Q2 2020 Earnings Call

Good morning, and welcome to the Carpenter Technology second quarter of fiscal 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance. Please signor conference specialist by pressing the star key followed by zero 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 over to Brad Edwards investor relations, please go ahead. Thank you operator. Good morning everyone and welcome to the Carpenter Technology earnings conference call for the fiscal second quarter ended December 31st, 2019. 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 and slide movement speakers on a call today or 20 tane president and chief executive officer and Tim Lane vice president and Chief Financial Officer.

statements made by management

During this morning's 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 Technology package recent SEC filings, including the companies report on Form 10-K for the year ended June 30th, 2019.

Form 10-Q for the quarter ended September 30th, 2019 and the exhibits attached to those filings, please also note that in the following discussion unless otherwise noted when management discussing a 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.

Thank you, Brad and good morning to everyone on the call today. Let's begin on slide four and a review of our safety performance. Our total case incident rate or t c i r stands at one point three through the second quarter of fiscal year 2020 or employees are the face of our safety program. They are the most knowledgeable about the workplace and know how to make it safer. They're engaging and promotion of our safety system is essential for our success while TCI our is our primary measure of performance. We continue to see improvements in our leading indicators off. For instance. When we look at our total injuries, which include first aid treatment cases. Our injury frequency rate has improved 17% year-over-year in addition facts active activities such as reporting of near-misses and safety stops of increased by 44%

the emphasis we have

Placed on improving our safety culture has resulted in a reduced severity of injuries, which is a direct result of our employees involvement and engagement.

We're confident that continued focus on ongoing investment in our safety systems will deliver our ultimate goal of a zero injury workplace. Now, let's turn to slide five and a review on a second floor apartment.

4 second quarter results demonstrate our ability to deliver consistent year-over-year earnings growth and drive backlog expansion while generating record performance at this page marker 12th consecutive quarter of year-over-year sales and earnings growth. It also marked the 12th consecutive quarter of year-over-year backlog growth as we continue to execute at a higher wage are solutions help customers address critical performance requirements, and this is driving expanded sales opportunities and share gains across there in news markets.

did I say oh

We are driving a richer product mix which contributed to record second quarter operating income. This marked a second consecutive quarter of record operating income performance at Sao tome in addition our deliberate mix shift the benefit of our Athens facility and productivity improvements resulted in adjusted operating margin of 19.9% during the summer quarter. This is the fifth consecutive quarter in which Sao adjusted operating margin was above 18%

In the Aerospace and defense in used market sales increased 19% year-over-year and backlog was up 14% compared to last year or sales and back off performance in Aerospace and defense used Market demonstrate the benefits of a broad solution portfolio are strong presence across attractive submarket and participation on almost all the major platforms Edition customer activity and dialogue at Athens remains high and and we received for additional VAP approvals during the second quarter.

I was in the medical and used Market which accounts for approximately 9% of total company revenues increased 13% compared to last year as our high-value Solutions continue to capitalize on strong and patterns.

Last week we continue to be committed to building on our strong Core Business by making strategic investments in critical emerging Technologies.

These are areas that we believe will be significant in the future of our industry and our investments will strengthen our long-term position as a Solutions provider and critical supply chain partner for our customers touch more on this subject later the presentation.

Now, let's move to slide six and the end market update.

Looking first at Aerospace and defense or sales increased 19% compared to last year this included year-over-year growth in each of our Aerospace submarkets.

The 737 Max grounding and recent production halt is a major and ongoing development for the entire Aerospace supply chain while we are certainly not immune to the situation. We do believe we are well-positioned to navigate the near-term impact. I will provide more detailed comments on this topic shortly.

moving on to the

Medical induced Market or sales were up 13% year-over-year. This growth was due to share games primarily in the orthopedic and dental submarkets.

It is clear a solution for a significant value to customers as we are winning market share and are deepened OEM relationships or unlocking incremental opportunities for our high value applications.

Capacity expansion projects dynamic or nearing completion which will allow us to further capitalize on the strong for Werdum and indicators. We see in this image Market we see on going strong in for applications across many of our sub Market including Orthopedics Cardiology and dental.

In a transportation in use market sales or a 4% compared to last year in the light vehicle submarket. There's increasing demand in North America for local content and high temperature resistant Alloys. We are capitalizing on these demand patterns with our high temperature bar and strips solutions that are specifically designed to address increasing engine performance requirements.

