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

Gautam Khanna - Cowen & Company Phil Gibbs - KeyBanc Capital Markets Jorge Beristain - Deutsche Bank.

Good morning, and welcome to the Carpenter Technology Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instruction]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Brad Edwards, Investor Relations. Please go ahead..

Thank you, operator. Good morning everyone and welcome to Carpenter’s earnings conference call for the second quarter ended December 31, 2016. This call is also being broadcast over the Internet along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement.

Speakers on the call today are Tony Thene, President and Chief Executive Officer and Damon Audia, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations.

Risk factors that could cause actual results to differ materially from those forward-looking statements can be found in Carpenter’s most recent SEC filings, including the Company's September 30, 2016 10-Q 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 on the call. Let's begin on slide number 4 with an update on our safety performance. Year-to-date in fiscal year 2017 our total case incident rate or TCIR stands at 2.0 which is down compared to a TCIR of 2.2 for fiscal year 2016. I know we can do better.

We are pushing through to the next level of improvement in our safety performance. To achieve the next level of improvement it is necessary to drive fundamental changes to our safety culture. The transformation I'm referring to requires an interdependent safety culture, with all employees engaged in the process.

A critical component of this change is developing the capabilities of middle and front line management so they understand what good looks like.

Key capabilities are tied directly to our operating model including setting appropriate standards, intervening when standards are not met, problem solving, active listening, and engaging the total workforce in improvements.

The cultural transformation to an interdependent safety culture across the entire organization will be the key to achieving further improvements in our safety performance. Achieving our goal of a zero injury workplace is fundamental to our values and will require the engagement of all of our employees.

Turning to slide number 5 in a summary of our second quarter results. Overall we delivered an improved second quarter with notable sequential growth on the back of strong execution and richer product mix and an improving environment across several of our end used markets.

Our aerospace and defense market experienced increased demand in the engine submarket given the growing ramp up of the new engine platforms.

Our energy market continued to see ongoing signs of a recovery as the North American directional and horizontal rig count increased 30% on a sequential basis which translated to an increase in activity levels at our Amega West business. The improvement is of a low base but it appears that the industry at least in the U.S.

is beginning to show signs of improving conditions. So, strengthening demand in the oil and gas sub-market coupled with our sharp focus on managing cost resulted in our Amega West business improving operating income by 23% sequentially.

Although that business is still in an operating loss position its improved results helped the overall PEP segment achieve positive operating income for the first time in six quarters.

During the second quarter we continued to advance our transformation plan aimed at best positioning Carpenter to execute against the growth opportunities across our markets, generate improved margins, and deliver sustainable long-term growth.

This plan includes the ongoing implementation of a Carpenter operating model which continues to deliver cost efficiencies and productivity enhancements. In our SAO segment we have reduced our variable operating expenses by 6% from the same quarter a year ago and 3% sequentially.

As referenced our internal goal is to reduce SAO variable operating cost by at least 3% net inflation annually. Last quarter we began implementing the Carpenter operating model across our PEP facilities and expect future improvement not only in cost reduction but also productivity enhancements that should drive additional capacity.

On the commercial side we have repositioned Carpenter as a solutions provider and realigned our sales team to be market focused rather than product focused.

This reformulated strategy and commercial approach is gaining traction with our customers, and strong execution by the commercial team and an improving market landscape is helping to drive backlog growth. In fact in the second quarter our backlog increased sequentially by approximately 20%.

Looking forward we see continued momentum for bookings coupled with improving market indicators for the back half of the year. We're focused on positioning our operations to pursue a range of attractive growth opportunities by expanding our capabilities.

This strategic mandate is reflected in our titanium powder's acquisition that we announced earlier this morning. This transaction provides Carpenter with immediate entry into the titanium powder market. It strengthens our added manufacturing presence and expands our capabilities as a solutions provider for our customers.

