Carpenter Technology Corp (CRS) 2013 Q1 法說會逐字稿

Good morning, and welcome to Carpenter Technology's First Quarter Earnings Conference call. My name is Tony, and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers remarks, you will be invited to participate in a question and answer session towards the end of this call.

(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 Tony. Good morning everyone, and welcome to Carpenter's Earnings Conference Call for the first quarter ended September 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, 2012 10-K and the exhibits attached to that filing. I will now turn the call over to Bill.

Thank you Mike, and good morning everyone. I'm pleased to share that we had a strong first quarter. In addition, our results demonstrate that we are executing well against our long-term strategy which we detailed during our September 7 Investor Day. I'd like to personally thank those investors and analysts who participated in our Investor Conference and are on this call. For those of you who are not with us in New York, but would like to learn more, the replay of our presentation is still available on our website.

During our Investor Day, we provided clarity on why we believe we are a true specialty materials Company and not a commodity steel Company. More specifically, we explained that our strategy is to focus our technical and capital resources on long product in what we call the premium and ultra premium segments within the specialty steel market. By targeting these specialty steel segments, we are focused on the top 1% of the 1.5 billion ton steel market.

Note these target segments require differential technology, high levels of technical qualifications, and a strong focus on customer satisfaction excellence. There are very few companies that can service these segments, and that is why our business is less impacted by some of the macroeconomic factors which are currently affecting the broader steel industry. In addition, our targeted niche segments are quite profitable. This is due to the associated barriers to entry by new competitors and limited available capacity. We are also fortunate that the end markets for our products are concentrated in aerospace and energy, where long-term demand is expected to remain strong and continue to outpace existing capacity.

Our first quarter results show this strategy to target the specialty end of the market is continuing to progress well and yielding positive results. More specifically, we achieved top line growth of 41% in the quarter versus prior year. In addition, revenue growth out paced volume growth by 5%, which reflects a further improvement in mix as we shipped more ultra premium and premium products. In summary, our strong sales growth, improved mix, combined with strong manufacturing performance enabled us to achieve operating income of roughly $70 million, which is up 46% from prior year, an operating margin of 15.8%, and EBITDA of $104 million in the quarter.

To augment and accelerate our focus on premium and ultra premium products, we also discussed at our Investor Day our commitment to quickly integrate Latrobe. I'm happy to report that after seven months of ownership, Latrobe results are tracking ahead of our deal economics. We continue to be very encouraged by progress to date on achieving our targeted operational synergies. I was walking the Latrobe floor just a few weeks ago, and was very excited to see that there is a mutual respect between the Latrobe and Carpenter teams. And this is leading to knowledge sharing and best practice implementation. This teamwork and knowledge sharing is enabling us to produce more premium products and achieve higher yields. In some cases, yields in productivity have improved by more than 30%.

Finally, I was able to see one of our three new VARs installed with one already in operation. All three of these VAR furnaces will be in operation this quarter. This additional capacity, along with actions taken in Redding, is critical for us as we work to meet growing demand for our premium products. Looking forward, we are tracking well against our target for Latrobe to be at least 10% accretive to earnings per share in fiscal year '13 and we continue to believe we can meet or beat the targeted $25 million of net pretax synergies by year three.

Switching gears to another critical component of our strategy, we are working hard to put in place required ultra premium and premium capacity to meet mid-decade customer demand. We believe action is needed in this area as demand, growth for our premium and ultra premium products is outpacing capacity. A situation which we expect will get more significant over time. To address this opportunity, we announced a year ago a $518 million investment to build over 27,000 tons of new premium capacity in Athens, Alabama. I'm pleased to report that construction of this new facility remains on track, and we expect to begin commercial production by April 2014.

I visited the Athens site about a month ago, and saw great progress being made. The facility is really coming to life. The facility will house the world's largest and most sophisticated radial forge, which is currently being built in Germany. And in preparation for its arrival, we conducted a continuous 24-hour pour of cement, consuming over 300 truck loads. We have begun hiring critical lab personnel, and are training these employees in Redding. And in addition, we are making progress on the commercial side with our long-term agreement customers and other new business opportunities to ensure we utilize this new capacity as soon as it comes online.

In summary, we remain extremely excited about the upside opportunity this new facility will create for Carpenter and its customers. And with our low break-even point and expected cost efficiencies, we remain very confident that the facility will be quickly accretive to earnings.

