Carpenter Technology Corp (CRS) 2014 Q4 法說會逐字稿

Good morning and welcome to Carpenter Technology's fourth-quarter earnings conference call. My name is Kim and I will be your coordinator for today. At this time all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session towards the end of the presentation.

(Operator Instructions)

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

Thank you Kim.

Good morning everyone and welcome to Carpenter's earnings conference call for the fourth-quarter ended June 30, 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. The 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 or SAO as we call it; and Gary Heasley, Senior Vice President Performance Products or PEP as we call it.

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 and March 31, 2014 10-Qs and the exhibits attached to those filings. Please also note that in the following discussion unless otherwise noted, when Management discusses sales or revenue that reference excludes surcharge. When discussing operating income, that reference excludes pension, earnings, interest and deferrals or EID. When referring to operating margins, that is based on sales excluding surcharge and operating income excluding pension EID.

I will now turn the call over to Bill.

Good morning everyone and thank you for joining us for Carpenter's fourth-quarter earnings call.

While our market environment is challenging this is an exciting time here at Carpenter. Beginning on page 4, sales in the quarter were up sequentially versus Q3 in both of our two reporting segments. Pep Sales were also up versus prior year's Q4. EBITDA was a strong 22% of sales and up from our third quarter on both the dollar and percent of sales basis. Q4 operating income and earnings per share were up sequentially versus our Q3. These results were achieved through discipline cost control and strong SAO operating margins at 17% of sales combined with a 4% increase in SAO sales leads. When compared to prior year, Q4 operating income and EPS were down as improved Pep earnings were offset by lingering weakness in SAO sales mix and incremental depreciation expense. Cash from operating activities was a strong $96 million in the quarter.

Moving to page 5, for the three years leading up to FY14, we had increased our EBITDA on an average of $91 million per year. FY14 proved to be a challenge. Our sales mix was negatively impact by weak demand for the ultra-premium products we provide for aerospace engines and industrial gas turbines. In this context, the Carpenter team showed the agility to respond in areas we could impact. More specifically, we grew sales volume in the Medical, Transportation and Consumer Industrial segments. We also lowered our SAO process or production cost per ton even with the $3 million of incremental Athens variable start-up related costs factored in. Finally, we reduced our SG&A by 7%. The net result was $382 million of EBITDA which was down by 6% versus prior year.

It's important to note that during FY14 we completed some important strategic moves which we believe have positioned Carpenter to grow profitably in FY15 and beyond. More specifically, we completed the construction and startup of Athens, the world's most advanced specialty alloy manufacturing facility. We expanded our supply position to the additive manufacturing market. We purchased Pratt & Whitney Superalloy Powder Technology, entered into a long-term supply agreement and began constructing a superalloy powder plant in Athens. We significantly expanded our Dynamet titanium wire capacity, we started and have nearly completed the construction of a new production facility in China.

We continue to drive gains from our Latrobe acquisition, surpassing our original synergy projections by 70% and finally we signed multiple LTAs which are key to our future growth. In summary, in FY14, I believe we showed agility in a difficult context and now start what we believe will be a strengthening demand cycle with over $380 million of EBITDA and the capacity to support volume growth. As a result, we believe Carpenter is in an excellent position to grow profitably in fiscal year and beyond.

Moving to page 6, I will discuss key dynamics we see in our market segments. To begin, you'll note that sales were up sequentially in all segments other than Medical, which was essentially flat. What you don't see on this page is that our SAO backlog is now up 32% versus where it was a year ago at this time. As a result our lead times have extended considerably. For example our [Reading press] is now fully booked until mid-December. And finally the orders we took in the quarter contained a stronger mix of ultra-premium products.

Moving to Aerospace, on a tons basis our SAO Carpenter brand backlog is currently up 13% versus the start of the calendar year. In PEP, the demand for titanium fastener wire continues to grow rapidly. In Energy, we continue to experience demand weakness for power generation materials in the quarter. In addition, while the rig count was up 9% over prior-year and demand for drill column materials was high, we saw weakness in demand for Carpenter's materials used in oil and gas completions. But the future is looking brighter as on a ton basis, we have seen a 50% increase this year and our SAO Carpenter brand backlog for the Energy segment.

In the Medical market, we finally saw increased demand from distributors and for surgical materials during the quarter. We don't talk much about the Transportation market but we have made major gains in the segment with highly differentiated materials. More specifically, our sales in the segment are increasing rapidly due to the increased use of Carpenter materials and new engine designs. These engines utilize higher-temperature fuel injectors and many incorporate the use of turbochargers. Finally, we have seen strong growth in the Industrial and Consumer end market as demand for high-end valves and fittings used in plant equipment and the semiconductor industry has increased.

