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Executives

Michael A. Hajost – Vice President of Investor Relations & Treasurer

William A. Wulfsohn -President & Chief Executive Officer

Doug Ralph – Senior Vice President & Chief Financial Officer

Analysts

Gautam Khanna - Cowen & Co.

Edward Marshall, Jr - Sidoti & Company

Steve Levenson – Stifel Nicolaus

Jonathan Sullivan - Citi Group

Josh Sullivan - Sterne Agee

John Tumazos – Independent Research

Lloyd O'Carroll – Davenport & Company

Phil Gibbs – KeyBanc Capital Markets

Carpenter Technology Corporation (CRS) Q4 2012 Earnings Conference Call July 31, 2012 10:00 AM ET

Operator

Good morning and welcome to the Carpenter Technology Fourth Quarter Earnings Conference Call. My name is Dominique, and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in the question-and-answer session towards the end of this call.

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

Mike Hajost

Thank you, Dominique. Good morning everyone and welcome to Carpenter’s earnings conference call for the fourth quarter ended June 30th, 2012. This call is also being broadcast over the Internet.

With us today are William A. Wulfsohn, President and Chief Executive Officer; and Doug Ralph, Senior Vice President and Chief Financial Officer, as well as other members of the management team.

Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's most recent SEC filings, including the company's June 30th, 2011 10-K, September 30th 2011, December 31st, 2011 and March 31st, 2012 10-Qs and the exhibits attached to those filings.

I will now turn the call over to Bill.

William A. Wulfsohn

Thank you, Mike, and good morning everyone. Fiscal year 2012 was an excellent year for Carpenter. As a team, we executed well and we exceeded our earnings targets. The legacy Carpenter business saw a 68% increase in operating income, excluding pension EID, which was above our 50% growth target. This profit growth was driven primarily by focus pricing action, mix management initiatives designed to free up capacity for increased sales of high value products and excellent manufacturing performance, which reduced our cost per ton for the third straight year. Combined these actions drove a $0.44 per pound or 66% improvement in SAO profit per pound, and equally as important, these actions enabled the capacity gains to sell an additional 4,500 premium tons in the year.

Fiscal year 2012 was also an outstanding year for the company in terms of positioning for future growth. I would like to highlight four key areas of particular strategic importance. First, and the highlight of the year, was our acquisition of Latrobe Specialty Metals. We have now owned Latrobe for four months and the results in the business are strong. As expected, on an operating basis, the acquisition has been immediately accretive to earnings. I am also pleased to report that the integration is going extremely well.

Based upon what we have learned to date, we are even more excited about the strategic value and synergy potential from this transaction. Thus in summary, Latrobe is tracking ahead of our overall deal economics and we remain confident that we will achieve at least $25 million of synergy by year three.

Second, we announced earlier this year the construction of a $500 million premium products facility in Alabama. This state-of-the-art facility will enable us to support existing and increasing customer demand for our aerospace and energy products, with 27,000 tons of new premium product capacity.

In addition, the plant will enable us to improve customer satisfaction by offering dramatically reduced lead time. We monitor the progress of the plant’s construction weekly, and I am pleased to report that the project is on schedule and on budget.

Third, this year, we expanded our Dynamet facility in Clearwater, Florida. We believe this project which will eventually lead to the doubling of our Titanium wire capacity is essential, as we work to meet rapidly growing demand for our Titanium aerospace fastener wire products.

And fourth, this year, we expanded Amega West footprint to better support international market for oil and glass exploration, with acquisitions in Canada, Singapore and Dubai.

Looking forward, as we move into fiscal year ’13, our business remains strong and our backlog is high. We are coming off a record quarter in terms of volume in our premium forged bar and billet business. In addition, we have worked hard over the last several years to strengthen customer relationships. As a result of these efforts, we have seen increased and expanded long-term supply agreement.

In addition, I would like to highlight three important and unique factors driving Carpenter’s strong customer demand and profitability in the context of various global pressures at this time. First, to limit the impact of raw material price changes on profits, we have implemented pricing mechanism and hedging policies.

Second, we have focused our strategy on the design qualification and manufacturer of high-value differentiated in this product. Note, only a small percentage of our products are sold through distribution or service centers. And Carpenter doesn’t participate in the flat rolled stainless market. These areas, while attractive at specific points of an economic cycle, can experience higher levels of cyclicality and pricing pressure in the context of weak demand.

