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

Q3 2007 Earnings Call

October 26, 2007 11:00 AM ET

Executives

Katie Pyra - IR Ashton Partners

Mike Goldberg - President and CEO

Larry Boik - VP of Finance and CFO

Analysts

Bob Schenosky - Jefferies & Co

Timothy Hayes - Davenport & Company

Nat Kellogg - Next Generation Equity Research

Philip Gibbs - Keybanc Capital Markets

Jim Altschul - Aviation Advisory Service

Operator

Good morning ladies and gentlemen, thank you so much for standing by and welcome to A.M. Castle & Company's Third Quarter 2007 Earnings Call.

During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions and instructions will be provided at that time. As a reminder, this conference is being recorded today, Friday, October 26, 2007.

I would now like to turn the conference over to Ms. Katie Pyra with Ashton Partners. Please go ahead, ma'am.

Katie Pyra

Thanks, good morning. Thank you everyone for joining us for A.M. Castle's 2007 third quarter conference call. By now, you should have all received a copy of this morning's press release. If anyone still needs one, please call my office at 312-553-6717 and we will fax you a copy immediately following the conference call.

With us from the management of Castle this morning are Mike Goldberg, President and CEO and Larry Boik, Vice President of Finance and CFO.

Before we begin, as usual, we would ask that everyone take note of precautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in this morning's conference call.

We will begin the call with a brief overview of the quarter, and then we will open up the lines for questions.

Now, I will turn the call over to Mike. Go ahead, Mike.

Mike Goldberg

Thanks, Katie. Good morning, everyone. Thanks you for joining us today and for your continued interest in our company.

As reported in our earnings release this morning, sales for the third quarter were $350.3 million. Net income was $12.9 million and diluted earnings per share were $0.57.

Year-to-date sales $1.1 billion, net income was $44.5 million and diluted earnings per share were $2.14.

I will now spend some time describing the business conditions we experienced in the third quarter. And provide you with our thoughts for the balance of the year.

Generally speaking, the third quarter was characterized by continued softer business conditions. And as anticipated, lower commodity prices. July was the weakest month of the quarter, with 4th of July falling on the Wednesday. And although the following month's activity sequentially improved, our total metal volume for the quarter was 10.3% weaker than the third quarter of '06.

Our year-over-year comparisons have been about of this rate for most of the year, which reflects the generally softer market conditions we have experienced. In spite of the market weakness, third quarter average selling prices were higher by 17% compared to the same period last year. So, when you combine the acquisition of Transtar, the high average selling prices and the decline in volume, third quarter comparative revenues increased by 16%.

Compared to the second quarter of this year, daily volumes declined 6%, and our average prices declined less than 0.5%.

For the last 12 months, the aerospace market has been impacted by the delays in A-380 and the Joint Strike Fighter Programs. The increased mill capacity has been absorbed by healthy demand from narrow-body planes and increased demand for armor plate, which use the similar manufacturing (inaudible). Hence our aerospace business has been a bright spot over a year.

In the third quarter, we saw the impact of excess inventory in the aerospace supply chain resulting in reduced volumes and margin pressure compared to the previous quarters.

Aircraft build rates have not declined, but we saw a slow down in demand from parts manufactures, which can only be explained by excess inventory summer in this supply chain.

Although, we view this as a timing issue, it has reduced volumes in our contractual accounts, and put pressure on margins as we sell material in this spot market.

However, we are pleased to report that Transtar's volumes were 29% ahead of the third quarter of last year. We anticipate that for the second half of the year, the aerospace industry will continue to work through its excess inventory position.

Our challenge for the short-term will be to continue to lower our inventory levels while maintaining acceptable gross margin rates and managing our expenses.

As for our other end markets, we do not anticipate any pull on downturn, but we are focused on managing the business based on the current demand levels. Since, we are LIFO cost base company we typically are able to sustain our gross margin rate, even when there are significant fluctuations in cost.

In this environment we're very pleased that we have been able to maintain our gross margin rate close to our historic levels, while reducing our inventory significantly. However, the decline in nickel pricing increased pressure on our margins, as nickel-bearing materials were being sold at future lower surcharge rates, as company has attempted to reduce inventory.

