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

Q1 2008 Earnings Call Transcript

April 29, 2008 11:00 am ET

Executives

Katie Pyra – IR, Ashton Partners

Mike Goldberg – President and CEO

Larry Boik – VP of Finance, CFO and Treasurer

Analysts

Kevin Money – Cleveland Research

Nat Kellogg – Next Generation Equity Research

Mark Parr – KeyBanc Capital Markets

Tim Hayes – Davenport & Co.

Ralph Marish [ph] – First Manhattan

Operator

Thank you for standing by and welcome to the A.M. Castle & Co. first quarter 2008 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 being recorded today Tuesday, April, 29, 2008. I would now like to turn the conference over to Katie Pyra with Ashton Partners. Please go ahead.

Katie Pyra

Thanks. Good morning. Thank you, everyone, for joining us for A.M. Castle's 2008 first quarter conference call. By now, you should have all received a copy of this morning's press release. If anyone still needs one, please call my office at 312-553-6717, and we'll send 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 the 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'll begin the call with an overview of the quarter and then we'll open up the line for questions. And now, I'll turn the call over to Mike Goldberg. Go ahead, Mike.

Mike Goldberg

Thanks, Katie. Good morning, everyone, and thanks for joining us on today's call. As you have seen in our press release, we are pleased to report strong financial results for the first quarter of 2008. We experienced healthy demand in a number of key markets and pricing was strong across most of our product lines.

Before we review some of the financial details of our first quarter performance, I'd like to make some high level comments on the current business environment. As you know, our business is somewhat seasonal with the first quarter typically being our strongest one, and our fourth our weakest. If you remember, the first quarter of 2007 was characterized by very strong demand and tight supply. Prices and nickel-related surcharges escalated to record levels and margins were subsequently higher. As we moved through 2007, demand softened and supply became more plentiful, which caused the quarter-by-quarter falloff to be greater than one might expect from the seasonality alone.

In the first quarter of 2008, our business volumes recovered significantly, returning to first quarter 2007 levels. Demand was particularly strong in our plate, oil and gas, and plastics markets. Aerospace activity was also firm. With the exception of aerospace-grade aluminum, prices remained strong with both base prices and surcharges increasing, especially in our carbon and alloy products. Margins were somewhat softer than a year ago, primarily due to the continuing oversupply of the aerospace aluminum plate and rising surcharges, particularly for scrap.

Over the last two to three years, we have seen periods of time when certain materials were in short supply and cost and prices escalated. In 2005 and 2006, this was true of heat treated aluminum plate. This time last year nickel was reaching record levels. This year it's carbon's turn. As you know, we do not sell carbon sheet or coil, but we do sell carbon plate, primarily into the heavy equipment markets. We expect this product in these markets to remain strong, but like everything else, it will eventually return to a more normal trading environment.

Our first quarter consolidated net sales were a record $393.5 million, compared to $375.4 million in the same quarter of last year. Net income was $13.8 million, or $0.62 per diluted share, compared to $15.6 million, or $0.81 per diluted share in the prior year. Very importantly, our inventory performance improved markedly to 112 days DSI.

We achieved these strong results despite an uncertain U.S. economic environment and we can attribute this to the fact that our business is focused on the producer durable capital goods end use markets, whose performance is not as strongly tied to the more consumer-driven general economic cycle. Furthermore, the weak dollar and our customer base becoming increasingly more global in scope moderates our susceptibility to the U.S. economic cycle.

Looking across our markets, our carbon and alloy plate business is particularly strong right now. Supply has tightened to the point of shortage, especially in high strength carbon and in quench and tempered products, and prices continue to rise. Supply is being impacted by the MRAP Program and strength in a number of infrastructure markets. The strongest areas for us so far this year include industrial cranes, non-residential construction equipment, and mining equipment. Oil and gas activities were also strong with increased activity in nearly all our large accounts. With oil prices hovering at record levels, the outlook for this market remains excellent.

The aerospace market had good activity, but the results are still impacted by the tough conditions for heat treated plate. Margins for heat treated plate in the first quarter were similar to the fourth quarter of last year. As we have reported before, we don't anticipate much of a recovery in prices and margins until the latter part of the year.

