Michael A. Hajost - Vice President of Treasury and Investor Relations William A. Wulfsohn - Chief Executive Officer, President, Director and Member of Science & Technology Committee Tony R. Thene - Chief Financial Officer and Senior Vice President Andrew T. Ziolkowski - Senior Vice President of Operations Gary E.

Heasley - Senior Vice President of Performance Engineered Products (PEP).

Julie Yates Stewart - Crédit Suisse AG, Research Division Richard Tobie Safran - The Buckingham Research Group Incorporated Gautam Khanna - Cowen and Company, LLC, Research Division Christopher David Olin - Cleveland Research Company Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division Josh W.

Sullivan - Sterne Agee & Leach Inc., Research Division Philip Gibbs - KeyBanc Capital Markets Inc., Research Division Daniel M. Whalen - Topeka Capital Markets Inc., Research Division.

Good morning, and welcome to Carpenter Technology's Third Quarter Earnings Conference Call. My name is Steve, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed, sir..

Thank you, Steve. Good morning, everyone, and welcome to Carpenter's earnings conference call for the third quarter ended March 31, 2014. This call is also being broadcast over the Internet along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement.

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

Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations.

Risk Factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's most recent SEC filings, including the company's June 30, 2013 10-K, September 30 and December 31, 2013 10-Qs, and the exhibits attached to those filings. I will now turn the call over to Bill..

Thank you, Mike, and good morning, everyone. I have to say that Carpenter's third quarter was both exciting and frustrating. It was frustrating because, as previously announced, we were heavily impacted by the severe weather in the Northeast where a majority of our operations are centered.

This resulted in approximately $8 million of additional energy rate-related expense. Our Reading, Pennsylvania operations were impacted the most as energy expense at the site was roughly double what we experienced prior year and prior quarter.

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

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

From an earnings perspective, were it not for the $8 million of unusual weather-related expense, our operating margins would've increased by 120 basis points, sequentially.

In addition, our Performance Engineered Products segment, or PEP as we call it, showed stronger results as revenue, operating income and margin, all improved, both sequentially and year-over-year.

On the strategic front, I'm pleased to report that we have now completed the bulk of our Athens construction, and it is ahead of schedule and below our budget. This means we expect to, again, become a strong cash flow generator beginning in Q4. More importantly, Athens is now online and producing products.

We are now AS9100 and NADCAP-approved, and we have already produced and shipped products such as [indiscernible] and 300M from Athens. From our perspective, the timing of Athens couldn't be better. In the quarter, we saw a substantial increase in our backlog, most notably in the aerospace, energy, transportation, consumer, and industrial markets.

Lead times also extended by 4 to 6 weeks. In Specialty Alloy Operations, or SOA as we call it, we measured the utilization of roughly 50 work centers in Reading. At the beginning of December, we -- only 1 of these work centers was fully booked 1 quarter out. As of today, 50% are fully booked 1 quarter out and an additional 23% are over 80% booked.

In fact, our March SAO production volume was at its highest level since 2011. With our legacy SAO operations running at high levels, we really need the Athens capacity to support our targeted volume growth. We currently plan to produce more than 1,000 tons in Athens during Q4.

To more fully utilize the capacity, we will need more internal and customer approvals. Some will come quickly in the next couple of quarters; others, primarily aerospace, will take longer.

As for price and mix, with demand growing, we have implemented price increases on the transactional portion of our business and we have also recently seen an uptick in demand for key ultra-premium products.

That said, SAO will have a tough year-over-year comparison in Q4 as last year's Q4 was a peak period for Carpenter in terms of ultra-premium sales. And given our extending lead times, it will take time for our price and mix improvement actions to work their way from new orders into sales. This isn't unusual.

Looking back to the market recovery in 2010, it took approximately 4 quarters to see the full impact of our product mix and pricing improvements.

The difference is that this time, we are now starting from a much higher base in terms of our volume, margin and EBITDA, and we have the capacity to keep our current sales base while adding in more ultra-premium product volume. Turning to Page 5, I'm happy to say there are lot of green arrows on the page.

