Carpenter Technology Corp (CRS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 Carpenter Technology earnings conference call. My name is Becky, and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Dave Christiansen, Vice President for Investor Relations and Business Development. Please proceed.

Thank you, Becky, and good morning, everyone. Welcome to Carpenter's earnings conference call for the second quarter ended December 31, 2008. This call is also being broadcast over the Internet.

With me today are Anne Stevens, Chairman, President and Chief Executive Officer; Doug Ralph, Senior Vice President, Finance, and Chief Financial Officer; and Sanjay Guglani, Vice President and Chief Marketing Officer; as well as other members of the Management team.

Statements made by Management during this conference call 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, 2008 10-K; its September 30, 2008 10-Q; and the exhibits attached to those filings.

I will now turn the call over to Anne.

Thank you, Dave, and good morning, everyone. Our second-quarter performance reflects the difficult market conditions during the last three months, but our financial results demonstrate that Carpenter is capable of operating profitably in this downturn.

Demand in most of our global markets has weakened considerably. We expect this slowdown to last for several quarters. Our leadership team is focused on managing through it. You have seen the numbers in the earnings release, but I'm sure your focus -- like ours -- is on what is happening right now.

If I had to characterize current business conditions, I would have to say that there seems to be a continuing uncertainty that is hanging over the end markets. What I'm seeing across the dashboard are several factors that combined make it difficult to predict anything approaching a recovery.

Our consumer automotive and industrial businesses are seeing the effects of dramatically lower consumer spending. Manufacturers are reducing inventories. Consumer spending tends to track unemployment, and that's not giving anyone much comfort right now with US unemployment at the highest levels in 26 years.

Energy is slowing. The dramatic decline in oil prices has reduced the near-term urgency of exploration in the face of declining economic activity around the globe.

Our aerospace business has held up pretty well through the first half despite softening market conditions ever since the Boeing strike. Fastener demand has remained stable as jet engine requirements have come down. Market conditions in the second half will probably get tougher, although the long-term build rates are very promising for Carpenter.

Finally, the medical market is relatively stable and growing moderatively. We're seeing improved demand as we successfully pursue new customer initiatives.

During this downturn we benefit from a strong and growing presence with key customers, particularly in aerospace. We have a healthy balance sheet, even though we have a lot of work to do in right sizing inventories and restoring cash flow after the pothole we hit in the second quarter.

For the past two years we have intensified our focus on cost and operating efficiency. The Carpenter organization is aligning our operating costs with the lower demand levels. What we're doing right now is to further reduce spending by cutting labor hours to reflect decreased demand, lowering the number of shifts, adjusting headcount where necessary, and sharply scaling back on all other costs.

Equally important is what we're not doing. We're not cutting back on either new product development or searching for new market opportunities. We remain committed to growing our presence internationally. So I feel good that we're working smarter and that we remain obsessed with improving our cost structure.

As difficult as things are right now, the long-term fundamentals of our key markets in energy, aerospace, and medical remain strong.

Now I will review our end markets, and then Doug will cover the financial highlights. After that we will take your questions.

To provide better insight into our performance, the year over year revenue comparisons exclude surcharges.

Aerospace sales were $117 million, a 4% decline over a year ago. Shipment volumes were about the same as last year. The lower aerospace revenues came from reduced sales of alloys used in jet engines and lower titanium raw material costs, while the sales of materials for fastener applications remained solid. The softness in our sales for aerospace engines was due to the reduced build demand and the Boeing strike.

With both Airbus and Boeing slowing their production, we expect it will take a few quarters to work through the excess inventory in the engine supply chain. Despite general weakening of demand, we improved our position with key aerospace customers, which is reflected in the solid shipment volumes. In the long run, the large backlog at both Boeing and Airbus confirms the strong future for this business.

Medical market sales decreased 7% over a year ago to $21 million with an encouraging 9% increase in volume. The strong volume increase reflects solid demand for joint replacements and surgical instruments while the revenue decline is mostly due to lower titanium raw material costs.

As part of our success in medical, we've had good acceptance of our new use ULTRABAR material, which is a high precision titanium bar used for orthopedic screws and other applications. We have strengthened our position with key medical customers, and we expect to grow faster than the overall market in the second half.

