Carpenter Technology Corporation (CRS) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Carpenter Technology's First Quarter Earnings Conference Call. My name is Greta, and I'll 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, Greta. Good morning, everyone, and welcome to Carpenter's earnings conference call for the first quarter ended September 30, 2014. 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 or SAO, as we call it; Gary Heasley, Senior Vice President, Performance Engineered Products or PEP, as we call it; and Dave Strobel, Senior Vice President, 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, 2014, 10-K and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference excludes surcharge. When discussing operating income, that reference excludes pension, earnings, interest and deferrals, or EID. When referring to operating margin, that is based on sales excluding surcharge and operating income excluding pension EID. I will now turn the call over to Bill.

Good morning, everyone, and thank you for joining us for Carpenter's Fiscal Year '15 First Quarter Earnings Call. Note that our opening comments will be relatively brief so as to ensure we have time to answer any questions you may have. Beginning on Page 4. We made $0.25 per share in the quarter. This result is below last year and our plan and was heavily influenced by the issues we profiled in our September 24 press release. The good news is that since the release on September 24, the Latrobe press went back on line 4 days of schedule. In addition, the Reading summer shutdown issues are now behind us. And perhaps most importantly, we began to see a richer mix in the backlog translate into a richer mix in our sales in September. Later in the call, Dave Strobel will provide more color on the operational issues we have in Q1. He will also share details on a more recent issue with our Reading press. We would normally not call this issue out but felt we should mention it during this call, as we are exiting the period where we have been impacted by operating issues. With July and August essentially breakeven, the EPS generated in the quarter was driven by our September results. The month was relatively strong as the team worked hard to make up some of the lost ground from earlier in the quarter. SAO have the highest sales tons for September since prior to the last downturn. They also saw signs of an improving mix and SAO cost per ton began trending down. In PEP, although sequentially down, we are starting to see the benefit of our productivity improvements throughout the segment. Finally, once again, we held our corporate overhead relatively flat sequentially and year-over-year. Our free cash flow in the quarter was negative. As you will recall, the second half of our fiscal year is typically 15% higher in terms of tons sold than in the first half of our fiscal year. To ensure we have adequate supplies of melted materials to support the targeted sales increase in the back half of our fiscal year, we need to melt and stage product. This year, we also made the decision to prestage some material at Latrobe to ensure we could start up operations quickly once the press outage was complete. Now that the Latrobe press is back on line, we expect to drive down inventory throughout the remainder of our fiscal year. On a cash basis, we used close to 40% of our fiscal year '15 capital budget in Q1 as we cleared payables associated with the fiscal year '14 Athens construction activities. With capital spending and inventory expected to decrease over the remainder of this fiscal year, we expect our cash flow to become positive by mid-fiscal year. While we've seen numerous organic and acquisition-related opportunities, we've decided to focus our immediate attention on, one, executing to drive the targeted returns from our prior capital investments; and potentially using a portion of the cash we generate to repurchase Carpenter shares under our new authorization. Later in the call, Tony will speak to this authorization in greater detail. Moving to Page 5, I will discuss the dynamics we see in our markets. Our sales revenue in the quarter was up overall in each of our end markets, except aerospace, which was relatively flat versus prior year's fiscal quarter 1. Looking specifically at the aerospace and defense subsegment, we are now beginning to see year-over-year demand recovery. Fastener material demand remains strong and aerospace engine-related demand, which have been depressed, was up year-over-year. That said, our mix was weaker due to lower sales of defense-related products and our relatively weak mix of materials sold for aerospace engines. Fortunately, we see signs in our backlog that these trends should reverse in the upcoming quarters. In energy, we clearly saw the impact of the increased rig count in our energy-related sales, with strong drill collar sales. That said, demand for completions material was down, which impacted the subsegment's mix. I want to note that we have not seen any discernible trail off of demand in the oil and gas area, in spite of the lower energy costs or prices. Moving to our medical subsegment. We are now seeing demand for our medical material increasing year-over-year. We expect this trend to continue going forward as our backlog remains strong. Transportation continues to be a bright spot for Carpenter. You can see that demand for our premium fuel injector materials continues to grow rapidly. We are starting to see some impact of our margin and price management actions in this area. In the consumer and industrial subsegment, we are seeing strengthening demand for our valve and fitting materials, driven to a great extent by downstream consumer electronics production. Overall in the quarter, our sales revenue was up 7% and 11% higher volume year-over-year, indicating strong sales demand with a relatively weak mix. That said, while you don't see it on this page, our average selling price per pound in our backlog is now up 13% over where it was at the start of our fiscal year. That indicates an improving mix going forward. And with that, I will turn the call over to Tony, who will discuss our financial performance in greater detail.

