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

Q4 2007 Earnings Call

March 11, 2008, 11:00 am ET

Executives

Michael Goldberg – President & CEO

Larry Boik – VP of Finance & CFO

Katie Pyra – Ashton Partners

Analysts

Nat Kellogg – Next Generation Equity Research

Timothy Hayes – Davenport Equity Research

[Sharad Patel] – Jefferies & Co.

Mark Parr – Keybanc Capital Markets

David Fondrie – Heartland Funds

Operator

Thank you for standing by, and welcome to the A.M. Castle & Company’s Fourth Quarter and Year-End 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. As a reminder, this conference is now being recorded today, Tuesday, March 11, 2008. I would now like to turn the conference over to Katie Pyra with Ashton Partners. Please go ahead.

Katie Pyra

Thank you. Good morning. Thank you everyone for joining us A.M. Castle’s 2007 Fourth Quarter/Year-End Conference Call. By now, you should’ve all received the copy of this morning’s release. If anyone still needs one, please call my office at 312-553-6717, and we’ll 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 an overview of the quarter and the year-end, then we will open the line for questions. I’ll now turn the call over to Mike. Go ahead, Mike.

Michael Goldberg

Thanks, Katie. Good morning everybody. Thank you for joining us today on the call and for your ongoing interest in our Company.

We are pleased to report that 2007 was a record year for sales and EBITDA as we achieved a new milestone of $1.4 billion in revenue, a 20.6% increase over 2006. We also reported $116 million in EBITDA, a 5.5% increase over 2006. Despite changing economic conditions as 2007 unfolded, we’re very pleased with our results and the positive momentum we carry into 2008.

These milestones were achieved as our Company made significant strides on the execution of our long-term growth strategy that we presented to you a year ago. As we head into 2008, our focus continues to remain on building organization into the industries leading global provider of specialty metal products and supply chain services.

On this call, we highlight some of our key accomplishments in 2007, provide you with our perspective on the current business environment and share our early outlook for 2008. But first, a quick recap of our Fourth Quarter and Year-End Financial Results. .

As you have seen from our press release, our fourth quarter consolidated net sales were $322 million, equal to the corresponding quarter last year. Net earnings were $6.7 million or $0.29 per diluted share compared to $9 million or $0.47 per diluted share in the prior year. I’d like to remind you that fourth quarter is typically our softest quarter of the year primarily due to the reduced number of shipping days, the slowness around the holidays and the normal year-end customer shutdowns. This was true in 2007.

In addition, material price has softened in some areas in the fourth quarter, most notably in nickel alloy and stainless steel, which were impacted by a reduction in the nickel commodity prices. Also, we saw a decline in the heat treated aluminum plate prices as a result of the excess inventories in the aerospace supply chain. This all resulted in lower gross margins and hence profit margins for the quarter.

Before I recap our full year results, I’d like to make a few comments about the 2007 business environment. Overall the yield’s characterized by softer demand. The softness was somewhat mitigated by our acquisition of Transtar in September of 2006 and by generally higher specialty investment prices. It’s noteworthy, and in fact unprecedented in our industry, that despite the market softness, we experienced higher average prices across our product lines.

We believe there are two major reasons for this. First, there is the continued underlying strength in demand for commodities like nickel and steel from the emerging economies in Asia and elsewhere. Second, there is a structural shift taking place in our industry as a result of the expensive ongoing (inaudible) consolidation. Suppliers are becoming more efficient and matching capacity to demand, which reduced the likelihood of wider price swings and softens the overall impact on the broader business economic cycle on our industry.

I’d also like to comment specifically on the dynamics of the aerospace marketplace during 2007. While ongoing demand and aircraft build rates remain very healthy, our volume in margins were increasingly effected by excess inventories in the total aerospace supply chain, particularly an oversupply in heat treated aluminum plate. We believe that this is a temporary situation brought on as additional mill capacity has come on stream and because of announced delays in the A380 and joint strike fighter programs. As the industry works through its excess inventory position over the next few quarters and as the A380 production ramps up, we anticipate a return to market conditions most similar to 2006. If the first couple months of 2008 are an indication, the inventories becoming more in balance with current demand and result in margins have stabilized.

Also make our brief comment on plastics business: Our plastics business experienced significant growth in the office market furniture in 2007. However, general machining, boat building and retail product purchase markets softened over the course of the year. Even so, margins remain steady despite an oversupply of some key products across the supply chain.

