Good morning. And welcome to Carpenter Technology’s First Quarter Earnings Conference Call. My name is Tony, and I’ll be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session towards the end of this call. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed.

Thank you, Tony. Good morning, everyone. And welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 2012. This call is also being broadcast over the internet. With us today are Bill Wulfsohn, President and Chief Executive Officer; and Doug Ralph, Senior Vice President and Chief Financial Officer, as well as other members of the management team. Statements made by management during this conference call 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’s most recent SEC filings, including the company’s June 30, 2012 10-K and the exhibits attached to that filing. I will now turn the call over to Bill.

Thank you, Mike, and good morning, everyone. I’m pleased to share that we had a strong first quarter. In addition, our results demonstrate that we are executing well against our long-term strategy, which we detailed during our September 7th Investor Day. I would like to personally thank those investors and analysts who participated in our Investor conference and are on this call. For those of you, who are not with us in New York, but would like to learn more, the replay of our presentation is still available on our website. During our Investor Day, we provided clarity on why we believe we are a true specialty materials company and not a commodity steel company. More specifically, we explained that our strategy is to focus our technical and capital resources on long products and what we call the premium and ultra premium segments within the specialty steel market. By targeting these specialty steel segments, we are focused on the top 1% of the 1.5 billion ton steel market. Note these target segments required differential technology, high levels of technical qualifications and a strong focus on customer satisfaction excellence. There are very few companies that can service these segments and that is why our business is less impacted by some of the macro-economic factors, which are currently affecting the broader steel industry. In addition, our targeted niche segments are quite profitable. This is due to the associated barriers to entry by new competitors and limited available capacity. We are also fortunate that the end markets for our products are concentrated in aerospace and energy, where long-term demand is expected to remain strong and continue to outpace existing capacity. Our first quarter results show this strategy to target the specialty end of the market is continuing to progress well and yielding positive…

Okay. Thank you, Bill. We continue to execute well and are tracking right on our fiscal year plan through the first quarter. Overall, we delivered operating income, ex-pension EID of $69.6 million or 46% higher than a year ago, with earnings per share of $0.74. In terms of our reporting segments, the Latrobe acquisition continues to perform well. We are tracking ahead of our deal economics due to very strong progress on operating synergies. The Latrobe segment, which currently includes the Latrobe and Mexico distribution businesses that we are divesting and excludes the SSS energy distribution business that is now being managed as one of our PEP segment businesses, contributed $15.7 million of operating income in the quarter and the acquisition was $0.07 accretive to earnings. Our specialty alloy operations or SAO segment grew sales excluding raw material surcharge by 16% in the quarter on strong 7% volume growth, with most of this growth in our highest value ultra premium and premium products. SAO operating income was $54.4 million, with a 20% segment operating margin. Last, our performance engineered products or PEP segment grew sales 17% due to the inclusion of the SSS energy distribution business. Overall operating income continues to be a bit disappointing on this business near-term at $11.5 million or 12% for the quarter. This largely reflects some weakening of demand in the titanium distributor channel, including medical and some higher near-term manufacturing costs in the Amega West business, on top of continuing softness in our European powder business. We expect strong improvement in the second half of the fiscal year from the PEP segment. We remain on track to achieve our full fiscal year target for operating income ex-pension EID of plus $70 million or 30% higher than last fiscal year, with EBITDA over $110 million…

Thank you. (Operator Instructions) And your first question comes from the line of Ed Marshall of Sidoti & Company. Please proceed, sir.

Good morning, guys.

Good morning.

So the first question is on the fastener business, especially nickel and titanium. Maybe you can address them separately. But I’m wondering if you can kind of tell me where your lead times have gone and what’s going -- and what you see the industry in general’s lead times.

Sure. This is Bill. And our nickel and stainless steel fasteners are actually up about 5.5% versus Q1 in 2012 and in titanium by over 7%. And our backlogs for those materials are essentially about 12 to 14 weeks for ti fasteners and at about five months for the nickel and stainless steel fasteners.

And where was that, say, about six months ago or a year ago, whatever is easier, however you guys look at it?

Well, it would have been roughly the same for titanium and instead of five months, it would have been roughly six months worth of backlog for nickel and stainless.

Okay. Doug, by any chance do you have revenue with surcharge by segment?

Yeah.

I don’t think that was in the release this time.

Just bear with me a second here.

Sure.

So we’ll follow-up and clarify if -- but you had asked by segment?

Right.

So the SAO segment was up 14%.

I’m sorry. I’m sorry. By market, I’m sorry.