Thank you, Bill, and good morning, everyone. This is Tony Thene. Let's start on Slide 7 with the income statement summary. Net sales in the quarter were $550 million or $440 million excluding surcharge, with aerospace and energy accounting for 56% of the total. In the quarter, we again managed our SG&A expense very closely with only a slight sequential increase and a decrease versus year ago quarter. As I've mentioned previously, we expect to manage fiscal year '15 SG&A inside a tight window compared to fiscal year 2014. Operating income was $22 million in the quarter and $24.5 million, excluding pension EID. Operating margins decreased sequentially by 770 basis points to 5.6% driven primarily by the weaker mix and the shutdown issues communicated earlier. As communicated earlier, interest expense was higher year-over-year due to the Athens assets coming on line, and therefore, less capitalized interest. The effective tax rate for the quarter was 32.5%. We continue to see the full year tax rate to be in the range of 34% to 34.5%. Net income for the quarter was $13.5 million or $0.25 per share. Net income includes a favorable legal settlement of $4.4 million or $0.05 per share. This settlement is included in the other income line on the income statement. Now let me turn to Slide 8 and the free cash flow summary. Free cash flow was a negative $54 million in the quarter, driven primarily by 2 items. The first, a $31 million increase in inventory. As Bill stated earlier, it is common for us to build inventory in the first quarter of our fiscal year to prepare for the higher shipments in the second half of the year. It is important to point out that the sequential inventory build of $31 million is significantly less than it was the same quarter a year ago of $47 million and the $79 million built in the first quarter of FY '13. And the second was $32 million of Athens capital spending. To date, we have spent approximately 93% of the total projected Athens capital spend on a cash basis. In total, capital expenditures were down 35% year-over-year to $59 million. 55% of that total was related to Athens. Our guidance on capital expenditure remains at $160 million to $175 million for the year. And lastly, our total liquidity stands at $558 million, which includes $66 million of cash on hand. Now let's turn to the share repurchase authorization slide. As Bill mentioned earlier, yesterday, our Board of Directors authorized a share repurchase program of up to $500 million over 2 years. We now have the option to consider share repurchases from time to time based on the capital needs of the business, general market conditions and the market price of the stock. We have multiple levers available to create financial flexibility, including strong cash flow beginning later this year, the heavy capital spending largely behind us, opportunities in working capital management and a strong balance sheet. With that, let me turn it over to Andy.

Thank you, Tony. I will now cover the SAO segment depicted on Slide 11. Compared to a year ago, revenues grew by 5% with 11% higher volume. We experienced growth in all end-use markets, except for aerospace, but had a weaker selling mix than a year ago. The lower margins were caused primarily by lower sales in premium products in the defense and certain engine applications, lower transactional pricing to aerospace distributors, higher statement sales in medical and lower completion sales in oil and gas. Volumes and revenues were lower on a sequential basis as is customary due to the seasonal differences between our quarter 4 and quarter 1. Operating margins were also adversely impacted by higher labor and maintenance and supply spending and reduced output levels caused by unanticipated startup issues after the summer shutdown at the Reading mill and a crack in the dome with a primary press at the Latrobe operations. Dave Strobel will further elaborate on these issues at the end of my remarks. Looking forward, we believe our margins will improve in quarter 2 relative to quarter 1. Our backlogs continue to grow with revenues up compared to the end of the fiscal year by 7%. More importantly, the backlog for our large bar business unit, serving primarily the aerospace and energy market segments, is up 14% for the same time period. Progress continues with our qualification process at Athens. We have approved specific grade and customer combinations that equate to approximately 6,000 tons on an annualized basis. I will now turn the discussion over to Dave Strobel to discuss the status of the operating cost issues and the Reading press outage.