With that, I'll turn the call over to Tony Thene who will discuss our financial performance in greater detail.

Thank you Bill and good morning to everyone. This is Tony Thene.

Let's start on slide 8 with a financial overview of the quarter and then we can get into some of the details. Net income was $38 million or $0.71 per share. Net sales excluding surcharge were $489 million, a $22 million or 5% sequential increase. As I have noted in prior earnings calls, two of our key end-use markets, Aerospace and Energy, account for 58% of our total sales in the quarter. Operating margin of 13.3% was up 140 basis points sequentially. Cash flow from operations was at its annual peak in the fourth quarter at $96 million and free cash flow was positive coming in at $35 million for the quarter. Capital expenditures were down 46% sequentially to $51 million, 63% of the total was related to Athens. And lastly, our total liquidity improved to $612 million, which includes $120 million of cash on hand. Now let's turn to the next couple of slides and I will give you some more detail on the results.

Moving to slide 9 and the income statement summary. Net sales in the quarter was $605 million or $489 million excluding surcharge. We realized sequential sales growth in all of our markets with the exception of Medical which was flat. And our market position remains strong. SG&A expense increased sequentially by $1.4 million in the quarter. Our internal emphasis has been and remains, to closely manage our SG&A cost versus year-over-year while absorbing the incremental Athens costs. For FY14, we actually reduced SG&A costs versus FY13 by $14 million. For FY15, we expect to manage SG&A inside a tight window compared to FY14.

Operating income was $59 million in the quarter and $65 million excluding pension EID. Operating margins increased sequentially by 140 basis points to 13.3%. But to be fair the third-quarter of 2014 included $8 million of weather-related expense that we called out. If you adjust third-quarter margins accordingly margins were relatively flat quarter-over-quarter. The effective tax rate for the quarter was 29.7%. For the full year, the tax rate was 32.4% which is equal to the FY13 effective tax rate. The lower quarterly rate was driven by a benefit recorded in the fourth quarter related to an adjustment of certain tax valuation allowances done in connection with our normal year-end work. Lastly, as I mentioned earlier net income for the quarter was $38 million or $0.71 per share.

Now let's turn to slide 10 and the free cash flow summary. In the fourth quarter, we managed working capital very closely. Inventories up $37 million year-over-year primarily due to developmental product inventoried assets. But the fourth quarter, we were able to drive down inventory sequentially by $23 million. The other positive drive in the quarter was the continued quarterly reduction in capital expenditures. As I said earlier in the fourth quarter, CapEx was down 46% sequentially to $51 million, reflecting the wind down in Athens spending. And most importantly, we moved to a free cash flow positive position for the quarter at $35 million.

Our primary focus is on EBITDA growth. As you update your FY15 models, let me give you some key information on some other financial items. While not impacting our EBITDA growth, we are expecting higher depreciation and amortization, D&A, expense in FY15, primarily due to our Athens facility coming online. For FY15, we expect D&A to increase from $112 million in FY14 to approximately $124 million. Net interest expense, as shown on the income statement, is expected to increase from approximately $17 million in FY14 to $30 million in FY15. This is due to the fact that we expect capitalized interest will be down $13 million lower in FY15 due to the significantly reduced capital spending. For FY15 we expect net pension expense to decrease by approximately $14 million versus FY14. Driven by favorable asset returns partially offset by a lower discount rate assumption.

For FY15 we expect effective tax rate to be 34.5%. In terms of FY15 free cash flow, I can add the following color, in terms of working capital we expect to closely monitor and drive down our days working capital year-over-year, pension contributions for FY15 are estimated to be $16 million. For capital expenditures I can reiterate what we have said previously; our base CapEx level is expected to be approximately $120 million plus any remaining Athens spent. So for FY15 please use an all-in range of $160 million to $175 million. Post-FY15, use $120 million. Of course this estimate would not include any dollars for special growth projects or opportunities.

With that let me turn it over to Andy.

Thank you Tony.

I will now cover the SAO segment depicted on slide 13. Q4 experienced sequential volume growth in all end-use market at a similar sales mix to the third quarter. Compared to a year ago, volume was up considerably but at a weaker sales mix of less ultra-premium Aerospace and oil and gas completion materials. On an adjusted basis, sequential operating margins were flat showing signs of our continued focus on controllable expenses and lower production costs. Our backlogs continue to strengthen, up sequentially and compared to a year ago by 11% and 32%, respectively. We are also beginning to seen the signs of the impact of our recent price increases and increased activity in more premium applications and the Aerospace market.

