Carpenter Technology Corp (CRS) 2012 Q4 法說會逐字稿

Good morning and welcome to the Carpenter Technology fourth-quarter earnings conference call. My name is Dominique and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed, sir.

Thank you, Dominique. Good morning, everyone, and welcome to Carpenter's earnings conference call for the fourth quarter ended June 30, 2012. This call is also being broadcast over the Internet.

With us today are Bill Wulfsohn, President and Chief Executive Officer, and Doug Ralph, Senior Vice President and Chief Financial 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, 2011, 10-K; September 30, 2011, December 31, 2011, and March 31, 2012, 10-Qs; and the exhibits attached to those filings.

I will now turn the call over to Bill.

Thank you, Mike, and good morning, everyone.

Fiscal-year 2012 was an excellent year for Carpenter. As a team, we executed well and we exceeded our earnings targets. The legacy Carpenter business saw a 68% increase in operating income, excluding pension EID, which was above our 50% growth target. This profit growth was driven primarily by focused pricing actions, mix management initiatives designed to free up capacity for increased sales of high-value products, and excellent manufacturing performance, which reduced our cost per ton for the third straight year.

Combined, these actions drove a $0.44 per pound, or 66% improvement, in SAO profit per pound. And equally as important, these actions enabled the capacity gains to sell an additional 4,500 premium tons in the year.

Fiscal-year 2012 was also an outstanding year for the Company in terms of positioning for future growth. I'd like to highlight four key areas of particular strategic importance.

First, and the highlight of the year, was our acquisition of Latrobe Specialty Metals. We have now owned Latrobe for four months and the results in the business are strong. As expected, on an operating basis, the acquisition has been immediately accretive to earnings. I'm also pleased to report that the integration is going extremely well.

Based upon what we've learned to date, we are even more excited about the strategic value and synergy potential from this transaction.

Thus in summary, Latrobe is tracking ahead of our overall deal economics, and we remain confident that we will achieve at least $25 million of synergy by year three.

Second, we announced earlier this year the construction of a $500 million premium products facility in Alabama. This state-of-the-art facility will enable us to support existing and increasing customer demand for our aerospace and energy products with 27,000 tons of new premium product capacity. In addition, the plant will enable us to improve customer satisfaction by offering dramatically reduced lead times.

We monitor the progress of the plant's construction weekly, and I'm pleased to report that the project is on schedule and on budget.

Third, this year we expanded our Dynamet facility in Clearwater, Florida. We believe this project, which will eventually lead to the doubling of our titanium wire capacity, is essential as we work to meet rapidly growing demand for our titanium aerospace fastener wire product.

And fourth, this year we expanded Amega West's footprint to better support international markets for oil and gas exploration with acquisitions in Canada, Singapore, and Dubai.

Looking forward, as we move into fiscal-year 2013 our business remains strong and our backlog is high. We are coming off a record quarter in terms of volume in our premium forged bar and billet business.

In addition, we have worked hard over the last several years to strengthen customer relationships. As a result of these efforts, we have seen increased and expanded long-term supply agreements.

In addition, I'd like to highlight three important and unique factors driving Carpenter's strong customer demand and profitability in the context of various global pressures at this time.

First, to limit the impact of raw material price changes on profits, we've implemented pricing mechanisms and hedging policies.

Second, we've focused our strategy on the design, qualification, and manufacture of high-value differentiated niche products. Note, only a small percentage of our products are sold through distribution or service centers, and Carpenter doesn't participate in the flat-rolled stainless market. These areas, while attractive at specific points of an economic cycle, can experience higher levels of cyclicality and pricing pressure in the context of weak demand.

Third, supply and demand dynamics in the majority of our segments are favorable as we sell into growing end markets and the manufacture of our products require large capital investments, long qualification cycles, and significant technical expertise, making entry difficult for new competitors.

Beyond these strategic differentiators, we are fortunate as our key end markets of aerospace and energy continue to show strength.

Within aerospace, airplane build rates remain high and the mix shift to larger planes and new platforms favors higher use of Carpenter products. As a result, we continue to experience strong demand for our engine materials, and fastener demand is near or above prior peak level.

We are also having success selling Carpenter's Custom series stainless alloys and Latrobe's complementary line of aerospace products, both of which broaden our sales penetration into aerospace structural components.

