Brad Edwards - IR Tony Thene - President & CEO Damon Audia - SVP & CFO.

Gautam Khanna - Cowen & Company Phil Gibbs - KeyBanc Capital Markets Josh Sullivan - Seaport Global.

Good morning, and welcome to the Carpenter Technology Corporation’s Fiscal First Quarter of 2017 Conference Call. All participants will be in listen-only mode. [Operator Instruction] Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards, Investor Relations. Please 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, 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, 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 surcharges 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. 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 fiscal year 2016.

We are continuing to emphasize a culture of safety across the organization, supported by 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 stated before, a safe workforce 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 were magnified by various industry-wide challenges in specific sub-markets 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 pre-tax 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 pre-tax earnings.

As Damon will discuss later, we took action in this quarter to freeze our largest defined benefit pension plan, which will result in lower net pension expense with a majority starting in the third quarter 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 end use market conditions, the Carpenter operating model continues to gain traction by reducing costs, improving efficiencies 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 fiscal year 2015, despite revenues being 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 of fiscal year 2015 speaks to the success we have had reducing fixed costs and the early success we have had with implementing the Carpenter operating model.

The current first quarter results also reflect the impact of improving product mix relative to the first quarter of fiscal year 2015. These factors are evident in the expansion of SAO's operating income margin by a 180 basis-points from 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 oil and gas market, PEP operating income in the first quarter of 2017, was $12.5 million lower than in the first quarter of fiscal 2015.

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 being largely flat in both periods.

Overall, we’ve driven margin expansion in 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 end use market challenges, but are addressing what we can control.

As we build on our cost reduction progress and seek additional operating efficiencies across our business, we believe we are well position to drive operating leverage as volumes recover. Let’s move to slide seven, and end use market update.

As I mentioned in my previous comments, our aerospace and defense results were heavily impacted by the transition occurring in industry. The bright spot for our aerospace business is the engine sub-market, where our volume is up compared to last year and demand is increasing due to growing 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 in wide-body build rates, and the continuation of the existing fastener de-stocking trends, have all combined to drive a new level of market uncertainty. This uncertainty disrupted order patterns within our aerospace fastener, structural, and distribution sub-markets.

Supply chain inventory adjustments continue to impact fastener sub-market results.

While oversupply concerns and the potential impact of the wide-body transition create some near-term uncertainty, expectations for longer-term demand remain intact, given the projected total fleet build-rates, particularly on the narrow-bodies where we have strong market share.

Aerospace structural and distributed sub-markets were affected 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 I/O side.

Overall, we expect our structural business will face near-term headwind as the industry digest the changes in build-rates and its impact on channel inventory levels. These developments in certain aerospace sub-markets are not specific to Carpenter, but are an industry-wide dynamic that has created 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 sub-market 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 power generation sub-market, driven by higher IGT after-market sales. The order patterns in this sub-market tend to be more sporadic for quarter-to-quarter.

That said, we do see healthy demand for our materials using IGT applications moving forward and remain focused on growing share and further strengthening our market position. Our oil and gas sub-market 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.

Oil and 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 increase is of 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, while our Amega West Business has built strong customer relationships with service providers.

On prior calls, I spoke about the hard work we have been doing to build Amega West market share during the downturn. In the first quarter, Amerga West generated an increase in two utilization rates in excess of the rig count increase. This speaks to our ability to grow our market share and be a value partner to customers.

While the timing of the rebounding in the energy market is still unclear, we remained 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 to improve mix as we make further headwind, advancing our high temperature gas kit and turbo charger bolt applications. From a broader prospective, 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 production being down in calendar 2016, and slightly down in calendar 2017. But offset by an improved light truck production, leading to an overall net positive growth in both years.

Evolving engine design factors make the light vehicle sub-segment attractive for Carpenter over the long-term. As vehicles increase the horsepower per litre 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 drawn-down 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 our titanium offerings, 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 nine, and 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 volume driven by normal seasonality patterns, coupled with declines in certain aerospace sub-markets that Tony highlighted.

On a year-over-year basis, revenue, excluding surcharge, decreased $45.3 million or 12% on 7% lower volume, reflecting the decline in our energy related end-use market. We anticipate the decline in the transportation, mainly related to lower heavy-truck demand, and lower than expected sales in certain aerospace sub-markets 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 lower volume in the current period coupled with the year-over-year decline in our PEP related business and the inclusion of the 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 fiscal year 2017 included a $2.1 million desecrate tax charge related to our decision to make a $100 million voluntary pension plan contribution.

In the first quarter of fiscal year 2016 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 have been $3.7 million or $0.08 per share.

The special items in the quarter relate to our decision to freeze our largest defined benefit plan, which I’ll 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 quarter 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 increased in line with the normal inventory build in the first half in the fiscal year that has been historically reduced through the second half of our fiscal year.

The negative $43 million showed in the working capital and other line, mainly reflects the tax impact of our decision to make the $100 million voluntary pension contribution in October. As a 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 current receivable and corresponding offset to deferred taxes, which is included in the net income and non-cash items lines. Thus, there is no cash impact related to the taxes in this quarter.

