Carpenter Technology Corporation (CRS) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to Carpenter Technology First Quarter Earnings Conference Call. My name is Caroline, and I will be your coordinator for today. [Operator Instructions] 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.

Thank you, Caroline. Good morning, everyone, and welcome to Carpenter's earnings conference call for the first quarter ended September 30, 2013. This call is also being broadcast over the Internet, along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Bill Wulfsohn, President and Chief Executive Officer; Tony Thene, Senior Vice President and Chief Financial Officer; Andy Ziolkowski, Senior Vice President, Commercial Specialty Alloys Operations; and Gary Heasley, Senior Vice President Performance Engineered Products. Also in the room are Dave Strobel Senior Vice President of Global Operations, as well as other members of the management team. Statements made by management during this earnings presentation 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 30, 2013, 10-K and the exhibits attached to that filing. I will now turn the call over to Bill.

Thank you, Mike. Good morning, everyone. Thank you for joining us for our fiscal year '14 Q1 earnings call. From an earnings perspective, we met our expectations in a very challenging environment. As we anticipated, market demand remained soft in the quarter. We believe market conditions suffered as raw material and scrap prices remained low, lead times remained soft and economic uncertainty remained high. In this context, I believe the Carpenter team responded aggressively, showed agility and demonstrated strong execution. Within our Specialty Alloy Operations, or SAO, as we call it, the commercial team did a great job of offsetting market weakness by bringing in new, value-product sales. As a result, while revenues declined, we achieved a 1% volume increase in the quarter. This volume helped keep our operations busy and drove strong overhead absorption. Our operations also performed at a high level in the quarter. They did a great job of reducing cost per ton by improving yields, expanding scrap management practices and by aggressively controlling costs. They also completed our planned forge overhaul ahead of schedule and below budget. Our Performance Engineered Products, or PEP business, showed sequential profit improvement in the quarter. There's much work to be done to get this segment back to our targeted levels of profitability. Gary Heasley, our Senior Vice President at PEP, will outline PEP development and action plans in a couple of minutes. All of Carpenter benefited from the restructuring actions we executed at the end of fiscal year '13. Overhead was down sequentially and flat versus prior year. In total, the team showed the agility to respond to a rapidly changing environment. In a down market environment, we were able to sustain our sales volume and maintain our operating income margins. We would also like to note that while cash flow was negative in the quarter, strong cash from operations helped to substantially offset our largest quarterly Athens CapEx to date. Projects, capital spending will decline from here. Post-Athens, we expect CapEx to drop to around $120 million or less annually. This is key as we seek to drive strong cash flow in the future. On the strategic front, we've made some important gains. To advance our position in aerospace within ultra premium products, we negotiated several key customer long-term agreements and we obtained a license from Pratt & Whitney enabling carpenter to enter the rapidly growing super alloy powder market. We also made substantial progress in finishing the construction of our new Athens facility. I will discuss Athens in more detail later, but want to emphasize that Athens is nearing completion and is on time and on budget. These are difficult times from a market-demand perspective. In this environment, the Carpenter team executed well against our stated goals and strategy. Moving to page 5, I will discuss our end markets. You see we had a down quarter in terms of sales revenue. However, from the takeaway at the bottom of the page, you can also see that we actually increased our sales tons. Let me explain. Aerospace was down substantially. We believe this decline was largely driven by customer destocking. Why? Because the number of aircraft being built by Airbus and Boeing increased by 9% over last year and is expected to grow by another 8% in 2014. Our demand decline does not match OEM build growth. This can only last for so long. In the energy market, our demand was impacted by 2 factors. In oil and gas, the North American rig count was down by 1%. At the same time, we have seen a customer trend away from purchasing drill collars to, instead, renting them. This dynamic is not necessarily bad for Carpenter. While it lowers sales revenue, it increases our profitability. In the power generation arena, GE announced during their recent earnings call that industrial gas turbines or sales were down 7% versus the prior year. With the low price of natural gas and the newly proposed taxes on coal generation -- power generation, coal power generation, we believe this market is poised for a recovery from a cyclical low. In transportation, European auto sales were down 4% year-over-year. This decline impacted our sales as Carpenter has significant content on European vehicles due to their advanced field delivery systems and extensive use of turbochargers. With demand down in our premium markets, the commercial team responded by increasing our value-product sales to transportation, industrial and the consumer market. Altogether, revenue was down but our volume was up 1% in the quarter versus last year. Note that while our strategy is to increase sales into more premium segments, I think our team did a great job in bringing volume and to offset weak demand. These actions helped drive higher levels of manufacturing absorption, which helped us maintain our operating margins. I will now turn the call over to Tony who will walk you through our financial results for the quarter.