Moving to oil and gas, directional drilling activity remains strong. While the number of North American directional and horizontal land drilling rigs is level, offshore and international oil and gas exploration activity is increasing. To capture these opportunities, Amega West is making investments to expand our footprint in the US and abroad. These efforts enable Carpenter to broaden this reach and gain market share.

In addition, Amega West is also successfully targeting new product areas for growth. For example, Amega has just been awarded its first deepwater contract.

To support increasing demand, our capacity expansions in Reading and Latrobe will permit us to ship an additional 4,000 tons in fiscal-year 2013 and another 4,000 tons of premium products in fiscal-year 2014. We believe these capacity additions will enable us to support growing customer demand in the near term until our Alabama facility comes online in April of 2014.

With regards to financial expectations, we had previously stated a near-term goal of getting back to our prior peak EBITDA on the legacy Carpenter business by fiscal-year 2013 or 2014. Based upon the current momentum of the business, we feel strongly that we will achieve that level in fiscal-year 2013. With the addition of Latrobe and our announced capacity expansions, we'll soon be setting and communicating a new target for further growing our EBITDA.

Please join us for our Investor Day on September 7 in New York City. During that session, we intend to provide more details on our growth strategies and expected financial results.

I'll now turn the call over to Doug, who will cover our Quarter 4 and fiscal year financial results.

Thanks, Bill.

We had another good quarter of results. Overall, we delivered earnings per share of $0.77, which included $0.11 of Latrobe inventory fair-value cost adjustments. Without this impact, we would've been at $0.88. The Latrobe business was accretive by $0.08 on an operating basis in its first full quarter.

Before commenting further on Latrobe, I'll provide a few highlights our legacy Carpenter business, which finished out a very strong year of financial performance.

We had consistently strong positive spreads between our revenue growth rate and volume growth rate, reflecting successful results from our pricing and mix management strategy. We improved our average mill profit per pound by $0.44 during the year, due again to very strong mix management actions and growth of premium products.

Our average mill cost per ton improved for the third consecutive year, due to strong operational efficiency and productivity. And as a result of all this, operating income, excluding pension EID on the legacy Carpenter business, was up 68% for the year, which exceeded our 50% going-in target.

Overall EBITDA for the year, ex-Latrobe, was $328 million, which is on track to get back to our prior peak profit level this fiscal, or a year ahead of schedule

We also feel good about the results that Latrobe is delivering. The Latrobe integration is going well. We have already achieved about $2 million in net synergies through the first four months of ownership. This is mostly due to immediate cost synergies from overlapping third-party service agreements and purchasing contracts.

The business has also gotten off to a very fast start on operational cost synergies through the strong collaboration that is occurring between the Latrobe and Carpenter manufacturing teams. Examples of early wins include better yield performance, increases in the number of heats per day, fewer scrapped heats, and lower costs through better scrap segregation. We are tracking all of these metrics, and again, the early success is very encouraging and the team is executing very well.

The most significant deal synergy, as we've previously communicated, is the ability to produce more premium tons from the Latrobe assets, including the immediate investments we made in three new VAR furnaces. We are making good progress in bringing these new furnaces onstream by the end of the calendar year.

Given the strong progress being made, we expect by the end of this fiscal year we'll be at a run rate of $16 million of net synergies, or about two-thirds of the $25 million target in our original deal economics. Note that much of the benefit from the additional premium-tons capacity will show up as SAO segment sales, so the synergies will be spread across the total integrated mill operation.

As we head into fiscal-year 2013, our business momentum is strong, and we continue to expect further operating income improvement of at least $70 million, or 30%. This is versus a fiscal-year 2012 base of $237 million that excludes pension EID and $11.7 million of Latrobe acquisition-related costs.

Since our depreciation and pension expenses both increase next year, this will translate into an EBITDA improvement of over $110 million in fiscal-year 2013.

The biggest year-over-year improvement will be the full-year impact of the Latrobe business, together with strong progress against our committed synergies. All in, the Latrobe business and synergies will contribute about $90 million of EBITDA in fiscal-year 2013, including the portion that will show up in SAO results.

In addition, our SAO business will further improve profits, due primarily to additional premium-tons volume from our Reading investments and Latrobe. Note that within the SAO segment, we will have about $6 million of first-year costs associated with the new Alabama facility.

And finally, our PEP segment is expected to post revenue and profit increases on all three of the component businesses this fiscal year, with growth focused in aerospace and energy.