In my view, the team has shown great agility to adapt to the changing market conditions. More specifically, over the last year, demand for some of our ultra-premium products used in aerospace, energy, and medical, have been down.

In this context, the commercial team has done a great job of holding price and finding new opportunities to fill in excess volume capacity with value-type products. The net results of these actions show in our quarterly results. While revenue was down, tons were up, and so were margins, excluding the $8 million of unusual weather-related expense.

You can see this dynamic in our aerospace market results. Demand for our ultra-premium nickel fastener and engine materials was down year-over-year. In this context, the team worked hard to grow our sales of materials used in structural applications and titanium fasteners.

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

The dynamics in the energy market are similar. Revenue and tons sold were both up significantly in spite of lower demand for our ultra-premium oil and gas completion products. The good news is that the rig count has begun to grow again.

We also see signs that demand for completion materials will recover by the end of the calendar year and power generation is finally showing some year-over-year growth albeit from a cyclically low base. In the medical market, over the last year, we have seen the decline in demand due largely to the stocking and distribution.

A majority of this material is transactional in nature and competitors have been aggressive using price to capture volume. It appears this trend is beginning to abate and we are now seeing demand growth again. Rising titanium scrap prices should accelerate growth later this calendar year.

In the transportation segment, we continued to see expanded use of our materials in new engine platforms, primarily for fuel injectors. In summary, the trends are encouraging, both in terms of market demand and our market positions.

We have a strong base of sales and profitability, and we expect demand for our key ultra-premium products to rebound later this year. This timing coincides well with the Athens ramp up and our initial approval schedule. With that, I'll turn the call over to Tony, who will walk you through our financials..

Thank you, Bill, and good morning, to everyone. Let's start on Slide 7, with a financial overview in the quarter, and then we can get into some of the details. Net income was $30.6 million, or $0.57 per share. That $0.57 per share included the $8 million, or $0.10 per share, of additional weather-related expense.

Net sales, excluding surcharge, were $467.2 million, a $53 million, or 13%, sequential increase. As I stressed on previous calls, 2 of our key end-use markets, aerospace and energy, accounted for 59% of our total sales. Operating margins increased sequentially by 120 basis points, excluding the additional weather-related expense.

We delivered a significant improvement in free cash flow, coming in at negative $22.2 million for the quarter. Capital expenditures for the quarter were $93.6 million, the majority related to Athens. And lastly, our total liquidity stands at $577 million, with $85 million of cash-on-hand.

Now let's turn to the next couple of slides, and I will give you more details on the results. Moving to Slide 8, in the income statement summary. Net sales in the quarter were $566.3 million, or $467.2 million excluding surcharge. We realized sequential sales growth in all of our markets, and our market position remained strong.

Overall, the long-term market fundamentals remain solid, and we are well-positioned to capitalize on growth opportunities. SG&A expense decreased sequentially by $3 million in the quarter. Our internal emphasis has been and remains to hold SG&A costs flat, versus year-over-year, while absorbing the Athens ramp-up costs.

Through the first 3 quarters of this year, we are actually $5 million lower versus the same period last year. We will continue our portfolio review to seek out additional cost-savings opportunities. Operating income was $49.5 million in the quarter. And operating income, excluding pension EID, was $55.5 million in the quarter.

Our operating margins declined sequentially, 50 basis points to 11.9%. However, if you exclude the impact of the additional weather-related expense, operating margins would have increased sequentially by 120 basis points. The effective tax rate for the quarter was 33.8%. For the fourth quarter, continue to use 34% in your models.

And lastly, as I mentioned earlier, net income for the quarter was $30.6 million, or $0.57 per share. Now let me turn to Slide 9, in the free cash flow summary. In the third quarter, we had our working capital relatively flat as we continue to focus on working capital improvement initiatives.

As you can see, our capital expenditures decreased 18% in the quarter. In the fourth quarter FY '14, we expect capital expenditures to be significantly lower than Q3 as the Athens spending winds down, and free cash flow will be positive.

