Carpenter Technology Corp (CRS) 2013 Q4 法說會逐字稿

Good morning, and welcome to Carpenter Technology's fourth quarter earnings conference call. My name is Delou, and I will be your coordinator for today. At this time, all participants will be in listen-only mode. After the speakers' remarks, you will be invited to participate in the question-and-answer session towards the end of this presentation. 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, Delou. Good morning, everyone. And welcome to Carpenter's earnings conference call for the fourth quarter ended June 30, 2013. This call is also being broadcast over the Internet, along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement.

Speakers on the call today are Bill Wulfsohn, President and Chief Executive Officer, Tony Thene, Senior Vice President and Chief Financial Officer, and Andy Ziolkowski, Senior Vice President, Commercial for Specialty Alloys Operations. Also in the room are Dave Strobel, Senior Vice President of Global Operations, Gary Heasley, Senior Vice President, Performance Engineered Products, as well as other members of the management team. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's most recent SEC filings, including the company's June 30th, 2012 10-K, September 30th, 2012, December 31st, 2012 and March 31, 2013 10-Qs, and the exhibits attached it to those filings. I will now turn the call over to Bill.

Good morning, everyone. And thank you for calling in. I'm happy to report that Carpenter had a strong Q4 and a solid fiscal year '13. For those of you who follow us closely, you know we have a focused strategy and aligned capable team, and we execute with discipline. More specifically, we focus on the top 1% of the specialty steel market. This is the area with the greatest opportunities for differentiation and the highest barriers to entry. You can see the impact of the strategy in our results.

Operating margins were roughly 15% for the year, and in the quarter. In our specialty alloy operations or SAO, margin per pound increased again in fiscal year '13, as we sold a better mix of products. To enhance our position in our 1% target market, this year, we took multiple strategic actions. We continued our strong investments in developing and commercializing new differential materials. We also increased our titanium wire capacity to better serve the growing demand for titanium fasteners.

We built a new Amega West facility in San Antonio, Texas. We began construction of our new manufacturing facility in China. And as we will talk about later in more detail, we are now more than halfway through the construction of our Athens facility. In terms of execution, we delivered some great results. Operationally, we had a great team effort to integrate Latrobe. In summary, we achieved above deal economics, driven by twice the originally targeted synergies.

In addition, we expanded our Lean Six Sigma training. These tools enabled the SAO team to fully offset inflation on a variable cost per ton basis for the fourth year in a row. We also completed multiple new long-term agreements with important customers, such as Rolls Royce. And finally, in Q4, we took the difficult action to reduce our salaried work force by approximately 3%. This action is critical for us, as we seek to minimize the impact of inflation in fiscal year '14.

From an earnings perspective, we completed the year with a strong Q4. EPS on an adjusted basis was up 12%, versus Q3. Note this was the second best quarter for Carpenter in the last 5 years. For the year, EBITDA was up 21%. This is an all-time record EBITDA for the company. Finally, even in the context of our Athens investment, we're able to strengthen our capital structure liquidity. Just this quarter, we generated $61 million of positive cash flow, and we expanded our revolver to $500 million.

In terms of our aligned team, we have made some significant moves this year. After successfully integrating Latrobe, we've expanded Andy Ziolkowski's roll, as he is now responsible for the combined Latrobe and SAO commercial teams. Tony Thene joined us from Alcoa as our new CFO. And finally, I'm pleased to welcome Gary Heasley to our team. Many of you know Gary from his tenures with KeyBanc Capital Markets and McDonald Investments. You may also know Gary from his recent role as Senior VP at Steel Dynamics. I will now turn the discussion over to Tony, who will walk you through the final numbers for the quarter and the year. When he is done, I will discuss the current market conditions and expected future outlook for our business. Tony?

Thank you, Bill, and good morning to everyone. Let's start on slide 7 with a financial overview of the quarter, and then we can get into the some of the details. Net income was $40.9 million, or $0.77 per share. Net sales, excluding surcharge, was $497 million, a 5% sequential increase. Importantly, two of our key end use markets, Aerospace and Energy, accounted for over 60% of the total.