Capital expenditures for the first quarter were $27 million, effectively in line with the quarter outlay of $29 million, and $3 million below the $30 million recorded in the 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 the growth opportunities across our end-use markets. Overall, our balance sheet remains healthy.

As of September 30th, we have $545 million of total liquidity, including $51 million of cash and $491 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’ve elected to not extend 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 return to shareholders via our quarterly dividends.

Now, let’s turn to slide 11 to cover our decision to freeze our largest defined find benefit to 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 an easy one given the 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, fiscal year 2018 net pension expense will be reduced by almost $60 million versus our original fiscal year 2017 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 fiscal year 2017. Also, at the time of the pension freeze announcement, we’ve communicated our intent to voluntarily contribute $100 million to the GRP. This contribution was subsequently made this month.

Following the required re-measurement of the GRP in 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 rates since our 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 fiscal year 2020. Turning 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 lower than expected volumes due to the volatility in certain aerospace sub-markets. Operating income was $25 million in the quarter.

This is down versus the $41 million in the first quarter of fiscal year 2016, which, as you recall, did include $4 million related to insurance settlement. The impact of the lower volume was 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.

These operating costs improvements will not always be linear, and may be influenced by volumes at time. But we remain encouraged by the progress we are making.

Continued execution of the Carpenter operating model will support our efforts to further improve the efficiency as we continue to identify waste in our processes and redesign our flow-paths to improve 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 and 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 sub-markets, such as fasteners and distribution, are expected to continue to face headwinds due to the industry transition of lower build rates, inventory de-stocking and consolidation.

We'll 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 industry-wide demand in the energy end-use markets and its negative impact on drilling activity continued 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 leads-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 expect 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 business hope that we’ve reached the bottom for our 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 capitalizing 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.

Given the positive indicators we have seen late in the 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 depreciation and amortization to equal our capital expenditures at a $120 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 range of 28% o 30% range for the year. With the pension freeze, we now expect pension expense for fiscal year 2017 to be $48 million.

Given the timing of the freeze, first-half pension expense will be approximately $31 million, and decreasing to $17 million for the second-half of our fiscal year 2017. In addition, you 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, with our specialty alloy focus and commitment to be in a complete solutions provider for our customers. We remain well position in aerospace, including participation on all the new engine platforms.

And believe that the industry headwinds will abate and inventory restocking will drive improve results. As I said, the current aerospace program transition is creating near-term headwind for participants across the industry. However, the market uncertainly does not temper our enthusiasm or industry’s long-term growth potential.

The underlying fundamentals, such as total projected 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 the 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 sub-markets, 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 distributor consolidation will impact us in the short-term, we believe we have a strong growth potential given 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 suggest that oil and gas sub-market may have reached the bottom. We can’t predict the timing of recovery, but we have been hard at work, both on the customer and cost side, to best position Carpenter for the recovery.

And in the power generation sub-segment, we expect to benefit from strong after-market IGT demand. Overall, we believe the energy market offer solid upside for Carpenter. Lastly, our industrial and consumer applications are becoming increasingly value-add. On the industrial side, demand levels vary across our some categories.

But we see good potential in infrastructure projects spending, while multiple trends, including miniaturization and embedded computing technologies represent opportunities in the consumer sub-market. In summary, our position in each of our key markets remained strong, and we see solid growth opportunities for Carpenter over the longer term.

Turning to slide 17, during fiscal 2016, 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 for our planned long-term success.

First, we committed to safety as our absolute first priority, and we will continue to strike 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 standards rich environment, improved flow through our facilities, and improved 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 the roll-out 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 for our customers.

In connection with our strategy, we realigned our commercial team to become more market centric as opposed to product focus. The feedback from our customers and the new opportunities we’ve identified as a result of our new go-to-market strategy appear promising.

And engagement with our customers’ technical teams to identify where we can help solve our customers’ biggest challenges has been well received. And lastly, we improved the linkage between our R&D and commercial teams, in line with our strategic focus on becoming a solutions provider for our customers.

We originally 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, executed in fiscal 2016, created a stronger and more focused organization. We delivered solid financial results throughout fiscal 2016 despite market headwinds.

These efforts led to reduction in operating cost of $78 million through the roll-out of the Carpenter operating model and our focus on improving our cost structure. As a result of our efforts, we entered fiscal year 2017 as a much linear and focused organization compared to 12 months ago.

We’re confident that we can build on that progress in the months ahead. Using the fiscal year 2016 result as a base line, we see a number of drivers that we believe can contribute meaningfully to our future performance.

First, our decision to freeze our largest defined benefit pension plan, which we expect will result in approximately $50 million in net annual cost savings in fiscal year 2018. This is 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 the long-term value creation. Next, as I said before, today we are carrying a full operational cost of the Athens facility, which is approximately $8 million to $10 million a quarter, despite running at low utilization levels.