Thanks, Andy, and good morning, everyone. I do want to give an update on the press situation today, as I realize this coupled with our issues coming out of shutdown have likely created a few questions. But let me start by saying this: I believe we have one of the best maintenance and engineering teams on the planet in this industry. We have over 300 craftsmen in Reading, which support our operations here and elsewhere, coupled with another 130-plus craftsmen in our other locations. With operations, we do have issues that arise at times, but I do want people to know that we do over 80% to 85% of our maintenance jobs on a planned basis. Just to give you an idea, that's about 15,000 to 20,000 planned jobs per year. When something does pop up on an unplanned basis, we will pool expertise from any location necessary to help solve that problem quickly. Okay. So now our Q1 issues. We did have some startup issues coming out of the shutdown, particularly in our arc shops and our #5 hot rolling mill. The arc issues were predominantly transformer-related in Latrobe and the caster line issue here in Reading. The 5 mill problem was related to some new equipment we installed over shutdown, and we had some unexpected delays in getting that up and going. Those issues have all been squared away, but they did cause us to have unplanned downtime and associated labor costs that we were not able to absorb effectively, again, due to the nature of the delays. Now as for the presses. As I've communicated, we did have an issue with the dome of the messed up press in Latrobe that required repair. The press has been back up in operation since September 29, and it's working great. The repair was essentially a complex weld repair and the installation of a new bronze bushing in the dome itself. We expect this to be a solid, permanent repair. As sometimes happen, the stars aligned, unfortunately, this time, in the absolute worst way possible. And in late September, we also found an issue with our 4,500-ton press in Reading. We found the crosshead of this press had some cracks that we would need to deal with as well. We had an annual planned outage scheduled for this key unit over the Thanksgiving holiday time frame, and thought we'd be able to hold off on that repair until then, as we carefully monitored the crosshead for any propagation of the cracks. This past weekend, we did see that we had some crack growth and we've pulled up that shutdown and we'll deal with the issue now. The result of this will be about an extra 9 days of downtime versus what was originally planned, and the net impact of that outage to Q2, we would estimate at this time to be somewhere in the neighborhood of $4 million, more or less. And that's an early estimate and we're going to continue to work it. Coming back to the unplanned work. I can tell you that historically, and we've had this press in operation since January 2000, this press has experienced less than 2% unplanned maintenance jobs. We take very good care of it. And just to give you an idea of the work accomplished through that time frame, we estimate it has been through 70 million to 80 million cycles. The team that we have brought in to assist us in this repair has the experience of like issues elsewhere in the industry. We are confident in the robustness of the repair and ability to get it back on track. That's our highlights and lowlights of the recent operational issues. Again, we have a great team to respond well to issues, while at the same time, we work to keep improving our predictive analysis and planned activities. I'll now turn the call over to Gary Heasley to discuss the PEP business performance.

Thank you, Dave, and good morning, everyone. PEP reported revenue growth of 10%. However, operating income declined 16% compared to the first quarter of fiscal 2014. Revenue growth was driven by increased downhole tools sales and rentals, increased powder shipments and sales growth in our distribution businesses. As we discussed during our last quarterly call, PEP's results for the quarter were impacted by a weaker mix, which primarily affected our distribution businesses and our titanium business. We're expecting better results in our fiscal second quarter with our backlog to manufacture downhole drilling tools at an all-time high and rentals expected to remain healthy based on strong demand in the oil and gas market. We expect continued strength in shipments of our titanium products into the aerospace and medical markets, and continuing efforts to improve productivity across the PEP platform. Also in the second quarter, Dynamet will be installing an additional wire finishing line and equipment that will support that line. This investment will expand our nameplate capacity and will also enable us to access additional capacity on our existing processing lines. These investments will help us become more responsive to our customers’ needs, beginning in our fiscal third quarter. Our fiscal first quarter was challenging. However, we are on a path to deliver improved results going forward based on our market outlook and actions being taken within the PEP business units. Thank you. And now I will turn the call back to Bill.