Thank you, Bill, and good morning to everyone. Let's start on Slide 7 with a financial overview of the quarter and then we can get into some of the details. Overall, we had a very clean quarter with no special items, and the results were in line with our expectations. Net income was $34.6 million or $0.65 per share. Net sales, excluding surcharge, was $412 million. Importantly, 2 of our key end-use markets, aerospace and energy, accounted for 59% of our total sales as we further strengthened our position in these markets. Operating margins improved sequentially by 20 basis points. We generated free cash flow from operations of $64 million, and free cash flow was a negative $61 million. Capital expenditures for the quarter were $115 million. And lastly, our total liquidity stands at $693 million with $201 million of cash on hand. Now let's turn to the next couple of slides, and I will give you more color on the results. First, the income statement. Revenue in the quarter was $499 million or $412 million excluding surcharge. Although sales declined sequentially and year-over-year, it's important to emphasize that this decline was macro related. In fact, our market position in our key markets has been enhanced. Overall, the long-term market fundamentals remain solid, and we are well positioned to capitalize on growth opportunities. SG&A was $48 million in the quarter, a $7 million sequential decrease and back in line with what we view as a normal run rate. If you remember, our fourth quarter fiscal year '13 SG&A was driven up by the restructuring activities and the normal year-end variable compensation adjustments. Our internal emphasis has been, at a minimum, to hold SG&A cost flat versus year-over-year, and we are achieving that objective. Operating income, excluding pension EID, was $61.8 million in the quarter. It's important to note that our operating margins improved, sequentially, 20 basis points to 15% versus 14.8% in a very challenging market. This was driven primarily by manufacturing efficiencies and fixed cost control. The effective tax rate for the quarter was 32.8%. However, for the remainder of FY '14, you should use an all-inclusive rate of 34%. And lastly, as I mentioned earlier, net income for the quarter was $34.6 million or $0.65 per share. Now let's turn to Slide 9 and the free cash flow summary. Net cash flows provided from operations was $64 million, our fourth quarter in a row of positive net cash from operations. In the first quarter of each year, we usually see an increase in net working capital. As you can see, we managed net working capital, particularly our inventory levels, much tighter this quarter compared to the year-ago quarter. In addition, our required pension contributions were significantly lower as a result of the strategic, discretionary pension contribution we made in the third quarter of fiscal year 2013. The result was $101 million year-over-year improvement in net cash from operating activities. For the quarter, we continued to have elevated capital expenditures, driven by the Athens project, which was $94 million or 82% of total capital expenditures in the quarter. In the second quarter of fiscal year 2014, I expect capital expenditures to be slightly lower than quarter 1, however, I do expect free cash flow to be negative in the second quarter due to the Athens spend. In the third and fourth quarters of this year, I expect much lower levels of CapEx as the Athens spending winds down. Accordingly, I anticipate the second half of fiscal year 2014 to be positive free cash flow. As the Athens project nears completion and with minimal, near-term required pension contributions and debt payment to do, we believe Carpenter has the ability to generate significant free cash flows going forward. With that, let me turn it over to Andy.

Thank you, Tony. I will now cover the SAO segment. Compared to a year ago, quarter 1 experienced slightly higher operating margins due mainly to continued solid operating performance and focused cost-control efforts. Quarter 1 experienced a weaker sales mix resulting from lower volumes of aerospace and power generation materials and higher volumes of more value-oriented materials used in the transportation, industrial and consumer markets. Volumes in the period were actually higher than a year ago, and a thorough analysis of our portfolio indicated that pricing levels were similar to prior period levels. Inventory adjustments in the aerospace supply chain continued to have a destabilizing effect on current demand with higher levels of deferrals and cancellation activities than the same period a year ago. Moving forward, we believe the longer-term perspective in many of our core markets is positive, particularly for aerospace. But in the near term, the markets will remain challenging and we expect supply chain adjustments continue. To that end, sales mix and production activity levels are likely to be weaker than we saw in quarter 1. I will now turn the discussion over to Gary Heasley to cover the PEP segment.

