Carpenter Technology Corp

NYSE:CRS

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Carpenter Technology Corporation First Quarter 2020 Fiscal Year Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would like to now turn the conference over to Mr. Brad Edwards, Investor Relations. Please go ahead.

[Brad Edwards, Investor Relations]

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal first quarter ended September 30, 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, and the exhibits attached to that filings.

Please also note that in the following discussion, unless otherwise noted, when management discusses 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.

[Tony Thene, President and Chief Executive Officer]

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 was 1.4 in the first quarter of fiscal year 2020, which is slightly above the performance of fiscal year 2019. Over the last four years, we have made significant strides to improve the safety performance across our facilities. However, we've hit a point where our recordable rate has remained flat without improvement and we are disappointed with the results.

Our focus remains on accelerating proactive engagement with our employees and continued investment in the development of our leadership team. We are encouraged that as a result of our effort to redefine the safety culture over the last several years, our employees feel empowered to stop any process or equipment or action that is unsafe. Our employees are the face of our safety program. They are the most knowledgeable about the workplace and how to make it better.

In addition, we are putting all of our supervisors through a refresher course, focusing on the principles of human performance. We are investing heavily in our safety programs, hand safe, ergonomics, human performance and the stop program to name a few. That will lead to sustainable and lasting improvement across our business. Through employee engagement, system improvement and leadership commitment, we will continue toward our goal of a zero injury workplace.

Now, let's turn to Slide 5, and a review of our first quarter performance. In our first quarter, once again, we delivered impressive operating performance. Let me highlight a couple of noteworthy points. First, we delivered our 11th consecutive quarter of year-over-year sales growth and earnings growth. Second, we generated record first quarter operating income at SAO. And third, SAO adjusted operating margin was 20.6% during the first quarter, this marked our second consecutive quarter of 20 plus percent adjusted operating margin at SAO.

In addition, commercial execution remain strong as we continue to drive a richer product mix and delivered our 11th consecutive quarter of year-over-year backlog growth up 26%. This backlog growth includes strong gains in our key end use markets. Aerospace and defense backlog was up 40% compared to last year and medical backlog was up 15% over last year. In the aerospace and defense end use market, sales were up 19% compared to last year with gains across almost all of our submarkets as we continue to benefit from a broad industry participation and submarket diversity.

We are also uniquely positioned with our Athens facility to provide incremental capacity during this aerospace peak cycle. Overall, customer engagement levels at Athens remain high and we received an additional VAP qualification during the quarter.

Customers continue to work aggressively to secure capacity with us via long-term agreements. In fact, we recently finalized two long-term agreements with major OEMs where we are able to gain incremental market share with favorable pricing.

Another important and rapidly growing end use market for us is medical where sales increased 11% compared to last year and forward demand for our solutions remain strong. Sales into the medical market have consistently outpaced the broader industry which is a clear indication of the value of our solution and our ability to consistently gain market share.

Given our elevated supply chain position in the medical market, we are expanding our production capabilities and capacity at our Dynamet facility to capitalize on the attractive high margin growth opportunities we see in the years ahead.

Finally, we continue to support our consistent quarter-over-quarter earnings growth and strong sales execution with strategic investments in the long-term future of our industry. A company of the future must explore next generation sales and earnings growth drivers to remain successful.

In recent years an area where we have focused is additive manufacturing where we have built a leading end-to-end active manufacturing platform. We are currently generating operating losses in our Carpenter additive business, which is part of the PEP segment. It is important to note that those losses are the equivalent of research and development cost as we drive to create a business that will generate accelerated long-term growth for Carpenter Technology and enhanced value for our shareholders. I will talk more about our capabilities and key emerging technology including additive manufacturing and soft magnetics later in my comments.

Now, let's move to Slide 6, and the end use market update. Looking first to the aerospace and defense, sales were up 19% over last year, on a sequential basis sales were down, but the overall strength in the market muted the typical seasonal decline compared to prior years. Demand patterns across our submarkets remain strong and our leadership in multiple attractive application area is driving growth.

Demand in the engine submarket remains at high levels, and we saw a strong demand in the fastener submarket during the quarter. Certainly, the 737 MAX situation is a significant issue for the industry. We continue to monitor the situation and are in regular contact with our customers, current reports suggest it will be resolved in the near future. While we are seeing some adjustments in order patterns in inventory planning primarily in distribution, we are also still seeing request for expedited delivery and increased orders from materials used for spares.

