Welcome to Carpenter Technology Third Quarter Earnings Conference 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, sir.

Thank you, Cathy. Good morning everyone and welcome to Carpenter's earnings conference call for the third quarter ended March 31, 2015. 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 Greg Pratt, Chairman, President and Chief Executive Officer; Tony Thene, Senior Vice President and Chief Financial Officer; Andy Ziolkowski, Senior Vice President, Commercial for Specialty Alloys Operations or SAO, as we call it; and also in the room is Dave Strobel, Senior Vice President of Global Operations. 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's most recent SEC filings including the company's June 30, 2014, 10-K, September 30 and December 31, 2014, 10-Q and the exhibit attached to those filings. Please also note in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference excludes surcharge. When discussing operating income, that reference excludes pension, earnings, interest and deferrals or EID. When referring to operating margins, that is based on sales excluding surcharge and operating income excluding pension EID. I will now turn the call over to Greg.

Thank you, Mike. Good morning everyone. It is good to be with you today. Let me start with slide four and give you an update on our safety performance. We're very proud of the safety improvements we have made during this fiscal year. We have driven our total case incident rate or TCIR from 3.3 in fiscal year 2014 to our current rate of 1.9 in fiscal 2015. At Carpenter 44% fewer employees have been hurt through the first nine months of this year compared to last year. Let me give you a couple of examples. Our Reading facility has reduced its TCIR by 50% compared to last year. Last Saturday our Athens facility achieved a significant milestone, one year without a record able injury. And in our PEP business Amega West has improved their TCIR by 68% compared to last year. Turning to slide five I want to provide some highlights on our third quarter results. Our SAO segment continues to realize the benefits of an improving sales mix, driving improvements both sequentially and year-over-year. As we had anticipated, our PEP segment revenues were adversely impacted by weakness in the oil and gas industry resulting in lower sales sequentially and year-over-year. The third quarter results reflect higher year-over-year operating costs and we're taking corrective actions to improve in this area. In January of 2015 we introduced our business management office or BMO as we call it. The BMO is focused on identifying and acting on opportunities to improve profit margins and reduce costs and inventory of the organization. We have been pleased with early progress from the BMO and believe we will continue to realize benefits from the work that is being done. We initiated a restructuring plan during the quarter that is expected to yield a $30 million…

Thank you, Greg and good morning to everyone. Let's start with slide eight with the income statement summary. Net sales in the quarter were $571 million or $463 million excluding surcharge with aerospace and energy accounting for 59% of the total. In the quarter SG&A expense returned to a more normalized level of $46 million which is in line with the prior six quarter average. Operating income was $4.8 million in the quarter and $7.2 million excluding pension EID. Excluding the restructuring charges and special items operating income was $32.7 million and $35.1 million excluding EID. Operating margins ex-EID, restructuring charges and special items decreased year-over-year by 600 basis points. The operating margin decline reflects the benefits of a stronger mix SAO [ph] offset by weakness in the oil and gas business that significantly impacted PEP performance. The decline in operating margin also reflects higher operating cost and the unfavorable margin impacts of reducing inventory. Again this quarter interest expense was higher year-over-year due to the Athens assets coming online and therefore less capitalized interest. Our third quarter effective tax rate was 39.1%. Given that our reported pretax loss is so close to a break-even the discreet items that we recorded in the third quarter are having a disproportionate impact on the reported effective tax rate. To give you a sense of the magnitude of the impact the discreet items we recorded in Q3 totaled only $140,000 but had a 600 basis points impact on our effective tax rate versus a normal run rate of 33%. We continue to expect our rate for quarter four to be in a more normalized level of 33% to 34%. Net loss for the quarter was $1.4 million or a net loss per share of 0.03. Excluding the $27.9 million of restructuring charges and…