Operating margins improved sequentially by 190 basis points, driven primarily by manufacturing efficiencies, and increased volumes. From a cash standpoint, we had a strong quarter. Cash flows provided from operations was $184 million, and free cash flow was $61 million. Capital expenditures for the quarter were $113 million. And lastly, our total liquidity stands at $750 million, with $258 million of cash on hand.

Moving to slide 8. In the income statement summary, revenue in the quarter was $612 million, or $497 million, excluding surcharge. SG&A was $55 million in the quarter. This is a $7 million sequential increase, driven primarily by the restructuring activities and variable compensation adjustments. SG&A for the total year was $201 million, versus $169 million last year. If you adjust for the Latrobe acquisition, SG&A was up $9 million year-over-year. This was driven primarily by the restructuring activities in this quarter, and an increase in the net pension expense.

Operating income, excluding pension EID, was an impressive $73.4 million in the quarter, a 20% sequential increase driven by improved yields, better scrap management and increased volume. As a result, our margins improved to 14.8%, versus 12.9% in the previous quarter. The effective tax rate for the quarter was 30.7%. Now, let's take a few seconds to talk about this. If you remember, last quarter, we made a $75 million discretionary pension contribution, and our intention was we would make an additional $90 million in the fourth quarter. Accordingly, we took a charge of approximately $0.06 a share, and I called that out as a special item to be added back to our earnings per share. Since then, our pension assumptions have improved, and we elected not to make the additional $90 million discretionary pension contribution.

Therefore, we reversed a portion of that third quarter charge. The result is an approximate four percentage point benefit in the quarterly tax rate. To be consistent with last quarter's treatment, this has been noted as a special item, and the benefit has been excluded from the adjusted EPS calculation. Going forward, and for FY '14, you should continue to use an all-inclusive tax rate of 34%. Lastly, as I mentioned earlier, net income for the quarter was $40.9 million, or $0.77 per share.

Now let's turn to slide 9. Our fourth quarter was very clean, in terms of special items. As I said on last quarter's call, going forward, we are going to limit our special items to restructuring and significant discrete tax matters, and that's exactly what we did. The first item is the restructuring related actions worth $0.04. As Bill noted earlier, this is primarily related to the approximately 3% salaried work force reduction. And as we just discussed, the second item is the tax impact of the change in assumption regarding the previously-planned discretionary pension contribution. As you can see, the two items net to zero. And therefore, no impact to our reported EPS of $0.77 per share.

Now let's turn to slide 10 and the free cash flow summary. Net cash flows provided from operations was $184 million, the highest quarter of fiscal year 2013. Last earnings call, I stated that fourth quarter free cash flow would be positive, and as you can see that is exactly what we did. The main drivers were improved earnings and focused working capital management. Capital expenditures were $113 million, of which $84 million was related to Athens. The result was $61 million in free cash flow for the quarter. With that, let me turn it back to Bill.

Thank you, Tony. Turning to page 12, you can see we experienced mixed results in our core market segments. Aerospace demand continues to grow sequentially in year-over-year. We expect that trend to continue, as The Airline Monitor projects the combined build rates of Boeing and Airbus will go from 1,260 in 2013, to 1,355 in 2014. That's an 8% increase. While the rig count and OEM production of industrial gas turbines were both down this year, our sales have grown rapidly. This is largely the result of share gain.

As for the rest of our markets, we have seen declining demand, year-over-year. We believe this trend is largely due to customer destocking. It's our belief that destocking has occurred due to our improved on-time performance, low scrap prices and our reduced lead time. The good news is that orders have picked up substantially, and we have seen a dramatic reduction in deferrals, versus what we experienced in Q3. That said, we are still waiting for an expected surge, which we believe will be needed soon to replenish low customer inventories. It is difficult to clearly determine the exact timing of this demand expansion, as our lead times have shortened dramatically, giving us less forward visibility, and close to 50% of our sales are from stock. Since these items are held for quick delivery, they have no specialized delivery date. That means shipments can go up or down with little notice. Moving to slide 14, I will turn the discussion over to Andy, who will speak to the Latrobe and SAO results.

Good morning. I will begin on slide 14 with the Latrobe segment. This will be the last time you will see the Latrobe segment broken out separately. You may recall the Latrobe segment includes both results of Latrobe manufacturing and the distribution company. Discussions for fiscal '14 will include the manufacturing operations in SAO and the distribution operations in PEP.