Turning to our balance sheet, we achieved the $19 million reduction in inventory during the third quarter, which in turn allowed us to reduce our debt. We intend to reduce our inventory levels further during the fourth quarter. Looking towards the fourth quarter, we expect business conditions that we experienced in the third quarter to continue and expect margins will remain under pressure.

I would again remind everyone that the fourth quarter is typically our slowest quarter of the year, due primary to the holidays impact on the number of effective shipping days, and typical year-end customer slowdowns.

We feel that our people now have to manage through the fluctuations of commodity prices and demand as a normal part of our business. Longer-term the major end markets we serve have good outlooks. We remained steadfast in our commitment to be the foremost provider of specialty metal products, and supply-chain services, and we are focused on targeted end markets such as aerospace, oil and gas and energy.

We will continue to invest in our infrastructure to execute our strategy, and as such, our Oracle implementation project remains on target and on budget for completion by the end of 2008. We also continue to pursue strategic acquisition opportunities and seek to expand out international presence in these identified growth industries.

This time, I'll hand the call over to Larry Boik who will give you more details on the financials. Larry?

Larry Boik

Thanks Mike. Good morning, everyone. I will start with the summary of our third quarter financial comparisons, followed the year-to-date results and I'll close with some commentary on our balance sheet and cash flows through September.

Third quarter 2007, consolidated net sales were $350.3 million or $49.5 million, or 16.5% higher than the third quarter of the last year. Sales in our metal segment were $320.8 million for the quarter, which represents a 17.9% growth year-over-year. The Transtar acquisition contributed 17.1% of this segment's sales increase. Mike already went through our volumes citing a decline of 10% versus the third quarter of 2006.

Material prices were not as robust as previous quarters this year, but remained at high levels compared to last year which served to offset the tonnage decline and support our favorable revenue comparison.

Our plastic segment third quarter sale is $29.5 million or $0.8 million higher than the third quarter of 2006.

Volume was 1.3% lower than last year and material prices increased 4.2%. Our consolidated gross margin rate in the third quarter was 27.7% of sales compared to prior year at 28.6%.

Margins have declined due to competitive market conditions. And margins for aerospace grade material have also declined due to an oversupply light-gauge aluminum plate in the market

Consolidated operating expense in the quarter was $74.9 million or $14.7 million higher than last year. Transtar added $11.1 million in operating expenses compared to 2006. Included in operating expense in the third quarter was a $0.5 million of cost for the consolidation of our Riverdale, Illinois operation into our Franklin Park, Illinois facility. Third quarter 2007 operating expense was 29% of sales, as compared to 20% in 2006.

Interest expense of $2.7 million for the third quarter was $0.8 million higher than last year, due largely the higher working capital levels. Interest expense for the second quarter of '07 was $4.2 million by comparison. Our inventories continue to come down and we are paying down debt rapidly as a result, and we'll speak more about this in just a minute.

Joint venture earnings of $1.4 million were up $0.4 million versus the third quarter of 2006. And our consolidated EBITDA for the quarter was $28.6 million or 8.2% of sales, as compared to $30.1 million or 10% of sales in the third quarter of '06.

Net income for the third quarter was $12.9 million or $0.57 per diluted share, as compared to $15.3 million or $0.82 per diluted share last year. Additional shares issued and outstanding stemming from our secondary offering completed in May of this year at an in $0.08 per share diluted effect on EPS for this quarter. Total diluted shares in the third quarter of '07 averaged approximately 22.8 million shares, versus 18.9 million in the third quarter of last year.

I will now briefly go through our year-to-date comparative results. Consolidated sales for the nine months ended September 30th this year were $1.1 billion, $242.7 million or 28.4% higher than last year. Sales in our Metal segment year-to-date were $1 billion or 31.7% higher than 2006.

Transtar sales for the nine months were $191.8 million or 25% of the revenue increase, lower volume accounted for an 8% decline in revenue, which was more than offset by higher metal pricing.

Our Plastic segment year-to-date sales were $87.5 million, $0.6 million lower than last year. Plastic segment volume was 2.8% lower, and material prices increased 2.3% compared to the same period of '06.

Our consolidated 2007 gross margin rate, through September, was 27.8%, which was the same rate we reported at the half year mark as compared to prior year at 29.2%. The lower rate reflects higher metal surcharges in competitive market conditions.

Consolidated operating expense for the nine months of 2007 were $225 million, which includes, a $1.4 million charge associated with the write-off of our former business systems, a $0.6 million second quarter asset impairment charge, a $1.1 million charge for Riverdale and Franklin Park reengineering project, and $0.4 million to date for the external Oracle implementation cost that could not be capitalized.

Adjusting for these one-time charges, operating expenses through September were 20% of sales this year, which is comparable to last year. The dollar increase in expenses year-over-year, also includes, $43.1 million for the impact of the Transtar acquisition.

Interest expense through September was $11.2 million versus $3.9 million for the first nine months of 06. The increase versus last year was primarily attributed to our Transtar acquisition.

Joint venture earnings at $3.7 million year-to-date in '07 were $0.4 million above last year’s earnings. And our consolidated EBITDA through September was $99 million or 9% of sales and was 13.4% higher than the $87.3 million we recorded through September of '06.

Net income year-to-date was $44.5 million or $2.14 per diluted share, as compared to $45.2 million or $2.45 per diluted share for the same period last year

The equity offering had a $0.14 per share dilutive effect on EPS for the nine month period this year. Diluted shares for that nine month period this year averaged 21.1 million shares versus 18.8 million for the same period last year.

Moving on to the balance sheet, as Mike mentioned we've been diligently reducing our inventory levels. And during the third quarter our net inventory declined $19 million.

Through September we generated $11.2 million of free cash flows. And our debt-to-capital declined to 27% at the end of the third quarter versus our peak of 51% at the start of this year and 31% at the end of June

Receivable DSO or Days Sales Outstanding was 46.6 days at the end of September, as compared to 47.3 days at year-end 2006. And inventory DSI, or Days Sales in Inventory was high at 140 days at quarter end. And that’s due to a temporary over supply in products that support aerospace and the oil and gas growth markets. However, we expect DSI to come down with the continued decline in inventory levels as Mike alluded to earlier in his comments.

Capital expenditures through September were $13.2 million, including $4.8 million for the Oracle ERP implementation. And our total capital expenditures for the full year of 2007, is expected to be in the $15 million to $17 million range.

Just after the quarter end, on October 2nd, we announced the sale of Metal Mart, LLC. Doing business is Metal Express for approximately $6.7 million. Metal Express was a small order, metal distribution business that had an average orders size of approximately one tenth of our core business, and thus did not provide strategic value to the Company in the longer-term. The sale approximated our booked value for the business and the proceeds that will be used or were used in October to repay a portion of the Company's outstanding debt.

We will now open up the call for any questions that you might have.

Question-And-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Bob Schenosky with Jefferies & Co. Please go ahead.

Bob Schenosky - Jefferies & Co

Thanks. Good morning.

Mike Goldberg

Good morning.

Larry Boik

Hey Bob.

Bob Schenosky - Jefferies & Co

Larry, question on, and I may have missed this, did you mention what the LIFO impact was on the quarter?

Larry Boik

No, I didn't, but I do have that information. Basically, through nine months our LIFO reserves have increased $18 million. You might recall through June that increase was $33 million, so for the quarter it went down $15 million.

Bob Schenosky - Jefferies & Co

All right. And do we expect the same directional move in 4Q as well?

Larry Boik

Yeah. It's always difficult to predict LIFO. But, directionally if you think of our comments of inventory coming down, and basically pricing being relatively similar to what we saw here in the third quarter than you would expect it to continue to decline.

Bob Schenosky - Jefferies & Co

Okay, great. And then just the second question for Michael, with the movement of Metal Mart out, what's your view on the Plastics business? It's down for the year. Plastics have always been a tough business for a lot of companies. One, is their anything that you are doing internally to enhance the valuation their and enhance the profitability and/or are you taking a long look at this to figure out whether it's strategic asset for the company?

Mike Goldberg

The Plastics business has been a good business for us. It's been historically as profitable as our metal segment and it's been a kind of good counter acting force in different markets with obviously different products. So, we've been very happy with our Plastic business. And this year they are pretty flat in that business, so considering economic conditions they have done a good job in keeping their business volumes at a steady level.

We continue to look at increasing the value of that business. They are going through an upgrade in the ERP systems, which we were investing in, and they recently acquired the assets of a very small plastics distributor in Northeast to increase their coverage. So, we continue to invest in that business and certainly have high hopes for its future growth.

Bob Schenosky - Jefferies & Co

Okay. Thank you

Operator

All right. Thank you. Timothy Hayes with Davenport & Company, please go ahead.

Timothy Hayes - Davenport & Company

Hi, good morning.

Larry Boik

Good morning, Tim

Timothy Hayes - Davenport & Company

I have few questions. We will start off on the aircraft side. You mentioned that during the quarter you saw some pressure on contractual volumes. I guess I have to read into that, that there is min/max volume contracts there and the customers are down closer to their minimum?

Mike Goldberg

Yeah. There is always some sort of corridor their, but we think it's a bit of timing issue. When we see the build rates of planes being pretty steady here, so we know that's not declining, but we have a number of contracts with various sub-contractors and parts manufacturers and we are seeing that demand for that is going to slow down.

And so, what that tells us is that there has to be a kind of a back up of inventory either at the primes or at the sub-contractors, somewhere along the line. But, in terms of the min/max you are talking about Tim here, we are really in kind of ways working in a corridor, because nobody knows exactly the pounds that anybody is going to consume in a one year period.

Timothy Hayes - Davenport & Company

Okay. And then in terms of the expected rebound in the aircraft cycle, what's your view on when orders will start before you will start picking back up, particularly with flight going into A-380?

Mike Goldberg

I think there is most probably two or three things that could help us on that side. One is the clearing of the excessive material in the supply chain. So, I would expect that going to take the balance of this year, so hopefully in the early part of the New Year that issue kind of goes away. In terms of the tick-ups through the A-380, I think we like most people we anticipate it's going to be round about mid-year. I think 13 A-380s were just scheduled to be built in 2008.

Some of that material is already in the supply chain, and I think that at least about half of that material is most probably in the supply chain. And so, we would expect to see the [scope] or the balance of that in the second half of next year. And then, I think there is about 25 probably scheduled for 2009, and again we would expect to see the demand for that in the second half of next year. So, all-in-all we would think around about in the middle of the year we should see that tick-up hopefully very significantly.

Timothy Hayes - Davenport & Company

Okay, and one another question, just to verify some number that you gave in your prepared remarks. The sequential decline in volumes and unit revenue, could you give those again, please?

Mike Goldberg

A sequential increase, July was the slowest. And again, we mentioned the July 4th holiday. That was a bad week for I think everybody in industry, it seemed like it was at least three days out of the regular shipping days. August picked a couple of points and then September for us was significantly strong, about 7% stronger than August, so we did see a nice recovery into September, but I think what we would say is that we expect the fourth quarter to kind of have the opposite sort of shape that October might look like September and then as we get into the holiday seasons, again everybody knows that slowdown, and would imagine this would taper off towards the end of the year.

Timothy Hayes - Davenport and Company

But, from Q2 to Q3 what were the change in unit revenue and then?

Mike Goldberg

In terms of volume, we were about 6% down, its actually, if you come and look at it again the holiday season and take a couple of days out of that its actually less, but from the reported perspective we were 6% down on Q3 versus Q2.

Timothy Hayes - Davenport and Company

Okay. And your revenue?

Mike Goldberg

Revenue in the Q3 was $350 million against $372 million in the Q2.

Timothy Hayes - Davenport and Company

Okay, right. What about unit revenue not just revenue?

Larry Boik

We don’t track and report that. In case of our product mix it swings pretty wildly.

Timothy Hayes - Davenport and Company

Yeah right, okay. I was just asking, because I thought, I heard that you said that unit revenue was up 17% year-over-year.

Mike Goldberg

Yeah. I think what we mention was, that our pricing was down, our average pricing and again it’s all subject to mix. But as best as we can tell our average pricing was down just about 0.5% There's a lot of moving parts in that number.

Timothy Hayes - Davenport and Company

Okay. And that was sequential right?

Mike Goldberg

Yes.

Timothy Hayes - Davenport and Company

Alright, very good thank you

Operator

I think your next question is from the line of Nat Kellogg with Next Generation Equity Research. Please go ahead.

Nat Kellogg - Next Generation Equity Research

Hi, guys. Larry can you just give me the charge you took in the quarter, was it a $0.5 million and where did that fall?

Larry Boik

The $0.5 million that I mentioned was you might recall from prior quarters, we were talking about our Franklin Park reengineering, and that freed up space here to basically take another facility close by, which is a large tubing facility for us and collapse it into our facility here. And that work started in the third quarter and it was $0.5 million worth of expense.

Nat Kellogg - Next Generation Equity Research

And that was in the warehouse process delivery side or?

Larry Boik

Yeah.

Nat Kellogg - Next Generation Equity Research

Okay. And then if I just look at SG&A it seems like it was up about a $1.5 million from Q2 to Q3. Is there anything in particular going on there and what if you quantify some?

Larry Boik

Yeah we had some increases largely in our earlier accruals, and associated with some typical accruals for litigation type settlements. Those were worth about $600,000, and we also had some tax audit fees expenses that we incurred from Ohio property tax two of our facilities for tax years '04 and '05.

Nat Kellogg - Next Generation Equity Research

Okay.

Larry Boik

Those were worth about another $400,000 that was the bulk of it.

Nat Kellogg - Next Generation Equity Research

So, we would be correct to characterize or maybe SG&A came in a little bit ahead of maybe where you were been expecting beginning in a quarter outlook for the end-to-year. Just seems like it was up a little bit to me in a market where obviously volume?

Larry Boik

Some of that that’s kind of underneath the covers is going to the investment in the Oracle implementation. We've got a full team dedicated to make it through that project, to complete it successfully and on time, but we have not taken the option to carve those cost out for everybody.

Nat Kellogg - Next Generation Equity Research

Right.

Larry Boik

Because we just feel that’s a part of the commitment we have made there.

Nat Kellogg - Next Generation Equity Research

Sure.

Mike Goldberg

Yeah, I'll add a bit more color on that, we have reduced our direct labor in line with our volume declines this year, but as Larry said to a large degree some of that has been offset by the effort, and the resources that are catered towards the Oracle ERP implementations. So, we do keep a very close track on our headcount and a direct labor against our volumes.

Nat Kellogg - Next Generation Equity Research

Okay. So, cost maybe a little bit higher than whatever, but that’s probably we are going to see that obviously for the next four or five quarters, you guys are finishing up the Oracle ERP?

Mike Goldberg

Yeah, from my perspective cost is always too high, but yeah, there is a burden there. In don’t think that anybody would hide the fact that there was a tremendous amount of resources dedicated to that. Just for example, when every month we have a, what we call a stake holder checking meeting, where people fly in from around the country to really to be actively involved in the development of the program, this is management level.

Those are cost which the business has to bare and they are not capitalized cost. We don’t call them project cost, and they going to continue. And so, your comment is most probably correct.

Nat Kellogg - Next Generation Equity Research

Okay. Alright, no that’s helpful. Then just on the inventory side, what sort of inventory level, obviously it varies from quarter-to-quarter, due to seasonality issues. But, what kind of inventory level you guys are shooting for or comfortable with. I mean, obviously, looking at the MSCI data lot of people have sort of being saying service center inventories are low and if demand picks up you could get a run in pricing and you could get a scramble for material, and it doesn't sound like that's really much of a concern for you guys. I am just trying to balance sort of the other things that are favorable to all, the feedback you guys have given to us?

Mike Goldberg

Yeah. I hope those circumstances kind of turn out that way.

Nat Kellogg - Next Generation Equity Research

Right.

Mike Goldberg

And our inventory is in pretty good shape with a couple of pocket, and Larry addressed them, and I think they are actually results of the same thing. Our inventories are higher than we would like them in oil and gas sector and then in our aerospace sector. And I think in both of those sectors what we experienced over perhaps the last twelve months is that; I won't say panic buy, but an excessive buying by the people in the supply chain.

And as everybody has realized the level of businesses out their, I think that back things up. And so, our general inventory, our carbon bar, our plates inventory, our carbon alloy plates, our stainless bar inventory, that's in pretty good shape, but we do have some excess in the inventory supporting those what we consider to the higher growth markets, which already I think are going through a bit of a correction at this time. So, we have got to work it down.

We will continue to look it down in the fourth quarter. And then like everybody else we are going to see where the business goes in the early part of the New Year. But, we should be pretty much in balance where we want to be by the end of the year.

Nat Kellogg - Next Generation Equity Research

Okay. And then just on -- I guess you've done a nice job paying down debt and getting debt to capital ratio back in a lower frame. Going forward as that continues to come down when you guys generate a little bit of cash on the sale of the business and obviously as you continue moving down in inventory, do you guys think of spending on Oracle, or towards the CapEx or continue the debt repayment or would you like to get back in the market on an acquisition front?

Larry Boik

It will be more of the latter two. We are still in the market on the acquisition front and we continue to actively look at target companies that would fit our long-term strategy. And we've said this before we are very pleased that our debt-to-capital is down to where it is, because it keeps us active in that market. In the interim we would continue to pay down debt and then acquisitions are opportunistic as everybody know.

So, over the long run we've stated this was our objective post Transtar to pay it down to pre Transtar levels, which we are pretty much at now. And as we do acquire it will balance up and down kind of the same mood that we saw here with the Transtar acquisition in subsequent. And we hope to have reached out like in the low to mid 48% over the long run.

Nat Kellogg - Next Generation Equity Research

Okay.

Larry Boik

So, hopefully that answers your question.

Nat Kellogg - Next Generation Equity Research

Yeah. That's helpful. And then just the last thing obviously you guys -- I am just trying to look at year-over-year comparisons, Q4 last year, with volume down in Q4 last year. I think that's sort of when things start to slowdown little bit or was it volume still up year-over-year in Q4 last year?

Mike Goldberg

We saw the slowdown, sequential slowdown in the third quarter of last year.

Nat Kellogg - Next Generation Equity Research

Okay.

Mike Goldberg

That's maybe the second quarter. That the second quarter of last year was less than the first and third was less than second, the fourth was less than the third, and that kind of trend is kind of continuing now for most probably six quarters when you look at it going back. Last year's volumes were higher than the year before volumes. So, off top my head, I have to check it, but would say that I think fourth quarter volumes in '06 were higher than fourth quarter volumes in '05.

Larry Boik

I think so.

Mike Goldberg

Yeah, yeah.

Larry Boik

I don't have the numbers either, but I think generally each quarter last year was still stronger than '05.

Nat Kellogg - Next Generation Equity Research

Okay, okay. Okay, that's helpful. Alright, thanks for time guys.

Mike Goldberg

Thank you.

Operator

All right. Thank you. Our next question is from Mark Parr with Keybanc Capital Markets. Please go ahead.

Philip Gibbs - Keybanc Capital Markets

Hi, this is Philip Gibbs in Mark's stead. How are you?

Mike Goldberg

All right, good.

Larry Boik

Excellent.

Philip Gibbs - Keybanc Capital Markets

Good. I had a question about the fourth quarter outlook, is it incrementally different then your proposed outlook given post the Q2 results, any incremental surprises in that outlook or changes?

Mike Goldberg

I think it's kind of tough question to answer, but I think what we are seeing is that the business has slowed down a little bit more than we had anticipated. So, if we go back to the summer time, we didn't anticipate the business being at the levels that it is currently at. So, I think what we have seen is kind of our anticipation and the way that we are going to manage is kind of at a lower than we had anticipated earlier in the summer.

Larry Boik

I think another way to say it is, our third quarter was a bit softer than the second, and the margins were bit more compressed competitively, including our aerospace margins. So, what we would expect now in the fourth quarter, barring the crystal ball, it is similar to the third, but then we've got the holiday impact and it's seasonally our slowest quarter of the year. So, that factor layered on top of it.

Philip Gibbs - Keybanc Capital Markets

Okay. That’s fair, and related to that did you envision this excess supply in what you deemed as high growth product inventories, as far as the temporary glide in those. And you said you are working those down in the fourth quarter, is that predominantly your aluminum gauge plates, Light gauge?

Mike Goldberg

Yes, it’s a light gauge aluminum plate and some of our nickel products.

Philip Gibbs - Keybanc Capital Markets

Okay.

Larry Boik

We’ve been carrying a little bit higher inventory in those products throughout the year, and we have been mentioning that. But, just as the delay in the normal production cycles of the planes themselves just kind of exasperates that over time.

Philip Gibbs - Keybanc Capital Markets

Is their more sensitivity to the A-380 than the 787 delays?

Larry Boik

For us.

Mike Goldberg

For us, yes.

Philip Gibbs - Keybanc Capital Markets

Okay.

Mike Goldberg

Obviously, it’s a very large amount of heat-treated aluminum plate on the A-380. So, as we go forward here that would be a major factor in the plate market.

Philip Gibbs - Keybanc Capital Markets

Okay. So the 787, would have a pretty de minimis impact on?

Mike Goldberg

Yeah, at this stage, I don’t think it’s going to really impact the service center business, and production schedules are out there. Now people think that there is no metal on the 787, no 50% of the plane still has a metal component, between titanium and aluminum. So, there is that incremental demand out there, but it’s truly not in our kind of short term plan cycles, so the impact of those delays on us are really not significant at all.

Philip Gibbs - Keybanc Capital Markets

Okay. So, there is basically a near-term backup in inventories at the sub-contractor level, that’s kind of holding you back from pushing more through?

Mike Goldberg

Yeah, but that’s what we think, because we know the planes have been built and we know that we are the sole source of supply, and so we made that conclusion.

Philip Gibbs - Keybanc Capital Markets

Okay. Thank you I appreciate it guys.

Operator

Alright, thank you. Our next question is from Jim Altschul with Aviation Advisory Service. Please go ahead

Jim Altschul - Aviation Advisory Service

Good morning gentlemen. A couple of questions please, first of all in the flat recession in the earlier part of this decade, if I remember it correctly, for at least two years the company was losing money. I don’t have crystal ball, but if there is going to be an economic downturn one of these days, do you think in the next economic downturn you can remain profitable? And if so why?

Larry Boik

I think the answer is yes, and the why, probably the biggest difference is the mill or the supplier consolidation has occurred during the last time, and since, as we've stated many times, that the price of the metal, the cost that we pay and enhance our ability to maintain our margins on top of that to our customers, is really driven by the mills and the supplier base. So, those dynamics have changed, we've reported now several quarters in a row, where volume is down. So, your prices remained steady to up, and that speaks to the testimony of the supplier consolidation. So, I think that’s a big factor.

Mike Goldberg

We are very much of a different company now, than we were then. If you look at our markets, about at least 50% if not more of our businesses is within aerospace or in the oil and gas sectors. Now we know that those industries are cyclical, but we don’t think that they are going to be in the same cycle as kind of general economy. If you look back in '02, '03 our share in those markets would've been 17% to 20%. So, we saw that the company is in a better position now, in terms of the market served and the products provided into those markets.

Larry Boik

One other factor I would add is, back into 2000, '03 recession, is the company went into that period, we are talking about higher levels of inventory now, but they are nothing compare to what the company had back then. So, our ability to better manage our inventory has been proven over the last three years is as well.

Jim Altschul - Aviation Advisory Service

Good. Next question, is there a general relationship between the price and the underlying commodities in your performance, in general is your company hurt or hindered when the price of nickel and another commodities goes up or down or is it not that simple?

Mike Goldberg

The answer to that question is yes both, there is a relationship, but it's not necessarily collinear. At the last call we talked about our exposure to nickel prices, and we said that about 24% of our revenue had some sort of nickel content in it. And that really equated to about a kind of 7%, which had a kind of direct relationship with nickel.

