Good day ladies and gentlemen and welcome to the Second Quarter Carpenter's Earnings Conference Call. My name is Katie and I'll 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 a question-and-answer session towards the end of this call. [Operator Instructions]. I would like to now turn the call over to your host for today, Mr. Jaime Vasquez, Vice President and Treasurer. Please proceed.

Thank you Katie. Good morning. Welcome to our conference call for the period ended December 31, 2007, the second quarter of Carpenter's fiscal year 2008. This call is also being broadcast over the internet. With me today are Anne Stevens, Chairman, President, and Chief Executive Officer; Doug Ralph, Senior Vice President, Finance and Chief Financial Officer; Rick Simons, Vice President and Corporate Controller; and from our Operations, Mike Shor, Senior Vice President of our Premium Alloys Operations, and Mark Kamon, Senior Vice President of our Advanced Metals Operations as well as other members of the management team. Some of Carpenter's statements will be forward-looking-statements, which 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 recent SEC filings, including the company's June 30, 2007 10-K, subsequent Form 10-Q, and the exhibits attached to those filings. I will now turn the call over to Anne who will start with a brief overview.

Thank you Jaime and good morning everyone. We are pleased to report record second quarter results, which were primarily driven by strong demand from the energy market and from international growth. As I'll discuss in more detail in a moment, increased demand for our high strength corrosion resistant alloys generated strong oil and gas sales, while robust demand from the power generation sector combined to deliver record sales to the energy market. The growth in energy also helped drive our quarterly international sales to the point where they accounted for more than one-third of total company sales. Now let turn to review of our end-use markets and then I'll turn the call over to Doug who will discus the second quarter's financial highlights. Then we'll take your questions. Now to provide insight into our actual performance, the year-over-year comparisons exclude surcharge in order to adjust for the impact of changing nickel prices. As noted in the earnings release, we are reporting results from continuing operations to reflect our announced plan to sell our ceramics businesses to Morgan Crucible. While these businesses are strong, they were not a priority for long-term growth at Carpenter and added complexity to our operations. The sale reflects our strategic decision to focus our efforts on further strengthening and growing our nickel-based alloy and titanium businesses in the global market. Energy continues to be Carpenter's fastest growing market, with sales driven by international demand. Energy sales grew 65% over the second quarter of 2007 to $45 million. International demand was particularly strong for nickel-based alloys sold into the industrial gas turbines segment. This business continues to benefit from solid demand for IGT units, particularly form the Middle East. Additionally, increased demand in global growth with key customers for both our stainless drill collars and for corrosion…

Thanks Anne. To start with, we are reporting our results for the first time this quarter with the ceramics businesses as discontinued operations. We announced the agreement to sell these businesses on December 21. However, we will not close on the transaction or report our gain on the sale until some time in the second half of the fiscal year. The accounting regulations require that we recognize expenses related to the sales as incurred and adjust deferred taxes in anticipation of the sale. Therefore, while the businesses have strong operating performance in the second quarter, we are reporting a net loss from discontinued operations of $1.6 million, which will eventually be more than offset by the gain on sale. Let me now turn to our results starting with the income statement. All the income statement comparisons are for continuing operations excluding ceramics. Second quarter sales were up 6% to $446 million. Excluding surcharge, our sales were down 1% from a year ago. The 1% decline reflects lower overall volume of 9%, which was mostly offset by increased sales of higher value materials and some positive selling price impacts. Gross profit improved to a second quarter record of $117.4 million, which is up 29% from the year ago level of $91.1 million. The higher gross profit reflected a richer sales mix and the differential impact of the lag effect in our surcharge mechanism, which was about a $5 million positive this year and about $19 million negative last year. Adjusted for the surcharge effect on revenue and the lag effect in our surcharge mechanism, our estimated gross margin, apples-to-apples, would have been 35.2% in the second quarter compared to 34.2% in the year ago quarter. A major contributor to this margin improvement is mix. Our more strategic and higher profit markets…

