Brad Edwards - The Plunkett Group Tony R. Thene - Carpenter Technology Corp. Timothy Lain - Carpenter Technology Corp..

Jeff Molinari - Cowen & Co. LLC Josh Ward Sullivan - Seaport Global Securities LLC Philip N. Gibbs - KeyBanc Capital Markets, Inc. Jeremy Kliewer - Deutsche Bank Securities, Inc..

Good day and welcome to the Carpenter Technology Corporation First Quarter Fiscal Year 2019 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference call over to Mr.

Brad Edwards, Investor Relations. Mr. Edwards, the floor is yours, sir..

Thank you, operator. Good morning, everyone and welcome to Carpenter's earnings conference call for the first quarter ended September 30, 2018. 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 Tim Lain, 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 on Carpenter's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2018, and the exhibits attached to that filing.

Please also note that in the following discussion, unless otherwise noted, when management discuss the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on operating income and sales excluding surcharge. I will now turn the call over to Tony..

continued market strength; increased customer urgency on Athens qualifications; Carpenter's acquisition of LPW Technology, which builds on our leading position in additive manufacturing industry; and our strong balance sheet leading to direct returns to our shareholders.

Let me speak briefly about each one now and then get into more detail later in the presentation. Demand conditions across our markets remained strong and we generated healthy year-over-year sales growth in each of our five end-use markets during the quarter. In addition, backlogs continue to grow, up 38% compared to last year, and up 9% sequentially.

This quarter marks the ninth consecutive quarter of sequential backlog growth. Drilling down specifically to the aerospace and defense end-use market, sales increased 11% compared to last year, driven by engine sub-market activity remain at near record levels, and the benefit of our diverse industry participation.

The first quarter marks the seventh consecutive quarter of year-over-year sales growth in our aerospace and defense end-use market. Another consistent bright spot has been the medical end-use market, where sales were up 18% compared to last year.

Our growth in this market is outpacing industry growth projections due to robust demand for our leading titanium solutions, as well as the success we have had in expanding our customer relationships. A significant earnings growth enabler for Carpenter is our Athens facility.

This quarter, we experienced a noticeable increase in customer engagement concerning qualification of their specific engine products. Our customers recognize the urgency to qualify additional capacity, given increasing lead times and the projected airframe and engine build rates.

Our technical teams are hosting onsite visits with large OEMs and are actively engaged with customer contacts to exchange information toward completing each of their qualifications.

This morning, we announced the acquisition of LPW Technology, a leading global developer and supplier of metal powder solutions for additive manufacturing, including software and hardware-based powder lifecycle management solutions.

The acquisition of LPW adds an innovative solution to managing powder quality during the 3D printing process, and improving powder recyclability to our existing additive manufacturing platform.

This acquisition keeps Carpenter at the forefront of the additive manufacturing industry, and we continue to build out an impressive group of assets and capabilities. Lastly, our solid balance sheet gives us the important flexibility to invest for the future and to provide increased direct returns to our shareholders.

To that end, during the first quarter, we increased our regular quarterly cash dividend by a 11%, which reflects our solid financial position, as well as our confidence in our ability to generate sustainable long-term growth. Let's move to slide 6, and the end-use market update.

I'll begin with aerospace and defense, where sales were up 11% on a year-over-year basis, driven primarily by continued strong demand in the engine submarket, as well as higher avionics and distribution sales. Our total aerospace and defense backlog continues to increase, it was up 40% on a year-over-year basis, and 12% sequentially.

Year-over-year, we experienced backlog growth in each of our sub-markets. In the engine sub-market, we achieved another strong quarter with sales up 17% compared to last year, as market demand remains robust given the new platform ramp.

We also continue to fulfill expedited orders for our OEM partners, given current engine build rates and industry lead times. The fastener sub-market sales were down both year-over-year and sequentially as visibility remains limited with inconsistent demand patterns.

While the fastener near-term outlook is hard to predict, we are confident in our market position given our diverse offerings and believe the long-term demand levels are supported by the backlog of over 14,000 aircraft In the structural sub-market, we continue to experience healthy demand for our solutions used on major platforms, including the A320 and the 737.

Finally, sales in our defense sub-market increased both year-over-year and sequentially due to program specific demand.

Now, moving to the energy market and our oil and gas and power generation sub-markets, total energy sales were up 30% year-over-year due to higher oil and gas sub-market sales and higher rental and replacement activity at Amega West.