I'm going to skip the normal recital of the income statement figures this time since you can get all this information from our press release and there are a couple of other areas that I want to expand on. I'll just comment briefly on our fourth-quarter segment results.

Excluding surcharge, Specialty Alloy Operations, or SAO, sales increased 18% on 10% higher volume, with operating income of $65.5 million and a 20.2% segment operating margin. Performance Engineered Products, or PEP, sales increased 15%, with operating income of $9.7 million and a 10.4% operating margin.

Latrobe reported operating income of $9.2 million and a 7.5% operating margin, but excluding the inventory fair-value cost adjustment, operating profit was $17.9 million with a 14.5% operating margin. As we mentioned in our last call, the Latrobe inventory cost adjustment has now ended, so we will not need to call this out separately going forward.

Free cash flow was positive $37 million for the quarter and ended up negative $59 million for the year, which was in the range of what we've been communicating all year. We did reduce inventory in the quarter by $36 million, driven by strong improvement in our finished-goods turns.

We still believe we can further improve our inventory turns, especially in combination with the Latrobe business. Toward this end, we have initiated an external consulting project to identify inventory and operational improvement opportunities across the total integrated mill system. This is being funded by a provision we included in our Latrobe deal economics, and we expect to see cash benefits from this effort in the second half of the fiscal year.

To put our cash-flow results in context, our free cash flow has been modestly negative in each of the last two fiscal years, as we forecasted, due primarily to working capital increases to support business growth coming out of the downturn. Over the next two fiscal years, we expect capital spending to peak at about $350 million in fiscal-year 2013 and another $250 million to $275 million in fiscal-year 2014, driven by the investment in our new Alabama facility.

Fortunately, our business generates strong cash flow with $286 million in cash flow from earnings in fiscal-year 2012 and an estimated $350 million cash from earnings in fiscal-year 2013. The net result is overall expected free cash flow that will be about $125 million negative in fiscal-year 2013 and around $50 million negative in fiscal-year 2014 before overall free cash flow turns strongly positive in fiscal-year 2015 for the balance of the decade.

Note that our out-year cash flows will benefit from the additional earnings leverage created from our current investment base. We also anticipated the Latrobe and Alabama investments when we did our financings last year, so we will continue to have a strong balance sheet with good liquidity throughout the investment period.

Next, I'd also like to say a few words on our pension plans. Our unfunded liability has increased due to lower returns on the asset side of the equation and continuing lower interest rates that increase the calculated liability. We have closed the Carpenter general retirement plan to new entrants and the majority of the pension liability is for already retired employees.

After more than two decades of no pension funding requirements, we put $30 million of cash into our pension plans in fiscal 2012 and are due to put another $82 million of cash into the plan this fiscal year. Over the next seven years, current estimates are that we will need to put about $400 million into our various pension plans to address the underfunding, subject to market return and interest rate assumptions, of course. This, again, is something that we have factored into our cash flow and capital structure planning.

Beyond the cash funding aspect, the combination of lower asset values and lower interest rates will increase the pension expense we will record in fiscal-year 2013 to $68.4 million, or $0.83 per share, which is about $9 million higher than what we communicated in our last call. So this will negatively impact our EPS versus your previous models.

We are looking at some options to proactively deal with the liability and earnings impact from the pension plan, especially with the current favorable credit markets and low borrowing rates. This would all be tied into a strategy as we think about the $100 million of current debt coming due in May 2013. We will continue to evaluate our options and provide additional updates as we are able.

Finally, I want to alert you to one small change we will be implementing to our forward reporting. We will continue to report volume and tons for our mill business, but will discontinue this for the PEP businesses since volume is a less meaningful metric on these businesses and revenue is the more relevant and consistent performance metric. Hopefully you agree this is a minor and logical change that we just wanted to make you aware of.

With that, let me now turn it back to the Operator so we can open the line for your questions.

(Operator Instructions). Gautam Khanna, Cowen and Company.

A couple questions. One, you know, the special -- the SAO and PEP businesses had sequential sales gains, ex the surcharge, but the operating profit was slightly down in both cases. Is there any -- what explains that?

You got them on the -- nothing that we're concerned about from a continuing basis.

On the SAO business, there were some negative inventory effects with our LIFO accounting. When we de-build inventory and the current market price is below our cost standard, there are some negative profit effects from that, and we had a fair amount of inventory reduction in the quarter.

