Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Carpenter Technology Corporation (NYSE:CRS)

Q3 2013 Earnings Call

April 25, 2013, 09:00 am ET

Executives

Mike Hajost - VP, Investor Relations & Treasurer

Bill Wulfsohn - President & CEO

Tony Thene - SVP & CFO

Dave Strobel - SVP, Global Operations

Analysts

Gautam Khanna - Cowen & Company

Steve Levenson - Stifel Nicolaus

John Tumazos - Very Independent Research

Sal Tharani - Goldman Sachs

Josh Sullivan - Sterne Agee

Dan Whalen - Topeka Capital Markets

Richard Safran - Buckingham Research Group

Edward Marshall - Sidoti & Company

Jonathan Sullivan - Citigroup

Operator

Good morning and welcome to Carpenter Technology’s Third Quarter Earnings Conference Call. My name is Steve and I will be your coordinator today. At this time, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in question-and-answer session towards the end of this presentation. (Operator Instructions)

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed sir.

Mike Hajost

Thank you, Steve. Good morning, everyone and welcome to Carpenter’s earnings conference call for the third quarter ended March 31, 2013. 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.

With us today are Bill Wulfsohn, President and Chief Executive Officer and Tony Thene, Senior Vice President and Chief Financial Officer, as well as other members of the management team.

Statements made by the management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter’s most recent SEC filings, including the company’s June 30, 2012 10-K, September 30, 2012 and December 31, 2012 10-Qs and the exhibits attached to those filings.

I will now turn the call over to Bill.

Bill Wulfsohn

Thank you, Mike, and good morning, everyone. Thank you for participating in our Q3 fiscal year ’13 webcast. We are pleased to have a new member of the Carpenter team with us on the call. We welcome Tony Thene who joined us from our call on February 1st and is our new CFO. As you have noticed we have adopted a new approach by condensing our press release and augmenting it with more detail in our webcast presentation materials.

We will begin this morning’s discussion with a high level summary of the quarter. I will then turn the call over to Tony who will discuss our financial results. I will then provide more information on our reporting segment and markets and we will finish with Q&A.

Moving to page four, in summary for the third quarter, while we felt good about the underlying growth dynamics in our core markets and the progress we are making versus our strategic initiatives, we need to begin this discussion by noting that market conditions changed significantly during the third quarter.

More specifically, we saw increased customer deferrals; in fact January deferrals and cancellations increased by 40% over their recent historical run-rate. Also weak sales to distribution customers and defense related mix impacted our overall profitability. Thus we achieved lower sales and earnings in Q3 than expected in January. While we have seen a reduction in orders and a decline in deferrals Q3 results combined with uncertainty in Q4 has led us to revise down our full fiscal year ’13 earnings outlook.

That said in this challenging context, we have made some important and solid gains. More specifically, we have achieved sequential sales and EPS growth. We saw a solid demand for our Premium and Ultra-Premium products sold to the aerospace and energy markets. We realized above plan above-plan Latrobe synergies and have completed our integration with synergies running roughly double, our targeted 25 million rate; we've also strengthened our capital structure and liquidity while improving our pension funding status and Tony will speak to that.

With the recent operating improvement, we now have the capacity to grow our sales and realize margin expansion. This is important. You may recall that during recent communications, we’ve highlighted that we were capacity constraint. Now with the addition of Latrobe and key auto (inaudible) improvement initiatives, we have roughly 10,000 tons of new available capacity to support growth as demand recovers. Beyond volume related income growth, we now have additional margin expansion opportunities as additional volume will run through our existing assets.

With that, I will turn the discussion over to Tony who will walk through our financial results for the quarter.

Tony Thene

Well, thank you Bill and good morning to everyone. I am happy to be here; I look forward to meeting many of you in the near future and developing a good working relationship going forward.

So let’s get started with slide six. I will give you a financial overview of the quarter and then we can get in to some of the details. Net income was $32.9 million or $0.62 per share. If you exclude the impact of restructuring and special items, net income was $36.7 million or $0.69 a share. In March, the first comparable month, Latrobe manufacturing achieved year-over-year improvement, driven by stronger than expected synergies.

In February, we successfully completed the 300 million 10-year bond issuance with an impressive 4.45% coupon. This issuance provides us flexibility to make discretionary pension contributions and allows us to repay the $100 million 6.625% note maturing in May. Once we pay off the $100 million note next month, we do not have a scheduled debt payment until 2018.

