Good day and welcome to Carpenter Technology Corporation Third Quarter 2023 Conference Call. All participants are in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like now to hand the conference over to John Huyette, Vice President of Investor Relations. Please go ahead, sir, at this time. Thank you.

Thank you, Operator. Good morning everyone and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2023 Third Quarter ended March 31, 2023. 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. Risks 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, 2022, Forms 10-Q for the quarters ended September 30, 2022 and December 31, 2022, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, those references exclude surcharges. When referring to operating margin, that is based on adjusted operating income excluding special items and sales excluding surcharges. I will now turn the call over to Tony.

Thank you, John, and good morning to everyone on the call today. I'll begin on slide four and a review of our safety performance. Through the third quarter of fiscal year 2023, our total case incident rate was 1.4. We saw improved performance in the third quarter, lowering the year-to-date rate. As we have discussed in recent quarters, the year-over-year rate increase is largely due to the increased number of employees undertaking new tasks, either as new hires or transfers into new roles. We continue to invest in additional training for any employee new to a job or task, with frequent monitoring and follow-up. Although a 1.4 injury rate would rank us as one of the safest metal manufacturing companies, our goal continues to be a zero-injury workplace. Now, let's turn to slide five and a review of the third quarter. The third quarter performance was driven by higher productivity at our operating facilities and increasing demand in each of our end-use markets. Most notably, we see the Aerospace and Defense end-use market ramp excel. With a strong demand environment, our backlog increased 10% sequentially and 70% year-over-year. This marks the ninth consecutive quarter of backlog growth. And with the strong demand environment across our end-use markets, we continue to realize price gains, which expands our operating margins. In fact, this week, we announced another price increase of 7% to 12% on our transactional business. We continue to improve the productivity of our labor force across our facilities by safely onboarding new employees across all of our production centers and investing in the training required to accelerate learning. We are starting to realize the benefits of these productivity efforts and the performance of our business segments. For the quarter, the SAO segment delivered operating income of $49 million, exceeding our expectations. With the improvement in productivity, we were able to ship additional material to our customers, particularly in the Aerospace and Defense and Medical end-use markets. The PEP segment turned in another strong performance with $10.2 million in operating income for the recent quarter. In particular, we saw strong demand for titanium products for the aerospace, defense, and medical end-use markets. Finally, our liquidity remains healthy, as we finished the quarter with $212 million in total liquidity. Now, let's move to slide six and the end-use market update. All of our end-use markets were up year-over-year and sequentially, except the medical end-use market, which was essentially flat sequentially. Our near-term and long-term outlook for each of our end-use markets remains positive and our record backlog levels support this outlook. Our aerospace and defense end-use market accounted for 49% of sales continues to ramp and was up 21% sequentially and 59% year-over-year. Customers across our aerospace submarkets continue to urgently request material and seek higher delivery levels. Global aerospace traffic continues to grow, pushing the supply chain to ramp production for new planes to meet the growing demand. As a result of the continued increases in demand, lead times across the industry have extended, and our backlog continues to rise. Notably, our Aerospace and Defense end-use market backlog is up 17% sequentially and 93% year-over-year. Our record backlog levels reflect price increases and customer urgency to secure material. The medical end-use market accounting for 13% of sales was essentially flat sequentially and up 35% year-over-year. The higher year-over-year results were driven primarily by ongoing growth in electric surgery. To meet growing demand for electric surgery, customers are increasing their manufacturing activity. The overall outlook continues to be positive as medical procedures are expected to rise throughout calendar year 2023. We are seeing evidence of this replenishment in the supply chain as our medical end-use market backlog is up 9% sequentially and 80% year-over-year. The transportation end-use market accounted for 7% of sales was up 25% sequentially and up 5% compared to last year with strong demand and low inventory of both light-duty and heavy-duty vehicles. Build rates are expected to increase throughout calendar year 2023. The energy end-use market accounting for 6% of sales was up 27% sequentially and up 24% compared to last year. Demand for energy continues to outpace supply, driving growth in capital investment and demand for our material solutions. In many cases, the materials we are supplying into the energy end-use market are now reaching margins similar to our Aerospace and Defense business due to the unique solutions and overall demand environment. The industrial and consumer end-use market accounted for 19% of sales was up 22% sequentially and up 17% year-over-year. We remain focused on high-margin high growth business like material solutions used in semiconductor fabrication. Now, I will 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 $690.1 million and sales excluding surcharge totaled $491.5 million. Sales excluding surcharge increased 33% from the same period a year ago on 15% higher volume. Sequentially, sales were up 17% on 13% higher volume. The higher volumes are driven by our improving productivity and throughput across our operations. I would also note that the sales growth outpaced the volume growth both sequentially and year-over-year, driven by an improving product mix and increased base prices. Gross profit was $93.5 million in the current quarter, compared to $39.5 million in the same quarter of last year and $70 million in the second quarter of fiscal year 2023. Gross profit is up 137% compared to the same quarter last year and up 34% sequentially. The improvement in gross profit is primarily driven by higher sales and improving product mix and increased selling prices partially offset by inflationary cost increases. SG&A expenses were $54.2 million in the third quarter, up about $16 million from the same period a year ago and roughly $7 million higher sequentially. When adjusting for the special item in last year's third quarter, SG&A