With that, let me recap our 2007 results: Consolidated sales rose 20.6 over prior year, reaching a record $1.4 billion. Metal sales, which account for 92% of total reported revenue, increase 23% to a record $1.3 billion. The acquisition of Transtar contributed 18% of that increase. (Inaudible) from the year was $51 million or $2.41 per diluted share compared to $54 million or $2.89 per diluted share in 2006. EBITDA increased 5.5% to a record $160 million, reflecting the full year earnings for the Transtar acquisition. Larry will provide more details on the comparative financial results later on in the call.

Now I’d like to highlight a few of the last year’s significant accomplishments. 18 months ago we launched a multi-year strategy to become our industry’s premier global provider of specialty metals and processing and supply chain solutions. Last year we made some significant progress towards this goal, positioning our Company to maximize its growth potential over the next several years. Our secondary of public equity offering in May raised $93 million enhancing both our capital structure and our operating flexibility. We the proceeds to accelerate debt reduction related to the Transtar acquisition, which in turn lowered our interest expense providing us immediate flexibility to make additional acquisitions and investments while remaining well within our target leverage range of 30% to 50%. Also as a result of the offering, our largest shareholder converted their stock from preferred to common, thus eliminating the annual preferred dividends of $1 million going forward.

The equity offering which coincided with our move to the New York Stock Exchange, increased Castle’s public float and gave our Company additional visibility. Consequently we have broadened our investor base and seen a doubling in our average daily trading volume.

We made significant progress in 2007 on our Transtar integration efforts. This included implementation of cross-selling initiatives supported by product trading and synchronization of procurement and customer sale and service activities. In 2008, we will retire the Transtar name and we’ll operate under the Castle Metals Aerospace brand.

In another noteworthy development last year, we reengineered our flagship Franklin Park, Illinois, facility. This enabled us to consolidate and close our nearby Riverdale facility, together yielding estimated annual savings of approximately $3 million beginning in the second quarter of ’08.

Finally, 2007 was a year of significant investment in our infrastructure to better support execution of our strategy. Cornerstone of these efforts has been our project to implement a new oracle enterprise resource planning system. This new system will allow us to manage our metals business on a single platform and will support future acquisitions in our global businesses.

In 2007, we completed system design and several iterations of increasingly rigorous systems tests. The second quarter of this year we will go live with a new system for most of our aerospace business with waves later this year targeting the rest of our metals business.

Also in early 2008, we have realigned the commercial leadership within our metals business into four teams to provide greater focus on our target markets. So in addition to aerospace, there are commercial teams focused on the oil and gas business, the carbon alloy and stainless plate business that serves the heavy equipment and infrastructure markets and the bar and tubing business with a focus on applications of highly engineered products into the broad manufacturing markets. All four units operate under the Castle Metals’ brand and are supported by corporate shared services group, which provides finance, human resources, information technology and operations and legal support.

As you may have seen, we recently announced the hiring of Curtis Samford to lead our Castle Metals Oil & Gas commercial unit.

Our plastics business serves the industrial plastics market following a strategy very similar to our metals business, that is it focuses on the specialty industrial plastics, it forms high valued-added processing services and targets higher growth markets. In 2007, TPI continued its geographic expansion requiring a small plastics distributor in Rhode Island to increase its coverage of the Northeast corridor. TPI also began an upgrade of its own enterprise resource planning systems.

Now I’d like to share our current thinking about 2008. While the current outlook for the general U.S. economy is uncertain, we are cautiously optimistic about 2008 for several reasons. First, we expect pricing to remain at historically high levels. We’re continuing to see the effects of supply rationalization and strong global demand for raw materials, which has produced a much more stable pricing environment.

Second, we’ve participated in several strong markets like aerospace and oil and gas, but we don’t participate in any significant way in end markets that are strongly tied to the more consumer-driven general economic cycle such as automotive and residential construction.

Third, our customer base is increasingly global in scope, which further moderates our susceptibility to economic downturns in North America.

Last but not least, we’re very excited about the two strategy moves we made recently and the opportunities they create. Both of these moves support our emphasis in high growth markets and expend our global capability. The first is our acquisition of the Metals UK Group, distributor and processor of specialty metals serving primarily the oil and gas, aerospace, petrochemical and power general markets worldwide. Metals UK Group has four facilities, three in UK, including its headquarters, and one in Spain. Sales out of the UK comprise approximately 25% of Metals UK total revenues and include customers in 36 countries throughout Europe, Asia, Austral Asia and the Americas. We expect this acquisition to be accretive to earnings in 2008.

Another strategic moved announced in January was the establishment of our new service center in Shanghai, China, which will be fully operational in the second quarter of this year. The 45,000 square foot facility will enable us to more effectively serve our existing customers in China, give us a base for expanding our business across the booming Asian marketplace. Initially, the new service center will focus on aerospace business. We have plans to expand our offerings to other markets in the future.

