Carpenter Technology Corp (CRS) 2016 Q3 法說會逐字稿

Good morning and welcome to the Carpenter Technology Corporation third-quarter FY16 financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards, Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Carpenter's earnings conference call for the third quarter ended March 31, 2016.

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 Tony Thene, President and Chief Executive Officer; and Damon Audia, Senior Vice President and Chief Financial Officer.

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 those forward-looking statements can be found in Carpenter's most recent SEC filings, including the Company's June 30, 2015 10-K, Form 10-Q for the quarters ended September 30, 2015 and December 31, 2015 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, and special items. When referring to operating margins, that is based on sales excluding surcharge and operating income excluding pension, EID and special items.

I will now turn the call over to Tony.

Thank you, Brad, and good morning to everyone. As always let's begin on slide 4 with an update on our safety results.

Our third quarter total case incident rate, or TCIR, was 2.2, up from 1.9 in the previous quarter. This gives us a TCIR of 2.2 year to date. Effectively flat with our FY15 year.

In terms of safety performance, there is only one acceptable target, and that is a zero injury workplace. I firmly believe it is possible and it is our highest priority goal. We have spent a significant amount of effort in driving the required change in the Carpenter's safety culture.

Through the first nine months of FY16, we conducted over 69,000 safety audits and observations across our facilities which is approximately five times as many as we conducted over the same period last year. We will continue to utilize safety training, education and increased audits in an effort to drive a reduction in our incident rate and ultimately a zero injury workplace.

Now turning to a summary of the third quarter on slide 5. With $0.30 of adjusted earnings per share, we have delivered another strong quarter. Our operating results reflect the continued rollout of our new Carpenter operating model, our unwavering approach to cost management and our product diversification of high-end premium alloys across a broad range of critical applications.

As a result of our focused efforts, we increased our operating income margin by 110 basis points versus last year's third quarter on significantly lower volume. In our specialty alloys operations, or SAO segment, margins were increased 390 basis points versus last year's third quarter. We continue to aggressively reduce the cost base in our business with improved efficiencies and cost reductions.

This quarter we executed yet another action by reducing production and maintenance positions by approximately 130 through an early retirement incentive, locking in meaningful savings. To give you a little more insight, the Carpenter operating model is how we conduct work across our entire organization as a means to deploy our operational excellence approach. The approach engages the entire workforce to serve our customers and markets with the highest quality products at the shortest lead times that meet their requirements.

The system is based on the Toyota production system and is grounded in creating a standards-rich environment using visual factory concepts to make the standards visible to employees and engaging the entire workforce in problem-solving any deviations to standard via the elimination of waste. The system is checked routinely via leaders standard work to ensure it is effective.

In addition, a rigorous social system is used including daily management, and weekly and monthly reporting to ensure execution of the strategic and tactical plans. The early results generate through the execution of our new operating model gives me confidence that there is significant opportunity to continue improving our processes and our margins. The strength of our technology and scope of our product and customer base was evident during the quarter as we achieved sequential revenue growth in the majority of our end-use markets.

However, the headwinds associated with the oil and gas sector continued in the quarter with North American rig count declining 24% sequentially and 58% versus last year. Drilling activity remains dramatically below the levels we saw prior to the downturn and the timing and extent in the recovery in oil prices necessary to spark a sustainable increase from current levels remains unclear.

Entering the new calendar year, there was a view that oil and gas service companies would increase their capital spending in 2016 versus the levels in the latter part of 2015. However, given current market conditions our customers are continuing to limit their capital investments in the new calendar year and some major customers are pulling back further. This trend impacts the entire oil and gas sector and those supplying product into it.

Given the impact this has had on our oil and gas related businesses, it became necessary to recognize non-cash asset impairment charges in certain businesses within our performance engineered products, or PEP segment. Despite the impairment charges, the lingering sector downturn and its negative impact on our business we continue to believe the energy market remains a long-term growth opportunity. Even though the energy market represents only 8% of our total revenue, our high durability and corrosion resistant products offer strategically important solutions to our customers.