expenses were up roughly $11 million year-over-year. The increase in SG&A expenses largely reflects higher variable compensation accruals, higher travel costs, and the timing of certain other expenses. The SG&A line includes corporate costs, which totaled $19.6 million in the recent third quarter. As we look ahead to the upcoming fourth quarter of fiscal year 2023, we expect corporate costs to be about $21 million. Operating income was $39.3 million in the current quarter. When excluding the impact of special items in the prior year quarter, adjusted operating loss was $1.6 million and in our recent second quarter, operating income was $22.6 million. Again, the improvement in profitability is being driven by the increasing productivity driving volume gains along with mix and price benefits. Although not shown on the slide, interest expense was $14.5 million in the current quarter compared to $13 million in our recent second quarter. The increase is due to the rising interest rates on our outstanding revolver borrowings. We currently expect interest expense to be about $15 million in our upcoming fourth quarter. Our effective tax rate for the third quarter was 22.5%. We continue to expect that the full year 2023 effective tax rate will be approximately 22% to 24%. Earnings per share for the current quarter was $0.38 per share. The results demonstrate our continued momentum supported by improving productivity and a strong demand environment. Now turning to Slide 9 and our SAO segment results. Net sales for the third quarter were $603.4 million or $411.5 million excluding surcharge. Compared to the same period last year, net sales excluding surcharge increased 37% on 13% higher volumes. Sequentially, net sales excluding surcharge increased 19% on 14% higher volume. The year-over-year improvement in net sales was driven by higher shipment volumes due to productivity gains, the impacts of higher prices, and an improving product mix across our key end-use markets, as Tony reviewed on the market slide. Sequentially, we continue to drive momentum in net sales as the operating efficiencies drove higher volumes combined with a stronger mix of products. Moving to operating results, SAO reported an operating income of $49 million in our recent third quarter, a significant improvement versus both the same quarter last year and our recent second quarter. The improving operating income results reflect continued progress towards returning to our fiscal year 2019 run rates. On a year-over-year basis, the SAO adjusted operating income improvement of $41.4 million is largely due to higher sales driven from increased production activity and throughput which has also improved our cost performance. This was coupled with an improving product mix and price increases on both transactional and contract business. On a sequential basis, operating income improved $18.7 million, which is ahead of the expectations we set last quarter. This was driven by increased volumes, as we continue to ramp our operations to meet the strong demand, partially offset by higher variable compensation accruals in the current quarter. Looking ahead, the SAO team remains focused on accelerating activity levels and production flow in a safe manner to meet the needs of our customers for the foreseeable future. Based on current expectations, we anticipate SAO will generate operating income in the range of $65 million to $70 million in the upcoming fourth quarter of fiscal year 2023. This is significant as it would mark a return to pre-pandemic operating income levels. Now turning to Slide 10 and our PEP segment results. Net sales in the third quarter of fiscal year 2023 were $115.1 million or $103.8 million excluding surcharge. Net sales excluding surcharge increased 20% from the same quarter last year and 6% sequentially. The year-over-year growth in net sales reflects increased demand primarily in our Dynamet Titanium and additive businesses. In our Dynamet titanium business, net sales increased in both the Aerospace and Defense and Medical end-use markets from the same quarter a year ago. We've also seen a significant improvement in year-over-year sales in our additive business driven primarily by aerospace and defense market applications. The sequential increase in net sales primarily reflects increases in both Dynamet titanium sales and additive sales to the aerospace and defense end-use market. In the current quarter, PEP reported operating income of $10.2 million. This compares to adjusted operating income of $4.4 million in the same quarter a year ago and operating income of $9.3 million in the second quarter of fiscal year 2023. The operating income improvement year-over-year is largely driven by higher sales in our Dynamet and additive businesses. We currently anticipate that the PEP segment will deliver operating income in the range of $10 million to $11 million for the upcoming fourth quarter of fiscal year 2023. Now turning to slide 11 and a review of adjusted free cash flow. In the current quarter, we generated $5 million of cash from operating activities, or a $91 million sequential improvement. The increase is largely attributable to the higher earnings, combined with an inventory reduction of $13 million, compared to an inventory build in the prior quarter. We anticipate that we will reduce inventories from the current levels in the upcoming fourth quarter. The reduction will be driven by increased shipments and a more balanced flow of materials across the operations. In terms of other working capital, the current quarter's $69 million use of cash is largely due to increased accounts receivable, driven by higher sales, as the quarter progressed. In the third quarter of fiscal year 2023, we spent $21 million on capital expenditures. We expect fiscal year 2023 capital expenditures to be in the range of $80 million to $85 million, which is down slightly from the previous guidance of $85 million to $90 million due to the timing of our capital projects. Lastly, as I continue to highlight, we continue to fund a constant dividend to our shareholders which is included in our adjusted free cash flow and an important part of our overall shareholder return. With those details in mind, we reported adjusted free cash flow of negative $26 million in the third quarter of fiscal year 2023. Looking ahead to the fourth quarter, we expect to generate positive adjusted free cash flow. Our liquidity remains healthy and we ended the current quarter with total liquidity of $212 million, including $22 million of cash and $190 million of available borrowings under our credit facility. Earlier this month, we executed an agreement with our banking group to amend and extend our credit facility. Under the agreement, we increased our credit facility size from $300 million to $350 million and extended the maturity to April 2028. You should note that the incremental $50 million is not reflected in this slide, as the increase was effective post-quarter end. With that, I will turn the call back to Tony.