Drilling down a bit further on our markets, we believe that aerospace will continue to be strong in 2008 driven by the expanding and changing global commercial fleet, (inaudible) aerospace programs and no more replacement cycle for aircraft. In fact, the wide body commercial aircraft are gaining increasing share of the global fleet has particular relevance for our business because it increases the demand for the five performance allied materials.

However, in the early part of the year, we expect our aluminum plate products will see similar demand in margin levels that we experience in the second half of ’07. But we do anticipate improvement and the excess inventory has worked its way through the system as demand picks up in the second half of ’08.

We believe that dynamics driving other capital intensive activities by oil and gas exploration as well as the increased global demand for commodities suggests that markets such as the oil and gas heavy equipment, mining equipment and power generation will remain healthy for the foreseeable future.

Overall, we expect supply lead times to remain stable or move out slightly and pricing to remain stable to modestly high. As we said earlier, we plan to have most of our metals business on the new ERP system by the end of the year. To date, we are on plan and on budget.

In 2008, we will continue to look for investment opportunities. That better equip us to serve our global sourcing requirements of our customers. This includes additional investments in Mexico. We say tremendous growth in 2007 as well as continued expansion in Europe and Asia. We will continue to look for acquisitions that are consistent with our strategy.

At this time, I’ll turn things over to Larry Boik to give you more a detail review of the numbers. Larry.

Larry Boik

Thank you, Mike; and good morning, everyone. I’ll start with a summary of our fourth quarter financial comparisons and follow with the full year competitive results and close with some commentary on our balance sheet and cash flows through December.

As Mike stated earlier, our fourth quarter 2007 consolidated sales of $322 million were equal to the fourth quarter of last year. Again, fourth quarter demand reflected our typical seasonal slowness driven by the year-end holiday period. Sales in our metal segment were $294 million for the quarter or about $1 million less than last year. Overall tonnage was down about 7.5%, but a 7.3% increase in average material prices helped offset most of the impact on revenue dollars.

Our plastic segment fourth quarter sales of $28 million were also approximately $1 million higher than the same quarter of 2006. Our consolidated gross margin rate in the fourth quarter was 25.6% of sales compared to prior year at 27.6%. Margins have remained compressed due to competitive market conditions. Margins for aerospace grade aluminum plate have been impacted by the ongoing inventory oversupply that Mike already spoke to.

Consolidated operating expense in the fourth quarter was $72 million, close to last year.

We did incur two separate significant project expenses during the quarter. The first was $800,000 of expense related to the consolidation of our Riverdale, Illinois, tubing operations into our nearby Franklin Park facility. In early 2008, we permanently exited the Riverdale facility, which will result in an expected annual rent savings of $1 million starting in mid second quarter of this year. Secondly, we incurred $1 million of expense in the fourth quarter of ’07 related to our Oracle ERP project. If we exclude these two items, total operating expense was 22% of sales for the fourth quarter as compared to 22.3% last year.

Interest expense of $1.7 million for the fourth quarter of 2007 was $2.6 million lower than last year due to reduced debt levels. The proceeds from our May 2007 equity offering and solid cash flow from the business were used to reduce debt. Fourth quarter 2006 debt and related interest expense reflected the funding of the Transtar acquisition.

Joint venture earnings of $1.6 million were up $600,000 versus the same quarter of 2006. Results for Kreher Steel are 50% owned joint venture reflect an acquisition they completed in April of 2007. Consolidated EBITDA for the quarter was $17 million or 5.3 % of sales as compared to $23 million or 7.1% of sales in 2006.

Net income for the fourth quarter was $6.7 million or $0.29 per diluted share as compared to $9 million or $0.47 per diluted share last year. Additional shares issued and outstanding, stemming primarily from the secondary equity offering completed in May 2007, had a $0.06 per share dilutive effect on the EPS for the this quarter. Average shares were 23.1 million for the fourth quarter of ’07 compared to 19.6 million in the fourth quarter of 2006.

I’ll now briefly go through our year-to-date comparative results. Consolidated sales for fiscal year 2007 were a record $1.4 billion, an increase of $243 million or 20.6% over 2006. Sales in our metal segment were $1.3 billion or 22.8% higher than 2006. The Transtar acquisition accounted for $192 million of this increase. Price increases accounted for 14% of the revenue growth and average tons sold declined 8%.