And then, the rest is really kind of SG&A or overhead cost driven, much of that activity related since we're resourcing a lot of activity out of Reading. Some of it is, frankly, a phenomenon of people spending their budget money at the end of the year, and I would note that from a total dollar SG&A standpoint, when you exclude the Latrobe and Omega, we were actually down year to year in dollars, but a lot of that spending occurred in the fourth quarter. And there were also some performance-related cost impacts in the fourth quarter since our operation hit its targets for cost per ton and profit per pound and those type of things. So, some of those items impacted our fourth quarter on the SAO business.

On the PEP business, really just some temporarily higher costs in our manufacturing operations. Some are related to the new capacity that we're bringing onstream and staffing up for, the higher demand in the market, and some areas of performance that we're focused on there as well.

Should we think of the margins of both segments to return to where they were in Q3 and perhaps Q2, depending on which segment you're looking at? I'm just looking at specialty alloys north of 21%, ex the surcharge, in Q3, and then PEP has been as high as 14% this year and 16% last year. I'm just curious where we're trending to, given your order book.

Yes, so the figures -- the things that I mentioned there will correct out. That'll be partly offset in the beginning part of the year just by the fact that our volume is lower, so that we have lower volume efficiencies during the first two quarters of the year.

Okay. The other thing, there was a lot of noise intra-quarter and [both] some of your peers' earnings reports of weakening aftermarket and just in general a weakening order book in the quarter. Did you see any evidence of either, and maybe if you can just characterize how orders trended through the quarter, June versus May and April, and perhaps what you've seen thus far in July?

Sure. We don't have as much visibility on aftermarket versus, if you will, the primary consumers as some of our customers who are a little further downstream have it.

That being said, we've seen continued strength. Our backlog has stayed strong. We actually had a record backlog, as well as sales, coming out of June with our forged bar and billet business, so at this point overall our business is very strong. Limited areas of weakness, not surprisingly, would be around the small percentage of business that we do through distribution, some powder-related sales in Europe for tool sales, but again, these are smaller components of our overall business mix.

And lead times, have they changed at all at either segment?

We've been working hard, actually, to try to bring down our lead times and we've been successful in some respects, although we're quoting out into the first calendar quarter of now 2013, but our backlog level is remaining high. We're just getting more out.

Edward Marshall, Sidoti & Company.

Good morning. Question on, if I could -- and maybe get too granular, but the end-market data that you have. If you have that combination, less Latrobe, say for the aerospace and industrial businesses, I think that would be helpful.

Okay, we do call out in the press release the volumes with and without the Latrobe impact, so that you've probably seen it as one point, but I believe Doug also has some additional data here.

Okay.

Ed, are you talking about something other than what we called out in the press release, which is the year-over-year growth rates in volume and revenue, ex Latrobe?

Right, if you -- do you have the revenue numbers, less Latrobe, for the individual businesses? I don't think that was called out in the release, was it?

It is, but I'll just rattle down through them (multiple speakers). Our aerospace business, and this is all revenues excluding the effects of surcharges we always quoted, so the aerospace business was up 24%. Our energy business was up 15%. The industrial consumer business was flat in revenue terms, transportation up 19%, and our medical business up 12%.

I see that in the press release now, yes (multiple speakers)

So, overall, up 15%.

And if you could comment on what you're seeing in maybe the gas turbine market, because we haven't spent that much time on there, but my sense is we're seeing a shift from what was spare and aftermarket demand to a more OEM build backlog. Are you seeing that with your customer base?

Well, we have described in the past and will continue to say that demand in this market is lumpy. It comes in in projects and we get fairly strong orders, and then they dissipate a little bit.

Right now, I'd say in the short term that it's a little bit weaker, but we've seen, and I think we all acknowledge, that given the lower cost of natural gas, the fundamentals are definitely likely to drive a higher demand rate over time. So, we're bullish in the long run, but in the short run it's not our strongest area.

And the capacity additions that you're putting in place that take place in the next two years, just refresh my memory. I think these are modest procedures. It's not like you have any chance of disruption to any of the facilities or anything along those lines? This is just a furnace here or there, is that correct?

We are adding a couple of VSRs in the Reading facility, a couple of VARs in the Latrobe facility. We're moving forward on some operational-efficiency efforts on our forging press, and then we're getting the benefit of being able to schedule the Latrobe and Reading operations, if you will, as one mill, so we're getting the synergies that come from the combined capability.