Third, supply and demand dynamics in the majority of our segments are favorable, as we sell in to grow in that market and the manufacturer of our products require large capital investments, long qualification cycles and significant technical expertise, making entry difficult for new competitors.

Beyond these strategic differentiators, we are fortunate as our key end market of aerospace and energy continued to show strength. Within aerospace, airplane build rates remain high and the mix shift to larger planes and new platforms favors higher use of Carpenter products. As a result, we continue to experience strong demand for our engine materials and fastener demand is near or above higher peak levels.

We are also having success selling Carpenter’s custom-series stainless alloys and Latrobe’s complementary line of aerospace products, both of which broaden our sales penetration into aerospace structural components.

Moving to oil and gas, directional drilling activity remains strong. While the number of North American directional and horizontal land drilling rigs is leveled, offshore and international oil and gas exploration activity is increasing. To capture these opportunities, Amega West is making investments to expand our footprint in the U.S. and abroad. These efforts enable Carpenter to broaden its reach and gain market share.

In addition, Amega West is also successfully targeting new product areas for growth. For example, Amega has just been awarded its first deepwater contract. To support increasing demand, our capacity expansions in Reading and Latrobe will permit us to ship an additional 4,000 tons in fiscal year ’13 and another 4,000 tons of premium products in fiscal year ’14. We believe these capacity additions will enable us to support growing customer demand in the near term, until our Alabama facility comes online in April of 2014.

With regards to financial expectations, we had previously stated a near-term goal of getting back to our prior peak EBITDA on the legacy Carpenter business by fiscal year ’13 or ’14. Based upon the current momentum of the business, we feel strongly that we will achieve that level in fiscal year ’13. With the addition of Latrobe and our announced capacity expansions, we will soon be starting and communicating a new target for further growing our EBITDA.

Please join us for our Investor Day on September 7th, in New York City. During that session, we intend to provide more details on our growth strategies and expected financial results.

I will now turn the call over to Doug, who will cover our quarter four and fiscal year financial results.

Doug Ralph

Thanks Bill. We had another good quarter of results. Overall, we delivered earnings per share of $0.77, which included $0.11 of Latrobe inventory fair value cost adjustments. Without this impact, we would have been at $0.88. The Latrobe business was accretive by $0.08 on an operating basis in its first full quarter.

Before commenting further on Latrobe, I will provide a few highlights on our legacy Carpenter business, which finished out a very strong year of financial performance. We had consistently strong positive spreads between our revenue growth rate and volume growth rate, reflecting successful results from our pricing and mix management strategy.

We improved our average mill profit per pound by $0.44 during the year, due again to very strong mix management actions and growth of premium products. Our average mill cost per ton improved for the third consecutive year, due to strong operational efficiency and productivity. And as a result of all this, operating income, excluding pension EID on the legacy Carpenter business was up 68% for the year, which exceeded our 50% going in target.

Overall, EBITDA for the year, ex-Latrobe, was $328 million, which is on track to get back to our prior-peak profit level this fiscal or a year ahead of schedule. We also feel good about the results that Latrobe is delivering. The Latrobe integration is going very well. We have already achieved about $2 million in net synergies through the first four months of ownership. This is mostly due to immediate cost synergies from overlapping third-party service agreements and purchasing contracts. The business has also gotten off to a very fast start on operational cost synergies, through the strong collaboration that is occurring between the Latrobe and Carpenter manufacturing teams.

Examples of early wins include better yield performance, increases in the number of heats per day, fewer scrap heats and lower cost through better scrap segregation. We are tracking all of these metrics and again, the early success if very encouraging and the team is executing very well.

The most significant deal synergy, as we have previously communicated is the ability to produce more premium tons from the Latrobe assets, including the immediate investments we made in three new VAR furnaces. We are making good progress in bringing these new furnaces on-stream by the end of the calendar year.

Given the strong progress being made, we expect by the end of this fiscal year, will be at a run rate of $16 million of net synergies or about two-thirds of the $25 million target in our original deal economics. Note that much of the benefit from the additional premium tons capacity will show up as SAO segment sales, so the synergies will be spread across the total integrated mill operation.

As we head into fiscal year ’13, our business momentum is strong and we continue to expect further operating income improvement of at least $70 million or 30%. This is versus a fiscal year ’12 base of $237 million that excludes pension EID and $11.7 million of Latrobe acquisition-related costs.