The North American directional and horizontal rig count has largely stabilized in the range of 1,100 rigs and we see further opportunities, particularly in the Permian Basin, where drilling activity by our customers remains at healthy levels. In the power generation sub-market, overall demand and order levels remain at relatively low baselines.

Now, onto the transportation market, where sales were up 3% year-over-year as the rebound in the heavy truck market matures. In this market, we have been making solid progress expanding into attractive market adjacencies and diversifying our revenue streams.

Sales into those additional sub-markets such as heavy duty off-road, marine and rail were up over 50% compared to the first quarter of last year. While our selective push into these sub-markets remains in the early stages, I'm pleased with our progress so far and believe we have additional growth opportunities in these areas.

Moving onto the medical market, sales were up 18% compared to last year due to stronger demand for our titanium solutions at Dynamet. Our medical portfolio has been an area of strategic emphasis over the last several years.

We've worked hard to balance our traditional customer base with more direct OEM relationships, while diligently implementing the Carpenter operating model to unlock incremental capacity to meet rising customer demand.

Today, we are recognized in this market for both our leading portfolio of material and processing solutions and our commitment to advanced solutions, including additive manufacturing.

In the industrial and consumer end-use market, revenues were up 4% on a year-over-year basis due to increased sales in certain sub-markets, including semiconductors, as well as sporting goods. Now, I'll turn it over to Tim for the financial review..

Thank you, Tony. Good morning, everyone. I'll start on slide 8, the income statement summary. Our first quarter results represent a strong start to our fiscal year. In fact, as Tony mentioned, this quarter's results marked the strongest first quarter operating income in five years.

Net sales in the first quarter were $572 million or $456 million excluding surcharge. Sales excluding surcharge decreased by 8% on a sequential basis on 10% lower volume.

Historically, our first quarter sales relative to the preceding fourth quarter decline due to the timing of our planned annual preventative maintenance shutdowns at key work centers across our facilities.

We continue to see signs of strength in our business, including increased demand across most of our end-use markets as we execute on our solutions-focused strategy. From the first quarter a year ago, sales were up 11% on 4% higher volumes.

In addition, our backlog continues to grow, most notably in aerospace and defense with year-over-year backlog growth of 40% and sequential growth of 12%. SG&A expenses declined by $8.3 million sequentially to $47 million. The reduction is mostly attributable to the timing of certain costs in Q4 that did not repeat in Q1.

Year-over-year SG&A expenses increased by $3.2 million due mostly to targeted investments in key areas.

As an administrative note, given the current adoption of the recent accounting standard, operating income and the reporting we previously made related to operating income excluding pension EID are now one and the same and will simply be referred to as operating income. Prior period numbers have been recast to conform to the current year presentation.

As a percent of sales, operating income was 9.9% in the quarter. Our margin declined as expected on a sequential basis compared to 12.1% in the fourth quarter due to lower volume. Operating margin declined 40 basis points as compared to the first quarter of fiscal year 2018.

In addition, our operating margin was also negatively impacted by ongoing fire recovery efforts at our Dynamet business which we will discuss in more detail in a moment.

Our effective tax rate for the first quarter was 21.8%, which reflects certain discrete tax benefits associated with stock-based compensation, equity awards vesting and exercises in the current quarter. We continue to expect our effective tax rate to be in the range of 24% to 26% for the balance of fiscal year 2019.

First quarter net income was $31.5 million or $0.65 per share. Year-over-year, EPS grew 33%. Now, turning to slide 9 and a review of free cash flow. Free cash flow in the first quarter was negative $42 million compared to positive $56 million in the fourth quarter of fiscal year 2018.

This performance was consistent with historical sequential declines as the fourth quarter is generally our strongest free cash flow quarter in each year. We generally build inventory in the first half of the fiscal year to support the higher sales volumes in the second half of our fiscal year.

To that end, we increased inventory by $51 million during the current quarter as we aligned the inventory levels with demand patterns we are experiencing across our end-use markets and our increasing backlog.

On a year-over-year basis, free cash flow was relatively flat with higher cash from operations mainly as a result of increased earnings and improving working capital, offset by higher capital expenditures in the current period. Capital expenditures in the first quarter of fiscal year 2019 were $41 million.

