Carpenter Technology Corp (CRS) 2014 Q3 法說會逐字稿

Good morning, and welcome to Carpenter Technology's third-quarter earnings conference call. My name is Steve 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, Steve. Good morning, everyone, and welcome to Carpenter's earnings conference call for the third quarter ended March 31, 2014.

This call is also being broadcast over the Internet, along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement.

Speakers on the call today are Bill Wulfsohn, President and Chief Executive Officer; Tony Thene, Senior Vice President and Chief Financial Officer; Andy Ziolkowski, Senior Vice President Commercial, for Specialty Alloys Operations; and Gary Heasley, Senior Vice President, Performance Engineered Products.

Statements made by Management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's most recent SEC filings, including the Company's June 30, 2013, 10-K; September 30 and December 31, 2013, 10-Q's; and the exhibits attached to those filings.

I will now turn the call over to Bill.

Thank you, Mike, and good morning everyone.

I have to say that Carpenter's third quarter was both exciting and frustrating. It was frustrating because, as previously announced, we were heavily impacted by the severe weather in the Northeast, where a majority of our operations are centered. This resulted in approximately $8 million of additional energy rate-related expense. Our Reading, Pennsylvania, operations were impacted the most, as energy expense at the site was roughly double what we experienced prior year and prior quarter.

The aggregate weather-related impact on our results was significantly greater than we expected when we held our January earnings call. At that time, we thought the worst was behind us. Unfortunately, February and early March were equally problematic.

Now, for the exciting part of the quarter. From a volume perspective, Q3 tons were up by 8% versus prior year. While aerospace tons were flat year over year, they were up sequentially by 20%. Demand in each of our other markets increased both year over year and sequentially.

From an earnings perspective, were it not for the $8 million of unusual weather-related expense, our operating margins would have increased by 120 basis points, sequentially. In addition, our Performance Engineered Products segment, or PEP, as we call it, showed stronger results as revenue, operating income, and margin all improved both sequentially and year over year.

On the strategic front, I'm pleased to report that we have now completed the bulk of our Athens construction and that it is ahead of schedule and below our budget. This means we expect to again become a strong cash flow generator beginning in Q4. More importantly, Athens is now online and producing products. We are now AS9100 and NADCAP approved and we have already produced and shipped products such as [lostboy] and 300 M from Athens.

From our perspective, the timing of Athens couldn't be better. In the quarter, we saw a substantial increase in our backlog, most notably in the aerospace, energy, transportation, consumer, and industrial markets. Lead times also extended by four to six weeks.

In Specialty Alloy Operations, or SAO as we call it, we measure the utilization of roughly 50 work centers in Reading. At the beginning of December, only one of these work centers was fully booked one quarter out. As of today, 50% are fully booked one quarter out and an additional 23% are over 80% booked. In fact, our March SAO production volume was at its highest level since 2011.

With our legacy SAO operations running at high levels, we really need the Athens capacity to support our targeted volume growth. We currently plan to produce more than 1000 tons in Athens during Q4. To more fully utilize the capacity, we will need more internal and customer approvals. Some will come quickly in the next couple of quarters; others, primarily aerospace, will take longer. As for price and mix, with demand growing, we have implemented price increases on the transactional portion of our business and we have also recently seen an uptick in demand for key ultra-premium products.

That said, SAO will have a tough year over year comparison in Q4, as last year's Q4 was a peak period for Carpenter in terms of ultra-premium sales. Given our extending lead times, it will take time for our price and mix improvement actions to work their way from new orders into sales. This isn't unusual. Looking back to the market recovery in 2010, it took approximately four quarters to see the full impact of our product mix and price improvements. The difference is that this time, we are now starting from a much higher base in terms of our volume, margin and EBITDA, and we have the capacity to keep our current sales base while adding in more ultra-premium products volume.

Turning to page 5, I'm happy to say there are a lot of green arrows on the page. In my view, the team has shown great agility to adapt to changing market conditions. More specifically, over the last year demand for some of our ultra-premium products used in aerospace, energy, and medical have been down. In this context, the commercial team has done a great job of holding price and finding new opportunities to fill in excess volume capacity with value-type products.

The net result of these actions show in our quarterly results. While revenue was down, tons were up and so were margins, excluding the $8 million of unusual weather-related expenses. You can see this dynamic in our aerospace market results. Demand for our ultra-premium nickel fastener and engine materials was down year over year. In this context, the team worked hard to grow our sales of materials used in structural applications and titanium fasteners.