Since our depreciation and pension expenses both increased next year, this will translate into an EBITDA improvement of over $110 million in fiscal year ’13. The biggest year-over-year improvement will be the full-year impact of the Latrobe business, together with strong progress against our committed synergies. All in, the Latrobe business and synergies will contribute about $90 million of EBITDA in fiscal year ’13, including the portion that will show up in SAO results.

In addition, our SAO business will further improve profits, due primarily to additional premium tons volume from our Reading investments in Latrobe. Note that within the SAO segment, we will have about $6 million of first year costs associated with the new Alabama facility.

And finally, our PEP segment is expected to post revenue and profit increases on all three of the component businesses this fiscal year, with growth focused in aerospace and energy.

I am going to skip the normal recital of the income statement figures this time, since you can get all of this information from our press release and there are a couple of other areas that I want to expand on. I will just comment briefly on our fourth quarter segment results. Excluding surcharge, Specialty Alloy Operations or SAO sales increased 18% on 10% higher volume, with operating income of $65.5 million and a 20.2% segment operating margin. Performance Engineered Products or PEP sales increased 15%, with operating income of $9.7 million and a 10.4% operating margin.

Latrobe reported operating income of $9.2 million and a 7.5% operating margin, but excluding the inventory fair value cost adjustment, operating profit was $17.9 million, with a 14.5% operating margin. As we mentioned in our last call, the Latrobe inventory cost adjustment has now ended. So, we will not need to call this out separately going forward.

Free cash flow was positive $37 million for the quarter and ended up negative $59 million for the year, which was in the range of what we have been communicating all year. We did reduce inventory in the quarter by $36 million, driven by strong improvement in our finished goods turns. We still believe we can further improve our inventory turns especially in combination with the Latrobe business.

Toward this end, we have initiated an external consulting project to identify inventory and operational improvement opportunities across the total integrated mill system. This is being funded by a provision we included in our Latrobe deal economics and we expect to see cash benefits from this effort in the second half of the fiscal year. To put our cash flow results in context, our pre cash flow has been modestly negative in each of the last two fiscal years as we forecasted due primarily working capital increases to support business growth coming out of the downturn.

Over the next two fiscal years, we expect capital spending to peak at about $350 million in fiscal year ’13 and another $250 to $275 million in fiscal year ’14 driven by the investment in our new Alabama facility. Fortunately, our business generates strong cash flow with 286 million in cash flow from earnings in fiscal year ’12 and an estimated 350 million cash from earnings in fiscal year ’13. The net result is overall expected free cash flow that will be about 125 million negative in fiscal year ’13 and around 50 million negative in fiscal year ’14, before overall pre cash flow turns strongly positive in fiscal year ’15 for the balance of the decade.

Note that our out year cash flows will benefit from the additional earnings leverage created from our current investment phase. We also anticipated the Latrobe and Alabama investments when we did our financings last year. So, we will continue to have a strong balance sheet with good liquidity throughout the investment period.

Next, I’d also like to say a few words on our pension plans. Our unfunded liability has increased due to lower returns on the asset side of the equation and continuing lower interest rates that increase the calculated liability. We have closed the Carpenter general retirement plans in new entrants and the majority of the pension liability is for already retired employees.

After more than two decades of no pension funding requirements, we put 30 million of cash into our pension plans in fiscal ’12 and are due to put another 82 million of cash into the plans this fiscal year. Over the next seven years, current estimates are that we will need to put about $400 million into our various pension plans to address the underfunding, subject to market return and interest rate assumptions of course. This again is nothing that we affected into our cash flow and capital structure planning.

Beyond the cash funding aspect, the combination of lower asset values and lower interest rates will increase the pension expense we will record in fiscal year ’13 to 68.4 million or $0.83 per share, which is about 9 million higher than what we communicated in our last call. So this will negatively impact our EPS versus your previous models.

We are looking at some options to proactively deal with the liability and earnings impact from the pension plan, especially with the current favorable credit markets and low borrowing rates. This would all be tied into a strategy as we think about the $100 million of current debt coming due in May 2013. We will continue to evaluate our options and provide additional updates as we are able.