We will recast each segment for you with these changes, so that you can adjust your models, going forward. We expect to release the restatement prior to releasing our Q1 results. Further guidance for FY '14 will be embedded in the SAO and PEP segments. In quarter four, Latrobe manufacturing benefited from continued operating effectiveness and the positive effects of our integration activities. In addition, we had some initial successes with improving our mix, which is an area of opportunity for us, moving forward.

Moving on to SAO and slide 15. As Bill mentioned earlier, compared to a year ago, Q4 saw continued growth in Aerospace, particularly in engines and structural applications, and oil and gas. The quarter benefited from solid operating performance, driven mainly by increased activity levels and our continued focus on reducing our operating costs. And while the markets continue to be volatile, we experience less deferral and cancellation activity than we did in Q3, and our entry levels and incoming order activities are improving. Moving forward, while the longer term perspective in many of our core markets is quite positive, particularly for Aerospace, in the near term, we believe the markets will remain challenging and expect supply chain adjustments to continue. We expect our Q1 to exhibit a normal seasonal volume decline, from a sequential perspective. In addition, we will also be having a major preventative maintenance outage for our forging operations. I will now turn it over to Bill Wulfsohn to cover the PEP segment.

Thank you, Andy. I'd like to note that Andy did a great job with the Latrobe integration and is off to a strong start in his new role leading the combined Latrobe and SAO commercial teams. Turning to page 17, I will now discuss our performance engineered products segment, or PEP business as we refer to it. As I mentioned earlier, Gary Heasley joined the Carpenter team last week. We strongly believe that his extensive operating experience will help us as we seek to improve the PEP's operating performance, which is good, because we have lots of room for improvement in PEP. Since this is only Gary's second week on the job, I will speak to our PEP results.

Sales were sequentially up, due largely to strong demand for aerospace fasteners, but they were off versus Q4 fiscal year '12, as a result of weakness in the tools field distribution and titanium medical markets. We believe this weakness is largely driven by customer inventory destocking, and as such, we expect to see a solid demand recovery in these markets during fiscal year '14. From an earnings perspective, our margins were down to 4%. These results include the impact of aggressive actions we took to improve our tool steel powder business, and startup related expense associated with our new Amega West San Antonio facility. This facility is important to our oil and gas strategy, as it will enable us to attack and support the rapidly growth Eagle Ford oil shale region. Looking forward, we have a strong focus on improving the operating results within our PEP business. With Gary's leadership and having completed the previously-referenced actions, we expect significantly better performance in this segment this fiscal year.

Moving to page 18, I'm very pleased to report that both our forge finish and Athens projects are on time and under budget. Both facilities are key to supporting our capacity-constrained premium and ultra premium product sales. I'd like to emphasize a couple points about our Athens capacity expansion. Number one, we are investing a needed capacity to support growing market demand for our premium and ultra premium products. Two, the facility will have the largest, most capable radio press in the world, and the lean nature of the Athens facility will enable industry-leading lead times and quality.

As for the economics, I want to make it clear that the incremental overhead we are adding over fiscal year '13 will only be approximately $4 million. In total, the Athens facility overhead will be less than $10 million in fiscal year '14. This is not a high overhead facility. Where as we have roughly 2,300 employees in the Reading area, we will have approximately 200 in Athens. It is important to clarify that in addition to the ongoing fixed overhead I just referenced, we also expect to have startup related costs of approximately $8 million to $10 million during fiscal year '14. Also, note that Athens will operate under a units of production-based depreciation method, and thus depreciation will be variable with levels of production. As a result, depreciation will be relatively low in the early years, as we ramp up output.

Based upon our average margins, to cover our fixed costs and excluding one-time startup costs, we need to sell approximately 2,000 tons to 3,000 tons of the 27,000 tons of capacity to be accretive. To put this in perspective, we currently sell over 40,000 tons of hot work product, so roughly a 5% increase in premium product sales will drive accretion. As for demand, in fiscal year '13, we shipped more forged bar and billet tons with a more profitable mix than any other year in our company's history. The forged bar and billet business sells the type of product that will run through our Athens operation. Note that this achievement was in the context of extensive customer destocking and we are currently today constrained in portions of our existing hot working equipment.