Our plastic segments 2000 [sic] sales were $116 million, an increase of $600,000 versus last year. Plastics volume was 2.3% lower than last year, but material price increases of 2.9% more than offset the volume decline. Our consolidated 2007 gross margin rate was 27.3% of sales compared to 28.7% in 2006. Again, competitive price pressures and the market oversupply of light gauged aerospace grade aluminum plate contributed to margin rate compression, most noticeably in the third and fourth quarters.

Consolidated operating expense for 2007 was $297 million. The Transtar business acquired in September of 2006 added $44 million of incremental operating expense year-over-year. During the year, the company also incurred the following costs: A $1.4 million charge associated with the write-off of our former business systems which we incurred the first quarter of 2007; a $600,000 second quarter asset impairment charge; a $1.8 million spend for our Franklin Park, Illinois, lean engineering initiative, including the cost to move the Riverdale operation, all of which occurred during the fourth quarter; $2 million for the Oracle ERP implementation which was evenly split between the third and fourth quarters. When we adjust for these items, operating expenses for the year were 20.5% of sales compared to 20.9% last year.

Interest expense was $13 million in 2007 versus $8 million in 2006. The increase versus last year was primarily attributed to the funding of the Transtar acquisition. That acquisition debt was subsequently repaid with proceeds from the Company’s secondary equity offering and favorable operating cash flow from the business.

Joint venture earnings of $5.3 million in 2007 were $1 million above last year, primarily due to Kreher’s acquisition completed in the spring of 2007. Consolidated EBITDA for 2007 was a record $116 million or 8.2% of sales compared to $110 million or 9.3% of sales in 2006. Net income was $51 million or $2.41 per diluted share as compared to $54 million or $2.89 per share last year.

Again, additional shares issued and outstanding stemming primarily from the secondary equity offering had a $0.30 per share dilutive effect on EPS for the full year. Our full year average dilutive shares for 2007 were $21.5 million versus $19.1 million for 2006.

Moving on to the balance sheet, we continue to aggressively reduce our inventory levels through the fourth quarter of 2007. Total inventory declined $21 million in the fourth quarter and $40 million since June 2007. We anticipate our average DSI for 2008 to be close to previous year’s normal level of 120 days. We generated $79 million of operating cash flow for 2007 compared to $31 million in 2006. The combination of cash generated by the business and the proceeds of the equity offering were again used to repay debt. Debt declined $140 million in 2007. As of December 31, 2007, our debt to capital ratio was 18.3% compared to 51.2% at the close of 2006.

Capital expenditures were $20 million in 2007 compared to $13 million in 2006. Included in the 2007 expenditure were $8 million for the Oracle ERP project and $2 million for the combined Franklin Park lean project and the subsequent Riverdale consolidation and closure. The balance of the spending was for our typical maintenance capital in the business.

We anticipate 2008 capital spending to be similar 2007 and will include the rollout of Oracle into our metals business throughout the course of the year. We also estimate the Oracle project will add approximately $6 million of expense in 2008 with the majority of the spend occurring in the first three quarters.

In summary, the Company ended 2007 in terrific financial shape and with a strong capital structure giving us the ability to execute on our strategic initiatives and continue to look at growth and expansion opportunities, including potential acquisitions both here and abroad.

We’ll now open up the call for any questions you might have.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we’ll begin our question-and-answer session. (Operator Instructions) Our first question comes from the line of Nat Kellogg. Please state your company followed by your question.

Nat Kellogg – Next Generation Equity Research

Nat Kellogg from Next Generation Equity Research. Nice quarter, guys. Just sort of a couple of quick questions. Do you guys have any estimate of what sort of revenue you expect out of the facility in China once it gets up and running?

Michael Goldberg

That’s a good question; I wish I really knew the answer to that. We’re starting off, we have some business currently in China that we’re going to transfer from the U.S. to China and so that business is our cornerstone. I think that in annualized terms its most probably in the first to the fiscal year of ’08 most probably it’s in, it’s relatively small numbers, single-digit to millions of dollars. Beyond that, we anticipate very significant growth opportunities kind of doubling of that business probably year-after-year. Initially we’re starting small to more effectively service our current business, but we do expect that to grow very significantly once we get established in that marketplace.

Nat Kellogg – Next Generation Equity Research

So obviously will it start off small and some future opportunities?

Michael Goldberg

Right.

Nat Kellogg – Next Generation Equity Research

Then it looked like DNA picked up a little bit in Q4 maybe a little bit where I had it. Is there anything in particular there or is that a good run rate going forward with the Oracle cap ex spend maybe it goes up in more in ’08, just a little guidance on that maybe.