Energy had been a very strong market for Carpenter for the last several years. But as I mentioned earlier, too much inventory and declining oil prices are causing a slowdown in this market. Sales were $35 million, down 17% from last year. We saw lower global demand for materials for oil and gas due to excess inventory in our customer base and in the overall supply chain.

Historically, oil and gas drilling activity has correlated with the price of oil. With the recent declines in oil prices and the forecast for them to remain low for the next few quarters, we expect drilling activity to slow. Now, it's not yet clear how much the drilling activity will decline or how long the inventory correction will last.

We sell our materials for use in large, high-end gas turbines where gas -- where demand for these has dropped. Our lower shipments for gas turbines are consistent with the drop in the market. We don't expect growth in high-end turbines for the next few quarters.

Carpenter sales to the industrial market were $62 million, a decline of 10% compared to the second quarter last year. US industrial production declined about 7% during the same period. We experienced lower demand for products used in valves and fittings, in fasteners, and in semiconductors. This was only partially offset by growth in welding and general industrial applications. We shed some business at the lower end of our portfolio and partially offset that by strengthening our position at the higher end.

Industrial production forecasts show continuing decline through the rest of our fiscal year. We will continue to focus on our high-value materials and deemphasize those products that do not provide adequate returns.

Carpenter sales to the consumer market were $20 million, down 23% from last year. Consumer spending has slowed considerably, and consumer credit has tightened significantly in both the mortgage and the general credit markets.

Historically, our sales in the overall consumer market have a high correlation with US housing construction activity. Housing construction over the last quarter was down 40% compared to the same period last year. We have strengthened our position with key customers in this market. For the rest of the fiscal year we expect our business to be in line with the housing construction market. Recovery in this market does not seem likely over the next several quarters.

Currently, the automotive market remained depressed. Our sales were down 44% to $19 million. The decline reflects the continued dramatic drop in automotive sales in the US that has now spread to Europe and Asia. The industry forecasts for auto builds have continually fallen, resulting in a grower inventory of unsold cars. In fact, some dealerships are reporting that their supply of unsold small and mid-size cars has grown to four months or more. We have little expectation for near-term recovery in the auto market. In fact, we're anticipating further deterioration this year. It may not turn around until later in fiscal 2010.

Including surcharge, Carpenter's international sales in the second quarter were $130 million, a 14% decrease over the 2008 second quarter. International sales were 36% of our total revenues in the second quarter.

Global markets are weakening, and manufacturers are doing what they can to improve their cash position. Credit and liquidity issues are affecting investment in durable goods and capital spending. In addition we are feeling the effects of currency devaluations in a number of countries that give a competitive advantage to local producers. We expect the global markets to continue to weaken through the end of our fiscal year.

Carpenter continues to be well positioned in our key markets. While the economic outlook for the near future is weak, long-term potential in our markets remains strong.

Now, Doug will walk us through the financials.

Thanks, Anne. I will start by reviewing our second-quarter results, and then I want to comment on our cash flow status and the steps we are taking to manage cash in the current economic environment.

Net sales in the quarter were $361.8 million, or 18% below a year ago. Excluding raw material surcharge, sales were down 13% compared to a 3% decline in the first quarter, so the downturn is having an increasing effect on our topline results, as you expect.

Overall tonnage volume decreased 10% in the quarter. In terms of product forms, titanium products grew 10%, which was more than offset by special alloys down 14% and stainless steel products down 9%.

Second-quarter gross profit was $75.9 million compared with $116.1 million a year ago. Excluding surcharge revenue, our gross margin in the period was 27.8% versus 36.9% last year. The biggest contributor to the profit reduction is lower shipment volumes.

Our manufacturing costs were higher than the prior year period but improved versus our first quarter performance as we have worked through the equipment startup issues that we were experiencing a few months ago.

As with the prior quarter, we also experienced a timing impact associated with hedge contracts as well as other negatives from the current low price of nickel.

Moving down the income statement, our SG&A expenses decreased 1% year over year and would've been down 5% if you adjust out the impact of higher pension expense. This is the result of actions we have taken to control headcount and reduce spending.

Overall, operating income for the quarter was $39.7 million compared with $79.5 million in last year's second quarter. Our operating margin excluding surcharge was 14.5% for the quarter, down from 25.3% last year.

