Good morning, and welcome to the Carpenter Technology Fiscal 2022 Third Quarter Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Brad Edwards of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2022 Third Quarter ended March 31, 2022. 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, Senior 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 these 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, 2021, Form 10-Q for the quarters ended September 30, 2021, and December 31, 2021, and the exhibits attached to those 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.

Thank you, Brad, and good morning to everyone on the call today. Let's begin on Slide 4 and review our safety performance. Through the third quarter, our total case incident rate was 1.0, holding at the same level from the prior quarter. It remains above our fiscal year 2021 performance of 0.6, which was our best fiscal year safety performance on record. Safety is our #1 core value, and we continue to push towards our ultimate goal to be a 0-injury workplace. Our path to 0 includes benchmark safety systems, leadership, and employee engagement. We continue to invest in training to drive high levels of employee empowerment, further enabling our workforce as the first line of defense in injury prevention. One example of our employee engagement and safety systems in action has led to over 200 ladders being removed from our facility, reducing a source of injury risk from our operations. Now let's turn to Slide 5 and a review of the third quarter. We see strong demand in each of our end-use markets as we emerge from the pandemic. Notably, the aerospace ramp is accelerating. Although the aerospace end-use market, measured by global passenger traffic, is not yet fully recovered, our shipments continue to ramp, and our order backlogs have now exceeded pre-COVID levels. The medical end-use market conditions continued to improve as the industry recovers from the impact of the Omicron variant. End-use markets like transportation, industrial, and consumer have returned to pre-COVID levels. I would like to share 3 indicators of the demand environment. First, our backlog increased 34% sequentially and 164% year-over-year, continuing the growth we saw in the second quarter. Second, the backlog growth is driven by the bookings rate, which increased 21% sequentially and 119% year-over-year. This was a record quarter in terms of bookings for the company. And third, we continue to realize price gains on both our contractual and transactional business. We worked with our customers throughout the pandemic, preparing for the recovery across our markets. You will recall that during this time, we continued to negotiate price increases. In this last quarter, we increased base prices on our transactional business by at least 12% to 15%. This marks the third price increase in the last 10 months. I will cover the demand environment for each of our end-use markets in more detail later in this call. The SAO segment finished ahead of our expectations, driven by the strong demand environment and our ability to navigate short-term operational challenges. As we reported in March, we have completed the repair of the Reading press on time and it is fully operational. The Omicron variant has subsided after a challenge in January with significant COVID-19 isolations at key work centers. We have addressed the majority of our hiring challenges we had in the first half of fiscal year 2022. PEP's performance aligned with expectations, building on a strong second quarter. Growth in operating income was largely driven by the ongoing recovery in the medical end-use market. Finally, our liquidity remains healthy as we finished the quarter with $388 million in total liquidity. In March, we completed the refinancing of senior notes, extending our debt maturity profile. Now let's move to Slide 6 and the end-use market update. As you can see on the slide, each of our end-use markets was up sequentially and year-over-year, reflecting the recovering demand environment. Our aerospace and defense end-use market sales were up 14% sequentially and 11% year-over-year. Demand for our materials is increasing substantially as customers prepare for strong future activity. Although our shipments in the aerospace and defense end-use market were approximately 50% of pre-pandemic levels when comparing the 12 months ending March 2022 to the 12 months ending March 2020, we see demand continue to accelerate across all the aerospace submarkets as the supply chain ramps to meet steadily increasing travel demand. And despite challenges in the overall supply chain, OEMs maintain positive outlooks on further build rate increases. As a result, lead times across the industry have extended, and our backlog continues to rise as customers plan for ongoing improvement. Specifically, our aerospace and defense end-use market backlog is up 42% sequentially and 157% year-over-year, which is 17% higher than our pre-pandemic peak. In the medical end-use market, sales were up 14% sequentially and up 48% compared to last year. The results reflect ongoing recovery in elective surgeries after the Omicron variant with customers focused on increasing stock levels to meet growing demand. The overall outlook continues to be positive as medical procedures are expected to rise to pre-pandemic levels in the second half of calendar year 2022. We are seeing replenishment in the supply chain to support the expected growth as our medical end-use market backlog is up 51% sequentially and 227% year-over-year. We also see an opportunity to increase share in our titanium business as customers look to de-risk their supply of titanium from Russia. In the transportation end-use market, sales were up 14% sequentially and up 11% compared to last year. Light-duty demand remains very high with consumers continuing to buy even if inventories are at historic lows. The industry continues to deal with the supply chain challenges and chip shortages that are impacting the end-use market activity levels. With strong demand and low inventories, we expect continued improvement. We continue to see growth opportunities in the heavy-duty truck, off-road, watercraft, and aftermarket submarkets. In the energy end-use market, sales were up 44% sequentially and up 28% compared to last year. In the oil and gas submarket, a demand and supply imbalance is driving growth in investment. As the world recovers from the pandemic, requiring more energy, global supply has not kept up. The supply shortage has been further challenged by recent geopolitical disruptions. As a result, global investment and capital expenditures are expected to increase. In the industrial and consumer end-use market, sales were up 23% on a sequential basis and up 47% on a year-over-year basis. We continue to see historically high demand for our semiconductor solutions and expect demand to remain strong throughout the calendar year. In addition, we continue to see healthy demand in the electronics submarket, evidenced by increased sales and growing backlog. Further, we have strong engagement from our customers in the consumer electronics submarket and our recently commissioned Hot Strip Mill in Reading. I will review the long-term outlook for each of these markets later in the presentation. Now I'll turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. Net sales in the third quarter were $489 million, and sales, excluding surcharge, totaled $369 million. Sales excluding surcharge increased 24% from the same period a year ago on 32% higher volume. Sequentially, sales were up 17% on 15% higher volumes. Gross profit was $39.5 million in the current quarter compared to $12.8 million in the third quarter of last year and $13.1 million in the second quarter of fiscal year 2022. The improvement in gross profit is primarily due to the higher sales. The tailwind from higher sales both sequentially and year-over-year was partially offset by operational challenges that we worked through early in the quarter related to the press outage in SAO's Reading