Carpenter Technology Corp Q2 FY2020 Earnings Call

Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal second quarter ended December 31, 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 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 in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2019, Form 10-Q for the quarter ended September 30, 2019, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses 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.

Thank you, Brad, and good morning to everyone on the call today. Let's begin on Slide 4 and a review of our safety performance. Our total case incident rate, or TCIR, stands at 1.3 through the second quarter of fiscal year 2020. Our employees are the face of our safety program. They are the most knowledgeable about the workplace and know how to make it safer. Their engagement and promotion of our safety systems are essential for our success. While TCIR is our primary measure of performance, we continue to see improvements in our leading indicators. 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, proactive activities such as reporting near misses and safety stops have 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 0 injury workplace. Now let's turn to Slide 5 and a review of the second quarter performance. Our second quarter results demonstrate our ability to deliver consistent year-over-year earnings growth and drive backlog expansion while generating record performance at SAO. This past quarter marked our 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 high level. Our solutions help customers address critical performance requirements, and this is driving expanded sales opportunities and share gains across our end-use markets. At SAO, we are driving a richer product mix, which contributed to record second quarter operating income. This marked the second consecutive quarter of record operating income performance at SAO. 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 second quarter. This is the fifth consecutive quarter in which SAO adjusted operating margin was above 18%. In the Aerospace and Defense end-use market, sales increased 19% year-over-year and backlog was up 14% compared to last year. Our sales and backlog performance in the Aerospace and Defense end-use market demonstrate the benefits of our broad solutions portfolio, our strong presence across attractive submarkets and participation on almost all the major platforms. In addition, customer activity and dialogue at Athens remains high, and we received 4 additional VAP approvals during the second quarter. Sales in the medical end-use market, which accounts for approximately 9% of total company revenue, increased 13% compared to last year. Our high-value solutions continue to capitalize on strong demand patterns. Lastly, 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. I will touch more on this subject later in the presentation. Now let's move to Slide 6 and the end market update. Looking first at Aerospace and Defense, where sales increased 19% compared to last year. This is 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're certainly not immune to the situation, we do believe we're well-positioned to navigate the near-term impact. I will provide more detailed comments on this topic shortly. Moving on to the Medical end-use market, where sales were up 13% year-over-year. This growth was due to share gains, primarily in the orthopedic and dental submarkets. It is clear our solutions bring significant value to customers as we're winning market share, and our deepened OEM relationships are unlocking incremental opportunities for our high-value applications. Capacity expansion projects at Dynamet are nearing completion, which will allow us to further capitalize on the strong forward demand indicators we see in this end-use market. We see ongoing strong demand for applications across many of our submarkets, including orthopedics, cardiology and dental. In the Transportation end-use market, sales were up 4% compared to last year. In the light-vehicle submarket, there is 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 strip solutions that are specifically designed to address increasing engine performance requirements. Now moving to the energy end-use market and our oil and gas and power generation submarkets. 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, idled equipment and continue to operate with a focus on managing 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 Amega West business during the second quarter. In the industrial and consumer end-use market, revenues were down 18% year-over-year and sales declined mainly due to reduced infrastructure activity and some volatility in the semiconductor market. It is also important to note that our sales into the industrial submarket continue to be impacted by portfolio prioritization as we further shift our production to higher value solutions. Now let's move to Slide 7, where I will update you on a 737 MAX discussion. Over the last several years, we've worked hard to refine our strategic vision, which is to be a preferred solutions provider of mission-critical products 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 evident today as the supply chain manages through the 737 MAX disruption. More than half of our total revenue is generated from the Aerospace and Defense end-use market, which, as you know, is an attractive margin business. However, we also provide key solutions in other strategic end-use markets such as Medical, Industrial and Consumer and Transportation. Important to note that across every one of these end-use markets, we participate in the top 1% of the value pyramid, high-end specialty alloy products that address critical application performance requirements. In our Aerospace and Defense market, we participate in rich submarkets such as engines, fasteners, structural and defense with exposure to 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 portfolio breadth provides opportunities to partially mitigate disruptions in the market, such as the current 737 MAX issue over the next couple of quarters. With that said, it's clear that 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 their material needs 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 of certain customers that already anticipated the latest negative news to some degree and adjusted their projected requirements. We've also seen certain customers reporting a high need for spares 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 to manage; 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? Carpenter 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 it more difficult for us to specifically identify which platform or application each pound of material that we sell will be used in. However, we know our customers well and can make certain assumptions. Those assumptions 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. With that framework in mind and based on what we know today, we estimate the net impact for our 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 actions. And finally, this estimate is for SAO Q3 only and may not be relevant to other periods. Assuming this estimated net impact, SAO operating income in Q3 is projected to be similar to the results delivered in Q2. The result would be a record third quarter for SAO despite the negative impact of the 737 MAX disruption. I think that speaks to the earnings strength of SAO. For our PEP segment, we estimate that the net impact in Q3 will be between $1.5 million and $2.5 million in operating income. The same clarifications I just made apply to the PEP segment estimate as well. Obviously, the fourth quarter is less clear. We would expect that the gross impact will be higher, but we also have more opportunity to exercise the mitigating actions. That being said, it is possible that 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 end-use markets, including Transportation, Medical, Energy, and Industrial and Consumer end-use markets. In some cases, 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 we may be able to be more flexible in these high-value areas by redeploying our capacity as the aerospace supply chain digests the 737 MAX production situation. While the ongoing 737 MAX situation is certainly a major development, we continue to believe in the strong long-term underlying fundamentals of the aerospace market. The 737 MAX situation clearly presents challenges for the overall aerospace supply chain. However, we believe we are better positioned than many other companies to weather 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 over to Tim for the financial review.