Other income in the quarter was $6.5 million compared to $12.1 million last year. We received $6 million from the Continued Dumping and Subsidy Offset Act -- or CDSOA -- in the period compared with a -- $8.2 million last year. As we warned last year, this program has expired, so any amounts that we receive in the future will certainly be lower and will eventually end.

Other income also reflects lower interest income on our invested cash, partially offset by foreign exchange gains.

Our second-quarter income tax provision was $12.6 million, or 29.7%, versus $29.2 million, or 33.8%, in the same period last year. The lower rate is mostly due to the government's approval to extend the R&D tax credit during the quarter. Our full-year effective tax rate is expected to be about 33%.

First-quarter net income was $29.8 million, or $0.68 per diluted share, versus comparable income from continuing operations of $57.1 million, or $1.16 per diluted share, in last year's second quarter.

Looking forward, in terms of our profit performance, we would expect the declining volume will put greater pressure on our earnings. In addition, our profits in the second half of year will be negatively impacted by the LIFO effect of reducing inventory, similar to what we experienced last year. Counterbalancing this, we expect to see further improvements from our focus on manufacturing performance and an improving product mix.

Taken altogether, we expect our overall base operating margin excluding surcharge to remain in the low double digits as we manage our way through the downturn. And everything of course is dependent on end market conditions not worsening beyond our current outlook.

Now I would like to shift to cash. Our free cash flow performance, particularly inventory, was clearly the most disappointing aspect of our second-quarter results. This is largely the result of a rapidly changing demand forecast and continuing volatile end market conditions on a business where we generally melt about three months ahead of the order.

We now have our work cut out for us in the second half to bring down these inventory levels, and this is getting high priority organization focus. It is still our objective to finish the year in a positive free cash flow position, with inventory obviously the key to this.

In addition, we are differing discretionary capital projects and expect to end the year at or below the $119 million we spent on CapEx last year versus the $125 million we had forecasted previously for this year. Beyond this year, should the downturn continue, CapEx is one of the areas that we can throttle back in the short term to maintain positive free cash flow.

We continue to maintain a strong and conservative balance sheet. Liquidity and covenants are simply not an issue for us as they are for many companies in the current environment. We are closely monitoring our accounts receivable and other financial exposures.

Of note, given the decline in asset values for our defined benefit pension plan, we estimate we will need to make a cash contribution to the plan of at least $20 million during calendar year 2010, which will be the first time we've had to do this in over 20 years. Fortunately, we have the financial strength to manage through the current downturn while doing what's right for the long-term success of the business.

The cash deployment priorities that we have communicated many times before have not changed. As you are aware, we do not have a current share repurchase authorization in place, which we believe is a sound approach given the general economic conditions and our desire to maintain the cash flexibility to fund growth initiatives.

With that, let me now turn things back to Anne.

Thank you, Doug.

We are all experiencing the weakening of the global economy, and we expect it to stay weak at least through the rest of fiscal year 2009. As demand softens, Management is focused on the actions necessary to generate healthy earnings and to protect our cash flow.

As Doug noted, the startup problems with our rolling mill are behind us. The organization is concentrating on aligning our operational activities with lower demand. Our objective remains to generate positive free cash flow for this year.

To manage our cash, we will lower our inventories, improve other working capital, and reduce capital expenditures.

Even with these efforts, we expect our business will be 20% to 25% lower in the second half of our fiscal year compared to the same period last year. Long-term prospects for our markets remain strong.

We remain committed to our customers and to our strategic investments in R&D marketing and international growth. The Company intends to complete our premium melting expansion project by the end of our fiscal year. We know it will be needed in the future. We are still seeking the right acquisition that will add products, geographic scope, and new capabilities to accelerate our growth.

With that, we will now open the lines for your questions.

(Operator Instructions). David MacGregor, Longbow Research.

Just a question with respect to the press release. You cite that revenue and volumes are expected to be down 20% to 25%. Should we infer from that that you're expecting a relatively stable pricing environment?

No. That would assume our current outlook of pricing conditions, which are becoming more aggressive in the marketplace, especially on our lower end more commodity part of the business.

Okay. As you said revenue and volume down 20% to 25%, it seems like most of the downturn, though, you would describe to volume as opposed to price?

Well, the pricing pressure we are experiencing is in the lower end of the market. So there is pricing pressure out there. We have moved our business to about 40% long-term contracts, and obviously we've had some push-outs, but we do expect our customers to meet the terms of the agreement.

