Good morning and welcome to the Carpenter Technology Corporation's Fourth Quarter and Fiscal Year 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards, Carpenter Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Carpenter's earnings conference call for the fourth quarter and fiscal year ended June 30, 2016. 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 Damon Audia, 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 those forward-looking statements can be found in Carpenter's most recent SEC filings, including the company's June 30, 2015, 10-K, Form 10-Q for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, and the exhibits attached to those filings. Please also note that in the following discussion unless otherwise noted when a management discusses sales or revenue that reference excludes surcharge. When discussing operating income, that reference excludes pension, earnings, interest and deferrals or EID and special items. When referring to operating margins that is based on sales excluding surcharge and operating income excluding pension EID and special items. I will now turn the call over to Tony.

Thank you, Brad. And good morning to everyone on the call. As always, let's start on slide 4 with an update on our safety results. For the fourth quarter of fiscal year 2016, our total case incident rate or TCIR was 2.2. We finished 2016 with a TCIR of 2.2, which is up compared to the 2.1 for fiscal year 2015. Our improvement in the safety culture over the last year has been driven by enhancing our safety system with standards of behavior established and designed to help our employees work injury-free. Effectively, we have moved from a reactive state where people try to avoid injuries to a state where adherence to standards in the engagement of the total workforce prevent them from occurring. Overall, while I'm pleased with the improvements we have made, I'm not satisfied and I know there is more we can do and will do to further improve our safety performance. We are continuing on a path to make Carpenter a safe work environment. The actions we have instituted over the last year are creating an environment where individuals take responsibility for their own safety rather than just follow a rule and we will continue to evolve until we are operating in an interdependent state where everyone is fully engaged and committed to ensuring the safety of not only themselves but all team members. This is a journey and our focus is on creating a true cultural change on the shop floors and moving towards a model where everyone is responsible for safety, both their own, as well as that of others. This coming year we will focus on efforts to further drive a safe injury-free workplace, to the benefit of everyone involved with Carpenter. A safe workforce is a more productive workforce, and we will…

Thank you Tony and good morning everyone. Turning to slide 10 and the income statement summary, net sales in the fourth quarter were $458 million or $406 million, excluding surcharge. Sales excluding surcharge were up almost 1% sequentially as higher volumes in the quarter were offset by weaker mix. On a year-over-year basis, revenue declined $57 million, mainly due to the impact the oil and gas market has had on our energy and industrial consumer end-use markets. Operating income as a percent of sales when excluding pension EID and special items was 8.9%, which is marginally better than the 8.7% reported in the third quarter. The 8.9% is a testament of the strong cost actions taken in the quarter, which help to mute the impact of some weaker mix products sold in the quarter. Operating margin was down compared to the 10.4% in the fourth quarter of last year, with the decline due to lower volume in the current period and almost a $10 million change in lower operating income from our PEP year-over-year, which I will touch on further in the PEP segment slide. In the fourth quarter, our effective tax rate was 36.1%, up from the 27.6% in the third quarter. As a reminder, our third quarter tax rate was impacted by the completion of the sale of an equity method investment in India, as well as the tax impact of certain special items incurred during the period. For 2016, on an adjusted basis, our full-year tax rate was 32.7%. Net income in the fourth quarter was $14.9 million or $0.32 per share. On an adjusted basis, excluding special items, net income would've been $16.3 million or $0.35 per share. Now turning to slide 11 to review our free cash flow. We generated $83 million in free cash…

Thank you, Damon. Moving to slide 16, Carpenter has a 127 year history of being a leader in the development and production of high-value specialty alloys that serve demanding application needs. Looking at Carpenter today, we provide specialty solutions and value to customers across highly attractive end-use markets. While some of these markets are undergoing transition like aerospace or dealing with unprecedented headwinds like energy, their long-term growth potential is unquestioned. Our aim is clear: To further strengthen and capitalize on our position as a preferred solutions provider. To do this, we need to ensure we are investing in the future and continuing our legacy of helping customers address their needs and challenges. This includes investing in our overall capabilities as a means to not only address the future of our customers and industry, but also to expand our revenue stream by unlocking new growth opportunities in adjacencies across our end-use markets. With our Athens investment, we have a fully operational state-of-the-art facility, built to primarily serve the aerospace and energy markets. We believe Athens will deliver important incremental earnings to our financial results and value to our shareholders over the next several years as the new engine platforms ramp and the oil and gas sector improves. As we've previously noted, our financial results reflect the full operational costs of the facility, despite it currently running at low utilization levels. This cost is approximately $8 million to $10 million a quarter. We continue to make progress with the required qualifications at Athens. 99% of non-VAP certifications have been completed. Oil and gas qualifications are up to 83%. And our range of products approved for manufacturing continues to increase. With regard to our powder of products, we are one of the world's most diverse producers of gas atomized specialty alloy systems.…

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gautam Khanna with Cowen and Company. Please go ahead.