Larry Boik

I think what you’re seeing is, again, we spent $20 million in cap ex this year. We are in straight line half year convention, so anything we’re spending in any given year is that’s except the DNA will also lag behind that. So I would think that as we continue to move forward with another roughly $20 million next, the DNA will pick up.

Nat Kellogg – Next Generation Equity Research

That’s helpful. Then I guess you guys have sort of said it seems like aluminum plate market pricing is a little bit, starting to stabilize a little bit. I’m just sort of curious with the recent sort of run up in aluminum plate, does that sort of help clear things out and does that sort of increase people’s buying patterns or does that seem to have had much effect on pricing?

Michael Goldberg

The aluminum plate we’re really referring to is the aerospace two and seven series plate, which have kind of their own pricing dynamics and some of the other plate products I think long-term are going to get, will have upward pricing pressure on with the movement in the L&B aluminum pricing. But the majority of what we sell is really kind of a somewhat of a different kind of pricing cycle and to a large extent is being reflected by the supply and demand dynamics of the aerospace market. As we said in our comments, we most probably saw that at its weakest in the fourth quarter and we’ve seen, we’ve certainly seen it stabilize in the first couple months of this year. We still think there’s going to be excess inventory through the first half but we would anticipate that market strengthening and pricing strengthening in the second half of this year.

Nat Kellogg – Next Generation Equity Research

You know I know carbon isn’t a huge part of your business, but you guys have some explosion there and obviously with the recent run up in price we’ve seen in a lot of carbon products, I just wondered if you guys can talk a little bit about your sort of availability towards getting steel and then also sort of the affect on customer buying patterns that you’ve seen so far.

Michael Goldberg

We have relatively significant part of our business in carbon products both in bar form and in plate form. As everybody knows, there’s a significant movement upwards significantly driven by kind of by the cost of raw materials and that’s get passed through. So pricing for both bar and plate is moving upwards. The availability issue is more of a question in plate that certain carbon plate products are increasingly under tight supply and we’re seeing some fairly significant price increases announced in those areas and so in terms of the market, the plate market is certainly hotter than the bar market and some of the applications that the plate goes into are stronger as well.

Nat Kellogg – Next Generation Equity Research

That’s great. Well that’s all I got, but just want congratulate you guys, obviously a nice quarter, particularly on the balance sheet. You guys have done a lot of good things this year, so congratulations and that’s all I got.

Larry Boik

Thanks, Nat.

Operator

Thank you. Our next question is from the line of Timothy Hayes. Please state your company followed by your question.

Timothy Hayes – Davenport Equity Research

Hi. Good morning. Tim Hayes from Davenport.

Larry Boik

Hi Dan.

Timothy Hayes – Davenport Equity Research

Back on the heat treat plate and again just the aerospace grade plate products so that the weakness in Q4 on pricing, just to clarify, that had nothing with the aluminum price on the LME, correct?

Michael Goldberg

That would be correct, yeah.

Timothy Hayes – Davenport Equity Research

That’s stabilized so far this year?

Michael Goldberg

That’s also correct.

Timothy Hayes – Davenport Equity Research

The margins on those products, I think you made mention a comment on that, is that picking up a little bit so far this year?

Michael Goldberg

A little bit, yeah, I think what we saw margin-wise, after two months you hope that the two months is indicative so that’s really all that we can see. But the margins for that product were at their lowest in the fourth quarter. So we’ve seen that pickup a little bit in 2008. It’s still significantly weaker than it was and significantly weaker than we would like it to be. But that’s why we use the word stabilize, that we haven’t seen that deteriorate any further and we’re kind of hopeful that we’ve seen a bit of pickup in recent weeks.

Timothy Hayes – Davenport Equity Research

There’s really no seasonality to that business, correct?

Michael Goldberg

No, I think it’s… As you know, the aircraft build continues. That’s not the issue and so it’s really been driven by supply in the whole chain. I think that in prior years, the old Transtar business had very healthy third quarters compared to a first quarter which typically we tend to see stronger business in the first and second quarter in our other segments, but they’ve seen strength in second halves in prior years as well.

Timothy Hayes – Davenport Equity Research

Then on your outlook for ’08 for margins, did I hear correctly, did you state that margins in ’08 would be similar to ’07?