We also have over 3,000 tons of lower end stainless and alloy materials, which are currently outsourced, largely for distribution, that we can insource virtually immediately to help cover fixed overhead. Finally, in the past, we were capacity constrained, and as a result, while we were a valued supplier to the energy market, we were sometimes deemed unreliable, because we were seen as entering and exiting the market based upon demand in Aerospace. Now, we have the capacity to support the market, irrespective of where we are in the economic cycle. Our new capacity also enables us to sell into new highly attractive market segments, such as corrosion resistant materials, to the chemical processing, electronics, and medical markets.

The last point I want to make is that we are very disciplined as it relates to the approach to our markets. We also don't need to fill Athens to be accretive. Thus we will not change our pricing strategy to gain volume. In fact, we have internally what we call a 10 plus 10 strategy for SAO. That means we are targeting 10,000 additional tons and $0.10 per pound improvement in profit, driven by mix and productivity related actions over the next two years.

So let me restate three key points regarding Athens. One, Athens is a game changer for us, in terms of capability, capacity and growth potential. Two, a 5% increase in our premium volume sales or 2,000 tons are expected to make the facility accretive. And three, we will not change our pricing strategy to our core market to drive volume growth. Now, moving to page 19.

In summary, Q4 was a good quarter. With sequential improvements in sales and earnings, continued growth in our core Aerospace and Energy segments. In addition, we took aggressive action to lower our overhead through restructuring, drive positive free cash flow and expand our liquidity. The year was also strong, although some of our key markets were less robust than we anticipated at the start of the year, due largely to customer destocking. At the same time, we feel great about integrating Latrobe above the deal economics, delivering record EBITDA, showing strong growth in our premium forge bar and billet business. As we discussed, this is the part of the business which will be the primary driver of our Athens-related sales.

Looking forward to fiscal year '14, we expect Q1 earnings to be sequentially lower versus prior year. This is based upon three factors. The first is normal seasonality of sales and earnings. If you look to last fiscal year, you can see the magnitude of the impact of this seasonality in our earnings. Second, we are completing a major preventative maintenance procedure on our large forge. This procedure is completed once every 3 to 5 years. Since our forge is capacity-constrained, its outage will force some sales into Q2.

Thirdly, while orders have picked up substantially, we still may experience weak demand and mix in Q1. Based upon our internal projections and the underlying growth rates in our core markets, we should see a solid demand recovery as the fiscal year continues. In this context, we expect to show solid earnings growth for the full fiscal year. Before closing, I'd like to comment on the previously announced potential sale of our distribution business. I think we've shown that we buy and sell businesses with financial discipline. Because of this discipline, and because the business is a strong contributor of earnings and cash, we have decided not to sell the business at this time.

During this call, I have focused on our commitment to our clear differentiated strategy to be the leader in the top 1% of the specialty steel market. We support this strategy with an aligned lean and capable organization. Finally, this team has shown that it can implement with discipline to drive positive results. We are excited about our business, our markets, our strategy and our future. With that, I'll turn the call over to the operator to take your questions. Thank you.

Thank you.

(Operator Instructions)

Julie Yates, of Credit Suisse.

Good morning. Andy noted that there is initial success improving the mix at SAO. Can you elaborate on this? And update us on where the mix ended for FY '13 in ultra premium and premium as a percentage of total sales? I think it was 35% and 51% at the end of FY '12, based on your Investor Day material.

Julie, this is Andy. Let me go back into the comments. When I made those comments, I was referring to Latrobe, and we were talking about the synergies. And we had about a 6% increase in the margins at Latrobe through the fiscal year and over our expectations. That's what the comment referred to. Could you restate the second part of your question then?

Sure. I was looking for an update as a percentage of total sales where you ended the year with ultra premium and premium.

This is Bill. We typically don't break that out, and we break it out, of course, by segment. We did share that during the investor conference, and I think in the future, we can provide better clarity around that. Because as we look at it internally, while we strategically drive our business by investing in those core areas, we actually track the sales by the business unit, forge bar and billet, which as we mentioned is primarily the premium and ultra premium products where we had record sales tons, as well as record profitability per ton. And we also look at it, of course, by market segment. So we'll have to get back to you with a specific number on that one.