Thank you Doug. Before we get to your questions, I want to take a moment to briefly summarize our expectations for the third and fourth quarters and to make a few additional observations. Now as you may recall, we expect continuing strength in our energy business and a pickup in growth from aerospace in the second half of fiscal 2008. While we see no impact at this time from the 787 Dreamliner delay, it may temper some of the sales growth. We still believe, however, that our total sales to the aerospace market will increase in the second half of fiscal 2008 from a year ago. As we look at the second half of our fiscal year, we remain on track for another record year. Our third quarter performance might not surpass the exceptionally strong third quarter results of a year ago due to the softening of the US economic condition. Now, the real challenge will be our exposure to the economic sensitive market. Right now, our end-use market diversification and international exposure have more than offset the weakness that we saw in some of these markets. However, some customers may become concerned about the economy, which could have an effect on demand. While we expect continued strength in energy market sales and a resumption in sales growth to the aerospace market for the third quarter, sales to other end-use markets could offset this growth. Looking further out, we believe our fiscal fourth quarter will show year-over-year improvement, as increasing momentum in aerospace and solid demand in energy should more than offset any weakness in our economically sensitive businesses. Now with that, I wound like to take your questions. Katie, we will now open the call to questions. Question And Answer

[Operator Instructions] Your first question comes from the line of Chris Olin from Cleveland Research, please proceed.

How are you doing?

Good morning Chris.

Just a little bit more on your guidance, I appreciate the color you provided, but just to try to help me with my modeling, can you compare maybe expectations versus the second quarter? I know you said results might not hit that third quarter number, but how are you looking sequentially?

Yes, Chris, we're not going to go down the path of specific quarterly guidance, but what I would point out is that we are up against an exceptionally strong base period comparison if you look at our year ago numbers. And I would just stick with the comment we made on the third quarter and Anne's statement that we might not surpass that record last year third quarter result.

Fair enough. Question on stainless steel, it seems like the data points may be getting better in the sense that inventories were getting drawn down and there could be a potential for a channel fill, at the same time the import situation is getting a little bit better. I am just wondering if you're seeing any kind of pickup in stainless orders or how you are feeling about that specific market.

Yes, I think at the distributors, the business there is always impacted with economic indicators and the slump in the market. The other thing that impacted is the nickel prices. But you look at it month by month and some months it's up and some months it's down, and it's just really hard to predict what that one is going to be. But I believe it will track confidence in the economic market, but as you pointed out, many of them have drained inventories and with the drained inventories, we do see reordering of stock.

Okay. So you are seeing better orders today?

Yes.

And then a final question I have is your alliance with Titanium Metals, is there any kind of benefit from that in the numbers today, or is that a more of a future type of impact?

When we announced that one, we said that we weren't going to see that until the end of '08 and that's still again once we expect to see the benefit from that one.

And that's fiscal '08?

Yes.

Okay, thanks a lot.

Thank you Chris.

Your next question comes from the line of Brian Yu from Citi. Please proceed.

Thank you. I have a follow-up question along the same line as Chris in terms of guidance. I know you said fourth quarter... fiscal fourth quarter earnings will be better than the prior year, but those comparisons were relatively easy. And can you comment on whether fourth quarter will be better than the third quarter?

Yes, Brian again, I don't want to give any specific earnings guidance. We would just stick with our statements in the press release that third quarter comparison is challenging. If you look back at our year ago, the number on a continuing basis, we were $0.91 in the first quarter, $0.86 in the second quarter and then that stepped up a lot to $1.23 in the third and $1.12 in the fourth. So those are tougher base period comparisons and at this point, we might not surpass that level in the third quarter, but we do expect year-on-year improvement in the fourth quarter, especially as the momentum in aerospace picks up across the second half of the year.

Okay. And then a question on volume, could you provide some volume splits between Premium Alloys and the Advanced Metals and how far can you take this richer product mix shift that we are seeing?

Yes, I have the sales number, which Advanced Metals, we were down 15% excluding surcharge and Premium Alloys, we were up 15%. And within that what drives the mix, as I mentioned, about 90% of our Premium Alloys business is aerospace and energy and a majority of our AMO business is in the economically sensitive markets of consumer, industrial and automotive.

On the comment of the mix, what I would say on that one is as you know, we are investing in facilities which is a 40% capacity expansion in the melting area. So with that as the markets develop, then we do have opportunity to even further return the mix. Of course, all this is going to depend on costumer demand, but we are very optimistic and see growth not only domestic here and domestic Europe, but internationally in Asia and the Middle East. Because more and more in these markets, there is difficulty that applications that at one point in time could be solved with stainless no longer can be solved with stainless. And so it drives to the Premium Alloys, which is why we have the confidence to invest in that part of our business.

Brian, just to come back to your question on the volumes of the two, Advanced Metals was down 13% in the quarter and our Premium Alloys business was up 15% in volume terms in the quarter.

I don't suppose you have the absolute numbers?

Not in volume terms. In sales terms, it's for Premium Alloys $93.4 million and for Advanced Metals $224.2 million.

Okay, great, thanks. I'll jump back in the queue.

Thank you.