I’ll talk more about the acquisition in a few minutes. Lastly and critically important is that we are in a solid financial position and our balance sheet remains strong with no meaningful near term obligations. Let's move to slide 6, in the end-use market update. Our aerospace and defense market delivered a solid second quarter performance.

Sales ex-surcharge went up 15% sequentially and relatively flat on a year-over-year quarter basis. To give you a little more insight let's look at a couple of the aerospace sub-markets.

We experienced strong sequential and year-over-year quarter demand in our engine sub-market related to the ramp of the new engine platforms up 31% and 19% respectively.

We remain confident that the overall growth potential of our engine sub-market remains strong given our participation on the new platforms as well as the projected build dates and backlog numbers coming from the engine and aircraft manufacturers.

Inventory consolidation in the supply chain continued to impact our fastener business which was up slightly on a sequential basis but down year-over-year.

While we remain cautious we are beginning to see positive signals in the market and the long-term growth prospects remain healthy given our strong narrow buying market share and the OEMs expected build rates.

Conditions in the structural and distribution sub-markets are slightly better in the second quarter on a sequential basis but are below the year ago quarter. Visibility here remains somewhat challenged given the transactional nature of the business.

We remain cautiously optimistic moving forward as we are seeing some improved activity levels in this sub-market. Lastly, our defense sub-market revenues were up on a sequential basis due to increases in select programs as well as market share gains although sales were relatively flat on a year-over-year basis.

In total, the second quarter performance in our aerospace and defense end-use market highlights the benefits of our broad product portfolio. I will speak more about our position in the aerospace and defense and related sub-markets shortly. Our energy market is made up of two primary sub-markets; oil and gas and power generation.

In total, energy sales were up 5% sequentially with the oil and gas sub-market up 2% and the power generation sub-market up 10%. On a year-over-year quarter basis sales were also up 5% as strong power generation sales offset lower oil and gas sales.

In the oil and gas sub-market we're seeing some indications that customers are beginning to make critical replacement orders and we are continuing to see improved rental activity in select regions including the Permian Basin where we have worked far to gain market share and strengthen our position as a reliable and high value add partner.

For the North American the directional and horizontal rig count remains down on a year-over-year basis. It increased 30% on sequential basis. As we have stated previously, the North American directional and horizontal rig count is a leading indicator for our business. So the strong sequential growth also gives us optimism moving forward.

Of course it's important to note that it is still very early in the recovery and although activity levels are increasing, the improvement is coming off a historic low base. While some hurdles remain, we are encouraged by positive trends in developments we are seeing in the market and by our conversations with our customers.

As I stated previously we place strategic emphasis on enhancing our competitive position and deepening our customer relationships during the downturn. Today we believe we are in a solid position to realize market share gains as activity and volume levels increase. Finally, our outlook for the power generation sub-market remains robust.

Given our industrial gas turbines or IGT market position and look forward to the demand we see in replacement market. Moving now to transportation where revenues were down sequentially and year-over-year primarily due to ongoing weakness in the heavy truck market.

We expect the heavy truck market will continue to be challenging in numeric terms as it works through a cyclical downturn. As we navigate this challenging environment, our strategic focus is on strengthening our competitive position and product offerings.

On the light vehicle side, revenue was impacted by decreased production of select customer programs as OEM's worked to rebalance their inventories. We currently believe this trend is largely behind us.

While North America light vehicle production was projected to be down versus record levels last year, it remains an attractive market for Carpenter and we are focused on continuing to strengthen our customer relationships.

Overall we remain well positioned in the transportation market given that our solutions help address evolving engine design and performance requirements. We have strong industry relationships and are one of the few advanced materials suppliers whose product portfolio helps address the critical challenges facing OEMs.

Moving to medical, on a sequential basis medical sales were up a very healthy 9% due primarily to continued strong interest for our high end titanium, nickel, and cobalt solutions as well as additional progress we have made shifting our customer base to more direct OEM relationships.

