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

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

Good morning, and welcome to Carpenter's Fiscal Fourth Quarter and Full Fiscal Year Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Brad Edwards. Please go ahead..

Thank you, operator. Good morning, everyone, and welcome to Carpenter's earnings conference call for the fourth quarter and fiscal year ended June 30, 2017. 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 Form 10-K, Form 10-Q for the quarters ended September 30, 2016, December 31, 2016 and March 31, 2017, and the exhibits attached to those filings.

Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference excludes surcharge.

When discussing operating income, that reference excludes pension, earnings, interest and deferrals or EID, and special items, when referring to operating margins that is based on sales excluding surcharge, and operating income excluding pension, EID and special items. I will now turn the call over to Tony..

Thank you, Brad, and good morning to everyone. As always we will begin with a review of our safety performance on slide number 4. We finished fiscal year 2017 with a total case incident rate or TCIR of 2.0. While this is an improvement compared to last year, much progress and work remains to be done.

Our goal, a zero injury workplace will not change and our commitment to achieving this will not waiver. During fiscal year 2017, we successfully rolled out targeted training programs and increased communication engagement initiatives to address areas of concern at our facilities.

This included a focus on hand safety which continues to account for many of our total reportable injuries. One of our employee engagement initiatives included launching hand safe teams at our facilities. Together with our employees we have developed tools, methods and communication channels to address and reduce hand and finger injuries.

We expect the program to lead to reduced hand injuries in the year ahead and beyond. We also placed a concerted focus on utilizing plant supervisors through leadership development programs aimed at developing safety ambassadors that monitor and interact with employees every day.

Through these interactions we are having candid one-on-one discussions with employees to discuss our core safety values as well as reinforce the personal responsibility to contribute to the creation of an injury free workplace.

Part of eliminating injuries is thoroughly examining processes and working to eliminate deviations in air that increase the chances of someone being hurt. During fiscal year 2017 we launched our human performance initiative to strengthen our ability to recognize these situations and move to implement countermeasures.

One result of our focus on safety has been the identification of multiple injury employees who to date have not embraced our safety initiatives and core value.

As you would expect, our level of engagement with these employees is high and we are using increased training, tools and communication to adjust how they think about their own safety as well as the safety of others. We need to continue moving from a knowledge-based to a rules-based approach.

Then in time we will reach an interdependent state where employees come to work with a commitment not only to their own safety but also for all those fellow employees who they work with everyday. As a stated, our goal remains clear. Achieving zero injury across all of our locations.

Today I believe that commitment to achieving this is a stronger than ever. Turning to Slide number 5, a look back on this past fiscal year. Overall, fiscal year 2017 was a successful one for Carpenter as we continued building a foundation for long-term sustainable growth.

We executed our updated strategy by making notable progress in becoming a complete solutions provider for our customers and an irreplaceable partner in their supply chain. Our focus was on commercial engagement, operational excellence and technology expansion. Let me give you a few examples.

During the year we began to see the benefit of our realigned, commercial team and market focused sales approach. We achieved share gains across our end use market. We delivered consistent backlog growth. SAO backlog was up 53% versus last year. We drove increased booking rate. SAO bookings were up 32% in FY '17 versus FY '16.

We made progress in fostering deeper customer relationships through the development of shared technology roadmap. And we took advantage of improved market conditions across most of our end use markets in the second half of the fiscal year.

This is a direct result of the hard work of our commercial group, stronger connection we are forging with customers, as well as the benefits of our market and product diversity. We are seeing an increasing level of enthusiasm for solutions focused approach from customers.

Most recently at the Paris Air Show, which I will speak more about in a few minutes. I am also pleased with the progress we have made on the manufacturing side this year, where we advanced our productivity and cost reduction plans through the further rollout of the Carpenter operating model.

Looking back in fiscal year 2016, we reduced SAO variable cost by approximately 6% year-over-year. In fiscal year 2017, we continued to improve by reducing SAO variable cost by about 3% year-over-year. And in fiscal year 2017, we extended the rollout of the Carpenter operating model into our PEP businesses and have experienced immediate results.

Let me give you two examples of our Dynamet business. At our facility in Washington, Pennsylvania and Clearwater, Florida we applied the operating model principles to relieve a capacity constraint in a wire draw block department. Applying standardized work and visual flow control with hour by hour boards to initiate problem-solving.