Accordingly, we have not reduced production rate and have no current plan to reduce production rate as these are longer lead time products, we have a significant backlog and our solutions are utilized across multiple aircraft applications and platforms. Overall, we continue to see strong demand for aerospace grade materials and the medium to long-term industry demand is expected to remain robust. Current backlog is close to 13,000 aircraft which represents seven to eight years of production.

Moving onto the medical end use market where sales were up 11% compared to last year reflecting continued market share growth. The sequential decline in sales was largely driven by normal seasonality. Looking ahead, the outlook for the medical market points to solid demand patterns, our key submarkets, orthopedics, cardiology and dental all expect consistent growth in the coming years.

We continued to generate year-over-year sales growth well above market growth rate which demonstrates our ability to gain share and develop strategic inroads with major industry OEMs.

In addition, collaboration on [agile] [ph] manufacturing with customers is accelerating and AEM products continue to penetrate the medical market given their potential to improve patient outcomes. In just a few years, we have transitioned from being primarily a supplier to distributors to now being a strategic OEM partner whose portfolio of material solutions is increasingly recognized in the development of new medical devices and applications.

In the transportation end use market sales were up 5% compared to last year and up 2% sequentially. The increases were driven primarily by richer product mix as we look to emphasize solutions that have been specifically engineered for high temp and high wear applications. While international markets continue to struggle with macro related headwinds and new emission regulations, the demand in North America remains relatively stable. Tariffs have impacted our mode of supply chain, but we are working hard to offset those challenges by expanding market growth in countries not impacted by the tariffs.

Now moving to the energy end use market and our oil and gas and power generation sub-markets. Total energy sales were down 12% compared to last year. Overall, the oil and gas sub-market is facing notable headwinds in North America as operators have steadily moved from growing production to managing for cash flow.

North America rig count declined 3% on a sequential basis following a 10% sequential decline last quarter. On a year-over-year basis, the rig count is down 16%. The market slowdown has been accelerated due to operators reaching budget exhaustion earlier than normal in North America. The decline in drilling activity and contraction in the number of running rigs has created increasing pricing pressure as operators move to capture market share.

The declining market activity and growing pricing pressures continue to negatively impact the overall tour, rental and service market, which in turn has affected Amega West operating performance.

In the industrial and consumer end use market revenues were down 19% both year-over-year and sequentially. Sales in industrial market where negatively impacted by reduced global manufacturing and a related decline in demand for select applications. Our performance was also impacted by our ongoing portfolio prioritization as we continue shifting our overall production towards higher value applications.

Lastly, sales into the consumer market increased year-over-year as we experienced solid demand in consumer electronics. In fact, we enjoyed one of the strongest quarters in terms of bookings in the last four years. We expect to see continued healthy demand for our high-end electronic products given the increasing need for critical applications.

Now I'll turn it over to Tim for the financial review.

[Tim Lain, Vice President and Chief Financial Officer]

Thank you, Tony. Good morning everyone.

I'll start on Slide 8, the income statement summary. As Tony covered in his comments, the current quarter's results marked the best first quarter operating income since fiscal year 2014. In fact, for our SAO segment this quarter marked the best first quarter operating income performance on record, which I will comment on shortly.

Our strong financial performance in the first quarter as further evidenced that our consistent execution coupled with our solutions focus strategy is generating positive momentum in our business. We continue to drive market share gains, expand customer relationships, unlock critical capacity through operational process improvements, while also obtaining the necessary qualifications for our Athens facility.

Net sales in the first quarter were $585 million and sales excluding surcharge were $487 million. Sales excluding surcharge grew 7% year-over-year on 5% 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 by 26% year-over-year. The growth is clearly evident in our key end use markets where aerospace and defense backlog grew 40% year-over-year and medical backlog grew 15% compared to the previous year.

SG&A expenses were $52.8 million in the current first quarter up $6.1 million versus the same period a year ago. This increase is primarily due to investments in additive manufacturing. It's worth noting that we acquired LPW Technology in the second quarter of fiscal year 2019 and as such those costs were not in our cost base in last year's first quarter.

Going forward, we expect SG&A expenses to be in the range of $55 million to $60 million per quarter for the balance of the year. Operating margin was 12.3% in the quarter representing 2.4 points of margin expansion versus Q1 of fiscal year 2019 driven by the strong performance in SAO.