Medical sales were down year-over-year due to the ongoing impact of distributors and OEM inventory corrections for select product groups. We believe this trend has moderated as evidenced by recent booking rates as well as conversations with our customers.

Looking ahead we anticipate further growth opportunities for our higher end products particularly on the titanium side as we capture incremental market share. Lastly sales in the industrial and consumer end use market were flat on a sequential basis due to improvements in select industrial applications.

This was offset by lower consumer revenues due to seasonality patents as well as timing of certain program launches. The consumer submarket is quickly becoming very exciting for us, as our capability to address critical needs in electronics market, expanding battery life, durability, and shielding which are all areas of increasing customer focus.

Last quarter we launched CarTech Hypocore alloy, the first in what will be a continuing series of new solutions to advance our clear leadership position in the high performance electrical steel arena.

With the drive towards miniaturization and embedded digital technology, our suite of soft magnetic solutions is enabling next generation electrical machines and electromagnetic devices to be designed smaller and to be more efficient at higher frequency while generating less heat.

Carpenter is a leader in multiple attractive end use markets due to the diversity of our offerings, our sole focus on premium specialty alloys, as well as the various customer needs and challenges that our solutions address. We view this end-use market diversity as a significant differentiating strength.

Of course our largest end-use market accounted for over 50% of our sales in the second quarter is aerospace and defense. The fundamental long-term growth drivers of the aerospace market remains strong and Carpenter has differentiated market position given the breadth of our revenue streams.

Let’s move to slide 7 for more detailed look in our broad aerospace capabilities. Today Carpenter has broad participation in the aerospace market fuelled by our specialty alloy focus, strong customer relationships, and product diversity across multiple attractive industry sub-markets.

So long-term growth potential of the aerospace market is demonstrated by a number of critical long-term projections including steady growth in passenger miles as well as the build rate provided by the engine and aircraft manufacturers.

As I mentioned, Carpenter has content across the new engine platforms including the leap engine and the gear turbo fan. Both are projecting increases in deliveries for their next generation engines in calendar year 2017. With GE stating it will deliver more than 5x as many leap engines compared to 2016.

Pratt & Whitney currently expects to increase its gear turbo fan production from 138 engines in 2016 to a range of 350 to 400 in calendar year 2017. We have content on each of these new engine platforms and stand to benefit from the short uptick in projected deliveries in calendar year 2017.

In terms of the aircraft OEMs both Boeing and Airbus have strong long-term outlooks for aircraft build rates based on continued growth in global passenger traffic.

The engine and airplane build rates are important indicators for our future growth in aerospace, as we have broad industry participation and leadership positions across multiple submarkets including engine, fasteners and structural.

The diversity of our product portfolio is a key competitive differentiator and our specialty alloy focus positions us to address evolving material needs facing aerospace industry today and in the future.

Whether an engine needs to run harder to drive fuel efficiency or reduce weight is required or more corrosion resistant material is needed Carpenter provides solutions that enable our customers to address their challenges.

In the engine sub-market a number of industry dynamics including higher temperature and pressure present growth opportunities for our aluminum [ph] and disk solutions while we also see increasing application demands for various other products.

OEM's are also looking for higher value add products in the fastener market both on the airplanes and engine side where today we are the market leader. And in structural the focus on reduced rate and increased corrosion resistance is driving interest in the usage of our specialty solutions and applications.

As part of our market focus commercial strategy we are in close collaboration with our aerospace customers and have launched new engine, structural, and avionics products this year to help meet the material requirements. Moving forward we will continue to align our solution portfolio against current and future customer needs.

This commitment is clearly demonstrated by the addition of titanium powder capabilities which strengthens our ability to meet high demand technology applications and needs in the aerospace market. Overall the aerospace market has strong long-term growth potential given the industry dynamics with respect to engines and aircraft deliveries.

The diversity of our offerings and our market leadership puts Carpenter in solid position to capitalize on the many growth opportunities we see in the future. Now I will turn the call over to Damon for the financial review..