Thanks, Tony. Good morning, everyone. I'll start on Slide 9, the income statement summary. Net sales in the second quarter were $573 million, and sales, excluding surcharge, were $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. Demand levels remain strong as total backlog grew 7% year-over-year, again, driven by the strength in Aerospace and Defense. This quarter marked the 12th consecutive quarter of year-over-year backlog growth. SG&A expenses were $55.3 million in the second quarter, up roughly $4 million from the same period a year ago. The increase was primarily due to the ongoing investments in additive manufacturing. Going forward, we expect SG&A expenses to be relatively flat or about $55 million per quarter for the balance of the year. Operating income was $55 million in the quarter compared to $55.4 million in the prior year period. Operating income in the current second quarter includes $2.3 million of restructuring charges related to our Amega West business as we took actions to rightsize the footprint and cost structure of that business to reflect current market conditions. Last year's 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 $56.6 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 23% to 25% 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 to Slide 10 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. 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. In the second quarter, we spent $47 million on capital projects. We expect to spend $170 million in capital expenditures for fiscal year 2020, consistent with our prior guidance. Within the $170 million, there are several large multiyear projects. First, the $100 million 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 magnetics portfolio and is expected to be completed in the summer of this year. Second, in the third quarter of fiscal year 2020, we will complete the capacity expansion projects for our Dynamet titanium business, allowing us to capture emerging growth for our high-value titanium solutions in the Medical market. Finally, we recently completed our emerging technology center. In early December, we held a grand opening to showcase the facility that is located on our Athens, Alabama campus. Tony will provide some more commentary on this project later in the presentation. Finishing up this slide, our liquidity position remains strong. As of the close of the current quarter, we had $305 million of total liquidity, including $30 million of cash. 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.

Thanks, Tim. Let's move to Slide 14. As I noted earlier, over half of our revenue comes from the Aerospace and Defense end-use market. The long-term fundamentals of the aerospace market are robust, and Carpenter Technology is well-positioned to capitalize on 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. At Carpenter Technology, we want to be well prepared to mitigate 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 while also investing for the future in order to position Carpenter Technology for sustainable long-term growth. We are doing this in 3 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 in the years to come. Second, identifying 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 forward demand patterns in our Medical end-use 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 strategy over the last several years has been to build a leading end-to-end additive 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 ETC, on our Athens campus. ETC demonstrates our end-to-end platform by managing the complete production cycle under one roof and in one location of making metal powder, producing parts via additive manufacturing, finishing the parts and shipping the finished parts to customers. Another area where we continued to invest for future growth is soft magnetics to capitalize on the growing number of electrification initiatives being pursued by major OEMs. We're leveraging our existing proprietary alloys and developing solutions for this rapidly developing market that includes not only electric vehicles but also other electrification initiatives and markets such as Aerospace and Defense. The construction of our hot strip mill on our Reading campus remains on track as we look to expand our existing soft magnetics capabilities and capacity. And lastly, the capacity expansion projects at our Dynamet facilities. The Medical end-use market has been one of our fastest-growing markets, given consistent strong demand for our high-value solutions. The capacity expansion at Dynamet 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. To summarize, these growth areas: additive manufacturing; soft magnetics and increased titanium capacity are strategic extensions of our core business and critical to accelerating our earnings growth and remain a solutions provider for our customers in the years and decades to come. Now let's turn to the next slide and my closing comments. In closing, let me summarize the key takeaways from today's call. Number one, we continued to deliver consistent year-over-year earnings growth and backlog expansion. The second quarter was our 12th consecutive quarter of year-over-year earnings and sales growth and our 12th consecutive quarter of year-over-year backlog growth. Number two, SAO delivered another record quarterly operating income, with adjusted operating margins of 19.9%. We see strong potential for further margin expansion at SAO, given our ongoing mix shift to higher value applications, the benefits of our Athens facility, and continued productivity improvements through the Carpenter operating model. Number three, customer engagement at Athens remains high given the critical incremental capacity we can offer the aerospace industry. We continue to progress on obtaining the stringent VAP qualifications and received 4 additional qualifications during our second quarter. Number four, the long-term demand signals in Aerospace and Defense remained robust with a current backlog posted at 13,000 aircraft, which represents 7 to 8 years of production. In addition, our broad platform exposure and leading position across multiple attractive aerospace submarkets offer strong future growth opportunities. Number five, our Medical end-use market continues to deliver meaningful year-over-year growth as our high-value solutions are fulfilling emergent demand, and we're 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 your future in our mission to position Carpenter Technology for sustainable long-term growth. These investments include additive manufacturing, soft magnetics, and titanium capacity expansion. Number seven, our balance sheet remained 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 for 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're well positioned to manage the situation. We have a diverse range of applications across other end-use markets. We have a broad solution portfolio across multiple attractive aerospace submarkets. We participate on almost every commercial aerospace platform, and we have opportunities to redeploy capacity to capitalize on the growth opportunities in markets other than aerospace. The 737 MAX disruption is the highest profile topic in the aerospace industry today and rightly so. However, we are optimistic that an appropriate solution will be agreed and aircraft will return to service. Without a doubt, there will be a near-term impact to earnings. 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 intact, the 737 MAX disruption does not change that. We remain excited about the future of Carpenter Technology. We believe the execution of our 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, and I'll turn it back over to the operator to field your questions.