Understood. Okay. And then Tony, just one quick one for you. Given the move in interest rate and improved funding status, could you just update us on how we should be thinking about pension expense for FY '14?

For FY '14, Julie, you should use approximately $60 million.

Okay, great. Thank you.

Steve Levenson, of Stifel.

Thanks. Good morning, everybody. Just a question on what you think the trends are, out there in the rest of the world. Do you think with customer destocking, that inventory levels will ever return to where they were? Or will new equipment, like what you're putting in Athens, keep lead times low and inventories low for a while?

I think inevitably that you will see that customers will feel the need to rebuild a portion of their inventories. We will maintain short lead times, and we are working to actually improve those lead times and shorten them further. But in the end, I think not only do our customers have lean inventories, but downstream, their customers and even further downstream, their customers also have lean inventories. So when that chain begins to pull, I think that will cause a vibration that will ripple back through, and I think that really throughout the supply chain, it's likely that inventories will come back up. Maybe not to the levels where they were two, three years ago, but above the levels where they are today.

Okay. Thanks. And do you think low commodity prices are related more to oversupply or more related to low demand from the destocking that's been going on?

Well, when you look at the underlying raw materials--for the most part, those are true commodities, and so I think that is probably representative of the macroeconomic condition versus the capacity that the suppliers of these materials have put online over the course of the last few years. But I don't think that it's indicative of the health of our particular segments, as really we consume only a relatively small portion of those all--of those underlying raw material commodities. So I think they're somewhat disconnected.

Okay. That's helpful. Thanks. And last question is about powder metals. I guess most of your powders right now are in steel alloys. Can you tell us what you see for powders in the future? And if 3D printing, additive manufacturing will be a factor for Carpenter?

3D printing and additive manufacturing will definitely be part. It is today, part of our mix. And as that marketplace grows, we expect to be a significant part of it. Tool steels are, if you will, the foundation that the business was built upon. As you can imagine, especially in this part of the economic cycle, that's had a more of a commodity dynamic to it. And that's why we--that's been the area that we've taken the most aggressive actions to actually lean out our cost structure and make sure that we can be profitable and competitive. But it's also important to note that we have vacuum melted materials, which are more premium in nature. And as such, get a higher margin, as there's higher value associated with it, and that is an area that we are also focusing on growing the business.

Thanks for all of the additional detail.

Gautam Khanna, of Cowen and Company.

Thank you, and great results. So I was hoping you could elaborate on how you guys sort of buck the trend. I mean, we look at what Rolls Royce said last week, with respect to the destocking initiative they had recently embarked on. We saw PCP make the same points, and we saw ATI kind of cite similar dynamics, and yet sales in every end market seemed up sequentially for you guys. The order dynamics are better. And it doesn't sounds like you're calling out kind of intensified destocking in the first half of the fiscal year. How do we square all that?

Well, first of all, I think you have to look. When you reference a couple of those customers, they're further upstream, if you will, from us, and so they're going to see the dynamic in a different way than we do. Secondly, I can speak more specifically to our company, as opposed to some of the others that you referenced, and I can tell that you we have an intensive focus on making sure that, of course we have the best quality, the best service, the best delivery, the best relationships in the industry. And with that, I can tell you that our commercial teams have been very aggressive in going out and seeking to, if you will, build the business base.

If you recall a couple of years back, we, because of our capacity constraint, actually had to mix manage some business out of our overall sales portfolio. But as you also recall, we did that and we called this out in a very graceful way. In other words, we didn't burn the relationships we had with our customers. And so that's given us the opportunity to go back to some of those customers and to help, if you will, fill the bucket back up, even though there is the issue of destocking that you're referencing in areas. And for example, on Aerospace. We don't see Aerospace as being a very strong quarter for us in Q1, based upon the order patterns. We're going to see and feel some of that in Q1, and potentially in Q2. Although we think by then, we're more likely to see a recovery.