Thank you Tony, good morning everyone. Turning to slide 9, the income statement summary. As Tony noted we delivered a solid quarter and sequential net sales increasing across the majority of our end-use markets most notably our aerospace and defense segment which represents 54% of our net sales in the quarter.

The performance in this end use market demonstrates the strength of our diversified aerospace product offerings and that we are also well positioned to take advantage of the ramp up in the new engine production in the years ahead. Overall net sales in the second quarter was $427 million or 367 million excluding surcharge.

Sales excluding surcharge increased 8% sequentially reflecting a solid performance of our aerospace and defense market as well as the improving demand in our energy business from the increased order activity related to the industrial gas turbine replacement cycle.

On a year-over-year basis net sales excluding surcharge decreased 13 million or 3% and 6% lower volume due to the decline in the oil and gas portion of our energy end-use market which had a volume decline of 31%. As well as the decline in our industrial and consumer end-use market driven primarily by its exposure to oil and gas markets.

The year-over-year performance was also influenced by a decline in our transportation business primarily due to the demand trends in the heavy truck category. SG&A expenses were up $2.5 million on a sequential basis.

SG&A expenses during the second quarter included a number of expenses related to our office and personnel relocations and other expenses that aren't necessarily incurred ratably throughout the year. Going forward, we would expect our SG&A to be more in line with our historical spend.

Operating income as a percent of sales when excluding pension EID and special items was 5.7% which was more than double the 2.6% reported in the first quarter. On a year-over-year basis operating margin was down from the 7.7% with the volume declines more than offsetting the cost savings associated with the execution of the Carpenter operating model.

Our effective tax rate for the second fiscal quarter was 15.7% compared to a negative 17% in the first quarter and 23.8% in the last year's second fiscal quarter. Lower tax rate in the quarter was influenced by a tax benefit recognized in connection with the repatriation of earnings from one of our foreign subsidiaries.

We continue to expect the full year tax rate excluding special items to be in the range of 28% to 30%. We recorded net income of 7 million in the second quarter or $0.15 per share. This performance represents a significant improvement versus the first quarter with a $0.23 sequential increase in adjusted earnings per share.

Now turning to slide 10, free cash flow in the second quarter was negative 57 million due primarily to the impact of our voluntary pension plan contribution of 100 million that we made back in October.

Excluding the net tax affected pension plan contribution which amounted to about 61 million outflow in the quarter, free cash flow was approximately 4 million during the quarter. This would be our seventh quarter of positive free cash flow out of the past eight quarters.

In the quarter we increased inventory by 41 million up from increases of 33 million in the first quarter and 2 million in the second quarter of last year. The normal seasonal inventory increase was further magnified in the quarter as a result of the overhang from the lower sales in our first quarter in several end-use markets.

At this point we continue to expect inventory to be flat at year-end 2017 compared to 2016 levels as we work through the inventory in the second half of our fiscal year.

The working capital other line was a positive 56 million during the quarter which primarily reflects the cash tax benefit that we realized associated with the voluntary pension contribution made this quarter.

Capital expenditures for the second quarter were 19 million as compared to 27 million in the first quarter and in line with the 20 million in CAPEX recorded last year.

We remain committed to taking a disciplined approach to managing our capital expenditures as we seek to balance our maintenance capital needs against market conditions and our plans to strategically invest in our infrastructure to ensure we can capitalize on our growth opportunities across our end markets.

Turning to slide 11, overall our balance sheet and liquidity remain very strong. As of December 31st we have 492 million of total liquidity including 23 million of cash and 469 million of borrowings available under our revolving credit facility. We have no significant debt maturities until fiscal year 2022.

In addition with $100 million voluntary pension contribution made in October we don't expect to have any significant required pension contributions until fiscal year 2020.

Since we have near-term calls on our free cash flow we’re well positioned to accelerate our growth through key opportunistic acquisitions like for titanium powder transaction announced earlier today, which Tony will elaborate on in a moment.