Our plastics business had a very strong first quarter due to the phase in of several large contracts. These were in the automotive interiors, personal protection, and life science markets, which offer significant opportunities for the plastics business in the near term.

Also of note is that many of our employees have been putting in a very, very significant effort on our ERP implementation. We completed the first phase within our Metals business in early April. I am pleased to report that the system in our facilities were operational day one, and with each passing day our people are become more acclimated and efficient as we work through the typical learning curve. We remain on budget and on schedule. Our next phase of the ERP implementation is planned for September and we expect to have the majority of our North American Metals business on the new platform by the end of the year.

As I mentioned earlier, we are seeing healthy demand in many of our target markets, not only domestically, but also internationally. As part of our growth strategy we are building on our infrastructure overseas to accommodate the growing needs of our customers, whose business continues to expand globally. During our last call, we talked about our acquisition of Metals UK Group, and in the first quarter sales of, especially plate products, to the oil and gas, aerospace and petrochem markets, have been strong.

We are also operating our new center in Shanghai. Initially, this new facility will enable us to serve existing aerospace customers locally in China who previously were being serviced out of the U.S. This also will provide us a base for expansion in aerospace and other growth markets across the Asia Pacific region in the future. Processing equipment and inventory are in place and we have a full complement of people. We will host a formal opening of the Shanghai center next week.

Continuing with the international scene, our Mexico operation continues to grow at a rapid pace. And just last week, our Board approved the capital investment to double the size and processing capability of our facility in Monterey. The expansion will be complete in early 2009.

As we look ahead to the second quarter, we anticipate that the current level of business activity will be somewhat softer than the first quarter due to normal seasonality patterns as experienced in prior years. We don't anticipate any significant changes in our key end markets or any precipitous or immediate falloff in demand. Pricing will remain at historically high levels with nickel prices steady and carbon and alloy prices high due to significant surcharge increases. Supply availability will likely remain tight in certain plate products keeping margins for that metal firm. Aerospace aluminum prices and margins will remain close to current levels until inventories reach a better state of balance.

At this time, I'll turn things over to Larry Boik to give you a more detailed review of the first quarter numbers.

Larry Boik

Thank you, Mike, and good morning, everyone. I'll begin with comparative operating results for our first quarter and follow with some comments on our balance sheet and cash flow. As a reminder, the company completed its acquisition of Metals UK Group in January of this year and their results, therefore, are included in our first quarter '08 financial reporting.

As Mike mentioned, we reported record sales in the first quarter of $393.5 million, an increase of $18.1 million, or 4.8%, as compared to the first quarter of 2007. Sales in our Metals segment were $362.3 million for the quarter, $15.7 million, or 4.5%, higher than last year. The Metals UK business obviously contributed to the year-over-year increase.

Excluding the acquisition, our average tons sold per day increased 1.4% and average prices were 3.1% higher than the first quarter of 2007. As an aside, our average tons sold per day were approximately 14% higher than either the third or fourth quarter of 2007.

Our Plastics segment first quarter sales were $31.2 million, an increase of $2.5 million, or 8.5%, as compared to the first quarter of 2007.

Our consolidated gross margin rate in the first quarter was 26% of sales, compared to prior year at 28.2%. Aerospace margins were comparable to the fourth quarter of 2007, but remain compressed due to the continuing industry oversupply of aluminum plate. Margins in the balance of our Metals business improved slightly versus the fourth quarter of 2007, but were below first quarter 2007 levels. Tightening of supply in certain grades of carbon plate in the first quarter of this year resulted in higher prices and margin for those products, which are sold to the heavy equipment and infrastructure-related markets.

Consolidated operating expense in the first quarter was $79.8 million, $3 million higher than the first quarter of last year. This increase largely reflects the operating expense of our newly acquired Metals UK operation. During the quarter, we incurred $1.4 million of expense associated with our Oracle ERP implementation. We also recorded a $0.5 million credit to pension expense stemming from the company's decision to freeze the defined benefit pension plans for the majority of our employees. Excluding these two items, total operating expense was 20% of sales, as compared to 20.5% for the first quarter of last year.