Having said that, I'm looking forward to the first quarter. We expect volumes to be up over last year at a similar sales mix to Q4 of FY14. With our current lead times and the ramp up of the approval process of the Athens facility, it will likely take some time until we see significant improvement in mix. Our Athens facility continues to make steady progress with customer approvals. In the fourth quarter we produced 1,000 tons of salable product and received customer approvals for nearly 50% of our customer base to the processing of certain nickel-bearing fastener grades. Customers remain very enthusiastic and supportive of our approval plans.

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

Thank you Andy and good morning everyone.

PEP reported revenue growth of 4% and an operating income growth of 37% compared to the fourth quarter of FY13. Sales growth resulted from strength of demand for our titanium fastener material, better penetration of the orthopedic market and increased sales into the oil and gas market. Our improvement in operating income was a result of improvements in the manufacturing processes and multiple PEP business units, higher production levels resulting in improved absorption and cost reductions. Some specific factors that drove our results for the quarter, were improved performance by our newer Amega West locations as those businesses have become established in their markets. Cost savings and commercial initiatives in our distribution businesses and improved demand for our powder metal products in some of our core powder market coupled with operational improvements in that business unit.

Looking to the first quarter of FY15, we expect market conditions to remain robust but we anticipate some compression in margins as a result of anticipated changes in our product mix. While we expect demand for Aerospace fastener wire to remain strong generally, we expect some decline in shipments based on our view of customer inventories. Within the PEP Companies, our team is taking actions to respond to our customers needs and to improve results.

To better serve our Aerospace fastener customers, we installed and commissioned two additional titanium finishing lines in FY14 and we will begin installation of an additional line in the first quarter of FY15. Also, we expect further operational improvements in our powder business that will allow us to better serve our customers and improve results in that business unit. With these and other actions we are taking, we are positioning PEP for continued improvement over the long-term.

Thank you and now I will turn the call back to Bill.

Thank you, Gary. It's good to see the PEP-reporting segments showing year-over-year improvements again.

Turning to page 17, I'd like to highlight a couple of key growth enablers for the Company. Clearly the startup of Athens is the highlight of our quarter and fiscal year. We delivered this large complex project ahead of schedule and under budget. The plant is now fully operational. Early in the call, Andy mentioned that we produced over 1,000 tons of salable product in our Q4. I'd like to add that over 60% of this product is for the Aerospace market and the tons produced are richer on a profit per pound basis than our SAO system average.

From a commercial viewpoint, the market timing seems right. We need to ramp up production in Athens quickly to support existing customer demand which is outstripping our legacy system capacity. This will help us bring down lead times and also give Carpenter the capacity to target new sales from new customers in markets such as the chemical processing industry. We are working diligently to complete the internal testing required for us to transfer more product to Athens. This will free-up capacity on our currently constrained VAP-approved Reading and Latrobe operations. From an economic viewpoint, Athens will have some important impacts on our near and long-term financial results. In the near-term, we already have the full overhead burden from Athens in our FY14 results so there will be no increases in FY15 in that area.

We will however, as Tony mentioned, see incremental year-over-year depreciation primarily in the first three quarters of the fiscal year. At the same time, as just discussed, Athens will enable Carpenter to expand its sales base quickly. The result is that we are targeting to have Athens be accretive to earnings before the end of the fiscal year. Looking longer-term Athens will clearly enable substantial and profitable growth. Athens will ultimately have a lower variable cost-per-process-ton than our legacy SAO system.

More importantly, we have now have the installed capacity to support 27,000 tons of incremental superalloy sales. While we would like to utilize this capacity as soon as possible, I want to emphasize that Athens have a low breakeven volume requirement. There's demand today for this capacity and this demand is growing. As such we neither need to, nor interested in using price as a leverage point to drive buying growth. In fact, the SAO Commercial team's primary FY15 goal is to improve process per ton.

Moving to the second column, I'm also excited to share that we've made significant invested to expand our Dynamet capacity. As Gary mentioned, we opened two lines this year and we've improved capital to bring another line online this calendar year. In total, these investments will yield a 50% increase in Dynamet's wire capacity. We've added this capacity not only to support customer demand growth but also to ensure that we have short lead times and the surge capacity to consistently drive high levels of customer satisfaction.

Turning to page 18 to conclude, FY14 was a challenging year as demand for our Aerospace and Energy products was down. In this context we showed the agility to make key improvements in the areas we could control. The SAO commercial team sold an additional 9,000 tons. The SAO operations team reduced the cost per production ton even with the inclusion of Athens variable start-up costs in Q4. Gary and his team turned the trajectory of the PEP business and in corporate, we offset inflation and reduced spending. In each of the three years leading up to FY14 we increased our EBITDA by an average of $91 million per year. Now with this FY14 behind us, we need to restart our EBITDA growth so we can meet our mid-decade earnings targets.