Finally, I want to alert you to one small change we will be implementing to our forward reporting. We will continue to report volume in tons for our mill business but will discontinue this for the PEP businesses, since volume is a less meaning for metric on these businesses and revenue is the more relevant in consistent performance metric. Hopefully, you agree this is a minor in logical change that we just wanted to make you aware of. With that, let me now turn it back to the operator so we can open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gautam Khanna with Cowen & Co. Please proceed.

Gautam Khanna - Cowen & Co.

Yes good morning.

Doug Ralph

Good morning.

Gautam Khanna - Cowen & Co.

Couple of questions. One, the special SAO and PEP businesses had sequential sales gain, expert thorough charge, but the operating profit was slightly down in both cases, is there any -- what explains that?

Doug Ralph

Nothing that we’re concerned about from a continuing basis on the SAO business there were some negative inventory effects, with our (inaudible) accounting in the detailed inventory in the current market prices below our cost standard, the are some negative profit affects from that and we had a fair amount of inventory reduction in the quarter. And then the rest is really SG&A or overhead cost driven much of that activity related since we’re resourcing a lot of activity out of [ph]Redding. Some of it is frankly a phenomenon whose people spending near their budget money at the end of the year, and now it knows that from a total dollar SG&A standpoint when you exclude the Latrobe and Amega, we were actually down year-to-year in dollars, but a lot of that spending occurred in the fourth quarter. And there were also some performance related cost impacts in the fourth quarter, since our operation hit its targets were cost per ton and profit per pound, and those types of things. So some of those items impacted our fourth quarter on the SAO business. On the PEP business, really just some temporarily higher costs in our manufacturing operations, some are related to the new capacity that we’re bringing on stream and stepping up forward of the higher demand in that market, and some areas of performance that we’re focused on there as well.

Gautam Khanna - Cowen & Co.

Should we think of the margins of both segments to return to where they were in Q3 and perhaps Q2, depending on what segment you’re looking at, I’m just looking at specialty allies, but north of 21% excess surcharge in Q3. And then, PEP has been as size 14% this year and 16% last year, I’m just curious where we are trending to given the order book.

Doug Ralph

Yeah, so the things that I mentioned there will correct out, that will be partly offset in the beginning part of the year just by the fact that our volume is lower, so that we have lower volume efficiencies during the first two quarters of the year.

Gautam Khanna - Cowen & Co.

Okay, the other thing, there is lot of noise intra-quarter and both of the year’s earnings report of weakening after market and this in general kind of a weakening order book in the quarter. Did you see any evidence of either and maybe if you could just characterized how orders trended through the quarter June versus May and April and perhaps what you’ve seen thus far in July, Thanks.

Doug Ralph

Sure, we don’t have as much visibility on after market versus if you were the primary consumers as some of our customers who are little further down stream have it. With that being said, we’ve seen continued strength, our backlog has stayed strong. We actually had a record backlog as well as sales coming out of June with our forged bar and billet business. So, at this point overall our business is very strong, limited areas of weakness not surprisingly would be around the small percentage of business that we do through distribution, some powder related sales in Europe or tool sales, but again these are smaller components of our overall business.

Gautam Khanna - Cowen & Co.

In lead time, have they changed at all at either segment?

Doug Ralph

We’ve been working hard actually to -- try to bring down our lead times and we’ve been successful in some respects, although we are quoting out into the first calendar quarter of now 2013, but our backlog level is remaining high. We’re just getting more out.

Gautam Khanna - Cowen & Co.

Thanks a lot.

Operator

Your next question comes from the line of Edward Marshall, Jr. with Sidoti & Company. Please proceed sir.

Edward Marshall, Jr - Sidoti & Company

Good morning. Question on, if I could may get too granular, but the end-market data which you have, if you have that combination Latrobe say for the aerospace and industrial businesses, I think that would be helpful.

Doug Ralph

Hi, we do call out in the press release of volumes with and without the probe impact so that you probably seen and it is one point, but I believe the other goal also has some additional data here.

William Wulfsohn

Eddie, he is talking about something other than what we called out in the press release which is the year-over-year growth rates and volume and revenue of Latrobe.

Edward Marshall, Jr - Sidoti & Company

Right, do you have the revenue numbers [ph]less Latrobe for the individual businesses. I don’t think that was called out in the release, was it?

William Wulfsohn

It is, but I’ll just rattle down through into our aerospace business and this is all revenues excluding the apex of surcharges we always quoted. So, the aerospace business was up 24%, our energy business was up 15%, the industrial consumer business was flat in revenue terms, transportation up 19% and our medical business up 12%. So, overall of 15%.