Interest expense of $2 million for the first quarter of 2008 was 42.2 million lower than last year due to reduced debt levels. First quarter 2007 debt and related interest expense reflect the funding of the Transtar acquisition, which was subsequently reduced by using the proceeds from our May 2007 equity offering.

Joint venture earnings of $1.8 million were up $900,000 versus the first quarter of 2007. Results for Kreher Steel, our 50%-owned joint venture, reflect an acquisition they completed in April of 2007.

Consolidated EBITDA for the quarter was $30 million, or 7.6% of sales, as compared to $34.9 million, or 9.3% of sales in 2007. Net income for the first quarter was $13.8 million, or $0.62 per diluted share, as compared to $15.6 million, or $0.81 per diluted share last year. Additional shares issued and outstanding, stemming primarily from the secondary equity offering, had an $0.08 per share dilutive effect on EPS for the quarter. Average shares for the first quarter of 2008 were 22.4 million, as compared to 19.6 million in the same quarter of 2007.

Moving to the balance sheet, our focus on inventory management resulted in a significant improvement in our turn rate during this quarter. Our DSI, or days sales in inventory, was 112 days for the first quarter versus an average of 132 days for fiscal year 2007. This in fact was our best inventory turn rate since the second quarter of 2004, which was a period characterized by very tight supply environment, including product on allocation from the mills. Receivable DSO, or days sales outstanding, was 45 days in the quarter, on par with 2007 performance despite our increased international sales exposure.

Net debt increased by $30.2 million in the first quarter, primarily due to the funding of the Metals UK Group acquisition. Our debt-to-capital ratio remains very healthy at 24.1% as of the end of March.

Capital expenditures were $5.4 million in the first quarter of 2008, as compared to $2.2 million in the first quarter of 2007. Included in the 2008 expenditure was $3.1 million for the ERP project in our Metals business. We anticipate 2008 capital spending to be around $20 million, similar to last year, and it includes the rollout of our ERP system.

In summary, we are pleased with our first quarter results, our inventory performance, and the resulting financial condition of the company.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Kevin Money with Cleveland Research. Please go ahead.

Kevin Money – Cleveland Research

Good morning.

Mike Goldberg

Good morning.

Larry Boik

Good morning.

Kevin Money – Cleveland Research

I just wondered if you could provide some color on what impact you guys are seeing from the 787 delays. And also, just last quarter you referenced the A380 and the joint strike fighter delays and I was wondering if you can give an update on what you are seeing on those programs there.

Mike Goldberg

First of all, the 787, our direct involvement in that, obviously, today is very small. And so we didn't plan on having too much impact to that. We actually do–we do provide some titanium to the engines that go into the 787, so that's going to slow down a bit. But that's a – it's a relatively small amount of revenue. So, directly, that's not going to have much of an impact on us. In terms of the marketplace – the extent of that – there is aluminum – heat treated aluminum on the plane that will slightly impact the overall market supply-demand balance, but not – we don't think significantly. In terms of the A380, the JSF, really nothing has changed since the last time we spoke. And we are anticipating some pull through on the A380 in the second half of the year as the production starts to ramp up. And that is a critical factor to us and to the whole marketplace as a major consumer of the heat treated plate.

Kevin Money – Cleveland Research

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Nat Kellogg with Next Generation Equity Research. Please go ahead.

Nat Kellogg – Next Generation Equity Research

Hi, guys. Nice quarter. Just one quick question. On the share count, it seemed like it was a little bit lower than Q4. Did you guys buy back shares in the quarter?

Larry Boik

No. This is a result, Nat, of the 2005 through 2007 long-term incentive plan. And what we did is the plan pays out in shares, but we withheld a certain amount of shares on the payout, elected – and that's for withholding tax, and we elected to pay that in cash instead. And hence, that's the difference in the share count.

Nat Kellogg – Next Generation Equity Research

Okay. And so we should expect somewhere around this number going forward?

Larry Boik

Yes.