Thank you, Andy, and good morning, everyone. Our PEP segment is made up of a group of 4 differentiated businesses. Each of these businesses has experienced unique market conditions in the first quarter that resulted in PEP reporting increased operating income for Q1 versus Q4 while sales were down 11%. Operating income improved as a result of an improved product mix and cost savings in our powder business, increased drill collar rentals and improved profitability in our distribution businesses, among other factors. The decline in revenue was driven by softness in demand for Dynamet's titanium products in the medical and distribution markets, decreased powder shipments and seasonal softness for some products. Looking forward, PEP's performance is expected to be affected by: solid demand for aerospace titanium fastener wire for Dynamet, with some seasonal softness in other markets that Dynamet serves; soft demand for power tools deals in Europe and North America, resulting in weak power sales; and continued improvement in tool rental in Amega West. As we look to the second quarter, we, again, expect varied results from the PEP businesses that will make it a more challenging quarter for PEP. To improve performance in the PEP group, we are working to complete the installation of additional wire capacity to serve anticipated growth and demand for titanium fastener wire in the aerospace market, to identify and implement cost-savings opportunities in our powder operations as we work to improve execution in that business, to improve efficiency at Amega West to capitalize on the growth we have seen in that business over the last couple of years and to better leverage our distribution businesses by more closely integrating them into other Carpenter business units. The PEP businesses are facing markets that range from steady to soft over the next quarter, but we see market opportunities that we will capitalize on and opportunities for cost savings and operational improvements that we will be implementing to drive results. Bill?