As the Athens project nears completion, and with minimal near-term required pension contributions, we believe Carpenter has the ability to generate significant free cash flows, going forward. In the upcoming slides, Bill, Andy, and Gary, will give you some details on our market, volume, and product mix outlook.

So as you begin to update your models for FY '15, let me add to that by sharing some financial information that may be helpful to you. From an SG&A and overhead expense standpoint, our goal remains to manage those costs inside a tight window compared to FY '14.

While not impacting our EBITDA growth, we do anticipate higher depreciation expense in FY '15, primarily due to our Athens facility coming online. Once the facility is fully-operational, we expect approximately $4.5 million per quarter. Therefore, for the full fiscal year 2015, we will estimate Athens depreciation to be approximately $18 million.

Please keep in mind that this depreciation expense is fully baked into the Athens' 4,000 to 5,000-ton breakeven share during our last call. In terms of gross interest expense, we expect to be relatively flat year-over-year at approximately $32 million.

However, we expect capitalized interest to be much lower as we significantly reduce our capital expenditures in FY '15. We anticipate capitalized interest to decrease from approximately $15 million in FY '14, to $4 million in FY '15.

Therefore, the net interest expense, as shown on the income statement, is expected to increase from approximately $17 million in FY '14, to $28 million in FY '15.

Although there could be changes, we currently expect pension expense to decrease in FY '15 versus FY '14 if discount rates and asset performance stays relatively constant through fiscal year end. In terms of working capital, we will continue to work our initiatives and expect to drive down our days [ph] working capital.

And for FY '15, we expect the effective tax rate to be 34.5%. With that, let me turn it over to Andy..

Thank you, Tony. I will now cover the SAO segment, depicted on Slide 11. Quarter 3 experienced a dramatic and unprecedented increase in energy costs due to the extreme weather conditions during the quarter. As Bill mentioned earlier, energy costs were higher than normal by $8 million.

Excluding this impact, operating margins were in line with the second quarter. In the quarter, we continued to drive high volumes, and saw gains compared to a year ago and sequentially in all markets except for aerospace. Aero volumes were flat compared to year ago, but were up 22% on a sequential basis.

Revenues were up 11% versus Q2, but were lower than a year ago due to a weaker sales mix of less ultra-premium aerospace and oil and gas completions materials. Looking forward, order intake levels continue to outpace the prior year and sequential quarters. Our backlog grew 19% versus the end of Quarter 2.

And the mix of aerospace and oil and gas materials is improving. However, with our current lead times and the ramp-up of the approval process of the Athens facility, it will likely take us until later this calendar year until we see significant improvements in mix.

That said, we expect that Quarter 4's sales mix will be similar to Quarter 3's, which will translate to a challenging comparison to a relatively rich mix in the fourth quarter a year ago. I will now turn the discussion over to Gary Heasley to cover the PEP segment..

Thank you, Andy, and good morning, everyone. Our PEP segment delivered revenue growth of 5% and operating income growth of 15% compared to the third quarter of 2013. These improvements were driven by strengthened demand in some key markets, stronger integration across the PEP platform and operational improvements.

Looking to the fourth quarter, we expect market conditions to remain strong, and we continue to take steps to improve execution within the PEP businesses.

In the third quarter, we saw improvement in the oil and gas market, which benefited Amega West in our machining and distribution business, demand for titanium fastener wire for aerospace applications, and penetration of the medical VAR market by Dynamet.

Earnings growth was also driven by growing business resulting from our incremental investments in Amega West locations in Asia and the United States, incremental business from new customer relationships in our titanium and distribution businesses, and efforts to improve productivity and control costs across our PEP businesses.

In our fiscal fourth quarter, we expect demand for aerospace fastener wire to remain strong. We anticipate continued strength and demand for drill collar rentals, as well as some improvement in demand for complex collars and material in the oil and gas market.