Our effective tax rate for the first quarter was 23.8%, we currently expect the effective tax rate to be 23% to 25% for the balance of the year. Net income for the quarter was $41.2 million, which is an improvement of almost $10 million year-over-year or 31%. Diluted earnings per share also grew a 31% year-over-year from $0.65 per share to $0.85 per share. EPS results marked another solid quarter of year-over-year growth. In fact, this quarter represents the 11th consecutive quarter of year-over-year earnings growth.

Now turning to Slide 9, and a review of free cash flow. The cash flow in the first quarter was negative $56 million. During the quarter, we increased inventory by $51 million, as we continue to align inventory levels with our increasing backlog of complex material solutions to ensure that we can meet customer demands. We currently plan to reduce inventory levels in the second half of our fiscal year as we have demonstrated in prior years.

In the first quarter, we spent $48 million in capital expenditures. We expect to spend approximately $170 million of capital expenditures in fiscal year 2020, which is consistent with the guidance that we presented in our last quarterly call. Within the $170 million, there are several large multiyear projects including the $100 million investment in the hot strip mill on our Reading PA campus that will provide capacity and capabilities related to our soft magnetics portfolio. The strip mill project is on track for completion in the summer of 2020.

The capital expenditures for fiscal year 2020 also include investments in capacity expansion projects in our Dynamet business to capture growth in the medical market. Additionally, we are nearing completion of the construction of our emerging tech center on our Athens, Alabama campus. The Dynamet expansion projects and the emerging tech center are on track to be completed by the end of our second quarter. Accordingly, our capital spending will be more heavily weighted to the first half of this fiscal year.

Our liquidity position remains strong. As of the close of the current quarter, we had $341 million of total liquidity, including $25 million of cash. As we said consistently, our financial position is important as it allows us the flexibility to invest in our future growth and return value to our shareholders.

Now turning to Slide 10 and our SAO segment results. Net sales for the quarter were $491 million or $393 million excluding surcharge. Sales excluding surcharge increased 9% year-over-year on 4% lower volumes. The results clearly demonstrate the improving year-over-year product mix driven by the aerospace and defense end use market. From an operating income perspective SAO delivered $81 million in the current quarter up 53% versus the same period a year ago. The current quarter's performance marks the highest first quarter operating income on record for SAO.

Operating margin was 20.6%, the second consecutive quarter of margin in excess of 20%. SAO's first quarter record financial performance is further evidenced that our strategic positioning and focus on driving operational improvements has momentum. We continue to both capture manufacturing improvements which are driving incremental capacity and realize benefits associated with moving additional production to Athens as qualifications are received. With one additional VAP qualification this quarter, we will continue to see benefits from Athens.

Our efforts to increase productivity and capacity are critical given our growing backlog and our strategic focus on a richer mix driven by our expanding complex solutions portfolio. In our recent first quarter, we actively managed our planned annual maintenance shutdowns at key work centers to both optimize our production schedules and ensure the reliability of our key equipment by performing the necessary maintenance.

Looking ahead to the second quarter, we continue to see strong demand trends in most of our key end use markets. We are currently expecting to deliver operating income in Q2 at similar levels to Q1 given the number of production days available in Q2 relative to Q1. Our expectations would result in the best second quarter for SAO on record.

Now turning to Slide 11, and our PEP segment results. Net sales excluding surcharge were $108 million, which were flat compared to Q1 of fiscal year 2019. In the current quarter, the PEP segment generated an operating loss of $2 million. The PEP results in the current quarter reflect ongoing strong demand for titanium products to our Dynamet business, primarily in the aerospace and defense and medical unused markets. The current quarter's results for Dynamet were slightly below expectations. However, as I mentioned, we are nearing the completion of the capacity expansion projects and expect to capture additional opportunities in the medical market in the second half of this fiscal year.

PEP's operating results in the current quarter were negatively impacted by the ongoing challenging market conditions in oil and gas industry, especially in North America, which has had a significant impact on Amega West operating income. Amega West rents and manufacturers downhill drilling tools and components to oil field service drilling companies. Given the ongoing challenges in the overall state of the industry, specifically in the Permian basin, we are actively evaluating the operating strategy for Amega West going forward to ensure we are well positioned both in the short-term and the long-term.