Now moving to the energy in used market and our oil and gas and power generation submarket, total energy sales declined 26% year-over-year. The oil and gas market is facing significant headwinds in North America, as operators have reduced drilling activity titled equipment and continue to operate with a focus on managing the free cash flow the North American directional and horizontal rig count fell 9% sequentially and was down 23% compared to last year.

The oil and gas submarket accounts for only 5% of total company Revenue.

Given the ongoing challenges facing the oil and gas business, especially in North America. We initiated restructuring actions at our Mega West business during the second quarter.

And Industrial and consumer in used Market revenues were down 18% year-over-year at sales declined mainly due to reduce infrastructure activity and some volatility in the semiconductor Market.

So important to note that our sales into the industrial submarket continue to be impacted by portfolio privatization as we further shift our production to higher-value Solutions. Now, let's move to slide 7 months update you on a 737 Max discussion.

Well, the last several years we have worked hard to refine our strategic Vision which is to be a preferred Solutions provider of mission-critical product and an Irreplaceable partner in the supply chains. We participate I've mentioned several times in the past that the breadth of our Solutions portfolio is a strategic advantage that Advantage is evidenced today as a Supply Chain management to the 737 Max disruption more than half of our total revenue is generated from the Aerospace and defense and use Market which as you know is an attractive margin business. However, we also prep key Solutions and other strategic and used Market such as medical industrial and consumer and transportation important to note that across every one of these Indians markets. We participate in the top 1% of the value pyramid high-end specialty alloy products that address critical application performance requirements.

Aerospace and defense

We participate in Rich submarkets such as engines Fasteners structural and defense with exposure on practically all commercial platforms.

We believe our diverse industry participation from an application and submarket standpoint is an important differentiator when compared to other Aerospace supply chain participants as such this is folio Brett provides opportunities to partially mitigate disruptions in the market such as the current 737 Max issue over the next couple of quarters.

But that said it's clear at the supply chain reaction to the recent 737 Max development remains in a state of flux. We are working closely with our customers to understand the material and evaluate how the reaction to the 737 Max production halt will ultimately impact our production plans, of course, every customer is different.

For instance. We know a certain customers that already anticipated the latest negative news to some degree and adjusted the projected requirements. We've also seen certain customers reporting a high need for spare change and asking for Urgent spot support to be clear when I speak of the need for spares. I'm referring to older engines which are still in service and are running longer.

Of course, there are many.

Supply chain participants who are still evaluating how they want to proceed as they look to balance near-term reduced requirements against the need to maintain production rate Readiness. This is a critical concept managers production capacity in this complex supply chain can easily and effectively be turned off and on.

Finally, there are participants that did not anticipate the recent news having built ahead. They are now expressing reduced near-term requirements.

That takes us to the ultimate question. What is the anticipated impact of Carpenter Technology due to the 737 Max disruption?

Computer technology provides specialty materials to our customers who in turn use that material to forge and manufacture parts that are ultimately used in the production of aircraft and related components. This makes more difficult for us to specifically identify which platform are application each pound of material that we sell will be used in however, we know our customers well and can make certain assumptions Choice options are based on where we believe our customers are positioned in the supply chain and what portion of their business is allocated to each aircraft platform as well as where they might be leading or lagging actual demand.

Is that framework?

And based on what we know today. We estimate the net impact for Sao segment in the third quarter to be approximately $10 million of operating income. Let me offer a few points of clarification.

The estimate is not exact but rather represents the average of a range based on varying time assumptions. The estimated Financial impact is a net impact number. In other words. It is our estimated gross impact less an estimate of any mitigating action. And finally this estimate is for Sao Q3 only and may not be relevant to others.

Assuming this estimated net impact operating income in Q3 is projected to be similar to the results delivered in Q2.

The result would be a record third-quarter for SEO despite the negative impact of the 737 Max disruption. I think that speaks to the earnings strength of Sao.

Pep segment we estimate that the net impact in Q3 will will be between 1.5 and 2.5 million in operating income the same clarifications. I just made an offer to the pep segment estimate as well.

Obviously the fourth quarter is less clear, we would expect it to gross impact will be higher. But we also have more opportunity to exercise the mitigating actions. That being said it is possible. The fourth quarter net impact is similar to what I just communicated for the third quarter.

As I mentioned the exposure we are referring to is net of actions. We anticipate will reduce the disruption impact.

Those actions in the near-term include redeploying capacity to non 737 Max demand for firm orders currently in our backlog.