Edward Marshall, Jr - Sidoti & Company

And if you could comment on what you’re seeing in the gas turbine market because we haven’t spent that much time in there, but my senses we’re seeing a shift from what was spare in after market demand too a more OEM built backlog. Are you seeing that with your customer base?

William Wulfsohn

Well, we have described in the past and would continue to say that the demand in this market is lumpy, it comes in projects and we get fairly strong orders and then they dissipate a little bit. Right now, I’d say in the short term that it is a little bit weaker, but we’ve seen and I think we all acknowledge that given the lower cost of natural gas, the fundamentals are definitely likely to drive a higher demand rate overtime. So, we’re bullish in the long run, but in the short run it is not our strongest area.

Edward Marshall, Jr - Sidoti & Company

And the capacity additions which you’re putting in place, to it take place in the next 2 years, just refresh my memory and I think these are modest procedures. It is not like you are – have any chance of disruption to any other facilities or anything along those lines. This is just (inaudible) is that correct?

William Wulfsohn

We are adding a couple of VSRs in the running facility a couple of VARs in the Latrobe facility, we’re moving forward on some operational efficiency efforts on our Forge and press and then we’re getting the benefit of being able to schedule the Latrobe and Redding operations if you will as one mill, so we’re getting the synergies that come from the combined capability.

Edward Marshall, Jr - Sidoti & Company

But this isn’t like taking down a line to put it in a new furnace and etc.

William Wulfsohn

No, it is pretty straight forward.

Edward Marshall, Jr - Sidoti & Company

Okay, thank you.

Operator

Your next question comes from the line of Steve Levenson with Stifel Nicolaus, please proceed.

Steve Levenson – Stifel Nicolaus

Thanks and good morning everybody. I know you quoted lead trans added in to the first quarter next year, but can you talk about what dynamics lead times are and where you hope to get after the expansion?

William Wulfsohn

Okay. Right now, they are running about 12 weeks that is pretty much of our normal lead time. We’re expanding, I mean ultimately our desire is just to step back for a moment is to have the capacity so that across our businesses we can offer those type of lead times consistently. So, demand has we believe growing and we will be strong, but we’re hoping we can stay with those kind of lead times.

Steve Levenson – Stifel Nicolaus

Okay, do you think the ability to offer those lead times is going to affect the pricing at all or do you think pricing will remain strong.

William Wulfsohn

We are not seeing affecting pricing, as we add capacity we’re very careful. We try to develop long term strategic value based supply and pricing with our customers, not move to either spike prices or to chase prices and plan exactly where we are in given fuel current supply situation. So, we don’t see it is affecting pricing.

Steve Levenson – Stifel Nicolaus

Great thanks and on the Nicolaus front, do you see a shift away from some of the legacy super alloys (inaudible) that can handle the higher temperatures and how do you feel you’re positioned to meet the demand there?

William Wulfsohn

Well that general dynamic and trend is something that we’re excited about because, as you know we invest more in research and development and we believe as a percentage of sales anybody else in our industry and so this is an area that we try to lead and be an innovator. We feel good about our position on new air craft and new engines. Some of that is still to be determined because those materials haven’t been specified, but we feel encouraged by what those trends and innovations mean to us as a company.

Steve Levenson – Stifel Nicolaus

Okay, in the fact they are not specified yet, does that mean we still have an opportunity on some of these new engine designs.

William Wulfsohn

Oh absolutely, I just – some of them aren’t finalized in their design, so though the materials aren’t specified.

Steve Levenson – Stifel Nicolaus

Great, thank you very much.

Operator

Your next question come from the line of Jonathan Sullivan with Citi Group, please proceed t

Jonathan Sullivan - Citi Group

Hi, good morning and congratulation on the quarter. If I had a quick question in terms of the operating income [ph]XEID, it looks like the first three quarters of the year were revised down, will it take about 3 million – was that related to something with the acquisition cost or what was going on there?

William Wulfsohn

I am not sure what you are referencing Jonathan, to be honest?

Jonathan Sullivan - Citi Group

Well, in the 3Q release I think you had operating income, excluding pension EID 169 million and then for the full year it was 237 and end 70.8 in the fourth quarter which would imply 166 in the first three quarters? Perhaps I have my math wrong.