The results were that, while year over year revenue was down, tons were flat but up sequentially. We now have a strong expanded base to work from, as demand for engine and fastener materials increased later this year. Note that we have recently added significant titanium wire capacity to support growing fastener wire demand.

The dynamics in the energy market are similar. Revenue and tons sold were both up significantly in spite of lower demand for our ultra-premium oil and gas completion products. The good news is, that the rig count has begun to grow again. We also see signs that demand for completion materials will recover by the end of the calendar year, and power generation is finally showing some year-over-year growth, albeit from a cyclically low base.

In the medical market, over the last year, we have seen a decline in demand due largely to de-stocking and distribution. The majority of this material is transactional in nature, and competitors have been aggressive using price-to-capture volume. It appears this trend is beginning to abate and we are now seeing demand growth again. Rising titanium scrap prices should accelerate growth later this calendar year. In the transportation segment, we continue to see expanded use of our materials and new engine platforms, primarily for fuel injectors.

In summary, the trends are encouraging both in terms of market demand and our market positions. We have a strong base of sales and profitability and we expect demand for our key ultra-premium products to rebound later this year. This timing coincides well with the Athens ramp up and our initial approval schedule.

With that, I will turn the call over to Tony, who will walk you through our financials.

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 some of the details.

Net income was $30.6 million or $0.57 per share. That $0.57 per share included the $8 million or $0.10 per share of additional weather-related expense. Net sales excluding surcharge were $467.2 million; a $53 million or 13% sequential increase.

As I stressed on previous calls, two of our key end-use markets, aerospace and energy, accounted for 59% of our total sales. Operating margins increased sequentially by 120 basis points, excluding the additional weather-related expense. We delivered a significant improvement in free cash flow, coming in at negative $22.2 million for the quarter. Capital expenditures for the quarter were $93.6 million, the majority related to Athens. Lastly, our total liquidity stands at $577 million, with $85 million of cash on hand.

Now, let's turn to the next couple of slides and I will give you more details on the results. Moving to slide 8 and income statement summary. Net sales in the quarter were $566.3 million, or $467.2 million excluding surcharge. We realized sequential sales growth in all of our markets and our market position remains strong. Overall, the long-term market fundamentals remain solid and we are well positioned to capitalize on growth opportunities.

SG&A expense decreased sequentially by $3 million in the quarter. Our internal emphasis has been and remains to hold SG&A cost flat versus year-over-year, while absorbing the Athens ramp up cost. Through the first three quarters of this year we are actually $5 million lower versus the same period last year. We will continue our portfolio review to seek out additional cost savings opportunities.

Operating income was $49.5 million in the quarter, and operating income excluding pension EID was $55.5 million in the quarter. Our operating margins declined sequentially, 50 basis points, to 11.9%. However, if you exclude the impact of the additional weather-related expense, operating margins would have increased sequentially by 120 basis points.

The effective tax rate for the quarter was 33.8%. For the fourth quarter, continuing to use 34% in your models. Lastly, as I mentioned earlier, net income for the quarter was $30.6 million, or $0.57 per share.

Now, let me turn to slide 9 and the free cash flow summary. In the third quarter, we held our working capital relatively flat as we continued to focus on working capital improvement initiatives. As you can see, our capital expenditures decreased 18% in the quarter.

In the fourth quarter FY14, we expect capital expenditures to be significantly lower than Q3 as the Athens spending winds down. And, free cash flow will be positive. As the Athens project nears completion and with minimal near-term required pension contributions, we believe Carpenter has the ability to generate significant free cash flows moving forward.

In the upcoming slides, Bill, Andy, and Gary will give you some details on our market, volume, and product mix outlook. As you begin to update your models for FY15, let me add to that by sharing some financial information that may be helpful to you.

From an SG&A and overhead expense standpoint, our goal remains to manage those costs inside a tight window compared to FY14. While not impacting our EBITDA growth, we do anticipate higher depreciation expense in FY15, primarily due to our Athens facility coming online. Once the facility is fully operational, we expect approximately $4.5 million per quarter. Therefore, for the full fiscal year 2015, we would estimate Athens depreciation to be approximately $18 million. Please keep in mind that this depreciation expense is fully baked in to the Athens 4,000 to 5,000 ton breakeven shared during our last call.