I realize you've got some higher cost inventory coming through, and you're probably working down some of your fixed costs. What should we be thinking about these days in terms of fixed cost/variable cost proportion? Once upon a time it was a 75/25. Is it closer to an 80/20 now?

Well, we have been focused on maintaining our fixed costs and are trending at a rate that's -- in dollars -- below the level that we were at last year. We've taken a number of actions on the -- both the headcount area as well as other areas of that spending. And then our -- on variable costs our objective has been to truly make those variable with production, and so based on that, the percentage of fixed cost is going to increase slightly in percentage terms, but it's not a big percentage amount.

From that normalized 75/25 relationship?

Yes. Just by nature of our topline, and especially for the second half being down 20% to 25%, fixed costs would probably increase 2% to 3% of the total pot, something of that magnitude.

Okay. That's helpful. Thank you. Then a final question just has to do with your hedges -- nickel hedges and other hedges. What would be the impact on the next couple of quarters? Can you quantify that for us?

Yes. They are not significant numbers. But just to provide some background, we take out raw material hedges at the customers' request under our long-term agreements, which account for about 40% of our overall sales. And so as some volumes under those agreements have been pushed out, as the hedge contract comes due -- and given the decline in nickel, comes due at a negative or at a cost -- the offset to that is as the customer takes the volume.

And so for the first quarter, it was about a $5 million impact in our results and a similar number in the second quarter. During the second half of the year, we would actually expect that to turn slightly positive due to the timing effect of customers then taking volume on hedge contracts that have expired during the first half of the year.

Edward Marshall, Sidoti & Company.

Is it out of the realm of possibilities that if this demand trend continues that -- longer than we anticipate, that the capacity expansion that is slated I guess now for the end of the year to be delayed further?

Let me answer that. We have some smaller furnaces that we can idle, and so the plan still is to slow down, but to start up those furnaces. The reason for that, in some of the furnaces the product is triple built, and it takes a while to get the qualifications and approvals, so what we would do is idle some less efficient furnaces, start them up, and then work on qualifying the material so that when demand returns, the materials are qualified and we can produce it in the furnaces.

So we -- the kinds of things that we obviously did when we looked at the projects is took out any overtime to deliver the project on time. When we needed the capacity, that was scheduled in there to improve the timing. That has been removed. Obviously we won't be operating any overtime on those furnaces, but what we will do is qualify the new materials.

I see. And the recent decline of Malian cobalt and that effect on its businesses, could it have the same impact that nickel has had to the overall business and the industry?

Nickel for us is a much greater impact. And when we do on cobalt -- hedge cobalt, we don't hedge Mali. So we hedge nickel and cobalt, but the nickel numbers are much greater than any of the other materials.

And then the cost cuts that you guys have discussed today -- or a further reduction in costs. Do you care to quantify that in any way to help us kind of project the future? Did I miss that?

On our last call we had talked about actions that we were taking on the fixed costs line (multiple speakers)

The 2% that you discussed?

And the 2%. So that -- as we explained that time -- is a targeted reduction versus the approved budgets that we had coming into this year. We have rolled that -- commitments into all the new budget departments -- or new budget targets for all departments. We track against that on a monthly basis, and we are on track to at least achieve those numbers.

As far as from the classification of the segments -- specialty alloys, stainless steels -- can I have a sales number without surcharge, please? If you have that available.

Yes. For special alloys, our second quarter sales excluding surcharge was down 22% -- 27% when you include surcharge. For stainless products, down 3% -- and down 9% when you include surcharge. And for titanium products, down 9% on both measures.

Gautam Khanna. Cowen and Company.

Can you talk about the PAO operating margins in the quarter? You had a modest sequential decline in sales ex surcharge yet a pretty pronounced one in terms of operating profits. Specifically, what is driving that?

Yes. I think the single answer, Gautam, is inventory impacts. I think if you were to look at our fiscal year-to-date numbers and margins on both the advance materials and premium alloys business, you have a more normal relationship there between the two. But it's really inventory effects between the two businesses.

Should that persist? I mean, is that something we're going to see as an overhang through the second half of the year?

I would consider our fiscal year-to-date numbers representative of the kind of difference in margins between the two businesses.