Nat Kellogg – Next Generation Equity Research

Okay, that's great. And then, I know you guys have talked about you guys consolidating two of your Illinois facilities, basically closing down one and moving all that inventory into the facility that you guys have there at the headquarters. And I'm just wondering if you guys would remind us sort of what the – when that happens and when you should start to see the benefit of lower rent and what not.

Larry Boik

Well, we have already closed our Riverdale facility and moved all the inventory into our Franklin Park facility. That was really done by the end of '07.

Nat Kellogg – Next Generation Equity Research

Okay.

Larry Boik

We won't start to see the savings from that, which is really rent expense of approximately $1 million a year – our lease expires in May, so we won't start to see that until later this year.

Nat Kellogg – Next Generation Equity Research

Okay. So that will really be Q3 and Q4 you'll get some savings from that.

Larry Boik

Right. But keep in mind, as we report every quarter here, we will still have expense associated with the rest of the rollout of our Oracle, so it can offset it.

Nat Kellogg – Next Generation Equity Research

Right, absolutely. And then, just on the Oracle, I know you guys – in the press release you said you have implemented successfully in one piece of the Metals business, which is I guess the Transtar business, and then you have to roll it out to the rest of the Castle business. Is that the prognosis for then sort of the course of the year?

Mike Goldberg

Yes, that's a pretty good description. We rolled out Oracle to the domestic former Transtar business, so the Transtar legacy system. And then, the plan is in the third quarter to rollout to the Castle Metals legacy system

Nat Kellogg – Next Generation Equity Research

Domestic?

Mike Goldberg

Domestic, yes.

Nat Kellogg – Next Generation Equity Research

And fingers crossed, so far so good?

Mike Goldberg

Yes, fingers crossed. As I said in my comments, I'm very pleased with the implementation. There is a significant learning curve. We wouldn't say that we are where we are – where we want to be. But we are going up that learning curve, both from a user and – user perspective and from a technical perspective. So we are up and running and everybody has done a tremendous job to get us to where we are.

Nat Kellogg – Next Generation Equity Research

Okay. And then just last question. I know you guys have obviously talked about the improvement in the heat treated aluminum plate sort of in the back half of the year. And is there anything just beyond the fact that people continue to build the planes that gives you confidence that's going to happen? I mean, I guess the question is we have had this issue with sort of supply and demand. Do you guys see that the supply is moving – it's retreating as well as demand is increasing?

Mike Goldberg

Well, I – in our own analysis, if you can project out the build rates and the supply of material, then as the A380 gets into ramped up production that supply and demand gets much more into balance. So I think there's really two phases. I think there is the shedding of the current over-inventory situation in parts and all sorts of things, which is still going to play itself out. And then, the second part will be just the incremental demand, which would put the whole market into a better balance, and so, really going back to my comments to the first question that the A380 is a significant component of bringing that market into balance. I think there's 2.2 million pounds of heat treated plate on every one of those planes. And so, multiply that by 10 or so. That becomes a very, very sizeable chunk of demand. And so, that is the key. There's no doubt about it. I think if – and the additional capacity that was brought on was – it was brought on in anticipation of that and other programs, and so it is a crucial part.

Nat Kellogg – Next Generation Equity Research

Okay. Great. Well, thanks–

Larry Boik

And I'll just–

Nat Kellogg – Next Generation Equity Research

Yes, go ahead.

Larry Boik

And I'll just add to that at least in our inventory you might recall second half of last year we aggressively reduced inventory. And we are in a much better place than we were six months ago in our heat treated aluminum plate inventory internally. So I guess it's really once the market starts to move, we are in a good spot to move with it.

Nat Kellogg – Next Generation Equity Research

Okay, that's great. Now, I appreciate the time and thanks for answering all of my questions. And now, that's all I have got. Thanks, guys.

Mike Goldberg

Thanks.

Operator

Thank you. Our next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Mark Parr – KeyBanc Capital Markets

Thanks very much. Hi, guys.

Mike Goldberg

Good morning, Mark.

Larry Boik

Good morning.

Mark Parr – KeyBanc Capital Markets

I had got a couple of questions. First, Larry, could you give us some color on the impact of LIFO accounting in the quarter?