Before I close, I'd like to make a few comments on our outlook for the rest of the fiscal year. We remain on track to achieve the targeted financials that we set earlier for the fiscal year. We expect to experience the typical first half, second half seasonal split of 45%, 50% in our business. Our current internal assessment indicates a strong level of shipments in the second half of the fiscal year. We continue to be well positioned with strong demand for ultra premium and premium products. Our backlog remains very strong in this area and is consuming all of our current premium capacity.

We have seen areas where customer demand has softened, but primarily in areas that we have not targeted for growth. In fact in some instances, we've been able to leverage the situation to accelerate our product mix improvement. These pockets of weakness tend to be in lower value products sold within the industrial and consumer markets, where economic and political uncertainty tend to impact near-term demand. There is also softer demand for some products sold through distribution channels. Distributors tend to purchase and have their decisions influenced by falling raw material prices, causing inventory levels in these channels to contract in the hope that they can rebuild their inventory with lower-priced material. We are continuing to vigilantly monitor our market, and we remain confident that these soft spots will strengthen.

In closing, we remain committed to meeting our fiscal year targets. Success this year is important, as we work to achieve a mid-decade EBITDA target of $550 million to $580 million, and seek to generate over $1 billion of excess free cash flow in the second half of the decade. With that, I'll turn the call over to Doug who will cover our Q1 financial results in greater detail.

Okay, thank you Bill. We continue to execute well, and are tracking right on our fiscal year plan through the first quarter. Overall, we delivered operating income ex pension EID of $69.6 million, or 46% higher than a year ago, with earnings per share of $0.74. In terms of our reporting segments, the Latrobe acquisition continues to perform well. We are tracking ahead of our deal economics due to very strong progress on operating synergies.

The Latrobe segment, which currently includes the Latrobe and Mexico distribution businesses that we are divesting, and excludes the SSS energy distribution business that is now being managed as one of our PEP segment businesses, contributed $15.7 million of operating income in the quarter, and the acquisition was $0.07 accretive to earnings.

Our specialty alloy operations, or SAO segment, grew sales excluding raw material surcharge by 16% in the quarter on strong 7% volume growth, with most of this growth in our highest value ultra premium and premium products. SAO operating income was $54.4 million, with a 20% segment operating margin.

Last, our performance engineered products, or PEP segment, grew sales 17% due to the inclusion of the SSS energy distribution business. Overall operating income continues to be a bit disappointing on this business near term at $11.5 million, or 12% for the quarter. This largely reflects some weakening of demand in the titanium distributor channel, including medical, and some higher near-term manufacturing costs in the Amega West business, on top of continuing softness in our European Powder business. We expect strong improvement in the second half of the fiscal year from the PEP segment.

We remain on track to achieve our full fiscal year target for operating income ex pension EID of plus $70 million, or 30% higher than last fiscal year, with EBITDA over $110 million higher. We also still expect we will have a first half, second half split of about 45%, 55% this fiscal year. And the second quarter should be very similar operationally to what we achieved in the first quarter, which is also in line with last year's experience.

There are several initiatives that will have an impact on our results this fiscal year that I want to comment on briefly to make sure they are on your radar screen. The first is the sale of the Latrobe and Mexico distribution businesses. We have had very strong interest in these businesses, and are confident we will be able to close the sale on satisfactory terms. The closing is most likely to occur in our fiscal third quarter, and the business will move to discontinued operations when we have a purchase agreement in place. We intend to eventually reinvest the proceeds from the sale in other more strategic businesses.

Second, we continue to plan for a new debt issue this spring that could combine a cash pension contribution and the $100 million of debt we have maturing this May. This will not impact our operating income target, but there will be EPS impacts due to the added interest expense in the back half of the year. In addition, while a discretionary pension contribution has a positive cash tax effect, it would increase our book tax rate in the second half of the year due to the impact on our domestic manufacturing deduction. As mentioned previously, we believe the debt issue and discretionary pension contribution makes sense, given favorable credit market conditions, and the ability to recoup the additional pension cash contribution in four years, while reducing near-term operating cash flow needs. It will also reduce the pension expense drag on our EPS beginning in fiscal year '14.

Finally, there are three other items that we have begun reporting as adjustments to our normal operating income in a non-GAAP schedule to our press release. The three are Athens plant startup costs, manufacturing footprint optimization opportunities, and an inventory reduction initiative. Let me comment briefly on each.