This would include firm orders for the broader Aerospace and defense Market as well as high value applications across our other in used markets including Transportation medical energy. I'm just really consumer in Niche markets.

in some cases

Is the long lead times we have seen due to the ramp in Aerospace demand over the last several years have been limiting our ability to capitalize on sales opportunities. In other markets. We believe she may be able to be more flexible in these high-value areas by redeploying our capacity at the Aerospace supply chain digest the 737 Max production situation.

Well, the ongoing 737 Max situation is certainly a major development. We continue to believe in a strong long-term underlying fundamentals of the Aerospace Market.

737 Max situation clearly presents challenges for the overall Aerospace supply chain. However, we believe we are better positioned than many other companies to whether this situation we will continue to evaluate the situation stay in close contact with our customers and execute initiatives aimed at partially offsetting the negative impact of the 737 Max disruption now, I'll turn it off for the Financial reviews.

Thanks, Tony. Good morning. Everyone. I'll start on slide nine income statement summary.

Net sales in the second quarter for $573 million in sales excluding surcharge or 471.2 million.

Sales, excluding surcharge grew 5% year-over-year on 7% lower volume driven by double-digit growth in our Aerospace and defense and medical end use markets.

Main levels remain strong as total backlog 7% year-over-year again driven by strength in Aerospace & Defence this quarter Mark the 12th consecutive quarter of year-over-year backlog growth.

Sg&a expenses were fifty five point three million in the second quarter up roughly four million from the same. A year ago. The increase is primarily due to the ongoing Investments and additive Manufacturing.

Going forward we expect sg&a expenses to be relatively flat. We're about fifty five million per quarter for the balance of the year.

Operating income was $55 million in the quarter compared to fifty five point four million in the prior year. Operating income in the current second quarter includes two point three million of restructuring charges related to our West business as we took actions to right-size the footprint and cost structure of that business to reflect current market conditions.

Last year second quarter included 1.2 million of acquisition-related costs associated with the lpw transaction.

Excluding these special items operating income was 57.3 million in the current quarter and fifty six point six million in the same quarter last year.

Operating income excluding special items as a percentage of sales was 12.2% in the quarter.

Our effective tax rate for the second quarter was 23.2% We currently expect the effective tax rate to be twenty-three to twenty-five percent for the balance of the year.

Net income for the quarter was 38.8 million or $0.79 per diluted share when adjusted for the restructuring charges adjusted earnings-per-share was $0.83 for the quarter.

Adjusted EPS grew 9% year-over-year marking the 12th consecutive quarter of year-over-year earnings growth.

Now turning this like 10:00 and a review of free cash flow free cash flow in the second quarter was negative $35 million within the quarter. We increased inventory by 57 million month. We expect to reduce inventory in the second half of our fiscal year consistent with our historic pattern of building inventory in the first half with a follow-on reduction in inventory in the second half of the fiscal year.

and the

Recorder we spend $47 million on capital projects. We expect to spend $170 billion in capital expenditures for fiscal year twenty-twenty consistent with our prior guidance within the $1,070 million. There are several large multi-year projects.

First one hundred million dollar hot strip Mill being constructed on our Reading PA campus. This investment is being made to provide enhanced capacity and capabilities related to our soft magnetic sport package and is expected to be completed in the summer of this year.

Second and the third quarter of fiscal year 2020 we will complete the capacity expansion projects for our dining at titanium business allowing us to capture emerging growth for a high-value titanium Solutions in the medical Market.

Finally, we recently completed our emerging Technology Center in early December . We had a grand opening to showcase the facility that is located on our Athens Alabama campus May provide some more commentary on this project later in the presentation.

finishing

This slide our liquidity position remains strong as of the close of the current quarter. We had $305 million of total liquidity including Thirty million of cash long as we have consistently said our financial position is important as it allows us the flexibility to invest in our future growth and return value to shareholders.

Now turning to slide 11:00 and our Sao segment results.

Net sales for the quarter. We're 483 million or three hundred eighty two point five million, excluding surcharge sales, excluding surcharge increase 7% year-over-year on 8% lower.

The results reflect strong demand in the Aerospace and defense and medical end use markets combined with continued improvement in our product mix. The Improvement was partially offset by the ongoing weakness in the energy market and our portfolio rationalization efforts in the industrial and consumer Market.

sequentially sales excluding surcharge decreased 3% on 6% lower volumes

Sao operating income was 76.3 Million for the second quarter with adjusted operating margin of 19.9%

The same quarter a year ago SEO is operating, with $69 million. The current quarter's performance marks the highest second quarter operating income on record for sale.

