks, good morning everybody.

Bill Wulfsohn

Good morning, Steve.

Stephen Levenson – Stifel, Nicolaus

And forgive me, I’ve been bouncing back and forth between conference calls so I hope this one hasn’t been asked before. But could you talk a little bit about some of the new alloys that you got some of these new LTAs and some of the restrictions particularly in Europe about using coatings or plated products that you think you can beat and where your market share has headed in relation to that product, some of the coatings on landing gear for example?

Bill Wulfsohn

Sure, Steve. I am not sure if you were on when I made the comments about structural and landing gear. But we’re doing number of trials with our more proprietary products that are stainless in nature and therefore offer corrosion resistance that doesn’t require cadmium coatings. So those kinds of – that kind of material in an application like a landing gear is very desirable and we continued to focus on that as longer term growth opportunity for us.

Stephen Levenson – Stifel, Nicolaus

Have you – do you have a size for that market in estimate?

Bill Wulfsohn

We said in our Investor Day that overall market size material usage is over billion dollars annually and we have no new information from that.

Stephen Levenson – Stifel, Nicolaus

Great, thanks a lot.

Bill Wulfsohn

Yeah, you’re welcome.

Operator

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

Tim Hayes – Davenport & Company

Yes, in terms of the backlog, I presume that would exclude surcharge?

Bill Wulfsohn

Yeah, we typically look at it on ton basis, so yes.

Tim Hayes – Davenport & Company

Okay, thank you.

Operator

It looks no further questions at this time. I would now like to turn the call back to Mr. Bill Wulfsohn for closing remarks.

Bill Wulfsohn – President and Chief Executive Officer

Well, thank you again for participating in today’s call. We are off to good start this year, but we’ve got lot more work to do and we look forward to speaking with you again next quarter. Thank you and goodbye.

Operator

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

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