We continue to expect capital expenditures for the full year to be about $190 million. As we talked about last quarter, the elevated CapEx levels relative to historical rates reflect our strategic investments in growth projects associated with additive manufacturing and soft magnetics.

Free cash flow in the quarter also reflects the impact of the increase in our quarterly cash dividend. The dividend increase is another signal of the confidence we have in the strength of our business, as well as our commitment to delivering direct returns to our shareholders.

At September 30, we had $411 million of total liquidity, including $17 million of cash and $394 million of availability under our credit facility. Our solid financial position is supported by no debt maturities or major required pension contributions until fiscal year 2022.

We remain well-positioned to continue investing in targeted growth areas and strengthening our foundation for long-term sustainable growth. Now turning to slide 10 and an update on our SAO segment. Net sales excluding surcharge were $362 million, which was down $34 million or 9% on a sequential basis on 11% lower shipment volume.

Again, the sequential decline reflects the seasonal impact of our planned annual preventative maintenance during the first fiscal quarter. On a year-over-year basis, sales excluding surcharge increased $36 million or 11% on 2% higher shipment volume.

The increase reflects continuing strong demand patterns across most of our end-use markets, driven by aerospace and defense and medical, combined with an improving product mix. SAO operating income in the current quarter was $52.8 million, down $21 million compared to the fourth quarter and up $2 million year-over-year.

The sequential decline in operating income reflects the reduced shipment volumes and higher input prices on certain production elements. Operating margin was 14.6% compared to 18.7% in the fourth quarter of last year and 15.5% in last year's first quarter.

Looking ahead, demand across our end-use markets remain strong and we are continuing to drive backlog growth. We are confident we will continue to expand customer relationships and capitalize on emerging market opportunities.

Given the number of production days available in Q2, we currently estimate that operating income for SAO will increase up to 10% sequentially from Q1 to Q2, which would represent the best second quarter operating income performance in six years.

Now turning to slide 11 and a review of our PEP segment results, PEP net sales excluding surcharge were $108 million, down $6 million sequentially or 5%.

On a year-over-year basis, PEP sales excluding surcharge increased $8 million or 7% driven by continued growth in our high value titanium solutions for the medical market and increased demand at Amega West. Operating income in the first quarter was $7.3 million, down $600,000 compared to the fourth quarter and up $2 million year-over-year.

As Tony mentioned earlier, the PEP results in the current quarter were below our expectations as a result of our Dynamet and Amega West business units. To reiterate, our Dynamet business continues to deal with short-term headwinds from a fire at one of its facilities earlier this calendar year.

Operating income continues to be impacted by sub-optimal production flow path. Reconstruction of the damaged facility is well underway and is expected to be completed over the next several months.

In addition, Dynamet continues to deal with inconsistencies in fastener demand patterns, which negatively impact the results of this quarter relative to our expectations. At Amega West, the current quarter's results were lower than our expectations due to the timing of certain rental tool arrangements.

Looking at the second quarter of fiscal year 2019, we currently expect PEP's operating income, excluding any impacts of our recent LPW acquisition, to improve sequentially by up to 10%. With that, I will turn the call back over to Tony..

Thanks, Tim. Over the past several years, we have focused on expanding our capabilities in the additive manufacturing space and evolving our platform to ensure we are positioned at the forefront of this rapidly changing and disruptive technology. We strengthened our powder capabilities by acquiring titanium powder producer Puris.

And then, last fiscal year, acquired CalRAM, which brought extensive additive manufacturing product design and part production capabilities. In addition, last fiscal year, we announced our investment in an Emerging Technology Center in Athens, Alabama, which will enhance our technical capabilities and scale.

We have also mobilized over 30 engineers, scientists, operators and technicians, who specialize specifically in additive manufacturing technology. Having this expertise from feedstock (00:21:42) through design and component production positions Carpenter as an irreplaceable technical partner with our customers.

During our last call, I talked about our collaboration with one of the major U.S. oilfield service providers to develop a unique 3D design and printed in-hole tool for the drill string.

Overall, collaborations like this one are steadily increasing, as a growing number of customers are engaging with Carpenter Technology due to our end-to-end additive manufacturing solutions.

Additive manufacturing technology maturation is now presenting commercial opportunities in advanced applications such as jet engine component, satellite structurals, down-hole oil and gas drilling systems, surgical instruments, medical implants and state-of-the-art defense platforms.