By market.

Yeah.

Okay. I just wanted to clarify that. So I didn’t need to look so hard then.

Yeah. Sorry about that.

Aerospace was up 45%. Our Energy business was up 7%. Our Medical business was down 8%, Transportation was up 10% and Industrial Consumer business was up 8%.

Okay. And the last question, outlook for CapEx for the full year seemed to run a little bit lower than anticipated in Q1?

Yeah. We’re still expecting $350 million that of total CapEx for the year and I think the fact that we’re running a little less than that in the first quarter, it’s just a function of the ramp-up in the Athens project.

Okay. So it will be more back half weighted?

Yeah.

Good. Thanks, guys.

Thank you.

Thank you.

Your next question comes from the line of Gautam Khanna of Cowen & Company. Please proceed.

Hey, guys. Great results.

Thank you.

So, a couple of questions. First, the SAO, extra surcharge was down from a sales perspective, 16% sequentially. I wanted to understand if you saw, you mentioned, market share gains in the engine alloy segment. But do you -- did you see any aftermarket weakness or did you see any sort of unusual pricing behavior by competitors that would explain that big drop down sequentially?

No. Gautam, I think that’s just a function of our normal seasonality. So, we typically run a first half, second half, split on the topline of about 45%, 55%, and so what you see between the fourth and the first quarter is just a normal function of that.

Okay. And the distribution sale, you mentioned you’ll recognize it in disco ops when you have an agreement in place. So should we be thinking that it will be discoed in the numbers of a fiscal Q2, if you’re going to effect the sale in Q3? And if so, what is the earnings impact of discoing it and will you have opportunities to backfill or in fill, whether outperformance on the Latrobe synergies or perhaps M&A, or something else that you could quantify the impact and talk about the offsets?

Yeah. So we would anticipate having purchase agreement in place currently in our fiscal third quarter and at that time, we would currently plan to flip it over into discontinued operations. The businesses combined have revenue of $150 million and EBITDA of $15 million, the operating income would be just a tad below that and Latrobe synergies are tracking ahead of our deal economics and so that would be certainly one opportunity to fill in that gap is how we characterized it.

And we are actively looking at and pursuing additional opportunities to grow our business through organic investments as well as acquisitions. So we’re confident we can use that money wisely to backfill and actually gain from the transaction.

Okay. And then just a follow-up on the first question about the sequential sales decline -- maybe asked differently. Can you talk about lead times at the three segments and how they have changed and perhaps why they have changed over the last three and six months?

So I -- this is Bill. I can start off more by industry area that the aerospace engine materials are currently running about five months worth of backlog. We actually are booking some of our materials out into the April timeframe. There was probably about a six-month backlog, if you go back a few months ago. Drill collars roughly four to five months worth of backlog and that’s relatively unchanged. And I mentioned about the fasteners tend to be in titanium unchanged and down just slightly in the nickel and stainless steel fastener area.

And the aero engine one-month decline, is that a function of just productivity or is that a function of incoming orders?

I would say that we saw a weakness in incoming orders that we realized in the kind of mid-August to early September period. But we’ve seen a strong recovery of those orders as we completed September and moved into October. We are still running our assets at full utilization. We are getting out more tons because of the productivity investment efforts. So I think our objective has been to use that additional capacity to ultimately lower our lead times. So we feel like the demand is strong. And of course if you look at the underlying dynamics of aircraft builds, they are continuing as has been planned. So we know the underlying pull is there.

Last question, Doug alluded to new bond offerings to refinance the debt that’s coming due and to prefund the pension. And I just wondered if you could quantify how much you might raise? And I think we can figure out the potential coupon it would bear. But just to get a sense of what the incremental expense would be. What are you looking to raise? Just the full amount that you’ll funds of 150 or what’s it going to be?

We would be looking at between $250 million and $300 million, $100 million of that would go to effectively repay or refinance the $100 million of debt that’s coming due in May. We are narrowing in on how much discretionary pension contribution that we would make and we’ve done a lot of analysis to make sure that we pick an amount that delivers all the important benefits of giving us some relief on the operating -- near-term operating cash flow, helping our pension impact on earnings per share while not risking, putting too much stranded cash in the pension fund. So that’s our current thinking on that.

Thanks. I’ll get back in the queue. I appreciate it.

Okay.

Your next question comes from the line of Jonathan Sullivan of Citi. Please proceed, sir.

Hi. Good morning. I had a quick one on SG&A. In terms of the run rate for the rest of the year, I understand that 1Q included Latrobe overhead and higher pension expense. Is the 1Q figure of about $48 million, is that a good run rate for the rest of the year?