Thank you, Gary. Moving to page 15, I'd like to highlight some strategic developments, which we believe will enhance our growth. As previously mentioned, Athens is on budget and on schedule for our commercial start-up within 6 months. The radial press is in place. We are beginning to circulate the 46,000 gallons of hydraulic fluid that will drive the unit. The 2 manipulators for the press are now on-site, and we've even begin to fire up several of the furnaces. By the way, when we say start-up, we mean the target date for our first commercial sale, not when we will turn the equipment on. Cold start has already begun, and we expect to be moving hot metal within the next several months. We've often referred to Athens as a lean operation. From a cost-burden perspective, the ongoing Athens overhead rate, excluding depreciation, is already fully reflected in our Q1 numbers. So you won't hear us talk about incremental overhead from Athens impacting our results going forward. As stated in our last call, you will hear us clarify onetime start-up cost, which we expect will total approximately $8 million to $10 million. We will share these numbers with you as they are incurred since they are onetime in nature. In Q1, these expenses were approximately $600,000 and are likely to ramp up in Q2 as we begin our start-up activities. Enthusiasm for this facility is high. Senior leaders from key customers representing roughly 20% of our aerospace sales have already toured the facility. Their response has been extremely positive. Specific written comments resulting from this business -- or from these visits show their excitement. One customer referred to the project as a "game changer within our industry". Another noted that the facility will create "new ways to work with Carpenter to take advantage of the unique conversion processing." Perhaps most importantly, a senior leader from a third customer stated that "on the validation of proven -- approval schedule for the facility, I would really like a committed time plan so our technical teams can plan resources accordingly, and we can drive the teams to deliver against committed milestones." Our new capacity is also enabling Carpenter to begin in-sourcing approximately 8,000 tons of feedstock previously outsourced. Bringing these tons in will not impact revenue but will lower cost through increased absorption and enable Athens to get to steady-state operations more quickly. In addition, the new capacity is giving us the headroom to go after new, strategically attractive markets, such as the markets for corrosion-resistant materials and the CPI market. These segments are attractive and use our types of materials. However in the past, we could not support them due to our capacity limitations. Several new contracts in these markets have already been signed. Moving to the second column. As previously announced, we are entering the super alloy powder market and have commissioned the construction of a new facility to be built on our Athens campus. To gain fuel efficiency, aero manufacturers are designing engines to operate at higher temperatures. Higher temperatures can be achieved using super alloy powder parts. As a result, we anticipate this trend will lead to a tripling of super alloy powder usage over the next 5 years. Thus, it was essential that we take this strategic action. We appreciate the support and confidence Pratt & Whitney has shown in Carpenter by licensing us their technology and entering into a long-term supply agreement. You will recall that we often mentioned that Athens will enable Carpenter to expand operations quickly and efficiency. In the case of this new super alloy powder facility, we will use less than 1/3 of a preexisting building on the Athens site to house our new operations. The use of this existing infrastructure will reduce construction times by roughly 6 months and capital costs by approximately $10 million. Moving to the third column. I want to update you on the status of our 1-year development agreement that we entered into with U.S. Steel earlier this year. The purpose of this agreement was to determine if our proprietary Temper Tough alloy could be used as a large-scale steel solution to lightweight automobile frame components, such as rocker panels. We are extremely excited about the technical gains we have made with Temper Tough. We have shown that Temper Tough has the strength required to be used for safety supports. We have also demonstrated that Temper Tough has the targeted ductility and elongation to be warm or cold formed using existing equipment in the auto industry today. We believe Temper Tough can have a large and positive impact in the lightweighting of vehicles, which is crucial to meeting increasing fuel standards. We also believe the initial market in North America will be large, well beyond what we can produce in our mills. Therefore, we expect that Carpenter will ultimately license this technology to an automotive flat-roll producer. Now moving to Page 16. We have reviewed our Q1 results extensively. So to wrap up, I will summarize by reemphasizing that I believe the Carpenter team executed very well in a difficult environment. Looking forward, we expect that Q2 will be our most difficult quarter. From an operating viewpoint, we will melt fewer tons. In addition, while volume appears stable, our sales mix will remain weak. In this context, we are very actively managing our costs. Last year, we saw a $0.12 per share earnings reduction from Q1 to Q2. It's likely we will see roughly this level of contraction this year. Results could be up or down from this estimate, depending upon the timing and length of customer holiday shutdowns. It's too early to get a good read as to whether customers will extend the holiday shutdowns or use this period to get a jump-start on 2014. During Q2, we will complete the majority of the remaining Athens construction. By the end of Q2, we expect to have completed over 80% of the Athens project spend. The remaining 20% will be spent over the following 18 months. Thus, while we expect Q2 cash flow to be negative, we expect to become a strong cash flow generator by the end of this fiscal year. Continuing with our discussion on the back half of our fiscal year, we believe we will begin benefiting from increasing demand. When we look at order activity, each month, from October 2012 until April 2013, saw a decrease in orders versus the same month in the prior year. However, since May, each month has shown a year-over-year order increase. SAO's backlog in tons has stabilized. That is leading us to believe that demand recovery will occur next calendar year, as we have previously communicated. We also believe that we will begin to benefit from our numerous strategic actions. More specifically, the opening of Athens will give us the needed capacity to grow our SAO sales, the opening of our new Amega West San Antonio facility will position us to better serve the Eagle Ford Shale field and the commissioning of new Dynamet wirelines will enable us to support growing demand for titanium aerospace fasteners. We also believe we will benefit from the upcoming launch of several 2015 North American model vehicle redesigns. As an example, our materials are part of GM's Gen 5 engines fuel delivery systems. We also see an increased use of turbochargers and, with it, increased demand for Carpenter's materials. In summary, we believe market fundamentals dictate a demand recovery. The exact timing of this recovery is difficult to assess due to short lead times and overall economic uncertainty. That said, we remain optimistic that we will see improved demand and, with it, improved profit performance in the second half of our fiscal year. But we remain committed to our previously communicated 10-10-10 program. Essentially, we are targeting 10,000 tons of volume gains, with an average margin per pound increase of at least $0.10 while driving positive cash flow after completing the bulk of Athens construction later this quarter. To be clear, we will not drive volume with price. When I see how our team has responded to the current environment, I'm excited to see what we can deliver when our markets improve. With a longer view, we remain bullish on our business. We have a clear strategy, a solid team and proven execution skills. Our markets are growing, and the need for our type of materials is expanding. Finally, given our anticipated cash flow and our low level of debt, we believe we will have a great amount of financial flexibility to further enhance shareholder value. With that, I will turn the call over to the operator, so we can take your questions.

[Operator Instructions] Sounds like we have the first question, which comes from Richard Safran from Buckingham Research Group.

I wanted to ask about free cash flow. It looks to me like it's tracking a little bit better than you expected. You -- it seems to be working capital management. I heard your remarks about inventory management. I thought you might give some more color on how you're looking at working capital and free cash flow for the rest of the year. I know you expect to be free cash flow positive. We just heard your remark on that. Since you're managing working capital better though, I was just wondering if you have a more positive outlook on free cash flow expectations for the rest of the year.