But this isn't like taking down a line to put in a new furnace and et cetera?

No, no, no. It's pretty straightforward.

Steve Levenson, Stifel Nicolaus.

I know you quoted lead times out into the first quarter next year, but can you talk about what Dynamet's lead times are and where you hope to get after the expansion (multiple speakers)

Right now, they're running about 12 weeks. That is pretty much of a normal lead time.

We're expanding -- I mean, ultimately, our desire, just to step back for a moment, is to have the capacity so that across our businesses we can offer those type of lead times consistently. So, demand is, we believe, growing and will be strong, but we're hoping we can stay with those kind of lead times.

Okay, do you think the ability to offer those lead times is going to affect pricing at all or do you think pricing will remain strong?

We're not seeing effecting pricing. We are -- as we add capacity, we're very careful. We try to develop long-term strategic value-based supply and pricing with our customers, not move to either spike prices or to chase prices, depending upon exactly where we are and given, if you will, our current supply situation. So we don't see it affecting pricing.

Great, thanks, and on the nickel front, do you see a shift away from some of the legacy superalloys into new ones that can handle the higher temperatures, and how do you feel you're positioned to meet the demand there?

Well, that general dynamic and trend is something that we're excited about because, as you know, we invest more in research and development than we believe, as a percentage of sales, anybody else in our industry. So this is an area that we try to lead and be an innovator on.

We feel good about our position on new aircraft and new engines. Some of that is still to be determined because those materials haven't been specified, but we feel encouraged by what those trends and innovations mean to us as a Company.

Okay, and the fact that they're not specified yet, does that mean you still have an opportunity on some of these new engine designs?

Oh, absolutely. It's just some of them aren't finalized in their design, so the materials aren't specified.

Jonathan Sullivan, Citigroup.

Hi, good morning, and congratulations on the quarter. I just had a quick question in terms of the operating income, ex EID. It looks like the first three quarters of the year were revised down, it looks like, by about $3 million. Was that related to something with the acquisition costs or what was going on there?

I'm not sure what you're referencing, Jonathan, to be honest. When you say revised downward, from what?

In the 3Q release, I think, you had operating income, ex pension EID, at $169 million, and then for the full year I think it's $237 million and you had $70.8 million in the fourth quarter, which would imply $166 million in the first three quarters? Perhaps I have my math wrong.

It sounds like the amount that you're off, which is about $3 million, would correspond to the charge in March for our inventory fair-value cost adjustment, so that could be the difference in the numbers that you're looking at. It sounds like you're off about $3 million and that was a $3 million item, so I suspect that's the case.

Josh Sullivan, Sterne, Agee.

If we look at your guidance for 2013, the incremental, how much of that is volume versus mix shift in the portfolio?

I would say hard to generally summarize that. I would have to really kind of break down the pieces.

A good chunk of that is just the full-year effect of the Latrobe business and the synergies, and so I would say very -- the volume there is growing, but it's -- the bigger contributors are just the full-year effect, as well as the progress we're making on synergies.

In the SAO segment, it'll be volume driven because it's the effect of the 4,000 premium tons that we're adding, and in the PEP business it's, I would say, predominantly revenue growth with some other operational improvements.

Okay. And then on inventory, can you talk about inventory levels and how we should think of those coming down in light of the aerospace OEM production ramp over the next 12 to 18 months? Some of the other aerospace suppliers have reported varying levels of inventory preparedness. I'm just seeing how you guys are lining up.

Well, at this point we see a pretty good balance between inventory levels and demand profiles at our customer level. We're not expecting a big pushback or a big wave to pull.

We have built inventories over the course of the last year and a half, and a lot of that has been really related to the increase in volume output. But also recognizing that our lead times are longer than we'd like to see them, we've built some staged inventory so we can provide better responsiveness for our customers, and we are working to try to also, as Doug mentioned, see if we can't focus on more efficient ways of operating our inventory.

One other point, though, that would be worth noting is as our inventories have increased and they've increased in a dollar-per-pound basis because we've seen an improvement of our overall mix as well. So again, inventory is an opportunity for us, but we don't see it as either an issue on our side or the customer's side.

And then, just including Latrobe, does the fastener, engine, and narrow structures breakdown, is that consistent with the 35% fasteners, 50% engines, and the remainder structures, or does that change significantly with Latrobe?

