Carpenter Technology Corporation (CRS) Q2 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to Carpenter Technology's Second Quarter Earnings Conference Call. My name is Tenada, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded. 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, Tenada. Good morning, everyone, and welcome to Carpenter's earnings conference call for the second quarter ended December 31, 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 for Specialty Alloys Operations; Gary Heasley, Senior Vice President, Performance Engineered Products; and Dave Strobel, Senior Vice President of Global Operations. 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, September 30, 2013, 10-Q and the exhibits attached to those filings. I will now turn the call over to Bill.

Thank you, Mike, and good morning, everyone. During our last call, I conveyed that Q2 would be our most difficult quarter. It was, in fact, a very difficult quarter as aerospace and medical demand remained depressed. In this context, I believe the Carpenter team executed very well. As a result, I believe Carpenter is well positioned to realize near-term revenue, margin and cash flow growth. More specifically, during Q2, the Specialty Alloys Operation, or SAO team as we call it, again drove volume growth. This volume growth was the result of strong gains in the transportation, industrial and consumer market segments. In addition, the SAO operation team further reduced production costs per ton. The team accomplished this gain through their disciplined focus on cost, productivity, scrap management and yield improvement. In total, while SAO volume was up and costs were down, total revenue and margin were off due to reduced aerospace and medical sales. The Performance Engineered Products group, or PEP as we call it, was down in the quarter due largely to mix and operating performance. We have taken aggressive actions in this segment and anticipate a new performance trajectory beginning this quarter. Gary Heasley, our PEP Senior VP, will describe the PEP demand and operational dynamics to you in greater detail in a few moments. As a result of our prior restructuring activities and aggressive cost control, SG&A for the company was down versus Q2 last year. Adding it all up, in total, as a company, we experienced the seasonality and related earnings we expected. At the same time, in Q2, our order intake rate increased across all of our major end market segments. This increased order activity has raised our confidence that we can at least match prior year performance in Q3. Equally as important, just Monday of this week, we held our Athens facility ribbon-cutting ceremony and routed product through the facility. The Athens project is on budget and ahead of schedule. In fact, 2 weeks ago, PRI audited and is recommending that the Athens facility receive AS9100 accreditation as soon as March of 2014. This is one of the key certifications required to ship products into the aerospace market. We had a great team effort, and it yielded a fantastic result. As of today, over 80% of the Athens project has been completed. The remainder of the project-related spend will be completed over the next 18 to 24 months. We need to pay some bills for our Q2 Athens spend in Q3. After that, we expect to move back to strong cash flow generation beginning in Q4. Before we leave this page, I want to point out an important change we have made as it relates to our Athens project. We have decided to use straight-line depreciation rather than units of production for the Athens facility. Note this change does not impact our EBITDA but will only increase our EPS breakeven by approximately 1,000 tons per year. Tony will explain this decision and its implications in greater details in a few moments. Moving to Page 2, you can see that we had some pluses and minuses from a market subsegment perspective. Despite growing Boeing and Airbus build rates, the aerospace sales continued to be down. The good news is that demand for engine-related parts has stabilized, and we are expecting faster demand to grow in the second half of our fiscal year. While down versus last year, energy sales ticked up nicely versus Q1. The drill rig is moving up, and we see signs that power generation is gaining momentum. Medical demand remained depressed, but fortunately, the growing North American automotive build, combined with increased Carpenter content on new engine platforms, led to strong growth in the transportation subsegment. We also saw a spike in industrial and consumer activity due to an increased number of new plant and infrastructure projects which require Carpenter materials. Overall, while we achieved volume growth, we saw a revenue decline due to lower aerospace and medical sales. These are 2 of our highest-margin subsegments and typically represent approximately 50% of our revenue. As demand recovers in these key segments, we anticipate we will begin to see both sales and revenue -- sales revenue and margin expansion again. Signs indicate we will see this recovery begin this quarter and expand throughout the calendar year. With that, I will turn the call over to Tony, who will explain our financial performance in greater detail.