We continue to surpass prior financial performance due to the coupling of improving year-over-year product mix and creating incremental capacity being manufacturing improvements.

The current quarter's results were negatively impacted by pronounced surcharge line.

As a reminder for most of our business the impact of changes in raw materials is passed through to our customers via surcharges.

A portion of our business has a surcharge mechanism that is not aligned with how we buy raw materials and therefore creates a surcharge lag.

The surcharge lag is only significant in periods of sharply changing raw material prices.

Over the last several quarters, the surcharge leg has been in the range of one to two million and has not had a significant impact on earnings in a current quarter given a sharp increase in nickel prices off the surcharge lag resulted in an unfavorable impact in operating income of about 4 million.

In terms of the outlook for the upcoming third quarter we continue to see strong demand and most of our key end-use markets as Tony mentioned in his comments. We are currently evaluating opportunities to mitigate the impact of a 737 Max disruption in our third quarter based on feedback from our customers and what we now know we expect that we will be able to partially mitigate the near-term impact of this disruption and still deliver similar operating come in Q3 relative to Q2 for Sao.

Now turning this light 12 in our pep segment results.

Net sales, excluding surcharge. We're 104.1 million which were down 5 million from 2 to a fiscal year 2019 and the current quarter pep generated operating income of about 4 million.

Dynamite continue to experience strong demand for titanium products predominantly in the Aerospace and defense and medical end use markets in the second quarter.

Recorders results for Dynamite we're slightly below expectations. However, with the completion of the expansion projects, we expect to capture additional Medical Market opportunities in the second half of the fiscal year.

The ongoing challenges in the oil and gas industry, especially in North America continue to negatively impact the mega West operating income.

As I mentioned earlier, we took action in the second quarter to rationalize the footprint and cost structure that business based on the current market environment. We will continue to evaluate strategic options Mega West going forward as the market of olives.

The additive manufacturing business generated similar sequential losses in the current quarter and we continue to view additive as a long-term investment in emerging-market.

As we look ahead to the third quarter, we expect pep to deliver operating income similar to the second quarter.

Our estimate for Q3 includes the expected impact of 737 Max disruption on tap further the downturn in the energy Market specifically in the Permian Basin home is expected to continue oil and gas customers are continuing to moderate Investments.

We will also continue to invest strategically and additive manufacturing as this platform is critical for our long-term growth strategy.

Well now turn the call back over to Tony.

Thanks, Tim. Let's move to slide fourteen as I noted earlier over half of our Revenue comes from the Aerospace and defense in use Market.

Long-term fundamentals of the Aerospace Market or robust and Carpenter Technology is well positioned to capitalize on the future growth, especially with the ramp-up of our facility in Athens, Alabama.

But the 737 Max issue is a reminder that disruptions in the complex Aerospace supply chain will occur from time to time a Carpenter Technology. We want to be well prepared to Medical such disruptions as well as build-out businesses that will accelerate our revenue and earnings growth with that in mind. We continue to operate with a focus on driving near-term earnings growth also investing for the future in order to position Carpenter Technology for sustainable long-term growth.

We are doing this in.

Three distinct areas as portrayed on the slide first investing in emerging Technologies such as additive manufacturing to ensure our place as an Irreplaceable Solutions provider years to come second identifying an attractive market adjacencies for our Solutions such as soft magnetics that will strengthen our capabilities to capitalize on future disruptive Trends and third expanding our capacity and capability to meet strong for demand patterns and our medical induced Market, which is one of our fastest growing markets.

Let me start with additive manufacturing. I firmly believe that the future of our industry and our customers material needs are going to be meaningfully impacted by additive manufacturing our strategies last several years has been to build a leading into inactive manufacturing platform by combining the foundation of our long history of powder Metallurgy capabilities and expertise with capabilities acquired through several strategic Acquisitions. The Capstone of our additive manufacturing journey to date was the completion of our emerging Technology Center or dead on our Athens campus.

e t c demonstrates our

In platform by managing the complete production cycle Under One Roof and in one location of making metal powder reducing Parts via additive manufacturing finishing the parts off and shipping to finish parts to customers.

Another area where we continue to invest for future growth is soft magnetics to capitalize on the growing number of electrification initiatives being pursued by Major oems.