Yes, this is Tony. I think we're going to pull all the levers that we have in front of us. I mean, we know that the CapEx is going to go down, but certainly, working capital is a focus for us. You saw us do that with inventory this quarter, and we believe there's still ample opportunity there. So I feel pretty confident in saying the second half will be free cash flow positive, and I think there's several opportunities we can go chase.

This is Bill. And, Richard, I'd just add one more point, which is -- that we did increase the inventory in Q1, and that's really to ramp up in support of the second half of the year demand. We can't produce enough, if you will, if we don't -- or sell enough if we don't produce the materials, from a seasonality perspective, earlier in the fiscal year. But with that, we anticipate bringing that inventory level back down over the remainder of the fiscal year. So we see an opportunity to further enhance working capital manage with -- management with those actions.

The next question we have comes from the line of Sal Tharani from Goldman Sachs.

I have a couple of questions. First on the destocking. Is it only the OEM engine or in other products also?

Sal, this is Bill. And I think Andy may be able to provide perspective as Gary made -- but certainly, we have seen it at the OEM level. And I think, also, from the spare part level as well, although we have a little bit less visibility on the spare part market.

And, Sal, this is Andy Ziolkowski. Also, we've been talking over the last few quarters about the distribution market and the relatively short lead times, and this is all kind of symptomatic of the overall environment in that supply chain.

And we've also seen some destocking in medical bar and some other markets that the PEP company serves, so it's been broad.

Okay. And I have a question on the titanium side. You mentioned in your press release about the titanium prices being lower, which we know, and also that the -- that your -- I just want to say how does it affect your cost versus your sales contract. Does lower titanium price actually benefit you on the cost side in your fastener, being that prices are lower than the fastener stock you're selling?

Actually, we -- in our business model, we are -- if you will, are a converter. And so the price of those raw materials is reflected in the cost of the product that we sell or has hedged. Most of the case, in titanium fasteners, is actually built upon a direct to buy with a specific price associated with that material. I think the only dynamic that may come into play is that when scrap prices are low or going down, it creates an environment where, in other parts of the market, people are less inclined to go long on inventory and to hold back.

The next question we have comes from Gautam Khanna from Cowen and Co.

Just to follow up, first, on sales question about how broad-base the aero destocking was. I mean, Andy, did you see it also in landing gear products? It didn't sound like you saw it in titanium fastener wire, but was it across the entire product portfolio including Latrobe?

Gautam, yes. Yes, it is. And as you can imagine and you've seen by some of the recent communications, public communications, people are also looking at working capital and taking down their inventory levels as well. So all that is kind of conspiring into the destocking. So yes, broad-based across the whole portfolio.

Right. And just a little more color on Athens. You guys have been pretty firm about the 10-for-10 -- 10-plus-10 strategy. But I -- just looking at some of the capacity in the space, be it ATIs or PCPs, SMC business, where utilization rates appear low in kind of the nickel alloy, non-aero markets. So do you have conviction or do you have agreements in place now that as you start up Athens with customer product running through it, it's going to be at margin accretive kind of levels or price accretive levels? Or is this more something that you expect the market will just recover and, by the time you get there, will be in a more normal environment? Just wondering your conviction on that.

Sure. Well, first of all, we do believe that the market will recover, and it wasn't that long ago when capacity was pretty tight. And so we anticipate that, that will come back and, in fact, even become stronger, just based upon the build rates within the industry. But that being said, I will say that we have a strong conviction that we will not price for volume. Now that does not mean that we won't go after some materials that are very profitable for us, that are consistent with our overall margin within the business but will help to move additional volume in. Those are markets which were important and interesting to us in the past, but once again, because of lack of capacity, we couldn't effectively go after it. So I want to be clear. We will go after and drive some additional volume and some new markets, but at the same time, we will not be using price as a lever to drive volume.

It -- maybe asked differently, Bill -- and I appreciate your point. I -- if you have the capacity today, if Athens were available today, would we see what you're kind of planning for a play-out? In other words, in the current demand environment -- and I understand you'd go after some value products as well. But in general, it would not be price dilutive or margin dilutive to the overall segment or to the ambition of the 10-plus-10 strategy.

Exactly, exactly. And really, the 10-plus-10 strategy is one that's important for you to note. But I also want to say it's an important one within our organization and is part of the reason I, if you will, work the concept up is because I wanted to be very clear that while we will seek additional volume, we expect additional volume. It will not be done on the basis of diluting our margins. That is our objective and our strategy, and we think it can be achieved.