We unlocked about 40% increase in throughput and 300,000 in waste elimination savings. In addition, we developed and deployed standards for multiple key work centers that improved our process and product performance resulting in a 33% claim reduction.

From a product perspective, our solutions portfolio remains strongly aligned with the growing trend for higher performance products across all of our end-use markets. Our solutions are uniquely positioned to support critical, demanding applications and address the challenges that are most important to our customers.

To stay ahead of the curve, we made the strategic decision to add new technology and capabilities to further strengthen our solutions portfolio. These investments in core growth areas include the addition of titanium powder via the Puris acquisition and our concerted push to broaden our added manufacturing capability beyond just powders.

Lastly, we have actively managed our business and remain in solid financial position. In fiscal year 2017 we refinanced our existing credit facility while also reducing our pension liabilities moving forward by freezing our largest defined benefit pension plan in addition to a $100 million voluntary pension contribution.

These efforts provide us with the flexibility to strategically invest in capabilities that will increase our standing as a critical partner for our customers across each of our end use markets. Now let's turn to Slide number 6 and review our fourth quarter results.

We generated strong operating results in the fourth quarter driven by sequential revenue growth in four of our five end use markets. Improved mix, strong commercial execution of our solutions strategy and continued cost efficiency.

In our largest end use market, aerospace and defense, we experience sequential revenue growth of 8% due to the ramp of the next generation engines and our participation across other industry submarkets. This is our third consecutive quarter of sequential revenue growth.

We are seeing improvement in the oil and gas submarket but remain cautiously optimistic amidst several industry and macro related uncertainties. With that said, rental activity at our Amega West business is rising and sequentially the oil and gas submarket was up 37%. Looking at our business segments.

We are driving improved performance and each continues to reach notable milestones. At SAO, our operating margin increased 120 basis points on a sequential basis, reaching 17.3%, the highest level we have achieved in three years. In PEP, operating income was positive for the third consecutive quarter and came in ahead of our expectations.

Improvements include strong demand for our titanium products at our Dynamet business. In addition, Amega West being close to reaching breakeven in the quarter. As I have mentioned, the Carpenter operating model has fundamentally transformed our operations, interaction and processes. We are also executing at a high level on the commercial side.

Our SAO backlog increased 53% year-over-year and 5% sequentially during the fourth quarter as we are gaining market share and unlocking new opportunities across our end use markets. In terms of taking additional strategic actions, we recently divested the specialty steel supply business, or SSS, for proceeds of $12 million.

As background, SSS is a distribution business based on Texas that mainly services the oil and gas market that we acquired as part of the Latrobe acquisition in 2012. Our decision to sell SSS is consistent with our strategic direction.

More importantly, we broadened our capabilities in titanium powder with the introduction of Puris 5 plus and added manufacturing with the Burloak strategic alliance.

Lastly, the flexibility of our current liquidity position provides us a true strategic and competitive advantage to more allow us to allocate capital to building out our capability in several pivotal growth areas. Let's move to Slide number 7 and the end-use market update. We will begin with aerospace and defense.

As I noted earlier, aerospace and defense, sale ex surcharge increased 8% on a sequential basis. Sales were up 5% compared to fourth quarter of last year. Our results were driven by solid demand in the engine submarket where our participation across the new engine platforms drove double-digit growth sequentially as well as on a year-over-year basis.

Looking ahead, we continue to see solid overall demand in the engine submarket. Our fastener submarket was up sequentially. However, it continues to lag prior year levels. This was the third straight quarter of sequential growth in this submarket.

So we are seeing some pockets of demand and we are benefitting from our breadth of offering including nickel, titanium and stainless. While we are encouraged by leasing trends, this market remains challenging from a visibility perspective.

Our aerospace, structural and distribution submarket was down sequentially and year-over-year, primarily due to the timing of certain program related sales. As we have stated before, this submarket is largely transactional. So forward visibility can be limited.

However, based on what we are hearing in that channel, we believe improvement is expected in fiscal year 2018. Overall, we are enthusiastic about this submarket given the projected build rate as well as our advanced solutions and the benefits they bring to the market.

Lastly, our defense submarket revenues were up both sequentially and year-over-year due to program specific demand. Turning to our energy market which consists of our oil and gas and power generation submarket. Energy sales declined 5% on a sequential basis due to lower power generation sales which tend to be choppy from quarter-to-quarter.