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 another clean quarter, and the results were in line with our expectations. Net income was $29.5 million or $0.55 per share. Net sales excluding surcharge was $415 million. Importantly, 2 of our key end-use markets, aerospace and energy, account for 59% of our total sales. Operating margins decreased sequentially by 260 basis points due to weaker sales mix. We generated cash flow from operations of $7 million, and free cash flow was a negative $100 million. Capital expenditures for the quarter were $98 million. And lastly, our total liquidity stands at $598 million with $106 million of cash on hand. Now let's turn to the next couple of slides, and we'll get into more of the details. Moving to Slide 8 and the income statement summary. Revenue in the quarter was $504 million or $415 million excluding surcharge. We realized growth in transportation and industrial and consumer, which helped offset continued soft demand in our aerospace business. However, our market position in our key markets remains strong. Overall, the long-term market fundamentals remain solid, and we are well positioned to capitalize on growth opportunities. SG&A was virtually flat sequentially at $48 million in the quarter. Our internal emphasis has been and remains to hold SG&A costs flat versus year-over-year, even with the increased overhead cost at Athens. And we are achieving that objective. Operating income was $47.5 million in the quarter. Included in the $47.5 million was a $2.2 million benefit due to the correction of the amount of pension earnings, interest and deferrals capitalized into inventory. It also included $1 million of Athens start-up costs. Operating income, excluding pension EID, was $51.3 million in the quarter. Operating margins declined sequentially 260 basis points to 12.4%. This was driven primarily by a sequential decrease in aerospace products, partially offset by improved manufacturing performance. The effective tax rate for the quarter was 33.6%. 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 $29.5 million or $0.55 per share. Now let's turn to Slide 9 and the free cash flow summary. Net cash flows provided from operations was $7 million. This is our fifth quarter in a row of positive net cash from operations. In the second quarter, we increased our working capital, primarily due to lower accounts payable as spending on the Athens facility begins to wind down. In addition, our required pension contributions were significantly lower again this quarter as a result of the strategic discretionary pension contribution we made in the third quarter of fiscal year 2013. The result was a $69 million year-to-date improvement in net cash from operating activities compared to prior year. For the quarter, we continue to have elevated capital expenditures, again driven by the Athens project, which was $78 million or 80% of the total capital expenditures in the quarter. In the third quarter of fiscal year 2014, we expect capital expenditures to be lower than Q2. And while Q3 free cash flow will still be negative, it will be substantially improved versus Q2. In the fourth quarter, we expect CapEx to again decrease on a sequential basis as the Athens spending declines significantly. Accordingly, we anticipate strong positive free cash flow beginning in the fourth quarter of this year. And as Bill mentioned earlier, we have decided to use the straight-line depreciation method for our Athens facility. After careful consideration, we believe this method is more widely accepted and will cause less earnings volatility quarter-to-quarter. To help you adjust your models, we anticipate Athens depreciation of approximately $4.5 million per quarter once the facility is fully operational. For full fiscal year 2015, we estimate Athens depreciation to be approximately $18 million. As the Athens project nears completion, and with minimal near-term required pension contributions or debt payments due, 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. For the quarter, we drove higher volumes compared to a year ago and the previous quarter. These volumes were driven mainly by stronger underlying demand and share gains in the transportation and industrial consumer market segments. We continue to benefit from the growth of our material and new engine platforms designed to meet the new CAPA standards. The additional capacity provided by the Athens facility enables us to expand our participation into new market segments. This is desirable volume for us, and as the Athens facility becomes online and fully qualified, it will allow us to capture more volume and enjoy the richer margins associated with more premium applications. We have already begun to see the early signs of participation in new market segments such as the chemical processing industry or CPI. These early orders are specifically targeted for our Athens facility. The quarter experienced a weaker sales mix resulting from lower volumes of aerospace materials, which diluted overall operating margins. We continue to manage our costs, which resulted in lower operating cost per ton and lower SG&A costs compared to a year ago. And despite weaker demand in certain key market segments, our pricing continues to be virtually unchanged compared to prior period levels. Moving forward, order intake levels were up significantly in quarter 2 compared to a relatively soft quarter a year ago, and January has continued that trend. We expect sequential volume growth across all market segments. And we'll continue our focus on execution and cost management. Before I turn the call over to Gary, I would like to discuss some challenges we are facing in the month of January. The severe cold weather we are experiencing in the Northeastern U.S. is having a significant impact on electric costs. We anticipate a negative impact of as much as $4 million in the third quarter associated with higher electric costs and related curtailed operations. I will now turn the discussion over to Gary Heasley to cover the PEP segment.