Larry Boik

Yes, for the quarter it wasn't all that much. For first quarter '08 it was about $3 million. And first quarter of last year, because of nickel, it was pretty substantial. It was $15 million last year about this time.

Mark Parr – KeyBanc Capital Markets

So the LIFO was an impact or was a help?

Larry Boik

It was a charge. It was an impact.

Mark Parr – KeyBanc Capital Markets

Okay. All right. That's helpful. And on the international Greenfield and brownfields, Michael, that you talked about, is – could you give us some color on how big your international book is now with the inclusion of Metals UK and where you think that might be say 12 or 24 months from now as the Chinese operation ramps up?

Mike Goldberg

Yes. I think our international footprint is about – it's about 10% – 10 to 12% of total revenue. So that puts it around about $150 million approximately. Long term – I think I have talked about this before – I would anticipate us being able to double that in a relatively short period of time. And that would be coming from our growth in Asia, spring boarding off our Shanghai location, continued growth of our business out of the Metals UK Group, and the aerospace locations in the U.K. and France as well. And we –and that would also include further international growth, whether it be acquisitions, or as you say, brownfields, is most probably a good description. So that's where I think we can get to in a relatively short period of time, in say a couple of years, two or three years perhaps. And a lot of that would depend on the incremental growth opportunities in terms of acquisitions or other startups. We are – we have noticed that we are – in the market that we are in, specifically the oil and gas and the aerospace markets, there is a tremendous demand and push from our existing customer base to support them overseas. And so, that's what we are trying to do.

Mark Parr – KeyBanc Capital Markets

Okay. Are you seeing the business – from a bottom line contribution perspective, how does the international business compare to your domestic business?

Mike Goldberg

We don't – we look at each location. It obviously varies from period to period. But it's –at this stage it's no – it's probably no different in terms of kind of the EBITDA sort of margins.

Mark Parr – KeyBanc Capital Markets

Okay. So the international EBITDA margins are in line with the domestic ones?

Mike Goldberg

Yes. We don't – I mean, it's – obviously the China – China is kind of like two days old, so that doesn't – we don't know – we haven't got a P&L for that. So we look at the European operations and generally we are looking at the same sort of performance. It varies depending on what's going on. But at this stage it's about the same.

Mark Parr – KeyBanc Capital Markets

Okay.

Mike Goldberg

And in the future it's – I think we would anticipate that we could drive some more incremental profit from that.

Mark Parr – KeyBanc Capital Markets

Okay. And with the completion of the ERP implementation in '08, what – if we are looking at '09, Larry, what sort of – say the elimination of implementation expenses. What – could you give us an update just on what you expect the total implementation cost to be in '08, and so what we might see as an improvement in expenses next year as a result of that being put in place?

Larry Boik

Well, keep in mind that in '08 we are basically – we'll be up on the system in our U.S. or North American – well, I should say Canada and U.S. locations.

Mark Parr – KeyBanc Capital Markets

Yes.

Larry Boik

So we'll still be implementing Metals UK Group, the former Transtar French and U.K. operations, and our Mexico facility as well. So there'll still be some ongoing implementation costs.

Mark Parr – KeyBanc Capital Markets

But you'd think it would be a bit–

Larry Boik

It would be less, it would be less. With each phase that you go out, you are doing less of the repetitive costs and – in addition where the real savings, if you will, that we have always talked about with the system, is really on the working capital side and our ability to manage and turn the inventory better. And Mike has publicly stated and strongly stated more internally an objective to get us from – now we are at 112 days – down to 90 days.

Mark Parr – KeyBanc Capital Markets

Okay.

Larry Boik

And I think that will be the biggest benefit out of the system. I think in terms of other cost synergies, once we get the balance of our domestic locations up, we'll be fully implemented in a shared service – corporate shared service environment. All in, between that and some of the other savings that we see and talked about with Riverdale flowing through and what not, it could be a delta of $4 million to $5 million, somewhere in that magnitude.

Mark Parr – KeyBanc Capital Markets

Okay. That would be the P&L impact on top of the working capital?