Our oil and gas sales increased 37% sequentially due to an increase in rental and replacement activity in the North American directional drilling market. As I mentioned earlier, we are cautiously optimistic about the oil and gas submarket amidst several global industry and macro related concerns.

While the North American directional, horizontal rig count is up 123% compared to last year. It is relatively flat from Q3 to Q4. As the recovery cycle matures and rig count levels out in North America, we are seeing a continued increase in drilling and completion activity, particularly in the Permian region where we have a strong market presence.

This is driving higher rental and replacement orders in Amega West as we benefit from our strategic focus on staying close to our customers during the downturn with the goal of gaining share when activity rebounded.

We also continue to see some select increases in capital spending in North America while the international and offshore market spending and activity remains at depressed level. In the power generation submarket, sales were down both sequentially and year-over-year.

Overall, power generation remains a good market for Carpenter but one characterized by large, erratic orders that drive quarter-to-quarter volatility.

Moving on to transportation where sales were up 3% sequentially due to the ramp of share gains in the North America light vehicle market coupled with ongoing recovery in the heavy duty truck market as it continues working off a low base.

In the light vehicle market, production rates at select OEMs have declined as inventories and incentives remain elevated at the dealership level. While estimates for the calendar year 2017 remain at a healthy level, we are approaching the market with a focus on broadening our relationship.

To date, we have been largely successful offsetting the impact of production declines through increased market penetration which speaks to the value of our solutions we bring to this market. On a year-over-year basis, transportation revenues were down due to lower demand in light vehicle and heavy truck market.

Overall, the transportation market remained an underpenetrated one for Carpenter given the lack of advanced material suppliers in the market and the increasingly stringent requirements and expectation being levied on the industry, this market has become a key focus are for Carpenter.

For instance, we look at Europe and the opportunity for our solutions as environmental concerns are driving a transition from diesel to gas powered engines. This trend represents a solid opportunity for Carpenter to expand our international presence and help companies navigate this market shift.

Our medical end-use market delivered strong sequential and year-over-year growth. We are capitalizing on strong demand for our titanium products, and as I have mentioned, to the implementation of the Carpenter operating model we are winning business and becoming an increasingly valued supply chain partner.

In addition to our Titanium offering, we also benefited from the higher sales in select submarkets as customers began rebuilding inventory. Overall, we believe conditions have moderated at the distributor level following a period of consolidation and subsequent inventory destocking.

Like our other end-use markets, we are focused on building our relationship with key medical OEMs and becoming an increasingly recognized and valued partner. In the industrial and consumer end-use market, sales were up 13% sequentially including growth in both submarkets.

On a year-over-year basis, sales were up 7% as higher industrial sales more than offset lower consumer sales in select categories. Now I will turn it over to Damon for the financial review..

Thank you, Tony. Good morning, everyone. Turning to Slide 9 and the income statement summary. We finished fiscal year 2017 with solid financial results during our fourth quarter highlighted by sequential revenue growth, operating income increasing almost 30%, and in operating margin above 12%. Overall a strong finish to the year.

From a top line perspective, net sales in the fourth quarter were $508 million, or $439 million excluding surcharge. Sales excluding surcharge increased 6% sequentially on a 4% higher volume driven by healthy 8% revenue gains in our aerospace and defense end-use market.

As well as gains in three of our four remaining end-use markets which included double-digit increases in our medical and industrial and consumer end-use markets. Excluding the power generation submarket, our energy end-use market would have also been up double digits.

On a year-over-year basis, net sales excluding surcharge increased $33 million or 8% on flat volume, as we benefited from an improved product mix given growth in higher margin areas like aerospace engines and medical.

The improved performance reflects both strengthening market conditions as well as strong execution from our commercial team as we seek to broaden our customer base and expand applications for our high-end solutions. As Tony highlighted, we are realizing the benefits of our new go to market strategy.

SG&A expenses declined $2.4 million on a sequential basis and were in line with our expectations at approximately $45 million. Going forward, we would expect SG&A expense to be in the range of $45 million to $47 million per quarter in fiscal year 2018.

Operating income as a percent of sales was 12.2% in the quarter when excluding pension EID and a special item of $3.2 million which I will address in a moment.

The 12.2% margin represents considerable improvement from the 10% reported in the third quarter and is even more notable when compared to the 8.9% reported in the fourth quarter of last year, especially given the flat volume year-over-year.

This performance demonstrates the solid improvements in the underlying fundamentals of our business model as we execute our plan.