We are leveraging our existing proprietary Alloys and developing solutions for this rapidly developing Market that includes not only electric vehicles but also other electrification initiatives markets such as Aerospace and defense.

The construction of our hearts treadmill on a reading campus remains on track as we look to expand our existing soft magnetics capabilities and capacity.

And lastly the capacity expansion projects that are Dynamic facilities. The medical end-use Market has been one of our fastest growing markets give inconsistent strong demand for high-value Solutions.

That's the expansion of document will enable us to further capitalize on the demand for our Solutions, which are becoming increasingly recognized and used in the development of new medical applications.

Summarise these growth areas as his manufacturing soft magnetics and increase titanium capacity or strategic extensions of our Core Business and critical to age, you know earnings growth in Romania Solutions provided for our customers in the years and decades to come now. Let's turn to the next slide in my closing comments.

In closing, let me summarize the key takeaways from today's call. Number one. We continue to deliver consistent year-over-year earnings growth and backlog expansion. The second quarter was our 12th can suck a quarter of year-over-year earnings and sales growth and our 12th consecutive quarter of year-over-year backlog growth number to Sao delivered another record quarterly operating income with adjusted operating margin of 19.9% We see strong potential for further margin expansion Sao given our ongoing mix shift to higher-value Applications, the benefits of our Athens facility and continued productivity Improvement through the carpenter operating model number three.

customer

Athens remains High given the critical incremental capacity we can offer the Aerospace industry. We continue to progress on obtaining the stringent qualifications and receive for additional qualifications during our second quarter.

Number for the long-term demand signals in Aerospace and defense remain robust with a current backlog close to 13,000 aircraft which represents seven to eight years of production in addition a broad platform exposure and leading position across multiple attractive Aerospace submarkets offers strong future growth opportunities number five our Medical Market continues to deliver meaningful year-over-year growth as our high-value Solutions are fulfilling emergent demand and we have consistently driving sales in excess of market growth rates.

Number six we continue to operate with a focus on driving near-term earnings growth while also investing for the future in order to position Carpenter Technology for sustainable long-term growth these Investments include additive manufacturing soft magnetic and a titanium capacity expansion.

for seven

a balance sheet remains strong and we have no significant near-term financial obligations. This gives us the continued flexibility to invest in our future growth and best position Carpenter Technology package increasing returns to shareholders and number eight while the supply chain disruption caused by the 737. Max will have a near-term impact. We believe we are well-positioned to manage the situation a very diverse range of applications across other in used Market have a broad Solutions portfolio across multiple attractive Aerospace submarket. We participate on almost every commercial Aerospace platform, and we have opportunities to redeploy capacity capitalize on the growth opportunities in markets other than Aerospace.

737 Max disruption is the highest-profile topic in Aerospace industry today and rightly. So however, we are optimistic that an appropriate solution will be agreed to an aircraft return to service without question. There will be a near-term impact too early. We have given you guidance estimates for our next two quarters with the understanding that the situation can change quickly.

with the long term

Earnings potential of carpenter is intact. 737 Max disruption does not change that we remain excited about the future of Carpenter Technology. We believe the Executioner strategy will continue to enhance our long-term sustainable growth profile and will result in increasing returns for our shareholders and customers for years to come. Thank you for your interest. I'll turn it back to the operator the field your question.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to his office from the question. Queue, please press * then two.

The first question is from Josh Sullivan of The Benchmark Company, please go ahead good morning. Can you just talk a bit about you know, the appetite of those Aerospace programs outside of the 737, you know to take advantage of this short-term capacity, you know, you said either just build spares or OEM stocks, you know, I'm willing to negotiate. You know, how aggressive do you need to be to get them, you know to take that capacity.

Well, good morning Josh. I think the point is here we have.

Orders from customers in different markets that today we cannot fit into our near-term schedule. So this isn't a point of us going out and trying to find quote new business. This is business that we have in front of us that now allows us to pull that forward and satisfy that customer.

In customers are taking that inventory without any price concessions or anything along those lines.

We don't have any reason to do price concessions.

As far as the VAP qualifications go, you know, where do you stand on the total number expected? You know, I know some are more important than others, you know, maybe where do you stand on a percentage basis of the the total business needing VAP approvals with the for this quarter that puts us at nineteen. So I would say that's well over half of our way them as you know, not every qualification is of equal weight. Obviously the for that we received this quarter are meaningful, but there are still a couple large wage out there that we are working through and and many times I've said this before I would take progress on a very substantial qualification.

before I might take

A final qualification on another one if that makes sense. So we received for qualifications this month, but just as importantly we moved the ball down the field substantially on a couple other of very significant ones for said I think you'll see it start to announce over the next couple of quarters.