In terms of gross interest expense, we expect to be relatively flat year over year at approximately $32 million. However, we expect capitalized interest to be much lower, as we significantly reduce our capital expenditures in FY15. We anticipate capitalized interest to decrease from approximately $15 million in FY14 to $4 million in FY15. Therefore, net interest expense, as shown on income statement, is expected to increase from approximately $17 million in FY14 to $28 million in FY15.

Although there could be changes, we currently expect pension expense to decrease in FY15, versus FY14, if discount rates and asset performance stays relatively constant through fiscal year end. In terms of working capital, we will continue to work our initiatives and expect to drive down our days working capital. And for FY15, we expect the effective tax rate to be 34.5%.

With that, let me turn it over to Andy.

Thank you, Tony.

I will now cover the SAO segment depicted on slide 11. Quarter 3 experienced a dramatic and unprecedented increase in energy costs due to the extreme weather conditions during the quarter. As Bill mentioned earlier, energy costs were higher than normal by $8 million. Excluding this impact, operating margins were in line with the second quarter.

In the quarter we continued to drive higher volumes and saw gains compared to a year ago and sequentially in all markets except for aerospace. Aero volumes were flat compared to a year ago, but were up 22% on a sequential basis. Revenues were up 11% versus Q2 but were lower than a year ago due to a weaker sales mix of less ultra-premium aerospace and oil and gas completions materials.

Looking forward, order intake levels continue to outpace the prior year and sequential quarters. Our backlog grew 19% versus the end of quarter two. And, the mix of aerospace and oil and gas materials is improving.

However, with our current lead times and the ramp up of the approval process of the Athens facility, it will likely take us until later this calendar year until we see significant improvements in mix. That said, we expect that quarter 4's sales mix would be similar to quarter 3's, which was frankly to a challenging comparison to a relatively rich mix in the fourth quarter a year ago.

I will now turn the discussion over to Gary Heasley to cover the PEP segment.

Thank you, and good morning everyone.

Our PEP segment delivered revenue growth of 5% and operating income growth of 15% compared to the third quarter of 2013. These improvements were driven by strengthening demand in some key markets, stronger integration across the PEP platform, and operational improvements. Looking to the fourth quarter, we expect market conditions to remain strong and we continue to take steps to improve execution within the PEP businesses.

In the third quarter, we saw improvement in the oil and gas market, which benefited Omega West and our machining and distribution business. Demand for titanium fastener wire for aerospace applications and penetration of the medical bar market by Dynamet. Earnings growth was also driven by growing business resulting from our incremental investments in Omega West locations in Asia and the United States, incremental business from new customer relationships in our titanium and distribution businesses, and efforts to improve productivity and control costs across our PEP businesses.

In our fiscal fourth quarter, we expect demand for aerospace fastener wire to remain strong. We anticipate continued strength and demand for drill collar rentals, as well as some improvement in demand for complex collars and material in the oil and gas market. However, we see continuing competitive pressure in certain power products, medical bar products, and tool steel products, which will continue pressure margins in those markets.

Within the PEP companies, our team is taking actions to respond to our customers' needs and improve results. We have installed an additional wire finishing line at Dynamet to support our customers' forecasts of increased demand for our wire products as aerospace activity continues to strengthen. We've renewed our efforts to improve inventory management, resulting in inventory reductions in our distribution and power units. However, why we have reduced inventories in some areas, we are building some inventories where that investment is necessary to support our customers' needs.

The PEP team aggressively pursued opportunities to improve results in the third quarter and those efforts will continue into the fourth quarter. Our continued focus on operational improvements and greater integration across the PEP platform and with SAO will benefit the PEP Companies into the fourth quarter and FY15.

Now, I will turn the call back to Bill.

Thank you, Gary. It's great to see we are now delivering financial and operating improvements in our PEP segment.

Moving to page 15, I think we've already covered Athens in significant detail. The team has done a great job with the project and there aren't many projects of this size involving the amount of new technology we've introduced that come in early and under budget. We are already producing and shipping products from the remelt furnaces and the radial press. Customer visits, representing roughly half of our forged bar sales, have already taken place or are on schedule for visits in Q4.

We are now focused on getting a jump start on aerospace qualifications, as some can take several years to complete. By the end of Q4, three of the largest aerospace engine manufacturers will have visited Athens to begin the audit process.

We are simultaneously in the process of getting internal and customer approvals for oil and gas and other markets. These approvals take less time and will enable us to ship products to Athens. That will free up capacity to produce more aerospace product in Latrobe and Reading.