facility, as well as the ongoing inflationary pressures on operating costs, related to critical production supplies, freight, and labor. SG&A expenses were $38.4 million in the third quarter, down $9.4 million from the same period a year ago, and down $6.2 million sequentially. The current quarter's SG&A expenses include a $4.7 million noncash benefit associated with the reversal of a contingent liability from a historical acquisition for which the time period expired. We have included this benefit as a special item for the quarter. When normalizing for this benefit, SG&A expenses are down $4.7 million from a year ago, largely due to additional costs in last year's third quarter associated with implementing our new ERP system. Sequentially, again, normalizing for the special item, SG&A costs were down $1.5 million due to the timing of certain expenses and certain legal reserve adjustments. Operating income was $1.1 million in the current quarter. When excluding the impact of special items, adjusted operating loss was $1.6 million in the current quarter compared to a loss of $29.7 million in the prior year period and a loss of $29.8 million in our recent second quarter. Our effective tax rate for the third quarter was 9.6%. The effective tax rate is well below the statutory rate, given the impact of certain losses for which no benefits can be recorded as well as the impact of discrete items in the quarter. For the 9 months ended March 31, 2022, the effective tax rate is 24.5%. Earnings per share for the quarter was a loss of $0.16 per share. When excluding the impact of special items, specifically the COVID-19 costs and the benefit from the reversal of the contingent liability I mentioned, adjusted earnings per share was a loss of $0.20 per share. Now turning to Slide 9 and our SAO segment results. Net sales for the third quarter were $418 million, or $300 million excluding surcharge. Compared to the same period last year, net sales, excluding surcharge, increased 22% on 34% higher volumes. Sequentially, sales increased 19% on 15% higher volumes. The improvement in net sales was driven by increased sales and materials across all end-use markets, as Tony reviewed on the market slide. Moving to operating results, SAO reported operating income of $5.8 million for the current quarter. In the same quarter a year ago, SAO's operating loss was $9.9 million, and in the second quarter of this fiscal year, SAO reported an operating loss of $20.3 million. As we mentioned last quarter, SAO worked through some near-term operational challenges, including the Reading press outage that occurred late last quarter. The press is now back up and running as expected to support the growing demand, particularly for aerospace and defense. Year-over-year operating results increased by about $15 million when adjusting for the impacts of COVID-19 in both periods. The improvement in SAO's operating performance was largely due to the incremental margin associated with higher sales. The benefits of higher sales were partially offset by higher operating costs due to increases in production staff as well as inflationary pressures in critical operating supplies and other areas such as freight. We have continued to increase production staff in anticipation of increasing production utilization to meet the growing demand. From a sequential perspective, the higher operating results were largely a factor of the increased sales and increasing activity levels coming off the short-term operational challenges that we talked about last quarter. Looking ahead, our backlogs continue to grow, driven by strong order activity. In particular, we see increased activity across the aerospace supply chain to meet anticipated increases in build rates by the OEMs. Our teams remain focused on ensuring that we have the appropriate resources to meet the needs of our customers for the foreseeable future. Activity levels continue to accelerate in critical flow paths. Based on current expectations, we anticipate SAO will generate operating income in the range of $14 million to $18 million in the upcoming fourth quarter. Now turning to Slide 10 and our PEP segment results. Net sales in the third quarter of fiscal year 2022 were $88.4 million or $86.4 million, excluding surcharge. Net sales excluding surcharge increased 33% from the same quarter last year and were up 3% sequentially. The year-over-year growth in net sales reflects increased sales across all business units, led by our Dynamet titanium business where year-over-year demand increased in both aerospace and defense and medical end-use markets. We've also seen a significant improvement in sales driven by demand in our additive and distribution businesses. The sequential increase in net sales was led by growth in our Distribution business. In the current quarter, PEP reported operating income of $4.2 million. This compares to an operating loss of $3.3 million in the same quarter a year ago and operating income of $3 million in our recent second quarter. The year-over-year operating income improvement is primarily the result of the increased net sales, as well as the benefits from the actions we took to restructure the additive business in fiscal year 2021. As we look ahead, we believe that demand conditions will continue to improve in the coming quarters. We currently anticipate that the PEP segment will deliver operating income in the range of $4 million to $5 million for the upcoming fourth quarter. Now turning to Slide 11 and a review of free cash flow. In the current quarter, we generated $35 million of cash provided from operating activities. We have plans in place to further reduce inventory levels in our upcoming fourth quarter, albeit the levels higher than we previously planned. Our supply chains continue to see challenges, mainly around longer-than-anticipated lead times and ongoing logistics challenges. With that in mind, we are managing our inventory levels to ensure we have adequate supply to meet the strong market pull that we are seeing. With that said, our inventory days on hand metrics are still being targeted at levels well below pre-pandemic levels. I also want to highlight that we are actively managing our supply chain to minimize potential disruptions. We maintain regular contact with key suppliers to ensure that we have a steady supply of our critical raw materials and other operating supplies necessary to service our customers' needs. With the latest geopolitical events unfolding, we have not identified nor do we expect any potential sourcing issues. Moving down, we previously provided guidance that we do not expect to have any required minimum pension contributions for our U.S. qualified plans during fiscal year 2022. In the third quarter of fiscal year 2022, we spent $25 million on capital expenditures. We currently expect that the full year capital expenditures will be closer to $90 million given some delays in projects due to the availability of outside contractors as well as extended lead times for certain materials. We also continued to fund a constant dividend to our shareholders, which we consider part of our free cash flow. With those details in mind, we reported breakeven free cash flow in the quarter. Our liquidity remains healthy, and we ended the current quarter with total liquidity of $388 million including $94 million of cash and $294 million of available borrowings under our credit facility. In March 2022, we completed a $300 million bond offering to refinance $300 million of bonds that were due to mature in March of 2023. The offering pushes out the maturity date of this tranche of our debt profile to March 2030. Due to the timing of the offering and the notice requirements for the 2023 bondholders, we received the proceeds from the new bond issuance in March and redeemed the existing bonds in full in April 2022. We have excluded $300 million from the presentation of our liquidity measure as of March 31 due to the redemption of the principal of the bonds that was made in April 2022. With that, I'll turn the call back over to Tony.