We incurred $900,000 of Athens costs this quarter and expect about $6 million for the full year, as we mentioned in our last call. Overall, the upside opportunity from the Athens investment is extremely positive relative to the near-term costs and downside risk as we've discussed many times. We figured it would help you to call out the impact of these costs on our operating income, at least for the balance of this fiscal year and next before the facility starts up.

With respect to manufacturing footprint optimization, we are evaluating opportunities in this area as a result of the Latrobe acquisition, and other changes to manage our business as an integrated mill operation. As the first project in this area, we announced during the quarter that we are closing our wire production facility in Orangeburg, South Carolina, and moving the assets into an expansion of the Wauseon, Ohio facility that we acquired with Latrobe. Total cost in the quarter was only $100,000. We see other small consolidation opportunities related to the Latrobe acquisition, and continue to evaluate other opportunities to optimize the broader footprint of assets across the system. We will communicate more on this as we take further actions.

As for the inventory reduction initiative, we communicated previously that as part of our Latrobe deal economics we funded a third party consulting study to identify opportunities to reduce inventory across the integrated mill system, including Latrobe. We've not managed inventory as well as other areas of the business, and our inventory turns performance is currently below average in the industry, with Latrobe at even lower turns than SAO. The consulting project is just concluding, and we believe there are potentially significant opportunities to reduce inventory in the system and improve our turns performance to above average.

We are developing specific action plans, and expect to see the benefits from this beginning in the second half of the year. As we reduce inventory, this will trigger various earnings impacts, including a likely reduction to our year-end LIFO inventory base. We are not yet ready to estimate the fiscal year '13 impact of this initiative, but the reduction in inventory level will likely result in some reduction in this year's operating income, which is not currently factored into our targets. We'll be in a position to provide more specifics in next quarter's call. And in the meantime, we have $600,000 of costs in this quarter related to the consulting project.

Net our first quarter operating income included about $1.6 million of costs, or $0.02 a share associated with these three initiatives. Athens startup costs, the beginning of manufacturing footprint opportunities, and impact from our inventory reduction initiative. We'll continue to break these out for you in our results going forward. While there are near-term earnings impacts with each of these initiatives, we are confident they will all make our mill operations more efficient, allow us to continue to reduce our operating cost per ton, and strengthen our ability to deliver our recently communicated mid and end of decade EBITDA targets.

I'd like to now turn to our cash flow and balance sheet results and expectations. Free cash flow for the quarter was negative $102 million, compared to a negative $109 million in last year's first quarter. Within this, our inventory level was up $79 million, which is a typical trend for the first quarter, although still somewhat higher than we had planned. We had total capital spending of $56 million, and continue to expect around $350 million for the full year, as the Athens project picks up momentum. And we made total cash pension contributions of $48 million in the quarter.

For the full year, we had previously communicated a forecast for overall free cash flow of about negative $125 million. This is our current estimate before we set a target for end of year inventory reduction, and before sale of the distribution businesses. So we have a shot at being near neutral for the full year after all that. Our balance sheet and liquidity remain strong, since we anticipated the current period of negative free cash flow from the investments in Athens and other growth capacity, and incorporated that into our financing strategies.

In closing, we had a very good quarter of results. We remain on track to deliver our fiscal year targets. We are managing through the current economic uncertainties with a focus on continuing to grow our highest value businesses, and we are taking actions that will further strengthen the Company for the long-term. With that, let me now turn it back to the operator so we can open the line for your questions.

(Operator Instructions)

Ed Marshall of Sidoti & Company.

Good morning guys. So the first question is on the fastener business, especially nickel and titanium. Maybe you can address them separately. But I'm wondering if you can kind of tell me where lead times have gone and what you see the industry in general's lead times.

Sure. This is Bill. And our nickel and stainless steel fasteners are actually up about 5.5%, versus Q1 in 2012, and in titanium by over 7%. And our backlogs for those materials are essentially about 12 to 14 week for tie fasteners and at about five months for the nickel and stainless steel fasteners.

And where was that say about six months or a year ago, whatever's easier, however you guys look at it?

It would have been roughly the same for titanium. And instead of five months, it would have been roughly six months worth of backlog for nickel and stainless.

Okay. Doug, by any chance do you have revenue with surcharge by segment?

Yes.

I don't think that was in the release this time.

Just bear with me a second here.

Sure.