Concluding on page 16, while we can't control the weather, we feel great about our progress and execution in terms of building the strong sales base in the context of weak demand for some of our ultra-premium aerospace, energy, and medical product;, driving operational improvements within our PEP segment; and bringing Athens online early and under budget. We are also excited by clear signals that market demand is improving, as is evidenced by our growing backlog, increasing transactional prices, extending lead times, and improved order volumes for some of our key ultra-premium products. It feels like a good time to be bringing Athens online.

Looking forward, we feel very well-positioned. We sell differentiated products into attractive and growing industries; we have what we believe are the best and broadest capabilities in our industry; the capacity to grow, leveraging existing assets; and the opportunity to grow our margins through mix improvements, price, and volume leverage over our existing fixed cost base. In addition, we are now exiting our heavy organic investment phase with a strong balance sheet and high expectations for solid, positive cash flow generation, beginning in Q4.

All that said, as excited as we are about the Company and our future, it will take some time to see the full impact. SAO has a tough comparable in Q4 versus prior year, and it will take time to see the full impact of our pricing actions, realize the full demand recovery, and get the approvals required to fully use our Athens capacity.

The fundamentals in our business are strong and momentum is building. We expect to see improvements in our run rate performance beginning early in our FY15, increasing steadily as we go through our FY15 and continuing into FY16. From our view, with the warm spring weather arriving in Pennsylvania, the future looks bright.

With that, I thank you for listening and we will turn the call over to the operator to take your questions.

(Operator Instructions)

Julie Yates from Credit Suisse.

Tony, on the Athens breakeven, I think last quarter you spoke about 4,000 tons needed per year to break even, and that was higher because of the depreciation method selected. Just a minute ago you gave a range of 4,000 to 5,000. Has anything changed that's pushed the breakeven up?

No, nothing's changed. That's just giving a range there. Just the main point to be made there was that that depreciation was fully baked into that analysis.

Okay. Timing-wise, when do you think you could achieve incremental volumes needed for breakeven?

The good news is: We are getting a lot of good traction, as we work with our customers. So, we are seeing the interest and activity on the customer side to help pull in the volume. From a production ramp-up side of the standpoint, we continue to make, I think, excellent progress.

That being said, we provide very critical products in the marketplace, and so we are going through what I think is an appropriate ramp up to make sure that we can produce and sell products responsibly from the facility. So, we actually feel very good about our ability to ramp up and get to and beyond that breakeven. Not surprisingly, we are targeting to do that very quickly.

Okay. Going back a couple of years ago at the Investor Day, you gave a product mix at SAO with some targets for FY15. Where are you today, relative to those? Do you think you can still get to a mix of 42% ultra-premium by 2015?

What we have seen is, over the last couple of years, we've made some really great progress in that regard. So, that's great. But as I mentioned a couple of moments earlier, given that some of the demand for that product has been down, we've done a good job of filling that in with premium and value-type materials.

We intend to keep that base because it's good business for us, and we now have the capacity to retain that. But at the same time, we expect to see the ultra-premium products begin to grow, and then the demand to begin to recover. So, I see no reason why we can't continue to focus on achieving the same ultra-premium target mix that we initially laid out back a year ago.

Okay, thank you.

Richard Safran from Buckingham Research.

First off, I just want to say congrats on successfully executing Athens here. It's always recognized that it's difficult bringing on new capacity.

I wanted to ask about the aerospace destocking. It's been a little bit of a mixed bag here this quarter. Some noting a pickup in orders, others noting continued inventory draw down here.

What I wanted to know is if you could comment a bit more and maybe tell us what you are seeing demand will be like for the rest of the calendar year? And maybe you could differentiate, also, what you are seeing airframe versus engines?

Richard, this is Andy Ziolkowski; I will handle that. As we said, it's a difference between what we are experiencing in the current environment, and what we are seeing in the backlogs and the expectations in the future. Our aero backlogs are improving.

Aerospace alone was up 17% versus Q2, and the components of that -- the richer components of that, like engines and fasteners, are growing as well. So, our expectation, and given the guidance that Bill talked about when the realization of that happens, with Athens and with the current lead times that we have, we expect to see that gradually improve over the next four quarters.

Okay. Thanks very much.

Gautam Khanna from Cowen & Company.

Andy, I just wanted to follow up on that last question. Did you actually see, in the quarter, order rates pick up through the quarter? Because last earnings call, I thought you talked about stabilizing jet engine demand, and there was no mention of that in this quarter. I just wondered what changed, if anything?