Thanks, Tim. Now, to recap our third quarter of fiscal year 2023. Demand continues to increase, with positive near-term and long-term outlooks in each of our end-use markets. Notably, the aerospace submarkets continue to accelerate their recovery. As a result, our backlog continues to grow, and we expect it to remain strong for the foreseeable future. To meet the demand, we are continuing to increase production rates at all of our manufacturing facilities. To do that, we are focused on safely onboarding and training new employees across work centers to improve productivity. By increasing volumes, improving mix, increasing prices, and improving productivity, we will continue to see margin expansion. Notably, we expect margins to continue to improve in the SAO segment. We will continue to offset inflationary pressures through our raw material surcharge mechanism and our ability to increase prices on both our contractual and transactional business. As evident, we just announced our latest round of transactional price increases of 7% to 12% this week. It is important to note that inventory levels decreased during the quarter and we expect inventory to further decrease through the remainder of the fiscal year. And most importantly, looking ahead, we are positioned to achieve our goal of delivering operating income at the fiscal year 2019 run rate range in the fourth quarter of fiscal year 2023. Let's turn to the next slide and take a closer look at our full fiscal year 2023 outlook. On our last earnings call, I reviewed the path to achieving the fiscal year 2019 operating income run rate by the fourth quarter of this fiscal year. As you can see in the chart on the right, we have finished the third quarter ahead of our expectations. Our recent third quarter performance was primarily driven by the increased productivity across our manufacturing facility, resulting in a 17% sales increase sequentially and heading the 12% to 13% we previously guided to. With that momentum, we remain on track to achieve our fourth quarter fiscal year 2023 operating income goal. Demand remains strong across all of our end-use markets, as evidenced by growing backlog and extending lead times. We remain focused on safely training and developing the workforce to continue to drive production rates. Earlier, Tim communicated the SAO and PEP segment fourth quarter operating income outlook. Those combined with estimated corporate costs result in a total company operating income range of $54 million to $60 million for the fourth quarter. And looking ahead, we expect to continue to see strong performance in the first quarter of fiscal year 2024. It is an exciting time for Carpenter Technology, as we are in the midst of a demand upturn in our key end-use markets. We are well-positioned to return to pre-pandemic earning levels in this fiscal year and we have a path to significantly increase earnings over the coming years. We have scheduled an Investor Day event on May 16, and when we will go into more detail on our portfolio of material solutions, our unique assets and capabilities, and our financial outlook for the next several years. We look forward to sharing our vision with you. For more information about the event, please visit our Investor Relations website. Thank you for your time. And now I will turn it over to the operator to take your questions.