Thanks, Tim. I'd like to spend some time reviewing the long-term demand outlook of our end-use markets. First, rarely do we see demand so strong in both the near term and long term across all of our end-use markets. The combination of the recovery from the pandemic and emerging macro trends have positioned our material solutions for both near-term and long-term growth. In Aerospace, we see demand accelerating across the submarkets. With global travel demand growing, narrow-body build rates are expected to increase in calendar year 2023. Material demand is also expected to continue to increase. And as you will recall, before the pandemic, industry capacity was constrained, especially in the aerospace engine submarket. Over the last decade, Carpenter Technology was the only specialty metals provider to add capacity with our Athens facility, which positions us to capture additional growth. In defense, we are partnering with customers on the development of the next-generation programs and platforms that require our material solutions. Given the geopolitical environment, investment is expected to continue well into the future. The medical market was our fastest-growing market pre-pandemic, and we anticipate similar growth as the industry recovers from the pandemic. With the focus on improved patient outcomes, the impact on more device industry continues to innovate, requiring high-value material solutions. The aging population and growth in expected procedures should drive demand well into the future. The transportation industry has led the recovery from the pandemic with high demand for light and heavy-duty vehicles. Energy market demand has already exceeded pre-COVID levels with supply not keeping up with the rapid growth in demand. To readjust the supply imbalance, the industry is expecting growth in oil and gas investment in the near term, which will drive demand for our materials. In the industrial and consumer markets, we focus on providing high-value materials to specialized applications. With the broader trends in consumer electronics, the Internet of Things, and greater connectivity, we expect continued growth in the use of our materials. Finally, we have our 2 growth platforms, Electrification and Additive. For each of these, we anticipate growth in the medium to longer term as the macro trends continue to evolve. Let's turn to Slide 14 and my closing comments. We are in an environment in which demand in every end-use market is strong for both the near term and long term. We saw substantial increases in bookings and backlog during our current third quarter, and we expect them to remain strong for the foreseeable future. We continue to realize share and price gains through contract renewals and price increases on our transactional business. With a strong demand environment, we are focused on execution. We continue to implement the Carpenter operating model to address any short-term challenges and increase productivity across facilities. The repairs to the Reading press are complete, and it is fully operational. We continue to work closely with key customers, navigating the recovery in supply chain challenges and partnering to solve their critical needs. We continue to maintain a healthy liquidity position. Finally, our soft magnetics and additive manufacturing platforms offer long-term growth opportunities. Thank you for your time. And now I will turn it over to the operator to take your questions.