So, Gautam, it's just semantically. We talked about cancellations and deferrals and those kinds of things that could take volatility, and we haven't seen that level of volatility that we've had in the past. That kind of activity is what we would call more historic levels. The order intake is really what we are referring to, and we have seen the order intake, even in those submarkets, in the subcategories of the market, start to improve as we move through the quarter, both sequentially and compared to last year.

Okay. Can you give us a sense, given the qualification lead times at Athens, do you anticipate that you will be able to put 4,000 to 5,000 tons of premium alloys across the facility in FY15? Or is that sort of the exit run rate you hope to get to?

It certainly wouldn't be the exit run rate -- we hope to do better. We are working hard to make that happen. Clearly, that's within our objectives. So, we have the ability to not only produce the premium products with customer approvals, but again, as we increasingly ramp up our capabilities and abilities, we will be able to ship more products there from Latrobe and Reading, which will free up capacity in the rest of our system.

I've really tried to emphasize, if you will, this point during the call. More to make sure that it's clear that while we are online and operating, and while demand is growing and our backlog is growing, it's not that you can just flick a switch and kind of open the flood gates. I think it will be quick and steady, but it will take some time to get all the necessary approvals required.

I also want to mention again that we go through an internal qualification process ourselves before we move any materials there. We are very bullish on what the facility will bring to us. It's just interesting because our commercial team would love to see our access to that capacity grow at even a more rapid rate than we are seeing today.

Okay, and last one: What do you think explains the growth disconnect between nickel fastener material and titanium fastener material?

Certainly, one of the clear reasons is just the increased use of titanium in some of the new aircraft design. That would be one reason. And with that, I don't think there were the same kind of issues of, say, excess inventory build that occurred in the nickel side a couple of years back. That would be the reason I would point to.

All right. Thanks a lot.

Thank you.

Your next question is from the line of [Vince] Olin from Cleveland Research. Please go ahead.

Just quickly a follow-up on that titanium question. Are you shipping greater volumes into the channels, I guess, that would service the 77 and the A350? Has that been the big driver quarter to quarter?

Certainly, those are two heavy users of the materials that we provide. As you know, when you sell material that goes into a fastener, it becomes a little bit less clear where it ends up downstream. But as we look at kind of the megatrends drawing the demand growth, you've identified a couple of core components of that growth.

You wouldn't be able to determine that you are shipping into the channel at like a seven production rate for the 77 versus four last quarter, or anything like that?

I think that would be challenging for us. But I think in the titanium market, as we just discussed, we have seen less of an issue related to destocking and restocking. And so, it feels as though the volume that we are selling is being pulled through in a way which is relatively representative of the build schedule. And as we see the build schedule grow, we'd anticipate the same kind of growth dynamic. Again, I'm speaking specifically for titanium here.

Lastly, too -- I apologize if you touched on it. Just some further clarification in terms of the volume gains that you are seeing this quarter and the backlog strength. Can you determine how much of this strength could be related to hedging against maybe the commodity nickel movement or the geopolitical uncertainties out there versus real demand? Is there any sense at how much could just be inventory?

It's interesting because our view has been that over the last, we will say, year, few quarters certainly, that with some of the raw material prices being at a relatively low level, and in the case of titanium scrap falling, that it's been kind of a good time for some of the distributors to allow their inventories to run a little bit lean. Not surprisingly, as you suggest, with raw material prices rising, that some of those distributors are undoubtedly trying to refill their stock at, we will say, a more normalized level.

But I would also say that the great majority of what we sell really goes to, if you will, long-term contract or long-term supply relationships. While we do see inventory stocking and destocking effects there, and we've talked about that in aerospace engine, for the most part, it's less around the price of nickel. Often, the price of nickel is hedged, either by us or by the customer, and more based upon production rates and inventory targets.

I think the fundamental growth -- I'm sorry, just to make sure I'm clear -- that while there's undoubtedly some related to trying to capture the market before nickel prices go up too much, I think the majority of it is really just less destocking and more production growth with our core customers.

Makes sense. Thanks, Bill.

Steve Levenson from Stifel.

Just in terms of your titanium wire capacity, and the increased demand from the new platforms, new engines with more expected, how long do you think it will be before you have to invest again to add more? And would you ever consider melting titanium?