Okay. And last one, how many tons of material do you expect to run through Athens in the first year?

Some of that will relate to the pace of some of the in-sourcing and the timing of the market recovery. We would like to get to roughly around 8,000 tons. That would enable us to have, if you will, steady-state operations where we won't be seeing variances from our cost standards, which are essentially what we're calling out in our onetime costs.

The next question we have comes from the line of Steve Levenson from Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: I had a question on your -- on the powder metals arrangement. Can you tell us if the material you'll be making will be used for isothermal forgings or if it will be used in 3D printing applications? And is the arrangement exclusive, or can you use the technology, the licensed technology, for other products for other customers as well?

So the supply arrangement that we have is specifically to supply a certain type or a number of grades of material to our customer, Pratt & Whitney. How they further process it, that is really up to them. And as it relates to the technology in the marketplace, the technology that we license is being focused and targeted for the support of Pratt & Whitney. However, once we build the infrastructure, we do have significant powder science technology and manufacturing capabilities. We expect and we will target a broader group of customers and seek to develop a relationship with those over time. However, while we are very excited about additive manufacturing or 3D printing, we do not see this as the mechanism that will drive that growth. We expect we will be a party to that and we will grow with that market, but it's not specifically based upon this technology. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And just one other question about the drill collar situation. Is the investment that you need to make for rotables for rental equipment significant or relatively minor?

Well, I believe over the last several years, we've really made the majority of the investment that we need to, certainly to support the current levels of business we have today. So it's not going to take extensive capital. And I think this is one of those areas that falls well within the $120 million guideline that Tony has outlined to you in the past. Any capital required to support that market growth should fall within those broad parameters.

The next question comes from the line of Julie Yates Stewart at Crédit Suisse. Julie Yates - Crédit Suisse AG, Research Division: On the comment about F Q2, that you expect at least the same seasonal decline as last year, how do we think about that in the context that last year's decline from F Q1 to Q2 is largely driven by the inventory rebalancing initiative and, I think, weakness in the value-product side, but today, clearly, operational performance is at a much higher level?

Right. And I do want to emphasize, we -- obviously we're trying to provide information, which we hope will be helpful. But there is some degree of uncertainty at the end of the quarter, back to what I mentioned, as to the ultimate demand we will see in the quarter, based upon end-of-the-holiday shutdown period. But in general, we see that we will have less melt. We will not be building inventory during the quarter. That's our plan and expectation, not that we'll necessarily be bringing it down substantially. Again, the -- what we built in the first quarter is to support the second half of the year. But we'll have a weaker mix, we'll have less production or less melting as a result of our inventory management. Now what we talked about a year ago was related to the fact that we have built a substantial amount of inventory in Q1. And with the weakening of the market, we saw that there was an issue that we needed to deal with throughout the remainder of the fiscal year. I believe we're in a very different situation right now, where we feel as though we're in the right place for inventory position as we complete this calendar year and move into what we think will be a steady, but slow, and expanding environment next fiscal year or -- excuse me, next calendar year, the beginning part of the calendar year. Julie Yates - Crédit Suisse AG, Research Division: Okay. So it's really more about the incremental destocking that you saw since last quarter. I think last quarter, you guys had not really seen the same magnitude, especially on the engine OEM side of destocking. So what really happened in the first quarter, or how did things really deteriorate?

Well, we have a backlog, and our lead times right now are relatively short within the window of the quarter. We also have flexibility with our customers that they can take material within the quarter or they can take it as their quarters close and the next quarter, so some flexibility around that. And in general, the tone that we picked up from our customers, and I think it's been consistent with what I've heard and read in some other environments, is just been that, given this environment where there's no particular pressure on lead time, no particular pressure on raw material cost, that there's a greater focus on cash and cash management. And so we're just seeing that play out. And it is extending a little deeper and a little longer than we had anticipated at the beginning of the fiscal year. But that's only because of the lack of visibility that we have with our lead times being shorter, nothing fundamental. Julie Yates - Crédit Suisse AG, Research Division: Okay, great. And then, Tony, can you just remind us on -- as you near this inflection on free cash, the cash deployment priorities and then what you're seeing in the M&A pipeline.

Well, for -- as we said in the past, as we look forward over the next several quarters and we start generating some cash, we'll look at all of our options that we have there as far as redeploying cash. Obviously, we're looking at ways to strengthen ourselves in the market, but we'll also look at possible dividend increases, share buybacks. All of that's on the table.