That combined with the fact that we don’t anticipate the need to make any significant required pension contributions until fiscal year 2017 and the fact that the Athens spend will be winding down in FY14, it us in an in-viewable position in terms of capital structure and liquidity. Moving along, we achieved strong cash flow from operations of a $105 million excluding the discretionary pension contribution and lastly our total liquidity of $638 million is $85 million higher than where we ended fiscal year 2012.

Moving to slide seven on the income statement summary. Revenue in the quarter was $581 million, excluding surcharge, revenue was $471 million, up 9.4% sequentially and 12.5% versus the year ago quarter. If you exclude the impact of Latrobe, our third quarter revenue excluding surcharge was $375 million, up 7.7% sequentially and down 2.2% versus a year ago quarter.

SG&A was $48 million in the quarter as we drove our percent of sales excluding surcharge from 11.6% in the sequential quarter to 10.2%. SG&A increased approximately $7 million versus a year ago quarter and obviously the majority of this was driven by the Latrobe acquisition.

Operating income excluding pension EID was $61 million in the quarter, which is slightly higher on a sequential and year-over-year basis. Our margin of 12.9% in the quarter was lower on a sequential and year-over-year basis driven primarily by weaker mix as Bill mentioned in his opening comments.

The effective tax rate for the quarter was 33.1%. This does include the tax rate impact of our plan discretionary pension contributions and the R&D credit extension. For the fourth quarter and for full fiscal year 2014, you should use an all inclusive tax rate of 34%. As I mentioned earlier, net income for the quarter was $32.9 million or $0.62 per share and $0.69 per share excluding special items.

So now let's turn to slide eight and discuss in detail those special items. First, let me acknowledge that the quarter was a little messy, as we previously made mention of many items. Going forward, I intend to limit the special items discussion to restructuring and discrete tax matters, this will make it much easier for both of us.

The first item on the table is the inventory initiative worth $0.01. This is the cost that inventory consultants we engaged in connection with the Latrobe acquisition to reduce inventory levels across to integrated mill system. This consulting project has now ended and we will now have this expense going forward.

The second item is restructuring related items worth $0.02; mostly related to headcount reduction, asset write-offs and costs associated with a few footprint optimization opportunities.

The next item is the additional interest incurred due to the $300 million debt offering that was executed this quarter. In order to eliminate this item as a special item for next quarter, please use $5.8 million for interest expense in the fourth quarter.

The fourth item is the tax impact to the pension contribution. Pension contributions lower our taxable income; the tax low income is lower, we reduce the domestic manufacturing deduction on the delta. The impact this quarter is roughly three-fourths of the total impact for the year. The remainder will hit the fourth quarter. The tax rate guidance I just gave you of 34% for the fourth quarter accounts for this. So if you use this given rate this item drops off the special items statement.

The last item is the R&D tax credit extension; the only item on the list that was not a charged earnings. This credit expired at the end of calendar year 2011. In the quarter, the credit was extended on a retroactive basis and the $0.03 is equal to the catch up. Going forward the impact of the credit is included in my effective tax rate guidance. If you choose to net out the items on this table; earnings per share for the quarter were $0.69. Let me make three important points before leaving the slides. One, the Athens related expense was a startup expense was $1.4 million in the quarter and was not called out as a special item.

For the fourth quarter, I would expect Athens related expense to be $1.7 million. Two, given the current environment further restructuring is currently under consideration for the fourth quarter. It’s important to note that any restructuring actions would be accretive to earnings by year two. And three, if the distribution sale closes in the fourth quarter as expected, it is probable that we would take a significant non-cash charge to earnings. Again it’s important to note that such a charge would be booked in discontinued operations.

Now let's turn to slide nine and the free cash flow summary. Certainly our free cash flow in fiscal year 2013 has been impacted by our Athens expenditures; however when you look inside the detail of the third quarter you see solid performance. Net cash from operations, excluding the discretionary pension contribution was $105 million, the highest quarter this fiscal year. The main driver was a $47 million inventory reduction as the manufacturing team implements efficiencies throughout the integrated mill system. If I exclude any discretionary pension contributions, I expect the fourth quarter free cash flow to be positive, even without the proceeds of the sale from the distribution business.

With that let me turn it back to Bill.

Bill Wulfsohn

Thank you, Tony. I'll now go into greater detail regarding our end markets and reporting segments. On page 11 we profile our sales by end market segments as they compare to prior year quarter three and sequentially versus prior quarter. We saw a strong growth in our largest end market aerospace and defense, which represents 49% of our overall sales. Sales were up 20% versus prior year and 10% versus the prior quarter. Our sales versus prior year clearly reflect increased OEM builds, the addition of Latrobe and increased content on new platform. We saw no noticeable impact of the 787 issues. However; within the segment we had a significant mixed shift. While defense represents less than 5% of our sales, we saw 50% drop in several ultra premium products sold for such applications as missiles and military landing gear.