Thank you, Gary. Turning to Page 15. I'd like to highlight a couple of exciting developments. We will start on the left column where we are now wrapping up our heavy organic investment phase. Our Dynamet capacity expansions are now essentially on line, with the last tranche of capacity coming on in the third quarter. Over the last 3 fiscal years, we have expanded our titanium bar capacity by 35% and we've expanded our titanium wire capacity by 25%. We are also beginning today production at Carpenter's first production facility in China. This facility is located in Changzhou and is near Shanghai. It will enable Carpenter to provide better customer service by localizing product finishing. Next, we have increased the capacity of Amega West with the completion of our Singapore facility and the opening of a new facility in San Antonio to support the Eagle Ford Shale region. And last but not least, we are ramping up production at Athens. We produced another 1,000 tons of salable product in Q1 and expect to double that amount in Q2. Needless to say, the facility and its capabilities are drawing a great deal of customer interest. One major example is profiled on the right column. I'm pleased to share that last week, I signed a contract to supply disc quality grade material to Rolls-Royce for aerospace engines. It was just 2 years ago that Carpenter entered into its first supply contract for Rolls-Royce. We're excited to expand our supply relationship. We also appreciate that Rolls-Royce is working with Carpenter in an aggressive and structured plan to quantify Athens as the source of supply in the future. Turning to Page 16. To conclude, fiscal year '15 started with multiple operational challenges and a weak mix. That said, we saw operational performance and sales mix improve towards the end of the quarter. Looking forward, we expect SAO to continue year-over-year volume growth based upon our strong backlog and continued progress in obtaining key product approvals for production out of Athens. In SAO operations, while we're making progress, we will still be challenged in Q2. The issues Dave discussed will negatively impact us in the quarter, although we are working hard to mitigate the impact. What is most important to our results going forward is that we expect to realize the gradual improvements in our SAO sales mix, the improvements that we have been anticipating. This is based upon the profile of our recent sales and the mix and our backlog. We also expect PEP to show stronger performance in Q2 based upon operational improvements to reduce costs and continued strong demand for both oil and gas and aerospace products. We believe these factors, combined with continued corporate spending discipline will get us back on track in terms of driving profitable growth this fiscal year. This is essential as we have made a substantial investments in our business and need to leverage these assets and capabilities to drive improved results and returns. Like you, we are anxious to also drive strong cash generation. And given our recent share price, we are excited to have a new share repurchase authorization. With that, I will turn the call over to the operator for your questions.

[Operator Instructions] Your first question comes from the line of Gautam Khanna with Cowen and Company.

So a couple of questions. First, I was wondering, you've mentioned some of the items that impact SAO in the second quarter. Could you quantify for us how much of the premium ton slipped out of Q1? And whether you're going to expect some inefficiencies as you make those up, i.e. we should not assume the same type of contribution margin as you, in fact, make up those shipments you couldn't deliver in Q1. So if you could quantify it and then tell us if there's any productivity drag thereafter.

So trying to answer directly your question, we had the impact of some of these issues affecting some of our more premium assets. And as you can see, our volume was still up considerably. So the team, as in the past, focused and tried to be agile to respond and push or move product that was able to be produced on other parts of our equipment base. And so there was some more premium material which was pushed out, and you end up seeing the impact of the shutdowns with a much larger impact on our overall mix than on the, if you will, volume got out of the door. So I hope that answered your question.

It does. I mean, because one of the -- my next question was how we should interpret the 14% sequential increase in backlog? Is that a function of lower revenues, i.e. you didn't ship product so that number is not particularly meaningful? Or did you in fact ship much of what you were hoping to ship and therefore, that 14% is something we should actually look at?

Yes. Gautam, this is Andy. I would say it's actually something that we should look at. I mean, when you look at the segments, where we're seeing the benefit in the overall markets, it's in the premium applications. And it is consistent with where we see the steady growth coming for the premium and the ultra-premium products.