And today, we took another meaningful step forward with the acquisition of LPW Technology to enhance the value proposition we offer customers in the additive manufacturing market and to build on our leading position in this space.

The acquisition of LPW Technology strengthens our additive manufacturing platform through the addition of innovative and tightly controlled powder design, material optimization and lifecycle management solutions throughout the additive manufacturing process.

LPW addresses a critical need in the metals additive manufacturing marketplace by enabling quality assurance and traceability of metal powders.

This is achieved by linking the physical powder product to a digital platform, which collects real time data from sensors and other hardware, starting from the powder development phase through the printing process and multiple cycles of powder reuse.

As an example, the software can accurately measure moisture and oxygen levels at different points since variations beyond certain thresholds can lead to compromised part integrity, subpar performance or failed quality. LPW solutions can help identify and resolve problems before they happen.

Another major challenge facing additive manufacturing today is powder reuse. LPW's platform is aimed at improving the lifecycle cost of powder and achieving significant cost savings by minimizing degradation issues and enabling repeat uses of metal grade powders.

LPW's approach to data collection and digital manufacturing assist in making it easy to track and analyze the alloy powders, leading to more rapid innovation, product enhancement and overall part integrity. These lifecycle management tools can increase the probability of achieving 3D part printing success earlier in the development process.

From a customer standpoint, LPW has established relationships across many major industries, including aerospace, medical, transportation and energy. We're excited about the LPW acquisition as it accelerates Carpenter's leadership position in the emerging additive manufacturing industry with an integrated end-to-end solution.

Let's turn to slide 14 and my closing comments. In closing, we are making continued progress in strengthening our long term growth potential by executing our commercial strategy at a very high level, broadening our customer relationships and investing strategically in targeted growth areas.

Our first quarter results included a number of important highlights. We were successful in completing a critical preventative maintenance outage that will allow us to continue to serve a robust market, while delivering year-over-year earnings growth.

We capitalized on strong demand trends and generated year-over-year revenue growth across all of our end-use markets. And we benefited from a continued strong market and our solutions approach is driving further backlog growth, up 38% compared to last year and 9% sequentially.

Our facility in Athens, Alabama, remains a major growth driver when fully qualified and will offer significant incremental capacity for the aerospace industry during this major upcycle. As I noted earlier, our dialog with customers is accelerating and we are seeing increasing urgency to qualify their major aircraft components.

The future of our industry also offers significant growth opportunities for Carpenter. We know that industries and markets evolve and with that change comes new technologies, as well as enhanced customer needs. We have spent the last several years transforming Carpenter into a complete solutions provider.

That transformation must continue in the years ahead as we make the strategic investments needed to remain at the forefront of disruptive change impacting our customers and our end-use market. This includes additive manufacturing.

With the addition of LPW's leading powder lifecycle management solution, we have built a platform that offers materials and metallurgical processing expertise, powder development and optimization, part design and production capabilities, a technology-based platform that manages powder during the 3D printing process and a solution to improve powder reuse and recyclability.

Our future growth drivers also include our high value soft magnetic portfolio, where we are investing to significantly increase our capabilities and capacity. Today, we are the market leader in auxiliary power units for aerospace, and see strong future growth potential given the current aerospace cycle and projected build rates.

We also see attractive future growth opportunities for our soft magnetics solutions in consumer electronics and electric vehicle applications.

Our solutions focused strategy is working and delivering solid performance in a high demand environment, and we have multiple long term growth drivers that position Carpenter for sustainable growth in the years ahead.

With all of the mentioned progress, we have continued to maintain a solid balance sheet that gives us the important flexibility to continue investing in the future and providing increased direct returns to our shareholders, as evidenced by the 11% increase in our regular quarterly cash dividend.

In summary, we have just presented a positive outlook for the future. We project our SAO business earnings to be up as much as 17% on a year-over-year basis next quarter, with PEP earnings projected to increase by as much as 7% on a year-over-year basis next quarter. We see no indications of market weakness.

In fact, the markets are strengthening, especially for aerospace as backlogs and lead times continue to increase and expedited orders become more common. Our Athens facility is the only new capacity coming into the market and qualification activity has increased significantly over the last quarter.

The Carpenter operating model has delivered meaningful results, but future opportunities can be significant as we continue to implement, and we continue to make strategic investments in exciting growth areas such as soft magnetics and additive manufacturing.

The Carpenter team is committed to this journey and excited about the near and long-term future. 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. The first question we have will come from Gautam Khanna of Cowen and Company. Please go ahead..

Hey, good morning, Tony and Tim, this is Jeff Molinari on for Gautam. Thanks for taking my question here..

Good morning, Jeff..

Good morning..

Good morning. So yeah, I know you talked a bunch about the normally season planned maintenance being an issue at SAO.

Well, we're just wondering if there's anything else that kind of is dealing with this, are there any mix issues or other inefficiencies that could have amplified the sequential EBIT drop?.

Well, Jeff, this was primarily due to the outage, our decision in some areas to extend that outage, demand was up across all of our end-use markets, backlog was up, so this was not a mix issue, this was not a demand issue, this is simply that we have equipment right now that is running at very high utilizations, and we have to take this equipment down to make sure we protect Carpenter for the long run, protect our customers for the long run, and it's easy to get caught up in that quarterly earnings cycle, where you make decisions that are hurtful to the business long term, and we're just not going to do that.

So we had preventive maintenance shutdown. We took the time that was needed. And it impacted us versus the guidance we gave last quarter. But keep in mind that, the difference between our guidance and what we actually performed was as little as $5 million.

So, it's a rather small amount compared to the fact that our markets are getting stronger and backlogs are increasing and we see next quarter being up significantly year-over-year. I think that's the real point..

Now that's definitely helpful and it makes sense. We just wanted to make sure there was nothing else kind of at play. We understand you don't want to have, you want to make sure you get those maintenance things completed. Just on one other question if you don't mind. Can you update us on the status of the repairs, recovery on the Dynamet facility.

I know you said, expect to be completed in the next several months. Would you say that you're still meeting your delivery requirements.

And as you said in the past, are you – would you say the issues, kind of like the cost associated with this are largely behind you?.

Okay, Jeff. That's a good question. Thanks for asking. The new building now, I was just there about 10 days ago, it is now under roof and moving quickly, so we still have several months to go there to finish out the inside of that building. We are using alternative flow paths which are more costly to supply our customers.

It's been tight with many of our customers. I think they would say that we've worked very well with them to get them material when they needed. But I'll honest, in many cases, it has been hand to mouth.

So we think over the next couple of months, we'll continue to work around the clock to make sure those customers get what they need and hopefully here when the – by early spring, we could have that building complete..

Okay. Thank you..

Thank you..

The next question we have will come from Josh Sullivan of Seaport Global..

Hey, good morning..

Good morning, Josh..

Good morning, Josh..

Just as we think about the historical cadence of earnings through the year, given the results here in the outlook, essentially for the first half.

Should we expect a similar historical bump in the second half at this point or just how are we thinking about the cadence for the year now?.

Yeah, Josh. I think that's a fair assessment. Given the number of production days in Q2 versus Q1, there's not enough time to produce what we need to produce. And the second half, if you look at over a historical period, second half is generally stronger than the first for us..

Okay.

And then, just on the preventative maintenance, you said you extended the outage, did you find something you didn't expect or did you do something extra just given the high utilization rates, which may, I guess, benefit you down the road?.

Yeah, yeah, we didn't find anything that we didn't expect, there were no major issues. But we just want to make sure that everything is done appropriately. And there were some items that we wanted to – we just wanted to make sure that we had everything done exactly the way it should be.

Some areas took longer quite frankly than we expected from a manpower standpoint, from a part standpoint, took a little longer. So, if you had all that in. In a market, where you can sell everything you make, even when you extend for a week in some work centers has a significant impact on the bottom line..

So I mean, I guess, next year, do you think we would expect similar type outages or was this a special event just given....

Well, we've done an annual outage at Carpenter for as long as I've been here and probably for decades and usually, do that in the August timeframe, just because that's when some of your customers, especially European customers take a little time off.

I think we're always looking for ways to do this better and I would suggest that going forward, as opposed to taking one large outage, you could see us on more of a rolling schedule where we hit different points throughout the year and smooth that out a bit..

And then just one on Athens, where do you see the elbow in Athens contributions at this point? Is there a certain production rate on the 737 or A320 where we go above maybe 50% utilization at Athens?.

Let me make sure I understand your definition of elbow. Are you saying when....

So just as you defined it, I mean, when can we – when do you think Athens really kicks in? I mean, is there a rate on the OEM side that we can tie it to, just how are you looking at Athens? And maybe, when we get above 50% utilization, when do you see that happening?.

I think it's difficult to tie it to a specific rate. If you just look at what the engine manufacturers are going to do over the next year to 2x, sometimes more and just do some rough math based on the raw material supply, the nickel supply, you're going to need all of Athens to supply that engine demand.

So whether that happens in the next six months or in the next 12 months, is still going to be governed by the qualification rate.

And as I said, we had a significant uptick in the last quarter only as the ramp continues and these engine manufacturers who are managing a very, very large supply chain, works with us, understands the need, those discussions have intensified. Now with that said, and rightly so, we're not going to take any shortcuts on the quality side.

The customers are not going to take any shortcuts on their qualification methods, and we don't expect that. But I can tell you every week, we get closer and closer..

Okay. Thank you. I'll get back in the queue..

You're welcome..

Next we have Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Hey, good morning, Tony and Tim, how are you?.

Good morning..

Hi, Phil..

Hey, Tony, question just on the input cost pressures, I think you made that comment, or Tim did, I can't remember, what input cost inflation are we looking at? Are you speaking about more of the staggered increase in electrode and refractories, and rolls (00:38:43) and lubricants, and things like that hitting more aggressively this quarter? Is that what we should read or is there other things that you're talking about?.

I think, Phil, it's just more of a general sense of, there are inflation pressures out there. In the past, we did talk about electrodes, I think we've got the coverage there with the surcharge we implemented over the last 6 months to 12 months.

I would say the input prices we're talking about now are more just as – you asked the supply and demand question, as scrap prices are out there, the availability and sometimes is lacking.

So we're trying to be opportunistic about buying scrap on the open market at spot prices which maybe above what we hadn't anticipated maybe three or four months ago..

Okay. And the comments and color on the backlog growth, particularly in aerospace are obviously very strong, up double-digits, sequentially up 40% year-over-year.

But the question I'm struggling with right now is, does the backlog growth mean anything in terms of whether or not the supply chain can actually effectuate that into getting the product to market.

And so that's sort of the philosophical question, I think, people are trying to wrestle with is, can we deliver on some of these requirements? Can the build rates move forward or is everybody just so – effectively is everybody just so wrapped up with trying to get up the curve here?.

So, Phil, let me let me try that one and come back with a follow-up question, if I don't hit the exact point you're looking for. I think the backlogs are meaningful. We know that that product is required.

Lead times, for example – I don't think I mentioned this when I was speaking – in the last quarter has increased for us and we know for the other players in the industry, at least, 15% to 20% quarter-over-quarter. You have for engine material now, the lead time is approximately nine months. So that's real, that's real demand out there.

That's why you see a lot of these expedited orders, people trying to move up in the queue. And we try to do that the best we can to take care of our customers.

But this demand is real and I think it will – to be able to meet that demand, you'll have to see additional productivity improvements from the existing assets which we are doing, I talked about that, over the last couple of quarters, how we've been able to increase the productivity of our press units, as well as our melting furnaces.

And then, it comes down to Athens, Phil, as I said earlier, Athens is required to hit those types of engine builds and to meet the demand that's out there in the market. Let me know if that hit on what you were going after..

No. That's very helpful and just the last one, if I could sneak it in here is, I may have missed it, but did you give any color in terms of what the jet engine revenue growth may have been either sequentially or year-over-year? That's all I have. Thanks..

Sure, thanks. Year-over-year, the aero engines growth on a sales basis was 17%, sequentially it was flat. But if you remember, the last three quarters, we've been at the top level as far as sales in the jet engines, probably record levels as far as the history of Carpenter and we've maintained that high level now the last three quarters..

Thanks so much..

Next we have Jeremy Kliewer of Deutsche Bank..

Hey. Good morning..

Good morning..

I was looking for a little bit more clarity on your SAO guidance, that 10% increase, is that inclusive or excluding the kind of extended maintenance impacts?.

Jeremy, it would just be 10% over what's reported here in Q1..

Okay.

So more of a kind of normalized flat rate then over your Q1 results?.

Correct..

Assuming that there was a....

Given the number of production days in Q2 versus Q1 when we shutdown, yeah..

Okay.

And then, regards to LPW, how should we view this on kind of an accretion standpoint, is that going to do anything for revenues or earnings or is this just more of a long-term, as you stated, kind of end-to-end powder capabilities and additive manufacturing capabilities?.