The first question comes from Josh Sullivan with The Benchmark Company.

On the aerospace backlog and dynamics, how much of the acceleration in your estimate is restocking versus just aligning with the current build rates?

Josh, this is Tony. I think it's a combination of both, right? I mean when you take a look at where the backlog growth has been over the last couple of quarters, it's extremely strong. So both of those take into account. I think the biggest driver, though, is on the build rate side. When you take a look at what’s going on with the 737 MAX, the A320, very strong demand from our customers there and we see it in the backlog growth.

And have you seen any reaction in the market, titanium fastener or otherwise just on the 787 and 777X timelines?

That's a great question. Considering the recent news about the 777, from a Carpenter Technology shareholder's perspective, it doesn’t hold much significance in the short or long term. It's a lower rate production plane, and they announced a delay in deliveries until 2024, which just means a one-year pushback. Our order book is already full moving forward. The most noteworthy information for us from that news is regarding the 737 MAX, which is still on track to meet the desired production rates. We're seeing strong customer inquiries and orders for the 737 MAX, which is very encouraging. This is the key focus for Carpenter Technology compared to the uncertainty surrounding the 777.

Got it. And then just one last one. As far as customers looking to de-risk from Russian supplies, can you just outline Carpenter's titanium feedstock? You've heard a lot about Russian forging and casting tough to replace. But where and why is Carpenter a de-risking element for anybody exposed to Russian supplies?

Yes, Josh. So the conversations we're having with our customers is more about their supply chain. So we source nickel billet for the most part. Our sourcing is not through Russia. The bulk of our material comes through domestic producers of that nickel billet, and they're sourcing their material from Japan. So as our customers are looking at their supply chain, they do have supply chains that do some similar activity that our Dynamet business does with titanium, but they're looking to move away from their Russian-based supply chain into more stable supply chains, which are the conversations we're having today.

Our next question comes from Michael Leshock with KeyBanc Capital Markets.

I just wanted to ask on the base price increases of 12% to 15% on your transactional business. Is there some element of stickiness there to those increases if we see some easing of inflation or even deflation? What have you seen historically? And what can we expect?

You shouldn't expect that we will decrease prices.

Okay. And then on labor, how much more headcount do you expect to need to meet the recovery as we get back to some pre-pandemic levels? And when do you expect to get there given the cadence of hiring thus far?

Yes, good question, Michael. So it's a mixed answer now. If you look at some of the more specialized skills, there are some areas that are very tight right now. If you look at operations on our shop floor, some of our geographic locations still have hiring difficulties. However, in our larger plants, specifically Reading, we are in good shape, and we're at the headcount level we want to be at. So that's the good news, and that's the most impactful piece.

Great. And then following up on the nickel question. I think you generally sourced nickel supply from Canada, but I wanted to get an update on how you navigated the LME market issues and any impacts you saw there on the transactional business as well as contracts if there were any impacts there?

Yes. I'll take that question. Certainly, when you have such a drastic change in the nickel price, you have some discussions with your customers. We are able to work through all of that. On the transactional standpoint, we paused taking orders for a period to let that settle out.

Okay. And then did you give Jet Engine revenues for the quarter?

I did not give Jet Engine revenues for the quarter. I can tell you that they are up 16% sequentially and 13% year-over-year.

Our next question comes from Gautam Khanna with Cowen.

Just wanted to ask, at one point, you thought that fiscal '23 could be somewhere close to fiscal '19 in earnings per share. Can you give us an updated view on that?