However, we see continuing competitive pressure in certain powder products, medical VAR products and tool steel products, which will continue to pressure margins in those markets. Within the PEP companies, our team is taking actions to respond to our customers' needs and improve results.

We have installed additional wire -- an additional wire finishing line at Dynamet to support our customers' forecasts of increased demand for wire products as aerospace activity continues to strengthen. We've renewed our efforts to improve inventory management, resulting in inventory reductions in our distribution and power units.

However, while we have reduced inventories in some areas, we are building some inventories where that investment is necessary to support our customers' needs. The PEP team aggressively pursued opportunities to improve results in the third quarter, and those efforts will continue into the fourth quarter.

Our continued focus on operational improvements and greater integration across the PEP platform and with SAO will benefit the PEP companies into the fourth quarter and fiscal '15. And now, I'd like to turn the call back to Bill..

Thank you, Gary. It's great to see we are now delivering financial and operating improvements in our PEP segment. Moving to Page 15, I think we've already covered Athens in significant detail. The team has done a great job with the project, and there aren't our many projects of this size involving the amount of new technology we have introduced.

They come in early and under budget. We are already producing and shipping products from the remelt furnaces and the radio press. Customer visits, representing roughly half of our forged bar sales, have already taken place or are on schedule for visits in Q4.

We are now focused on getting a jump start on aerospace qualifications, as some can take several years to complete. By the end of Q4, 3 of the largest aerospace engine manufacturers will have visited Athens to begin the audit process. We are simultaneously in the process of getting internal and customer approvals for oil and gas in other markets.

These approvals take less time and will enable us to ship products to Athens. That will free up capacity to produce more aerospace product in Latrobe and Reading.

Concluding on Page 16, while we can't control the weather, we feel great about our progress and execution in terms of building a strong sales base in the context of weak demand for some of our ultra-premium aerospace, energy and medical products; driving operational improvements within our PEP segment; and bringing Athens online early and under budget.

We are also excited by clear signals that market demand is improving, as is evidenced by our growing backlog, increasing transactional prices, extending lead times, and improved order volumes for some of our key ultra-premium products. It feels like a good time to be bringing Athens online. Looking forward, we feel very well-positioned.

We sell differentiated products into attractive and growing industries; we have what we believe are the best and broadest capabilities in our industry; the capacity to grow, leveraging existing assets; and the opportunity to grow our margins through mix improvements, price and volume leverage over our existing fixed-cost base.

In addition, we are now exiting our heavy organic investment phase with a strong balance sheet and high expectations for solid, positive cash flow generation beginning in Q4. All that said, as excited as we are about the company and our future, it will take some time to see the full impact.

SAO has a tough comparable in Q4 versus prior year, and it will take time to see the full impact of our pricing actions, realize a full demand recovery and get the approvals required to fully use our Athens capacity. The fundamentals in our business are strong and momentum is building.

We expect to see improvements in our run rate performance beginning early in our fiscal year '15, increasing steadily as we go through our fiscal year '15, and continuing into fiscal year '16. From our view, with the warm spring weather arriving in Pennsylvania, the future looks bright.

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

[Operator Instructions] And your first question comes from the line of Julie Yates from Crédit Suisse..

Tony, on the Athens breakeven, I think last quarter you spoke about 4,000 tons needed per year to breakeven, and that was higher because of the depreciation method selected. And just 1 minute ago, you gave a range of 4,000 to 5,000.

Has anything changed that's pushed the breakeven up?.

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

Okay.

And then, timing-wise, when do you think you could achieve the incremental volumes needed for breakeven?.

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

That being said, we're -- we provide very critical products in the marketplace, and so we are going through, what I think is an appropriate ramp-up to make sure that we can produce and sell products responsibly from the facility. So we actually feel very good about our ability to ramp-up and get to and beyond that breakeven.

And not surprisingly, we're targeting to do that very quickly..

Okay. And then, going back a couple of years ago, at the Investor Day, you gave a product mix at SAO with some targets for FY '15.

Where are you today relative to those? And do you think you can still get to a mix of 42% ultra-premium by '15?.