Outside of the oil and gas related business, we remain optimistic about our ability to continue to differentiate Carpenter as a preferred solutions provider. Our focus on high-end premium alloys provides us with exposure to key markets and customers that are experiencing less cyclicality and pressure from current macro environment issues. Our mission lies in further penetrating our end-use markets and building a more robust and diversified business.

We are taking steps today to better align our organization to more effectively address the full spectrum of needs among our in use market customers. Building on our position as a preferred solutions provider, we are currently shifting towards a solutions oriented market-based sales and marketing model from what has traditionally been a product focused model. We are excited by the positive feedback we are receiving from our current customers and new customers as we seek to better serve them with our advanced solutions.

In addition, the Carpenter operating model is also yielding sustainable results in working capital efficiency as well as identifying solutions to manufacturing inefficiencies that can be achieved with little to no investment. In the quarter we generated positive free cash flow of $47 million, our fifth straight quarter of positive free cash flow. This continued focus on cash flow allowed us to repurchase $28 million of our common stock in the quarter.

Now let's turn to slide 6 and discuss our end-use markets in more detail. In our aerospace market we delivered sequential growth driven primarily by modest gains in select engine materials and fasteners, as well as in our defense business. The market's results were down year-over-year overall as we continue to experience temporary choppiness related to the transition in the engine platforms.

We also experienced a more difficult comparison against a very robust third quarter last year in terms of volume and revenue. As last year's comparable period included a spike in orders from a specific customer, versus the more traditional order patterns we have seen in recent quarters. I should also note that the improved trends we began to see in fasteners in January have continued, but overall, business continues to lag prior year levels as companies in the supply chain continue to take a conservative approach to managing inventory in conjunction with the transition to new platforms.

Overall, we remain excited about our participation on the new platforms and we're excited regarding the direction of the market. We continue to expect choppiness in the near term as engine manufacturers and suppliers began the ramp up of these new engine platforms. However, our long-term growth prospects are solid given that our high-performance materials are utilized for critical applications in multiple aircraft components.

Turning to energy. As I mentioned earlier in my comments, the oil and gas sub segment continues to struggle. Sales in our engine market would have been down sequentially if not for the strong performance in power generation sales, which tends to move up and down as major orders are filled.

In fact, our oil and gas sales declined by 13% sequentially and 69% year-over-year. To offset some of this pressure and position our operations for growth when the recovery takes hold, we are continuing to focus on extending our service offerings and our effort to build market share. Particularly in our Amega West business.

We believe our value proposition in the energy end-use market is strong and we will benefit from these actions when the industry ultimately improves. Our solutions enhance the drilling process significantly, lengthen equipment lifetimes and reduce costs for our customers. As we work through the tough environment we will continue to look for opportunities to reduce costs while not negatively impacting the long term potential this market holds for Carpenter.

Moving to transportation, which continues to be one of our most promising end-use markets over the long term, given the growing need for our premium products. While we achieved year-over-year growth against tough comps, we posted a slight sequential revenue decline.

The transportation market remains healthy, and we are well positioned to benefit from underlying trends driven by new regulations. Lighter, more durable products, will continue to play a major role in helping OEMs meet the new fuel efficiency standards, giving us a path to grow our market share on engine related and safety critical component applications over time.

Sales to our medical end-use market increased sequentially and we're flat year-over-year. We continue to experience pricing pressure on our transactional business pertaining to titanium and stainless materials given the amount of capacity in the industry.

At the same time, demand has remained steady for our premium titanium, nickel and cobalt materials in the US, which are supported by long term contracts. And we continue to explore opportunities to grow sales further for these higher-end applications.

As anticipated, sales in the industrial and consumer end-use market were down year-over-year and were impacted by continued economic headwinds and lower crude oil prices, which has limited demand for components and processing equipment used within energy-related sectors. Sales were up sequentially; however, and we are beginning to see isolated improvement in some of our submarkets.

With that, let me turn the call over Damon for the financial review.