Yeah. I think that’s a pretty good run rate. The way that we’re looking at SG&A is less dollars and more percentage of revenue, because we have -- we added some dollars with the Latrobe acquisition. But we would -- our objective would be to continue to reduce the SG&A costs as a percentage of our total revenue.

One additional point I’d make is that we have I think a very rigorous control process on headcount and actually our headcount at this time is lower than it was at the beginning of the fiscal year.

Okay. Great. And I had one other one. Just in terms of energy, looked like sales ex-Latrobe, I believe, we’re about flat year-on-year. I wonder if you could just comment a bit on your outlook on the energy market and what you expect to see there over the course of the year?

Well, rig count is down, it has been down about 5%. And a lot of that has to do with repositioning from, if you will, natural gas investment to the liquid side. So we’re cautiously optimistic that there will be a recovery as we reach the end of the year but we’ve been able to sustain our sales really through the share gains that we have been able to achieve both in Amega West. Their operations are SSS operations, and also our increased participation in completions. So we’re very confident and comfortable with our business in this area.

Terrific. Thanks a lot.

Your next question comes from the line of Josh Sullivan of Sterne, Agee. Please proceed, sir.

Good morning. Great quarter.

Thanks.

Just as we look at the aerospace supply chain and as they look for longer-term supply agreements, are you guys seeing that flow through into the Alabama backlog and just how does that filling in?

We have established and we identified this in our investor pack that we presented in September, that roughly nine of our 10 top customers, we have extended long-term agreements that go through the period in which we start up the new Athens operations. So we’re working closely with the customers, and that’s in I think both parties’ interest. It’s in our interest to make sure that that facility gets utilized and I think it’s in our customers’ interest to make sure they have access to the capacity that ultimately they are going to need to support their business growth.

Great. And then just post the distribution sale, what’s the breakdown just what you guys are going to be selling into the distribution channel versus directly to customers, without that arm?

Well, we will still be selling into the distribution segment and it represents roughly 15% of our sales that goes through distribution, if you exclude the distribution business at Latrobe.

Okay. And then the healthcare, it looked like that was more just a near-term issue. Do you guys see that kind of turning around post the election?

Well, actually, the price of titanium scrap has been decreasing and in that context, the distributors, if you will, of that material and the users have been reducing their inventories. And so we expect once that price stabilizes, you’ll see an increased demand profile. And again, we see that happening as the year rolls on here.

Good. I’ll jump back in the queue. Thanks.

Thank you.

Your next question comes from the line of Dan Whalen of Topeka Capital Markets. Please proceed, sir.

Great. Thanks. Hi, everyone.

Good morning.

A lot of my questions have been addressed. But can you just remind us in terms of your exposure to Europe, is that mostly aerospace-based and what have you guys kind of been seeing over there in terms of trends?

Yeah. Actually, our Europe business continues to prosper. A good majority of that business that we provide to Europe is for the aerospace industry and is actually in dollar-denominated transactions. So our business has been strong. And we’ve also seen that some of our high performance materials, which are used more frequently now and for automotive applications are being adopted. So we’re getting very good, very good support and growth for that segment. If you will, the area that we see some softness is the powder tool steel type activity, and that is soft. We expect that it will remain that way until you see an uptick in the general industrial environment in Europe.

Okay. Great. And then, just lastly, it’s very encouraging to see your comfort level in terms of sticking with guidance. Not surprised. One thing, given that one-month pullback in terms of the aerospace backlog, some softness in energy and what we’re seeing in the medical markets, I would have gotten the sense that maybe the 45/55 split was maybe a bit more back-end loaded or is kind of this energy softness built into your expectations or was this just kind of incremental things that are coming out of Latrobe that are offsetting some of those other factors?

So there is no doubt that we see the second quarter or excuse me, the third quarter being very strong from a demand standpoint. And we also see that our backlog for Forged Bar and Billet is up over where it was a year ago at this time. So we feel good about the fundamentals. As we look towards the year end, of course that’s the year, fiscal year end for a lot of our customers. So it will be interesting to see if they shut down for a day or a week at Christmas time or they take the whole week of Thanksgiving that can effect if you will some near-term demand. But again, we see the strength of our backlog and the scheduled shipments are very strong through the third quarter.

Okay. Great. And congrats on your continued success there.

Thank you.

Your next question comes from the line of Arun Viswanathan of Longbow Research. Please proceed, sir.