Okay. So Andy, to your point -- to your earlier point then, we have this Q2 dynamic, thereafter we're back to normal, i.e. there's no delinquency -- delinquent shipment makeup that's going to hurt productivity in fiscal Q3 and Q4. Is that fair?

Yes. I'd say that's fair. I don't think there's a penalty for delinquent shipments and our expectation is that we can continue in the same trajectory that we're on.

Okay. But by analogy, remember, Precision Castparts had a similar issue, and this is why I'm asking the question. When they had to run uneconomic unit runs to make up late shipments, you don't see that happening in terms of productivity drag on the presses? I just want to be clear about that.

Sure. Well, we have been running the press and the forge on essentially, we'll say, a 7 day a week, 3-shift basis. And obviously, we have some periods in there for maintenance along the way, but we've been running at that high level. So I wouldn't see it having any particular impact. You always have a little bit of an impact when you have a shut down because do you end up starving the piece of equipment downstream? And how do you react in terms of volume through that equipment? But I think our team's shown a pretty good ability to manage through those kind of dynamics. So we don't see a lot of knockdown effects.

Okay. And Bill, I know you don't provide annual guidance. But a couple of years back, you did provide mid-decade and end of decade EBITDA targets. And if I recall, it was like $550 million to $580 million round fiscal '15. And we're obviously not on track for that. Could you give us some sort of calibration of when you expect to get to that level, given what you see in the demand environment and operationally?

Sure. And when we referenced the mid-decade, it was, we'll say, fiscal year '15 or '16. I mean because we did reference mid-decade, and our fiscal year '16 starts in calendar '15. That being said, there is no question that over the last year, we have not had the growth that we were anticipating when we put that path forward. We had -- in the preceding 3 years, we had about $91 million of EBITDA growth per year, and then we haven't grown since then. So obviously, we need to get back on track. The formula for us getting there is very clear. And it really is dependent upon just a few things, important things. But we need to keep our SG&A flat, we know that. We need to keep our cost per ton flat. We need to leverage some of the Athens capacity that's coming online. We need to see the improvement in PEP that we're targeting. And most importantly, we need to see the mix improve. And when I say the mix improve, we're looking to go back to essentially the mix we saw in fiscal year '13. And so if I look at those, we've been able to keep the cost per ton flat. We've been able to get the incremental tons, and we've been able to keep the SG&A flat. So what's really essential to get us back on track and to get us there will be the pace and totality of the mix improvements in SAO and seeing the relatively modest improvements we're expecting from PEP. We are aggressive in managing our business with a goal to keep our commitments. But I also don't want to kind of raise undue expectations by giving you a specific time frame because we want to make sure that as we give any further clarity or guidance, that we would be clearly in a position to ensure that we can get there. So I'm not suggesting at this point to delay past the mid-decade, but I'm telling you the factors that are the key success factors to make sure that, that happens.

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

You made a comment about energy market that you haven't seen any decline in demand. I was just wondering -- there's always a lag in these things, so I was just wondering how your sales was on the ground? Are there negotiations for future orders and future business? Is that as robust as it was before the energy prices or oil prices came down?

Sal, this is Gary. We're not seeing any impact just yet, we have actually seen some increased activity in some markets. So at this point, we're not seeing that. And based on what we've seen in the analysis done, the cost of gas and oil right now still well above production cost. So we're not sure when that will begin, if it will -- when and if it will begin to impact activity.

And this is Bill just adding. We had a recent debrief with our team down in Houston. And not only reinforcing the points Gary just made, but saying that to the extent we would see a pullback, if there is a pullback, it probably would be some time in calendar '15, not an immediate kind of shut off of activity.

Okay. Just a quick question on maintenance CapEx. What should we expect as a sustaining maintenance CapEx for the company?

Sal, this is Tony. We were -- inside that $160 million to $170 million, if you take a look at our past history and use about 90%, that will give you a good ballpark number.

Got you. And your share buyback program, do you plan to use this to your free cash flow? Or do you think you want to level up a little bit to execute this $500 million share buyback?