Our fourth quarter margins marked our best operating margin performance in three years, highlighting our progress in strengthening our sales mix as we continue to strive to be a key solutions provider to our customers, coupled with the ongoing implementation of the Carpenter operating model.

As Tony mentioned earlier, in the quarter we divested our specialty steel supply business or SSS. The divestiture resulted in a non-cash charge of $3.2 million which we have identified as a special item in the quarter.

Our effective tax rate for the fourth fiscal quarter was 33.1% compared to 28.9% in the third quarter and 36.1% in last year's fourth fiscal quarter. The current quarter's tax rate was slightly higher than expected, mainly due to the reversal of certain state tax benefits due to the outcome of our recent state court ruling.

We reported net income of $25.5 million in the fourth quarter or $.54 per share, representing a solid increase from the $20.7 million or $.44 per share in the third quarter. Excluding the charge related to the divestiture, adjusted earnings per share was $.58 in the fourth quarter compared to $.44 in the third quarter and $.35 last year.

Now turning to Slide 10. We delivered strong free cash flow of $64 million in the fourth quarter driven by our operating performance, working capital improvements and proceeds from the divestiture.

This performance reflects good sequential improvement even when adjusting for the $35 million titanium powder acquisition in the third quarter and for the $12 million of divestiture proceeds in the fourth quarter. For the quarter we decreased inventory by $14 million. For the full-year inventory increased by $75 million.

As discussed last quarter we are adjusting to the strengthening demand environment, our increasing backlog and are focused on meeting customer orders while executing on our plant annual summer shutdowns for preventative maintenance.

For the quarter we spent $35 million on capital expenditures which takes our total to $99 million for the full fiscal year, which is in line with our prior guidance and effectively flat to the $95 million spent last year. We closed the year with a healthy balance sheet and a strong liquidity position.

As of June 30, we had $460 million of total liquidity including $66 million of cash and $394 million of availability under our recently refinanced credit facility. Turning to Slide 11 and our SAO segment results.

Net sales excluding surcharge were $345 million, representing increases of $23 million or 7% on both a sequential as well as a year-over-year basis. The sequential increase in sales reflected improved market conditions across all of our end-use markets other than energy, which was influenced by the power generation sales.

The year-over-year gain represented a second consecutive quarterly year-over-year increase. Operating income was $59.7 million in the quarter, up $8 million sequentially and up $11 million compared to the prior year fourth quarter. This was the best quarterly operating income performance for SAO since Q4 of fiscal year 2014.

Operating margin was 17.3% in the quarter, an increase over the operating margin of 16.1% during the third quarter and 15.1% in last year's comparable period. Supporting the increase, we delivered sequential improvement in our variable operating cost during the quarter.

As Tony noted, the results reflect the execution of our strategy, our strengthening product mix and our progress in implementing the Carpenter operating model. Looking at Q1 as historically our softest quarter given several factors, and we would expect that to be the case in fiscal year 2018 as we.

As we look at Q1 we remain confident in the continued momentum in the market demand across the majority of our end use markets, as evidenced by our increasing backlog heading into Q1. Even with the improving market demand, we expect our mix to be down sequentially due to the seasonal buying pattern in certain end use markets.

Additionally, from a profitability perspective, our Q1 results will be impacted by the downtime associated with our annual preventative maintenance at the majority of our operations that will result in lower productivity and impact our operating cost as in years past.

As such we anticipate operating income to decline approximately 15% on a sequential basis. This performance would reflect our best to Q1 in four years and a greater start to the year. Now turning to Slide 12 and the PEP segment overview.

On a year-over-year basis, PEP sales increased $15.7 million to $106 million while sequential sales rose by $7.4 million due primarily to an increase in rental activity in our Amega West business, as well as increased volume for our titanium products at Dynamet.

Our performance marks our third consecutive profitable quarter marked by $5.8 million of operating income, up both sequentially and year-over-year.

The performance in the quarter reflects continued improvement on our Amega West oil and gas business which achieved positive EBITDA for the second consecutive quarter and is approaching breakeven on an operating income basis.

In addition to Amega West performance, we saw continued strong demand for our titanium products from both aerospace and medical customers.

The increased productivity resulting from the rollout of the Carpenter operating model at our Dynamet facilities has not only allowed us to capture this incremental demand but has also shortened lead times to customers. This is a good example of the value of the Carpenter operating model in delivering tangible results to the bottom line.