Your next question comes from the line of Luke Folta from Longbow Research. Please proceed.

Hi, good morning.

Good morning.

It's actually Luke Folta from Longbow Research. I had a question. You had said you are seeing some improvement in the Airbus supply chain. Can you get more specific on that and maybe talk about what inventory levels are like for the OEMs over in that region?

No, I can't give you what the inventory levels are like in that region. What I do know from meeting many customers over there is Airbus went very aggressive on lean supply inventory across the whole chain. And that was an effort that lasted about a year and they have leaned out and right now what we are seeing is more of a balance with supply and demand factored on the build of aircraft. In terms of specific days in the chain, I can't comment on that, but I can just speak to what I see through our customers and the demand signal coming through Airbus.

Would you say that --

Thestabilization of A380 build has also helped with that one as well.

Okay. Would you say that we are looking for a replenishment of the inventory level there in back half of the year or are we in equilibrium right now?

I think we are in equilibrium on the Airbus side of the business. I don't think that's a replenishment. I see, as we all know, the builds on aircraft year-over-year is growing and as with the growth in the build of the aircraft, then we are going to see a growth in demand. But it is not an inventory buildup.

Okay. I just had one more question on titanium. As a converter of titanium, given the prices have come down, how should we look at how that affects your margins moving forward, I mean if prices continue to fall?

Mark, do you want to take that one?

Well, excuse me, Mark Kamon, AMO. As we see the price of titanium fall, obviously... and I am talking about raw material price of titanium, what I'd call the typical ingot transaction prices. Obviously, our revenues fall, but that doesn't necessarily correlate to a drop in income as a percentage basis.

Yes, that percent margin maintains parody. In titanium area as with our other products, we have put investment in new products. And so as we are introducing new products into the marketplace, that obviously gives you room for margin expansion, but it's more of a top line... not a margin phenomenon, although with the new products, I am hoping for margin growth. Those products have not fully hit the market yet.

Okay but... so for like operating income per pound on a dollar basis, you think that will be constant irrespective of changes in prices of titanium?

Yes, I mean, if we are successful at maintaining our profit, which certainly we also would be as the market prices come down and that would have a... that would be one of the things that would have a positive effect on the margin. But as I mentioned, this whole area of mix and margin is very complex and there is lot of puts and calls at any given point in time that are going on.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Sanil Daptardar, Sentinel Asset Management. Please proceed.

Yes, just a few questions. Could you just talk about how much exposure do you have to the 787 program?

Well, what I can see on the 787 program, we all know that the fastener manufacturers struggled initially to keep up the rate that Boeing was expecting. With the delay, what we basically see and are still seeing is the supply of the materials that we produced for the fastener market is still a steady and will be a growing demand. So for the products that we produce, we are not expecting an impact. On the engine side for products that we produce, it's more a function of the total engines being built, not the plane. And with the growth of airplane builds year-over-year, we see that demand is strong.

So you mean to say the engine build is very strong in that case. So you... the way I read it basically in the third... you said pickup in the aerospace may be in the fourth quarter but not in the third quarter, if the engine build is steady then the pickup in aerospace should be also materialized in the third quarter. Is that the way I should --?

Let me talk the way that I talked about quarter three. As I look at quarter three, there are forces that are strong supporting growth and those forces are on aerospace growth with the airplane build and strong demand in the energy market and their strength in the international market as we reported this quarter. There is an opposing force with the US economy, domestic automotive production and that affects markets like aerospace, industrial, and consumer. So, in the third quarter, what's the balance of the forces? The other thing is we had an exceptionally strong third quarter last year and the comments that I made were over a quarter-to-quarter year-over-year comparison.

Okay.

Just to clarify also for everyone, I think we've been very consistent in looking at the second half of our year as the period when we would expect to pickup momentum in our aerospace revenue and to see that revenue approach overall airline industry builds. And so, we've been consistent on that that would impact both the third and fourth quarter. And so we somehow conveyed that that wasn't going to happen until the fourth quarter. It's not what we indented to give away and we've been consistent with our message on that.

In terms... regards to the international market, what you have seen in the US market, are you seeing some kind of softening in any areas in the international markets, or you think that the international markets remain strong and they would continue to remain strong?

From what we are seeing, the international markets were strong and we are expecting to see continued strength in the international markets.

One last question on R&D tax credit, your assumptions for... is there any kind of assumptions built for the continuation of R&D tax credit in the second half, or there is no... the assumption is that there won't be any kind tax credit in the second half?

There has been no legislation passed on that. So we are not banking on any legislation.