Thank you, Andy, and good morning, everyone. Our Performance Engineered Products or PEP businesses continued to experience challenging market conditions in the second quarter. As we look forward into the second half of our fiscal year, we see indications of improving market fundamentals, and we have taken steps this quarter to position our PEP businesses to capitalize on those improvements. Operating income was negatively impacted by continued weakness in demand for titanium in the medical and distribution markets and weaker shipments into the aerospace market. These market dynamics were partially offset by continued strength in rentals of our drilling tools as service companies opted to rent tools instead of purchasing. As we look to the third quarter, we expect market conditions to remain challenging but begin to improve, and we expect the PEP businesses to deliver improved results from the second quarter. The improvements we anticipate are: an expected increase in demand for titanium in aerospace as inventories are better aligned with demand throughout the supply chain and an increasing onshore and offshore drilling activity in oil and gas. Our distribution businesses had strong bookings late in the quarter, which is a further indication of increasing activity in the oil and gas market. Within the PEP companies, our team is taking actions to respond to our customer needs and improve results. In response to our customers' forecasts of increasing demand of titanium fastener wire, we will launch an additional wire finishing line in the third quarter. Also, we have identified and implemented cost savings actions in our powder operations as we work to improve execution in that business. We continue to increase our investment in down-hole drilling tools to support our customers' demand for rental tools in both North America and Asia. We believe that we will see increasing positive momentum in the third fiscal quarter, which will carry through the balance of the fiscal year. PEP is well positioned to benefit from anticipated strengthening in the aerospace and energy markets. Strengthening in these markets, combined with our continued focus on operational improvements, will benefit the PEP companies in the second half of fiscal 2014. And now I will hand off the call to Dave Strobel, who will provide an update on our Athens project. Dave?

Thanks, Gary, and good morning, everyone. We've obviously had a lot of interest regarding our Athens facility, so I wanted to give you a quick update on this key project today as part of our presentation. In short, we're very pleased with the construction to date and the progress into the start-up phase. While we still have much work to do, as Bill mentioned earlier, we're tracking ahead of schedule and are on budget. We have now started up our Aga [ph] conditioning area. We've also begun processing heat through our ESR and VAR furnaces. We've also now hot-worked several ingots through the centerpiece of our facility, the largest-in-the-world radial press, pictured here on this slide in the upper-right corner. Again, there's lots of work to do yet with commissioning these large and complex pieces of equipment. As we get them dialed in, we'll also begin to validate our equipment from the technical perspective. For the next few months, we'll also begin working to complete and finish equipment installation. That side of the operation is also progressing very well. And I can't say enough about the great progress we've been making in every aspect of this project thanks to the dedication and hard work of our engineering, maintenance and production folks. From a quality certification perspective, we have received ISO17025 approval and have been recommended for accreditation of this site for AS9100 certification. This certification and the lab approvals are important steps in giving us the clearance to make products to the most stringent aerospace requirements in this facility. The auditors were very complimentary of the people they interfaced with, as well as the culture that they felt as they interviewed our employees. This is great validation of the selection training program we have put in place to support this facility. Also, I believe it's important to note that the auditors saw great strength in our cross-facility training and support from our other locations, including Reading and Latrobe. In short, they were very impressed. Wrapping up the slide, an important point I want to make is this. The work we had done to automate our material handling and streamline our processes, as well as building a high level of process control into every one of our operations, is truly excellent work. We will leverage this work back across our entire mill system as we continue to improve all of our operations. And we firmly believe the lean flow design and associated short lead time capability of this facility is a game changer in the industry. It gives us, as well as our customers, the ability to reduce the working capital required to support our markets as we can now make quality product much faster. I will now turn the call back to Bill.