So we'll follow up and clarify -- but you had asked by segment?

Right.

So the SAO segment was up 14%.

I'm sorry. I'm sorry. By market. I'm sorry.

By market. Okay. I just wanted to clarify that. So I didn't need to look so hard, then.

Sorry about that.

Aerospace was up 45%. Our energy business was up 7%. Medical business was down 8%. Transportation was up 10%. And industrial consumer business was up 8%.

Okay. And the last question, outlook for CapEx for the full year seemed to run a little bit lower than I anticipated in Q1.

Yes, but we're still expecting $350 million about of total CapEx for the year. And I think the fact that we're running a little less than that in the first quarter is just a function of the ramp up in the Athens project.

Okay. So it will be more back half weighted?

Yes.

Good. Thanks, guys.

Thank you.

Thank you.

Gautam Khanna of Cowen & Company.

Hello guys. Great results.

Thank you.

So a couple questions. First, the SAO, ex the surcharge was down from a sales perspective 16% sequentially. And I wanted to understand if you saw -- you mentioned market share gains in the engine allow segment. But did you see any after market weakness, or did you see any unusual pricing behavior by competitors that would explain that big drop down sequentially?

Now Gautam, I think that's just a function of our normal seasonality. So we typically run a first half, second half split on the top line of about 45%, 55%. And so what you see between the fourth and the first quarter is just a normal function of that.

Okay. And the distribution sale, you mentioned you'll recognize it in disco ops when you have an agreement in place. So should we be thinking that it will be discoed in the numbers of the fiscal Q2 if you're going to affect the sale in Q3? And if so, what is the earnings impact of discoing it? And will you have opportunity to back fill that earnings with either out performance on the Latrobe synergies or perhaps M&A or something else? If you could quantify the impact and then talk about the offsets?

Yes, so we would anticipate having a purchase agreement in place currently in our fiscal third quarter. And at that time, we would currently plan to flip it over into discontinued operations. The businesses combined have a revenue of $150 million and EBITDA of $15 million. The operating income would be just a tad below that. And Latrobe synergies are tracking ahead of our deal economics. And so that would be certainly one opportunity to fill in that gap or however you characterized it.

And we are actively looking at and pursuing additional opportunities to grow our business through organic investments as well as acquisitions. So we're confident we can use that money wisely to backfill and actually gain from the transaction.

Okay, and this is just a follow-up on the first question about the sequential sales decline. Maybe asked differently, can you talk about lead times at the three segments, and how they've changed and perhaps why they've changed over the last three and six months?

So I -- this is Bill. I can start off more by industry area, that the aerospace engine materials are currently running about five months worth of backlog. We actually are booking some of our materials out into the April timeframe. There was probably about a six month backlog, if you go back a few months ago. Drill collars, roughly four to five months worth of backlog, and that's relatively unchanged. And I mentioned about the fasteners tend to be in titanium unchanged, and down just slightly in the nickel and stainless steel fastener area.

And the aero engine one-month decline, is that a function of just productivity, or is that a function of incoming orders?

I would say that we saw a weakness in incoming orders that we realized in the kind of mid-August to early September period. But we've seen a strong recovery of those orders as we completed September and moved into October. We are still running our assets at full utilization. We are getting out more tons because of the productivity investment efforts. So I think our objective has been to use that additional capacity to ultimately lower our lead times. So we feel like the demand is strong. And of course if you look at the underlying dynamics of aircraft builds, they're continuing as has been planned. So we know the underlying pull is there.

Last question. Doug alluded to new bond offering to refinance the debt that's coming due, and to pre-fund the pension. And I just wondered if you could quantify how much you might raise, and I think we can figure out the potential coupon it would bear. But just to get a sense of what the incremental expense would be. What are you looking to raise? Just the full amount that you'll fund, so the $150 million, or what's it going to be?

We would be looking at between $250 million and $300 million. $100 of that would go to effectively repay or refinance the $100 million of debt that's coming due in May. We're narrowing in on how much discretionary pension contribution that we would make, and we've done a lot of analysis to make sure that we pick an amount that delivers all the important benefits of giving us some relief on the operating, near-term operating cash flow. Helping our pension impact on earnings per share, while not risking, putting too much stranded cash in the pension fund. So that's our current thinking on that.

Thanks. I'll get back in the queue. I appreciate it.

Okay.

Jonathan Sullivan of Citi.