The good news is that as we enter FY14 we see some key positive indicators. The SAO backlog is up 32% versus where it was last year at this time. We are also beginning to see a richer mix of orders entering the system and Athens is ramping up quickly so we will be able to increase our system output to support this demand. Please note, however, that as discussed in previous calls it will take some additional time to see these positive forces fully manifested in our results. In Q1 we expect normal seasonality and a similar mix to Q4. Thus, it will be a challenge to exceed prior year's Q1 EBITDA. After Q1 we expect to see an improving mix lead to growing year-over-year EBITDA gains. This will help us to become a strong cash generator in FY15.

In conclusion, while we've had a challenging FY14 and a challenging Q1 ahead of us, we believe as we work our way through FY15, Carpenter is very well-positioned to drive top-line growth as we have strong market positions, demand for our core products-and our core markets is growing and we have the installed capacity to support increased output. At the same time, we believe we are well-positioned to drive margin improvement as demand for our most profitable Aerospace, Energy and Defense markets not only recover, but continue to grow.

We leverage our Athens capacity to produce and sell more ultimate-premium product and we ultimately drive more volume across our existing fixed cost base. We have a strong team, we have a clear strategy and we have a proven track record of disciplined execution. With FY14 behind us, the Carpenter Team is committed to moving back to healthy levels a profitable growth this fiscal year.

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

(Operator Instructions)

Your first question comes from Julie Yates from Credit Suisse

Tony, how should we think about the magnitude of free cash flow that you will generate in FY15 taking into account the lower CapEx and some of the working capital initiatives?

I would frame it this way, Julie. The big piece of that is going to be CapEx and you know where that's going to range. We did approximately $350 million in FY14 and then a range of $160 million and $175 million from a working capital standpoint. We expect the volumes to go up so we know our receivables are going to go up but we anticipate holding our inventory at a rate lower than the increase in sales. So at the very least you'll get a push on the working capital side and then you'll get our earnings growth. So if you put those three together I think you get a pretty good idea of the magnitude change it will have year-over-year.

Okay. And then is there any update on how you will prioritize cash deployment or at what point you will communicate a more formal strategy?

As you can imagine, Julie, we are just moving now to a strong positive free cash flow position and we want to sustain that and we want to put some of that, if you will, quickly in the bank. But that being said, we are excited about prospects for acquisitions and we see a number of interesting opportunities that are out there and we have been quite consistent in stating that we're focused on accretive cost synergy-based acquisitions that are essentially completed at a reasonable purchase price. And if those are not available to us, then we would look at other mechanisms to get that back to -- that cash back to shareholders.

We do have additional organic opportunities, but frankly we have been putting a pretty high standard here to push back to limit the amount of capital investment within the Legacy Carpenter because we have made a fair investment over the last few years back into the business

Okay. Is there any color you can provide on what is going on in Aerospace? I think it's declined now for four quarters in a row year-on-year. And I think it was two quarters ago that you said that demand had stabilized and engine destocking was largely over. So is there any other factors you can attribute the weakness to, given where production rates are?

Julie. This is Andy. I would, to stay consistent with our guidance that we've given in the past, in terms of the engines we are seeing, as we've said, backlogs are continuing to improve and increase and our expectation is that that will be working its way out over the next couple of quarters.

One point, Julie, that I just add to maybe provide a little additional color on that is just that our backlogs have been extended and have extended out further so we're working our way through, if you will, the Legacy backlog that we had with its more Legacy mix. And that will take a little bit more time but it's beginning to change as we work our way through Q1.

Your next question comes from the line of Gautam Khanna from Cowen and Company

Tony and Bill, you have given some color on the below-the-line items. Last quarter you mentioned that you expect a gradual sales recovery and you have also made the comments on EBITDA improving year-on-year now starting in Q2. I was hoping you could give us a more direct feedback to calibrate expectations because when I look at consensus, EPS expectations, they are looking for a 44% year-over-year gain in FY15 on well-above 10% sales growth.

Can you please calibrate us more directly on above-the-line items and what you expect is a reasonable growth rate both for sales and perhaps for EBITDA given all these moving pieces?

You do a very good job of digging into the details and working through your model and so you've articulated, I think, some important points. We are very bullish in so many respects on the underlying demand in our core markets.