Moving to energy; the North America rig count was down 6% versus prior year and industrial gas turbine builds remained at cyclical low levels. In this context, we saw strong year-over-year and solid sequential volume growth, primarily due to increased Amega West share gains and further penetrations into completions. Moving to medical versus prior year, we saw a substantial volume decline as low titanium scrap prices, high inventories and industry consolidation downstream drove de-stocking. We have seen a mild recovery versus Q2 and are optimistic this trend will accelerate through the remainder of the calendar year.

You will note that transportation in consumer and industrial were our fastest growing segments in the quarter versus Q2. While we value this business, it is at a lower end of our profit per pound and thus dilutive to our overall profitability. Before I leave this page, I think it's important to mention that over the last quarter, I have spent a significant amount of time with customers and my observations are that there is a general feeling of cautious optimism about the future based upon the underlying market growth rates in our industries and related consumption. Most of our customers appear to be working on inventory due to the availability of material on short lead times and general market uncertainty; and finally our relationships with our key customers I believe are stronger than ever.

Moving to page 12, we’ll look specifically at our SAO segment. What you will first note is that we did see a solid increase in overall pounds sold versus Q2. But I have to note that this gain was still down roughly 3000 tons versus what we had forecasted in January. The growth we realize sequentially was driven by [aerial] engine related sales and oil and gas completions. Unfortunately even with this additional volume, our operating income dropped. This is because of the previously described dynamics related to reduced sales of high value of materials to defense and increased sales of industrial, consumer and transportation. In addition, we had less volume running through our system than anticipated which did affect overhead absorption. I would like to note that our variable cost per ton was actually down in the quarter as we worked effectively to reduce cost in a difficult context. Looking forward, order uptake is up 40% over the last three months versus the previous three months and deferrals are down during the same period by roughly 33%. Aerospace and energy demand is wrong, but I must emphasize it's too early to call the recent uptake a true trend.

That said; we have the capacity to grow and achieve margin expansion from an already healthy 16% margin when demand recovers. Moving to page 13, we will focus on Latrobe. Very similar to the dynamic we have seen in SAO, you can see that there was an uptick primarily seasonal and from Q2 to Q3. But overall we saw a weak mix. We expect steady sales profile with the clear potential for demand recovery, as we complete this calendar year. To me the key highlight for Latrobe is that we have now completed our full first year of owning and integrating Latrobe. As expected the acquisition has been strongly accretive, results to date are overall original plan as synergies are running at roughly double the expected levels.

We see a lot more upside as we complete the qualification of Latrobe’s assets for premium aerospace and energy applications. I would like to congratulate the legacy Carpenter and legacy Latrobe teams for working well together and executing at a high level. We look forward to celebrating Latrobe’s 100 year anniversary this spring. Now moving to page 14, we profile our PEP businesses. To describe these businesses, we must go through one by one as you will note there are very different business dynamics occurring within the segment.

Our Dynamet business is growing rapidly as wire sales to the aerospace industry are roughly 20% up over prior year. This growth is partially offset by weak demand to medical as a result of the previously described customer destocking. Amega West saw an increase in earning and weaker sales as uncertainty drove customers to rent as oppose to buying drill collars. Ultimately that’s good for us on the bottom line and our earnings were up despite rig count being down. Finally our powder product business had some specialty areas which are showing strong contribution; but we do see challenges in the [Airmill] portion of our business which serves the tool [still] market. This is an area which we will focus on for operational improvement and cost reductions as we move forward.

In summary with these puts and takes the PEP business was relatively flat in the quarter. Moving to page 15, we’ll discuss some exciting developments in the area of technology and innovations. We are pleased to announce a new agreement with Rolls-Royce to supply advanced material for jet engine components. It’s a five year agreement valued at roughly $75 million, and we will target production for this contract out of Athens. Most importantly it formalizes an expanding relationship with a key customer.

Moving to stainless steel landing gear, progress continues to be made as we've already made the fittings for nine units that ultimately will be used for flight which is planned in 2014.

Finally, as you recall last quarter we announced a joint development agreement with U.S. Steel to develop Carpenter’s proprietary TEMPER TOUGH materials to enable light weighting of vehicles. TEMPER TOUGH is stronger with superior fatigue resistant allowing thinner and lighter gauge materials to be used. Since the announcement much progress has been made as we've melted, cast and rolled product. We have also made prototype rocker panels that show a 10% productivity improvement, possible by eliminating welds along with thinner gauge material to result in material savings. We believe these are exciting developments and they have a bright future.