Latrobe has a greater percentage of their aerospace business on some of the structural components. They're a big supplier of materials, for example, for landing gear. So I think you'd see that being a higher percentage.

They also have fastener capabilities, but I think then in terms of the engine materials, that's probably where you'd see a lower percentage from the legacy Latrobe business.

John Tumazos, John Tumazos Very Independent Research, LLC.

Congratulations on the good results and conditions.

Thank you.

As you budget for the capacity increase and the 700 series alloys, what rate of growth and world commercial airline traffic do you use for the next 10 years?

And I now want to ask you your market assumptions, but I'm not smart enough to think of a different way to hide that question. But implicitly, you have to be making an assumption as to whether your competitors identically expand. You know how sometimes people don't notice what the other guy is doing? (Multiple speakers). Excuse me for not asking the second part of the question in a more clever way.

Yes, the way I would break that down, John, is that for the number of builds themselves, we rely on sources like Airline Monitor.

And over the period of time that you're talking about, it's about a 7% compounded annual growth rate in just the number of builds. When we look at the material content because of the larger planes, et cetera, we get that up to about a 10% type of ongoing growth rate, and then from a market-share standpoint, we feel like we've been growing our market share in the marketplace, and since we're being proactive about adding the capacity to support the future growth, we would expect that to continue as well.

I'm sorry, you didn't exactly answer my first question. What is your traffic assumption for the next 10 years for growth? Traffic may correlate better to whether the engines are on fire and used.

We do track the actual historical, if you will, miles and hours, airline hours available, seat miles, revenue passenger miles, ton miles. I don't know that we look at that as much going forward, but it's predicted to be roughly, airline traffic, up roughly 5% per year.

Lloyd O'Carroll, Davenport & Company.

Just so that we're absolutely clear, because I think there's been some confusion on the base in 2012 in which the -- your 30% guidance, what is the dollars in fiscal 2012 that we should apply to 30%?

Yes, Lloyd, it's in the table on, I guess, page 4 of the press release, or at least the version that I have printed out here. It would be that $237.1 million of operating income, excluding pension EID and the acquisition-related costs.

Okay, because we get confused sometimes, is Latrobe in or out and is the inventory in the latest quarter for Latrobe in or out? So that's the reason for the question.

Right. So, hopefully that table gives you the numbers that you need, and if you have any questions, you can call us and we can take you through it.

Okay. And then, can you give us the sequential growth in volume of -- by end-use market for the quarter? And we're looking tonnage rather than revenue.

So this would be excluding Latrobe?

Yes.

Versus last year.

Yes, versus the previous quarter.

Just bear with me a second here. So these numbers now include Latrobe.

Okay, yes (multiple speakers)

So aerospace is up 45%. Our energy business is down 1%. Industrial and consumer, up 13%; transportation, up 1%; and the medical business, up 15%.

Phil Gibbs, KeyBanc Capital Markets.

You talked about in the past as energy being your fastest-growing business. I'm just curious if you could talk about some of the successes that you've had in going outside some of your, call it, historically legacy markets, like nonmagnetic drill collars and land-based gas turbine, and some of the success you've had in some of the areas like completion and exploration.

Sure, we -- obviously a lot of our growth that we've seen has been related to Omega, its growth in terms of the position in the market and its share.

But we have also focused on providing some of our Custom series materials for mud motors and for completions. In addition to that, we've been able to sell our NeutroSorb materials for use in the nuclear market. That's used for -- on containing material for containing radiation. So that's been a big part of our growth story.

And we've focused on some new innovative materials. We'll be talking a little bit more about these in September, the PremoMet materials, which are beginning to be used for wind turbine and other applications in the energy market. So I would highlight those as three areas outside of our core.

Okay. And then, also, can you update us on the progress in the aerospace structural piece of the portfolio?

We'd begin with the 787. The new, excuse me, 747-8 consumes about 39,000 pounds of Custom 465 for flap tracks. That's a big gain for us.

Obviously the 787, which uses a significant multiple of titanium fasteners versus an equivalent 737 in size, those would be two areas that I'd try to highlight immediately for you.

Okay, perfect. And just a couple of housekeeping. Doug, do you have any sense of the LIFO impacts in your June quarter?

Yes, the figure that we quoted previously, which is just the straight effect of LIFO on the inventory change, is -- was negative $2 million in the fourth quarter.