Thank you, Tony. I will now cover the SAO and PEP segment beginning first with SAO on slide 13. Compared to a year ago revenues grew by 2% on 10% lower volume showing a continued strengthening in our sales mix due mainly to higher aerospace sales and lower volumes of industrial products in the quarter. Sales also increased on a sequential basis by 8%. We're experiencing growth in all end use markets except for energy and industrial consumer. As we indicated in earlier discussions lower oil prices are negatively impacting our activity for oil and gas applications. The improved revenue trend however was more than offset by higher than planned operating costs including unfavorable impacts from reducing inventory, inefficiencies associated with reduced operating levels for oil and gas products, added costs for the qualification process of ramping up our Athens facility and the combine mill operating system and higher Athens depreciation. Looking forward and based on our sales backlog we believe our sales mix will continue to improve in Q4. We also continue to aggressively reduce inventory. Actions taken to address the negative impacts from the reduce oil and gas demand in our operating challenges in areas such as labor productivity, yield and overhead costs will begin to have a positive impact in Q4 relative to Q3. The full impact of the decline in crude oil prices is still unknown and we will continue to monitor the situation and take actions as necessary. Our Athens customer qualification process continue to gain momentum and customer reactions to the facility are very positive. We believe the inefficiencies associated with startup and customer qualifications will improve as direct shipments to customers increase and we work through the integration process. Now I will turn to slide 14 and cover the PEP segment. Compared to…

Thank you, Andy. Turning to slide 16, I want to provide an update on our Athens facility. Our most significant growth enabler is our new Athens facility. Our ability to fully utilize this facility to support our growth of premium products is based on our ability to qualify Athens to make a broad range of materials. We continue to make great strides in this area and it is our intent to provide you with updates each quarter so you can gauge our progress. To start I think it would be helpful to break qualifications in to two buckets. One is site certifications and the other one is vendor approved process. So first what we broadly call site certifications. This includes products that meet base industry specifications as well as customer specific purchasing specifications. What this means is that we're an able to demonstrate the required performance characteristics in the materials being made at Athens. The second bucket is what we call vendor approved process materials or VAP. These are the most stringent material certifications that require specific customer agreements and take the longest time to achieve. In most cases these materials are used in critical aerospace engine applications such as rotating disks, rings and shafts. To achieve VAP certifications we must first develop a consistent manufacturing process that provides us with the required performance characteristics and optimal process efficiencies. Once we achieve these goals, we then quote, unquote lock in our process and begin to send data and materials to our supply chain customers for their evaluation of both our materials and our processes. This is followed by a formal vendor agreement, after which, we may begin using the process for commercial orders. We continue to find that our customers are engaged and supportive of the approval processes. To update…

[Operator Instructions]. The first question comes from the line of Gautam Khanna of Cowen & Co.

So I was wondering if you could first update us on the CEO search, timing and who and what type of candidates you're evaluating?

Sure. We're making very good progress. We're in fact coming to the end of the process. As I told you in prior quarterly reports, we expected that by June we would have a new CEO in place. We believe that was the track we had last time and we're progressing along the same path this time.

Okay. Are you considering both internal and external or can you say any more about it?

Yes, we have cast a very wide net. We have considered internal as well as external candidates.

And what skill sets do you think you're really going to prioritizing with whoever comes in? What are the most important characteristics?

Say again please. I'm sorry. I stepped on the last part of your question.

No, no. If you could just elaborate on what is it you are really trying to solve for.

At the end of the story we're trying to solve for the person who can best help Carpenter, drive Carpenter in to the future. We obviously have some issues and challenges near-term issues and challenges that we're facing but we also have long-term strategic goals and objectives. The right person will have a combination of skills both from operational skills and strategic skills that we will need to drive us forward. But I would suggest that we would also want to make sure that we have a very strong team such that at the -- what you want to have is someone that can drive a team, forge consensus, drive higher utilization, drive the competition such that if they don't have particular skill they're willing to bring someone in that has the skill that is necessary. So I wouldn't say that there is one set, one individual skill set that is required but actually it is a host. And we have seen some very, very good candidates that have been provided to us by our external search firm and I think we're making very good progress.

