A.M. Castle Q3 2007 Earnings Call Transcript

Oct.26.07 | About: A. M. (CAS)

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 forstanding by and welcome to A.M. Castle & Company's Third Quarter 2007 EarningsCall.

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

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

Katie Pyra

Thanks, good morning. Thank you everyone for joining us for A.M. Castle's2007 third quarter conference call. By now, you should have all received a copyof this morning's press release. If anyone still needs one, please call myoffice at 312-553-6717 and we will fax you a copy immediately following theconference call.

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

Before we begin, as usual, we would ask that everyone takenote of precautionary language regarding forward-looking statements containedin the press release. That same language applies to comments made in thismorning'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 forjoining us today and for your continued interest in our company.

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

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

I will now spend some time describing the businessconditions we experienced in the third quarter. And provide you with ourthoughts for the balance of the year.

Generally speaking, the third quarter was characterized bycontinued softer business conditions. And as anticipated, lower commodityprices. July was the weakest month of the quarter, with 4th of July falling onthe Wednesday. And although the following month's activity sequentiallyimproved, our total metal volume for the quarter was 10.3% weaker than thethird quarter of '06.

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

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

For the last 12 months, the aerospace market has beenimpacted by the delays in A-380 and the Joint Strike Fighter Programs. Theincreased mill capacity has been absorbed by healthy demand from narrow-body planesand 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 inventoryin the aerospace supply chain resulting in reduced volumes and margin pressurecompared to the previous quarters.

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

Although, we view this as a timing issue, it has reducedvolumes in our contractual accounts, and put pressure on margins as we sellmaterial in this spot market.

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

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

As for our other end markets, we do not anticipate any pullon downturn, but we are focused on managing the business based on the currentdemand levels. Since, we are LIFO cost base company we typically are able tosustain our gross margin rate, even when there are significant fluctuations incost.

In this environment we're very pleased that we have beenable to maintain our gross margin rate close to our historic levels, whilereducing our inventory significantly. However, the decline in nickel pricingincreased pressure on our margins, as nickel-bearing materials were being soldat future lower surcharge rates, as company has attempted to reduce inventory.

Turning to our balance sheet, we achieved the $19 millionreduction in inventory during the third quarter, which in turn allowed us toreduce our debt. We intend to reduce our inventory levels further during thefourth quarter. Looking towards the fourth quarter, we expect businessconditions that we experienced in the third quarter to continue and expectmargins will remain under pressure.

I would again remind everyone that the fourth quarter istypically our slowest quarter of the year, due primary to the holidays impacton the number of effective shipping days, and typical year-end customerslowdowns.

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

We will continue to invest in our infrastructure to executeour strategy, and as such, our Oracle implementation project remains on targetand on budget for completion by the end of 2008. We also continue to pursuestrategic acquisition opportunities and seek to expand out internationalpresence in these identified growth industries.

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

Larry Boik

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

Third quarter 2007, consolidated net sales were $350.3million or $49.5 million, or 16.5% higher than the third quarter of the lastyear. Sales in our metal segment were $320.8 million for the quarter, whichrepresents a 17.9% growth year-over-year. The Transtar acquisition contributed17.1% of this segment's sales increase. Mike already went through our volumesciting a decline of 10% versus the third quarter of 2006.

Material prices were not as robust as previous quarters thisyear, but remained at high levels compared to last year which served to offsetthe 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 pricesincreased 4.2%. Our consolidated gross margin rate in the third quarter was27.7% 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 anoversupply light-gauge aluminum plate in the market

Consolidated operating expense in the quarter was $74.9million or $14.7 million higher than last year. Transtar added $11.1 million inoperating expenses compared to 2006. Included in operating expense in the thirdquarter was a $0.5 million of cost for the consolidation of our Riverdale, Illinois operation into our Franklin Park, Illinois facility. Thirdquarter 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 capitallevels. Interest expense for the second quarter of '07 was $4.2 million bycomparison. Our inventories continue to come down and we are paying down debtrapidly 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 millionversus the third quarter of 2006. And our consolidated EBITDA for the quarterwas $28.6 million or 8.2% of sales, as compared to $30.1 million or 10% ofsales in the third quarter of '06.