It's important to note that the PEP segment also includes the results of our additive business. As Tony will cover later, this business is currently generating operating losses due to its nature as a long-term investment in an emerging market. We believe additive manufacturing will be disruptive to the manufacturing industry and a catalyst for our future growth.

As we look ahead to Q2, we expect PEP to deliver a breakeven to positive $2 million of operating income in the quarter. We are excited about the growth potential for our Dynamet business and we'll continue to balance a short-term focus on maximizing profitability with a desire to maintain our leadership in emerging technologies such as additive manufacturing. I will now turn the call back to Tony.

[Tony Thene, President and Chief Executive Officer]

Thanks Tim.

As I've said before, we know that consistent and profitable revenue growth is the most critical driver of total shareholder return. Our core business continues to perform at a high level evidenced by our 11th consecutive quarter of year-over-year earnings growth. We are also confident that our core business has more upside potential with the continued implementation of the Carpenter operating model and our solutions focus. But, our vision is to go beyond what our growing core business can accomplish.

In order to fulfill that aggressive vision, we must make the necessary investments in disruptive technologies to position ourselves for sustainable long-term growth. These investments are critical as we are committed to remain a key solutions provider to our customers for decades to come. The fact said, there is no doubt that additive manufacturing is going to meaningfully impact our industry, the markets we serve and material needs of our customers. We have built a leading end to end additive manufacturing platform and today are collaborating with customers in each stage of the AEM process from power development to effective part design, while utilizing power life cycle management solutions throughout the entire process.

The construction of our emerging technology center on our Athens, Alabama campus will be completed over the coming months. This state-of-the-art facility will serve as a critical customer collaboration center and adds multiple world-class capabilities to our overall additive manufacturing footprint. The investment we have made in building our additive manufacturing business is not insignificant as we are currently absorbing approximately $5 million to $6 million per quarter of operating losses associated with the additive investments.

As I said, additive manufacturing is a critical component of our long-term vision. The investments we are making today at a time when our core business is strong are necessary to capitalize on the significant benefits we believe will materialize in the coming years.

In addition to new technologies like additive manufacturing, we are also strengthening our long-term growth profile by identifying attractive market adjacencies for our solutions. Our investment in a soft magnetics portfolio is a perfect example of this. Electrification is accelerated across many of our end use markets including transportation and aerospace. For electric vehicles, consumer adoption is expected to accelerate as the cost profile declines. Electrification is also being increasingly utilized by the aerospace industry with major OEMs announcing significant electrification efforts.

Today the automotive and aerospace industries are facing similar challenges around electrification, mainly extending range, increasing cargo capacity and improving overall system efficiency and cost profile.

In addition, we have multiple growth opportunities in a consumer electronics space. These application areas require high performance materials that can help maximize motor power, while also providing reductions in size and weight. Our soft magnetics solutions address these challenges and help drive elevated performance.

In order to enhance and grow our current leading position in this area, we are investing in new capacity and increased capabilities. As you recall, in March, 2018, we announced the $100 million investment in a new precision strip hot rolling mill in our Reading, Pennsylvania facility to help meet increasing demand for aerospace, consumer electronics and electric vehicle manufacturing customers.

We see the total addressable market for our soft magnetics solutions being in the billions compared to the current 100 million in sales. We are clearly delivering on the present with an eye to the future.

Now turning to the next slide and my closing comments. In closing, let me highlight the 10 key takeaways from today's call. Number one, we continue to generate consistent year-over-year sales and earnings growth for example, our total Carpenter Technology, we delivered our 11th consecutive quarter of year-over-year sales growth and earnings growth. The SAO segment generated the highest first quarter operating income in its history and SAO adjusted operating margin of 20.6% during the first quarter marked our second consecutive quarter of 20 plus percent adjusted operating margin.

Number two, we are confident that we have only scratched the surface as to the growth potential that we can still achieve through the further implementation of the Carpenter operating model and the sales growth we can enjoy through ever expanding customer relationships. That is a powerful statement to make as we are currently generating record operating income.

Number three, 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, our broad platform exposure and leading position across multiple attractive aerospace sub-markets offers strong future growth opportunities.

Number four, we are benefiting from the additional capacity provided by Athens and continue to achieve incremental VAP qualifications with one more qualification received this quarter.