Okay. So by June. And then just two more if I will and I will turn it over. The pace of the buyback I just wonder what should we anticipate the pace of the buyback will be as we move forward. It has been pretty high, high relative to my estimates any way. Just want to make sure we can have it calibrated right for fiscal 2016 and beyond.

I think that the advice we have given in the past is still consistent. If you take the $500 million and divide it by quarters, you get somewhere around $62.5 million and that's the guidance we had talked about and I think that is probably still appropriate.

Okay. And then last one on the engine comment, I think you said sales up 15% year-over-year. Could you just talk about how broad based you're seeing demand improvement? Is it across multiple OEMs? And if you could also just comment on the pricing environment, in general nickel alloys when you think about oil and gas being weak are you seeing heighten price competition for whatever spot business is out there.

This is Andy, I will take that one. So your percentage is right driven mainly SAO that 15%. And I would say that is just a combination of the inherent volatility in the supply chain. The is nothing exceptional. We're moving along build rates. We talked about this destocking concept working it's way through a couple of quarters ago. The is a little bit of a share in the on the stainless and alloy side, but no one dominant factor is pushing that forward. There is still a considerable amount of volatility. We're seeing some spot cancellations as the supply chain just tries to level set itself. So I would say that is really symptomatic of normal progression of the market and some spot share gains in our different materials systems. In terms of pricing obviously on the nickel, oil and gas side there have been requests coming down from the primes in the order of 25% price reductions and we work our way through that with the customers balancing the needs of the customer and share considerations and the whole business aspects going forward We haven't really seen that bleed over. You asked that before in the prior call and so far we have been able to kind of keep that in that selected area of applications. But I will tell you the overall market for the most part is relatively stagnant. So we're not seeing a lot of leverage in either direction.

Thank you. The next question comes from Chris Olin of Cleveland Research.

I just wanted to dig a little bit deeper in to the SAO segment in terms of the demand environment. And I guess what I'm looking at is the 10% year-over-year reduction volumes. And I was wondering if you could break that down a bit in terms of how the demand environment looks for more of the commoditized stainless products versus premium or nickel based alloys and has the order environment changed. And what I'm really focused on is how much of the erosion currently is related to the falling surcharges and maybe people delaying orders?

Chris, this is Andy I will take that one. On a proportional basis your reading it correctly and if you just looked at the weighted average in aerospace products relative to consumer and industrial applications that is really where you're getting that play in the mix. So pretty steady environment in the -- take oil and gas nickel products out, pretty steady environment in aerospace right now. And using that as the proxy for nickel products. But in that general let's say industrial application the comments you made about nickel prices and I know there is a lot of discussion around that. And, yes, there is some waiting right now to see surcharges and visibility of where nickel is going to come down so that is definitely a factor. And then there is just the choice full business management as we go through and optimize our profits and look at the business as we entertain we have some selection over the business we go after and what we try to get. So I would say again the overall environment pretty much just moving along at GDP kind of rate. Pricing again depressed. Also you have the currency differences that are in there right now, so International competition in to the states obviously a little bit more aggressive than it was before. And kind of all those factors conspiring to the volume impacts that you see.

Can you talk a little bit about some of the levers within the jet engine market. If I look out 18 months to 24 months is there a certain program like maybe LEAP or Geared Turbo Fan that matters more or do you think the big volume driver will come aftermarket business picking up?

I will just get in to and, Chris, I will go back to some of the contracts and then you can connect to the platform that are going on there. But we have recently discussed some rings and disc packages, five year packages pieces of business with Rolls Royce, those were all share gains for us. And then the ten year deal both on the nickel and alloy side and the powder side with UTC so you can connect to the Geared Turbo Fan at PurePower, they're getting ready, UTC is getting ready to ramp that up. We see rate readiness activities on a continual basis. So we have talked about the share and positions we have on some of those platform and I would look to those for just that and the general overall build rate of both the aircrafts themselves and the engines going forward.