Thank you, Tony, and good morning everyone.

Turning to slide 8 and the income statement summary, net sales in the quarter were $456 million or $402 million excluding surcharge. Sales excluding surcharge were up $23 million or 6% sequentially. This 6% sequential increase was on approximately 8% higher volume which was influenced by a meaningful increase related to our power generation materials included in our energy end-use market.

Operating income as a percent of sales when excluding pension EID and special items was 8.7%. This is up versus the 7.6% last year as a result of the improved product mix we are selling and the improvements we have made in our costs over the last one year. The increase versus the 7.7% last quarter is a result of our continued efforts to reduce costs while seeing the benefit of the incremental sequential volume.

We remain focused on growing our premium product offerings and expanding our exposure to higher margin businesses going forward. At the same time, we continue to seek opportunities to increase operating efficiencies and reduce our costs. Particularly as we navigate this challenging environment in certain end-use markets.

In the third quarter, effective tax rate was 27.6%, up from 23.8% in the second quarter reflecting the completion of the sale of an equity method investment in India as well as the tax impact of the special items. Adjusting for these items, our tax rate would've been 34% in the quarter. We continue to expect our tax rate to be in the range of 31% to 32% for the fiscal year.

Net loss for the quarter was $24 million or $0.51 per share. On an adjusted basis, excluding special items that I will cover in a moment, net income would have been $14.3 million or $0.30 per share.

Turning to slide 9, we've highlighted the items related to the asset impairment charges as well as other special items in the quarter. They include the following items on an after tax basis: The $12 million related to restructuring and asset impairments include the write down of property and equipment at our Amega West business as well as the charge associated with an early retirement incentive offered to certain employees in the quarter that Tony discussed earlier.

The goodwill write-off related to our oil and gas businesses totaled $9.3 million on an after tax basis. In addition, we recorded $14.7 million related to the write down of excess inventory affiliated with these same businesses.

We also incurred after tax consulting costs of $1.4 million associated with our business management office and certain strategic planning initiatives. Finally, with the completion of the sale of an equity method investment in India, we recognized income tax charge of $800,000.

Now turning to slide 10 to review our free cash flow. In the third quarter we generated $47 million of free cash flow compared with $2 million in the second quarter. The biggest driver in the quarter was the $17 million reduction in inventory from its peak in Q2.

We continue to expect inventory levels to decline in the fiscal fourth quarter and to end FY16 roughly in line with prior year-end levels. Year to date we have now generated approximately $55 million in free cash flow compared to a use of $33 million for the same period last year. This represents an increase of $88 million year over year which is mainly driven by the lower capital expenditures as the prior year had expenditures related to our Athens facility.

Our capital expenditures year to date are $66 million. We continue to manage capital expenditures closely to balance the need for maintenance capital, current market conditions and investment to capitalize on growth opportunities. Given the current operating environment and our continued focus on cash flow, we now expect our capital expenditures for FY16 to be in the range of $85 million to $95 million versus our prior guidance of $100 million.

Our continued focus on cash flows provide us flexibility given the strength of our balance sheet. Slide 11 highlights the strength of our capital structure and strong liquidity position. At the end of the third quarter, we had $491 million of liquidity comprised of $23 million in cash and $468 million of available borrowings under our revolving credit facility.

With no debt maturities until FY22 and no meaningful required pension contributions expected until FY19, we remain well-positioned to utilize our free cash flow in the most effective way to enhance shareholder value. We will continue to focus on cash flow generation and be prudent with its allocation as we're focus on maintaining a strong balance sheet.

Moving to slide 12, which is an update on our share repurchase program that was authorized in October of 2014 for two years. During the quarter we repurchased approximately 1 million shares at a cost of approximately $28 million. Since the inception of this program, we have now spent $240 million to purchase 6.7 million shares.

We remain focused on returning capital to shareholders in an effective way. As we have said previously, our share repurchase activity will not be linear. We will continue to evaluate further activity as we balance [future] share repurchases with general business needs, market conditions and maintaining a strong balance sheet.

Given that to date we have executed roughly half of the total amount authorized, we do not expect to repurchase the total amount authorized by the Board of Directors within the two-year window that expires in October of 2016. However, we do expect to remain opportunistic in our repurchases over the balance of the remaining term of the authorization.

Now let's turn to slide 13 for a brief review of our SAO segment. Overall, SAO continued to deliver strong performance in the quarter. Similar to last quarter, our results year-over-year continued to be impacted by the slowdown in our energy, specifically oil and gas related, and industrial and consumer end markets.

This pullback accounted for the majority of year-over-year sales decrease in our SAO segment. Sequentially, we did see an improvement in both volume and revenue which was in line with our expectations. The increases were across almost all of our end-use markets.

As Tony mentioned, we did see an increase in our energy end-use market driven by the orders in the power generation sub market segment. We also saw improvement in our operating income year-over-year and sequentially delivering operating margin of 14.4% in the third quarter. This is a meaningful improvement versus last year's 10.5%.

The positive impact of the restructuring program we initiated one year ago, coupled with our deployment of the new Carpenter operating model, has allowed us to deliver improving operating margins on less volume year over year. As we look ahead to the fourth quarter, we expect overall volumes and sales to be similar to Q3.

However, we do anticipate a slightly lower mix as the power generation volume in Q3 is not expected to repeat. We will also continue to execute with an intense focus on operational efficiency and securing further cost reductions as we begin to recognize the benefit of the early retirements executed in the third quarter.

Now let's turn to slide 14 and the PEP segment overview. Similar to last quarter, our PEP segment continued to be heavily influenced by the decline in oil and gas demand. Oil demand continues to be down year-over-year related mainly to energy and industrial consumer end-use markets, we continue to see increases in our aerospace business.

This continued growth in aerospace helped keep volumes effectively flat sequentially despite the continued headwinds in the energy end-use market. As we mentioned in our Q2 conference call, we saw orders for our titanium fasteners begin to recover early in the third quarter. Although not in line with prior year levels, we're hopeful the supply chain has adjusted inventory levels and order patterns will stabilize going forward.

We expect the fourth quarter to be similar to Q3 in overall performance. Aerospace orders coupled with the increased orders for our powder products are expected to offset the continued challenges in our oil and gas related businesses.

Our teams at our oil and gas businesses are addressing their cost base to weather the impact of the current market. They continue to be aggressive in eliminating cost while continuously working with our customers in the best possible way to win when the market recovers. Now let me turn the call back to Tony.

Thank you, Damon. Moving to slide 16.

As previously highlighted, Carpenter is a leader in the development and production of high-value specialty alloys used in demanding applications. We serve highly attractive end-use markets with strong long-term growth outlooks. Our aim is to further strengthen and capitalize on our position as a preferred solutions provider of mission-critical materials to a broad range of strategic manufacturers.

Looking to the future, we're executing on our plan to better leverage our technology and resources to deepen our presence and expand our revenue base across several attractive end-use markets. This requires the right investment and focus across our products, our processes and our people.

In terms of our technology and product portfolio, we see a number of growth opportunities that we can capitalize on, including further growth in aerospace where our revenue per engine is increasing on next generation engine platforms and increased penetration in the transportation market. In addition, we're actively enhancing our product capabilities including investment in new technologies such as super alloy and titanium powder.

With regard to our Athens facility, Carpenter has made the significant investment to add state-of-the-art capacity to serve primarily the aerospace market, which participants and supply chain experts agree is poised for a substantial increase over the coming years. It is important to remember that although the facility is currently running at low utilization levels, our financial results reflect the full operational cost of approximately $8 million to $10 million per quarter. As the facility become the VAP qualified and as the engine build rates increase significantly, we believe Athens will deliver important incremental earnings to our financial results and value to our shareholders.

With regard to our powder products, we are one of the world most diverse producers of spherical, gas atomized specialty alloys from tool steels and stainless steel to nickel and cobalt-based super alloys. We are a key powder supplier for major applications such as additive manufacturing, metal injection molding and coatings. Our new super alloy powder facility in Athens Alabama is currently producing high quality powders with the endgame of providing qualified disc quality powder for rotating components in aerospace jet engines.

And we continue with the design work on the titanium powder operation adjacent to our super alloy powder facility. This titanium powder product offering will increase our reach into aerospace and medical markets and offer growth opportunities in transportation.

We will be able to supply a complete sales offering to additive manufacturing OEMs, service providers and machine suppliers. We're excited about our powder product portfolio and believe it represents solid growth potential for Carpenter.

Now let's turn to slide 17 and my closing comments. We delivered another solid quarter. Our new aggressive approach to managing our manufacturing operations and our sales and marketing efforts are yielding sustainable improvement that are reflected in our results.

Let me emphatically state that we are only getting started. We are doing to be hard work and heavy lifting right now to position Carpenter for success. Our efforts are concentrated in markets such as aerospace, medical, and transportation.

These are markets that everyone believes in and are confident will realize long-term value. Although we, like everyone else, don't know exactly when the energy market will recover, we do know that it eventually will. And even though our oil and gas business inside our PEP segment is currently generating approximately $6 million of operating losses a quarter on a run rate basis, an increase in drilling activity will drive incremental value to our bottom line.

We have already made the investments that are critical for the future of this industry. Our Athens mill, and most recently, our super alloy powder facility. Our customers are excited about Athens and are actively engaged in the qualification efforts.

What is now a drag on our earnings should become a significant incremental tailwind as the aerospace ramp up accelerates. In addition, Carpenter has prided itself on a strong balance sheet with no major debt securities due until FY22, and no significant pension plan contributions planned until FY19.

As I stated earlier, the heavy lifting is occurring right now. Our strategic imperative is centered on strengthening our position as a preferred solutions provider, especially alloys, for very critical applications. We believe the cash generation opportunity is building and Carpenter's potential is undeniable.

Thank you for your attention, and I will turn it back to the operator to open the line up for your questions.

(Operator Instructions)

Gautam Khanna, Cowen and Company.

Good morning. Tony, I wanted to ask you a couple of questions on what you're seeing in the aerospace supply chain. You mentioned there are some perturbations of some sort as engines transition. I was wondering if you could expand on that?

And secondly, if you could talk -- ATI reported today they had very strong sequential gains in engine-related shipments. I wondered what you're seeing, and why, if anything, your shipments are not tracking at the same rate that theirs are?

Okay. Thank you, Gautam. From an aerospace standpoint, I think we've been relatively strong throughout the last three or four quarters. If you start comparing quarter over quarter or year over year, as I said in my remarks, we did have a large order come in third quarter of last year that hurt that comp a little bit.

From our standpoint, Gautam, it's been pretty consistent over the last couple of quarters. I don't have anything really new to report this quarter versus last. And we look forward and we see a similar performance going forward.

Have you guys ever been able to quantify what your content is on the LEAP engines or the geared turbofan versus the predecessor engines, CFM and V2500?

Yes, we are working on that. It's more difficult for us as opposed to someone that's closer to that end customer because we are supplying the feedstock into the foragers. But we have done that work. We do believe -- or we do know that on these new platforms we will have a higher content, and I think I've said that multiple times in the past.

And last one -- in terms of the buyback, what should we anticipate, what should we model in, over the next couple of quarters? I know you're not going to get to [$500 million], but what are you expecting to get to?

Gautam, we haven't -- obviously, we're not giving any forward-looking guidance on our anticipation to repurchase shares. But as we said, we're going to focus on our cash flow generation here, and between now and October, to the extent we feel we have surplus cash, we will be opportunistic in repurchasing. But there's no specific amount that we are looking to purchase between now and the end of the expiration in October.

All right, thanks, guys. I will get back in queue.

Thank you.

Phil Gibbs, KeyBanc Capital Markets.

Good morning. Just had a question on the inventory guidance -- are we thinking there then that the quarter-on-quarter move here will be relatively flattish? Is that what you are trying to portray at this point in time?

No, Phil, so as we -- in the second quarter we said that we expected inventory levels to be flat with year end. You saw an improvement of about $17 million in inventory coming down from the second quarter to the third quarter here. That would leave us about $18 million or so, directionally, of inventory reduction between the third quarter and the fourth quarter.

Okay, so further reductions in inventory in the fourth quarter. Okay.

And that should leave us about -- that will leave us flat effectively, when you think about year end versus year end.

Okay. And then just some overall thoughts on the backlog. Can you help us in terms of what the backlog right now -- either within SAO or cumulatively between SAO and PEP looks like today, maybe relative to the end of 2015?

Well, if you look at it from a sequential standpoint, Phil, our backlog, whether it is in tons or dollars, is pretty flat. It's about the same. Certainly, if you look year over year -- so, March last year -- you will see a decrease, and that's primarily driven by the energy market, as well as industrial. And that's the oil and gas business that we supply through the industrial market.

Okay. I appreciate that, Tony.

And lastly if I could here, on your typical mix of business that you either sell through, let's say, distribution or OEM direct, what typically is that mix? And then secondarily, what are the distributors broadly telling you guys right now, in terms of where they are in inventory positioning, your readiness to order, lean, heavy, that sort of thing? So, just looking for the typical breakout, and then what the distribution guys and potentially even some of the foragers are saying. Thanks so much.

Yes. Thanks, Phil. I can tell you this, and answer the question. From a distribution standpoint, we're seeing some increased activity in the market -- some positive signs right now where our distributors are looking to build back some of their inventory levels. So for us, we see that as a positive going forward.

(Operator Instructions)

Andrew Lane, Morningstar.

Good morning.

Good morning, Andrew.

I'm trying to get a sense of where inventories will settle over a longer time horizon. And along those lines, do you have a sense as to how much developmental product inventory you are currently carrying for qualification purposes?

Andrew, I'll answer the first part, and then maybe come back on the second part. For us, we haven't given any specific guidance for longer-term inventory. We have said that we will come down to be flat for the end of this fiscal year.

As we tried to talk about -- as we continue to implement the Carpenter operating model, our goal is to improve the efficiency of our mills here, and that is leaning out our inventory. As we talked about in our last quarter call, we expect our work-in-process levels to come down year over year, although inventory levels will stay flat year over year. It's because we will see an increase in our raw materials, and we'll see a slight increase in our finished goods. But what we are doing with our operating model is improving that flow through the factory and through the mills here, where we are taking waste out of the system, reducing the surplus inventory sitting at different steps.

So as we continue to execute that model, we continue to believe that the inventory levels will come down. We don't have a specific number as to what that will be. But our expectations are that, as that continues to decline and as volumes in our end markets continue to increase, we should be able to improve the turns of our finished goods, which should allow inventory to continue to reduce over the next period -- year or two.

And, Andrew, this is Tony, if I could just add -- certainly, our goal is to take inventory down. We think we have a means to do that. Over the next year -- over the next two years.

From a development -- you asked a question around developmental inventory -- we do have developmental inventory on hand, primarily at Athens. But it's not a significant amount of our total inventory. And we hold that relatively flat quarter [over quarter].

Okay. And then, would you be able to update us as to the current utilization rate at Athens in the quarter, please?

I think last quarter I said 20%, and it is very close to that number as we speak now.

Okay, thank you very much.

You're welcome.

Gautam Khanna, Cowen and Company.

Tony, when you took over last year, I remember you talked about getting to root cause on some of the operating inefficiencies you discovered. I just wondered where you are in that progression? Have you, station by station, worked out what the issues are, or do you still have a lot of discovery ahead of you?

Well, I will tell you that we have a lot of discovery ahead of us, which means we have a tremendous amount of opportunity. Some of the -- over the last three quarters, the results you have seen has been a direct impact from the work that we are doing, and the items that we're solving to root cause.