Thank you, Dave. The operations team has done an outstanding job with the design, construction and staffing of the plant. We need to complete the commissioning, but I am very confident that this will be completed on budget and ahead of schedule. The result will be a world-class operation, which will be the leanest, have the shortest lead time and house the most capable radial press in the world. Wrapping it up on Page 17, Q2 performance was as we expected. Sales demand for aerospace and medical products remained depressed. We took actions to mitigate the related impact. More specifically, we executed well in reducing costs and gained share in several key segments. Looking forward, our order intake rate has increased. Last year at this time, our backlog was dropping. This year, our sales backlog is up versus Q1. As a result, even factoring in the negative impact from the roughly $4 million unusual spike in energy costs and all incremental Athens expense, we expect our fiscal year '14 Q3 operating EPS to be similar or better to the adjusted EPS reported in Q3 last year. Beyond Q3, if our markets continue to recover and the Athens startup proceeds as anticipated, it makes for a very exciting outlook. Our operating income is 12.4% of sales in spite of weak aerospace demand. Now our order intake rate is increasing. Once we get a healthier mix with greater aerospace and medical sales, complete some key PEP operational improvements and drive some volume through Athens, we expect sales and profit momentum to grow as we complete our fiscal year. With the majority of the Athens spend behind us, those earnings will drive strong cash flow in Q4 and in our fiscal year '15. Given our strong balance sheet and the fact that we need no major unannounced capital investments to support our targeted volume growth, we believe we have a great opportunity to leverage our operating cash flow to increase shareholder returns. We still have a lot of work to do, and we need to see continued signs of market demand recovery, but our future is looking bright. With that, I will turn the call over to the operator to take your questions. Thank you.

[Operator Instructions] And your first question comes from the line of Julie Yates Stewart with Crédit Suisse. Julie Yates Stewart - Crédit Suisse AG, Research Division: Bill, just for clarification, does the guidance for flat EPS in F Q3 with last year include the additional $4 million of electric costs?

That is correct, yes. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. So you're offsetting that, that headwind?

We're offsetting that, and I want to just clarify that last year, as you may recall, we had an adjusted EPS which was actually higher than our reported EPS. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. You're speaking to the adjusted $0.69?

Speaking to the adjusted number, yes. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. And then just you mentioned accelerating the customer quantifications at Athens. Is this more in oil and gas? Or are you talking about aerospace too? And how long do you think that the aerospace qualifications will take?

Well, we have seen very significant interest from our aerospace and other customers in the Athens facility, and once they've toured the facility, that level of enthusiasm has increased. So we have a number of what we would call fast-track programs to move through the qualifications. It does take time because of the nature of the product. And we expect that we'll be getting approvals starting this fiscal year, continuing all the way through, we'll say, the next 2 years as we bring on different portions of our business, starting more primarily in oil and gas and then expanding with the aerospace approvals. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. And so where does that lead you in terms of where you're -- when you're expecting to hit the 4,000 premium tons to achieve breakeven? And is that -- does it have to go specifically through Athens? Or is that just incremental tons across the integrated mill system?

It really is across the integrated mill system. And so Andy referenced before and he can speak to, we really are seeing some great opportunities, not just in aerospace but in other markets, very attractive markets we just haven't been able to go after and support in the past. And frankly, it's been very well received when we've gone to those market phases and customers. And so as we bring in that additional volume, we can use the entire system. And we'll produce where that product mix is the best fit and, of course, has the needed approvals.