Thanks for taking my question. Good quarter. So I guess a lot of my questions have also been answered. So I just want to clarify on that last issue. Can you, you know, give us some of the levers that are going to help you meet or exceed your $436 million of EBITDA guidance for fiscal 2013?

Well, I would say first and foremost is the mix change that we’re experiencing in our business and that’s supported by the premium and ultra premium products. When you look at our sales level, our percentage of sales to those segments, it was 68% of our sales in fiscal year ‘10 and now it’s about 86% of our sales. So, we’ve really changed our mix quite considerably and that allows us to, with the industry, aerospace, as we said, is continuing to increase the number of aircraft being built. And in fact, even if you look at GE’s comments, they have seen an 81% increase in industrial gas turbines. So the underlying fundamentals supporting our premium and ultra premium business remains strong. Our capacity additions that we’ve targeted both from organic efforts as well as from the integration of Latrobe continue to go very well.

And the only things I would add to that is that we also expect a strong second half from our PEP segment.

Okay. So you guys are fully on track, I guess, from a volume and pricing standpoint as it stands, is what you’re saying, I guess right now?

That’s where we stand, yeah.

Okay. And then I guess just to clarify on the medical side, you did say you’ve seen a little bit of a softening. And I guess you attributed that to titanium scraps, so would you, I guess, clarify that volumes there have not necessarily seen a negative impact or what are you seeing on that side?

Yeah. It would be more volume related. We don’t have as much exposure to the underlying price of the raw materials as other manufacturers have. And so we would tend to see it more from a volume standpoint. And it’d be primarily through the distribution channel. Where the distributors are trying not to get, if you all stuck with higher price material, they’d rather wait and buy that at the bottom. And since there is available capacity for all the titanium market, they feel that they have the flexibility to rebuild their inventory and not be crowded out by the aerospace market.

So, in order to keep your guidance intact, I guess as you said earlier, you do expect to reacceleration in those volumes once there is a stabilization in the raw material side?

I would say that’s not a core assumption that we built into our forward perspective. It’s really the aerospace fastener area that we expect to see a stronger pull from a titanium perspective in the second half of the year.

So, any upside in -- so you do expect some upside in some of these other growth markets to offset both the medical and potential industrial consumer softness?

That’s our focus. Absolutely.

Okay. Thanks.

Thank you.

Your next question comes from the line of Steve Levenson of Stifel Nicolaus. Please proceed, sir.

Thanks. Good morning, everybody.

Good morning.

Earlier you spoke about some swings in orders from jet engine, do you attribute to decline it all to lower demand for MRO parts and then the upturn in servicing some of the pent-up demand for 787 engines and the increased build rates or is there something else going on?

No. I -- and thank you for asking the question. I apologize, if I came across saying it was aerospace related. We saw in general across our business, I’d say a weaker demand or order intake rate at the end of August going into September. I don’t have that broken down by individual sub segments but what I can tell you is our forge bar and billet backlog is above where it was this year or at this time last year. So that would imply that our aerospace and energy businesses are remaining actually as strong or stronger as -- at this point in time versus where we were last year.

And that part of our business that has a very high concentration of ultra-premium and premium products.

Thanks for clearing that one up. Can you talk a little bit about the trends on the Custom 465? I know that was a big subject at the Analyst Day.

Well, we continue to see great interest and demand for that material. And as the new aircraft are being specified, we see increased participation of that material along the lines that we highlighted during our investor presentation. So, I don’t have anything very specific to point out at this point in time other than that we continue to see strong interest and strong demand for the material. And by the way, we are also seeing interest in a similar type level as we look at completions and activity in the oil and gas field.

Very good. Thank you very much.

Your next question comes from the line of Phil Gibbs of KeyBanc Capital Markets. Please proceed, sir.

Good morning, gentlemen.

Good morning.

Just had a question on some of the inventory reduction plans that you have going forward and in what specific areas of the process are we looking at it, is it for trying to improve the raw material piece, the work in process, finished goods, I mean how do we think about that and where you’re targeting across the platform?

I would say that in general terms roughly two-thirds of that would be work in process and that would be through improving some cycle times and reducing some bottlenecks that exist within our multi-staged operation. There are some opportunities in the raw material area and there are areas where we have been carrying more finished goods for customers than is required by our contracts. We’ve been doing that so that we can provide great support to them. Obviously, as we can pull our lead times in a little closer it makes us easier to take some of those levels down. So, I would say it’s across all areas, but the biggest area focus would be the work in process.

Okay. Great. And Doug, at this point in time the potential discretionary contribution to the pension, the $150 million that you outlined. Is that something that we should bank on as far as probability is concerned or are you going to evaluate that more closely as you get there?