Number five, our medical end use market is thriving as fiscal year 2019 was the highest sales level on record. We continue to gain share within the medical market by offering a full portfolio of premium materials and we expect strong forward demand.

Number six, although the quarterly operating income for our Dynamet business was a bit lower than expected, it is a business on a significant growth trajectory. As noted earlier, we are currently expanding the capabilities and capacity of both operating locations to meet the emerging demand.

Number seven, our Amega West business has been impacted by lower demand trends in North America. Even though Amega West represents only 3% of total Carpenter Technology revenue, they did lose approximately $2 million in the first quarter after breaking even in fiscal year 2019. This performance is not acceptable and we are currently looking at all options for the business and expect to return to at least breakeven in the second half of fiscal year 2020.

Number eight, today we operate a leading end-to-end additive manufacturing platform and are partnering with customers and forging new collaborations as strategic discussions in this space accelerate. However, as I mentioned earlier, the additive business is currently not profitable. This is a strategic investment that we believe will add long-term shareholder value in the years to come.

Number nine, our balance sheet remains strong and we have no significant near-term financial obligations. This gives us the continued flexibility to invest in transformative growth and best position Carpenter Technology for increasing returns to shareholders.

And number 10, the second quarter fiscal year 2020 guidance that we just provided demonstrates continued solid earnings growth. Specifically the SAO guidance if achieved, would again deliver one of the best quarters in the history of SAO and certainly the best second quarter ever. As I stated earlier, SAO has additional opportunities to increase productivity and capacity in the near term and we are actively working on those projects. As such, we expect SAO operating income to be higher in the second half of fiscal year 2020 versus the first half of the year.

In our PEP segment, we were working hard to get Amega West business back to breakeven and to complete the expansion projects in the Dynamet business, so we can capture the growth potential of a strong market. Based on our guidance, we expect the PEP segments second quarter to show sequential improvement. Further, we expect the improvement in results to accelerate in the second half of fiscal year 2020 as the additional capacity at Dynamet comes online.

More specifically, we project a third quarter to increase by as much as $9 million versus the first quarter and separately, we project the fourth quarter to also be approximately $9 million higher in the first quarter. I have said it before and I will say it again, over the last couple of years Carpenter Technology has [slowed] [ph] a bit under the radar as we have quietly put together solid quarter after solid quarter results while at the same time investing in next generation growth opportunities that will benefit the company and our shareholders for years to come.

In addition, we have communicated an outlook of continued productivity improvement and capacity enhancement. For Carpenter Technology, the present is compelling and the future is bright.

Thank you for your attention and I'll turn it back to the operator to field your questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gautam Khanna with Cowen & Company. Please go ahead.

[Jeff Molinari, Cowen & Company]

Hi. Thank you. Good morning, Tim. Tony. This is Jeff Molinari on for Gautam. Thanks for taking my question. So on SAO, great quarter there, was there anything unusual or beneficial in the margins that was driving that or what were the kind of big, or is it mostly just kind of product mix and more additional production moving to Athens?

[Tony Thene, President and Chief Executive Officer]

Yes. Good morning, Jeff. This is Tony. There were no special items in the quarter from a negative standpoint or from a positive standpoint. And it's us continuing to drive productivity, a richer mix, trying to open up capacity and also really the impact of Athens is becoming more and more positive for us each quarter.

[Jeff Molinari, Cowen & Company]

Okay. That makes sense. And so this business is performing exceptionally well. Where is the new margin bar -- can we -- is above 20% now a new norm?

[Tony Thene, President and Chief Executive Officer]

Jeff, it didn't take you and Gautam long to move on from the 20% target. So, we fit that two quarters in a row. Without giving you a specific number, I said in my opening comments. I really believe we're scratching the surface in SAO as we visit the plants and work there, there's so much more we can do on productivity and flow to increase capacity and make it a more efficient plant still. I think we're just getting started as far as what we can accomplish in SAO.

[Jeff Molinari, Cowen & Company]

Okay. That's fair enough. And if I can just ask one more here on Athens. First off, congratulations on another qualification. I know I wouldn't think that each one is the same size and volume. If that's true, have most of the larger volume of quals been completed already or are there some big ones still in the pipeline to come? Any color you can provide there would be helpful.