Yeah. So, Jeremy, on the additive manufacturing side, all of these acquisitions that you have seen over the last year or two, the majority of them are not earnings positive. We're very early in this stage, in this development. Now, we look for companies that aren't significantly EBITDA losers, but that's where we're at today.

And if you want to play in this market, now is the time for you to get in it, because two years from now, it is going to be priced exceptionally higher than what it is now. And I believe you're going to miss the boat.

What's important with Carpenter and why we're so interested in additive manufacturing, because it has a direct line to our traditional business? As an alloy development company, we work with these customers on a day-to-day basis, and now, they are interested in taking the leap potentially in additive manufacturing in some of these specific applications that I mentioned earlier, like satellite, structural material, some jet engine components, oil and gas drilling systems, medical instruments, et cetera.

So we can transition very easily from being a wrought (00:44:45) supplier, a solutions provider, and now, say, listen, we don't just make powder for AM, we develop that powder. We now have the ability to design additive manufacturing parts.

We have the ability to actually do the part production, to do the post processing and now with LPW, you bring in an entirely new set of skills as far as the digital side of it, powder design, lifecycle management, recyclability.

I would say from a raw materials supplier, there's no one that has what we have now where we can go from powder through design, which is critical and make the final part.

And to be honest with you, we've made calls to some of our customers this morning with the LPW announcement and it has been absolute excitement that we've added this other piece to the puzzle and I think over the next couple of years, as additive manufacturing continues to grow, Carpenter will, in fact, be a primary player in that field..

Okay. Thank you and good luck..

Thank you..

Next we have a follow-up question from the location of Gautam Khanna of Cowen and Company..

Hi, yes, thanks for the follow up. This is Jeff again. I had a question on the aerospace fastener market. You mentioned that you were dealing with some inconsistencies in (00:46:19) demand patterns, and you're having kind of trouble with visibility.

Can you just kind of expand on that? And also, specifically answer whether or not you're seeing spot demand and picking up business from others? Thank you..

Jeff, aerospace fasteners is a habitually inconsistent sub-market and it has been – I've been around for a long time, it has been as long as I've been in this industry and I think going forward, it will be as well. I think you're going to see stocking and destocking. Every time there's an acquisition, it's going to impact the demand.

Every time there is a signal that says we're going to be potentially short, it's going to trigger overpurchasing at some time. The critical thing for Carpenter is that we are the broadest supplier of aerospace fasteners out there. We have our titanium supply, we have our nickel supply, we touch all customers. It's a very nice margin business for us.

And I think we're just going to have to accept the fact that it will be inconsistent from quarter to quarter..

And would you segregate the titanium and nickel or would you kind of characterize them both the same characteristics?.

I would say there are differences, but in totality, they are very similar..

Okay. Thanks. That's helpful..

The next question we have will also be a follow-up and this will be from Josh Sullivan of Seaport Global..

Yeah.

Just how big is your powder business at this point with CalRAM LRW (sic) [LPW] (00:48:10) and your other operations? Just how big is the powder additive vertical at this point?.

It's a good question, Josh. I think, I'd say it's – depending on the year and what volumes we're able to get out, it's roughly $100 million business top line..

And then on LRW (sic) [LPW] (00:48:31). Sorry, go ahead..

No, you go ahead, Josh..

I was just going say on LRW (sic) [LPW] (00:48:36) what percentage of it is software at this point, is it entirely software or you would....

No it's not. So LPW, it's not an entirely software company, I mean, they are very heavy into IP. They have developed the solutions that I talked about earlier, but they also optimize powder, they have one atomizer in place, with a second one on order.

So if – even as a subset, they have become fully integrated as well where they produce the powder, they optimize the powder and then they sell to different service providers. LPW, in fact, has been customer of Carpenter in the past..

Okay. Thank you..

Well, at this time, we're showing no further questions. We will go ahead and conclude the question-and-answer session. I would now like to turn the conference call back over to Mr. Brad Edwards for any closing remarks.

Sir?.

Thank you, Michael. And thanks, everyone for joining us today on our first quarter conference call. We look forward to speaking with all of you again on our next earnings call. Have a great day..

And we thank you, sir, and also to the rest of the management team for your time also today. Again, we thank you all for attending today's presentation. At this time, you may disconnect. Thank you. Take care and again, have a great day, everyone..