Well, we have a lot of options. Obviously, the free cash flow we have going forward, and we've got some working capital initiatives, and we'll take a look at that. We have a strong balance sheet and that could be an option.

And your next question comes from the line of Michael Gambardella with JPMorgan. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Just wanted to follow up, Bill, on the first question regarding the backlog, again, just to get it straight. Just assuming you didn't have any operational problems in the quarter, would your backlog pretty much look the same?

I think that's right. We -- as indicated, we had some impact in terms of the mix in Q1. So there logically would be some benefit of material that's being carried into Q2 that wasn't produced in Q1. But what we've seen is a change in the revenue per pound, not so much in the volume. In the past, we've seen more of the volume increasing. This time, it was more in the revenue per pound, and that's obviously indicative, we believe, of a better mix to come. And so that was the core driver. It would be hard to quantify the Q1 carryover effect, but I think it would be incorrect to assume that the spike we've seen is driven primarily by that. It would have contributed to it, but it would not be the primary driver. And maybe, Andy, if you could reflect upon a little bit more of the nature of some of the orders that are coming in?

Yes. I would just -- Mike, I would just -- this is Andy. I would just look at it and embellish on Bill's comments a little, as pricing, too -- as we're starting to see activity, particularly in the more transactional distribution-type applications increase, then pricing comes along with that. And that's certainly reflected in the backlog. But just in terms of -- I tend to look at it at the sub-segments in terms of fasteners and engines and the components that imply a richer mix, and we're starting to see those products steadily come back into the backlog. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: And then just last question regarding Athens. I know you don't want to get ahead of yourself, but is there any way you could give us a feel for contribution out of Athens over the next 2 years, how the ramp-up will proceed?

I will do my best there. And I want to just reinforce that when we look at Athens, it's really part of now the SAO system. So whatever incremental production we can get out of Athens will affect our ability for the entire system to grow in its size. And the reason why that's important is because we'll have some materials which will be a little bit lower in value going through Athens in the early days, but that will enable the capacity and some more constrained premium assets backs in, and write in our Latrobe to be better utilized. So we said we had about 1,000 tons last quarter, about 1,000 tons this quarter, and we expect to ramp that up to about 2,000 tons saleable product by the end of Q2. And so if you take that as a run rate and assume that we're going to continue to increase our output capabilities, that should give you a pretty good sense for the type of impact we'll have over the next 2 years. That will be the average system margin that's the -- that was really the first point I was trying to make, and that's growing the volume.

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

Your longer term -- just to piggy back off of an earlier question. The $550 million-plus in EBITDA goal, how much is that assumed from Athens as far as an EBITDA contribution?

Well, I would say that it would be essentially in the 10,000 to 12,000 ton-type output. And that would be the -- more the system additional output required, and so I'm tagging that with Athens. But I'd point out that while volume is an important component in the equation, the real key here is to see that mix recover to the levels where it was just 2 years ago or 1.5 years ago.

Okay. And I think you had mentioned in the release some recovery in the power generation markets. Just if you could talk a little bit about what you're seeing there as far as near-term order patterns or strength in the MRO or OEM segment. I know that there's just been a lot of sort of mixed signals there for a bit of time and that's been largely MRO- driven. Just looking for anything that you could give us there.

Phil, this is Andy. So you know that, that subsegment for us is highly variabilized, and it's really dependent on one specific customer and a couple of the large frame platforms that they have in their IGT build. And so we tend to see demand come in tranches, and we had a very nice demand tranche in the first quarter. Having said that, the guidance from the downstream OEM is flat to down to last year. So while we had a good quarter this quarter overall, I wouldn't have exceedingly high expectations that it's going to be significantly higher than last year.

And your next question comes from the line of Josh Sullivan with Sterne Agee. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Can you walk us through how maybe you see the cadence of approvals at Athens over the next 12 months? I think you had mentioned you had already done about 6,000 annualized -- 6,000 tons annualized?