William Wulfsohn

That sounds like being not that you are off, which is about 3, would correspond to the charge in March for our inventory fair value cost adjustment. So, that could be the difference in the numbers that you are looking at. That’s not like you are up about $3 million and that was a $3 million item. So, I suspect that’s the case.

Jonathan Sullivan - Citi Group

Okay, fair enough. Thanks a lot.

William Wulfsohn

Okay.

Operator

Your next question comes from the line of Josh Sullivan with Sterne Agee. Please proceed.

Josh Sullivan – Sterne Agee

Hi, thanks for taking my call, questions. If you look at your guidance for 2013, the incremental, how much of that is volume versus mix shift in the portfolio?

William Wulfsohn

I would say generally summarize that, I would have to really kind of break down the pieces, a good chunk of that is just the full year effective of Latrobe business and the synergies. And so, I would say very, the volume there is growing, but the bigger contributors are just the full-year effect as well as the progress we are making on synergies. In the SAO segment, it will be volume-driven because it’s the effect of the 4,000 premium tons that we are adding. And in the PEP business, I would say predominantly revenue growth with some operational improvements.

Josh Sullivan – Sterne Agee

Okay. And then on inventories, can you talk about inventory levels and how we should think of those coming down, in light of the aerospace OEM production ramp over the next 12 to 18 months? Actually suppliers reported varying levels of inventory preparedness and just how you guys are lining up.

William Wulfsohn

At this point, we see a pretty good bounce between inventory levels and demand profiles at our customer level. We are not expecting a big pushback or a big wave to pull. We have built inventories over the course of the last year-and-a-half, and a lot of that has been really related to the increase in volume output, but also recognizing that our lead times are longer than we would like to see them. We have built some staged inventory, so we can provide better responsiveness for our customers. We are working to try to also, as Doug mentioned, see if we can focus on more efficient ways of operating our inventory.

One other point that would be worth noting is as our inventories have increased and they have increased in dollar per pound basis because we have seen an improvement of our overall mix as well. So, again, inventory is an opportunity for us, but we don’t see it as either an issue on our side or the customer side.

Josh Sullivan – Sterne Agee

And then just including Latrobe, does the fastener engines and narrow structures break down? Is that consistent with the 35% fasteners, 50% engines and remainders structures, does that change the feeling of Latrobe?

William Wulfsohn

Latrobe has that greater percentage of aerospace business on some of the structural components. They are big supplier of materials, for example, for landing gear. So, I think you would see that being a higher percentage. They also have fastener capabilities, but I think then in terms of the engine materials, that’s probably where you would see a lower percentage from the legacy Latrobe business.

Josh Sullivan – Sterne Agee

Great, thanks.

Operator

And your next question comes from the line of John Tumazos with Independent Research. Please proceed.

John Tumazos – Independent Research

Congratulations on the good results and conditions.

William Wulfsohn

Thank you.

John Tumazos – Independent Research

As you budget for the capacity increase and the 700 series alloys, what rate of growth in world commercial airline traffic do you use for the next 10 years? And I don’t want to ask you your market share assumption, but I am not smart enough to think of a different way to hide that question. But implicitly, you have to be making an assumption as to whether your competitors identically expand? You know how sometimes people don’t notice what the other guys are doing. I am not asking the second part of the question in a more clever way.

William Wulfsohn

Yes, the way I would break that down, John is that for the number of builds themselves, we rely on sources like airline monitor and over the period of time that you are talking about, it’s about a 7% compounded annual growth rate and just the number of builds. When we look at the material content, because of the larger planes, etcetera, we get that up to about a 10% type of ongoing growth rate. And then from a market share standpoint, we feel like we have been growing our market share in the marketplace, and since we are being proactive about adding the capacity to support the future growth that we would expect that to continue as well.

John Tumazos – Independent Research

I am sorry. You didn’t exactly answer my first question. What is your traffic assumption for the next 10 years for growth? Traffic may correlate better to whether the engines are on fire and used.

William Wulfsohn

We do track the actual historical, if you will, miles and hours, airline hours, available seat miles, revenue passenger miles, ton miles. I don’t know that we look at that as much going forward, but it’s predicted to be roughly airline traffic, roughly 5% per year.

John Tumazos – Independent Research

Thank you.

Operator

Your next question comes from the line of Lloyd O'Carroll with Davenport & Company. Please proceed.