Moving to page 16 from an operational perspective some great project is being made on some exciting initiatives. We will begin with our biggest and most exciting project that is the construction of our new Athens facility and I would like to highlight that this project is on time, under budget and will start up on or before April 2014. I would also like to note that as Tony described, we are incurring some overhead this year associated with the construction and startup of that operation and we see it increasing by roughly $4 million in fiscal year ’14 before actually coming down in fiscal ’15 year and beyond. So you won't see a major impact of cost related to Athens as we move into fiscal year ’14 or ’15.

We are trying to accelerate the construction and commissioning of this facility because we are still overtaxing some of our existing assets and are constrained in our press. In addition, the Athens facility will give us a chance to lower production costs on some key products and we believe in the underlying growth in our core markets and want to be ready with approvals as that demand comes to fruition.

Moving to Dynamet, as I described year-over-year titanium wire sales have expanded dramatically. To support this growth and expected future growth, we will be commissioning two lines in our Florida facility and that will represent roughly a 22% increase in total capacity. Customer demand for this product has been very high and we are quickly booking that capacity. In fact, we are considering additional investment to expand our wire capacity further.

And finally, our China expansion which will focus on bar finishing is moving forward. We have a site. We've ordered equipment. We expect that our capital investment will be roughly $20 million and our first commercial sales from that facility will begin in fiscal year ’14, which is great because we just had our largest sales month ever in China and March.

So moving to page 17, in summary market conditions changed significantly during Q3. We expected greater sales and a stronger mix and results were below our expectations.

That said, we achieved sequential sales and EPS growth. We continue to see strong demand for our premium and ultra premium aerospace and energy products. We completed our Latrobe integration with synergies above plan and we strengthened our capital structure and liquidity while improving our pension funded status.

Looking forward, we've seen a recent uptick in orders and a reduction in deferrals. We have also seen that volume pickup should help to improve in absorption but recognize that risk remain in Q4 that the dynamics we experienced in Q3 will continue.

In conclusion, while we are not happy with our Q3 results and the markets remain a bit uncertain, we feel good about the financial progress we've made over time, the underlying position and dynamics in our core markets, and the strong upside we have as the markets recover. Remember we have now roughly 10,000 tons of capacity to leverage in our legacy Latrobe and SAO assets, 22% titanium wire expansion and ultimately our Athens operations which will help debottleneck our hard working operations and will give us the new capacity for growth with our premium and ultra-premium products.

With that, I'll turn the call over to the operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gautam Khanna from Cowen & Company. Please go ahead.

Gautam Khanna - Cowen & Company

Bill, can you update us on your mid-decade EBITDA target, should we still rely on the 550 to 580 guidance you provided in September? Then I have a second.

Bill Wulfsohn

We remain confident in the projections that we put forward. We see at this point a current weakness and uncertainty in demand, but we believe that is if you will a mid-cycle dynamic and that ultimately the aerospace builds will continue as we have forecasted earlier. The dynamics in our energy market, it will be strong, so while we are disappointed with our Q3 results, we still believe strongly in our mid-decade targets.

Gautam Khanna - Cowen & Company

Okay. And if you could just talk a little bit more about the phasing of the Athens facility, you mentioned in the slides the 9.5 million of overhead, could you give us the other moving pieces, depreciation one, how big that will be in fiscal ‘14 incrementally and do we actually see a step down or GAAP EPS dilution as it brought online and sort of just the phasing if you could give us any granularity? Thank you.

Tony Thene

Yeah, I can take on the depreciation question, as it stands right now assuming an April startup, depreciation for FY ‘14 for Athens will be approximately $1.5 million.

Bill Wulfsohn

With that in mind, our objective as we have stated before is to commission and sale sufficient products to enable us to have this facility to be accretive to earnings in its first full year of operations.

Gautam Khanna - Cowen & Company

Thank you.

Operator

Your next question is from the line of Steve Levenson from Stifel. Please go ahead Steve.

Steve Levenson - Stifel Nicolaus

Thanks. Good morning, everybody.

Bill Wulfsohn

Good morning.

Tony Thene

Good morning

Steve Levenson - Stifel Nicolaus

Can you tell us a little bit more about your LTA with Rolls Royce, which materials it covers and which engine or engines?