Also although we already maintain an investment grade credit rating we will continue to focus on strengthening our balance sheet mainly through our pension plan funded status which will also help reduce income statement volatility as the funded status improves.

At the same time we remain committed to delivering direct returns to our shareholders via our quarterly dividend program. Looking ahead we remain focused on driving free cash flow and closely managing our capital as we balance maintaining strong liquidity with strategic investments in our business and continued shareholder returns.

Turning to slide 12 in our SAO segment results. Net sales excluding surcharge were 280 million representing an increase of 22 million versus the first quarter and a decrease of 11 million compared to last year second quarter.

The sequential increase in sales reflect stronger mix achieved across all of our end use markets which more than offset slightly lower volume. Operating income was almost 36 million in the quarter up by approximately 11 million sequentially and down by 6 million compared to last year second quarter.

Operating margin was 12.4% in the quarter which was up compared to operating margin of 9.4% during the first quarter. This improvement was driven by improved mix across our end-use markets as well as the continued improvement from the Carpenter operating model.

Operating margin was down versus the 13.9% in the same quarter last year due to 6% lower volume partially offset by the improvements in our variable manufacturing costs related to the Carpenter operating model. Our progress is evident in the reduction of our variable manufacturing costs which decreased by 6% on a year-over-year basis.

Our ongoing implementation of the Carpenter operating model is aimed at identifying additional channels to drive efficiency gains and reduce waste in our production and distribution processes.

We believe the steps we're taking which represent a broad and permanent cultural shift across the organization will serve to increase customer service and strengthen our competitive position and drive margin enhancement over the long term.

Looking at the third quarter in SAO, we expect continued strengthening across our end-use markets given our booking levels, and the demand indicators in the marketplace as well as the traditional seasonal increase.

On the cost side we expect to continue the execution of the Carpenter operating model to drive further efficiencies and operating margin expansion when taken in conjunction with the $3 million of savings associated with the pension freeze and shift to define contribution plan starting in the third quarter.

As such based on current market conditions we expect operating income at SAO to be up approximately 20% on a sequential basis. Now turning to slide 13 in the PEP segment overview, as Tony noted this was our first profitable quarter since the fourth quarter of fiscal year 2015.

Due to the improving oil and gas environment, the early benefits of the Carpenter operating model in this segment, as well as improved performance in our titanium business. On a year-over-year basis PEP reported a sales decline of 2.2 million to 83 million mainly due to the lower volumes related to the energy end-use market.

On a sequential basis sales increased by 4.7 million due primarily to increased rental activity in oil and gas as well as higher demands on our titanium products. As Tony mentioned we are encouraged by the further signs of recovery in the oil and gas market as well as the increased activity we're seeing in our PEP businesses.

However, it is still early in the recovery so we will continue to work to enhance our customer relationships and work to best position ourselves for success as the markets continue to strengthen.

For our third fiscal quarter we expect PEP to deliver further improvements in operating performance given the ongoing albeit modest recovery in the oil and gas demand as well as higher market demand for our titanium products.

Based on current market conditions we expect PEPs operating income to almost triple compared to the $8000 reported in the second quarter. Turning now to slide 14 and an update on our full year guidance items we provided on our last call. We continue to expect depreciation and amortization to be around 120 million for the full year.

In addition we expect interest expense to be approximately 32 million. With our largest defined benefit plan being frozen effective December 31, 2016 pension expense for the full year will be approximately 48 million. Of this 31 million was incurred in the first half of our fiscal year.

In addition to the 17 million of pension expense in the second half of the fiscal year our defined contribution costs will increase by approximately 5 million to reflect the shift through defined contribution plan versus defined benefit plan.

Also our guidance reflects a $100 million voluntary contribution made towards a defined benefit pension plan in October. As I stated earlier, our full year effective tax rate is expected to be in the range of 28% to 30% for the year.