Sure. Maybe I'll start and then Dave and Andy can chime in here. But we have a detailed list of product and size and customer approvals that we were working through. We have a regular cadence that we review them on a monthly basis. And it's hard to put a specific approval because, ultimately, it has a -- like, here's the threshold where you've now moved tremendous amount. Because it's a series of these size- and grade-dependent items, and so we're moving them along kind of 1 by 1. And I think Dave could provide some more color on that.

Sure. First off, let me say that the lab that we have in place down in Athens has been through the approvals and we've got approval, and we're doing a lot of testing down there and certifications of those test results. That's a real positive move for us. And then the next key comment is that every customer that we have that towards that facility and works with us is absolutely thrilled with what they see. We've worked now with at least 30 different grades. And to Bill's comments, the qualifications are really grade and -- grade, size and customer dependent. So when Andy talks about the fact that we've now got approval for about 6,000 tons on an annualized basis, that's really great progress from where we've started, and it's just a matter of continuing to turn those on. And the rate of approvals, I believe, is increasing. So it's good progress. Lower than, obviously -- that anybody from operations would like, but we're working our way through it. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay. Great. And then how are you thinking of breakeven volumes now at Athens?

Well, our outlook on that, really, is unchanged. And it goes back to the mix equation and our overall system. We need to, want to and expect to go back to the type of margins we had before. And with that, there's nothing from a cost structure standpoint that's changed our point of view. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay. And then -- and just one last one on the fastener business. With all the capacity that you guys have put in place, how should we look at utilization as the new programs in the aerospace market ramp? And on the 787, there is obviously a big inventory overhang. Should we see that to be more linear this time around?

Yes. This is Gary. I think that we will see continued increase in demand and shipments. The feedback we're getting from all of our customers is that they want access to more capacity and they want it to be more responsive to their needs. So the installations that we've done of additional finishing capacity has been designed to do that. So we are definitely in place when they need us to deliver the product that they're looking for. I'd tell you that at this point, we struggle to keep up with the capacity we have installed at this point.

[Operator Instructions] And your next question comes from the line of Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division: Could you please give us an update on your nickel powder project with Pratt & Whitney, if it's on schedule and if you think it will ultimately expand to other customers?

This is Gary once again. Yes, that project is on schedule. It's moving well. We've gone through lots of design analysis that's allowed us to make certain that, that facility will be able to serve not just Pratt & Whitney and even not just aerospace, but a lot of different industries and customers. The amount that is spoken for in our capacity in that facility is actually quite a low percentage of its overall capacity. So we're looking to take that to serve a lot of different customers. And so yes, we'll be using that with -- in lots of different ways. Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And just in relation to the last question about titanium fasteners. Do you still see a large overhang? Or do you think that inventory has mostly been consumed?

No, there is no large overhang. That lasted a very short period of time, and it was specific to us because we had some specific shipments in the fourth quarter that were strong. And we thought that might be more of a challenge in the first quarter than -- in this quarter than it was. We're through that.

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

I just wanted to ask you where this legal settlement you got, which line item is it in the P&L?

It's on other income line.

And your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

I just had a question for Tony, just as far as capital deployment priority. I know you've got the share repurchase in place coming off of a lot of CapEx spending over the last couple of years. How do you put the CapEx priorities and the share repurchase and acquisitions and things in sort of a hierarchy here moving forward as to what you're looking to do?

Okay. Thanks, Phil. First, let me just make sure we're all on the same page with capital expenditures. For about a year, we've said that our -- that we keep capital expenditures on a cash basis. So what you see on the cash flow statement, about $120 million excluding Athens. So when I say in FY '15 that CapEx is going to be $160 million to $175 million, that's at $120 million plus the remaining of Athens. Earlier, when Sal asked, what was your maintenance CapEx kind of trajectory, we've always said that if you take a look at our depreciation for the last couple of years and use about 80% or 90% of that, that would be what we'd spend in sustaining CapEx. So take a look at that number and then add on anything for growth going forward, you get to about $120 million. So hopefully, that's clear when we say what we think our CapEx going forward. So at $120 million on a cash basis, that's a significant reduction from what we've done in the past. And we believe that will be sufficient to sustain our operations and to find those smaller productivity type projects that we feel have about a 1 year payback. So those are important for us to keep the business, the equipment up and running. We look at productivity projects. We think the $120 million will take care of that. When we take a look at the rest of our free cash flow, obviously, the share repurchase program is important to us, and we'll use our free cash flow to possibly enter in and out of that market. But to say which one is most -- a bigger priority is kind of tough to say. We'll use our free cash flow in the way we see best over the next couple of quarters.