Bill Wulfsohn

Well, I believe that at this point it's appropriate for us to leave description as we have shared with you and we will be able to communicate more information as time moves on, but I would like to lead the commentary to the way we have described it. It is an important development for us. I think that our value-added products will help enable some of the Rolls Royce objectives for improving and enhancing their supply chain and their future engine designs, so we are looking at, this is really the start of our longer-term partnership.

Steve Levenson - Stifel Nicolaus

Okay, I understand. Thank you. In terms of fastener demand, can you talk a little bit about titanium availability, pricing and lean times, is it still pretty much of a glut out there, you can get material you need and are you adding to stock advantageously right now?

Bill Wulfsohn

We have availability of the titanium materials which are required to produce our fastener wire that has not been a challenge or difficulty for us and we are currently using our assets to produce that titanium wire completely and that output is going to customers and we are not building inventory in the segment and in fact that is why we are bringing on additional capacity because there is additional demand that currently we are having difficulty supporting and that is the new capacity which will come on board over the course of the next couple of months.

Steve Levenson - Stifel Nicolaus

Okay, thanks. And last one on powder metals. Are you seeing any impact at all or do you expect an impact in the next year or so related to additive manufacturing, 3D printing and is that something that is still a future story?

Bill Wulfsohn

It’s clearly a future story. We are well-positioned in that area and we are seeing increases in demand for that product, but from the volume standpoint, it is relatively small compared to the products owned to other parts of our, if you will sales mix. And with that in mind, it will be several years before we were to say that that would have a very large influence on our overall sales growth in the powder area.

Operator

Again, next question comes from the line of John Tumazos Very Independent Research. Please go ahead John.

John Tumazos - Very Independent Research

Back in the 80s, Carpenter did a really good restructuring going from two plants to one, closing Bridgeport and having economies of scale in Reading. As you are growing to four plants incurring the old Talley plant in Carolina and Alabama and Latrobe, how are you maintaining your efficiencies and would it make sense to go from four plants to three plants to two plants particularly as the market is poor?

Bill Wulfsohn

First of all, we of course with the addition of Latrobe and the operation they have brought on, the incremental sales that were related to that core business and actually in that case we view the opportunity to leverage the capabilities and have invested to expand our output in productive capacity. And of course the addition of Athens is meant to support what we believe will be strong industry demand and growth for the products that we provide in the Premium and Ultra-Premium area.

So we are clearly focused on trying to run our combined system as efficiently as possible. We do make some specific consolidations to bring specific equipment up to high levels of utilization and in fact Dave Strobel our Senior Vice President of Operations would like to make a comment about that.

Dave Strobel

Just to add on to what Bill has talked about, one of the strategies that we had undertaken in the 80s with closing of the Bridgeport operation was really to kind of upgrade our mix and we have the ability with that strategy in place to really pull in a lot of those operations into our Reading operations and we moved some equipment in. Our strategy today, we are looking at focused on centers of excellence with our operations and as you can see from the standpoint of the synergies that we’ve gained as we've begun to work with the fine folks out of Latrobe we've really been able to adopt our operating practices and really get much more out of the operations. And that's really our strategy going forward. We believe the long term demand is there and our operations will be geared up to support that efficiently.

John Tumazos - Very Independent Research

Thank you.

Operator

And your next question is from the line of Sal Tharani with Goldman Sachs. Please go ahead Sal.

Sal Tharani - Goldman Sachs

Can you give us some more color on the deferrals; where are you seeing the improvement; are these the OEMs or their agents and also are these deferrals are also on the LTAs, they are just deferring?

Bill Wulfsohn

Yeah, just to provide a quick profile, roughly 60% of what we sell from our, I would say organization is for billed orders and 40% are from stock, so when we talk about deferrals they are really on the bill based orders. The deferrals were by and large across all markets. Some of those deferrals moved into Q4 and some moved out further. The deferral levels peaked in January and have been declining since, so I hope that answers your question there.

Sal Tharani - Goldman Sachs

Okay. And next you mentioned shorter lead times; can you give us an idea what the lead times are right now and couple of products, main products and what they were last year at this time?

Bill Wulfsohn

Sure. The lead times are down substantially and really that’s the result of one, the demand levels are lower, but two, we've had a significant focus to bring our lead times down. We focused extensively on improving the flow within our operations so that we could not only achieve shorter lead times, but our goal is to sustain those regardless of where we are in the cycle. Overall, you would see that our lead times are between eight and 14 weeks and if you go back, perhaps a year and half ago, they would have been as long as six months, but again, that was a result of not only demand, but also our production process.

Operator

And your next question is from the line of Josh Sullivan of Sterne Agee. Please go ahead, Josh.