Thank you. We will now begin the question-and-answer session. The first question will be from Joshua Sullivan of The Benchmark Company. Please go ahead.

Hi, good morning.

Good morning, Josh.

Just how do you think of system-wide SAO capacity relative to 2019? You've implemented the Carpenter operating model during COVID. Athens has more qualifications. How much more can you sweat the asset, given you have aerospace demand coupled with strength across other segments now?

I can give you at a high level, Josh. You mentioned a couple of them. One, our productivity is higher or projected to be higher than what it was in FY 2019, and FY 2019 Athens effectively was at 0% utilization. So now you have them coming on. And we changed the mix of our products as well, where we've cut off the tail on some of the products and focused more on higher-margin products such as aerospace and defense. So those three combined, you should see a significant or meaningful, I should say, increase in our capacity versus FY 2019.

And then just with regards to the new hire component there. Can you give us some color maybe on what does the learning curve look like recently, retention rates? Any particular skill sets that still need some focus?

Well, the big difference this year, and I think most companies are experiencing this, is that the workforce or the new employees that we bring in, have less manufacturing experience than they did maybe four or five or six years ago. So the learning curve is steeper for us. We're making great progress. You could see it in the numbers for the third quarter here. That was a big step up. So you're seeing that we're being successful in that area. There's still some areas that we need to hire a couple more people, reading in our Dynamet facility. We want to bring on more capacity, so there'll be more hiring there as well. But we're in a good place right now and looking forward to take it to the next level in the fourth quarter as well.

Got it. And then maybe just one last one on PEP. What does the aerospace fastener cycle look like? Are you having big build rates ahead of these build rate jumps at the OEMs or customers building inventory to avoid disruptions? Little more hand about.

Yes, nobody is building inventory right now. But Dynamet, from a supply-demand standpoint, is just like SAO. It is Dynamet, 60-40 medical aerospace and both of those markets are extremely tight. So think of Dynamet just like you think about SAO from a supply-demand standpoint.

Thank you for the time.

Thank you.

Next question will be from Michael Leshock, KeyBanc Capital Markets. Please go ahead.

Good morning. I wanted to start out asking how to 1Q how are you expecting that to fare versus three months ago and maybe what platforms are driving the growth for you sequentially just given some of the seasonal downtime that you typically experience in that quarter? Are you seeing stronger mix contributions, or is that more of an ongoing volume ramp despite the seasonality.

Yeah. Thanks for the question. Maybe take a little bit of time on that, because certainly since you asked the question, you know how impactful that would be. So as you said, I mean, given productivity improvements continued strong demand, we don't expect the same level of seasonality in our fiscal fourth quarter going into our fiscal first quarter that we've seen in previous years. So we don't see that same type of seasonality. Now, as you know, over the past 8 to 10 years, that dip in the first quarter versus the fourth has probably averaged around 30% and it's been as high as 60%. So that's significant. So for us to tell you that we're not going to see that is a real meaningful comment. I think in the last earnings call, in fact, I said we'd see another meaningful increase in the fourth quarter or another step up. Now, we'll give you some more color for the first quarter as we get to the next earnings call, but I think it's safe to say that even if the first quarter is sequentially flat to the fourth quarter, that would be major positive earnings growth inflection versus the past fiscal year first quarters. Now, you talked about the normal seasonality; we usually do our planned maintenance, preventive maintenance outage during that time. And as you know, we'd love to run the equipment 24/7 right now, and the demand is there, but we need to continue to be good operators and we needed to perform that essential preventive maintenance. And we're going through those schedules as we speak to try to understand how we can minimize that type of preventive maintenance. But even with all that factored in, you've got at least essentially flat first quarter to the fourth. And as I said earlier, that would be an extremely major positive earnings growth inflection point for us.