Finally, given the announced titanium powder acquisition we've reduced our capital expenditure for the year to 100 million to reflect the elimination of the capital we had allocated for the construction of our planned titanium powder facility. Now I will turn the call back over to Tony..

Thank you, Damon. Moving to slide number 16, previously I have talked about our strategy to become a leading solutions provider to our customers, an irreplaceable partner in the supply chain. We are focused on multiple growth enablers that will support and accelerate this strategy.

For example, on our Athens campus, we had a super alloy powder facility that is currently producing high quality powder metals. We are working on the qualification process for this facility necessary to achieve its intended purpose of producing disk quality powder for rotating components in aerospace jet engines.

Also in Athens we continue to progress on the VAP qualifications. As planned we expect the submission of desired VAP qualifications to occur in calendar year 2017. The timing and pace of the OEM approvals will be dictated by our customers who are continuing to be actively involved.

And today we announced our agreement to acquire the assets of Puris LLC, a leading producer of titanium powder for added manufacturing and other applications. This is a strategic transaction that provides us with immediate entry into the rapidly expanding titanium powder market.

It advances our position and added manufacturing, a key future growth area for our industry and it strengthens our capabilities as a solutions provider for our customers.

As a result of the transaction we will enter the titanium powder market significantly earlier than we previously planned and we will reduce our planned capital expenditures for the year as Damon discussed.

The transaction brings industry leading technology and processes for the production of titanium powder, added manufacturing assets, a talented team, and attractive intellectual property portfolio, and established customer relationships across several of our key end-use markets.

The immediate addition of titanium powder to our portfolio is significant given the current and anticipated demand expected to come from the additive manufacturing industry. We continue to transition Carpenter into a solutions provider and market focused company.

We believe the expansion of our powder and added manufacturing capabilities together with our focus on premium alloys and broad commercial reach positions us to strengthen the value we provide our customers and deliver against their growing needs.

We will continue to evaluate strategic opportunities like this one that enable our organization to significantly strengthen our production and process capabilities and enable us to drive success for our customers.

Now let’s turn to slide number 17 and my closing comments, in the second quarter we generated a notable sequential improvement in operating results driven by strong execution and improving conditions in several of our end-use markets.

In aerospace we experienced solid demand from the new engine platforms and remain well positioned to further benefit as the platform ramp continues. We remain cautiously optimistic about the oil and gas market and are continuing to control what we can by strengthening our customer relationships and positioning ourselves to win market share.

And our realigned commercial team continues to forge deeper relationships with key customers, and combine with improving market conditions is driving backlog growth for the first time in a year.

The Carpenter operating model continues to be rolled out across our entire organization and we are identifying and locking in additional cost and productivity gains. The success we are having here generating operating leverage will set the stage for continued margin enhancement.

We also continue to expand our solutions portfolio and capabilities to strengthen our market position in a number of important growth areas, including titanium powder and asset manufacturing.

We believe these strategic actions strengthen our competitive position across the attractive end-use markets we serve and set the foundation for sustainable long-term growth in revenues and profitability as volumes recover. And we have maintained our strong balance sheet position.

We are making steady progress, quarter by quarter and building a stronger and more profitable Carpenter. Thank you for your attention and I’ll turn it back to the operator to field your questions..

[Operator Instructions]. Our first question comes from Gautam Khanna with Cowen & Company. Please go ahead..

Hey thank you, couple of questions. First, with the aerospace business up quite a bit sequentially it sounded like not all the areas are picking up as you mentioned.

So how much were engines up in the quarter and then are there any specific platforms you can attribute it to or what do you think explains kind of the surge?.

Well good morning Gautam, this is Tony. The pickup was really across all of the platforms and I think I have said in my speaker notes in fact that engines were up significantly sequentially as well as year-over-year..

What do you mean by significantly, because if it was up 15% sequentially with the other pieces relatively down below that rate, what are you talking about, 30%, 40%?.