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

We intend to keep that base, because it's good business for us, and we now have capacity to retain that. But at the same time, we expect to see the ultra-premium products begin to grow and then the demand to begin to recover.

So I see no reason why we can't continue to focus on achieving the same ultra-premium target mix that we initially laid out back a year ago..

And your next question comes from the line of Richard Safran from Buckingham Research..

First off, I just want to say congrats on successfully executing Athens here. It's always recognized that it's difficult bringing on new capacity. But I wanted to ask about the aerospace destocking. It's been a little bit of a mixed bag here this quarter, some noting a pick-up in orders, others noting continued inventory drawdown here.

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

Richard, this is Andy Ziolkowski. I'll handle that. As we said, it's the difference between what we're experiencing in the current environment and what we're seeing in the backlogs and the expectations in the future. So our aero backlogs are improving. Aerospace alone was up 17% versus Q2.

And the components of that, the richer components of that, like engines and fasteners, are growing as well. So our expectation in giving the guidance that Bill talked about, when the realization of that happens with Athens, and with the current lead times that we have, we expect to see that gradually improve over the next 4 quarters..

And your next question is from the line of Gautam Khanna from Cowen and Company..

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

And I just wondered what changed, if anything?.

Yes. So Gautam, let's just get it [ph] semantically. So we talked about cancellations and deferrals and those kinds of things that depict volatility, and we haven't seen that level of volatility that we've had in past. So there -- that kind of activity is at what we would call more historic levels.

The order intake is really what we're referring to, and we have seen the order intake, even in those submarkets -- in the subcategories of the market, start to improve as we move through the quarter, both sequentially and compared to last year..

Okay.

And can you give us a sense -- given the qualification lead times at Athens, I mean, do you anticipate that you'll be able to put 4,000 to 5,000 tons of premiums alloys across the facility in fiscal '15? Or is it that sort of the exit run rate you hope to get to?.

Well, certainly, it wouldn't be the exit run rate. We hope to do better. And we -- we're working hard to make that happen. Clearly, that's within our objective.

So we have the ability to, not only produce the premium products with customer approvals, but again, as we increasingly ramp-up our capabilities and abilities, we'll be able to ship more product there from Latrobe and Reading, which will free up capacity in the rest of our system.

I've really tried to emphasize, if you will, this point during the call more to make sure that it's clear that while we're online and operating, and while demand is growing and our backlog is growing, it's not that you can just flick a switch and kind of open the flood gates.

I think it will be quick and steady, but it will take some time to get all the necessary approvals required. And I also want to mention again that we go through an internal qualification process ourselves before we move any materials there. So we're very bullish on what the facility will bring to us.

It's just interesting because our commercial team would love to see our access to that capacity grow at even a more rapid rate than we're seeing today..

Okay.

And last one, what do you think explains the growth disconnect between nickel fastener material and titanium fastener material?.

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

And your next question is from the line of Chris Olin from Cleveland Research..

Just quickly follow-up on that titanium question, are you shipping greater volumes into the channels, I guess, that would service the 787 and A350? Has that been the big driver quarter-to-quarter?.

Well, certainly those are 2 heavy users of the materials that we provide. As you know, when you sell material that goes into a fastener, it becomes a little bit less clear where it ends up downstream. But as we look at kind of the mega-trends drawing the demand growth, you've identified a couple of core components of that growth..

So you wouldn't be able to determine that you're shipping into the channel at like a 7 production rate for the 787 versus 4 last quarter evenly good [ph]?.

I think that would be challenging for us. But I think, in the titanium market, as we just discussed, we have seen less of an issue related to destocking and restocking. And so it feels as though the volume that we're selling is being pulled through in a way which is relatively representative of the build schedule.

And as we see the build schedule grow, we'd anticipate the same kind of growth dynamic. And again, I'm speaking specifically for titanium here..

Very good. Just lastly, too. I apologize if you've touched on it, but just some further clarification in terms of the volume gains that you're seeing this quarter and the backlog strength.