Hello, good morning. I had a quick one on SG&A. In terms of the run rate for the rest of the year, I understand that 1Q included Latrobe overhead and higher pension expense. Is the 1Q figure of about $48 million, is that a good run rate for the rest of the year?

Yes, I think that's a pretty good run rate. The way that we're looking at SG&A is less dollars and more percentage of revenue, because we have added some dollars with the Latrobe acquisition. But our objective would be to continue to reduce the SG&A costs as a percentage of our total revenue.

One additional point I'd make is that we have I think a very rigorous control process on head count. And actually, our head count at this time is lower than it was at the beginning of the fiscal year.

Okay, great. And I had one other one. Just in terms of energy, it looked like sales ex-Latrobe I believe were about flat year on year. I wonder if you could just comment a bit on your outlook on the energy market and what you expect to see there over the course of the year.

Well, rig count is down. It has been down about 5%. And a lot of that has to do with repositioning from, if you will, natural gas investment to the liquids side. So we're cautiously optimistic that there will be a recovery as we reach the end of the year, but we've been able to sustain our sales really through the share gains that we have been able to achieve both in Amega West, their operations, our SSS operations, and also our increased participation in completions. So we're very confident and comfortable with our business in this area.

Terrific. Thanks a lot.

Josh Sullivan of Sterne Agee.

Good morning. Great quarter.

Thanks.

Just as we look at the aerospace supply chain and as they look for longer-term supply agreements, are you guys seeing that flow through into the Alabama backlog? And just how is that filling in?

We have established and we identified this in our Investor pack that we presented in September. That roughly 9 of our top 10 customers, we have extended long-term agreements that go through the period in which we start up the new Athens operations. So we're working closely with the customers. And that's in both parties interest. It's in our interest to make sure that facility gets utilized, and I think it's in our customers' interest to make sure they have access to the capacity that ultimately they're going to need to support their business growth.

Great. And then just post the distribution sale, what's the breakdown just what are you guys are going to be selling into the distribution channel versus directly to customers, without that arm?

Well we will still be selling into the distribution segment, and it represents roughly 15% of our sales that goes through distribution, if you exclude the distribution business at Latrobe.

Okay, and then the healthcare. It looked like that was more just a near-term issue. Do you guys see that kind of turning around post the election?

Well, actually, the price of titanium scrap has been decreasing. And in that context, the distributors, if you will, of that material and the users have been reducing their inventories. And so we expect once that price stabilizes, you'll see an increased demand profile. And again, we see that happening as the year rolls on here.

Great. I'll jump back in the queue. Thanks.

Thank you.

Dan Whalen of Topeka Capital Markets.

Great, thanks. Hello everyone. A lot of my questions have been addressed. But can you just remind us in terms of your exposure to Europe, is that mostly aerospace-based? And what have you guys kind of been seeing over there in terms of trends?

Actually, our Europe business continues to prosper. A good majority of that business that we provide to Europe is for the aerospace industry, and is actually in dollar denominated transactions. So our business has been strong, and we've also seen that some of our high performance materials, which are used more frequently now and for automotive applications are being adopted. And so we're getting very good support and growth for that segment. If you will, the area that we see some softness is the powder tool steel type activity. And that is soft. We expect that it will remain that way until you see an uptick in the general industrial environment in Europe.

Okay, great. And then just lastly, it's very encouraging to see your comfort level in terns of sticking with it with guidance, not surprised. The one thing, given that the one-month pullback in terms of the aerospace backlog, some softness in energy and what we're seeing in the medical markets, I would have gotten the sense that maybe the 45,55 split was maybe a bit more back end loaded? Or was this energy softness built in to your expectations? Or was this just kind of incremental things that are coming out of Latrobe that are offsetting some of those other factors?

So there's no doubt that we see the second quarter, or excuse me, the third quarter being very strong from a demand standpoint. And we also see that our backlog for forged bar and billet is up over where it was a year ago at this time. So we feel good about the fundamentals. As we look towards the year end, of course that's the fiscal year end for a lot of our customers. So it will be interesting to see if they shut down for a day or a week at Christmastime or they take the whole week of Thanksgiving, that can affect some near term demand. But again, we see the strength of our backlog and the scheduled shipments are very strong through the third quarter.

Okay. Great, and congrats on your continued success there.

Thank you.

Arun Viswanathan of Longbow Research.