Thank you; good morning.

Good morning Gautam.

So, you've given us some color on Q1 and I wanted to just calibrate expectations, if you wouldn't mind. Q1 down sequentially consistent with seasonality, I imagine Q2 will be similar to Q1 as it has been historically. When we look at the second half, are you expecting a pretty substantial increase like you have had historically? Is there anything you can point to in the second half of the fiscal year? Because when I look at consensus estimates north of $1.80 in earnings, I'm just trying to see what really moves up. Is there some pricing increase or something of that nature that you can point to that would justify such an increase?

Well, I'll answer your question, Gautam, in terms of volume. Yes, in the second half of this upcoming year we expect volumes to be up, all things considered, as they have been in the last couple fiscal years.

Can you comment on pricing? Are there any step-ups in pricing that would…?

Nothing specific to comment on that would be significantly different between the two halves.

Okay. Last quarter I think I asked this, if you could quantify your exposure to the new aircraft engines, I am thinking about your turbo fan and the leap engines, specifically. How much additional content do you have on those programs versus the legacy CFM and B2500?

Yes, I can say this, Gautam, that on all those new platforms we are incrementally higher than on the legacy programs.

Can you give us a magnitude, how much higher?

Yes, I would say that they are meaningful. I don't have a specific percentage point. As you know that we don't sell directly to those engine manufacturers. So, I would say that it's a meaningful increase across all the new platforms.

Okay. Could you give us come color on what you see, given your order book now, for SAO top-line growth ex-surcharge in fiscal 2017?

Do you mean what do I think the margins could be in FY 2017?

Not just margins, but also the top line.

Yes, I mean - yes. As I said in my comments, we believe that the aerospace ramp-up is a reality. We're going to benefit from that. We believe that in transportation we've just begun to look at other applications that we can benefit from, as you look at - regardless of whether the build rate for auto increases or not, we're going to see a much broader use of our products as the emission standards get tighter, as engines run hotter, as performance requirements go up. And we believe we have opportunities in energy as we believe that we'll see a recovery. Now it won't be a V-shape. It's going to be gradual, but one [indiscernible] very low point right now. So, I think from an SAO standpoint, we believe there's ample opportunity for us to increase the top line. In terms of margins in SAO, well - look what we've done in FY 2016. I think we've probably moved 3 percentage points, if you look FY 2015 to FY 2016. We're not quite at the high that SAO was at probably back in FY 2013, FY 2014 range, but that's our goal to get back there.

Do you think you could actually get to a 20% level at some quarter in fiscal year 2017?

I think - yes, I'm not ready to say that. I will tell you that we made a 3 percentage point increase in FY 2016. And we believe we're on track to do better than that, but not ready to tell you exactly what the target margins would be in FY 2017.

All right. Thank you. I’ll turn it over to the other guys.

Thanks, Gautam.

The next question comes from Phil Gibbs with KeyBanc. Please go ahead.

Hi, good morning.

Hello, Phil.

Good morning, Phil.

In terms of the customer view of the oil and gas market and the existing inventories in the supply chain, assuming that the call to the rig count, is only up marginally from here. When do you think you will actually start to see a much stronger pull than what you saw last quarter? Meaning how much inventory is in the channel that we still have to slog through?

That's a tough question, Phil. I would say that the rig count is the best indicator for us as far as sales. So as you see that rig count go up, you'll see our sales go up accordingly. And I think maybe you will even see a multiplier, because as we've said on the call that we believe that we positioned ourselves to come out of this downturn with better market share. But it's really difficult to say where we think that's going to go over the next couple, I do believe that the recovery will be measured and not abrupt.

Okay. And, Damon, on the side of the pension you gave the minimum contributions this year, which were obviously very menial. Is there any thought to putting in a voluntary contribution this year at all?