Clearly we need to continue to ramp up the output of Athens to enable sales growth and we feel very good about that, but our Legacy system is pretty well tapped-out, so Athens is really an important component of that. That will be, to some degree, the rate-limiting step in terms of volume growth from Carpenter. And from a mix standpoint we see the improved or richer order entry mix and we see it in our backlog. We see it, if you will, projected to begin in Q2. But just like you, we would like to see it start hitting our sales before we begin to stretch expectations too far.

So I think this is a year which is going to be a transition year for us and we have internally aggressive targets and I think externally, some people have maybe more aggressive targets than we have ourselves.

And maybe to drill down at SAO, you do have incremental depreciation kicking in in the September quarter. It sounds like you had some of it in the June quarter as well. Do you expect the net operating margin in SAO, ex surcharge, giving you a tough Q1 comparable from last year being above, equal to, or below that of FY14, the 17.3% that you reported ex surcharge?

That's probably at a level of detail that we wouldn't get into right now, but I think you are correct. We will have the incremental depreciation but it's important to note that, for the most part, we have that in our Q4 numbers. We started up operations essentially on April 1 and while there are a couple pieces of equipment that arrived in the quarter, we have the bulk of depreciation in our Q4 numbers.

So that's why we talked about normal seasonality and the factor of depreciation. You can see it in our Q4 results already.

To clarify your earlier comment, Bill, you mentioned obviously the backlog numbers that SAO sequentially has picked up now for two quarters in a big way. Yet, the conversion into revenue, is that gated by the backlog you had to get out the door that's lower-priced and, if you will, Legacy? Or is it the purchase orders you're getting have ship-to dates that are way out in the future and that's the gating factor?

The ship-to dates are not way out in the future. They are, for the most part, driven by the first available ship date given the loading on our system.

As I mentioned, for example, if we were to take an order today for an exciting new application with an exciting new margin, we would be quoting essentially delivery in January. So that gives you the type of time that it's taking to work through our existing backlog.

I think if you were to reflect back, as we have, upon what happened in FY10, we began to see our backlog go up and it was several quarters later where we saw that translate into the margin improvement on a direct contribution per pound, so we've made comments about that in the past and, obviously, our past Earnings Calls. But there was a lag that happened before and we see a lag which is essentially consistent with that in this current market cycle.

Chris Olin, Cleveland Research Company

I guess I just wanted to circle back to your comments on the Titanium Wire Business. Can you give us a little bit more color on what you are seeing regarding this inventory situation, how long you think it would take to get balanced and is there anything in there that's changed your outlook? I guess I ask because some of the other companies that have reported, started to talk about the inventory, at least within the Boeing channel getting better, and I guess I wanted a little more perspective from you.

No macro change. This is Gary Heasley speaking. We don't anticipate any macro change.

We think demand will remain robust, as I said. We had very strong shipments in the fourth quarter. We think we'll have robust shipments in the first quarter but we don't know that they will be quite as strong because some material has to work through the system. We spoke about the additional capacity we are bringing online. We need that capacity going forward to make sure we properly serve our customers. So again not a macro change and we think that market will remain strong for us.

And, Chris, this is Bill. We have not necessarily felt or seen that there was a buildup of Titanium Fastener Wire inventory in the system. I think where we have seen and felt that has really been more on the nickel and thin-side and that side -- again from the order intake pattern, it appears as though the consumption rate is picking up and from our viewpoint more in line with actual consumption at the OAM level.

Just one more question. As this Airbus A350 ramps in its production, will you see a benefit from that on the wire side?

No question about that. It will not only use fasteners but with the composite materials that are used, it expands the use of titanium and our titanium fasteners and we will logically benefit from that demand growth

Your next question comes from the line of Phil Gibbs from KeyBank Capital Markets. Please proceed.

How should we think about the engine business kind of moving through 2015 into 2016 as far as where we should expect an inflection? You described it in, I believe, in the press releases, as demand weakness, so I'm trying to think about that. And then also how you are seeing the spares market unfold?

Sure. This is Bill and Andy can provide some additional comments but when we refer to "demand weakness" I think, from our perspective, that was essentially reduction of inventory further down in the supply chain because the number of aircrafts being built is increasing and is expected to increase further. I think there's going to be some interesting supply chain dynamics over the course of the next couple of years as the OAMs transition from one model and one engine to another.

There will be some builds and there will be some prebuilds and then there will be some periods where inventory will be worked down. So I think it's going to be a growing dynamic market over the next year and we believe that the consumption of materials will increase, not just based upon the organic growth rate but we don't see the trend towards destocking being at least as strong as it was over the past year.

This is Andy. I would say that we are well positioned for growth on the new platforms. If you look at our Legacy share positions with the core components like rings and discs and bearings and superalloy and [ti] fastener materials and in the contracts that we've announced and we've talked about in prior earnings calls and are currently in negotiations for superalloys and powder, we see increased share positions on the new platforms.