Yeah, if you let interest go one by one. If you look at fasteners we had just a slight uptick on fasteners. If you look at some of the other markets we saw nice increases. On the engine side alone we saw -- we were up 31% on a sequential basis and 19% on a year-over-year basis..

Okay and do you think there's some just catch up of deferrals or what do you think actually is a sort of a sustained rate that we're going to be at.

I'm talking -- I just wonder what kind of broke the logjam because if you look at production it hasn't really changed that much on a sequential basis?.

Right, remember our sequential -- our sequential quarter was quite low so we came off a low bottom there.

I think you're always going to have some ups and downs in the aerospace market but if you look at our next quarter, I would tell you that where I stand right now that engines will be higher in our next quarter then it were in this quarter that we just completed. .

Okay.

And then maybe just a NIT question, with all the pension changes what is the ongoing pension EID expense and if you could remind us of what the benefit to the segment average profit, the segment EBIT is in the various segments from the changes to the pension just sequentially?.

I’m sorry Gautam, sure. Gautam the EID is going to as you know that will be remeasured every year at the end of our fiscal year so it's hard to give you a forecast for 2018 and beyond. Sequentially for us EID in the second quarter was just about $6 million. That'll be the EID component going forward for Q3 and Q4 as well. So you'll see no change there.

Sequentially for the service cost or the defined benefit plan versus the DC that's about a $3 million sequential pickup in our third quarter versus our second quarter..

And is that mostly at SAO?.

Yes..

Okay and so the 20% increase in operating income is that excluding the $3 million pickup at SAO just from pension?.

No, that would include it. .

Okay.

And then just one other one on these acquisition that you announced, what are the immediate kind of opportunities that provides and can you talk a little bit about the company you're acquiring customer base, what kind of contracts they have either on GTF or what have you just, where are they, and if you're going to take it?.

Yes, so it’s a relatively young company if you know anything about their peers, they are very solid group of owners. We will retain all of, basically all of the employees.

Many of their customers today are customers of ours right now and the areas that you'll be looking at is primarily on additive manufacturing but also thermal spray, medical coatings, near net shape, etc..

And do they bring like a position on any of these engines that are ramping right now, Leap 181b [ph] PW1000 [ph], etc?.

No. .

Okay, alright. Thank you. I'll turn it over. Appreciate it..

Thank you. .

Our next call is from Phil Gibbs with KeyBanc Capital Markets. Please go ahead. .

Good morning Tony, Damon, Brad.

Good morning Phil..

Congrats on the progress. .

Thank you. .

Had a question on the mix. I mean the mix in the second quarter was a lot higher than we were anticipating and maybe even you were anticipating probably a couple months ago.

What really drove that and then in terms of the base pricing per pound particularly for SAO, should we expect that to moderate a bit as the sales growth becomes a little bit more broad based than your seasonal strength?.

Yeah Phil, so two things really drove the increased mix. One is aerospace engines of course that was up as I told Gautam up 31% sequentially. The other thing was powder generation. So, we had higher powder generation sales than what we expected probably when we announced it the last time..

And in terms of your thought process whether it continuing into the back half year, should we expect the mix to normalize a bit maybe to where it was in the last couple of quarters or take an average of the last couple of quarters, just wondered how…?.

Yes, I would probably take an average. I mean as we look forward I think the mix is going to be strong. Like I said earlier we see aerospace engines being up again next quarter. Basically you all know there's going to be some -- there's going to be some movement from quarter-to-quarter.

But I think for the most part it will be close to where we're right now..

Okay and Damon, why is the interest expense poised to go higher into the end of the year based on where your full year guidance is?.

Phil, we have a slop in there right now that we can't really record the benefit or the losses. In our 20 million last year we had games that reduced the underlying interest expense to the 28. Right now where interest rates are we can't forecast where it's going to be for the second half of the year.