And then just switch it over to the pet business, you know on the medical side obviously some great growth. You'll one is there any opportunity to vertically integrate their and then to you know the off position versus the margin Dynamic with this new capacity coming on. You know, how leverage will is that? You know, how should we think about that as it gets filled here over the next year?

Let me take the second part first.

We've timed this expansion in our dining facility primarily due to medical and we're really on the razor's Edge. So to speak in many cases you build capacity before the demand. We are actually both of those simultaneously so our customers are asking for that material right now. It is a relatively complex expansion because we're expanding not just both of our facilities, but we are moving some equipment between the facilities. So that makes just another level of complexity. So the the answer the area is we are trying to expand and move equipment at the same time. They were trying to deal with in some cases significant increase in demand jobs. That is the challenge right now and to be very transparent. I think the team is doing a very nice job, but I think we need to go faster and we have customers that are standing beside Israel.

Now but at the end they they want more.

Cereal and and we need to up our game a bit there to push this expansion across the line and and get them in material. They so much desire.

Appreciate I'll get back to you a question of vertical integration. I think that really might come from a you know, I think that's where the additive manufacturing comes into play. I don't want to talk. I don't have a lot of information I share with you at this time, but I think there are opportunities for us in the vertical integration side around the am business that we're building.

Okay, thank you. The next question is from Phil Gibbs of keybanc capital markets, please. Go ahead. Good morning. Thank you Tony. What was what was the backlog growth? Overall year-on-year. I think you said Aerospace and defense is 14% But what was the overall number? And then also can you give us a feel for what your jet engine sales where you're on here? You got it. So the overall backlog growth was 7% So it's a little lower than it's been the last couple of quarters as you might guess what's pushing that number down is off your business? The backlog has decreased substantially year-over-year and also our transportation of business was down a bit as as well. That's a business wage that is quite critical for us. But at times we have an issue of fitting that into the schedule from a from an engine. I think you asked the engine sales year-over-year wage.

They were up year-over-year.

My Seventeen and half percent and up 4% sequentially.

Okay, thank you. And then just the general kind of kind of view here as we think about your Aerospace and defense businesses and its entirety you gave a nice break out here between engines fast and structural and defense, but if I think about just overall, you know overall aftermarket or call it Mr. Versus OEM within that whole portfolio wage, you know any any sense and or feel is it is it an equal split? Are you heavier on the side? Just trying to think through this as you know, the the Market's going to be, you know influx for a few quarters.

Is not an equal split I would say were more were more dependent on the OEM versus the the aftermarket.

I'd rather not give you the exact break out but I would say the majority is over here.

Okay, that's helpful. I appreciate it guys. Thanks so much. Thank you.

And if you have a question, please press * then 1 the next question comes from Gotham Kana of Colin and Company, please go ahead.

Hey, good morning guys a couple questions. So just on the sequential ebit impact that you talked about at sa pag so flat sequentially.

That's net. So what is sort of what's your estimate of the gross impact if you will before the mitigation and what happens to the four million of them out of a surcharge. Is that ever come back? Is that included in the ten million that any granularity there would be helpful. Okay, I'll start with the first of the latest Tim take on the the lack. There are two different two different questions and two separate issues.

We made a conscious decision got them and I'm not surprised. He was the one to ask this question. We made a conscious decision to say it's not the best thing for us to do to talk about water content on a per per platform. Right which gets into your question about what's gross and what's net and trying to really bifurcate all of that that out. Obviously we have assumption and we have marks for each one of those platforms to be able to get you to the number that we did for us. We thought it was best to give you that net number and really give you some clarity of what the impact was going to be for the quarter. We spent quite a bit of time on that quite frankly and I'd rather just stick to that going forward as opposed to saying what's the gross amount? What is the name? What is the net amount? I think it is fair to point out that because of the longer Cycle products that we make the production cycle is quite long.

obviously the impact in

3 is going to be less because those products are already in production cycle our contracts for the most part allow us to to not accept changes to life cycle once it has been started. But then once we get to the second quarter, I start the fourth quarter or fiscal fourth-quarter that Dynamic changes a little bit, right? So I'm gross impact will increase but as I said on the call, it also gives us an opportunity now to adjust milk schedules to go after some other business, so I didn't answer your question directly there, but hopefully you understand that's really the way we've decided to to guide on this very important issue going forward and I'll give it back to him to talk about the last time you got them on the leg. I mean as I said in my remarks a generally hasn't been a big driver of profitability one way or the other it's been about a million or two. We did have that big spike in nickel prices early in the quarter dead.