From a production capacity capability, we've just brought online and we are in the process of adding additional capacity because we want to stay ahead of the demand curve. We want to make sure that we have the available capacity to meet the surges in demand that sometimes our customers experience. So, we are continuing to grow in that regard.

And the question of melting -- at this point, we see plenty of global supply for the material we need, and we've got really good supply chain lineup all the way from melting out to the end of our finishing line. We don't really see a need to do that. And the way we've got our supply chain lined up, we've mitigated the risk of supply chain interruptions and capacity limitations, we think, pretty effectively. At this point, there'd be no reason to really do that.

And just one other point to add as it relates to titanium wire and fastener materials, that a great deal of what we end up processing is specified on a directed buy from the OEMs themselves. So, even if we had melt capacity or capabilities, which we don't intend to build, I'm not sure we could use it for that purpose.

That's helpful. Thanks a lot.

The last thing is: You talked about lead times going out four to six weeks. Does that put them in the 13- to 15-week range? Or do you see them lower or even going beyond that range?

It's in that range. I have to say that while it's always good to see lead times going out in one regard, our goal and objective is to reduce our lead times even at the, say, peak periods associated with demand. Our capacity strategy is to make sure that we have that ability, and we are not running things at a red line kind of production fashion.

So, as we go on, and as Athens, as an example, comes online, I think what you will see is that our output will grow but our lead times will drop because we will have greater flexibility to support our customers. That's really our objective. We want the best product and we want to make sure we have the best customer service, as well.

Got it, thank you very much.

Josh Sullivan from Sterne Agee.

Just touching on the nickel question from earlier. I realize you guys are limited with SAO bookings and timing of Athens qualifications, but with nickel pricing improving, will that free up layers of inventory which could be shipped in lieu of capacity?

Well, certainly you touch on, I think, a really interesting and important point for us. But yes, as nickel prices go up, it gives us the ability to look at bringing some of our inventories down without having to, if you will, eat into LIFO layers. So, we are focused on making sure that we drive working capital turn improvement; we've begun to see some of that. But we think that we've got a lot more upside opportunities over the course of the next year.

As far as CapEx year to date, how much of that was for the Athens build versus what you see as a normal run rate?

The Athens build, Josh, was the majority of that. It was probably over 70% of the total CapEx spend.

Okay. Flipping over to the cash generation store that is building up here, how are you prioritizing that going forward, versus returning to shareholders versus maybe some acquisitions in the pipeline?

Well, first, I'd like to generate some of that cash. I don't want to get too far out and ahead of ourselves. But we are open up to any of those possibilities, whether that's a return of cash to shareholders, whether there's some internal, highly accretive projects we can look at. So, everything's on the table for us going forward as we move into that free cash flow positive position.

Tony, you didn't mention acquisitions, but that certainly is something that we've done in the past, and we are inclined to do going forward. I always make the caveat, though: We want to do those in a way which are accretive and logical, and it takes two to tango, if you will, on that front. Don't want to overpay just because we have some cash in our pocket.

Glad to hear that. Thanks.

Next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

I wanted to see if there was some differentiation between some of the order patterns in oil and gas, and in aerospace. I know Andy touched upon the aerospace piece being up nicely quarter on quarter. What are you seeing in the oil and gas supply chain?

Phil, this is Andy. Our channels to market are a little bit different in oil to gas than they are in aerospace. I could let Gary touch on the Amega West activity, which rolls up under our discussions of oil and gas.

But from the nickel side, it's mainly through distribution, and into the completions and exploration portion of the market segments. We are starting to see -- we had been going through a similar market destocking in those subsegments, and we are starting to see that abating as well, and starting to see some of that activity come back online.

I will let Gary cover Amega West.

In Amega West, and in our distribution business, we saw some indications that we might be seeing increased demand as we move through the latter part of last calendar year. We did see that happen, and we've seen a nice, steady incremental growth from there.

Amega West is better positioned all the time with some of the investments we've made to grow its rental business, so that's been getting stronger. So, we think it's robust. It's been good. Of course, where it goes is dependent.

And Phil -- this is Andy again. I want to just punctuate your question with: This is one of the focus areas for us with this new capacity coming on. And with the Athens investment, it's allowed us to expand our participation into adjacent markets like the CPR market -- or CPI, the chemical processing industry. We are starting to see that initial activity come into the portfolio, as well.

It is interesting -- just to continue to add on -- I referenced some of the visits that have taken place over the last quarter and coming up here. A significant number of those have been, actually, in the oil and gas space. So, there is clearly interest in what we are doing there.