So... and you don't think there might be anything passed in 2008 probably? Or is there any kind of --?

At this point in time for what we know, we are not anticipating it yet. So the answer is, not anticipating it and not in the numbers.

Okay, great. Thanks a lot.

Your next question comes from the line of Timothy Hayes from Davenport & Company. Please proceed.

Good morning.

Hi, good morning.

First question on the volumes, you provided a year-over-year change for the medical segment. Could you give us some figures for the other segments please?

We are just getting them, if you could give us 30 seconds.

I'll tee up my second question.

Okay, that's okay, go --

What was your share count at the end of December?

We missed that last question.

Share count end of December.

Yes.

Let me answer question one Timothy, and we will work on your question two here, but volumes by market for the second quarter in aerospace, it was down 3 points, energy up 65, automotive down 22. Medical, we talked, consumer down 16 and industrial down 18. And our total shares was $49 million on average for the second quarter.

That was the average. What was it at the end of the period... that you are buying back shares; just wanted to get the end of period share count please?

48.7 million.

Yes, 48.7 million is our end of the quarter share count.

Okay and then lastly, the... how was the sales breakout within energy if... do you that breakout broken down by power gen versus oil and gas?

The numbers were very similar there. So I gave you a 65% volume and it was within a couple of points to that either side on power gen and oil and gas.

Okay. And then what about the sales, the dollar figure breakout for those two within energy please?

On a dollar basis, it was $20.1 million for power and $24.4 million for oil and gas.

Okay, thanks for the detail.

Thank you.

Okay.

Your next question comes from the line of Mark Parr from KeyBanc, please proceed.

Hey, thanks very much. Good morning.

Good morning Mark.

Congratulations, by the way. It's great quarter.

Thank you.

And stock is acting well too today. So that's a good acknowledgement. I was wondering if you could give a little more color on backlog trends. I know it seems as if you're looking for kind of a normal seasonal pickup in shipments in the second half, but could you talk a little about how the backlog evolved through the December quarter and what you we are seeing thus far in the March quarter?

We are just looking at the numbers and Dough, would --

Yes, there is really nothing exceptional, Mark, that we would want to highlight in terms of how our backlog has progressed.

Okay. Is it fair to say that backlog has been building modestly over the last couple of months? I mean is that an accurate way to characterize it?

No, I won't characterize it that way. I think our backlog just when you look at this as an aspect of our business, there is no significant trend. I don't think that I would point out looking at the data across periods here and there is nothing significant, positive or negative that I'd highlight in the backlog area.

Okay. One other question if I could. The key customer issue that has been kind of an ongoing subject in the releases. I was wondering if we could get a little more color on perhaps the ultimate resolution of that and when do you... how much longer do you expect that to be a significant impact on the quarters upcoming for you?

The key customer that we have talked about in the past, the impact of it is finished this quarter.

Okay. So the March quarter will be the... or the December quarter?

The March quarter, it will be fully in our base going into the next quarter.

Okay, all right, terrific. All right, thanks for the additional color and also thank you for all the detail on the call. This is really helpful.

Thank you Mark.

Your next question comes from the line of Amy Minella, Cardinal Capital. Please proceed.

Thank you. My question centers on the inventories, just could you give a little bit more color on the fact that they have gone up and is that due to volume, is that due to price? And the fact that you say it's going down, what drives that?

There is a couple of things on that one. The first thing is historically the inventory in the first half is a build to cover the second half demand. Historically, if you look at the past that is a typical trend. If you look at the numbers, this year, what you do see is obviously a higher number and this is the mix of the higher value material versus some of the lower value stainless that we built in the mix. If we look at volume, volume is actually down and when we make statements about continued improvement in this area, that's the result from the operational excellence initiatives that we're investing and as well as continued focus on our sales and operations planning process.

And so what causes it to go down, just the normal business practice, let's say, demand comes and the inventory goes?

The type of thing that causes this to go down is if you are looking at a finished and if you are looking at in process inventory, the one thing that you look at is the turns and as we look at the numbers on turns, I see room for improvement. So, as you are looking at inventory that has low turns and you see the opportunity to increase the turns, that's going to help the working capital number. The other thing is just work in process in the plant. Running with no inventory is not a good thing, but really planning where you have buffers in the equipment, where you build and where you don't is another thing. And the last thing, as you're transitioning from more of a mass production system to a lean production system, you schedule a bit differently. The other benefit that you' focus on and that we are focusing on is shorter lead time because as you have less inventory in the system, the time it takes the inventory to flow through to the customer shortens and your turns increase. So those are the types of things that the team is working on, on operational excellence.