And can you determine how much of this strength could be related to hedging against maybe the commodity nickel movement or the geopolitical uncertainties out there versus real demand? Is there any sense of how much could just be inventory?.

Well, it's interesting, because our view has been that over the last, we'll say, year, few quarters, certainly, that with some of the raw material prices being at a relatively low level -- in the case of titanium scrap, falling, that it's been kind of a good time for some of the distributors to allow their inventories to run a little bit lean.

Not surprisingly, as you suggest, with raw material prices rising, that some of those distributors are undoubtedly trying to refill their stock at, we'll say, a more normalized level. But I would also say that the great majority of what we saw really goes to, if you will, long-term contract or long-term supply relationships.

And while we do see inventory stocking and destocking effects there, and we've talked about that in aerospace engine, for the most part, it's less around the price of nickel. Often the price of nickel is hedged, either by us or by the customer, and more based upon production rates and inventory targets. But I think the fundamental growth -- I'm sorry.

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

And your next question comes from the line of Steve Levenson from Stifel..

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

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

And in terms of -- go ahead, I'm sorry..

Yes. On the question of melting, at this point, we see plenty of global supply for the material we need, and we've got really good supply chain lineup, all the way from melting, up to the end of our finishing line. So we don't really see a need to do that.

And the way we've got our supply chain lined up, we've mitigated the risk of supply chain interruptions and capacity limitations we think pretty effectively. So at this point, there'd be no reason to really do that..

And just one other point to add as it relates to titanium wire and fastener material, that a great deal of what we end up processing is specified on a directed by from the OEMs themselves. And so even if we had no capacity or capabilities, which we don't intend to build, I'm not sure we could use it for that purpose..

All right, that's helpful. The last thing is you talked about lead times going out 4 to 6 weeks.

Does that put them in the sort of 13 to 15-week range? Or do you see them lower, or even going beyond that range?.

No, it's in that range. And I have to say that while it's always good to see lead times going out in one regard, our goal and objective is to reduce our lead times even at the, say, peak periods associated with demand.

Our capacity strategy is to make sure that we have that ability, and we're not running things at a red line kind of production fashion. So as we go on and as Athens, as an example, comes online, I think what you'll see is that our output will grow, but our lead times will drop because we'll have greater flexibility to support our customers.

And that's really our objective. So we want the best product, and we want to make sure we have the best customer service as well..

And your next question, from the line of Josh Sullivan from Sterne Agee..

Just touching on the nickel question from earlier.

I mean, I realize you guys are limited with SAO bookings and timing of Athens qualifications, but with nickel pricing improving, will that free up layers of inventory which could be shipped and move capacity?.

Well, certainly, you're touching on, I think, a really interesting and important point for us. But yes, as nickel prices go up, it gives us the ability to look at bringing our -- some of our inventories down without having to, if you will, eat into LIFO layers. So we're focused on making sure that we drive working capital turn improvement.

We've begun to see some of that, but we think that we've got a lot more upside opportunities over the course of the next year..

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

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

Okay.

And then flipping over to the cash generation story that's building up here, how are you prioritizing that going forward versus returning to shareholders versus maybe some acquisitions in the pipeline?.

Well, first, I'd like to generate some of that cash, so I don't want to get too far out -- ahead of ourselves. But we're open to -- we're open up to any of those possibilities, whether that's a return of cash to shareholders, whether there's some internal highly-accretive projects we can look at.

So everything's on the table for us going forward as we move into that free cash flow positive position..

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

And your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets..

I just -- I wanted to see if there was some differentiation between some of the order patterns in oil and gas. And in aerospace, I know Andy touched upon the aerospace piece being up nicely quarter-on-quarter.

What are you seeing in the oil and gas supply chain?.

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

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

So I'll let Gary cover Amega West..

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

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

I feel that -- this is Andy, again. And I want to just punctuate your question with, yes, this is one of the focus areas where it's with this new capacity coming on. And with the Athens investment, it's around us to expand our participation into adjacent markets like the CPR market -- or CPI, the chemical processing industry.