[Tony Thene, President and Chief Executive Officer]

Yes. You're absolutely right, Jeff. I mean, not all of the qualifications are created equal. With that said, this one that we received this quarter was important. But to the second part of your question is no, there are still some significant qualifications that are out there that we're working on. And the number of qualifications in a quarter aren't necessarily indicative of whether that was a successful quarter or not. What's really important to us is that we're moving along, some of these larger qualifications with major OEMs and we had great progress this quarter. And I would suspect that over the next quarter or two you'll be seeing more official qualifications.

[Jeff Molinari, Cowen & Company]

Okay. That's helpful. Last follow-up for me. Is there like a total qualification that you target or is there any other way we can kind of frame the potential there?

[Tony Thene, President and Chief Executive Officer]

We don't really target a specific number. We're looking at, obviously, the primary grades and the primary customers trying to open up as much capability as possible at Athens that's how we look at it.

[Jeff Molinari, Cowen & Company]

Okay. Thank you.

[Brad Edwards, Investor Relations]

Thank you.

[Operator]

The next question comes from Chris Olin with Longbow Research. Please go ahead.

[Chris Olin, Longbow Research]

Hey, good morning. Can you guys talk a little bit about your exposure to the 787 program? I assume that Dynamet does some business there on the titanium side. Do you have any content or can you talk a little bit about maybe your exposure on the Rolls Royce Trent engine or the GE alternative?

[Tony Thene, President and Chief Executive Officer]

Well, Chris, we have content across all of those platforms. The strength of Carpenter is that we're not overly weighted to any of them. So there's always going to be pluses and minuses in the market. And with the way the strength in the market today is, we just don't see those types of negative dips. So we have content on it. If it goes down a bit, it's not an issue for us, because we have much more, many areas to go.

[Chris Olin, Longbow Research]

Okay. Would the same go for the 777X and the 9X engine? Like you consider that kind of [indiscernible]?

[Tony Thene, President and Chief Executive Officer]

Like I said, we're across all of those, the strength of Carpenter is that we are across all of the platforms, across all of the applications. And as you all know, you've been around long enough, there's always going to be pluses and minuses in some specific program. And right now, we're in the middle of a peak cycle. And also I'd say, keep in mind from a Dynamet standpoint, Dynamet is not just an aerospace facility that's a major medical facility from a titanium standpoint and that market is thriving for us.

[Chris Olin, Longbow Research]

And just to be clear on Dynamet, in the beginning you said fasteners was pretty good during the quarter, but it underperformed versus expectations. It wasn't a clear to me like why exactly did it underperform, does have to do with bottlenecks?

[Tony Thene, President and Chief Executive Officer]

Well, when we set the guidance last quarter, I mean I really pushed that business to take it to the next level. Keep in mind we're in the middle of expansion projects at both of those locations, that adds an extra bit of complexity. So, with some of the challenges with that, they didn't quite hit where we guided for in the quarter. But there's really no structural problems with Dynamet, we just need to get through -- you're trying to produce at the highest level ever at the same time, bringing on two expansion projects can be a little tough at times. So that was really the drives.

[Chris Olin, Longbow Research]

Okay. That make sense. That's all I have. Thanks.

[Brad Edwards, Investor Relations]

Thank you.

[Operator]

Next question comes from Josh Sullivan with Seaport Global. Please go ahead.

[Josh Sullivan, Seaport Global]

Good morning, Tony and Tim. You mentioned, there's still a lot of room to grow on the Carpenter operating model. Can you highlight what some of those actions might be and what might drive that?

[Tony Thene, President and Chief Executive Officer]

It was really -- good morning by the way. It's really the same thing across the board, when we implement the Carpenter operating model we don't go across all of our work centers at the same time. We really target the high valued work centers that will benefit us the most. So for us, it's really spreading that philosophy across all of our businesses. And in a lean manufacturing environment with a market that wants more than you can produce, there's always going to be a bottleneck. So, as we increase one area, make it more efficient that pushes the bottleneck somewhere else, and then we go tackle that one. So, the point is we focus really on a relatively limited number of work centers and there's much more opportunity for us out there. So that's what I mean when I say there's much more opportunity. There's a lot of areas that we just quite frankly haven't touched yet.

[Josh Sullivan, Seaport Global]

And then, just within the medical market, you mentioned, you're gaining some share here. What do you think that share opportunity could grow to? And maybe where do you think your share is right now?