Michael Goldberg

Think what we said was with respect to aerospace that the first half of this year will be more similar to the second half of last year, so we kind of average everything out. Hopefully they’re the opposite sides of a U, if you understand what I mean. The other side margins we expect to be, the rest of the business to be fairly similar to what we saw last year. Kind of a lot will depend on pricing and underlying strength of the marketplace. As we said, there are certain segments we think would be quite strong and there are certain segments of the market which we really don’t have a very good understanding of where it’s going beyond the first quarter. The more commodity, the more kind of the closer you get to the more consumer side the more questions we have about the general economy. But that’s only a part of our business and so the other half of our business which is heavily producer durable driven, now energy related, infrastructure related we see margins there being okay and holding up.

Timothy Hayes – Davenport Equity Research

A couple other quick questions. On the acquisition of Metals UK, what was the price that you paid for that?

Michael Goldberg

Well, we haven’t kind of reported that. One of the reasons why we haven’t is that, what I would add is that the total price will be a function of future earnings, so there’s an earning element in the transaction.

Timothy Hayes – Davenport Equity Research

Has there been a cash payment so far in the quarter though of Q1?

Michael Goldberg

Yeah, there was a cash payment upfront, yeah.

Timothy Hayes – Davenport Equity Research

So we’ll see that in the Q then?

Larry Boik

I don’t think so. I don’t think it’s considered material acquisition.

Timothy Hayes – Davenport Equity Research

Specific metals, are we talking stainless or nickel base?

Michael Goldberg

Out of the U.K., yeah: Nickel, stainless steel, duplex, super duplex alloys, they’re the major products, about two-thirds of that in plate form, the balance in bar form. So it’s a very good mix for us. It fits right into our strategy. They serve many of the same markets that our North American business serves as well.

Timothy Hayes – Davenport Equity Research

Then just my final question on the run rate for SG&A for ’08, do you have any guidance on that?

Larry Boik

Not specific guidance, no, Tim. But the SG&A really is not going to materially change in our view year-over-year. Again, the biggest pickup in the expense that we’re going to see this year is going to be related to the Oracle project and that’s the $6 million that I talked about in my prepared comment.

Timothy Hayes – Davenport Equity Research

Yeah, because on the first glance at the report, the other operating expense seemed to be unusually low in Q4, but it sounds now that there was some costs that came out of there and maybe ended up being allocated to the segments and (inaudible)…

Larry Boik

You’re looking at our segment reporting in the 10-Q and our other category there is basically executive related expense that we have difficulty allocating specially to the segments because it goes across really both the metals and plastics. You’re right, for the fourth quarter that other expense was lower than kind of the run rate you would’ve seen in the previous three quarters. It’s primarily, the way I would look at it is the third quarter we had roughly a $600,000 increase in our legal reserve accrual. We talked about it I believe in the third quarter. That was not allocated back to the segments until the fourth quarter. So when you look at the total company spend in terms of operating expenses quarter-over-quarter, the run rate’s similar. It’s just when you look in that particular segment reporting, you’re going to see that $600,000 come out of the other segment and moved into the metal segment.

Timothy Hayes – Davenport Equity Research

All right, very good. Thank you.

Operator

Thank you. Our next question is from the line of Sharad Patel. Please state your company followed by your question.

[Sharad Patel] – Jefferies & Co.

I’m with Jefferies. I’m in (inaudible) actually this afternoon, this morning. Just a quick question on: What was the LIFO charge that you guys took in the quarter?

Larry Boik

Actually in the fourth quarter of ’07 it was a LIFO credit of about $5 million. For the year, we took a LIFO charge of about $20 million.

[Sharad Patel] – Jefferies & Co.

The current inventory that you have, how long do you think it’ll take to work that down?

Michael Goldberg

I think as we said that we think we can back to our normal operating basis of about 120 days. We continue to make progress on that. So we think that’s going to be the average for the year, so we should get there by middle of the year.

Larry Boik

I think the big reduction we took second half of last year put us in really good shape of achieving that DSI.

Michael Goldberg

Kind of clarify that, we did have an adjustment to make in the second half, I’m sure you saw the results of that. We’re now pretty close in total terms kind of where we want to be. Our biggest concern is to make that the inventory levels are profit to the business activity levels. So we got a little bit further work to do and always you got to work it very day, but we’re not looking at making anymore significant adjustments to the inventory.

[Sharad Patel] – Jefferies & Co.

Excellent. Just one final thought here on the specific outlook for the end market, on your key end market, can you kind of break that down in kind of a percentage form? Do you expect 5% to 7% on aerospace and defense in commercial airline or is it something higher?

Michael Goldberg

We don’t… I would say, we don’t share that information. I’m not sure that we really know that information. We look at these markets more on a macro trend basis than specifically at specific growth rates. I mean you must probably have the same access to the information that we do and that really guidelines for us and we’re operating in parts of those markets and so we don’t look at any specific growth rates by end use market.