And then I wanted to ask on the price increase on the transactional business. What percent of your business does that apply to you today? And I know you wouldn't be repricing your backlog. But if you look at orders that are out maybe over a year, does it apply to that business as well?

Yeah, it's a good question. At any point in time, we're roughly 40% to 50% of our business is under some type of longer-term contract whether that be NLTA or one-year pricing agreements. And presently, when we're at 52 to 60-week lead times, these price increases that we just noted would be on that business. Now remember, we've communicated several price increases over the last year that are hitting now. But this specific one would be on that transactional business that's coming to us approximately 52 weeks from now, one year.

Got it. That makes sense. And then on your aerospace business, do you have visibility into the breakout? What is MRO versus OEM business that you're supplying into?

Yeah. We're on all platforms. And I get that question a lot just like I get is it wide-body or single aisle, or is it Boeing or Airbus? I mean, at this point right now, it doesn't matter. We're sold out. We can't make enough, and I don't see that changing any time in the near future.

Great. Lastly, did you provide information on Jet Engine sales for the quarter either sequentially or year-over-year?

I can do that for you. I didn't do that in my prepared remarks. Aerospace engine sales were up about 50% year-over-year. They were roughly flat sequentially. But really that sequential is primarily a matter of mix of product being run as our total aerospace sales were up 59% year-over-year and 21% sequentially. And I can also note just as a point of reference, our aerospace engine backlog was up 24% sequentially and the Aero engine bookings in the quarter were at record levels. So full speed ahead on aerospace engines.

Great. Thank you.

Thank you.

Thank you. Our next question will be from Gautam Khanna of Cowen. Please go ahead.

Hi. Good morning.

Hello, Gautam.

Tony, could you share some insights about the December quarter based on your backlog visibility? Are you planning to work through the holidays to potentially exceed the typical seasonal performance in that quarter?

Yes. So you're talking about our second quarter fiscal, right?

Yes, correct.

Yes, I can confirm we are currently focused on minimizing our downtime and becoming more efficient with our preventive maintenance. Throughout FY 2024, we expect to sell everything we produce, and this trend is likely to continue over the next three to four years. So, Gautam, as I mentioned, we're looking at the first quarter at least staying flat, with ongoing improvements expected in the subsequent quarters of FY 2024. While it's still a bit early to provide specific details, I don’t foresee any significant decrease as we progress through FY 2024.

Okay. And you commented on some of the non-spot business having better pricing. When do we start to see that flow through your results? Is it already flowing through, or is it going to pick up as we move through the second half of this calendar year on your long-term agreements?

We've observed that the pricing from long-term agreements is coming through. However, a few significant contracts will expire this year, which means we will have further negotiations. While I hope that the full price will positively impact our bottom line, we are also facing some input cost inflation. Although our pricing adjustments are helping to counteract this, we don't capture the entire pricing increase on our bottom line. Overall, we have seen improvements over the past several quarters, and I expect to continue seeing price enhancements in the upcoming year.

And just one last question. Regarding the backlog, historically Carpenter's backlog has represented about 30% to 40% of one-year forward sales. Currently, it is at a very high level. I'm curious if customers want that backlog as quickly as you can ship it, or if there are constraints in applying that ratio of around 40% of forward sales in the backlog today. Is it due to production limitations, or do customers prefer it at a later time? I’m interested in understanding what might be holding you back from achieving even better results.

Yes. For right now, it's just ramping up the operations. We're not at 100% yet, and that's primarily driven by onboarding new employees just like as you will know other companies in this industry have stated the same thing we have. So that's the main gating factor right now. I could sell significantly more material right now if my production rates were higher. Obviously, they were higher in the third quarter. They're going to have to take another step up in the fourth quarter and into FY 2024, and that's the plans. But there's really nobody placing orders now that if I went to them and said, I can increase deliveries to you by 25%, 30% that they would say no; they would take it.

Okay. Thanks a lot.

You're welcome.

This concludes our question-and-answer session. I'll now turn the call back over to Mr. John Huyette for closing remarks.

Thank you operator, and thank you everyone for joining us today for our fiscal 2023 third quarter conference call. Have a great rest of your day.

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