And the one thing, Julie, and I think you're quite familiar, we really try to focus on the M&A area, I'd say a very strong discipline, making sure that there are -- if there are any activities, are based upon strong synergies and early accretion. So we're -- we believe we have the financial flexibility to act, but we are also cautious in terms of taking steps, unless there's real value that can be created and quickly.

The next question we have comes from the line of Josh Sullivan from Sterne Agee. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Just following up on Gautam's Athens question. I think previously, you had talked about breakeven at 2,000 and 3,000 tons. I mean, can we infer, given you're now in-sourcing, about 8,000 tons, you're already well on the way to that 10-by-10 goal?

Well, no. We would -- first of all -- and that's a great question. So thank you for asking that. When we talk about the breakeven tons, we're really talking about the commercial profitably that would come from new and incremental tons to the system. In the in-sourcing, we're basically taking materials, which are our current raw materials, for say, our distribution business, and instead of having them sourced externally, we can bring those in-house. And as you can appreciate, that does help with absorption and kind of balancing the load as we start up. But that is not the volume that will lead us to our accretions that we expect from the facility. That's why we've been focused aggressively on not only our existing core markets and expanding the long-term agreements, but also making progress in some of these other adjacent markets where we think there's real potential for us to supply. And we found great interest and, I think, good success. It's an interesting point in the process, because we're very excited. We're going to be starting up soon. So we're getting ready to take orders, but we also want to make sure that we can deliver on those orders. So we're trying to strike the right time balance. But that in-sourcing activity would not be related to the 3,000 tons we had communicated in the past. It'll help, but it won't drive it. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay. And then can you just remind us on the commission of the new Dynamet wireline, I believe, in '14? How's that coming along? How much is the scope of that again?

It's coming along well. It should be commissioning in February. So it should be up and running shortly after that. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay, great. And then I think previously, you had outlined headwinds from defense spares. I mean, did you see additional headwinds from that in the quarter just given what's going on?

Josh, this is Andy. And in the past, we've communicated that defense is not a large portion of our business, but the products we sell tend to be the ultra premium or proprietary nature, and therefore, it's definitely part of the weaker mix story that we discussed. We'll continue to see that progress.

The next question we have comes from the line of Chris Olin from Cleveland Research.

I just wanted to circle back on this titanium issue and just to make sure I understand where you guys are. In terms of the current ramp for the 787, is that starting to impact your business yet, or is there an inventory situation in the feedstock market as well? And then second to that, is there going to be any type of positive impact from the Airbus A350 coming online?

Chris, this is Andy. Then I'll let Gary jump in, more particularly on the Ti side. Yes, we're seeing the build schedules and recently announced changes from Boeing, moving up to 10 and that -- that we knew, but moving through 12 build schedule in 2016 then up to 14 by the end of the decade. So that'll be very good for -- particularly for all of us, but particularly the titanium business. Gary?

Yes. And with titanium fastener wire, we largely support that market out of inventory that we have contractually on hand. And we've been talking to our aircraft customers here recently, and they're all very confident that the build rates are going to continue. And we should continue to strengthen. So as we bring new capacity online, it should slip right into that growth, and we should be able to capitalize on it as it comes.

And, Chris, this is Bill. In answer the second part of your question, clearly, the A350 will also drive demand for titanium fasteners, given its use of composites and the like.

You guys ship into that channel?

Well, we ship into the manufacturers of fasteners, and then the manufacturer of the fasteners ultimately ship into, of course, the end user. And...

Yes, we participate broadly at Airbus on their platforms, both single aisle and long range, and we do that through multiple channels, as Bill said. But yes, we will participate, we expect.

The next question comes from the line of Sal Tharani from Goldman Sachs.

I just want to confirm on the guidance side. You did mention that there will be exploration in the start-up costs. That guidance includes or excludes the start-up cost?

Well, for Q2, it certainly includes that we haven't provided, I don't think, very strong, if you will, guidance in the second half of our fiscal year. So as we get closer and we can provide more guidance in that area, we will also call out or reflect the start-up costs that we'll see or expect to see in the upcoming quarters. This quarter here or Q2 of our fiscal year, it shouldn't be significantly greater than what we experienced in Q1. It's -- the majority of that spend will really be coming when we begin to move material through the system. So that would happen in the first and second quarter of the calendar year next year. It may be $1 million in the quarter this year. But we -- I want to be clear, and we're trying not to call out all sorts of specials and all that and this is part of that, we want you to have the information because you have models and this is onetime in nature. But we're not trying to call these out as, if you will, excuse us for any results or a bridge to get to some other result.