Larry Boik

Yes. That's the P&L, yes.

Mark Parr – KeyBanc Capital Markets

Okay. All right. And just – I guess lastly, if I could just – Michael, you had indicated that first quarter tends to be the strongest of the year for you.

Mike Goldberg

Yes.

Mark Parr – KeyBanc Capital Markets

And I mean, are you looking at '08 being a relatively typical year where you would see –you'd look for the first quarter number to be the strongest quarter of the year?

Mike Goldberg

That's a toughie.

Mark Parr – KeyBanc Capital Markets

With the potential turnaround in aerospace in the second half, you might have a little better than normal seasonal impact is what I'm thinking.

Mike Goldberg

Right. And that's – I think more than most – we are never very good at forecasting. But this year's going to be tricky. We – the way we see it falling out is, yes, the second quarter being typically a little bit softer than the first. But as I said, the market's not substantially changing. And then, into the second half it becomes a bit of a crap shoot. Really, we think our market should remain strong. As you said, we are certainly hopeful that aerospace will pick up and that would make a significant difference. And that may –hopefully, that will offset any kind of commercial weakness that we might see if the economy slows. So, yes, at this stage we are fully in the camp of – we don't know how it's going to play out. And so, there's some positive factors and there's obviously the unknowns that everybody faces.

Mark Parr – KeyBanc Capital Markets

Right. It's interesting what you are seeing because we have been – I have been hearing a lot of companies comment that the economy is – the impacts of the economy, particularly on the durables side and the consumer side, has been pretty meaningful. And I think it's instructive that you guys really haven't seen much in the way of economic sensitivity. I mean, is there any particular area of your business where you'd say you'd be most at risk for just general economic sensitivity on the downside?

Mike Goldberg

Yes. If you go through our kind of – where we participate, the aerospace, as we have discussed and I think everybody kind of – everybody understands the dynamics. Nobody knows where it's going to go. We think–

Mark Parr – KeyBanc Capital Markets

It's got its own cycle, yes.

Mike Goldberg

Yes. We think the – we don't think the oil and gas is susceptible. Quite the opposite, we think that's got some real strength. We think our plate business, which goes into the heavy equipment and infrastructure, has got some real edge to it as well.

Mark Parr – KeyBanc Capital Markets

Okay.

Mike Goldberg

Again, for the most part for obvious reasons.

Mark Parr – KeyBanc Capital Markets

Yes.

Mike Goldberg

But as you kind of go down the food chain, you end up with more of our bar and tubing products, which go into more general manufacturing and applications, whether it be gears or whatever it might be. That segment of the business, which most probably represents say somewhere between a fifth and a quarter of the business, is more susceptible to perhaps the economic – any economic ills that we may come up against. But the other part of the business we think is – should be fairly firm and strong through the balance of the year.

Mark Parr – KeyBanc Capital Markets

Okay. So the tubing business would be, what, your stainless operation? Is that what you said–?

Mike Goldberg

Well, it would be the alloy – it would be the carbon bar, carbon tubing.

Mark Parr – KeyBanc Capital Markets

Okay.

Mike Goldberg

Some of the more commodity stainless bar products.

Mark Parr – KeyBanc Capital Markets

Okay.

Mike Goldberg

Stuff that goes typically into – is going into more general engineering applications. And that's the stuff that could be weak. I mean, through the first quarter at least we haven't seen that.

Mark Parr – KeyBanc Capital Markets

All right. Well, hey, congratulations on a solid first quarter and I look forward to a reasonable second quarter as well.

Mike Goldberg

You, too. Thanks.

Operator

Thank you. Our next question comes from the line of Tim Hayes with Davenport and Company. Please go ahead.

Tim Hayes – Davenport & Co.

Good morning.

Mike Goldberg

Hey, Tim.

Larry Boik

Good morning, Tim.

Tim Hayes – Davenport & Co.

A question on your nickel alloy business. How much was that in Q1 as a percentage of total sales?