[Sharad Patel] – Jefferies & Co.

I appreciate the time, guys. Thank you.

Operator

(Operator Instructions) Your next question is from the line of Mark Parr. Please state your company followed by your question.

Mark Parr – Keybanc Capital Markets

Keybanc Capital Markets. Can you hear me alright?

Larry Boik

Sure.

Michael Goldberg

Good morning, Mark.

Mark Parr – Keybanc Capital Markets

Good morning, Michael. I had a couple of questions. First, in listening to your comments about how you see the aerospace market unfolding in ’08, it sounds like, I think you heard you say that the first half would be pretty much a carbon copy of the second half of ’07. Did I hear that right?

Michael Goldberg

I’m not sure I know that. I’m not sure I’m that accurate. I think what we said was that it would be more like the second half of ’07. I mean really what we saw in ’07 a pretty significant decline in the second half so the third quarter was weaker than the second quarter and the fourth quarter was weaker than the third quarter. What we’re anticipating is a recovery of that. Now whether that’s completely symmetrical, I don’t know. We’re not… What we’re not anticipating is a weak, further weakening. Early indications certainly some that the market is at least stabilized and may be kind of just slightly improving. We would expect that to continue. As I said earlier, it’s the other side of the U, whether it’s completely symmetrical, time will tell. So we expect it to kind of improve month-by-month, quarter-by-quarter.

Mark Parr – Keybanc Capital Markets

Is what you’ve seen in January and February, it’s improving to as great an extent that you did see deterioration in the fourth quarter?

Michael Goldberg

No, again…

Mark Parr – Keybanc Capital Markets

Or is it more… It’s more like a stabilization process?

Michael Goldberg

Yeah, we’ve seen it stable and again certainly January stabilized and February may have been a little bit better, but I’m not sure that’s a trend. A few weeks from now we’ll talk about the first quarter. I think we’ll have a clearer picture at that time.

Larry Boik

I could just add comment regarding comparative to first quarter ’07. Just keep in mind first quarter ’07 was particularly strong in aerospace for us so…

Mark Parr – Keybanc Capital Markets

Just to add some more color on to that, Larry, could you give us kind of a sense of the difference between the first quarter and the fourth quarter from a volume perspective?

Michael Goldberg

Across the board, yeah, I think we can do that.

Mark Parr – Keybanc Capital Markets

If you can do it across the board, that’s fine, but also related to aerospace would be helpful as well.

Michael Goldberg

Just across the board actually, calculate the number for you, the fourth quarter total (inaudible) about 7% fourth quarter tonnage to first quarter tonnage.

Mark Parr – Keybanc Capital Markets

All right, so the fourth quarter…

Michael Goldberg

Let me correct that. It’s about 11%.

Mark Parr – Keybanc Capital Markets

All right, so the volume in the fourth quarter was 11% higher than the first quarter?

Michael Goldberg

No, first quarter was… Fourth quarter volumes was about 11% lower than the first quarter.

Mark Parr – Keybanc Capital Markets

All right.

Larry Boik

That’s overall…

Michael Goldberg

That’s overall, yeah.

Larry Boik

…metals business.

Mark Parr – Keybanc Capital Markets

How about the aerospace?

Michael Goldberg

It wasn’t off that much.

Larry Boik

Yeah, the volume comparables are actually pretty close really throughout the year. What’s been the issue is really the 2.7 plate and the oversupply. Because of the oversupply… For example, as you know Mark, a lot of that plate that we have is for use in the A380 and the joint strike fighter programs in terms of the contract business. Until that oversupply works its way through the chain and the production ramps up to a more normal base, we’re still going to be selling that stuff out into the more transactional spot side of the aerospace market. So the tonnage is actually pretty steady, but the pricing is depressed.

Mark Parr – Keybanc Capital Markets

All right, so what you really need to occur from your perspective is a shift in the customer mix back into the contract business?

Larry Boik

Well that plus, yeah, more of a balancing of the supply chain of the heat treated 2.7 series plate.

Mark Parr – Keybanc Capital Markets

Is there anything that you’re aware of on the supply side from the producer angle where the producers are willing to cut back the production of the material to support the stabilization of the supply chain?

Michael Goldberg

We haven’t said anything on that. There is the outage at Alcan in Ravenswood which can take a piece of equipment for the next six to eight weeks. That’s out there. But otherwise, we haven’t heard any announcements on the production side.

Mark Parr – Keybanc Capital Markets

How significant is that stretcher outage in the context of the overall aerospace supply?