Josh Sullivan - Sterne Agee

Can you talk about the timeline for the Alabama facility; you mentioned the possibility of opening earlier than April; can you just expand on that? And then can you just talk about how bookings are progressing for this facility, I think you had given some metrics out at the Analyst Day?

Dave Strobel

This is Dave again. I'll take the first part of that question. What was announced was that April 2014 startup and from an operation side, we're always pushing, you know, for faster, better and under budget and we believe that we have the potential to take some time out of that schedule. If everything goes according to how we see it today. There is a lot of room for, some issues to happen, that’s part of operations, but that’s what we're gearing for as to bring that in and online much sooner.

Bill Wulfsohn

And as we look at the overall demand that we have within our system, and how we will operate, we will operate that system or Athens as part of an integrated whole which is how we are also operating with Latrobe. So what we are looking to do is expand our overall sales base we’ll be moving products between Athens, Latrobe and Reading based up on where the approvals are achieved and where the economics of production are strongest.

Right now we are constrained in our hot working press which is for materials that is in support of aerospace engines and structural components and once we have the new capacity on board, while it will take time to qualify that for those applications, we will move other materials from Reading to Latrobe into the Athens facility which will enable us to produce more of the engine and structural materials there and support the customer needs.

Josh Sullivan - Sterne Agee

Okay. And then just on the guidance for 2013, can you just remind us what the comparable for the double-digit growth is?

Bill Wulfsohn

The double-digit growth would be based upon as we have communicated the fiscal year ‘13 number which is adjusted for the one-time related expenses associated with for example the acquisition of Latrobe and right now that would be $237 million operating income level and if we were to complete the divestiture of distribution the comparable would be approximately $233 million.

Operator

Thank you. And your next question is from the line of Dan Whalen from Topeka Capital Markets. Please go ahead, Dan.

Dan Whalen - Topeka Capital Markets

Just a follow up question in terms of the deferrals; just wanted to make sure there weren’t any meaningful cancellation; this is just story of push out of demand is that correct?

Bill Wulfsohn

We actually track separately cancelations and deferrals; and we always have - in any month we have some cancelations but the level of those cancelations did not fundamentally change. The spike was really in deferrals and that as I mention has been coming down consistently since January.

Dan Whalen - Topeka Capital Markets

And then any additional commentary you can provide for the after market aerospace engines, what do you guys in that market?

Bill Wulfsohn

It’s difficult for us to have the transparency that or understanding that some of who will say our peers and competitors have because their degree of vertical integration just as ours. We sell of course to the forgers who then sell either to the OEM or after market. What I can share is just the feedback that we have gotten, which is directionally that the spares market has been slow as the life of the parts if you will have been extended and that is something that will not sustain itself for an extended period.

Dan Whalen - Topeka Capital Markets

And then just given all the actions that you guys have been taking from the capital structure and some of the plans you haven't placed. In this quarter you had I think $0.21 headwind from post retirement benefit plans, how should we be thinking about that for next year; is that going to be a headwind or tailwind versus current conditions?

Dave Strobel

So the good news is with the discretionary payment to the pension that should substantially reduce the headwinds that we are facing. Tony may speak more directly.

Tony Thene

If we make the full as we expect a full discretionary pension contribution that will be about $0.14 positive for us in FY14 versus FY13.

Operator

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

Richard Safran - Buckingham Research Group

I had a general question for you on defense and some of the comments that you made today and in the release on sequestration. We've had some rather stellar earnings from the defense companies thus far, and well they’ve maintained guidance and they have blown away numbers this quarter. So I wanted to know if you could comment on in general the uncertainty that you are seeing associated with sequestration, do you think that that's like more of a very short term, near-term phenomena or do you think that's more maybe long term and more general and something that might impact defense companies later on this year.

Bill Wulfsohn

What we can share is what we see and that is some specific materials for specific applications that go through specific customers. We've seen a significant reduction in demand as I mentioned. This would not be related as we believe to any sort of a share shift or anything related to that as you can imagine these materials typically are well spec into the design of the equipment or aircraft, and so in our belief over time there will be a need for replacing the landing gear for example and the bills of say the joint strike fighter will increase over time. But we do see a reduction in demand that has sustained itself as we've entered into the fourth quarter in this area, and so I think it would be probably the earliest would be the latter half of this calendar year before we'd see a true recovery in this area. But to us there's nothing that is apparent that is structural.

Operator

Your next question is from the line of Gautam Khanna of Cowen & Co.

Gautam Khanna - Cowen & Co.