Yes. So I did say that. The last time I said on a run rate basis, so maybe not the full 4 quarters, but I said we could be at a run rate equivalent to FY '19. If you take a look then at FY '23, what it would take to get there, all of our markets could be exceeding FY '19 levels, but the big market is aerospace, as you all know, Gautam, that's 50% of our market. If you look at this quarter, we were about 50% of what it was pre-pandemic sales. If you get into FY '23, maybe you're at 60% to 65%. There's still a point there that could be an issue of course, and you have the impact of inflation that has hit us pretty strongly in the last quarter or 2. We'll offset a big chunk of that through the pricing that we've done over the last couple of years, which has been significant and some other items we have. I've not changed my view on that, Gautam. I only remind you that I said for FY '23 on a run rate basis, we could get there. I think quite frankly, to talk a little bit more about the upcoming year FY '23, we've given guidance on Q4. You look at Q1, you probably look at those 2 quarters in tandem and say as your recovery, but then you get into our second, third, and fourth quarter, obviously, we have to execute. From a market standpoint, I think you will see significant growth on the sales side.

Could you provide an update on the fastener business, specifically regarding all alloy types such as titanium, stainless, and nickel in the aerospace sector? Please continue.

Yes, I'll go ahead and answer the fastener one, and I'll give you a couple of numbers on fastener. On a sequential basis, sales were up 18%. Backlog was a big driver as well sequentially up 42%, 182% year-over-year. That's fasteners only. The real key one on the bookings sequentially faster is up 43%. That's probably the one and almost 200% year-over-year. The year-over-year comparisons, as you know, aren't as meaningful since a year ago, we were right in the middle of the pandemic. I know the point of your question, the big driver there is probably the bookings one and sequentially, that was up 43%.

Okay. Well. And then I remember VSMPO has a facility in PA that does medical fasteners as well. I was curious if that was what you were referring to earlier in your remarks about opportunities from Russia? If so, kind of, I mean, how big of an opportunity would you describe it as?

I wasn't specifically referring to any particular plant. What I can say is that we purchase titanium and then convert it into various shapes, products, and applications. This conversion process is where we are collaborating with some customers who are asking if we could do some work for them, and we have had several discussions. How significant is it? As part of our overall growth strategy for Dynamet, we believe that this could be much higher than its current state, even prior to the pandemic, and one of the potential growth areas could be in that conversion process. If we were to enhance our capacity in this area, our plan would be to secure those developments.

Right. But on the medical side, you're not seeing increased inquiries from like the Baxters or whatever the big OEMs currently buying from VSMPO? Have they come across your desk yet asking for...

Yes. I won't discuss any specific customers, but we have seen inquiries and activity due to that situation.

Tony, I would like to hear your thoughts on the casting delays mentioned by RTX and Raytheon, along with similar concerns raised by others regarding forgings and castings as a bottleneck, possibly involving one or more suppliers that are lagging. Are you noticing anything regarding your order book that indicates a preference for one OEM over another? Are there signs in the order flows you're receiving for nickel billet from your various forging customers that might suggest an issue if someone is falling behind, which could present us with an opportunity to catch up? Yes.

Yes. Overall, demand is returning and accelerating possibly faster than expected, at least based on our observations. We've heard from several industry contacts who are concerned about whether the supply chain can quickly adjust. Our customers are mindful of this and are placing more actual orders, not just for insurance. Our press outage impacted us, but now that it’s resolved, we are experiencing a sense of urgency in our bookings. These orders are entirely driven by genuine demand as we look ahead to the next few quarters and years.

Okay. And then just one last question. Regarding the long-term contracts in the aerospace business, do you have complete protection on elements like costs, energy, and labor inflation? If not, what is the mechanism in place? How quickly are the linkages to the indices adjusted; is it quarterly or annually? Should we expect any lag that could impact margins, or should we be aware of that?

Across all of our long-term contracts, the main cost passthrough element is materials, particularly nickel, which constitutes 50% of our costs. This effectively protects us against 50% of any inflation costs. The specifics can vary for each long-term contract, but most have a three-month lag. If you purchase something this quarter, pricing will reflect the previous quarter going forward. Certainly, rising nickel prices can affect the customer, but the opposite is true when prices decrease. Over extended periods, such as several years, these fluctuations tend to balance out, although there may be some quarter-to-quarter lag effects. As you know, we rarely discuss this because it’s usually not significant for us. However, given the recent substantial increase in nickel prices, now might be a relevant time to address it. On the energy front, we engage in natural gas hedging, which accounts for 5% of our total costs. While this is not negligible, it does not compare to materials costs. We mitigate our exposure by implementing various tranches of energy hedges.

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

Thank you, and thanks to everyone for joining us today for our third quarter conference call. We look forward to speaking with all of you again on our year-end call. Thanks again, and have a great day.

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