You know, Phil, no final decisions have been made. We're just starting our fiscal year here, so we'll step back, look at our capital allocation plan and for us, as we've said in the past, it's important for us to be balanced here. We want to make sure we're investing in growth Capex accordingly. We want to make sure that we're returning an appropriate amount back to the shareholders, but we also - very important to us to maintain a solid balance sheet and our leverage ratios with the rating agencies are important, so we'll look at the underfunded pension obligations as part of that debt-like obligation and see whether it’s prudent for us to be proactive. But at this stage we haven't made any final decisions.

Okay. And I think you kind of caught up to your inventory target in Q4. Any thoughts on inventory management in fiscal 2017 and what we should expect from you guys in terms of the cadence and potentially [indiscernible] a bit more, adding a bit more. Just trying to think about that.

Sure. No problem. So, Phil, I think there's no clear - we're not giving a specific guidance for 2017. And what I will tell you is that will be depended upon the markets and how we see our end markets perform throughout the course of the year. But right now what I would say is we expect our inventory to be flat year-over-year. We'll continue to focus on the management, especially in the work in process. And as you touched on, we did see good performance in that segment or that portion of it in 2016. And our goal for 2017 is really to hold it flat while we expect sales to increase and at the same time trying to improve our customer service. And that is the theory behind the operating model is to keep the inventory levels effectively where they are as revenue grows and thus taking down our days.

Okay. And then one more and I'll pop off. The payments from qualified pension plan associated with the restructuring was $9.4 million this year. Is that number going to continue to recur for a bit of time? Or is it something that comes off the rolls here soon?

I think that was more, that’s not really expected to recur.

Okay. Thanks so much.

Thanks, Phil.

Yes.

The next question comes from Andrew Lane with Morningstar. Please go ahead.

Hi, good morning.

Good morning.

Boeing's been discussing an earlier entry into service for the 737 MAX. Previously it was maybe the third quarter of 2017, now maybe the first half of 2017. Does this align with your production ramp-up to support the program or have you seen demands to move up here at your ramp?

We're prepared for that, Andrew, and that aligns with where we're at right now.

Okay. Could you provide some color as to the texture of your order book associated with the industrial and consumer end markets? It's on a nice 9% sequential growth here. Were there any particular areas of strength you would highlight for that particular end market and how important is oil and gas demand to your sales for the industrial and consumer end market?

The industrial market for us, there's times that we don't necessarily know where our product is going, so we know that inside of industrial there is some oil and gas influence. I will say for that specific quarter that we just finished, the big positive driver was on the consumer side.

Okay. Any particular product lines in particular that are consumer facing that you'd highlight?

Yes. Electronics.

Okay. Great. And then, finally, for more of a big picture perspective, what does it mean to be market focused versus product focused? And would you point to this strategy as a key driver of the fact that SAO margins were up year on year, even though volumes declined?

Well, it's still early days of making its move. It's a significant move. It certainly - it gave support. But the real issue is instead of just selling a specific product and for the most time that's going into the same application that it's been over the last 5 or 10 years, we're taking a step back and looking at the market and the solution that Carpenter can provide and saying that that could be applied to many other applications. So, that's really the focus is looking broad, looking at adjacencies that we can participate in.

Okay. Thanks very much.

[Operator Instructions] The next question comes from Chris Dowling with Rosenblatt Securities. Please go ahead.

Hey, good morning.

Good morning, Chris.

The commodity nickel market has been showing some strength and pricing has moved up this month. I was just wondering if you've seen a change in your order book to reflect maybe customers coming back in ahead of the surcharge or anything different over the past 30 days or so?

We have some chatter in the market. We haven't seen that actually show up as material difference in the order patterns, but we would expect if you saw nickel to continue to increase that you'd see some increase in activity, especially on the distribution side.

Okay. And then just switching gears, curious when you think - and I apologize if you mentioned it during the presentation, but when you think the titanium fasteners inventory will be balanced and less of a headwind?

Well, that's a tough question. I don't know. We saw some, quite frankly some upticks in our fastener demand early in the calendar year in January. And that has reversed and now we're seeing some more of this balancing, if you will. So, I am not - to be honest with you, I can't really tell you over the next couple quarters when that might flesh itself out.

Okay. Thank you.

We have a follow-up from Phil Gibbs with KeyBanc.