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

Last quarter, we had discussed the Temper Tough material, which you have had a -- some kind of a JV or alliance with U.S. Steel. I was wondering, how big is that opportunity because there's been -- automotive has been doing very well. It's a very large, in terms of volume, business. And recently, we saw aluminum sheet used on the F-150 truck. That got a lot of attention, but just the volume required for automotive industry is significant. Is that something could be a big contributor for you in the future?

There's no question about it. And we are continuing to make progress, and we are continuing to work with U.S. Steel, and we are very optimistic that this may be a great solution for steel, to have the light weighting and yet the strength properties that are required. And if you look at it, aluminum, while it provides a good solution, is clearly a more expensive option. So if we can prove out our technology and show that the desired properties can be achieved, then there's an opportunity for the metal produced with our technology to grow widely across the automotive industry. Now that being said, we are not looking to necessarily produce that product within our facilities. Certainly, for certain niche applications, it would make sense. But that's why we're working with U.S. Steel and other partners, because they have the bulk and large processing capabilities to potentially move this into the marketplace. And if we were successful in working with them, it's more likely that we would see the benefit in terms of, say, for example, a royalty-type revenue as opposed to a direct sale revenue.

And is this a Body in White product? Or is it the structure inside, like strusions [ph] and so forth?

Sal, this is Andy Z. Yes, it's Body in White, primarily Body in White, but then it has the capabilities to have the opportunity through lightweighting to spread into nontraditional ultra-high strength applications like clanks and pistons and what have you. But the original target would be Body in White.

And is this the alloying technology? Or is it the rolling technology? What are you bringing to the table?

Well, we really bring the material itself. So what our contribution would be the recipe for the material and the characteristics and the optimization for the properties that are required to hit the standards that are being required.

Bill, just one quick one. I don't know if you should -- we should read anything in there, but you mentioned 20% of the CapEx of Athens will be spent 18 to 24 months. In the past, you have mentioned usually within 18 months. I was just wondering if anything we should read into this.

No, nothing at all. We're staging the investment just as it makes the most sense. And 18 months would be a logical timeframe, so I put a little broader window there. But there's nothing to read into that.

Your next question comes from the line of Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Can you tell us a little bit about -- more about the qualification? Are the costs all built in as part of the Athens spend? Is that what's over the next 18 months, plus or minus? And can you also tell us how many alloys you expect to qualify and how long it is expected to take?

Sure. So when we speak to, if you will, special start-up expenses related to Athens, we're primarily speaking of what we'll say is unabsorbed labor. We have a team here, and we're not running on a constant basis as we're qualifying materials. And so that would be unusual, if you will, expense. Now we're not calling that out as a special, but we are noting it in our results just so that you can understand because we do view this as more onetime in nature. Our goal is to get the facility clearly up to full, consistent and, we'll say, uniform operation, where we don't have any of these variances from standard, during our next fiscal year. And in terms of the number of materials, Dave?

This is Dave. Just to add in here, when you take a look at the qualification, yes, we'd need to qualify the processes themselves to make sure that they're functioning the way we'd expect them to, getting the properties we'd be looking for. And then we'd start to work through a series of different alloys. And so in total, today, we have about 300 experimental orders planned to support that qualification process. We've got probably about 1,300 tons kind of aimed at those experimental orders, then, to get that process moving. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then it's just a matter of calibrating everything so it either happens quickly or it might take a little longer per alloy?

Right. Again, as far as the start-up goes, I mean, these are fairly complex pieces of equipment. We're really pleased with how it's been going to date. There's a lot of work to do there yet. But obviously, we've worked hard to be ahead of schedule versus where we're expected to be at this time. And we're going to continue to keep our foot on the gas and move as quickly as we can through those experimental orders.

Your next question comes from the line of Gautam Khanna with Cowen.

A couple of questions. First, Bill, if you could update us on your mid-decade targets that you laid out a couple of years ago? Do you feel like you're still on track to hitting them? And if you could tell us how you think we get from here to there?