The first question is from Josh Sullivan of The Benchmark Company.

Are they willing to negotiate? How aggressive do you need to be to get them to take that capacity?

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 new business. This is a business that we have in front of us that now allows us to pull that forward and satisfy that customer.

And then customers are taking that inventory without any price concessions or anything along those lines?

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

Got it. And then just as far as the VAP qualifications go, where do you stand on the total number expected? I know some are more important than others. Maybe where do you stand on a percentage basis of the total business needing VAP approvals?

With the four this quarter, that puts us at 19. So I would say that's well over half of our way there. As you know, not every qualification is of equal weight. Obviously, the four that we received this quarter are meaningful, but there are still a couple large ones out there that we are working through. 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 four qualifications this month, but just as importantly, we moved the ball down the field substantially on a couple of other very significant ones for us. And I think you'll see it start to announce over the next couple of quarters.

Got it. And then just switching over to the PEP business. On the Medical side, obviously, some great growth. One, is there any opportunity to vertically integrate there? And then two, the utilization versus the margin dynamic with this new capacity coming on, how leverageable is that? How should we think about that as it gets filled here over the next year?

Let me address the second part of your question first. We are expanding our Dynamet facility primarily due to increasing medical demand, and we are in a unique position where we are both building capacity and experiencing demand at the same time. Our customers are currently requesting that material. This expansion is complex because we are not only expanding both our facilities but also relocating some equipment between them, adding another layer of difficulty. Currently, we are trying to expand and shift equipment while also responding to a significant rise in demand. That is our current challenge. To be clear, I believe our team is doing well, but we need to accelerate our efforts as our customers are eager for more material. We must enhance our capabilities to complete this expansion and supply them with the material they need. Regarding your question on vertical integration, I believe opportunities may arise in the additive manufacturing area. I don’t have much detailed information to share at this moment, but I see potential for us in terms of vertical integration as we develop the AEM business.

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

Tony, 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 were year-end?

You got it. So the overall backlog growth was 7%. So it's a little lower than it's been in the last couple of quarters, as you might guess. What's pushing that number down is the energy business; the backlog has decreased substantially year-over-year, and also our Transportation business was down a bit as well. That's a business for us that is quite critical for us, but at times, we have an issue of fitting that into the schedule. From an engine, I think you asked the engine sales year-over-year; they were up year-over-year by 17.5% and up 4% sequentially.

Okay. Looking at your Aerospace and Defense businesses as a whole, you provided a nice breakdown of engines, faster and structural, and defense. However, in terms of the overall aftermarket or MRO versus OEM within that entire portfolio, do you have any insights? Is it evenly divided, or do you lean more towards the OE side? I'm trying to understand this as the market is expected to fluctuate over the next few quarters.

It is not an equal split. I would say we're more dependent on the OEM versus the aftermarket. I'd rather not give you the exact breakout, but I would say the majority is OEM.