Next question comes from Josh Sullivan from Sterne Agee

Can you expand on the dynamics in your oil and gas markets and why its completion has been so weak here with the rig concept?

This is Andy. I will take that one again. Just looking at primarily we got to split the business between the PEP side and SAO, but basically completions coming through SAO manifest mostly in the distribution supply chain. So when you look at that supply chain and what they've been doing with their stock levels, we've seen that they've been destocking over the prior couple of quarters, but we are seeing that start to moderate now and more normal patterns start to come in. So we expect that to -- as Bill made some comments about what we are seeing in the backlog for oil and gas and we think that should moderate going forward.

In the area of the drill collar demand, that has been strong both from a rental as well as a sales perspective, so --

Switching over to the Dynamet expansion. Has this been driven by contractual demand with customers or are you guys expanding for strategic reasons?

I would say that it is really a combination of the two. We do have established supply agreements that require us and we are happy to provide material to the growing demands of, say, Airbus and Boeing and others. At the same time, we view this as a strategic business for us and we know that one of the key success factors for us to be a core dependable supplier in the market that really has very few suppliers is to make sure that we have absolutely outstanding customer satisfaction. That we have quick lead times and the ability to handle surges in demand and so we're investing strategically so that our customers feel as comfortable, and hopefully even more comfortable, working more closely with us as their demand continues to grow.

Next question comes from the line of Steve Levenson, from Stifel. Please proceed.

I know your strategy in the past has been not to do anything that competes with customers, but some of your peers have completed some downstream acquisitions. So with free cash flow improvement coming up in the next coming fiscal year, the one that's just started, do you see any need to or feel any pressure to do something similar?

I would say that we still feel very good about the approach that we've taken in terms of supply in the market. We do, from time-to-time, find ourselves in a similar space as some of our customers.

It's hard to not have any overlap there, but for the most part what we've done is really focus on making sure that customers know that they can depend upon us, that we're a good partner and that we're not, if you will, supplying ourselves at a preferential rate. So we look at each opportunity as it comes up, we see opportunities to do acquisitions and grow in directions that won't put us in, if you will, direct competition with our customers. And so right now we are staying the course. And it's important to note that there are a number of companies out there that have the ability to manufacture their own metal, but they have somewhat of a tapered integration strategy that allows us to supply them as well.

So even as some customers have moved downstream, it doesn't mean that we're not able to supply them and that they don't feel good about supplying them. In fact, it's just the opposite. We are focusing to be excellent suppliers to them as well.

Thanks for the additional color.

Your next question comes from the line of Sal Tharani from Goldman Sachs. pPease proceed.

I want to ask you on the Athens facility and the growth in that part of the business. Is the (inaudible) of the bottleneck right now just the qualifications? I mean, if you were qualified right now, you can immediately get some more orders?

There certainly is no question about that. And I would like to use your question here, which is an important and good question, to point out a couple important concepts.

One, 20% to 30% of the Premium and Ultra-Premium product that we sell is not BAP approved. Sometimes there are location approvals, but frankly we've been seeing very good customer interest and success in getting those site approvals. But we know that the, say, rotating disk longer cycle BAPs will take a longer period of time.

The real bottleneck right now today is not customer approvals but, as you can imagine, we have a very rigorous approval process and standard that's required before we transfer existing production, even if it's not BAP, to another location. And we essentially just began moving from modeling to production in Athens in the first quarter.

So we are getting the internal approvals proving out our ability to produce the quality product that our customers expect, even in non-BAP applications, and that is the key step, if you will, at this point in time in terms of getting more sales through Athens.

Of course, we need customer approvals and that's an important part of what we need to get done. But right now we're just working very hard to complete the initial production on different products, to complete the testing associated with it, so we feel comfortable moving additional grades and sizes into Athens. I think we have a great effort on that and we're making good progress, but that's really the bigger step at this point in time.

If I could, I'm going to throw in one more point because we're very excited, of course, about Athens and we will be tracking some very important metrics on Athens, including its utilization and its cost per ton and other key aspects like that. But I want to emphasize that Athens division from the start is that it's part of the overall SAO system. So, as an example, in Athens we have remelt furnaces, we have a radial press and we have, if you will, downstream processing.

While ultimately we will be focused on products that will start with one and go all the way through the end, we're leveraging capacity that we have in the remelt furnaces and downstream in the finishing operations right now to debottleneck our Legacy in Latrobe and Reading operations, even while we are working through some of those internal approvals for Athens.