Lloyd O'Carroll – Davenport & Company

Just sounds that we are absolutely clear of what’s happening, there has been some confusion on the base in ’12, in which your 30% guidance. What is the dollars in fiscal ’12 that we should apply the 30% to?

William Wulfsohn

Yes, Lloyd, in the table on I guess page 4 of the press release or at least the version that I have printed out here, it would be that $237.1 million of operating income, excluding pension EID and the acquisition-related costs.

Lloyd O'Carroll – Davenport & Company

Okay. Because we are just confused sometimes, is Latrobe in or out, (inaudible) in the latest quarter for Latrobe in our out. So, that’s a reason for the question.

William Wulfsohn

Right. Hopefully that table gives you the numbers that you need, and if you have any questions, you can call us and we can take you through.

Lloyd O'Carroll – Davenport & Company

Okay. And then, can you give us the sequential growth in volume of end use market for the quarter? Yes, and we are looking tonnage rather than revenue.

Douglas Ralph

So, this would be excluding Latrobe.

Lloyd O'Carroll – Davenport & Company

Yes.

Douglas Ralph

That’s versus last year.

Lloyd O'Carroll – Davenport & Company

Yes, versus the previous quarter.

Douglas Ralph

You have to stay with me a second here. So, these numbers now include Latrobe. So, aerospace is up 45%, our energy business is down 1%, industrial and consumer up 13%, transportation up 1% and the medical business up 15%.

Lloyd O'Carroll – Davenport & Company

Okay. Thank you.

Douglas Ralph

You are welcome.

Operator

Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed.

Phil Gibbs – KeyBanc Capital Markets

Good morning Bill, Doug, Mike. How are you?

William Wulfsohn

Good morning.

Douglas Ralph

Good morning.

Phil Gibbs – KeyBanc Capital Markets

You talked about in the past as energy being your fastest growing business. I am just curious if you could talk about some of the success that you have had and going outside some of your\, call it historically legacy markets like non-magnetic drill collars and land-based gas turbine and some of the success you have had in some of the areas like completion and exploration.

William Wulfsohn

Sure. Obviously, a lot of our growth that we have seen has been related to Amega, its growth in terms of the position in the market and its share. But we have also focused on providing some of our custom series materials for mud motors and for completion. In addition to that, we have been able to sell our (inaudible) materials for used and nuclear market that’s used continuing material for containing radiation.

So that’s been a big part of our growth story. And we have focused on some new innovative materials. We will be talking a little bit more about these in September. The (inaudible) materials which are beginning to be used for wind turbine and other applications in the energy markets. I would hide like those as three areas outside of our core.

Phil Gibbs – KeyBanc Capital Markets

Okay. And then also, can you update us on a progress in the aerospace structural piece of the portfolio?

William Wulfsohn

Well, to begin with, the 747-8 consumes about 39000 pounds of custom 465 for flat tracks that’s a big gain for us. Obviously the 787 which uses a significant multiple of titanium fasteners versus an equivalent 737 in size, those would be two areas that I would try to highlight immediately for you.

Phil Gibbs – KeyBanc Capital Markets

Okay, perfect. And just a couple of housekeeping, Doug do you have any sense of the LIFO impacts in your June quarter?

Douglas Ralph

Yes, the figure that we had quoted previously, which is just the straight effect of LIFO on the inventory changes that was negative 2 million in the fourth quarter.

Phil Gibbs – KeyBanc Capital Markets

Okay. So, it was a headwind for you?

Douglas Ralph

Yes.

Phil Gibbs – KeyBanc Capital Markets

Okay. Thanks a lot guys. Great results.

Douglas Ralph

Yes, you are welcome.

William Wulfsohn

Thank you.

Operator

Your next question comes from the line of Gautam Khanna with Cowen & Co. Please proceed.

Gautam Khanna - Cowen & Co.

Yes, just a couple of follow-up questions. I think Bill mentioned staging inventory to help out the customers, did you see any evidence given nickel fell quite a bit in the quarter of customer destocking on the engine alloy side?

William Wulfsohn

No, we really didn’t. Even though nickel prices have not been strong, obviously they have been in the $7 to $8 range, not a huge swing in pricing. So, at this point my impression is that customers are more focused on making sure they have the right supply of materials than trying to – in kind of time or be opportunistic here. Plus, as you know, a lot of our contract suite, we either hedge or they hedge, so it takes out a lot of activity to try to gain that.