Okay, so it was a headwind for you.

Yes.

Okay, thanks a lot, guys. Great results.

Gautam Khanna, Cowen and Company.

Yes, just a couple of follow-up questions. I think Bill mentioned staging inventory to help out the customers. Did you see any evidence, given nickel fell quite a bit in the quarter, of customer destocking on the engine alloy side (multiple speakers)

No, no, we really didn't. And even though nickel prices have not been strong, I mean, obviously they've been in the $7 to $8 range, not a huge swing in pricing.

So at this point, my impression is the customers are more focused on making sure they have the right supply of materials than trying to kind of time or be opportunistic here. Plus, as you know, a lot of our contracts we either hedge or have -- they hedge, so it takes out a lot of the discipline -- or disciplined -- a lot of the activity to try to game that.

Yes, and you mentioned the fastener business was at or near peak, or prior peak, I should say. Can you give us some color around sequential fastener metal trends? If I recall, late last calendar year it sort of flattened out sequentially. How has it trended in the March and June quarters in terms of volume for titanium and nickel (multiple speakers)

The titanium demand we saw as a greater pickup beginning last year. We saw that, so it began, if you will, earlier in the cycle, and that makes sense given some of the pull associated with the 787.

We have seen some pickup now continuing in the titanium fastener market, and in the nickel area we continue to see growth coming forward and that accelerating. We expect that that will accelerate as aircraft builds continue (multiple speakers)

(Multiple speakers) I just want to be clear. Sequentially, did you see both of those areas pop?

Yes, titanium was up 28% from the third quarter to fourth quarter of our last fiscal year and nickel was closer to flat, we'll say, from quarter to quarter. But we expect that it will pick up as the builds increase here this fiscal year.

And just on Latrobe, if you could share any sort of initial customer feedback in the first four months, good or bad, and maybe if you could comment on the integration, the willingness of the folks at Latrobe to adopt the Carpenter system. Has there been any -- if there's been any issues on that front? Thanks.

Sure. So far, the feedback which I've received and my counterparts has been from customers very favorable.

I think the customers -- there were certain customers that had a legacy high regard for Latrobe, and they're happy with the expanded capabilities that Carpenter brings in, and there are those which were legacy Carpenter customers and also felt that there was a gain because of the increased product capabilities and capacity that the two companies together could bring.

We are delighted with the integration and working with the Latrobe team. It's really a great group of people. I think that we're working very well together. It feels very comfortable. Even though it's two different companies, when you really look at it they're two Pennsylvania companies with long histories of producing products in similar markets. There's a lot of compatibility, and I think people are excited about the prospect of what that does for the combined company.

So we just have really enjoyed working with the Latrobe folks, and I think it's gone very well.

(Operator Instructions). Josh Sullivan, Sterne, Agee.

Hi, just a follow-up on the Amega West order that you had. I think you said you had the first deepwater order. So is this a new area for you guys? Maybe if you could size that, great. Thanks.

It is a newer area for us in terms of our products, and while it is not an order that I would call out as fundamentally changing our volume profile, from the specific order what it does is it shows a sign, a confidence from both our part and our customers' part that we're working more closely with them, we're innovating with new materials, and we're getting access to new applications in areas that have been outside of what we've traditionally been able to provide to them.

So we're very excited about where this takes us. Obviously, there's a lot more activity in the deepwater drilling, and so that means that we'll be able to participate and grow with that market as it grows.

And then, just internationally right now, what's the breakdown?

In the oil and gas area?

Yes, yes.

The majority -- I mean, if you've -- I would say the majority is North American-centric. I'm not sure the exact split between the US and Canada, but if we take those together, it's North American-centric.

As you know, we did make an acquisition that gave us a footprint in Singapore and also in the Middle East, so we're well positioned to grow geographically as the demand in China and even Australia begins to pick up. So we expect that drilling activity in North America is about 70% of the overall activity, and as that number changes over time, we'll be focused on following around the globe where the need is the greatest.

Gautam Khanna, Cowen and Company.

One last one. I just wanted to ask if you had seen any evidence of new entrants in the fastener stock marketplace. Any traction with some of your larger customers or if that's still a ways off?

There is nothing that has -- that we've seen that's been any sort of a -- anything to wave a flag over. We just haven't seen it.

Okay, thank you.

We have no further questions, and I would like to turn the call back over to Mike Hajost for closing remarks.

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, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.