Although we have seen significant improvements in our all and gas submarket, our outlook is more cautious than the previous few quarters given the uncertain microenvironment in the sector. However, we still expect modest sequential improvement in our Amega West business supported by a relatively flat rig count.

For our PEP segment overall, in our first quarter we expect operating income to be up 5% to 10% sequentially as continued improvement at Amega West and increasing demand at Dynamet and our powder businesses continue to fuel our growth and mute any traditional first quarter declines.

Now turning to Slide 13 for review of our fiscal year 2018 financial guidance. We expect depreciation, amortization to be approximately $118 million for the full-year, in line with the prior year. In addition, we expect interest expense to be approximately $32 million.

With the actions taken last year to freeze our largest defined benefit plan, we expect pension expense to be approximately $14 million versus the $48 million last year. I would note that our original fiscal year 2017 expense was expected to be $69 million prior to the September 2016 announcement of the plan freeze.

Even after considering the incremental defined contribution cost post freeze, which will be around $9 million this year, the pension freeze has resulted in a significant operating cost savings as compared to fiscal year 2017.

Following the $100 million voluntary pension contribution we made during fiscal 2017 to our largest defined benefit plan, we currently expect to contribute around $7 million to our other qualified plans during fiscal year 2018. Our full-year effective tax rate for fiscal year 2018 is expected to be in the range of 32% to 34%.

Capital expenditures for the year are anticipated to be approximately $120 million. In addition to these points, as mentioned last quarter, we will continue to assess our inventory levels related to market demands. We will leverage our strong balance sheet to capitalize the market opportunities that we see ahead of us.

Based on our current views of the market, we would expect inventory to decrease in the range of $30 million to $50 million during fiscal year 2018. Now I'll turn the call back over to Tony..

Thank you, Damon. Moving to slide number 15. Carpenter had a notable presence at this year's Paris Air Show. It was a very successful event for Carpenter and the feedback and activity from our customers reaffirmed to me that our strategy of focusing on differentiated products, and process and solutions is resonating in the market.

Each customer I spoke with was excited and enthusiastic about our solutions approach and our goal of becoming irreplaceable partners in their supply chain. They see the value our solutions bring, whether in engines, structural or other aerospace submarkets. One thing that was clear was the continuing strength of the breadth of our offering.

We had over 125 meetings with customers and these were not concentrated on anyone submarket, product area, or geography.

We met with customers throughout the supply chain from OEMs to tiers across all geographies from Asia, North and South America to Europe, and covering all of our application areas from engines and fasteners to structural and avionics.

Some, for example, were eager to talk with us about our announcement of the additive manufacturing alliance with Burloak to explore how they could take advantage of our joint services. Others wanted to understand more about our soft magnetic product capabilities.

Specifically, how they might be applied and integrated as customers design their next generation of avionics. As a result, we are now engaged to begin an in-depth exploratory technology roadmap determining how we work together to achieve the next level of performance in our applications and to explore new material solutions.

While there we met with key aerospace customers with whom we recently secured or formalized deals that are expected to be worth more than half a billion dollars in revenue over the next five years. These include agreements with customers throughout the aerospace supply chain and across our end-use submarkets, including engines and structural.

These agreements not only secure ongoing existing business, but also increase Carpenter's position with a range of supply chain participants who are experiencing above market growth and investing in technology leadership and innovation.

We also announced that we formed an alliance with Burloak Technologies, a Samuel & Son company, that provides us with a strong opportunity to become an industry-leading solutions provider from concept to delivery within the additive manufacturing space.

In addition, we introduced Puris 5 plus, the first high strength, low oxygen, titanium powered solution in the market today. To date, balancing oxygen levels with desired strength property is a major challenge facing additive manufacturing.

We believe Puris 5 plus makes the balance easier, more efficient and more effective from the beginning all the way through the titanium powder life cycle. We see several application for Puris 5 plus across our end-use markets, particularly in aerospace.

Lastly, we broadened our reach in the 3D printing market through a supply relationship with Desktop Metal, who will be utilizing more than 20 of our alloy grade in their end to end 3D printing systems.

In summary, customers across all of our end-use markets continue exploring the world of additive manufacturing and are looking for trusted partners with leading solutions and capability.