The next question comes from the line of Steve Levenson of Stifel.

On the oil and gas side with things weak the way they are now I know you have got your hands full with some of the restructuring, but do you see opportunities, do you see this market coming back and see opportunities to expand downstream the way you did several years ago while prices might be attractive?

We continue to take a look at all opportunities. We have committed to make sure we right size our business for conditions that we see. I am certainly as ever one is slightly optimistic or feel a little bit better by the fact that WTI for example heading back across 60 as opposed to 43 when everyone started to panic. So we see opportunity. We're having conversations with folk that we have not had an opportunity to work with in the past as they are new opportunities for us. And we're doing everything that we can to be part of their new cost equation, so I think there is significant upside opportunity and we do see taking advantage of opportunities as they come along.

And last are there any issues with sourcing some of the materials? Do you see titanium tightening up for example? I know the price wouldn't indicate it but I'm curious on that.

Nothing that is on our radar screen. I'm looking around the room and nothing of that nature has presented itself.

Thank you. The next question comes from Phil Gibbs of KeyBanc Capital Market.

I had a question on the inventory impacts in the quarter. I know you outlined them in the pre-release but what was the flow-through in Q3 and what do you expect the flow-through in Q4 to be with a continued inventory reduction?

What we outlined in the pre-release is basically exactly the way it came in on the actual. For primary that is just the fixed cost absorption. We're driving inventories down, so we can't put as much of that fixed in to inventory. This restructuring that we have done by taking out $30 million of fixed costs that will phase in over the next year will certainly help that obviously. As you go forward in to the fourth quarter and into FY '16 we'll continue to see those type of impacts on the inventories. We continue to right size, but the impact will be lower going forward. Now that is on the absorption side. As we get into FY '16 and start to go even lower on inventory, we could get some LIFO layers, but those are noncash and from our point of view it is better to reduce our inventories and generate that cash flow as opposed to being worried what the LIFO layers might be.

How do we think about what LIFO was year-to-date or in the quarter? Because I think you have given in appendixes in the past but not really provide in the release or in the Q, so trying to think about how that has been an impact.

Let me give you example, if you look at the third quarter and the fourth quarter if you combine those on a true LIFO standpoint it will be approximately $1 million. So this quarter let's say it was less than $0.5 million, so it wasn't material we didn't mention it and you could see something similar to that maybe a little bit more in the third quarter. If you get into FY '16 and we take out another $50 million plus the LIFO layer could be more exaggerated and it could be as high as $7 million. Now remember that is noncash charge. But again our point of view is it is better for us to down size our inventory, generate that cash as opposed to building inventories based on a LIFO layer it just doesn't make good business sense to us.

Let me re-emphasis that Phil. We had a big debate internally about where we should come out on that issue. And I think better utilization of working capital trumps being afraid to tap into a LIFO layer. So we're going to do the right thing for the business. And we will spell out. If it is noncash hit, we'll just spell it out for you. If we don't mention it, it is only because it is not a material number.

No, I agree. I'm happy to see you doing it, just wanted more transparency on that. I appreciate it. The International business what are you seeing in terms of the non-aerospace International business particularly in Asia or Europe and some of the competitive environment outside of the U.S.

I'll take that. Phil, it is Andy. Roughly 30% of our business outside particularly when you're in Europe and U.K. we're feeling the pressures of the exchange rates and that is a dialogue we have against where there are appropriate Europe competitors. Asia is not the same situation and I would say that it is business as usual and we're following those markets as they develop.

The next question comes from Andrew Lane of Morningstar.

First from a big picture perspective could you provide an update as to the impact that low oil prices have taken on overall commercial aircraft demand? To what degree are you seeing low oil prices disrupt the replacement cycle for commercial aircraft deliveries?

I don't think I see anything but Andy, please.

Yes. At this point Andrew, the longer term impacts and what impact that will have both on aerospace and transportation with the CAFÉ standards but I don't believe we're at that point or we're seeing any impact of that at this point.