Okay. And premium melt expansion that I thought was slated for this quarter, the December quarter --?

It was; you're right. You have a good memory. What we did is, when we needed the capacity to deliver this quarter, we had contractor and Carpenter maintenance overtime. When we looked at it, we obviously don't need the capacity. So I canceled out all the overtime. And that is the only reason for the delay. There was no delay in the preparation of site, no delay in equipment arrival. It was strictly the cancellation of overtime that pushed out the time line.

Okay. You mentioned a couple of quarters of inventory overhang on the jet engine supply chain. How much visibility -- do you guys have production schedules looking out six months from the likes of GE and Rolls and the others?

Yes, Gautam. It's a great question. We've done a lot of work on that. What I'm going to ask is Sanjay Guglani to comment on that one.

So the inventory?

The visibility that we have in the engine supply chain.

Okay. Super. What's going on in the aerospace supply chain is that the jet engines are behaving differently than the fasteners because of several reasons. There is an excess inventory in the supply chain. One of them is the Boeing supply -- Boeing supply reduction due to the strike and push-outs of both the 787 and A380.

And also there is a forecast that the build schedule for both Airbus and Boeing will get reduced in the near future. And that is based on some of the forecasts we have seen in the industry.

That is causing the excess inventory in the engine supply chain. As we see it today, it will take a few quarters for that excess inventory to get worked out through the system.

So to answer the question and just add on what Sanjay is saying here, we look at the data from the airline monitor. And then the second thing that we obviously have is very close relationships with the forgers that are a step closer to the OEMs in the supply chain. So between the external data and then the demand patterns from the forgers, that's the visibility that we have.

Correct.

And do you have like a production schedule looking out six, nine months? Or is this just -- your lead times are actually very -- the order-to-production times are actually quite low?

So our lead times for engines is about nine to 12 months before the aircraft is actually built. So when we ship the material, our customers are actually forecasting based on the previous build schedules, and that build schedule we expect to come down. And we have seen some push-outs in the demand from our forgers.

So there is a lag in the time that the consumption of the engines, either by airlines or rebuilds or replacements, and builds of Airbus and Boeing. There's a lag before it hits our schedule.

Okay. And I think on the last call, Anne, you mentioned about a quarter of your jet engines sales are from aftermarket applications?

Yes.

Are you seeing any weakness? Are you seeing weakness in that part of the marketplace? And do you expect that to get weaker?

It's a good question, but honestly, when we supply the materials to the forgers, it's invisible to us whether it goes to a replacement engine or for new builds. But the type of data that we look at are things like revenue passenger miles -- both in the US, Europe, and Asia-Pacific -- and there is a correlation obviously with revenue passenger miles and the need for replacement parts and replacement engines.

So when we are looking at that, it's weaker. So based on interpolating the data, we would say it's had an impact. Quantifying it any more than that, I really can't do. We don't have the visibility.

Mark Parr, KeyBanc Capital Markets.

Thanks very much. I had a couple of questions. First, I wanted to clarify -- and I didn't hear everything that you guys said. But when you were talking about a second-half revenue outlook down 20% to 25%, does that include surcharges, or is that excluding surcharges?

Excluding surcharges the way that we would -- apples to apples -- look at our business.

Any sense that you can give us for the March quarter including the surcharges? How much incremental impact could that be?

I think the difference between our -- we had about a five-point difference in the second quarter between our sales excluding surcharge, and surcharge. That number will be at least that five-point gap, just given what's happened to nickel prices. But not materially different than that. But high single digits would be I would say the difference between revenue ex surcharge and revenue including surcharge.

Did you make any comments either specifically or anecdotally regarding backlog momentum?

No, we did not. Although, we have seen -- I think it's about a 10% reduction in the backlog, Mark -- the latest number I looked at.

Now, is that excluding surcharges?

That's on tons that we would look at that.

That's on tons? Okay. Down 10% in terms of volume.

Yes.

All right. And the -- help me to understand your position on jet engines. Is your material more focused on the fixed portions of the engines or the rotating portions?

Both. We supply materials that are used in the hot end of the engines. So we supply materials that are used for disk -- that is rotating. And we also supply similar material but different specifications for rings, and rings are stationary; they don't rotate. But as I said earlier, they are both used in the hot section so they both have very high nickel, which is extremely profitable for us.