So, effectively if it stays where it is the interest expense will come down a little bit from the 32..

Okay and….

Phil, this is Tony again, if I can just follow up real quick when you talked about mix because you're hitting on a good point.

I mean as we look forward, there's so many moving parts and it doesn't take a whole lot to move the mix in and that's why hopefully you'll see in our slides that Damon presented we gave a lot more guidance this quarter than we ever have in the past.

And that's a primary reason to try to make sure we stay on course to what we think the next quarter is going to be and we don't leave you guessing about what the mix may or may not be.

No, I appreciate that and a lot more helpful in terms of the details than the normal which we appreciate. A lot of good color in there.

In terms of the acquisitions, I think you made a comment Damon that you're going to be balancing capital allocation between keeping the strong balance sheet but also wanting to keep an eye on some tuck ins and I think you just said acquisitions in general, are you thinking about tuck ins or something bigger.

I mean how should we think about in terms of the size of the deals that you're going to be targeting?.

Yes, so I mean there's nothing specific Phil that we're talking about. The statement more is for us as we look at the balance is as Tony talked about growing the business here, being more of a solution provider to the customers. We are looking at different product lines, we’re looking at different forms.

We're looking at the build versus buy as you would expect us to do and Puris is an example of that that we had talked about the building of a titanium powder. But upon research we were able to identify a great company that gave us access to the market faster and it allowed us to buy that market place position bigger than building it.

So we'll continue to do that. There's nothing specific that will point you today. But we're continually looking at those sort of opportunities as we look to grow the business longer-term..

Are you putting that titanium investment on hold right now or are you just trying to make a more kind of measured entry with that investment given the CAPEX is down?.

No, we’re not doing anything at Athens. We had not started the construction of the facility down there so that plants is on hold right now..

Okay, appreciate that. Thanks so much..

[Operator Instructions]. Our next question comes from Jorge Beristain with Deutsche Bank. Please go ahead..

Hi guys, its Jorge Beristain with Deutsche Bank. Well good morning and congrats on the results.

Had a question about the just the decision to buy versus build on the powder facility, could you give us any color on what kind of multiples were paid for that asset either on a trailing or forward basis?.

You know Jorge we're not going to go into the transaction details more than what we have disclosed.

For us we view it, it was an appropriate price for us to access the market over the timeline versus what we were investing to the build that we had talked about previously and the duration for us to get into the market with qualified powder but we're not going to go into any more specifics than that. .

Okay, are you sensing that you're taking share in fasteners, we just had some color from another company that was saying fasteners were down, you guys were up a bit sequentially, is there anything to take away from that?.

I think we're holding our own on the fastener side. We noted that it was up. It was only up slightly and keep in mind we have multiple customers and multiple product types. I mean we have titanium, nickel, and stainless. So depending on what you hear in the market it’s always not a one for one for us.

But again I think it's important to note that this sequential increase was slight..

Okay and then just maybe last question on the aerospace revenue exposure you have, could you just kind of give us a big picture of what your exposure is on narrow body as a percent of that aerospace pie and specifically on next jet engines because clearly you guys are not showing the same destock effects we're seeing in the other parts of the supply chain and so just trying to understand how unique your leverages are to narrow and next gen engines? Thanks..

I would say Jorge we’re balanced for the most part on narrow versus wide body. We are across all the platforms. I think what might be helpful to you if you take a look at our aerospace revenues. The aerospace and defense only 40% is engines roughly. Now that's a long-term average. If you look at this quarter it was in the high 40%..

Okay, so then you've just benefited like you said for that surge in engines that was really of the next gen engines and that is the differentiator versus a lot of other supplies we are seeing that might be more airframe focused?.

I guess you could say that. I mean we're very focused on the airframe as well. I mean we saw some increases on the structural side and what's very interesting is on the avionics side as well. So those are some good growth avenues for us also..

Okay, thank you..

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

Thanks operator and thanks to everyone for joining us today. Have a great day..

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