Our efforts to strengthen our powder and additive manufacturing offering is consistent with our mandate of being a complete solutions provider for our customers and helping them address their challenges. Now let's turn to Slide number 16 and my closing comments. Our strong fourth quarter concluded a successful end to our fiscal year 2017.

Our performance was driven by solid execution of our commercial and manufacturing strategy, improved market conditions, and higher mix as we continue to focus on expanding the applications for our value-add solutions.

Our results also demonstrate how the diversity of our offerings from both an end-use market and product perspective enable us to capture growing share across the attractive end-use markets we serve. And as we look to the next quarter, we see the momentum continuing.

As Damon stated, our first quarter is typically our least profitable quarter of the year and based on our current view, we believe that will be the case again in fiscal year 2018. Almost two years ago we set out to redefine Carpenter and elevate awareness of the value proposition we can bring to both existing as well as new customers.

Today our commercial strategy is driving strong backlog growth, broadening existing customers relationships and unlocking new market opportunity. We are being increasingly viewed as a critical supply chain partner by our customers and our commitment to addressing their challenges has never been clearer.

Conditions across our markets are improving and we are successfully executing on the opportunities in front of us. This includes the aerospace and defense market, where our broad solutions portfolio is a competitive differentiator and we continue to benefit from the new engine platform ramp.

The energy market outlook remains uncertain but we are benefitting from our efforts to position Carpenter for market share expansion and long-term growth. The Carpenter operating model is driving results across every one of our facility. We are changing how we work, how we operate, how we think, and how we produce.

This has had a meaningful impact on our results, particularly when looking at our strong operating margin expansion at SAO, unlocked incremental capacity at Dynamet and our year-over-year variable cost reduction. Our future includes expanded power capability as well as a strong presence in the world of additive manufacturing.

Importantly, we have significantly enhanced our capabilities in these areas this year and have the strategic flexibility to continue investing in our solutions and strengthening our long-term growth profile. Thank you for your attention and I will turn it back to the operator to field your questions..

[Operator Instructions] Our first question is from Gautam Khanna at Cowen & Company..

I had a couple of questions. I was wondering if you could give us an update on how Athens utilization has trended and what the mix was like down there. Is it more premium? May be the utilization and then maybe if you can give us some quantification of how much of that reflects the mix you hopefully will end up with as the cycle progresses..

Okay. Good morning, Gautam. So the update for Athens is much like it was last quarter. Last quarter I said the utilization was about 30%. I could tell you that that’s ticked up 2 or 3 percentage point. Last quarter I said that the material that was running there was not incremental to Carpenter.

Now I would say that there is material down there that we are running that is incremental to our overall results. So I believe we are at where we need to be from a qualification standpoint. There is no update on what I told you last quarter and even the quarter before that. I believe we are on track.

We are making progress and continue to work it and it has been one of our top priorities..

All right. That’s helpful. And one other thing I was curious about, one of your competitors announced a very large contract with the United Technologies, the Pratt and Whitney businesses.

And I know you guys have been an incumbent supplier with UTC, I was just wondering if in your view this reveals any share shift or should we think about the relationship you have with UTC differently than we did going into ATI's announcement..

A couple of comments. I mean I did see that press release as I prepped through this earnings call and I would say that it has zero impact on Carpenter. It's my opinion that the high majority of that contract is associated with isothermal forging and as you know, [indiscernible] wheel. We don’t produce product in that area.

I could also say that it had no impact at all on high-value super alloy powder that we are currently qualifying for Pratt and Whitney at our Athens facility. It's safe to say that Carpenter will be just one of two people producing that powder, the second being the internal Pratt supply. So no impact for us..

Okay. That’s helpful. And maybe Damon, could you also just give us some color on the pension EID expense this year and what the service cost is running through the two segments..

Yes. So Gautam, as you saw the total pension expense for the full year is the $14 million. The majority of that, about $12 million of that will be service cost related. EID is only going to be about $2 million for the full year. So very small. The vast majority of the service cost will stick in SAO. I would also remind you to see on the footnote.

If you have incremental defined contribution cost in fiscal year '18 relative to '17, Q4 to Q1, there is really no change. But for the full year of '18 as a result of the pension freeze, we will have about $9 million of defined contribution cost going into the BC plan..

Okay. That’s helpful. And last question on CapEx. It goes up a little bit year to year.

I was just curious, can you remind us sort of what the long-term trajectory at CapEx is going to be beyond fiscal '18?.