It continues to be our plan. We also do continue to evaluate it and we’ll go back to our Board for a final approval, before we do anything specifically. But that continues to be the direction that we’re moving in.

All right. Thanks a lot, guys. Good luck.

Thank you.

We have a follow-up question from Gautam Khanna of Cowen & Company. Please proceed.

Hi. Thanks. Couple of things, I want to make sure I understand the guidance as it stands today. The operating income up $70 million, ex-pension EID, that includes the Athens $6 million, your consulting charges and the LIFO effects or is the LIFO effects going to bring that number down? And does it also include the -- call it $13 million or $14 million of EBIT lost from distribution as we move through the year? Then I have a follow-up.

Okay. So that was set before the distribution sale impact. So, that does not factor that in and does not factor the LIFO in but does include the Athens startup costs and does include the consulting study, those were anticipated in our plan.

Do you have a sense for how big the LIFO effect might be?

We really don’t. It’s a very complex issue and we need further study on that and any other impacts associated with pulling that inventory out. So, I think we’ll be able to talk more specifically in our call next quarter on those impacts.

And this is Bill. I’d just add that while we are looking at the potential LIFO impacts. One of the things, we hope is that by bringing up some of this work in process, we’ll be able to support customers demand and get additional throughput through our system. So we’re assessing the offset, if you will to the LIFO effects, as we’re assessing the LIFO effects themselves.

Good point. Okay. And then the other couple ones I have. You mentioned the discretionary contribution of the pension plan will lower the EID expense in ‘14. If you’re just assuming flat discounts rates, what have you -- could you give us a sense for what that might mean for EID next year, fiscal ‘14? If you hit your ROA and the discount rate doesn’t change?

Yeah. I’ll just give you a real ballpark, Gautam.

Yeah.

As assuming all other things equal, which you can’t assume as you know. I think it had the magnitude of maybe a $0.30 per share type of improvement in our EPS.

Okay. Great. And then, could you comment on two other -- three other items, effective tax rate this year, could you give us an update?

33%.

Okay. Bill, you mentioned some order weakening in the August, September timeframe that’s recovered. I wanted to get a sense do you -- is it demand that recovered or did you see kind of a restock, if you will after the destock, we actually recovered whatever was lost in that period in terms of orders?

Well, yeah. What we do is we are looking at our orders on a week-by-week basis. I mean of course we look at them day-by-day, but you try to look for a trend on a week-by-week basis. And what we saw was order pattern for a short period there that was below our average, although that’s not too surprising because that was also during the vacation period, if you will, and that effects especially in Europe some of the order profile. And then since mid-September, we’ve seen that the order intake has actually been above the average intake order. And so…

Got it.

There’s kind of an offset, but my impression is that there may be lower level of activity in some of the industrial and consumer-type applications, there may be. But that the -- any if you will, slowdown that we saw in orders related to the medical, related to the energy, the aerospace is all related to destocking and the impression we get is that that’s at -- we’ve gotten to the point that there’s not a lot of room for the downstream customers to take that further. That’s the impression we have.

Okay. Last question, fastener stock trends if you will, you have -- fastener metal stock bar -- like coil, et cetera. We’ve seen kind of different comments made by the fastener manufacturers, some seeing earlier and earlier upturn that began last year, others lagging what have you. Are you seeing kind of a more broadly based order rate across the OEMs, so that people are sort of normalizing whatever share shifts that happened have happened and now you’re starting to see just broader order patterns across the OEMs more consistent?

I’d say it is a fair reflection. Again, our nickel and stainless steel fasteners are up about 5.5% over prior year and titanium over 7%. I think that we expect that that will continue up, the trend will continue up, especially in Q3. And we’ve seen if you will, resurgent in titanium orders for fasteners, that’s really at all time record levels for us right now.

And that’s across many OEMs, not just one or two?

Exactly. Exactly.

Okay. Thanks a lot, guys. I appreciate it.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Please proceed.

Hey, Doug. I just had a quick follow-up. Did you have any LIFO benefits or charges in the quarter?

We had about $2 million positive in the quarter and that’s -- that was about $3 million positive last year’s first quarter. So, pretty much a wash on LIFO-related impacts.

Okay. Thanks a lot.

Welcome.

There are no further questions from the listening audience. I would like to turn the conference over to your host, Mr. Mike Hajost, for closing remarks.

Thank you again for participating on today’s call. We look forward to speaking with you again next quarter. Thank you and goodbye.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great week.