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

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

Transtar sales for the nine months were $191.8 million or25% of the revenue increase, lower volume accounted for an 8% decline inrevenue, 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, andmaterial 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 ascompared to prior year at 29.2%. The lower rate reflects higher metalsurcharges in competitive market conditions.

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

Adjusting for these one-time charges, operating expensesthrough September were 20% of sales this year, which is comparable to lastyear. The dollar increase in expenses year-over-year, also includes, $43.1million 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 wasprimarily attributed to our Transtar acquisition.

Joint venture earnings at $3.7 million year-to-date in '07were $0.4 million above last year’s earnings. And our consolidated EBITDAthrough 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 perdiluted share, as compared to $45.2 million or $2.45 per diluted share for thesame period last year

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

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

Through September we generated $11.2 million of free cashflows. And our debt-to-capital declined to 27% at the end of the third quarterversus 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 atthe end of September, as compared to 47.3 days at year-end 2006. And inventoryDSI, or Days Sales in Inventory was high at 140 days at quarter end. And that’sdue to a temporary over supply in products that support aerospace and the oiland gas growth markets. However, we expect DSI to come down with the continueddecline 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 capitalexpenditures 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 thesale of Metal Mart, LLC. Doing business is Metal Express for approximately $6.7million. Metal Express was a small order, metal distribution business that hadan average orders size of approximately one tenth of our core business, andthus did not provide strategic value to the Company in the longer-term. Thesale approximated our booked value for the business and the proceeds that willbe used or were used in October to repay a portion of the Company's outstandingdebt.

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

Question-And-AnswerSession

Operator

Thank you, sir. Ladies and gentlemen, we will now begin thequestion-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 youmention 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 mightrecall through June that increase was $33 million, so for the quarter it wentdown $15 million.

Bob Schenosky -Jefferies & Co

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

Larry Boik

Yeah. It's always difficult to predict LIFO. But,directionally if you think of our comments of inventory coming down, andbasically pricing being relatively similar to what we saw here in the thirdquarter 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 ofcompanies. One, is their anything that you are doing internally to enhance thevaluation their and enhance the profitability and/or are you taking a long lookat 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'sbeen historically as profitable as our metal segment and it's been a kind ofgood counter acting force in different markets with obviously differentproducts. So, we've been very happy with our Plastic business. And this yearthey are pretty flat in that business, so considering economic conditions theyhave done a good job in keeping their business volumes at a steady level.

We continue to look at increasing the value of thatbusiness. They are going through an upgrade in the ERP systems, which we wereinvesting in, and they recently acquired the assets of a very small plasticsdistributor in Northeast to increase their coverage. So, we continue to investin 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 aircraftside. You mentioned that during the quarter you saw some pressure oncontractual volumes. I guess I have to read into that, that there is min/maxvolume contracts there and the customers are down closer to their minimum?

Mike Goldberg

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

And so, what that tells us is that there has to be a kind ofa 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 aboutTim here, we are really in kind of ways working in a corridor, because nobodyknows 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 theaircraft cycle, what's your view on when orders will start before you willstart picking back up, particularly with flight going into A-380?

Mike Goldberg

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

Some of that material is already in the supply chain, and Ithink that at least about half of that material is most probably in the supplychain. And so, we would expect to see the [scope] or the balance of that in thesecond half of next year. And then, I think there is about 25 probablyscheduled for 2009, and again we would expect to see the demand for that in thesecond half of next year. So, all-in-all we would think around about in themiddle 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 numberthat you gave in your prepared remarks. The sequential decline in volumes andunit revenue, could you give those again, please?

Mike Goldberg

A sequential increase, July was the slowest. And again, wementioned the July 4th holiday. That was a bad week for I think everybody inindustry, it seemed like it was at least three days out of the regular shippingdays. August picked a couple of points and then September for us wassignificantly strong, about 7% stronger than August, so we did see a nicerecovery into September, but I think what we would say is that we expect thefourth quarter to kind of have the opposite sort of shape that October mightlook like September and then as we get into the holiday seasons, againeverybody knows that slowdown, and would imagine this would taper off towardsthe end of the year.

Timothy Hayes - Davenport and Company

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

Mike Goldberg

In terms of volume, we were about 6% down, its actually, ifyou come and look at it again the holiday season and take a couple of days outof that its actually less, but from the reported perspective we were 6% down onQ3 versus Q2.

Timothy Hayes - Davenport and Company

Okay. And your revenue?