I guess just to clarify, Bill, what I'm trying to get at is, is this something that could become an incremental issue? I mean, you've had sort of this idiosyncratic period, where you had to deal with deferrals and the like. And those are starting to recouple with underlying trends, but now we're hearing some of the downstream customer, PCP, Rolls Royce, that they're embarking on destocking from here. So I'm just wondering, have you moderated your expectations in the first half, even relative to where we were three months ago, with respect to the pace of that recovery? Recognizing there's always seasonal weakness and that's going to occur. I just don't want to be surprised again. Is there any chance of that, as we move forward?

It is a great question, and I tried to call that out in our earlier comments, that we do see a weaker Q1. And I think you have seen that we have seen some peaks and valleys from a demand and mix standpoint, over the course of the last few quarters. We're aggressively working with our customers and our portfolio. I will tell you that, to the extent that some of our customers are reducing their inventories, we see that in our order pattern. Because if they're taking those actions, then typically, three months or so before that, we would see that profile in our order intake. So I think, hopefully the comments I made earlier were clear. We see that as a clear risk in Q1, and it could continue. But I can also tell that you we prepared an annual plan this spring, and that plan had, of course, growth in both--in terms of sales and profitability, and that is our full expectation and plan, as we sit here today.

Okay. And then I just want to make sure I understood your comment on the distribution business. In Q1, you're going to actually discontinue it, but you're not planning to sell it now. So we're just waiting to improve the operations before you sell it, or--

No, actually, and I'm really glad you asked that question. If I communicated in that manner, that was--that's not what I intended. Actually, it's just the opposite. A year ago at this time, we looked at the business and we said that, really it might be an opportunity to move this business into somebody else's hands on--for the right price, and they could seek to grow it. We could invest that money in other areas. As you know, we've actually improved our liquidity over the last year. This hasn't been the best environment to be out selling a distribution business. And frankly, we've realized that the sales and earnings are beneficial to us.

In addition, I mentioned before that there's roughly 3,000 tons of material that they sell today that are sourced from other companies that we can bring inhouse to help base load our Athens operations. So when you put that all together, we're saying that at this point, we want to make it clear that we do not plan to sell that--the business at this time. In the future--what might happen down the road--at this point, we have no other plans. But as you know, where it fits in our portfolio, it's an important part, but it's also at the lower end. And so we're going to work it hard and improve the business, and expect that it'll be an important contributing part, and we'll see where it takes us down the road.

Thanks a lot.

Josh Sullivan, of Sterne Agee.

Good morning, Bill, Tony. Great quarter here. The operating strategy you guys have been pursuing is really showing through. But going forward, just given the low visibility environment, is there significant runway on the restructuring, debottlenecking synergies, and where should we look in '14, understanding in the first quarter you're doing some various things?

Well, first of all, we talk a lot about our commercial team and they've done a great job, in terms of the right position in the marketplace. But I have to say, Dave Strobel is here at the table, our Senior Vice President of Operations. He and his team have done a great job to really improve the operational excellence--execution within our operations. And that's in the area of safety. That's in the area of quality, but also clearly, that is in the area of costs.

And Dave and his team, they look very closely with the commercial team, and they line up our cost activities, our production level activities with the commercial demand. And I think the teams worked very well together. They're very nimble. And we are expecting them to continue to drive productivity improvements year-over-year, just as they have for the last four years. And that is irrespective of whether or not we see a significant growth in demand, whether it be in the quarter or for the year.

Good. And I mean, free cash flows are also pretty good in the quarter. And how do you see that, going forward? Especially after we're beyond the initial investment in Athens, and that's up and running?

Right. So a couple of points that I think are really essential to make here. One is that we are now over halfway through the capital expenditures for Athens. However, we have the largest of our payments here that will take place in the first quarter of our fiscal year. In fact, just today, our radio forge box is being delivered in Athens.

And so as you know, first quarter is typically not a good cash flow quarter for us. In fact, in the last few years, it's been negative. We expect that this will be a substantively negative cash flow quarter for the company. And from there, you will clearly see quick and rapid improvement in our cash flow profile, and we are targeting to be positive by the second half of this year, and strongly positive in fiscal year '15. Because as you know--I mean, think about it--we've been able to manage our cash flow, while ultimately investing roughly $500 million in our Athens operation. So this quarter's going to be a tough one on the cash side. We want to make sure that that's clear to everybody. But it's going to get a lot better from there on out, because, if you will, the bulk of it will be in the rear view mirror.