Certainly, we -- in fact, it's -- we just had our fall strategic plan we reported out on this week. So we looked at that, and we are -- have a path, and we're excited about moving in that direction. The timing, we'll say, of the aerospace recovery would be probably the biggest variable in terms of whether that occurs, say, in fiscal year '15 or '16, but we clearly have a path to get there. Now it's not an easy path. It's going to take a lot of work. But as you've seen, we've been able to execute, I think, a pretty rigorous agenda over the last couple of years. And the main parts of the formula are very straightforward. One is we need to bring in more volume in our SAO business, and we need to do so in margins which are consistent or higher than what we've had in the past. We also need to see the operational improvements we've been targeting with our PEP business, and we're confident we'll see those. And as Tony mentioned, we need to keep our overhead and cost per ton flat. And if we do those items, we'll be there. So -- and we're looking forward to it.

Just as a quick follow-up, when we look at -- fiscal '15 is right around the corner. When I look at consensus estimates, they imply a 48% increase on EPS, and I was just wondering if you could talk about puts and takes this fiscal year to next. You've talked about kind of the aero destocking abating and realigning with the underlying consumption. But are there other items that we should be mindful of that are substantially better as we move into fiscal '15 relative to '14?

Well, we continue to work on our operating improvements. As I mentioned, we -- and Andy can speak to this. We are picking up some additional business, and we'll get the benefit of volume leverage because, essentially, our fixed costs in the system are what they are, whether PEP, Athens overhead. Tony has clarified the depreciation. We're not planning on increasing our overhead across the company. So as we get the incremental volume, and we should see the incremental gross profit more or less going to the bottom line. Now we see a clear uptick in orders, and of course, we want to see that sustained for a longer period of time. But it's not clear if that will be, we'll say, a slow and steady and sustained ramp-up or if it'll be something more similar to what we saw in, I believe it was 2010, where the backlogs and the order level came in much faster as people began to order at a, we'll say, a more normal and rapid rate. If we see that, then I think we've got an opportunity to see a really outstanding fiscal year '15. If it's a slower ramp-up, I think it'll be a challenge to achieve the types of numbers you were referencing just a moment ago.

Last question. In terms of your exposure to the time at downstream conversion work that you process now, have you seen any of that work disappear? And if so, could you just size it again for us?

Are you referring to the wire portion?

No, the long product conversion you do for kind of [ph]...

Yes, well, we have a long-term agreement, and that agreement has, if you will, annual targets, min, maxes of kind of a normal long-term structure, and we continue to process material in a manner which is consistent with that long-term contract.

Your next question comes from the line of Josh Sullivan with Sterne Agee. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: With regard to your comments about the Athens investment winding down, how should we think about capital deployment? Is buying back the share dilution from the Latrobe acquisition a priority? Or are M&A targets more attractive at this point?

Well, we would love to find, first, organic opportunities to extend ourselves, those that have quick payback and high return. Then the next, I would say, if there are very attractive acquisitions, we're quite comfortable and think there are some areas that we could expand our business. So that would be a very logical choice. But I think you've also seen that we've taken a very disciplined approach. We're not looking to overpay with the kind of strategic umbrella over that purchase justification. And yes, if in fact those 2 items don't deliver the opportunities that we're excited about, buying back shares would be a very logical thing for us to begin doing. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay, great. And then what are just the drivers to get the medical market going again? I mean, do you need to see a turn in titanium raw material pricing? And are you seeing that?

This is Gary, and in the medical market, we do need to see some increase in demand, but we're also becoming more targeted in our actions to try to grow our presence in that market. So from the titanium perspective, we think we will see some improvements from here through the end of the year. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay. And then just one last one on pension. How close are you guys to being fully funded? And do you think you can move that off balance sheet at some point?

Yes, this is Tony. I mean, certainly, that would be the goal down the road. From a PPA standpoint, we're 100% funded in the legacy plan and in the 80% funded range in the Latrobe plan. So we're in very good shape with this -- with the discretionary contribution we made. And we'll go out a couple of years, you've maybe got $6 million required contribution this year and next year, '15, maybe, so we're in a very good spot with our pension.