So I know you're going to want more detail and we will -- I think we showed ourselves to be quite transparent in terms of how we portray the things that we are doing in the strategic initiatives and we will continue to provide information on that front. But I just want to emphasize that this really is a system gain that we are trying to drive and if you look at FY14, we are running at a very high level. So we need the system to grow and that will be sometimes using the remelt furnaces, sometimes it will be the radial press and sometimes it will be the turning and the finishing and sometimes it'll be all three.

That's probably more than you were looking for, but I think there are a couple of important notes about how we are looking at Athens and its role within our system which I want to emphasize. So thank you for asking that question.

Appreciate the details. If I look at your total capacity now you're going to have with the Athens (inaudible) and SAO, do you think if you look at the builder over the next two years that you can fully utilize this capacity?

We have said from the time we put the capital request before the Board through our Investor Presentations and continued today to think that we'll be able to use that capacity within, roughly, a four- year period. And we are still believing that that's the case. It's interesting because it's possible that that capacity could be used more quickly.

If the markets grow a little faster -- and as I mentioned, we're increasingly focusing on some other markets which are very attractive to us that we have not been able to support in the past. And then we don't have visibility as to the capacity capabilities that just a couple of other suppliers -- but to those other suppliers in the industry, and so it's not clear if we will end up tapping some of the capacity we have quicker just as the overall market gets tighter.

One more for Gary before I pass on the baton. Gary, you mentioned in your prepared remarks, two things: margin squeeze in the first quarter and also some inventory destocking. Can you tell us which products we're talking about and is the margin squeeze temporary or is it because of the pricing or is it the cost issues in the first quarter?

Good morning. That's a great question. In the products that we see some margin depression coming, it's more of a mixed shift. We don't see it in cost. We actually see our cost getting a little bit better, but we are growing our presence in some markets that we have not been as strong in where margins are a bit compressed or a bit tighter than what we've been doing otherwise. So it's just a matter of growing the business and shifting into a broader segment of the market and again participating in segments where margins are just a bit tighter. So I think that answers the question.

Which product inventories are high we are talking about? Titanium only, the inventory?

The only time I remain on inventory was that in our -- we had very strong shipments of Titanium Fastener Wire in the fourth quarter. As we roll into the first quarter, our goal is to rebuild our internal inventories, make sure we have got inventories where they need to be for all of our customers and to really actually improve our support to them. But there may be a little bit of material that has to work its way through the system in the first quarter.

Again, there's no change in the macro view that Titanium Fastener demand is going to remain very, very strong and as we put in this new capacity, we will get to a point where we hopefully have a little bit of headroom so that we could be much more responsive to our customers' short-term means. So that we can really make certain that they are always properly supplied. So what I was really speaking to was a very near-term circumstance based on strong shipments in Q4 and nothing longer term than that.

Your next question comes from the line of Michael Gambardella from JPMorgan. Please proceed.

I have a question-- and sorry if you responded to Sal's question with this answer. The operator broke in and I couldn't hear your response, but if you could assume that from the beginning of the fiscal year that just ended that you had Athens at capable of its full capacity, having ramped up already at the -- starting the beginning of the year, where do you think Athens would have produced for the year, what production number, and how much of that would have been incremental to the Company and how much of it would have taken volumes off of the load in your other Carpenter facilities? Just ballpark.

The first part of your question I need you, if you wouldn't mind, just to explain it again so I understand the reference period or the kind of scenario that you're profiling.

I would say that at this point, virtually every process ton we run through our Athens operation is incremental in terms of our ability to produce product for Carpenter because we are full on our press and our forage and our remelt furnaces and so forth in our Legacy operations, so anything we can do down in Athens is truly incremental to our system.

I was just saying if you had Athens at full -- capable of its full capacity at the beginning of this year that just ended, the fiscal year -- what do you think you would run Athens at for the full year that just ended? And how much of that would be incremental and how much of it would be taking some product away from some of the other Carpenter facilities? Because I would assume, since Athens is going to be your low-cost, higher-margin operation, that you'd want to baseload Athens to maximize profitability for the whole Company.

When you start the operation, as we are right now, the ability to produce, we will say non-BAP product in Athens, frees up capacity in our BAP equipment, Legacy, Carpenter, Latrobe and Reading. And over time, we believe the market is going to grow such that we'll be able to, as we get approvals, run more BAP product through Athens and other facilities will stay full as well. We're not looking to transfer existing production to Athens, we're looking to support our customers as we believe their demand is growing.

In terms of the question you had about if Athens was fully qualified across the circuit, fully operational across all aspects, that's a great question. And we could kind of throw out an answer, but I think it would really deserve a little bit more thought. And I say that because we're very specific about our sales efforts. And when the marketplace is slower, we tend to look a little bit broader on when you're booked-out for, if you will, through the end of December or the middle of December, we are not pushing to necessarily pull in all these new customers and new applications.

So it's a little bit of a hard hypothetical for me to throw an answer out -- and I'm not avoiding your question, we just need to ponder that a little further. Our vision is to not only participate more with our existing customers but also to be in some other markets that we just couldn't support or chase in the past. I wish I could be more precise, but I just don't have a fingertip number on that. It's a scenario we haven't really run.

Your next question comes from the line of Gautam Khanna, from Cowen and Company.

Hi, Gary, I was hoping you could comment on the new capacity of the Titanium Wire Finishing operations. What the cost structure looks like and if you are in talks with any of your major downstream customers for kind of longer-term tenure type of contract with firm pricing?

Sure. From a costs structure standpoint -- and we don't obviously get into the various cost structures of different process lines, but these will be very efficient lines and as they are incremental to what we already have, we should get better absorption of our fixed cost across those lines.

So that's all positive for us. The goal in establishing those lines, as I said a moment ago, is to not just have the ability to supply everything that's needed but to make sure that we're serving our customers even better. They have, at times, shorter-term needs that we may struggle to respond to. We want to get in a position where when they have a challenge, we're able to respond very, very quickly because I think that is going to make them just more effective in what they are trying to do in serving their customers who also, at times, have a bit of a mix shift in what their demand is.

And, Gautam, in terms of the contracts, as you can imagine, there are different customers with different cycles. Some are several years, some are year-over-year, and some are looking longer-term.

I will tell you as a Company and philosophically, we know that if customers are going to depend upon us, then we need to be prepared to participate them -- with them in a partnering manner to match up the length of our contracts, if they're interested, with the length of their contracts. And we also recognize that they have to step up for some commitments to make their, if you will, commercial relationship work and if we're going to be a partner, we have to step up with them. So we are very flexible, very open and we have different contact -- contract lengths, but really we want to be customer-driven on this. We need to be a partner in the supply chain.

To that point, you see all of the various sub-contract manufacturers, the Boeings, especially, talk about some incremental pricing pressure, at least cost pressure, under partnering for success, or whatever the other OEMs might want to call it. How does that relate to your business? You've mentioned some price increases you've announced. I presume you're giving deflationary price in some of your Aerospace business. And how should we think about net pricing year-to-year FY15 and beyond given all these moving pieces?

The price dynamics that we see, to a great extent, they are probably more related to transactional side of our business because of just the supply demand dynamics over the last 12 months.

We work with our customers to, again, try to provide price structure for the length of the contract that makes sense where we have a commitment to help them achieve their objectives in terms of, if you will, their ability to offer the product for a lower price to the OEM. We try to set up, as you can imagine, first and foremost, efforts to drive increased system efficiencies and productivity and we're actually pretty successful in doing that in many cases.

So it's not just a product in a box, but working with the customer to drive those efficiencies. And there are situations where they are, over the life of the contract, especially a longer-term one, there are some price reductions which are there, especially if we can't drive the productivity improvements that we want. So that's why it's important for us to continue to enhance our mix or bring on new business, continue to innovate with new technology, and to manage our production costs internally so that we can do that in a way that actually enhances our margins as opposed to lead to a contraction. So far, we feel pretty good about that approach.

I understand. I guess I'm asking more specifically in terms of -- many of us model sales growth kind of with the view that it's correlated one-to-one with volume growth. And that's --that pricing sort of nets to zero year-to-year. Is that a correct assumption or should we assume that you're going to get net price given the price increases that you've announced in the spot business? Or should we be thinking that it might, in fact, be down year-over-year given the deflationary characterization of most of the Aerospace Business out there today. Just help us tell.

I don't think it should be flat. Because you saw this year, our tons were up and our revenue was down. I would say again that the primary driver for that was not price.

There was some aspect of price there and so we would see, as the market tightens up, we'd like to think that the pricing on transactional business will actually have some improvement. But we also are targeting, anticipating and expecting that we'll see a richer mix of products come back into the system and so we -- our plans for the year are based on improving, if you will, the revenue per pound, not decreasing it.

I don't know that all that will be price. Some of it will be but again that will be more on the transactional side. Our long-term agreements -- if you look at it again -- I hope this is helpful detail, but we've been under the same basic long-term agreements in most cases for the last three to four years because they are long-term contracts.

So the dynamics in terms of pricing are the same this year as they were last year as they were two years ago and three years ago. There's nothing fundamentally that shifted in terms of those dynamics.

That concludes this question-and-answer portion of today's call. Let me now turn it over to Mr. Mike Hajost for 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.

This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.