Bill can you just talk about any changes to the relationship with Precision Castpar since the time at merger perhaps even on the conversion side.

Bill Wulfsohn

We haven't seen any as I think you appreciate we respect PCC a lot. They are an important customer to us. Now they are an important supplier to us with TIMET. We were working hard to be their best external supplier and the relationship that we have in terms of titanium from TIMET being supplied to us and conversion of titanium that runs for our facility. As of this point, we have not seen any sort of a decline. So we are not anticipating that at the moment and our relationship we believe remains strong.

Gautam Khanna - Cowen & Co.

Dave mentioned an interest in buying or perhaps building titanium fastener stock capability. I just wonder if they were to buy your larger competitor, in that market in the titanium market, what protection would you have to kind of guard against share loss in terms of contracts or what have you.

Bill Wulfsohn

I think there are a couple of aspects to that. First of all we maybe you have some indications that that's going to occur. We haven't gotten any indication that that would occur. We've seen our relationship actually, I believe get stronger in the fastener area since the purchase of TIMET which is fairly logical because we're not reverse integrated in to the manufacturing of titanium. So there is no conflict if you will on that front. But if they were to make that as a strategic action, I think the answer would be that you would have to take a look at the overall market and our sales to them and the relative size of the total market. To the extent they would overtime and I say overtime because in many cases it couldn't be or wouldn't be overnight to qualify and move to a different supply but if they were to take that trend because they purchased or built competitive capabilities, our thought is while we would miss that business, there would be other companies that are in this space that we currently supply to who would probably have a greater interest in purchasing from us just because that other source of supply would then be their competitors. So we're not looking for that to happen. We wouldn't be excited about hearing that in the news, but we don’t feel as though if it were to occur that that would fundamentally shift our business profile.

Gautam Khanna - Cowen & Co.

And lastly, M&A target that you guys, where are you looking to deploy capital, which end markets and do you expect any deal to be transacted over the next 12 months?

Bill Wulfsohn

We believe we have the financial flexibility to move forward. We, I think have shown pretty good discipline in terms of going after on the opportunities where there are strong synergies and we can add value in an area that mirrors if you will our focus on premium and ultra premium products. We are actively looking at opportunities in that space. We've talked before it takes two to tango if you will. We're not going to rush out and overpay for something and use the big strategic word around that. So we are active and we are optimistic that you will be seeing and reading some developments in this area over the course of next year.

Operator

Thank you and your next question is from the line of Edward Marshall from Sidoti & Company. Please go ahead Edward.

Edward Marshall - Sidoti & Company

You mentioned lead times and how they are coming in just a bit, and I was curious if you could kind of pass through, is it possible to look at it from how much of its destocking and slowing of demand and how much of it is the efficiencies being kind of wait that, and I image that’s pretty difficult to do.

Bill Wulfsohn

It is difficult to do, because there is a little bit of a chicken in the eggs syndrome if you will excuse the expression, because we have a general availability and our lead times are short, I think it gives customers the opportunity to layer in orders, closer to when they actually need the product, which make sense because they then carry less inventory and upgrade our certainty as to the demand profile and we have focused and will continue to focus on keeping our lead time short. Our goal is to sell an extra 10,000 tons out of our existing assets and to leverage our new Athens capacity and not see an increase in our overall lead time, least not a significant one. We have gotten that feedback from our customers that they need short lead times because, if you will the certainty in their business, the product ability of their customer demand downstream is not always difficult to see and we’ve really focused on trying to improve if you will customer satisfactions, customer related performance and we believe this is an important component, but it feeds upon itself. If lead times started extending because of difficulties with capacity, I think you would begin to see an effect which would layer upon itself as people would get in line faster to make sure that they would have access to that capacity.

Edward Marshall - Sidoti & Company

I mean does that shown your visibility at all, I mean in the long run with customers and movements in the markets and also does that increase may be your pricing risk to our own model?

Bill Wulfsohn

I don't know if that increases our pricing risk because so much of our materials are sold either on long-term contracts or with pretty well-established, but there is no question and I think we saw that this quarter that the short lead times do affect our visibility. As we enter quarter, our certain portion now of our business we are booking within the quarter and while we can assessed based upon recent trends what we expect those bookings will be, there is now some variability depend upon the certainty or uncertainty that our customers have and how they feel they need to layer in their inventory.

So yeah, I would say that that is creating more uncertainty in the market, if you go back a year ago and we weren't happy with six month lead times, know with our customers but those pretty good certainty as to what we are going to sell in the upcoming quarter when you are booked six months out. And so that is something and that affected the clarity of how we saw things in our January forecasted versus how the results came in and that is why, why we see some positive directional trends and order rate.