Okay. That's very helpful, thank you.

Thank you Amy.

One another question is just on the sale budget, the share buyback. Exactly how many shares were brought in the quarter?

Doug, look at that one, do you have the numbers?

I have it for the quarter. [indiscernible] Yes, we'll be reporting that in our Q at the end of the week. But right now I don't have specific numbers in front of me, Amy, on the amount that we bought in the quarter. We can try to get that during the course of the call and if we can get that, I'll report it as we get it.

-- figure it out since you gave us what the end number was. So it is about million, I would think.

Right.

Okay. Thank you very much.

We'll try to get that number, Amy, if not it will be in the queue.

Yes. Thanks.

Your next question... you have a follow-up question from Brian Yu from Citi. Please proceed.

Thank you. My follow-up question relates to the Boeing supply chain. We keep on hearing about inventory adjustment in aerospace, which would suggest that perhaps some of the parts build are slowing, yet commentary out of Boeing suggests they want to continue to receive those parts. What are you seeing in the chain and how do you kind of reconcile the different comments from the two sides?

Well, again Boeing is obviously talking a lot of parts that go into the plane versus the parts that we supply. The comments that I had were on the fastener and on the engine. On the fastener, there are many fasteners in that plane and the fasteners suppliers as they were launching the products had to deal with changeovers as well as engineering changes as Boeing was looking at improving their manufacturing processes to assemble the plane. So with that, obviously you do not want to shut down production on a plane because you're running out of fasteners. That's just not a smart decision for a manufacturer. So on that side of the business, I understand Boeing's comments, why they would want to see these fasteners continue to flow so that they have adequate inventories and don't run into a stop-build or a constraint in build or an abnormal process in build because they don't have the right fasteners. On the engine side again, the demand for aircraft builds are there. And so the need for engines is not falling down. So that's the best I can reconcile it. I don't know whether that's any more clarification or not. But as we are taking to the primes and as we are taking to our customers, that's the understanding that we have.

Great color. Thank you.

And while we are waiting for the next caller, just to go back on your question you were very close with your million shares, it's 1,002,000 shares that we purchased in the second quarter.

The next question comes from the line of Matt McGeary from Sentinel Assets Management. Please proceed.

Good morning.

Good morning.

I don't need any specific numbers, but I was just curious if you give me some sort of feel for how much of visibility do you have in to your both oil and gas business and the industrial gas turbines business?

Yes, I am going to let Mike Shor answer that because Mike has been recently traveling, visiting quite a few of our customers.

Matt, Mike Shor. The energy business is a business that obviously has a sort of excited not only for the past performance, but going forward. We supply products that go in to exploration, the completion side of the oil and gas and power gen and the key for us is staying very close to our customers and their customers, and we have had very good indications from them that we see continued robust growth going forward in the double-digit range. So things look very good. We are working with our customers. By the way, on the power gen side, the Middle East is something which is certainly a big part of the growth engine for us going forward and obviously oil price continues to drive the oil and gas exploration.

Okay, good. And just lastly, Anne, if you would comment just generally on how the capacity expansion is going and availability of the equipment etc.?

I'm extremely pleased. We have a fantastic team. The team reviews progress with us every single month. I know Mike is responsible for the projects, meets with the team more frequently. In fact we just had an update yesterday and the project is progressing very well and the project is on time.

Great. Thank you.

Your next question comes from the line of Leo Larkin from Standard & Poor's. Please proceed.

Good morning. Could you remind us what CapEx will be for all of '08 and also if you have any primarily guidance for CapEx for 2009?

I don't have for 2009; we are in our planning cycle now. But for '08 we have previously been communicating that we would expect a CapEx level of about $150 million. When we published our Q for this quarter, we will probably ratchet that down to about $125 million. As Anne mentioned, we reviewed yesterday our couple of key projects, the premium melt expansion as well as our five metal [ph] automation project that we talked about, and everything is on track. With those two big projects, it's just, we had as everybody knows, I think a pretty ambitious plateau of CapEx projects and we have got still a lot of good CapEx opportunities. We are not going to get through the whole list this year and we will probably spend a little bit less than what we have been communicating.

Okay. And DD&A for this year?

We were at $24 million through the first half of the year, so about $50 million for the full year.

Thank you.

At this time, I'm showing you have no further questions, and I would like turn the call back over to management for closing remarks.

Okay. I really appreciate the questions, appreciate the time that you took with us. So, we want to thank all of you that called in today and look forward to talking with all of you again at our next quarterly conference call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.