Good. And then, just on Boeing's Partnering for Success program. Obviously getting a lot of attention with the supplier base. Given you guys have this capacity coming on at Athens and what that frees up at Reading. Can you talk about it, if Boeing's reaching down to the material level, and then if Airbus is having any discussions of this as well?

Well, one of the things that we have done as an organization is go out and visit with some 70 customers that are either primary consumers or downstream consumers. And the reaction that we've gotten to the addition of capacity that we're putting in has been very positive. I think just even as recently as a year, year and a half ago, you saw that capacity was a real problem or issue in this area. And so, I think there is both a strategic interest in supply, but also because of the capabilities from a quality, from a delivery time standpoint, we've seen really great interest from the OEMs and from our core immediate customers. In terms of the specific Boeing and Airbus actions, we actually see those coming at us in two ways.

One, we do have direct discussions with those customers. And secondly, we supply companies that supply a broader package range to those companies, and they have also come and talked to us and worked with us, with the concept of delivering. But I'm going to also go back to the point I made before. Even though we have this capacity coming on, we're not interested in going out and cutting kind of crazy deals to, if you will, line up those capacities or those sales. We believe we've got a great value proposition, and we are going to stand behind it.

Great. Good to hear that. And just one last one. I mean, just looking at the growth environment, and you talk about 50% of stock, you know, held for sale or held for stock. Can you give us any granularity between the distribution versus OEM? Are the distributors hand-to-mouth right now? Are they down year-over-year, versus the OEM side?

Josh, this is Andy Z. I'll handle that one. Yes. As we talked in Q3, we see consistent behavior in Q4. And I would say that destocking has particularly manifested itself in the distribution community. We believe we have limited exposure to those different supply chains, but certainly more pronounced in the prospective.

It is an interesting dynamic, because our bar delivery performance has gotten better and our lead times have gotten shorter. That has made it easier for some of the OEMs, if you will, to just buy the--from stock, as opposed to from quick delivery distributors. And we certainly want our distributors or the distributors who work with us to be successful. And we know that, as the cycle moves forward, certainly they'll see more demand, just because of that dynamic.

All right. Good. Thanks for those. I'll jump back in the queue.

Sal Tharani, of Goldman Sachs.

Thank you. Well, welcome, Gary, and hope to hear from him next time in the PEP market segment. On the working capital, there was a quite a bit of positive generation this quarter. I'm wondering if the first quarter being a slower quarter, we should expect a similar pattern?

Well, when we look at working capital, let me begin with inventory. I think with the work we did last year, we have a much greater ability to predict and manage the amount of inventory that we have in our system. Now, some of the determination, in terms of how much inventory we'll have coming out of this quarter will be based upon the order pattern that we see over the course of the next 4 to 6 weeks. If we begin to see the steam start building, then we're going to begin positioning inventory, so we can make sure that we're responsive to growing customer demand. In terms of the other areas of our working capital--actually, this has become an increasing area of focus for us, as you can imagine, just trying to improve our cash flow as we go through this investment cycle. And so, we're putting some extra focus, if you will, on accounts payable. And we have some actions we've outlined in that area, which we think will have some nice impact in the first two quarters of this year.

Thanks. And Bill, you mentioned about this 10-10 rule. Can you elaborate? What are your timelines for reaching that goal?

Sure. I like to tell Andy that it's next week, but he tells me that it's not going to happen next week, that it's going to take a little longer. And the reality is that that will be somewhat the reflection of how quickly some of our core markets ultimately recover, if you will, from a demand standpoint. What's really important though, in that statement, and I mean, I think everybody knows, you're bringing on some additional capacity. We've got some excess capacity in our system--in parts of our system anyway--today. We want to sell more. Everybody wants to sell more.

But I think it's the second 10 that I ask that you focus on, because that's the discipline that we're bringing to our organization. Any volume is not good volume. Any price is not a good sale. We're focusing on making sure that we maintain our margins and enhance them through productivity and mix. And ultimately, we know that we're going to go into some new market segments that will be more in the premium area, whether it be marine or chemical, and others like that. And they may have just a little bit different profile than the Aerospace or Energy. But we are focused on targeting those at what we believe are strong margin positions. And the core message to you, and the core message to our organization is we're not chasing volume with price.