Athens is a state-of-the-art facility and in-time approved to be cost effective essential capacity with significant opportunity for our financial results as we complete the qualification process; the new engine platforms ramp and oil and gas subsector begins to recover.

A recovery in oil and gas market will help drive our PEP segment, mainly our Amega West business, achieving breakeven represents $20 million of upside to our financial results, and we know that our Amega West has the ability to be much better in just breakeven, given its historical performance, new products and 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 costs is worth approximately $10 million of SAO 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, medical 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 our prior slide, we have a leadership position across multiple attractive end-use market 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 were 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 continue to enhance our business through the implementation of the 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 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 important contributors to our future earnings power. We expect the aerospace market demand to continue to experience near-term challenges in certain sub-markets. However, the Aerospace market is resilient with strong long-term fundamentals.

We are pursuing 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 on growth opportunities in adjacent markets that can change trajectory of the Company. We have 5,000 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 will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Gautam Khanna with Cowen and Company. Please go ahead..

I had a couple of questions, the first was just you know there's this commentary about uncertainties in the supply chain within aerospace. But what specifically is so uncertain? I mean, we know what the production rates are, I guess there's some debate on whether 777 goes down again.

But what changed, do you know, with respect to your order book, as you said here three months ago. Did you just get cancellation? Is this all a non -- is this all a service center side phenomenon.

Like, what specifically changed?.

For us the uncertainty is really associated with the destocking on the platform changes, as well as customers delaying placing some of their orders. Remember, our lead-times are much shorter than they were a year ago, 10 to 12 weeks, or so, the visibility is a little less.

So from our standpoint, the primary areas were on the distribution side, the fasteners side, and the structural side..

And 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's not just Latrobe, it's here in Redding as well..

And then you're expecting the sequential pick-up, and 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've seen a pick-up in the first month of the quarter. I mean, if you look back over the last couple quarters, you've seen our backlog consistently drop. Some of that is obviously due to the energy market, but some on the aerospace side as we pull-in our lead-times.

But as we look at these last and first four weeks of this quarter, we've 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..

And then could 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 wouldn't 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're not seeing incremental price pressures on your side?.

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

Your next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

I have a question just on the engine business in general.

Any help you could give us in terms of how big the jet engine business is within the aerospace and defense space portfolio right now in order of magnitude? Is it half the business is it 35% kind of the business?.

Let me give you two rough numbers. If you look at total Carpenter revenue, aero-engines represents about 20% and there is -- that’s some plus and minuses, and obviously that’s changed a little bit over the last couple or several quarters because of the downturn in energy. But from approximate standpoint, I think 20% in total Carpenter.

And if you look at the aerospace market only, engines would be roughly 40% there..

In response to Gautam's question, did and you say that in your December quarter that you’re seeing a little bit of a pick-up in both engine and structural applications?.

Yes, we’ve seen a bit of a pick-up across all of the aero sub-segments, so far this quarter..

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 a month and half, we’ve seen that level off..

And then with -- question for Damon here. With the pension contribution this coming quarter, I think it is $100 million or so.

And 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?.

So, historically we have used the credit facility to revolver that we have for seasonal working capital needs. We have 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’ve repaid the revolver as we’ve repaid at year-end. I would anticipate the same seasonal pattern leveraging -- putting pension contribution here this month.

Obviously, that would likely -- portion of that will go on revolver, which we’ll work to pay down in the second half. The revolver itself is $500 million, matures in June of 2018. As of the end of the first quarter, we have about $495 million of available on that facility. So, no major issues from a liquidity standpoint.

And as you know, we have no debt maturities up until -- or major debt maturities until fiscal year 2022, 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 pick-up 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 is not. Actually you have to start, Phil it's $12 million, I apologize..

$12 million net, so that just, pension we are talking about in ‘17? And then lastly on the energy side of the equation, I think you pointed to some pick-up in your IGT business at least in the after-market.

Can you give us a bigger picture of what is going on there? Because that market has been seemingly a malaise or holding pattern for three or four year on the OEM side, you're citing after-market picking up.

But what are the big OEMs telling you right now in terms of their willingness or wantingness to increase production?.

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

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

Well, it's always going to be a bit choppy, right. That's a bit sporadic. But nothing new there than what we've seen here in recent history..

The next question comes from Josh Sullivan with Seaport Global. Please go ahead..

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 de-risking around where build rates may go?.

Well, I think it's a lot of items that's driving this. Obviously, you have the change in the build rate, the destocking 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 pre-tax is one penny of EPS. So if you were just to do some quick math and say okay we’ve lost $0.08 this quarter. If you would flip that to an $0.08 positive, that's only $11 million of pre-tax.

And if you put that in terms of volume, you know to answer your question in terms of aerospace side, that's less than 3,000 tons in the quarter. So you're talking less than 3,000 tons would take me from a minus $0.08 to a positive $0.08. That means I just would 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..

And then I’ll just 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, forging the energy related products..

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

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the 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 in today’s presentation. You may now disconnect..