Michael Goldberg

It’s a factor. I don’t think it’s really very significant. I think it’s… From right here, I think it’s more on the heavy side of the dates, so I think we’ll have to see how that plays out. But it’s not going to be a major factor, but it will be a factor.

Mark Parr – Keybanc Capital Markets

All right, if I could ask at least one more question. On the Metals UK acquisition, what is your anticipation of the earn out as percentage of the total purchase price and how many years does it occur over?

Michael Goldberg

Well to answer the question, it depends how profitable their going to be and so there’s a range from zero upwards. The earn out is based on 12 months. Again, so by this time next year that transaction will kind of be tied up and we’ll know exactly where we are.

Mark Parr – Keybanc Capital Markets

If the profitability is sort of the in the middle of the range that you expect, how big will the earn out as a percent of the total purchase price?

Michael Goldberg

Again, roughly if it’s in the middle range, it’d be about 25%.

Mark Parr – Keybanc Capital Markets

Terrific. Thank you very much for the color.

Operator

Thank you. Our next question is from the line of David Fondrie. Please state your company followed by your question.

David Fondrie – Heartland Funds

I’m sorry to continue to beat on this cost of sales question, but in the fourth quarter, it looks like your cost of sales were about 74.3% versus the third quarter of 72.2%, so roughly a 2% decline in gross margin. Is that primarily attributable to the aluminum situation?

Larry Boik

It’s both that. That’s certainly a good piece of it. But also, as Mike was saying earlier, on the other side of our business, demand has been down really throughout ’07 in terms of general manufacturing in North America, so there’s some price compression there. Also in the fourth quarter, nickel on the alloy (inaudible), so nickel price kind of declined as well and that will have an impact on cost of goods sold or margins.

David Fondrie – Heartland Funds

Would you anticipate as you go into 2008 that margins would rebound more towards the yearly 2007 margins as opposed to the relatively low Q4 margin?

Michael Goldberg

Again, if you look at the three factors which kind of drove that margin decline: One is the aerospace plate, and we’ve talked about that so we would anticipate that improving but more in the second half or the first. Second one would be the nickel decline. In the first quarter, nickel stabilized and then recently has jumped, so for the first quarter it shouldn’t be a factor. Thirdly, this may be the biggest unknown, the total competitive environment out there, we still think that the market is going to be very competitive for ’08 and so there’s going to be some pressure there. Hopefully at least two out of those three factors should be more positive. So once it’s paving a recovery of margins and the market will determine how much we recover, but we wouldn’t anticipate margin level by not the fourth quarter, no.

David Fondrie – Heartland Funds

In SG&A expense, that was down significantly from Q3 and you talked about it a little bit. I guess where I wanted to go is, and I think you said, overall for 2008 should be fairly comparable to 2007, but that would be on an annual basis which would suggest that it would be up from this run rate in the fourth quarter. Is that because of the $6 million of additional expense that’s going to be incurred on the Oracle system?

Larry Boik

Well we had Oracle expense in the fourth quarter as well. As I said, roughly about $1 million and we’re going to continue to have the Oracle expense throughout ’08 as we roll it out in our metals business. For the year it’s going to be somewhere around the $6 million range, more heavily weighted towards the first three. There’ll be some in the fourth as well in terms of quarter spread. Overall in the SG&A, we don’t see any significant, we don’t have any planned up ticks as far as SG&A goes. I mean you got your normal inflationary salary expenses, but other than that there’s no big needle movers.

David Fondrie – Heartland Funds

We will be better off to look at the fourth quarter as a run rate or look at the year as more of an average?

Larry Boik

You better look at the year as more of an average.

David Fondrie – Heartland Funds

Thank you very much, appreciate that.

Operator

Mr. Goldberg, there are no further questions at this time.

Michael Goldberg

I just sort of brief closing comments. Again, thanks for your questions and your interest. If you sum up, we’re cautiously optimistic about ’08. The majority of our business is involved with aerospace and energy and infrastructure, which we believe won’t be as impacted by any negative general economic trends. As we said, we continue to look for growth opportunities. We continue to pursue our strategy, become a specialist organization kind of differentiated by the products and the service and the market knowledge and expertise that we have. We’re pleased with the progress we made. There’s a lot of work in front of us for 2008, but we’re tremendously excited about the future and we’re doing it for the Company, for our customers and our employees and our investors. So again, very much appreciate everybody’s interest and thanks for listening and we’ll speak to you soon. Thanks.

Operator

Ladies and gentlemen, this concludes the A.M. Castle & Company’s Fourth Quarter and Year-End 2007 Earnings Conference Call. Thank you for your participation, and you may now disconnect.

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