Yes. I think Gautam for us here, we watch CapEx from a maintenance standpoint along with our long-term investments. But I think for the foreseeable future we are sort of in that range of around $120 million. We don’t see anything on the horizon at least that would require us to change that in the near-term..

The next question is from Chris Olin at Longbow Research..

Damon, quick question on the SSS divestment.

Did you give a revenue impact for that going forward?.

Not in my scripted remarks, Chris. But for us SSS was not a material part of our overall business as the revenue last year was about $17 million and from an OI perspective it was flat to a slight loss in fiscal year '17. So doesn’t have a real impact on the overall PEP business going forward..

Okay. Question on the aerospace markets. Do you get the sense that the excess inventory that has impacted your fasteners related business, has that inventory been balanced yet? Or, I guess, can you say that the production cuts on the wide-body market have been fully absorbed by the channel where we will see some growth in calendar 2018..

Thanks, Chris. Maybe I will take the last one there first. I would say on the wide-body cuts, especially on the A-380 that was just announced. That’s not a surprise to us nor do I think it's a surprise to the industry. I think everyone expected that to happen. We have exposure across all platforms. Obviously, including the A-380.

And for us and I would say for all suppliers, that cut is negative just because of the large amount of material that that platform consumes.

I think the important point here is, as you kind of alluded to, the projected growth across all the other platforms we believe will more than make up for this in a supply chain that I will say is tight and becoming tighter at multiple points. To your first question on fasteners, I would tell you that our visibility is mixed at best.

As we hear from some of our customers, they are de-stocking some or ordering. So I think we are going to be like we have over the last -- since I have been involved, whatever words you will use, choppy, lumpy, in terms of fasteners going forward..

Okay. Just final question. I was looking at the transportation segment. Could you give us an idea of what the mix is between heavy truck and all the other vehicles? I guess I am wondering if you have seen any impact from the improving build rates on the Class B truck market..

I would say roughly that heavy truck is about 25% of our total transportation market. 70% being light vehicle and then the remaining 5% from different markets like rail and marine etcetera..

[Operator Instructions] Next question is from Josh Sullivan at Seaport Global..

Just following upon what Airbus said this morning, signaling that delivering the 200 A-320 NEOs might be more challenging just given some of GTF issues.

Is Carpenter involved with the high pressure turbine on the GTF at all?.

Of course..

Do you see any impact to your outlook or are you guys in a position in the supply chain where you don’t think it will have much of an impact..

I think when you have such a massive ramp, there is going to be issues across the supply chain. There's thousands and thousands of vendors that input into that engine. We feel very comfortable, very confident that a large amount of the engines are going to be produced.

And I think the important point here, again, is that I believe it's a supply chain -- at least the way we see it and what we supply is going to become tighter and tighter. It's one of the main reasons why I think this company had the foresight several years ago to build Athens.

And I think some of the comments you and some of your colleagues have made plays right into Athens hands and the need to really qualify that sooner rather than later..

Okay. Great. And on the conversation around your growing powders business. One of the long-term push backs is that buy to fly ratios are going to come down with powders.

Can you comment on how that might play out? How much higher value are these next generation powders versus some of the traditional products?.

Yes. Well, I think it's a wider range. I mean I would really tell you that I think pretty high confidence level that you are going to see the move to AEM parts in aerospace because it's just too attractive, especially on the structural side. I mean I think there is a lot of opportunity there.

You are going to see that from powder and quite frankly from wires that are manufactured as well. Both which we participate in. And our goal really is, we believe that powder is the strategic feedstock that makes this entire supply chain attractive.

Right from a [indiscernible] flow ability and that’s where we play and some of the alliances that we are building with some of the part manufacturers, we can now go to customers and offer an end to end solution that we can supply a powder or a wire that meets those specifications.

It performs the way you want it to perform and it meets the end product specifications that are so important..

The next question is from Phil Gibbs at KeyBanc Capital Markets..

Damon, the inventory number, the gross number on the balance sheet I thought went down nearly $30 million but I think you had said it was down 14. So I was just trying to put those two together..

Yes. Phil, the delta between what I reported and what we showed on the cash flow statement versus the balance sheet is mainly the inventory that we sold with the SSS divestiture at the end of the quarter..

Okay.

And did you, I may have missed it in your prepared remarks, but did you guys provide any color on what your targets are, if any, for fiscal '18?.

For inventory?.

Yes..