Hello. Thanks for taking my question. Good quarter. So I guess a lot of my questions have also been answered. So I just want to clarify on that last issue. Can you give us some of the levers that are going to help you meet or exceed your $436 million of EBITDA guidance for fiscal 2013?

Well, I'd say first and foremost is the mix change that we're experiencing in our business, and that's supported by the premium and ultra premium products. When you look at our sales level, our percentage of sales to those segments, it was 68% of our sales in fiscal year '10 and now it's about 86% of our sales. So we've really changed our mix quite considerably, and that allows us to, with the industry, the aerospace, as we said, is continuing to increase the number of aircraft being built. And in fact even if you look at GE's comments, they have seen an 81% increase in industrial gas turbines. So the underlying fundamentals supporting our premium and ultra premium business remains strong. Our capacity additions that we've targeted both from organic efforts, as well as from the integration of Latrobe continue to go very well.

And the only things I would add to that is that we also expect a strong second half from our PEP segment.

Okay. So you guys are fully on track I guess from a volume and pricing standpoint as it stands is what you're saying, I guess right now?

That's where we stand, yes.

Okay. And then I guess just to clarify on the medical side, you did say you've seen a little bit of a softening. And I guess you attributed that to titanium scraps. So would you I guess clarify that volumes there have not necessarily seen a negative impact? Or what are you seeing on that side?

Yes, it would be more volume-related. We don't have as much exposure to the underlying price of the raw materials as other manufacturers have. And so we would tend to see it more from a volume standpoint. And it would be primarily through the distribution channel, where the distributors are trying not to get, if you will, stuck with higher priced material. They would rather wait and buy it at the bottom. And since there is available capacity overall in the titanium market, they feel that they have the flexibility to rebuild their inventory and not be crowded out by the aerospace market.

So in order to keep your guidance intact, I guess as you said earlier, you do expect a re-acceleration in those volumes once there's a stabilization in the raw material side?

I would say that's not a core assumption that we built into our forward perspective. It's really the aerospace fastener area that we expect to see a stronger pull from a titanium perspective in the second half of the year.

So any upside in -- so you do expect some upside in some of these other growth markets to offset both the medical and potential industrial consumer softness?

That's our focus, absolutely.

Okay, thanks.

Thank you.

Steve Levenson of Stifel Nicolaus.

Thanks. Good morning, everybody. Earlier you spoke about some swings in orders from jet engine. Do you attribute the decline at all to lower demand for MRO parts? And then the upturn in servicing some of the pent-up demand for 787 engines? And increased build rates? Or is there something else going on?

No. And I thank you for asking the question. I apologize if I came across as saying that it was aerospace related. We saw in general across our business, I'd say a weaker demand, or order intake rate at the end of August going into September. I don't have that broken down by individual sub-segments, but what I can tell you is our forge bar and billet backlog is above where it was this year, or at this time last year. So that would imply that our aerospace and energy businesses are remaining actually as strong or stronger as, at this point in time versus where we were last year.

And that part of our business, that has a very high concentration of our ultra premium and premium products.

Thanks for clearing that one up. Can you talk a little bit about the trends on the custom 465? I know that was a big subject at the Analyst Day.

Well, we continue to see great interest and demand for that material. And as the new aircraft are being specified, we see increased participation of that material along the lines that we highlighted during our investor presentation. So I don't have anything very specific to point out at this point in time, other than that we continue to see strong interest and strong demand for the material. And by the way, are also seeing interest in a similar type level as we look at completions and activity in the oil and gas field.

Very good. Thank you very much.

Phil Gibbs of KeyBanc Capital Markets.

Morning gentlemen.

Morning.

Just had a question on some of the inventory reduction plans that you have going forward, and in what specific areas of the process are we looking at? Is it trying to improve the raw material piece, the work in process, finished goods? How do we think about that, and where you're targeting across the platform?

I would say that in general terms, roughly two-thirds of that would be in work in process, and that would be through improving some cycle times and reducing some bottlenecks that exist within our multi-staged operation. There are some opportunities in the raw material area, and there are areas where we have been carrying more finished goods for customers than is required by our contracts. And we've been doing that so that we can provide great support to them. Obviously as we can pull our lead times in a little closer, it makes us easier to take some of those levels down. So I would say it's across all areas, but the biggest area of focus would be the work in process.