Great. Thank you very much.

Phil Gibbs, from KeyBanc Capital Markets.

Good morning. Great quarter. Bill, what were the real big drivers sequentially to the profitability at both Reading and Latrobe?

Well, clearly, when we get volume through our system, there is a lot of volume leverage that turns itself into earnings. And that's not just because of the variable margin associated with the contribution of our product. But frankly, it helps us with our absorption. And reflect back that earlier in the year, when we slowed down some of our production, we also talked about that. So I think we're very consistent, and as we've seen greater output out the door, we've been able to produce more, without bloating our inventories. And I see that--I think that you see that reflected in not only the contribution, but in the cost per ton, which the manufacturing team had an outstanding Q4, as it relates to actual cost per ton on a variable cost basis. Really, really outstanding. So that was a core contributor to that performance.

You give us a sense of the manufacturing utilizations at Reading and Latrobe, relative to the prior quarter?

Sure. Well, first of all, as we mentioned, our forge right now is running 24/7, and we're constrained in that area. So we're glad we're doing our outage. It's important. I think you know we take a lot of pride in maintaining our equipment, and that's part of our dependability equation, but that's in a constrained area. In our press and VIM, and remelt areas, we're in the mid to high 90s. And frankly, going back to the press, we've been running the press 24/7, almost 365 a year, for a long time here now. And so, it'll be nice to have a little bit of relief on that, because as you know, the head space has been pretty tight.

Great. And I just had a couple of housekeeping items for Tony, if I could. Hey, Tony, where did the restructuring, that $3 million come through the segment level?

It's in Corporate.

Okay. And then also, as far as '14 capital expenditures, can you give us feel what you're looking for there?

We say we're going to probably in the low 300s, probably somewhere between 300 and 350.

Thanks a lot, guys. Appreciate it.

Mark Parr, from KeyBanc.

Thanks a lot. Bill, good morning. I just--Phil was asking the questions about operations. I just want to say congratulations to Gary, and was wondering, Gary, if you have any thoughts about--there are a lot of different pieces in the organization that you've been charged with taking care of. Anything that's higher or lower on the priority list, or things we're going to hear earlier rather than later?

You know, Mark, I've been able to dig into some of the units a little deeper than others, but it seems to me that we'll be talking a lot about those near-term improvement opportunities, things can be done that can affect outcomes in 2014. And also, we'll be keeping a pretty steady eye on longer-term developments, products, customer relationships, things that we can do that'll be more accretive towards the end of '14 or into '15. And so, we're going to take kind of, I think, a two-pronged attack here. And it seems to me, having met with some of the teams, that there are a lot of opportunities out there for these units. So it's pretty exciting.

And just to help a little bit, because it is true that Gary just joined us last week. And so, he has had a whole week and has only been able to meet with some of his new team. I can maybe make a couple of comments, which I hope are relevant. One is that we're really excited about our position in oil and gas. SSS and Amega, and the opportunities there. I mentioned the foot pin expansion that we have. And conversely, we've gone through bit of a tough time in our powder business, and it's really important that we take the actions that we made in Q4 and we drive that into higher profitability and a much better growth profile. So those are two areas that I would call out, and I'm just guessing Gary will come to that same conclusion after he has a chance to dig in some more.

Okay. Just as a follow--Bill, I appreciate that color, and Gary, thanks for the comments as well. But on the powder side, is the--do you think there may be a higher potential for M&A there, as opposed to some of the other areas in PEP?

Well, actually, I would say that there's probably higher potential for acquisitions in some of the other areas where we can really do precision finishing type activities, like Amega West. And so, that would be the type of thing. Potentially something in Aerospace, but something that doesn't compete with our large forging customers. In the powder area, we are looking at some very specific business development opportunities, which may not be huge in size, but would be related to positioning ourselves for long-term growth that may be associated with additive manufacturing. So that would be the area that we would probably focus on, as it relates to the powder business.

Okay. All right. Thanks again for the color. Great job in the quarter. Can't wait to see how '14 unfolds for you guys.

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

Thank you again for participating 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. Have a great day.