The next question comes from Gautam Khanna of Cowen & Company. It is not an equal split. I would say we're more dependent on the OEM versus the aftermarket. I'd rather not give you the exact breakout, but I would say the majority is OEM.

I have a couple of questions regarding the sequential EBIT impact you mentioned at SAO, which is $10 million and flat sequentially. That's the net figure. What is your estimate of the gross impact before any mitigation? Additionally, what is the status of the $4 million in out-of-phase surcharges? Will that amount come back, and is it factored into the $10 million net? Any detailed information on this would be appreciated.

I will begin by addressing the first question, and I'll let Tim handle your two separate inquiries. We made a deliberate choice not to discuss water content per platform, which relates to your question about gross versus net figures. We have established assumptions and values for each platform to arrive at the figures we provided. We felt it was more beneficial to share the net number and clarify what the quarter's impact would be. We dedicated significant time to this decision, and I'd prefer to maintain this approach rather than differentiate between gross and net amounts. It’s important to note that due to the longer production cycles of our products, the impact in Q3 will be less because those products are already in the production phase. Our contracts typically do not allow for changes to the production cycle once it has begun. However, as we move into the fourth quarter, that situation will evolve, and the gross impact will rise. As I mentioned during the call, it also provides us with an opportunity to adjust production schedules to pursue other business. I realize I didn't directly answer your question, but hopefully, this gives you an understanding of our approach regarding this significant issue moving forward. Now, I will turn it over to Tim to discuss the lag.

Gautam, on the lag, I mean, as I said in my remarks, it generally hasn't been a big driver of profitability. One way or the other, it's been about $1 million or $2 million. We did have that big spike in nickel prices early in the quarter. So assuming nickel prices normalize here and stay where they are, yes, there may be some return of that in a favorable lag, but that's kind of all built into our numbers for Q3.

And Gautam, I want to emphasize that as you know, $0.01 earnings per share equates to roughly $600,000 in operating income for us. It doesn’t require much to reach that $0.01 per share. Our SAO came in slightly under our guidance, which was a significant factor in this. The lag was slightly more detrimental than we expected, and our shipments in the final days of the quarter were affected by the holidays. We missed a few shipments, which were the main reasons for the small shortfall in SAO compared to our guidance.

Yes, I agree. Just to clarify, have your customers in the forging supply chain shared their plans for the June quarter with you? Or is the situation still uncertain, meaning they haven't provided any numbers? We're hearing various reports from the supply chain. I'm curious about how variable things are right now. Additionally, in relation to a previous question about pricing in other markets, should we be worried that as other suppliers, like yourselves, try to fill capacity freed up by lower maximum volumes, there might be some price declines as everyone competes for those marginal markets? I'd appreciate your insights on both questions.

I'll address the second question first. We do not expect that and do not plan to take that approach. We view this as a long-term strategy. While it is indeed a significant short-term issue, we are not considering price concessions at this time as that does not align with our business model. Our relationships with our customers are robust, and we are committed to maintaining long-term partnerships. I do not perceive that dynamic in the market. Regarding your customer question, our customers are experiencing a range of situations. Some have been more proactive, anticipating potential challenges, and have adjusted their requirements accordingly, which we have factored into our guidance. Others are adapting slightly by shifting core capacity to meet immediate needs, despite still having urgent requests. Additionally, there are customers who are still navigating this situation and deciding on their approach. I’ve listened to several earnings calls recently, and it's important to note that capacity cannot be adjusted as easily as flipping a switch. Many are grappling with the challenge of not wanting to reduce production to zero, as that would hinder their ability to ramp up quickly when demand rebounds. A number of customers are currently facing this tough decision. Furthermore, a few have accumulated more inventory than desirable, and we are engaging with them individually to find solutions. Most of our contracts include flexibility clauses that specify when changes can be made. Typically, we do not allow modifications once production has commenced or if the products are in finished goods. Nevertheless, we prioritize long-term relationships and strive to assist each customer on a personal basis to navigate this process effectively, just as we are doing.

And one last one, if I may. Just at the PEP segment, Boeing announced the 787 rate cut to 10 at some point in early 2021. When would you, A, like, is there any ballpark you can give us on the magnitude of the impact to PEP Dynamet? And when you might feel it? Because I know it's a big titanium fastener platform and wondering when that starts to kick in and how that informs your view on the June quarter?

We've taken into consideration all those factors in the guidance we've provided. While I haven't specified a number regarding the impact on the 787, I want to highlight that although many people associate Dynamet primarily with aerospace, it also has a significant medical component. In fact, over 50% of our revenues come from the medical sector within Dynamet, which is a perspective that not everyone has fully recognized yet. I hope this provides some clarity.

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.

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