So assuming you know nickel price is normal.

I'm here and stay where they are. Yeah, there may be some return of that in a favorable lag. But you know, that's kind of all built into our numbers for Q3 and Gotham. I was used to add as you know, you can do the math. I mean a penny earnings per share is only about six hundred thousand of operating income for us. So it doesn't take a whole lot to to get to a penny a share in Sa Yo came in a bit below our guidance and that that was really one of the main factors. The lag was a little bit more negative than what we anticipated and or shipments wage or a little bit light those those last couple of days of the quarter with the holidays. There's a couple of shipments that we didn't get out. That was really the main the two main drivers for a relatively small Miss and they sale from birth versus our guidance. I should say

Yep. No, I agree. And then just so I understand have have the customers have your customers in the Forge in supply-chain conveyed to you with our plans are for the June quarter or is this truly influx? Like you're you know, you just don't know they haven't they haven't given you a number cuz we're hearing all kinds of things in the supply chain report. I'm just curious how fluid the situation is and and then relatedly to a prior question on pricing and other markets. Should we be concerned that off as other suppliers like yourselves look to backfill capacity that's being freed up from lower max volume that there is a bit of a a price degradation as you as you pursue those marginal, you know those other markets because everyone's trying to do it at the same time and any perspective on both questions. It's and I'll take the second one first. We do not anticipate.

that and we

not anticipate

taking that approach. We see this as a long-term approach. This is a short-term issue the way we see it all be in a significant one. It's not about price concessions in the near-term. It doesn't make sense to us. That's not the business that we're in and I think the relationships we have with our customers are very strong and I understand that and we want to have a long-term relationship with a customer. So I do not see that dynamic in the market to your customer question. There's no way you could you can

You can think about it this way. Our customers are in about every situation you can be in like we said there are some that have been very much more. I'll say aggressive looking forward anticipating what this might be and they've made some adjustments to their to their requirements. And those are built in those are built into our guidance today. There are there are others that although they're making these adjustments they've pivoted a bit and said, hey we have a need over here can we can remove some of our full capacity to that area? We still see some urgent spot request.

there are other

Who's got them that are still working through this and understanding?

How they want to handle it. I listen to a couple earnings calls prior two hours and listen to the management team speak and it's a very important point that you said, you can't turn this capacity on and off like a light switch. So a lot of them are really trying to think they I can't take this production down to zero because if I do I can't get back fast enough when this demand comes back. So there's a nice chunk of customers that are wrestling with that very difficult question right now. And of course, there's a couple that that had that have built a little bit more inventory than what they would like and we're working with them on an individual basis to to to mitigate that for them. I can't say that, you know, the majority of our contracts do have some flexibility causes that we that and it defines when a customer can and can't make a change for the most part. We do not we do not accept wage.

changes once that that product

has started production or if it's in finished goods, but again, we we prefer a long-term relationship and we work with each of our customers on a one-on-one basis to try to help them manage to this process effectively just like we're trying to

And one last one if I may just at the pap segment Boeing announced, you know, the 787 rate cuts of 10 at some point in early 2021. When would you like is there any ballpark you can give us on the magnitude of the impact too Pap Dynamat and when you might feel it cuz I know it's a big-time Fastener platform and wondering when that starts to kick in and how that informs your view on you know, the June quarter.

We we've taken into consideration. So the guidance that we have given you takes into consideration all those factors now. I've not given a specific number or what the how that impacts is for the for the 787. I would say this when you think about Dynamics and a lot of people rightly so think about dynamic as an aerospace business and that's that's true. But the and it's a very good business for us and we're very appreciative to have it but dining is a medical business as well and over 50% of our revenues are coming from medical entitlement. And that's that's a bit of a of a of a a mind shift that not everyone has really caught onto yet. So hope that helps

Thanks guys.

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

Thanks Kate. And thanks everyone for joining us today on our second quarter earnings call. We look forward to speaking with all of you on our third quarter call in April . Have a great day. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.