So I am very confident and very pleased with the work that we have done over the last two or three quarters. And quite frankly, without this, the results would not be what they are today. But we are -- as I said in my remarks, we're just getting started, and the potential, quite frankly, is significant moving forward.

Not to hold you to numbers, but do you anticipate being able to get SAO, ex-surcharge, EBIT margins to the 20% range again, without a recovery in the energy market? Can you do it just given the mix you currently have, but with better operating controls?

Right. I'll answer it this way, and that is: In our journey to get to a shop floor that is efficient and operating under the principles of the Carpenter operating system, if you -- we're in the first inning. So there is a lot of opportunity that's out there.

Last one, just on acquisitions, or divestitures, as you look at the portfolio, what do you think -- are there opportunities for M&A that you are looking at? And if so, maybe you can give some color on size and market focus and/or are there parts of the portfolio that you don't think fit as well, now that you've been at the helm for about a year, just under a year?

No specific comments, obviously, but as we have articulated being a solutions provider and connecting with the customers, there are opportunities that could present itself. In many ways, we can do that organically with the titanium powder project. But going forward, possibly there are some opportunities.

Quite frankly, our focus right now is dealing with the operational challenges that we have and the opportunities in front of us, and working our commercial and marketing team to branch out into new applications where Carpenter products can solve critical problems for our customers in areas that we have not participated in, in the past.

Tony, do you feel like your predecessor did that -- vertically integrating, forward integrating downstream is not a wise idea or -- I mean, just when you look around at your competitors, many are integrated, whether it be SMC with precision castparts or Alcoa I guess is a little bit less integrated, but still has some upstream nickel capability now with Firth Rixson. I just look at ATI, obviously, with Ladish. Is the merchant supplier model still the best one, in your view, or --?

I look at it a little bit differently, Gautam, as I speak with all of our customers, and our customers' customers in some cases. They understand the value and the unique position that Carpenter has in the market.

And what we want to do is, we think we can build going forward by understanding their needs and then filling out our portfolio to best support that. And that will take us wherever it takes us.

Fair enough. Thanks a lot.

Thank you.

Phil Gibbs, KeyBanc Capital Markets.

Thanks so much. Tony, did you say that the Athens overhead was $8 million to $10 million a quarter?

Yes.

Okay.

Yes, $8 million to $10 million a quarter. Just to clarify, Phil, that includes basically depreciation, the fixed costs and the variable costs that we have. We have a full workforce in Athens right now that we have trained, and we are running at 20% utilization.

The point to make there is, as the volume starts coming in, it is basically going to drop right to the bottom line, ex the raw materials. There are no other costs that need to be added as we increase the volume of that facility that aren't already in our numbers today. So thanks for bringing that up.

Sure. And how much of that bucket -- that $8 million to $10 million bucket -- is fixed versus variable, if you had an idea? Is it half and half, something along those lines?

75% is fixed of that number, and 25% then is the variable piece. When I say variable, it is certainly not variable now because we're not running much volume through there. But once you have a plant up and running, those are the operators on the shop floor. So, 75% fixed of that $8 million to $10 million, 25% variable.

Okay. And then it also sounds like broadly across Carpenter you are changing your go-to-market or commercial strategy and that this is something new. Can you elaborate a little bit more on that, and how that may be different than how you approached the market from a commercial discipline prior to this move? It just sounded different to me than what you had been doing. Thanks.

Yes. It's very different. And what Carpenter had done in the past is very product specific. So we sold a product. And what we're doing now going forward is we're going to sell a solution.

And what that does is that opens up a lot more applications for us as we talk to customers now. We have a much more robust and rich conversation of what their challenges are, and how the Carpenter products and alloys can help solve that.

So it opens us up significantly outside our traditional applications and markets. It's a different discussion now that we have with the customer.

Thank you.

You're welcome.

At this time, we will conclude the question-and-answer session. I would like to hand the conference back over to Brad Edwards for his closing comments.

Thank you, operator, and thanks, everyone, for joining us today. We look forward to speaking to you again this summer when we report fourth quarter. Have a great day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.