You are saying visits on the Athens facility?

Yes, visits on the Athens facility.

Okay. I just had another one for Gary. You had mentioned in the press release that the Ti fastener biz was up pretty strongly year on year. What's been the cadence as far as the last couple of quarters -- maybe the Ti fastener business relative to the December quarter or the September quarter.

We've seen steady growth in demand. As Bill indicated, we've been adding some capacity to make sure we are well positioned to support that growth.

We also built in some inventories that allowed us to make sure that we had the right material in place when customers had specific, crucial demand. We need to do more of that, because it comes in spurts sometimes.

So, we've seen steady growth over these last couple of quarters. This last quarter being one where we really had a nice bump.

Just one more strategic one for Bill. Bill, you had talked about, on the last call, trying to keep the inventory levels relative to, I think, the end of this March quarter, relatively level. How does that objective change, or does it, with your quest to maintain lower lead times versus the industry, as some of these lead times push out and you see better demand? Thanks.

It's a great question. As Gary indicated, we're trying to be smarter with our inventory. And what I mean by that is: Clearly, there are opportunities for us to improve. But we also found that there are a couple of areas where we need to pre-position some, either finished or semi-finished materials, so we could provide the right kind of support for our customers with quicker turnarounds on some key items.

Also, at this time, we are not really calling it out, but we have a very significant amount of material that we have produced and is in our system, which is all part of the Athens qualification process. So, we are absorbing that into our current numbers as you see them.

As we move forward and we seek to reduce our lead times, and especially in the forged bar and billet area with Athens, we have a much leaner process. And we believe we will need much less inventory to support the faster lead times that we are seeking to get out of that facility. So, we think we will actually be able to accomplish both objectives. It's much better to have a quick, lean process than it is to have a big buffer of inventory.

Dan Whalen from Topeka CM.

Just wanted to circle back to your commentary about a difficult comp versus a year ago fourth quarter. It sounds like the $0.77 number might be a little bit of a hurdle. Looking at this quarter, adding back the $0.10 for the weather, I would imagine you are still going to have sequential growth. Is that a fair way to look at it?

Well, as Andy indicated, we see a similar mix in SAO. By the way, when we talk about this dynamic -- it is interesting. We put our business into the buckets -- the buckets that we were referencing earlier. We actually look at it, as we call it, in quintiles.

You could see that last year, the growth in the top quintiles was growing, and then that took a step back as we went into this destocking program. So, I think we're going to hit a reset point there pretty quickly.

Having said that, Dan, on the top side, and what we were basically talking about is the mix. And as Bill indicated, when you see the backlog, we looked into cycles in the past. As you start to see the backlog start to build again, which we are experiencing now, that rate to which you experience the margin improvement, that mix associated with that, the richness of the products in there, it takes about four quarters. We anticipate seeing that as we go forward: a gradual and steady improvement as we work through the next couple of quarters.

Starting with that is the mix and we've talked a little bit about the volume side. We have some additional opportunity on the Latrobe and Reading, and we are doing our best to ramp up Athens. But it will take a little bit of time to kind of get that more debottlenecked.

As Tony mentioned, we are trying to keep our overheads relatively constant. So, you can kind of do the math on that, if you will.

On the SG&A, that is on an absolute dollar, not percentage sales, correct?

That's correct.

Okay. Lastly, on the acquisition commentary, can you just -- one, how the pipeline is looking; and two, what areas are kind of the focal points for you? Are you focusing on energy- and aerospace-related assets? What's the mindset on that?

Well, we are looking in a couple of directions. There are a couple of product forms that we don't have in our portfolio. There are also some adjacent materials which would be logical extensions of what we do. There are opportunities to move downstream.

We've been pretty clear that, especially in the aerospace realm, where we are not seeking to go head to head on some of those product areas with some of the folks we supply; also with raw materials. But there's a wide space of additional materials that we can focus on growing and advancing.

So, if you look at -- we've been a little bit light on this front because, over the last year, we've really focused on bringing Athens online. It's taken cash, and we've wanted to keep a heads-down execution focus on it. But if you look prior to that, then, of course Latrobe had some logical product extensions. Amega West allowed us to move downstream in the oil and gas realm. So, those are a couple of, I think, good examples of how we can grow our Business, from an acquisition basis, if you will.

Got you, great, thank you.

There are no further questions at the moment.

(Operator Instructions)

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