So we're starting to see that initial activity come into the portfolio as well..

And it is interesting -- just to continue to add on with -- I referenced some of the visits that have taken place over the last quarter and coming up here. And a significant number of those have been actually in the oil and gas space. So there's clearly interest in what we're doing there..

You're saying visits on the Athens facility?.

Yes, visits on the Athens facility..

Okay. And I just had another one for Gary. You've mentioned in the press release that the ti fastener biz was up pretty strongly year-on-year.

What's been the cadence as far as the last couple quarters? Maybe the ti fastener business relative to the December quarter or the September quarter?.

We've seen steady growth in demand. And we've been -- as Bill indicated, we've been adding some capacity to make sure we're well-positioned to support that growth. We also built in some inventories that allowed us to make sure that we had the right material in place when customers had specific crucial demand.

And we need to do more of that because it comes in spurts sometimes. So we've seen steady growth over these last couple of quarters, this last quarter being one where we really had a nice bump..

And then, just one more strategic one for Bill. Bill, you had talked about, on the last call, trying to keep the inventory levels relative to, I think, the end of this March quarter, relatively level.

How does that objective change, or does it, with your quest to, I guess, maintain lower lead times versus the industry as some of these lead times push out and you see better demand?.

That's a -- it's a great question. And as Gary indicated, we're trying to be smarter with our inventory. And what I mean by that is, clearly, there are opportunities for us to improve.

But we also found that there are a couple of areas where we needed to preposition some either finished or semifinished materials so we could provide the right kind of support for our customers with quicker turnarounds on some key items.

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

As we move forward, and we seek to reduce our lead times, and especially in the forged bar [ph] and billet area, with Athens, we have a much leaner process. And we believe we will need much less inventory to support the faster lead times that we're seeking to get out of that facility. So we think we will actually be able to accomplish both objectives.

And it's much better to have a quick lean process than it is to have a big buffer of inventory..

And your next question comes from the line Dan Whalen from Topeka CM..

Just want to circle back to your commentary about difficult comps versus year ago fourth quarter. It sounds like the $0.77 number might be a little bit of a hurdle. But I mean, looking at this quarter, adding back the $0.10 for the weather, automatically, you're still going to have sequential growth.

Is that a fair way to look at it?.

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

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

Just having said that on the top side, and what we are basically talking about is the mix.

And as Bill indicated, when you see the backlog, we looked in the cycles in the past, as you start to see the backlogs start to build again, which we're experiencing now, that rate to which we experience the margin improvement and mix associated with that, the richness of the products in there, it takes about 4 quarters.

So we anticipate seeing that as we go forward, a gradual and steady improvement as we work through the next couple of quarters..

So starting with that is the mix. When we've talked a little about the volume side, we have some additional opportunity on the Latrobe and Reading, and we're doing our best to ramp-up Athens. But it will take a little bit of time to kind of hit that more de-bottleneck. And as Tony mentioned, we're trying to keep our overheads relatively constant.

So you can kind of do the math on that, if you will..

Yes.

And on that SG&A, that's on an absolute dollar, not percentage sales, correct?.

That's correct..

Okay.

And then, just lastly, just on the acquisition commentary, can you just, I guess, one, how the pipeline is looking? And two, what areas are kind of the focal points for you? Are you focusing on energy and aerospace-related assets? Or what's the mindset on that?.

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

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

So we -- if you look at, we've been a little bit light on this front because over the last year, we've really focused on bringing Athens online and it's taking cash. And we've wanted to keep a heads-down execution focus on it.

But if you look prior to that, then, of course, Latrobe had some logical product extensions, Amega West allowed us to move downstream in the oil and gas realm. And so those are a couple of, I think, good examples of how we can grow our business and -- from an acquisition basis, if you will..

There are no further questions at the moment. [Operator Instructions].

Okay. Just thank you, again, for participating on today's call. We look forward to speaking with you next -- again next quarter. Thank you, and goodbye..