Thanks for taking this. I appreciate it. The mix in SAO, it looks like from a base revenue per pound was down about $0.29 quarter-on-quarter and I think we were anticipating that or you were anticipating that. How should we think about that mix moving through 2017?

Yes. Listen, one thing, just from a mix standpoint, obviously, with oil and gas business, how it's moved, it's tough to compare quarter-over-quarter. Right? But I think if you adjust for last quarter the large power generation order that we had, that's the type of run rate you should look for.

Maybe a second-half average or something like that?

Well, I mean for us, one large order there can make a big difference. And also, as you see they will ramp-up coming the end of this year into the next fiscal year, you'll see an increase on the mix as well.

Right. Okay. And then, Tony, just general question on the backlog. How is the backlog overall end of June versus maybe end of March?

Yes, we did see a decrease in our backlog, Phil. Some of that, quite frankly, had to do with fastener demand being a little choppy. Some of it had to be that we reduced our lead times in several products and was able to pick up some business. That pulled the backlog down a little bit and I'm okay with that. But we did see a reduction in quarter-over-quarter in the backlog.

Okay. Thanks very much.

Yes.

We have a follow-up from Gautam Khanna with Cowen and Company.

Tony, I was wondering if you could update us on the root cause analysis you've done at every workstation, if you could tell us how far along we are in the turnaround? If it's a baseline game, what inning are we in, if you will? Just to give us a sense for how mature this already is reflected in the margins.

Yes, I would say this. As you know, Gautam, moving to this type of approach is a long process. It's not going to happen in a couple quarters. But you can see in our results over the last FY 2016, especially over the last couple quarters, that we are - if you want to put it in a baseball analogy, we're hitting a lot of singles and maybe a double here and there. We're doing some, as I said on my comments, countless projects that are making their way to the bottom line. So, I think the good news is, from my vantage point that I believe we are probably in the second or third inning. That says we have a lot more opportunities out there as we continue to apply these principles. And quite frankly, not just in SAO, but as we branch out into our PEP businesses as well.

Okay. And can you give us a sense for the first half, second half, free cash profile in fiscal 2017 are you expecting to build inventory again as you normally do in Q1 and Q2 or how should we think about that?

Yes, Gautam, and again I don't expect very much change from our normal seasonal pattern. As we would likely see some inventory build, part of our goal with the Carpenter operating model is to reduce the peak to trough in that inventory. So, you may not see the order of magnitude that you've seen in years past as we build in the first half, but you would still see some sort of a marginal increase here and then coming back down in the second half.

Okay. And have you guys seen any demand pull yet with a new contracts with Pratt and Whitney UTX? The new nickel alloy contracts? Any of the powder or what have you moving up?

I will take the second one. We're working out through the quantification on the powder side with our facility in Alabama. We have produced powder and shipping that powder now. We have seen pull from the new contracts. We've seen pull across - to be more generic, across all the new platforms. So the answer is yes.

Okay. And you don't see any evidence of destocking or hesitation in the supply chain, something we saw for a couple years, that is completely abated?

Not overall. We do see the choppiness in the fastener market, Gautam. And I think that’s been pretty prevalent for other companies that have released prior to us and/or commented prior to us.

Great. But in the jet engine channel across the OEMs you're not seeing that any longer?

We have not. No.

Okay. And last question on the buyback. You mentioned you might buy back some stock before the authorization expires. Can you just talk about what you think about the stock these days versus other things that you could fund? Capex, obviously, is a priority, but you were asked about pension. Doesn't sound like there's any M&A in the pipeline, so why not buy back some stock here?

Gautam, for us, again, we’ll look at it in totality as we look at our cash that we had at the end of the year plus our Q1 outlook. And, again, from a capital allocation standpoint, our goal is to find that right balance between investing in growth projects for the Company longer term, maintaining or stabilizing the balance sheet and then whatever we feel is appropriate as excess or surplus we would look to redeploy to the shareholders in the form of the normal dividend that we have along with the share repurchase program. So it is something we consider. We evaluate it in totality versus the other uses of the cash, making sure that we try to find that optimal balance for everybody.

Okay. And last one, if you could just - do you expect any disruption or any share shift from the GE Alstom deal, you know on the gas turbine side or from the Alcoa separation?

We don't anticipate any change in either one of those events.

Okay. Thank you, guys. Good luck.

Thanks, Gautam

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, everyone, for joining us today. We look forward to speaking with you again on our first-quarter call. Have a great day.