We have seen some airlines swapping 787 deliveries for 777 deliveries. Will this have any impact on the trajectory of your aerospace sales or are there any other emerging trends as to the composition of incremental aircraft deliveries you're seeing that might constitute a headwind or tail wind for your aerospace exposure going forward?

I will take that one again. This is Andy. No. No kind of over arcing trends. Obviously there are tradeoffs. We like the larger platforms. 787 better for our titanium businesses with tie fasteners, so I would say the puts and takes for us are not dramatic enough to call out at this point.

Thank you for your question. The next question comes from Gautam Khanna of Cowen & Co.

Just had a couple of follow-up. First it seems like one of your competitors and customers is acquiring Press Forge and I was just wondering what your business relationship with Press Forge is and what threat of insourcing might confer to your business?

Not significant but I would ask anybody at the table.

No, it won't be a significant impact on us at all.

Okay. Secondly I was wondering there was some comments about tie fastener metals having pricing pressure. I was just wondering if you could comment on is this due to competitive [indiscernible] coming in or what do you think is driving that.

This is Andy. When we talk about the pricing pressure we're talking more on the medical side. Obviously on that aerospace side there are fewer players. It will take longer time for any other new entrants to get into the market. There are some people kind of coming in, but for the most part we have long secured positions and we continue to operate under those. Where it is more of a distributer base supply channel to market and we have some of the newer entrants that's where you see a lot of the pressure, so that would be more on the medical side at this point.

I would just add that we have turned on our seventh line and with that addition of almost -- I guess at full capacity it would be 400,000 pounds of materials we will add almost 15% additional capacity in that area to help supply our customer's needs. So that is very important.

This is Andy again. I don't want to leave you with the major airframe people all have their partnership for success or whatever program and obviously in the supply chains there is a lot of pressure to reduce overall cost but that is more coming down from the air framers than new entrants at this point.

Okay. Could you comment on what your expectations are for growth in the Dynamet part of the business and maybe parse it out by aero and medical separately over the coming year.

Okay. Obviously we still see a lot of the pressure coming on the medical side, pricing pressure as we've talked about a lot of new entrants. We expect to continue to see reasonable growth on the aerospace side. As we bring online six came up over the summer moving now to full capacity. Line seven as we talked about a little earlier it will be at full capacity within a relatively short period of time so we feel pretty comfortable on that part of the business. New entrants we'll see exactly where things sort out. There is certainly pressure as new entrants come into the market.

Okay. And one last one Greg, maybe just big picture, you have seen a lot of consolidation among your competitors and you guys still remain as sort of a merchant supplier and I just wondered have you given any more thought to whether it makes sense to go it alone or do you need to actually partner up at some point with the downstream asset?

We certainly review that on a regular basis. Part of the review since my coming in is to take a look at strategic opportunities and alternatives and we're certainly looking at that on a regular basis. In fact at our most recent Board meeting that topic came up and we had robust discussions. We do recognize however that while there are certainly many fewer players on the aerospace side the are other markets that are equally interesting to us particularly in the oil and gas side. I am delighted to tell you that the Athens facility while we know it will be very good for aerospace it is even going to be better on the oil and gas side. And we have gotten industry approvals we're getting our qualifications together. We have new relationships that we're forging now with the major suppliers, oil field suppliers. So I think there is tremendous upside. The faster we can get Athens up and operational the better off we're going to be. And we're moving very, very fast to try to push things along as quickly we can partnering with customers. In terms of will be standalone company, there are only a few that are completely independent, that are stand alone. We think if we had the right relationships with the right companies we will continue to be able to deliver -- return to delivering would be a better way of saying that significant shareholder appreciation to our stockholders.

So as of now you would say that the strategy outlined years ago of going it alone, remaining a merchant supplier is still kind of a longer term vision for the firm on the aerospace side.