Okay, great. And Doug, at this point in time, the potential discretionary contribution to the pension, the $150 million that you outlined. Is that something that we should bank on as far as probability is concerned, or are you going to evaluate that more closely as you get there?

It continues to be our plan. We also do continue to evaluate it, and we'll go back to our board for a final approval before we do anything specifically. But that continues to be the direction that we're moving in.

All right. Thanks a lot, guys. Good luck.

Thank you.

Gautam Khanna of Cowen & Company.

Hello, thanks. Couple things. So I want to make sure I understand the guidance as it stands today. The operating income of $70 million, ex pension EID, that includes the Athens $6 million, your consulting charges, and the LIFO effects? Or is the LIFO effects going to bring that number down? And does it also include the, call it $13 million, $13 million or 14 million of EBIT lost from distribution as we move through the year? And then I have a follow-up.

Okay. So that was set before the distribution sale impact. So, does not factor that in and does not factor the LIFO in, but does include the Athens startup costs and does include the consulting study. Those were anticipated in our plan.

Do you have a sense for how big the LIFO effect might be?

We really don't. It's a very complex issue, and we need further study on that and any other impacts associated with pulling that inventory out. So I think we'll be able to talk more specifically in our call next quarter on those impacts.

And this is Bill. I'd just add that while we are looking at the potential LIFO impacts, one of the things we hope is that by bringing up some of this work in process, we'll be able to support customers' demand and get additional throughput through our system. So we're assessing the offset, if you will, to the LIFO effects, as we're assessing the LIFO effects themselves.

Good point. Okay. And then the other couple ones I have, you mentioned the discretionary contribution of the pension plan will lower the EID expense in '14. If you're just assuming flat discounts rates, what have you, could you give us a sense for what that might mean for EID next year, fiscal '14? If you hit your ROA and the discount rate doesn't change?

Yes, I'll just give you a real ball park, Gautam. Is assuming all other things equal, which you can't assume, as you know, I think it had the magnitude of maybe a $0.30 per share type of improvement in our EPS.

Okay, great. And then could you comment on two other items, three other items, effective tax rate this year, could you give us an update?

33%.

Okay. Bill, you mentioned some order weakening in the August, September timeframe that's recovered. I wanted to get a sense, do you -- is it demand that recovered? Or did you seek a restock, if you will, after the de-stock, so you actually recovered whatever was lost in that period in terms of orders?

Yes, what we do is we are looking at our orders on a week by week basis. Of course we look at them day by day, but you try to look for a trend on a week by week basis. And what we saw was order pattern for a short period there that was below our average. Although that's not too surprising, because that was also during the vacation period, if you will, and that effects especially in Europe, some of the order profile. And then since mid-September, we've seen that the order intake has actually been above the average intake order.

Got it.

And so there's kind of an offset. My impression is that there may be lower level of activity in some of the industrial and consumer-type applications. There may be. But that any, if you will, slowdown that we saw in orders related to the medical, related to the energy, the aerospace, is all related to destocking. And the impression we get is that's at a -- we've gotten to the point that there's not a lot of room for the downstream customers to take that further. That's the impression we have.

Okay. Last question. Fastener stock trends, if you will, you had -- fastener metal stock, bar, billet, coil, et cetera. We've seen kind of different comments made by the fastener manufacturers. Some seeing earlier, an earlier upturn that began last year, others lagging, what have you. Are you seeing kind of a more broadly based order rate across the OEM, so that people are sort of normalizing whatever share shifts have happened, have happened and now you're starting to see just broader order patterns across the OEMs? More consistent?

I would say that's a fair reflection. Again, our nickel and stainless steel fasteners are up about 5.5% over prior year. And titanium, over 7%. I think that we expect that will continue up. The trend will continue up, especially in Q3. And we've seen, if you will, resurgent in titanium orders for fasteners. That's really at all-time record levels for us right now.

And that's across many OEMs, not just one or two.

Exactly, exactly.

Okay. Okay. Thanks a lot guys. I appreciate it.

Phil Gibbs with KeyBanc Capital Markets.

Hello Doug, I just had a quick follow-up. Did you have any LIFO benefits or charges in the quarter?

We had about $2 million positive in the quarter, and that's -- it was about $3 million positive last year's first quarter. So pretty much a wash on LIFO related impacts.

Okay. Thanks a lot.

You're welcome.

There are no further questions from the listening audience. I would like to turn the conference over to your host Mr. Mike Hajost, for 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.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great week.