Gautam Khanna - Cowen & Co.

Yes. You mentioned the fastener business is at on your peak and, the prior peak I should say, can you give us some color around sequential fastener metal trends? If I recall, late last calendar year, it is sort of flattened out sequentially, and how has it trended in the March and June quarter in terms of volume for titanium and nickel?

William Wulfsohn

The titanium demand we saw has a greater pickup, beginning last year we saw that. If you are early on the cycle and that makes sense given some of the poll associated with the 787. We have seen some pickup now, continuing in the titanium fastener market. In the nickel area, we continue to see growth coming forward and that accelerating and we expect that that will accelerate as aircraft builds continue.

Gautam Khanna - Cowen & Co.

I just want to be clear, sequentially, did you see both of those areas up?

William Wulfsohn

Yes, titanium was up 28% from the third quarter to fourth quarter of our last fiscal year and nickel was closer to flat from quarter-to-quarter. But we expect that it will pick up as the builds increase here this fiscal year.

Gautam Khanna - Cowen & Co.

And just, on Latrobe, if you could share any sort of initial customer feedbacks that on the first four months it’s good or bad? And maybe if you could comment on the integration kind of the willingness of the folks at Latrobe to kind of adopt the Carpenter’s system and if there have been any issues on that front? Thanks.

William Wulfsohn

Sure. So far the feedback, which obviously have been – my counterparts has been from customers is very favourable. I think customers, there were certain customers that had a legacy high regard for Latrobe and they are happy with the expanded capabilities that Carpenter brings. And there are those which were legacy Carpenter customers and also felt that there was a gain because of the increased product capabilities and capacity that the two companies together could bring. We are delighted with the integration and working with the Latrobe team. It’s really a great group of people. I think that we are working very well together. It feels very comfortable. Even though it’s two different companies, we really look at it there is the two Pennsylvania companies with long history producing products in similar markets. There is a lot of compatibility. I think people are excited about the prospects of what that does for the combined company. So, we just have really enjoyed working with the Latrobe folks and I think it’s going very well.

Gautam Khanna - Cowen & Co.

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Josh Sullivan with Sterne Agee. Please proceed.

Josh Sullivan - Sterne Agee

I just have a follow-up on the Amega West order that you had, I think you said your first deepwater order? I mean, is this a new area for you guys? If you could (inaudible) that? Thanks.

William Wulfsohn

It is a newer area for us in terms of our products. While it is not an order that I would call out as fundamental changing our volume profile. From the specific order of what it does is that it shows a signed confidence from both our part and our customers’ parts that we are working very closely with them. We are innovating with new materials and we are getting access to new applications in areas that have been outside of what we have traditionally been able to provide to them. So, we are very excited about where this takes us. Obviously, there is a lot more activity in the deepwater drilling and so that means that we will be able to participate and grow with that market as it grows.

Josh Sullivan - Sterne Agee

And then just internationally right now, what’s the breakdown?

William Wulfsohn

In the oil and gas area?

Josh Sullivan - Sterne Agee

Yes.

William Wulfsohn

I would say the majority is North American centric. I am not sure the exact split between the US and Canada but if we take those together it is North American centric. As you know, we did make an acquisition that gave us a footprint in Singapore and also in the Middle East. So we are well positioned to grow geographically as the demand in China and even Australia begins to pickup. So, we expect that drilling activity in North America is about 70% of the overall activity. And as that number changes over time we will focus on following around the globe where the need is the greatest.

Josh Sullivan - Sterne Agee

Okay, thanks.

Operator

Your next question comes from the line of Gautam Khanna with Cowen & Co. Please proceed.

Gautam Khanna - Cowen & Co.

One last one. I just wanted to ask if you had seen any evidence of new entrants in the fastener stock marketplace, any traction with some of your larger customers if that bill waives off?

William Wulfsohn

There is nothing that we have seen there has been any sort of – anything to wave a flag over – we just haven’t seen it.

Gautam Khanna - Cowen & Co.

Okay. Thank you.

Operator

We have no further questions. I would like to turn the call back over to Michael Hajost for closing remarks.

Michael Hajost

Thank you again for participating on today’s call. We look forward to speaking to you again next quarter. Thank you and goodbye.

Operator

Well, ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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