Yes. Towards the end of my comments, Phil, we said based on the market conditions and sort of reinforcing the inventory discussion last quarter that based on current market conditions we would expect inventory to come down in the range of $30 million to $50 million for fiscal year '18..

Okay. I think that’s what I missed because I think it was at the very tail end of what you had said. Tony, in terms of the energy markets, your point being, we are cautiously optimistic or we are a little cautious here on this given the fact that the rig count is starting to level out.

I mean help me pair that with Amega finally having a really good quarter and energy finally starting to inflect in, from a volume standpoint being well away from where we were a couple of years ago..

Yes. Thanks, Phil. I am very proud of the Amega West team because that was a -- two years that were pretty tough. And they worked really hard from the cost side as well as staying in very close contact with their customers. So I think, listen, when it comes to energy, I am probably always going to be cautiously optimistic.

I think a lot of the influence is shifting to North America with what they are doing out there in the field. I was lucky enough two weeks ago to visit many of our customers out in the field. And I will tell you right now, the Amega West business, they are placing orders. And in some cases you are seeing lead times increase in the oil and gas.

Which is, we want to decrease those lead times but it's a sign that the demand is there. Now inventory has got very low for some of our customers and there is some replenishment. But I see -- we are primarily in North America. We have operations across the world but our focus at least from a percentage of revenue is in North America.

And I see a lot of excitement but I guess that I am probably always going to remain cautiously optimistic..

Okay. How are you seeing the U.S. side relative to the international piece in that business? On just the energy business in general..

Yes. I think the growth areas, at least over the next four quarters will be more in North America as opposed to international offshore areas..

Okay. And I don’t know if you made the comments in your release or not and I know you provide just a broad aerospace bucket. But any color in terms of the engine, the engine sales, maybe relative to last quarter or relative to last year.

Anything that you guys could help us with there?.

Yes. I can tell you this, we just finished our fiscal year and if you take a look at FY '17 versus FY '16, our engine portfolio was up 8%, year-over-year. So that’s quite strong and as we look forward to FY' '18 and I have said this externally before that you can expect something in the higher single digits.

If you would say for us FY '18, 7% or 8% is extremely doable on the engine side..

Okay.

So that’s effectively base sales or volume?.

That’s on the sales. That on a revenue standpoint..

Okay. I appreciate that.

And one last question for Damon and I know it will be in the K when it comes out, but do you have the change in the LIFO reserve this year versus last year handy?.

I don’t have the exact number, Phil, but I think it's going to be a minimal change..

The next question is from Gautam Khanna at Cowen & Company..

Tony, I was wondering if you had any better sense now of how much your content has expanded on the LEAP engine versus the CFM and any color on the GTF as well, relative to predecessor platform [indiscernible] V2500 and CFM56..

Yes. Without getting into a lot of detail I would say it's roughly the same to slightly more across those platforms..

Okay.

And so, with slightly more meaning 10% more or just marginally?.

I think it's pretty tough to get into those specifics but I would say in single digits..

Okay. And so the ramp that you are seeing that is mostly just volume driven as the rates move up, as opposed to a big content gain story..

Yes. I think it's important to say, yes, I mean that’s correct. Remember for us, engines, again very very important but a lot of our growth is on the avionics side on the structural side where you see share gains as well.

So we are focused on engines, structural, avionics, you put all those together and I think you see a very strong trend going forward..

Okay. And I was wondering you have come a long way on the productivity improvements since you took over as CEO.

Just curious, in a nine-inning game where would you characterize this as being in right now? Where we are [indiscernible] for?.

Yes. I appreciate the question, Gautam. As you know, I mean, I spend a lot of time out in our operating facilities and getting to meet the folks that do this every day. And I am blown away every time I am out on the shop floor seeing the improvements that we have made. And they are just one after another.

But with that said, I would tell you that we have just scratched the surface. So in your analogy, I would tell you we are still in the first or second innings with a lot of upside that we can go get. It's hard work.

It's going to take some time but I think the evidence over the last two years is pretty strong as you have seen what we have done on the variable cost side. 6% in year one, 3% this year. But there is a hidden factor out there in many cases and a ton of opportunity.

And I think that’s a big plus for Carpenter going forward is that we have such opportunity there..

Absolutely. And one last one.

Could you remind us how much industrial gas turbines represent as a percentage of Carpenter's sales?.

I would say 1% or 2%..

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

Thanks, Amy, 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..