[Operator Instructions] Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

I had a question just on the energy business, particularly the oil and gas side. I think your comments seem to be fairly positive. Any color you could give us on just what you're seeing and how you're viewing the inventories and the channel right now? Do you think we're finally at the end of a lot of the weakness we've seen in the last year or so?

I will tell you -- this is Gary, Phil. From the perspective of our businesses that are downstream in the oil and gas sector, we have seen a nice improvement in activity that was called out to us earlier this year as our customers were identifying this time period as a point where they would expect to see a spike. We've seen some of that improvement, both in materials that are being ordered and the types of materials, indicating a broader type of activity going on, and in the volume of activity. And that includes the down-hole tools that we produce and rent. So I hope that gives you the color you're looking for. But it's a generally positive move.

And I would -- this is Bill. I would just add that we know that we're pretty far back in the chain, and because of that, we tend to see a little bit more of a whipsaw motion as markets may trend up or, in cases, trend down. And as confidence builds, and assuming that, that continues, I think that our customers, we're getting the sense, are getting more comfortable with the idea of ensuring that they have the right level of materials on their floor. Now if there are further disruptions in the economy, that obviously could change the mindset.

Terrific. And Bill, I had a question on just your own internal inventory levels. I know that it was a point of the discussion. You had been working with, I think, some outside folks about a year ago. What really is your inventory management strategy today? And how should we think about -- how are you feeling about your current levels as we move into the back half of the year as far as too high, too low, if you're okay, that sort of thing? Just trying to see how you're thinking about that.

Sure, so there's really 2 answers to your question there. One is -- relates to this fiscal year, and as is typically the case in the first half of the fiscal year, we'll have a bit of a build because we need to be ready for the second half of the year, which has a higher volume of finished products shipped. And so we would expect that we'll see, just like we did last year, some of our inventory go down. So we'll be at a similar level at the end of the year as we were at the start of the year, and of course, that'll be over the next 6 months. As it relates to the longer-term view, we clearly see inventory as an opportunity. And our goal is to keep our inventory at levels that are similar to where we are today in the context of what we hope and expect will be growing volume sales. So we're looking to increase our inventory turns as we increase our volume base. And that will make an improvement, but it will also help to avoid issues of us going into LIFO layers and things like that which kind of confuse the whole financial performance, and we're trying to stay away from that.

Perfect. If I could just sneak in one more on the housekeeping side. The $2 million, I think, tailwind for you relative to the first quarter on the pension side, is that something we're expecting going forward on a run rate basis, Tony?

No, that was the catch-up, and going forward, that's just -- we do our normal reviews. We saw that, that was something we should probably add to what we capitalize. We've done it now. That was the catch-up. It was small, and going forward, it'll just be a part of the normal results. So it's not a -- you won't -- it's not another impact for the course going forward.

Your next question is a follow-up from the line of Sal Tharani with Goldman Sachs.

Bill, aside from that 4,000 tons of incremental tonnage, sorry, for the baked in [ph], but you also had mentioned that 8,000 tons you will be insourcing from this new facility. I was wondering what will be the track between the 2? Would you be qualifying or producing the insourcing first before the 4,000 ton of outside sales?

I really appreciate you asking that question because I think it's an important area to clarify. We have 2, again, different actions or types of actions. And Athens is enabling both of them. One is the 4,000 tons that, we'll say, reaches our breakeven. Of course, we're targeting more volume than that, but we need that. And those are the tons that are, say, consistent with our current mix, what we call premium tons. What the second part and the insourcing that you referenced, that's really just because, in the past, we were out of headspace. So we had to have a number of materials and a number of conversion processes done on the outside. We can do those less expensively on the inside. They're not incremental tons like a new sale would be, but they do help us with our objective to keep our cost per ton flat. And in fact, we're targeting to go down, even with inflation and other factors that work against you. So the insourcing will help with the cost management. And the new tons, with the new markets and the growth in our existing markets, those are really the premium tons we talk about related to achieving our breakeven and, more importantly down the road, of course, getting the right return on our investment for our investors.