Mike Goldberg

Revenue in the Q3 was $350 million against $372 million inthe 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 mixit swings pretty wildly.

Timothy Hayes - Davenport and Company

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

Mike Goldberg

Yeah. I think what we mention was, that our pricing wasdown, our average pricing and again it’s all subject to mix. But as best as wecan tell our average pricing was down just about 0.5% There's a lot of movingparts 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 Kelloggwith Next Generation Equity Research. Please go ahead.

Nat Kellogg - Next GenerationEquity Research

Hi, guys. Larry can you just give me the charge you took inthe 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 fromprior quarters, we were talking about our Franklin Parkreengineering, and that freed up space here to basically take another facilityclose by, which is a large tubing facility for us and collapse it into ourfacility here. And that work started in the third quarter and it was $0.5million worth of expense.

Nat Kellogg - NextGeneration Equity Research

And that was in the warehouse process delivery side or?

Larry Boik

Yeah.

Nat Kellogg - NextGeneration Equity Research

Okay. And then if I just look at SG&A it seems like itwas up about a $1.5 million from Q2 to Q3. Is there anything in particulargoing 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 expensesthat we incurred from Ohioproperty tax two of our facilities for tax years '04 and '05.

Nat Kellogg - NextGeneration Equity Research

Okay.

Larry Boik

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

Nat Kellogg - NextGeneration Equity Research

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

Larry Boik

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

Nat Kellogg - NextGeneration Equity Research

Right.

Larry Boik

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

Nat Kellogg - NextGeneration Equity Research

Sure.

Mike Goldberg

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

Nat Kellogg - NextGeneration Equity Research

Okay. So, cost maybe a little bit higher than whatever, butthat’s probably we are going to see that obviously for the next four or fivequarters, 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 thatthere 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, wherepeople fly in from around the country to really to be actively involved in thedevelopment of the program, this is management level.

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

Nat Kellogg - NextGeneration Equity Research

Okay. Alright, no that’s helpful. Then just on the inventoryside, what sort of inventory level, obviously it varies fromquarter-to-quarter, due to seasonality issues. But, what kind of inventorylevel you guys are shooting for or comfortable with. I mean, obviously, lookingat the MSCI data lot of people have sort of being saying service centerinventories are low and if demand picks up you could get a run in pricing andyou could get a scramble for material, and it doesn't sound like that's reallymuch of a concern for you guys. I am just trying to balance sort of the otherthings 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 - NextGeneration Equity Research

Right.

Mike Goldberg

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

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

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

Nat Kellogg - NextGeneration Equity Research

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

Larry Boik

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

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

Nat Kellogg - NextGeneration Equity Research

Okay.

Larry Boik

So, hopefully that answers your question.

Nat Kellogg - NextGeneration Equity Research

Yeah. That's helpful. And then just the last thing obviously you guys -- I am justtrying to look at year-over-year comparisons, Q4 last year, with volume down inQ4 last year. I think that's sort of when things start to slowdown little bitor was it volume still up year-over-year in Q4 last year?

Mike Goldberg

We saw the slowdown, sequential slowdown in the thirdquarter of last year.

Nat Kellogg - NextGeneration Equity Research

Okay.

Mike Goldberg

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

Nat Kellogg - NextGeneration Equity Research

Okay, okay. Okay, that's helpful. Alright, thanks for timeguys.

Mike Goldberg

Thank you.

Operator

All right. Thank you. Our next question is from Mark Parrwith 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, isit incrementally different then your proposed outlook given post the Q2results, any incremental surprises in that outlook or changes?

Mike Goldberg

I think it's kind of tough question to answer, but I thinkwhat we are seeing is that the business has slowed down a little bit more thanwe had anticipated. So, if we go back to the summer time, we didn't anticipatethe business being at the levels that it is currently at. So, I think what wehave seen is kind of our anticipation and the way that we are going to manageis 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 abit softer than the second, and the margins were bit more compressedcompetitively, including our aerospace margins. So, what we would expect now inthe fourth quarter, barring the crystal ball, it is similar to the third, butthen we've got the holiday impact and it's seasonally our slowest quarter ofthe 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 thisexcess supply in what you deemed as high growth product inventories, as far asthe temporary glide in those. And you said you are working those down in thefourth quarter, is that predominantly your aluminum gauge plates, Light gauge?