Larry Boik

I don't think we really broke that out, Tim. But generally speaking – we went through this math before. When you look at the nickel products that we sell, predominantly into oil and gas and some into aerospace, and we look in nickel content, our nickel products or maybe 50% nickel – pure nickel based, and then our stainless products maybe 10% pure nickel based, and when you kind of slice through the math, in total it's going to be like 5% to 7% of our total revenue in terms of direct impact of the LME price. So it's going to be somewhere in that magnitude and remains pretty steady.

Mike Goldberg

The other way – stainless and nickel alloys constitute just over a quarter of our business. Last year, it was 27%, most probably about the same or 26% for the first quarter. And then, what Larry was really alluding to was that there's mix issues between – obviously, between nickel alloys and stainless steel, how much of the nickel content. And so that leads us to taking that 26%, 27% of stainless and alloy business of our total revenue, and actually the direct impact on nickel was – is that 5% to 7%.

Tim Hayes – Davenport & Co.

Okay, good. And turning to the A380, are you seeing any fresh orders for the A380?

Mike Goldberg

We haven't seen anything yet, no.

Tim Hayes – Davenport & Co.

And what would be your lead time, say, from a plate shipment out your door to a delivered A380 plane?

Mike Goldberg

I think what we saw on the first kind of the batch was that we were about six months ahead. So we are kind of – those – we would deliver six months ahead of Airbus delivery. That's sort of kind of lead time. Don't know whether that's going to repeat, but that's I think most probably a pretty good rule of thumb.

Tim Hayes – Davenport & Co.

Okay, thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Ralph Marish [ph] with First Manhattan. Please go ahead.

Ralph Marish – First Manhattan

Good morning.

Mike Goldberg

Hi, Ralph.

Ralph Marish – First Manhattan

Could you just generally state what your acquisition strategy might be over the next 12 months?

Mike Goldberg

Well, we continue to look. Our strategy is pretty well-defined in that our business strategy is to specialize in specialty products, added value services, and processing to certain end use markets. And so, when we look at our acquisition possibilities, that's the filter that we put through them. And so, we continue to look both domestically and internationally at people who have those characteristics. So specialty products, target markets, added value – added value services, and processing. And we are currently looking at a number of opportunities, all of which kind of fit that description. And so, we would hopefully anticipate trying to complete one or two of those in this fiscal year.

Larry Boik

Ralph, I'll just add to that, that given the overall economy, we are going to be a bit more conservative in our approach on the balance sheet. And where previously we would have said we would have been comfortable maybe getting up to a 50% debt-to-cap similar to what we did with Transtar, we are going to be a bit more conservative than that and limit ourselves to probably something at 40% or less. So that gives you a relative size as well that we'd be looking at.

Mike Goldberg

Right. Yes. We have got concerns like everybody else about what's – how will this whole economic situation play out in '08 and '09. And so, we don't want to get ourselves into – at the higher end of our comfort level. And we want to also not take ourselves out of the market, because when the right opportunity comes along we want to play with that opportunity. So I would absolutely support what Larry just said.

Ralph Marish – First Manhattan

Thanks for that answer. And the potential acquisitions would be in the markets that you are already in, unlike Transtar where you went into a new market?

Mike Goldberg

Well, yes, we – prior to Transtar we had–I think about 17% of our business was in aerospace. So it wasn't a brand new market. It – what it really did is expand our exposure to the air framing and the aluminum side of the aerospace business. Castle had some participation in there, but was actually very significantly in the kind of hot end – the engines and the landing gear. So we – it was – I would look at the Transtar acquisition as an expansion of the markets that we participated in. And so, yes, we would be – again, all our acquisitions would be very consistent with our strategy. We'd be looking at the markets that we serve and to try and expand upon our current participation in those markets because we think that's – we think that those are the markets which have got good long-term growth potential. They fit us. We have expertise in those markets and that's where we want to – really want to play.

Ralph Marish – First Manhattan

Thanks a lot.

Operator

Thank you. There are no further questions. I'd like to turn it back over to management for closing remarks.

Mike Goldberg

Well, thanks very much for your continued interest. We do appreciate that. And we look forward to speaking to you three months from now. Thanks very much.

Operator

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Source: A. M. Castle & Co. Q1 2008 Earnings Call Transcript
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