And if I look at the production profile, would the 8,000 ton be accelerating faster in the beginning? Or will they be running parallel to each other?

The insourcing would be coming quick, and as an example there, when we talk about qualification work, there's been a lot of qualification work done between the Reading operations and Latrobe operations, and we're through a lot of that. And so whether it's grinding or hot rolling in different places, we've been moving material around that mill system to help support that. And so we're talking about 5,000 tons, that neighborhood, that we're bringing back in for some of these key operations where we've done the qualification work and we've added capacity to help support the debottlenecking.

And the other 3,000 tons relates more to items where we had, in some cases, kind of single-stage activities in terms of processing, where we actually had to send product out mid-process to have the step completed so that we could complete the rest of it due to capacity limitations.

Would you be, going forward, giving us the numbers coming out of the Athens facility and break it down between these 2 categories?

Well, I think we can certainly share with you the progress we're making on insourcing. That's pretty straightforward. And we will discuss SAO, which, as we talked about, is the system, and it works together. And what we have in Athens, like we just referenced, enables us to bring in other volume. That volume may go to Reading. It may go to Latrobe. As we get approvals, we can bring product down to Athens. And so we'll continue to use the whole system. It's a little bit, in my mind, like we called out Latrobe in the first year after we acquired it, so you had some visibility. We're calling out Athens right now so that you have some visibility about it. But going forward, we're going to talk about the business, and of course we do today, but we're going to talk about the business in its entirety and how the system is working and how that's performing. And the key will be that the system has the capacity so that -- and the capabilities so that we can do things we couldn't do before.

Great. That's very helpful. And I have one more question for Gary. On the titanium wire capacity you're bringing, Gary, can you give us the magnitude of this capacity and if you think the market is going to absorb that easily?

Well, the magnitude, we'll add another 400,000 pounds of finishing capacity in our system here. That is an amount that is not extraordinary in light of what we are hearing from our customers that their demand increase will be over the next couple of years. So we do think it will be absorbed easily. We won't be pressed to fill it, if you will, so we're not going to do crazy things to fill that capacity. I think it'll blend in, and our customers will feel better for having -- we've actually had customers tell us they're concerned that we don't have sufficient capacity to meet their needs. We're doing this specifically to address that comment.

And so our goal here with this -- and that's why we're already talking about another line. And these are not huge capital investments like an Athens facility, but our goal is to have, if you will, extra capacity so that if there are specific spikes in demand, we can support our customers. We know it's a -- we have an important supply to them, and we just want to provide the best service we can and make sure they're confident and comfortable in terms of working with us in this critical area.

Your next question is a follow-up from the line of Julie Yates Stewart with Crédit Suisse. Julie Yates Stewart - Crédit Suisse AG, Research Division: Tony, one on interest expense. What should we be modeling for the year? And then how do we think about the headwinds from capitalized interest as Athens comes online?

I think on the capitalized interest part, Julie, we probably -- we had a tailwind in FY '14 compared to FY '13, probably approximately $5 million. That's going to flip, obviously, in FY '15 because our capital expenditures are going to go down significantly. And that could be as much as a $6 million to $7 million headwind for us in FY '15. But that's baked into our assumptions and into our targets for next year. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. And then what's the number that we should be using for '14?

Yes, approximately $11 million, I would say.

What's important, though, in that number is that -- and of course, Athens is a shining star as it relates to that, but we have ongoing and other projects. Next year, we'll be pretty deep in our superalloy powder construction project. And that's why the year-over-year change won't be the aggregate number. It'll be the numbers that Tony referenced. Julie Yates Stewart - Crédit Suisse AG, Research Division: Okay. So just we'd be adding the $7 million to the $11 million from this year?

Well, it'll actually be $7 million from the $11 million. It'll go down. The capitalized interest, right, it helps us, if you will.

And that concludes the question-and-answer portion of today's call. Let me now turn it over to Mr. Mike Hajost for any closing remarks. Please go ahead, sir.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.