We still are putting out some cautionary words because you don't like it when the results come in different than expected nor do we. So we want to communicate that this is a dynamic that we are now trying to work with and work through.

Edward Marshall - Sidoti & Company

So also on the order intake, is it -- it was up 40% I think is what you mentioned, and I was curios if you said I missed what if any market in particular was driving that. And is it related to the industrial consumer where you've seen the strength recently and thus we should assume a weaker mix going forward at least temporarily or could you kind of walk through that order intake rate?

Bill Wulfsohn

Sure. The order intake rate has picked up and I would say it’s really across all of our markets. We did see in Q3 as we mentioned really a couple of factors that affected our overall mix. One was the reduction, our change in the defense related mix and the other was the increase in overall balance in consumer, industrial and transportation. And I think it’s fair to assume that a similar dynamic will continue at least into Q4 here.

Over time as we mentioned the defense related activities will pick back up and we think that some of the aerospace dynamics where you are seeing some degree of inventory management if you will the line will get tight and that will come back into greater balance.

Also in the area of automotive and industrial, those really have multiple subcategories if you will. We are expanding our sales of materials, high value materials for our fuel injectors and automotive which should help our mix, that's something that will take time to see a full manifestation of it.

Also in our industrial realm we have that as a fairly broad definition but a big part of our sales and an important part of our sales are for industrial fittings, high value industrial fittings and we have seen an increase in orders and demand related to that portion of the business. So we believe there will be recovery, but again there's caution in saying that we are not saying that you will see an immediate bounce back here in Q4.

Edward Marshall - Sidoti & Company

And finally if you could it’s a little bit of bookkeeping net sales including the surcharge for the quarter, I think there was a $110 million in surcharge. It’s easier to give the full number or if it’s easier to give just the surcharge per segment or end market I'd appreciate it.

Tony Thene

Okay, I don't have that handy with me right now, but I can get that number for you.

Operator

Your next question is from the line of Jonathan Sullivan of Citigroup. Please go ahead, Jonathan.

Jonathan Sullivan - Citigroup

I just had a quick one to follow up on the guidance. So for the double digit, you know low double digit growth this year, would that include restructuring charges and inventory consulting fees or would it just be a operating income ex pension EID?

Bill Wulfsohn

It’s the latter. We don't want to further confuse the issue by introducing those and the directionality of our business. And as Tony said, we are going to try to reduce the impact and number of those things that we call out as we move forward, but especially last year as you will recall there were some significant costs that were associated with the acquisition of Latrobe and we are not including that as a benefit that we would call out an improvement over, so it’s really the latter if the underlying business is up.

Jonathan Sullivan - Citigroup

Got it, thanks. And just one more if I could. Did the weaker mix on the quarter, did that include any sales of commodity statements or would that be still a product that you are not or a market that you are not engaging in currently?

Bill Wulfsohn

Well, we defined and have discussed on kind of premium, ultra premium and value products. The value would be the closer to commodity grades, but I still wouldn't describe those as true commodities. And I think as you reference us versus some other companies that have a strong stainless commodity portfolio, we typically don’t compete in those portions of the business. We're not in flat-rolled product that might go for appliance and other applications and other things like that that you might be referencing or thinking.

Operator

Thank you. Your next question comes from the line of Gautam Khanna from Cowen & Company. Please go ahead.

Gautam Khanna - Cowen & Company

Yes, just to understand the comparability issue, if you were to exclude the distribution business in Q4, what is the impact to current year EBIT?

Bill Wulfsohn

We have not disclosed the actual EBIT that is associated with that business right now and I know you would like to have that number, but I think it would be difficult for us to convey that until we have completed the divestitures. So I am not trying to avoid your question. It's probably not appropriate for me to speak specifically to that.

Gautam Khanna - Cowen & Company

Okay. Maybe can you ballpark it, you have given us, I think it was 14 million or 15 million of EBITDA?

Bill Wulfsohn

Right. And that was essentially our target for the year and so we see the business performing in that range. There has been some market softness but in that range. So it also depends upon the timing of the divestiture of course.

Operator

Thank you. You have no further questions. (Operator Instructions) Back in terms of your question-and-answer portion of today’s call, now let me turn over to Mr. Mike Hajost for closing remarks. Please go ahead sir.

Mike Hajost

Thank you again for participating on today’s call. We look forward to speaking with you again next quarter. Thank you and good bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Carpenter Technology's CEO Discusses F3Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts