Carpenter Technology Corp (CRS) 2017 Q1 法說會逐字稿

Good morning and welcome to the Carpenter Technology Corporation's fiscal-first quarter of 2017 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. These go ahead.

Thank you, Operator.

Good morning, everyone and welcome to Carpenter's earnings conference call for the first quarter ended September 30, 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, Presidents 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, 2016, 10-K and the exhibits attached to that filing.

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 would now turn the call over to Tony.

Thank you, Brad and good morning to everyone.

Starting with a brief review of our safety track record, slide four highlights our progress in reducing our total case incident rate, or TCIR which finished at 1.8 for our fiscal first quarter. This compares to a TCIR of 2.2 for FY16.

We are continuing to emphasize a culture of safety, across the organization, supported by a strong set of standards of behavior aimed at helping our employees to work injury free. While we've made measurable progress in promoting safety and reducing injuries, we can and will always do more to improve our safety performance. As we've stated before, a safe work force is a more productive workforce and we will continue to strive for a zero injury workplace.

Turning to slide five, as expected, we experienced normal seasonality patterns during the first quarter. But the results where magnified by various industrywide challenges in specific submarkets within our Aerospace business. In addition, ongoing macroeconomic issues impacted our transportation and industrial demand in the quarter.

The seasonality and market volatility in the quarter resulted in a $29 million sequential decline in pretax income or approximately $0.44 per share and pushed us below breakeven for the quarter. In addition, net pension expense was sequentially higher in the first quarter, which resulted in a $3.4 million reduction in our pretax earnings. As Damon will discuss later, we took action in this quarter to freeze are largest defined benefit pension plan, which will result in lower net pension expense, with the majority starting in the third quarter of this year.

Despite the volume challenges we faced in the markets this quarter, we were able to generate cost savings. The Carpenter operating model continues to deliver results, and is becoming a cornerstone of our operating performance. As we deal with volatile and challenging in use market conditions, the Carpenter operating model continues to gain traction by reducing cost, improving efficiency and eliminating waste.

Slide six gives some historical context to our first-quarter results. The $25 million of operating income generated by SAO this quarter is in line with performance that we saw two years ago in the first quarter of FY15. Despite revenues be down $58 million in that segment, I believe there are a few important takeaways here.

First, SAO's operating income performance in the current quarter is not symptomatic of structural issues. Second, SAO's ability to deliver flat operating income in the current quarter, versus first quarter FY15, speaks to the success we have had reducing fixed cost and the early success we have had with implementing the Carpenter operating model.

The currently first-quarter results also reflect the impact of an improving product mix, relative to the first quarter of FY15. These factors are evident in the expansion of SAO's operating income margin, by 180 basis points, form the first quarter of 2015 to the first quarter of 2017.

However, the overall environment we are operating now is different than it was two years ago and includes some notable headwinds on our results. Due to the prolonged and dramatic downturn in the auto and gas market, PEP operating income in the first quarter of 2017 was $12.5 million lower than in the first quarter of FY15.

In addition, our pension earnings interest and deferrals, or EID as we call it, was $2.4 million in the first quarter of 2015, and increased to $7.1 million in the current quarter. Taken together, these items represent a $17 million negative swing to our first quarter consolidated operating income, compared to the first quarter of 2015, despite SAO operating income be a largely flat in both periods.

Overall, we've different margin expansion at SAO through our focus on addressing cost, while also improving productivity and manufacturing processes through fixed cost reduction, and ongoing implementation of the Carpenter operating model. We're facing a number of in use market challenges, but are addressing we can control. As we build on our cost reduction progress and seek additional operating efficiencies across our business, we believe we are well-positioned to drive operating leverage as volumes recover.

Let's move to Slide 7 and in-use market update. As a mentioned in my previous comments, our aerospace and defense results were heavily impacted by the transition occurring in the industry. The bright spot for our aerospace business is the engine submarket, where our volume is up compared to last year, and demand is increasing due to going new platform demand.

As I said previously, we participate on all new engine platforms, and we remain well-positioned and enthusiastic about our growth potential over the long-term, as the engine platform ramp accelerates. However, the transition to the new engine platforms, the reduction and wide-body build rates and the continuation of existing fastener destocking trends have all combined to drive a new level of market uncertainty. This uncertainty disrupted auto patterns within our aerospace fastener, structural and distribution submarkets.

Supply chain inventory adjustments continue to impact fastener submarket results. While over supply concerns and the potential impact of the wide-body transition great some near-term uncertainty, expectations for longer-term demand remain intact, given the projected total fleet to build rates, particularly on the narrow bodies, where we have strong market share.

Aerospace structural and distribution submarkets were effected the most by the current industry transition. The wide-body build reduction resulted in broader inventory caution throughout the supply chain. These factors are more than offsetting the gains we are making on the single aisle side. Overall, we expect our structural business will face near-term headwinds as the industry digests the changes in and build rates and its impact on channel inventory levels.

These developments in certain aerospace submarkets are not specific to Carpenter, but are an industrywide dynamic that's creating near-term challenges for many in the supply chain. Although these challenges do not change our views on the aerospace industry long-term, they do provide a level of volatility which is difficult to offset in the near term. Lastly, in aerospace and defense, our defense submarket revenues were down due to timing of program related purchases.

Our energy market sales were up 9% on a sequential basis due to higher sales in the pyrogeneration submarket driven by higher IGT aftermarket sales. The auto patterns in this submarket tend to be more sporadic from quarter to quarter. That said, we do see healthy demand for our materials used in IGT applications moving forward and remain focused on growing share and further strengthening our market position.

Our all-in gas submarket revenues were down year-over-year by 41%, which is in line with the North American directional and horizontal rig count decrease for the period. All in gas sales remained at depressed levels given the ongoing low levels of activity across the industry.

During the current quarter the North American directional and horizontal rig count is up 30% sequentially. Although this increases off a small base, we are encouraged that it could be a positive sign that the industry may be beginning to stabilize.

The rigs coming back online have been largely concentrated in the Permian Basin, where our Amega West business has built strong customer relationships with service providers. On prior calls I've spoken about the hard work we have been doing to build Amega West market share during the downturn.

In the first quarter, Amega West generated an increase in tool utilization rates in excess of the rig count increase. This speaks to our ability to grow on market share and be a valued partner to customers. While the timing of a rebounding in energy market is still unclear, remain focused on best positioning our assets and service offerings and getting closer to our customers.

Moving to transportation, transportation revenues were down both year-over-year and sequentially. We were able to dampen the impact of the sales decline through improved mix as we made further headwind advancing on our high temperature gasket, and turbocharger boat applications. From a broader perspective, the passenger car market is showing signs of slowing growth. Higher light vehicle inventories in North America are beginning to impact production levels.

Current forecast point to North America passenger car protection being down in calendar 2016, and slightly down in calendar 2017, but offset by improved light truck production, leading to an overall net positive growth in both years.

Evolving engine design factors make the light vehicle a sub segment attractive for Carpenter over the long term. As vehicles increase the horse power per liter of displacement, Carpenter is well positioned to support its customers with the material solutions needed to achieve their design and performance requirements. Carpenter is unique, as very few material suppliers have the experience to produce products that can achieve these high-performance characteristics.

Moving to medical, sales were down sequentially and year over year, mostly due to further inventory drawdown by distributors, following industry consolidation. We were encouraged to see booking levels increase on a sequential basis, which gives us some optimism that the distribution channel is beginning to normalize.

Our premium titanium, nickel, and cobalt medical products remain well-positioned and are generating strong demand and customer interest. In fact, we are seeing signs of increased demand for titanium offering following competitor activity in the marketplace.

Lastly, sales in the industrial and consumer end-use market were down 16% on a sequential basis. while much of this decline was due to seasonality, we did experience some pricing and inventory pressures among select industrial applications that more than offset gains in other applications.

Now I'll turn the call over to Damon for the financial review.

Thank you, Tony. Good morning, everyone.

Turning to slide 9 in the income statement summary, net sales in the first quarter were $389 million or $339.8 million, excluding surcharge. Sales excluding surcharge decreased 16% sequentially reflecting lower volumes, driven by normal seasonality patterns, coupled with declines in certain aerospace submarkets that Tony highlighted. On a year-over-year basis, revenue of sling surcharge decreased $45.3 million, or 12% on 7% lower volume, reflecting the decline in our energy-related end-use market, the anticipated decline in the transportation, mainly related to lower heavy truck demand, and lower than expected sales in certain aerospace submarkets year-over-year.

Operating income as a percent of sales when excluding pension EID and special items was 2.6%, a decrease from the 8.9% reported in the fourth quarter. Operating margin was also down compared to the 8.5% in the first quarter of last year with the decline attributable to the lower volume in the current period, coupled with the year-over-year decline in our pep-related business and the inclusion of are approximately $2.1 million in consulting costs reflected in SG&A expense that was excluded last year.

Our effective tax rate for the first fiscal quarter was negative 17%, compared to 36.1% in the fourth quarter, and 44.7% in last year's first fiscal quarter. The first quarter of FY17 included a $2.1 million discrete tax charge related to our decision to make $100 million voluntary pension plan contribution. And the first quarter of FY16, included a $2 million discrete tax charge related to our decision to sell an investment in India.

The net loss in the first quarter was $6.2 million, or a loss of $0.13 per share. On an adjusted basis, excluding special items, the net loss would've been $3.7 million or $0.8 per share. The special items in the quarter relate to our decision to freeze our largest defined benefit plan, which I will cover in a moment, and are detailed on page 20 in the appendix.

Now turning to Slide 10 to review our free cash flow, our free cash flow in the corner was negative $31 million compared to a positive $7 million during the first quarter of last year. The decline in free cash flow was driven primarily by lower earnings year over year. During the quarter we increased inventory by $33 million, similar to the first quarter last year. The inventory increase is in line with the normal inventory build in the first half of the fiscal year that it then historically reduced through the second half of our fiscal year.

The negative $43 million shown in working capital and other line mainly reflects the tax impact of our decision to make the $100 million voluntary pension contribution in October. As result of the contribution, we expect to receive a tax refund of about $35 million. Based on the timing of this refund, we have reflected a current receivable and a corresponding offset to deferred taxes, which is included in the net income and non-cash items line. Thus, there's no cash impact related to the taxes in this quarter.

Capital expenditures for the first quarter were $27 million. Effectively in line with the fourth quarter out lay of $29 million and $3 million below the $30 million recorded in last year's first quarter. Going forward, we will continue to manage our capital expenditures by balancing maintenance capital needs, market conditions and strategic investments to capitalize on growth opportunities across our end-use markets.

Overall, our balance sheet remains healthy. As of September 30, we have $545 million of total liquidity, including $51 million of cash and $494 million of borrowings available under our revolving credit facility. We did not execute any share repurchases in the quarter. The two-year share repurchase authorization approved by the Board of Directors expired in October this year and at this time we have elected to not extended that authorization. We continue to focus on delivering strong free cash flow, and managing our capital as we balance maintaining strong liquidity with strategic capital expenditures and returns to shareholders via our quarterly dividends.

Now let's turn to slide 11 to cover our decision to freeze our largest defined benefit pension plan. As announced last month, effective December 31, 2016, our general retirement plan or GRP will be frozen with no additional benefit accruals. This decision, while not easy one, given impact to many of our associates is another action consistent with our focus on aggressively managing our cost and better positioning carpenter for the long-term.

As a result of the freeze, and based on current assumptions, FY18 net pension expense will be reduced by almost $60 million versus our original FY17 estimate. Even when factoring in the incremental defined contribution cost of approximately $10 million, the savings is almost $50 million.

Given the timing of the pension freeze, we will begin to recognize the majority of these savings starting in the third quarter of FY17. Also, at the time of the pension freeze announcement we communicated our intent to voluntarily contribute $100 million to the GRP. This kind of contribution was subsequently made this month.

Following required re-measurement of the GRP and the current quarter and the contribution, the funded status of the GRP plan has improved approximately $120 million since our June 30, 2016 year end. The balance sheet funded status benefits of the freeze and the contribution have been partially muted by a further decline of almost 40 basis points in the discount rate since our year year-end rate of 3.92%. As a result of this change to our pension plan and the voluntary pension contribution, we have no significant required contributions until FY20.

Turn to slide 12 and our SAO segment results. Net sales excluding surcharge were $266 million, which was down almost $36 million versus the first quarter last year and $56 million versus the fourth quarter. The year over year decreases reflect the global slowdown in transportation and the ongoing weakness in oil and gas activity, coupled with the lower-than-expected volumes due to the volatility in certain aerospace submarkets.

Operating income was $25 million in the quarter. This is down versus the $41 million in the first quarter of FY16, which, as you recall did include $4 million related to an insurance settlement. The impact of the lower volume of almost 8% more than offset the cost savings associated with the continued implementation of the Carpenter operating model. As such, SAO operating margins were 9.4% down versus the first quarter of the prior year.

As Tony highlighted, we continue to make progress in executing the Carpenter operating model. Despite the lower volume year over year, the Carpenter operating model still delivered an improvement of 4% in variable manufacturing cost during the quarter. There operating cost improvements will not always be linear and may be influenced by volumes at times. But we remain encouraged by the progress we are making.

Continued execution of the Carpenter operating model will support our efforts to further improve efficiency is as we continue to identify waste in our processes and redesign our flow paths to approve productivity. These changes and evolution in our processes will help us increase customer service and thus strengthen our competitive position. Looking at the second quarter in SAO we expect sequential sales growth and mix improvement across our end-use markets.

In aerospace, engine volumes are expected to continue to grow while other submarkets, such as fasteners and distribution are expected to continue to face headwinds due to the industry transition of lower build rates, inventory destocking, and consolidation. We will also continue with an unwavering approach of implementing the Carpenter operating model to further position ourselves for increased long-term sustainable value that will enhance the opportunities we see in our end-use markets longer-term.

Now turning to slide 13 and the PEP segment overview, on a year-over-year basis, prolonged weak industrywide demand in the energy end-use market and its negative impact on drilling activity, continue to have a major impact on our PEP business. On a year over year basis, PEP reported sales decline of $13.1 million to $78.3 million, mainly due to the significant year-over-year decline related to our oil and gas businesses. In addition, we experienced slightly weaker mix including lower demand for titanium aerospace fasteners, given ongoing supply chain tightening and the impact of reduced lead times to fulfil customer orders.

On a sequential basis, sales declined by $11.9 million, as we saw our energy-related business stabilize, but experienced a decline in our titanium-related businesses in excess of expected normal seasonality. Although we still don't have adequate visibility to predict an upturn in the energy market, as Tony mentioned, we are seeing some positive indicators, such as a modest increase in our rental activity, that gives us hope that we have reached the bottom for oil and gas related businesses. Based on the actions we have taken over the last one year, we believe we are well-positioned with our customers to capitalize in the upturn when it happens.

For our second fiscal quarter, we expect PEP operating income to improve on a sequential basis driven by higher sales of our powder and titanium products. Give the positive indicators will have seen late in our first-quarter, we expect oil and gas demand to remain relatively flat to slightly positive compared to the first quarter.

In addition to the improvements from our end-use markets we've recently begun to roll out the Carpenter operating model to several of our PEP facilities and we are encouraged with the opportunities we are identifying to improve cost and productivity in a number of the facilities.

Turning now to slide 14, and an update to the full-year guidance items we provided on our last call. We continue to expect appreciation and amortization to equal our capital expenditures at $120 min million for the full year.

In addition, we expect interest expense to be approximately $32 million. Our effective tax rate is still expected to be in the 28% to 30% range for the year. With the pension freeze, we now expect pension expense for FY17 to be $48 million. Given the timing of the freeze, first half pension expense will be a approximately $31 million in decreasing to $17 million for the second half of our fiscal year. In addition, we now see our updated guidance reflects the $100 million voluntary contribution made to our pension plan earlier this month.

Now, I will turn the call back over to Tony.

Thank you, Damon.

Moving to slide 16, Carpenter has built a leadership position across multiple attractive end-use markets through our specialty alloy focus and commitment to being a complete solutions provider for customers. We remain well-positioned in aerospace, including participation on all the new engine platforms and believe that the industry headwinds will abate and inventory restocking will drive improved results.

As I've said, the current aerospace program transition is creating near-term headwinds for participants across the industry. However the market uncertainty does not temper our enthusiasm for the industry's industries long-term growth potential. The underlying fundamentals, such as total projected to build rates, projected engine deliveries and estimated global passenger growth, all point to an attractive long term outlook for the industry.

The transportation market also offers solid long-term growth potential for Carpenter, as our solutions help OEMs address a number of industry regulations. Light vehicle remains highly attractive as overall global production is expected to grow in calendar year 2017, pushing record level production.

While volume demand in the heavy truck market has been lower recently, our high-end alloys capture significant premium content per unit. We also continue to execute on our goal of unlocking new transportation submarkets, such as marine and rail, where we believe our solutions and expertise address industry trends and challenges.

Our market position in medical is strong as our solutions are aligned with market trends including the aging population and a growing focus on minimizing invasive procedures. While distributors consolidation will impact us in the short term, we believe we have a strong growth potential give the breadth of our offerings, including titanium bar, titanium wire, premium nickel, and cobalt based alloys, as well as powder metal.

In energy, as I mentioned, we are seeing some positive indicators in the market. That suggests that oil and gas submarkets may have reached the bottom. We can't predict the timing of a recovery, but we have been hard at work, both on the customer and cost side, to best position Carpenter for the recovery. And in power generation subsegment, we expect to benefit from strong aftermarket IGT demand. Overall, we believe the energy market offers solid upside for Carpenter.

Lastly, our industrial and consumer applications are becoming increasingly value-add. On the industrial side, demand levels vary across our sub categories, but we see good potential in infrastructure project spending, while on multiple trends, including miniaturization and embedded computing technologies represent opportunities in a consumer submarkets. In summary, our position in each of our key markets remain strong and we see solid growth opportunities for Carpenter over the longer-term.

Turning to slide 17, during FY16 we began an aggressive transformation plan to redefine our Company. Our efforts drove a number of changes necessary to better position Carpenter for growth over the long-term. The changes we have made and continue to make have become the foundation of our planned, long-term success.

First, we committed to safety as our absolute first priority, and we will continue to strive for a zero injury workplace. We introduced the Carpenter operating model, and began to fundamentally change our operations at the plant level.

Early gains include the creation of a standard rich environment, improve flow through our facilities and improve manufacturing processes. However, our work here is far from complete. We know there are additional operating efficiencies that we can achieve and we are hard at work extending rollouts of the Carpenter operating model across all of our facilities.

We also introduced a reformulated business strategy that defines our business purpose as a solutions provider or our customers. In connection with our strategy we realigned our commercial team to become more market centric as opposed to product focused. The feedback from our customers and the new opportunities we have identified as result of our new go to market strategy appear promising. Engagement with our customers technical teams to edify where we can help solve our customers' a biggest challenges has been well received.

Lastly, we improved the linkage between our R&D and commercial teams. In line with our strategic focus on becoming a solution provider for our customers. We recently hired a new chief technology officer who will play a pivotal role in strengthening the connection between our R&D and commercial groups.

All of these transformation initiatives excluded in FY16 created a stronger and more focused organization. We delivered solid financial results and throughout FY16, despite market headwinds. These efforts led to the reduction in operating cost of $78 million, through the rollout of the Carpenter operating model and our focus on improving our cost structure. As a result of our efforts we entered FY17 as a much leaner and focused organization, compared to 12 months ago. We are confident that we can build on that progress in the months ahead.

Using the FY16 results as a baseline, we see a number of drivers that we believe can contribute meaningfully to our future performance. First, our decision to freeze are largest defined benefit pension plan which we expect will result in approximately $50 million and net annual cost savings and FY18. This was not an easy decision for us given the impact on many of our employees, but it was something we needed to do to remain competitive as we continue to drive the Company for long-term value creation.

Next, as I said before, today we are carrying the full operational cost of the Athens facility, which is approximate $8 million to $10 million a quarter, despite running at low utilization levels. Athens is a state-of-the-art facility, and in time will prove to be cost effective essential capacity with a significant opportunity for financial results, as we complete the qualification process, the new engine platforms ramp and the oil and gas subsector begins to recover.

Recovery in the oil and gas market will help drive our PEP segment, mainly, our Amega West business. Achieving break even represent $20 million of upside to our financial results, and we know that Amega West has the ability to be much better than just breakeven, given its historical performance, new products, and the actions we have taken during this downturn to position it for success.

We continue to implement the Carpenter operating model across our SAO segment and believe we have significant opportunity for additional cost savings. For example, every 3% reduction in variable manufacturing cost is worth approximately $10 million of FAO annual operating income. In addition we have just begun to implement the Carpenter operating model in the PEP businesses.

We are excited about the opportunities we see in our powders business. We are a key supplier of major powder applications, including additive manufacturing, metal injection molding and surface enhancement coatings. Looking ahead, we see a number of solid growth opportunities across all of our markets. And as I outlined on the prior slide, we have leadership position across multiple attractive end-use markets that posses solid, long-term growth fundamentals. In addition, we have ample opportunities to expand into attractive market adjacencies. Taken together, these additional growth opportunities represent meaningful upside to our financial results.

Now let's turn to slide 18 and my closing comments. Certainly this quarter's results where disappointing, and below our expectations, but as I said earlier, the results were driven by market factors outside our control.

What I'm excited about is how we have aggressively improved from an operational and commercial standpoint. In the recent quarter we continued to enhance our business through the implementation of Carpenter operating model, and didn't hesitate to make the difficult decisions needed to deliver long-term value. The transformation initiatives we are executing across our organization are taking hold, and we believe the opportunities for additional savings are significant.

There are a number of exciting growth opportunities in front of us, including increasing utilization at our Athens facility as well as growing our strategically important powders business. We believe both will be appointed contributors to our future earnings power. We expect the aerospace market demand to continue to experience near term challenges in certain submarkets. However the aerospace market is resilient with strong long-term fundamentals. We're proceeding with caution, but the energy market is showing some early signs of recovery.

Carpenter has a strong balance sheet and ample liquidity with no sizable near-term debt maturities or required pension contributions. We are driving hard on operational efficiency, and commercial engagement. We are pushing forward a on growth opportunities and adjacent markets that can change the trajectory of the company.

We have 5000 proud employees that are getting behind the changes we are making and challenging the status quo. It is not if but when certain markets recover, Carpenter will be positioned for meaningful, long-term, value creation.

Thank you for your attention and I'll turn it back to the Operator to field your questions.

Thank you sir, we now beginning the question and answer session.

(Operator Instructions).

Our first question comes form Gautam Khanna, with Cowen & Company. Please go ahead.

Hello, guys.

Hello, Gautam.

So I have a couple questions. The first was just there's this commentary about uncertainties and in the supply chain within aerospace but what specifically is so uncertain? We know what the production rates are I guess there's some debate on whether Triple Seven goes down again but what changed? With respect to your order book, as you said, as you said here three months ago, did you just get cancellations? Is this all a service center phenomenon, what specifically changed?

Good morning, Gautam. For us the uncertain was associated with the de-stocking on the platform changes as well as customers delay, delaying placing some of their orders. Remember our lead times are much shorter than they were a year ago. 10 to 12 weeks so the visibility is a little less, so from our standpoint the primary areas were on the distribution side, the fastener side, and the structural side.

On the structural side is this the Latrobe landing gear business, or what specifically on the structural side did you see less demand for?

It was across all of the products, but it is not just the Latrobe, it is here in Redding as well.

Okay. Then you're expecting this sequential pick up, is that supported in orders you received that you are sitting on right now, or is this orders you anticipate you will get in the next month or so?

We have seen a pickup in the first month of the quarter. If you look back over the last couple quarters you have seen our backlog consistently drop. Some of that obviously due to the energy market, but some on the aerospace side as we pull in our lead times. As we look at these last and first four weeks of this quarter, we have seen an uptick across all of our aerospace sub-segments. So we've seen a bit of a growth in the backlog as well as the order intake.

Okay. Then can you talk about dynamics in pricing in the SAO segment. You mentioned some pressure in the industrial side. Is there pressures emerging elsewhere in other markets?

I would not say that we've seen significant pressures. Obviously as we speak with our customers, everybody is looking to maximize their value. I think we work with our customers very well to find a win-win situation.

So you are not seeing incremental price pressure is what you are saying?

We have price pressure from product to product, but that's not something that we are calling out as a significant issue in the quarter.

Okay. Thanks a lot, I will turn it back over.

Thanks, Gautam.

The next questions comes from Phil Gibbs, with KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning, Phil.

How are you doing Tony and Damon? I have a question just on the engine business in general. Any help you can give us in terms of how big the jet engine business is within your aerospace and defense portfolio right now in order of magnitude? Is it half the business? Is a 35% of the business?

Let me give you two rough numbers. If you look at total Carpenter revenue, aero engines represent about 20%. That's plus and minuses and obviously that's changed a little bit over the last couple, several quarters because of the downturn in energy. But from approximate standpoint think 20% in total, Carpenter, and if you look at the aerospace market only engines would be roughly 40% there.

Okay. That's helpful. In response to Gautam's question did and you say that in your December quarter that your seeing little bit of a pickup in both engine and structural applications?

We've seen a bit of a pickup across all of the aero subsegments so far this quarter.

Okay. And in terms of your total backlog you pointed at aerospace creeping up a little bit. Has your company wide backlog stabilized and started to move up here?

Yes, it has. We've seen that over the last month to month and a half we have seen that level off.

Okay. And then with, question for Damon here, with the pension contribution this coming quarter, I think it is $100 million or so. With still muted EBITDA momentum at least here in the next three months, are you anticipating that you will have to take out some short-term debt to make that payment, and can you remind us what your availability is on your ability to do that?

Yes, Phil, historically we have used the credit facility, the revolver we have, for seasonal working capital needs, we had the revolver outstanding at the end of the first quarter last year as well as the end of the second quarter. And then as we start to generate more of our cash flow in the back half of the second year we, have repaid the revolver as it was repaid at year-end. I would anticipate the same sort of seasonal pattern leveraging the -- putting pension contribution here this month obviously that would likely, a portion of that will go on the revolver which will work to pay down the second half. The revolver itself is $500 million matures in June of 2018 as of the end of the first quarter we had about $495 million of available on that facility, so no major issues from a liquidity standpoint and as you know we have no major debt maturities up until FY22 so no near-term calls on our cash.

Was that pension expense that you had given for the second half, I think you said $31 million for the first, $17 million for the second, is that net of the expected pickup in the defined contribution payments?

Yes. So there will be about $5 million of incremental defined contribution cost in the second half so the $17 million is net. Actually no, sorry Phil, it's $12 net.

$12 net, okay so that just, pension we are talking about?

Right.

Okay. Lastly on the energy side of the equation I think you pointed to some pickup in your IGT business early [sunny] after market, can you give us a bigger picture of what is going on there, because the market's been seemingly a malaise or holding pattern for three or four year on the OEM side. You're citing aftermarket picking up, but what are the big OEMs to you right now in terms of their willingness our are wantingness to increase production?

The IGT market for us, Phil, is a positive right now primarily on the spares. You saw the big build on the IGT and the 2008, 2009 timeframe. Now you're having the replacement parts come through, and we're seeing a nice pickup there.

Anything different on the OEM side, Tony? On the new builds?

It is always going to be a big, a bit choppy, right? That's a bit sporadic but nothing new there than what we've seen here in the recent history.

All right. Thanks so much.

Thank you.

The next questions comes from Josh Sullivan, Seaport Global. Please go ahead.

Good morning, Damon, Tony.

Hello, Josh.

If we look at the effect of aerospace production uncertainty, do you think the supply chain is under ordering relative to the build rates as the OEMs have communicated, or are we seeing any additional derisking around where build rates may go?

I think it is a lot of items that's driving this, obviously you have the change in the build rates, the de-stocking on the fastener side. So it doesn't take a whole lot to move the needle. If I can digress just a bit, if you just think about Carpenter as a company, we only have about 47 million shares outstanding, so that means 700,000 of pretax is one penny of EPS. So if you would just do quick math and say okay, we lost $0.8 this quarter, if you would just flip that to an $0.8 positive that's only $11 million of pretax. And if you put that in terms of volume, to answer your question in terms of aerospace side, that's less than 3000 tons in the quarter. So you are talking less than 3000 tons move [me], would take me from a minus $0.8 to a positive $0.8, that means I just would've had to ship about 10% more in the quarter. So it doesn't take a lot of change in the aerospace market for Carpenter with our size and our amount of shares outstanding, to make a significant move in our earnings per share from quarter to quarter.

Okay. Thanks. I will switch over to energy. On the uptick that you are potentially seeing is there any way to do any between consumption versus longer life oriented products?

Ask that again, Josh. I'm not sure I followed your question.

More short term consumption related energy, oil and gas products, versus longer life [four genes], or larger energy related products.

Well certainly, we play on the rental side with our Amega West business, which is more short-term and obviously a consumable.

Okay. Thank you.

Thank you.

(Operator Instructions).

This concludes our question and answer session. I would now like to turn conference back over to Mr. Brad Edwards for any closing remarks.

Thank you Zelda and thanks, everyone for joining us for today's conference call. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.