Terrific. And then the last question. I know -- I think that MacGregor had asked this question earlier, but I just wanted to get some clarification. Can you give us a sense of what the difference in the actual fixed costs for the second half could be relative to the first half?

I would position it relative to a year ago. We've been running slightly below a year ago through the first half of the year and about five points down when you exclude the effects of pension expense. And I think we will continue to tract at a rate that's below our year-ago spending level given the actions that we've taken.

Would you think it might accelerate in the second half, given the incrementally impaired economic outlook that we're seeing?

We've been on fixed costs all year, so we've had a hiring freeze in place since the beginning of the fiscal year. We've been clamping down on all of our discretionary costs since the beginning of the year, so I'm not sure that I would expect to see that rate accelerate. I think it will continue to be managed as tightly as we have managed it over the first half of the year.

And I had just one last question. Just looking at the inventory build that's occurred in the first half of the year -- and this is something that you are talking about as an area of focus for the second half -- it seems somewhat uncharacteristic for you guys. And I guess I would just really be curious kind of like what happened or what was the disconnect between the purchasing activities and the manufacturing activities. Could you give me a little color about that process?

Well, I think that what happened, if you look back at last year, we had a similar trend on inventories the first half -- the second half for different reasons. This year that what happened, I think the biggest what happened is the rapidity at which our demand forecast changed. It really wasn't until the first week of September that we started to see the evidence of the downturn that was timed for us with the Boeing strike.

And given that we're in a business where we melt three months ahead and have initiatives under way to improve the granularity of some of our systems for scheduling and production planning and those types of things, I think we've been doing our best efforts to react to the rapidly changing demand in a business where we did have an order book and were melting ahead of that order book. And we've certainly been implementing corrective actions as it's been clear that our demand forecast is down.

Okay. So it's just (multiple speakers)

One other aspect I would just highlight of inventory is that it is connected to customer service, and it's important and a priority for us to maintain good, strong levels of customer service. And so as we've been managing inventory, there's areas of waste certainly that we need to be managing down, and there's other areas where we have needed to put more inventory on the ground in order to do the right things from a customer service standpoint.

All right. And just last, was there a LIFO impact in the quarter that you can identify for us? Or did you say? I didn't know if you said that already, but --

For LIFO, we will report in our Q a number of $42 million. I don't view that as a particularly relevant number. Our LIFO -- we expense our current costs of raw materials as we go, and so we don't view that there's much of a mismatch between our raw material costs and the raw material value that's in our pricing, just given the way that we handle our transactional business and our long-term agreements.

Okay. Terrific. Thanks very much for all the color. I appreciate it.

Eugene Fox, Cardinal Capital Management.

Just a couple of questions related to inventory as well as production. In your volume and revenue guidance for the second half of the year, how much of that is based on a reduction of inventories to more normal levels?

Well, our inventory reduction efforts are internal, so those are our externally reported -- our expectation for externally reported topline revenues are going to be off 20% to 25%, and the impact that would have on our production schedules would be more than that because of our efforts to reduce our inventory in the second half. I don't know if that answers are question, Eugene.

I think I understand. How much your inventory is really associated with the build of jet engines that you are discussing earlier?

We really don't have anything internally that would help us identify the inventory to jet engines. It's certainly a factor. That's a business that's down. It's a high-value business to us, and so the rapidity at which that demand has moved downward because of what's happening in that industry is certainly a key factor in our inventory builds.

Are there any other products which you might identify as having particularly long lead time which would have been difficult for you to manage inventory around during the quarter?

Some of the products destined for energy as well. We had very good business in the drill collar sector, but that has dropped off considerably. And that's another factor that's impacted inventory.

The other comment that was made on the call was relative to this dumping subsidy of $6 million that you got in the quarter down from $8 million. In your guidance for the second half of the year, are you assuming you get any subsidy in the second half?

No. For us that's been an item that's always occurred in our second quarter, or at least for the last several years has occurred in our second quarter. So there's nothing that we would expect on that line for the balance of the year. And we would expect a much reduced number in the second quarter of next fiscal year.

You have no further questions at this time. I would now like to turn the call back over to Anne Stevens.

Thank you very much, Becky. For all participants, thank you so much for your interest in Carpenter. We look forward to talking to you (technical difficulty) to discuss our third quarter's results on our conference call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.