[Tony Thene, President and Chief Executive Officer]

It depends on the application. In some areas we are -- for all practical purposes sole sourced. And in others we have less share. So it's not one number that I can give you. It depends on the customer and it depends on the application.

[Josh Sullivan, Seaport Global]

And then just lastly on the consumer electronics growth you mentioned in the prepared remarks, is that related to the soft magnetics market currently? And then, as you think about the capacity that's coming online with the new mill here, what portion of that do you think will be consumer versus auto versus aero going forward?

[Tony Thene, President and Chief Executive Officer]

Yes. So, I'll take the first one, the last one first. The majority of the volume coming off of that new mill will be aero and transportation just because those are much larger markets. I mean, consumer is probably a 3% or 4% of total revenue for Carpenter albeit very high, very high margins. So in this case here, the answer to the first part of your question is yes, that the growth in consumer electronics is around soft magnetics, think iPhones, think those types of electronics.

[Josh Sullivan, Seaport Global]

Thank you.

[Operator]

[Operator Instructions] The next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

[Phil Gibbs, KeyBanc Capital Markets]

Thanks. Good morning, Tony, Tim and team. How are you?

[Tony Thene, President and Chief Executive Officer]

Good morning, Phil.

[Phil Gibbs, KeyBanc Capital Markets]

Just my typical question here, just on the engine sales. Can you give us just an idea how much engines, revenues grew on a year-on-year basis within aerospace?

[Tony Thene, President and Chief Executive Officer]

Well, year-on-year engines were relatively flat. But, I'd say from a total aerospace standpoint, which engines is 50% roughly. We had the highest sales ever for first quarter. So, flat from a year-over-year, but the highest sales rate ever.

[Phil Gibbs, KeyBanc Capital Markets]

So then, there'd be other sub-markets performed better I guess is the implication. So, is that defense or avionics or sort of all of the above?

[Tony Thene, President and Chief Executive Officer]

I would say all of the above.

[Phil Gibbs, KeyBanc Capital Markets]

Tony, when we're looking at, just trying to think about the electronics color that you provided, it was a little bit refreshing because you see a lot of kind of downtrodden commentary around the electronic supply chain and semiconductor supply chain. But, you said you're picking up some orders, you're seeing some green shoots in electronics. Any more perspective there?

[Tony Thene, President and Chief Executive Officer]

Well, that's an area that we really want to grow. I don't have any real specifics there. And like I said in the previous question, a relatively small part of our overall portfolio, but we see that as one of our -- quite frankly fastest growing sub-markets going forward.

[Phil Gibbs, KeyBanc Capital Markets]

Is that more so in the hands-up piece?

[Tony Thene, President and Chief Executive Officer]

Say again Phil?

[Phil Gibbs, KeyBanc Capital Markets]

In the handsets, smartphones?

[Tony Thene, President and Chief Executive Officer]

That's a big part of it. But there's other areas as well in all of the electronics, we see an opportunity for us.

[Phil Gibbs, KeyBanc Capital Markets]

And then, on the maintenance side of things, I know you typically have some maintenance and Tim you alluded to it in Q1. Any sense of the magnitude of the outages in Q1 and whether or not you're going to have any continuing in the second quarter?

[Tim Lain, Vice President and Chief Financial Officer]

I can just say this, Phil, from an overall standpoint, we're trying to get better and better the way we perform preventive maintenance. Obviously, it is critical and necessary and we've just developed a more rolling program as opposed to taking that one big large shutdown heads, we've done for decades here at Carpenter. So, you didn't have the same type of outage in the first quarter that you had compared to the past, but you'll see some, other preventive maintenance spread across the quarters to come.

[Phil Gibbs, KeyBanc Capital Markets]

Some more so level, I guess, if I'm hearing you correctly level loaded across the year versus just the beginning of the fiscal year is that you've done historically, so the practices are changing a little bit?

[Tim Lain, Vice President and Chief Financial Officer]

Correct.

[Phil Gibbs, KeyBanc Capital Markets]

Okay. Thanks so much.

[Brad Edwards, Investor Relations]

Thank you.

[Operator]

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

[Brad Edwards, Investor Relations]

Thanks Jake. Thanks everyone for joining us today on our first quarter call. We look forward to speaking with you on our second quarter call in the New Year. Have a great day.

[Operator]

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