But then you look that we have some business, which is on fix price, fix cost, so that doesn’t kind of fluctuate. So, that numbers starts to get diluted, and so there is direct relationship overtime, but if nickel goes up at 20% in one quarter, it doesn’t necessarily translate to a very significant change in our revenue base. Obviously to be higher, but there is many, many variables which kind of end up impacting our financial statements.

Jim Altschul - Aviation Advisory Service

Thank you, both for your detailed answers on both of my questions.

Mike Goldberg

Thanks.

Larry Boik

Alright. Thank you.

Operator

Next question from the line of Don DeFosset with U Capital. Please go ahead. Mr. DeFosset are you there? Mr. DeFosset your line is open. If your line is muted on mutual line or please pick up your handset if…

Don DeFosset - U Capital

Hi gentlemen, sorry about that. My question for you guys is the loss in terms of the inventory buildup, is that experiencing more towards one of your customers, whether it be Boeing or Airbus and also you mentioned that the margins on the thin portion of the aluminum business was hurting you. Can you describe also may be what you are seeing or part of the products are impacting you guys the most? Thank you.

Mike Goldberg

On the aerospace side it depends where our product goes. We supply all aspect of the aerospace business, both the large commercial and the big two regional guys, the business jets and the military platforms, as well as in MRO business. So, I don't think there is any one particular area, which is kind of impacting us in the third quarter. Now, aside the big programs that have been delayed now for over a year, so I don't think there is anything specific in terms of one platform, one customer which is impacting us there. Your second question was?

Don DeFosset - U Capital

Which specific products are you really realizing this issue at? Is it product specific or is it just across the board?

Mike Goldberg

Well, again, I think it's across the board, but in specific areas. We address the light-gauge aluminum, heat-treated aluminum plate is having some margin pressure, there is no doubt that. We see some margin pressure in our nickel products as people have reacted to this kind of very significant swings in the marketplace and that has kind of accelerated some of the lower surcharge numbers, which hopefully will now go away as nickel has bounced back and stabilized. And so, they are mostly the major impacts, but the general soft economy puts some more competitive edge on the home marketplace. But, those would be the areas where we would have seen the biggest impact.

Don DeFosset - U Capital

I guess, I am little confused, I am just trying to understand whether this is demand driven from the aerospace cycle, which continues to be very strong? And how that relates to what you are seeing in the marketplace, because it seems just inconsistent from what I have been [seeing] in the marketplace. I guess I am just trying to pair that two together.

Mike Goldberg

No, we feel the demand is strong. We have no indications that the build rate has not declined, we know they haven't. So, that' good. But, as I said, we have a large number of contracts where the sole supplier of some aluminum which goes into the various components of an aero plane, many, many parts. And so, that when we see our contractual business kind of slowdown while the build rates remain high, we know that there is a build up somewhere in the supply chain of parts. And so, that's why we think this is kind of just a temporary kind of phenomenon, so that's how it impacts us.

Don DeFosset - U Capital

And where do you think that's coming from mostly? Can you figure that out, is there a sense of additional supply or just poor inventory management?

Mike Goldberg

Well, it has been additional supply, but if I knew the answer we wouldn't be discussing this. I give you an opinion here, I think when material was tight in last year and earlier part of this year, I think people almost certainly over board and over manufactured and then somebody looks at their inventory levels and said we don't need that part for anther two weeks or a month or have much of the inventory they have. And then you go through that cycle. And it can happen; it happens all through the supply chain and unfortunately it's not unusual. That would be our best kind of guess as to those circumstances.

Don DeFosset - U Capital

Okay. Thank you very much. I appreciate it.

Operator

All right, thank you. (Operator Instruction) Management there are no further questions at this time. Please continue with any closing comments.

Mike Goldberg

I would just like to again thank everybody to be on the call today and their interest, and we well speak to everybody in the New Year. Thank you.

Operator

All right. Thank you. Ladies and gentlemen, this does concludes A.M. Castle & Company's third quarter 2007 earnings conference call. If you would like to listen to a replay of today's conference in it's entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000, and put the access code 11099524. Those numbers again, 1-800-405-2236 or 303-590-3000 and the access code to enter again 11099524.

AT&T conferencing would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.

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