Are you guys...

Hello?

Okay, go ahead. I'm sorry.

Well, I was just going to say that we clearly believe that our stock is a good long-term investment and we have this authorization, so we'll continue to assess conditions in the market and capital needs. But I will say that we increasingly are focusing on just making sure we drive the returns on the investments that we've made as opposed to kind of thinking more aggressively and more broadly. So while we would consider acquisitions and sometimes you can't pick the timing of them, really, we're focused on driving the returns right now on our core assets. And we think that we have other ways, as we've just authorized, to deploy our cash.

Okay. And is there anything in particular we should be thinking about as far as potential tuck-in acquisitions? I know you're digesting a lot here in the last couple of years, but anything related to further downstream any areas where you feel like you need a little bit more capability?

There are always things that are of interest, but there's nothing specific at the moment. And going back to my comment before, we'll remain open. Where we've kind of set some priorities for the near term here, so we're not going to be kind of pulling hard to make things happen that really aren't in play or unfolding naturally.

[Operator Instructions] And your next question comes from the line of Gautam Khanna with Cowen and Company.

Another follow-up. I think there was a comment in the prepared remarks about softer prices in the aerospace distribution channel. I wondered if you could expand on that. And also, just talk generally about what you're seeing in your aerospace pricing going forward because we hear a lot about price pressures. And if you could just talk about the various product categories and what you guys are anticipating over the next couple of years in terms of pricing.

Okay. I think Andy can describe the pricing dynamics in the distribution realm. I'll make my comments more focused on the longer-term trends. And we recognize, I think you hear it pretty broadly, that the OEMs are pushing for productivity enhancements that enable them to have a lower cost, if you will. Obviously we're focused on trying to help enable that through product solutions. But we also recognize that we're going to have to make sure that we're aggressive on managing our costs so we can be competitive and add a good margin. So that's an answer to it from a longer-term perspective. I mean, we see in here the same things that other people hear, and we're trying to align ourselves to respond appropriately to it. Now I think more specific and we'll say situational would be the inventory -- or excuse me, the distributors. And Andy if you could take that.

Yes. So Gautam those comments -- and it's kind of a natural outcome of where we are in the cycle. And as we see at a meteoric demand return but a slow and steady. And as that comes, the transactional businesses or a proxy for that, the distribution community, you start to see their activity in a volume basis pick up. And then the pricing is, as lead times go out, the pricing is near to follow. So while they are -- that's a comparative comment to a year ago. I would say to prior quarter, it's a different situation. So -- and I think that's natural for where we are and how we're coming back through the process.

Okay, Andy. And just maybe a follow-up on your earlier comment, I think on the jet engine supply chain. We've heard a couple of companies in the space already talk about prolonged and perhaps worse destocking by Rolls-Royce that was anticipated into the September quarter and perhaps the December quarter. Could you comment on when you expect to see a turnaround there in that particular -- with that customer? I mean, do you have faith that it's going to come back in March kind of like many of us were hoping? Or is this going to extend?

Gautam, I'm not going to get into specific customers. What I will tell you is that as we expected and kind of discussed it in the last call, we're seeing our engine activity increase. Our volume was up 5%. Now there is some variability in the types of products and specific programs and platforms, and we're working our way through that. So I think the long-term signs are good and the near-term activity is picking up. And some of these supply chains and specific customers are going to have to work their way through the process.

Okay. But relative to your expectations a quarter ago, it did not get worse?

It did not get worse. In fact, as we discussed, volume has picked up.

Right. I know you were anticipating volume to pick up, so I'm just curious about...

And it did. And we showed...

Relative to your expectation, did it get worse? Okay, it did not. That's good.

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.

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