Got it. And, Tony, you mentioned in your prepared remarks that the pressure on the -- is on the macro side, and the market position in the key markets is enhanced, is the word you used. I just want to understand. Are you gaining some market share, you think, from others in your key markets?

Sal, this is Andy. I'll take that for Tony. And as Bill said and we exemplified in the UTC agreement, we are well positioned to take advantage of the build rates and the increase in build rates going forward, and we continue to advance our positions as we go, so. In the end...

I'm sorry. This is in commensurate with the build rate. It's not that you're getting any access market share from others.

We have our own list of market share gains and losses, and we feel like we're doing well in that, if you will, win/loss column. But we have very capable competitors, and they are also working hard. And the good news is this is a market that, albeit a little bit slow now, is a growing and expanding market. We expect to do well, not only in general, but with our new capacity. And I don't think we'll be the only ones who will benefit from what we see as a demand increase coming up.

But, again, Sal -- this is Andy. I would say we're well positioned to take advantage of the build schedules, and the duration of those contract leads into the timing of when they'll accelerate and the commissioning of Athens.

The next question comes from the line of Gautam Khanna from Cowen and Company.

Just 2 quick follow-ups. Can you remind us what product forms you'll be making at Athens besides forged, billet and bar?

This is Dave. The product coming out of Athens will be in the neighborhood of 4 to 18 inches, but that will also feed our rolling mills and for bar and wire products as well.

Okay. And who do you perceive to be the direct competitors to that product portfolio at Athens?

Well, it depends upon which particular market that you are referencing coming out of that. For example, I think we know who are the primary -- our competitors in the aerospace markets. As you get into energy, there are a couple of other names that enter into the list. And certainly, as you go into transportation and other areas, you continue to expand the list. So we believe that we'll have unique capabilities, unique capacity, unique cost structure and also unique lead time capabilities that we think will allow us to excel in all those markets. But the primary market, not surprisingly, is aerospace and energy, and of course, you know the players there.

Yes, okay. And lastly, if you could just talk about -- in the titanium fastener wire and the nickel fastener wire markets, have you seen any disparities between kind of the relative growth rates or levels of demand?

I think you may answer -- or we might make it 2 answers, one from Andy and one from Gary. Why don't we start with Gary.

This is Gary. It's difficult to tie the number of aircraft builds directly into an expectation for demand in titanium fasteners. But what we've seen is steady demand. It's been as expected, and we think that it's going to continue to grow, as we've been saying. So I'm not sure that answers exactly what you're asking. But, Andy?

And, Gautam, on the nickel side, I would say there's definitely a lag between the announced build schedules and the rates at which we're seeing from the fastener OEMs at this point.

And is that broad-based or specific to any one major OEM?

It's broad-based.

I said 2 questions have asked 4 now. But...

It's okay. It's okay.

Sorry about that. Well, just to clarify, I think, in response to my question and then a follow-up from someone else. The -- in year 1, you expect to have how much product going out the door at Athens? Was it 8,000 tons? Is that -- did I hear that correctly, or was that in answer to a different question?

Yes. And again, thank you for asking. It's important. We throw out a lot of numbers, and we want to be clear. The 8,000 tons would be the level of production we are targeting out of Athens, and that includes a mix of new product sales or new customers, increased demand, along with some of the in-sourcing activity. And by the way, some of that in-sourcing activity will also benefit Latrobe and the Reading facility as well, so adding to the overall system. In the first year, we're going to be going through a fair number of approvals and certifications. But we're looking, and we haven't made any specific projections. I can tell you that from an internal standpoint, we have a laser focus on making sure that the facility is accretive at a very early stage. And I would only like to point out then, if you exclude the onetime expenses, which we'll call out and, at least, you'll be aware of, like I said, right now, the overhead associated with that facility, you see in our quarter 1 numbers, it's in our quarter 2 numbers and 3 numbers and 4. So any commercial volume that we bring into the system should help to improve our profitability, as well as our profits.

That concludes your question-and-answer session today. Now let me turn the call over to Mr. Mike Hajost for closing remarks. Please go ahead, sir.

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

Thank you. That concludes your presentation. You may now disconnect. Have a good day.