On the aerospace side simply because the market is changed, the roll up is essentially with minor exceptions particularly with recent [indiscernible] and RTI moves it is just a narrower field. We will continue to make ourselves very, very valuable to our customers and we think that is the best thing we can do to make sure that our shareholders enjoy whatever direction the world goes in. We're going to be prepared. We're focused on building a high performance team. I think that is the most essential and most important thing we can do. We need to drive efficiencies, we need to do all the things we have talked about from our BMO perspective. I think the future opportunity of the company with respect to powder metals added manufacturing all these things now some of which are in nascent stage, I agree, but we I think have earned a place at the table. And we compete -- my largest customer is my largest competitor as well know and we have an excellent relationship with them. And probably my second largest customer is also a part of a major customer. We want to be invaluable to them both. And I think doing that will allow us to continue to serve them and to serve our shareholder base most effectively.

And the next question comes from Phil Gibbs of KeyBanc Capital Market.

Just a general question on Athens profitability and maybe earnings or cash flow profit, cash flow whatever you think is the best way to look at it, but what are you envision the cadence being from call 2013, 2015, 2015, 2016 and beyond because you did give a lot of good color on the stages of qualification in your commentary. So I'm just trying to think of when we really start to get the profit leverage here and some of the return metrics in the right direction.

We'll do a tag team. Do you want to start Tony and I'll finish?

Yes, I think there is two important points in that one, Phil. And one keep in mind that any of the depreciation in the fixed costs related to Athens have been in our numbers for several quarters now. So as Athens ramps up there is not another tranche of additional costs that come online. And if you look at the qualifications standpoint of what we have got qualified to run through Athens we would be very closer at that breakeven point today as we speak.

And I would just add that as the VAP approvals come online we will be able to tap into that 27,000 tons of premium capacity that will drive the profitability of the company into the future. That's why we spent the additional time and reemphasized in my view the importance of Athens moving forward. I'm delighted as I said earlier that Athens will supply not only our aerospace -- and help us fulfil not only our aerospace aspirations but also I think will be very important in the oil and gas segment as that becomes -- as particularly as shale oil becomes the new marginal barrier [ph] of oil and the importance of being able to move quickly in expand, to contract and customer needs. The opportunity to reduce supply chain. Some of the what I would call automotive supply chain logic and logistics moving both in to aerospace and in to oil and gas we will be well positioned even as a low cost provider on some of those materials.

And I just had one follow-up there on the oil and gas side. Is there anything interesting that you could share as far as discussions with some of these oil and gas customers on what they see as the future of drilling and oil and gas needs and what they're looking for as far as call it new applications or new products? Just trying to gauge where the market is going relative to what we have seen here in the past couple of years.

I'm not sure I can speak for them a so much as I can tell you where we're getting involved in new areas. Sub-c as an adjacency to our completions business is an area that we believe will have a lot of upside potential for us. I don't know Andy do you have anything to add? I know you have direct relationship with Schlumberger and Baker Hughes, etcetera.

Yes, Phil. You know all the fundamental aspects of harder to get to oil and all the things that brings with that. Our powder developments near net shape capabilities, the premium materials nickel based materials, titanium based materials that we provide are things that we're talking about and obviously on the corrosion environment. So those direct discussions we more fully developed are engagement capabilities with the primes directly we're in the process of having those development discussions on innovations and their issues right now. I can tell we have positioned our internal portfolio where we were more heavily focused on drilling and exploration now to a more balance particularly on the SAO side with completions. So our rate of recovery and how we move out some of these situations we're in now could be dramatically different based on where positioned in the infrac wells and things like that. So I would say just kind of a broad based approach and getting at the more hard to get to reserves.

I would add to that structurally our commercial organization has realigned itself such that we now have the strategic primes group to work with customers more let's say downstream and trying to identify product needs they have and to try to work with them together with our technical group. So I think that will align us better to take it as something that Carpenter had gotten away from and that is now front and center. So I think that is going to be very important going forward.

Thank you. That concludes the question-and-answer portion of today's call. Let me now turn it over to Mr. Mike Hajost for any closing remarks. Please go ahead, sir.

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