Mike Goldberg

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

Philip Gibbs - KeybancCapital Markets

Okay.

Larry Boik

We’ve been carrying a little bit higher inventory in thoseproducts throughout the year, and we have been mentioning that. But, just asthe delay in the normal production cycles of the planes themselves just kind ofexasperates 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 aluminumplate on the A-380. So, as we go forward here that would be a major factor inthe 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 reallyimpact the service center business, and production schedules are out there. Nowpeople think that there is no metal on the 787, no 50% of the plane still has ametal component, between titanium and aluminum. So, there is that incrementaldemand out there, but it’s truly not in our kind of short term plan cycles, sothe 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 ininventories at the sub-contractor level, that’s kind of holding you back frompushing more through?

Mike Goldberg

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

Philip Gibbs -Keybanc Capital Markets

Okay. Thank you I appreciate it guys.

Operator

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

Jim Altschul -Aviation Advisory Service

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

Larry Boik

I think the answer is yes, and the why, probably the biggestdifference is the mill or the supplier consolidation has occurred during thelast 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 ofthat 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 tothe 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 werethen. If you look at our markets, about at least 50% if not more of ourbusinesses is within aerospace or in the oil and gas sectors. Now we know thatthose industries are cyclical, but we don’t think that they are going to be inthe same cycle as kind of general economy. If you look back in '02, '03 ourshare in those markets would've been 17% to 20%. So, we saw that the company isin a better position now, in terms of the market served and the productsprovided into those markets.

Larry Boik

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

Jim Altschul -Aviation Advisory Service

Good. Next question, is there a general relationship betweenthe price and the underlying commodities in your performance, in general isyour company hurt or hindered when the price of nickel and another commoditiesgoes 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 ourexposure to nickel prices, and we said that about 24% of our revenue had somesort 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 onfix price, fix cost, so that doesn’t kind of fluctuate. So, that numbers startsto get diluted, and so there is direct relationship overtime, but if nickelgoes up at 20% in one quarter, it doesn’t necessarily translate to a verysignificant change in our revenue base. Obviously to be higher, but there ismany, 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 myquestions.

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. Ifyour line is muted on mutual line or please pick up your handset if…

Don DeFosset - UCapital

Hi gentlemen, sorry about that. My question for you guys isthe loss in terms of the inventory buildup, is that experiencing more towardsone of your customers, whether it be Boeing or Airbus and also you mentionedthat 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 areimpacting you guys the most? Thank you.

Mike Goldberg

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

Don DeFosset - UCapital

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

Mike Goldberg

Well, again, I think it's across the board, but in specificareas. We address the light-gauge aluminum, heat-treated aluminum plate ishaving some margin pressure, there is no doubt that. We see some marginpressure in our nickel products as people have reacted to this kind of verysignificant swings in the marketplace and that has kind of accelerated some ofthe lower surcharge numbers, which hopefully will now go away as nickel hasbounced back and stabilized. And so, they are mostly the major impacts, but thegeneral 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 - UCapital

I guess, I am little confused, I am just trying tounderstand whether this is demand driven from the aerospace cycle, whichcontinues to be very strong? And how that relates to what you are seeing in themarketplace, 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 indicationsthat 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 ofsome 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 slowdownwhile the build rates remain high, we know that there is a build up somewherein the supply chain of parts. And so, that's why we think this is kind of justa temporary kind of phenomenon, so that's how it impacts us.

Don DeFosset - UCapital

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

Mike Goldberg

Well, it has been additional supply, but if I knew theanswer we wouldn't be discussing this. I give you an opinion here, I think whenmaterial was tight in last year and earlier part of this year, I think peoplealmost certainly over board and over manufactured and then somebody looks attheir inventory levels and said we don't need that part for anther two weeks ora month or have much of the inventory they have. And then you go through thatcycle. And it can happen; it happens all through the supply chain andunfortunately it's not unusual. That would be our best kind of guess as tothose circumstances.

Don DeFosset - UCapital

Okay. Thank you very much. I appreciate it.

Operator

All right, thank you. (Operator Instruction) Management thereare no further questions at this time. Please continue with any closingcomments.

Mike Goldberg

I would just like to again thank everybody to be on the calltoday and their interest, and we well speak to everybody in the New Year. Thankyou.

Operator

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

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

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