Good morning, and welcome to the Carpenter Technology Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instruction]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards, Investor Relations. Please go ahead.

Thank you, operator. Good morning everyone and welcome to Carpenter’s earnings conference call for the second quarter ended December 31, 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 September 30, 2016 10-Q and the exhibits attached to that filing. Please also note that 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 and special items. When referring to operating margins, that is based on sales, excluding surcharges 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. Let's begin on slide number 4 with an update on our safety performance. Year-to-date in fiscal year 2017 our total case incident rate or TCIR stands at 2.0 which is down compared to a TCIR of 2.2 for fiscal year 2016. I know we can do better. We are pushing through to the next level of improvement in our safety performance. To achieve the next level of improvement it is necessary to drive fundamental changes to our safety culture. The transformation I'm referring to requires an interdependent safety culture, with all employees engaged in the process. A critical component of this change is developing the capabilities of middle and front line management so they understand what good looks like. Key capabilities are tied directly to our operating model including setting appropriate standards, intervening when standards are not met, problem solving, active listening, and engaging the total workforce in improvements. The cultural transformation to an interdependent safety culture across the entire organization will be the key to achieving further improvements in our safety performance. Achieving our goal of a zero injury workplace is fundamental to our values and will require the engagement of all of our employees. Turning to slide number 5 in a summary of our second quarter results. Overall we delivered an improved second quarter with notable sequential growth on the back of strong execution and richer product mix and an improving environment across several of our end used markets. Our aerospace and defense market experienced increased demand in the engine submarket given the growing ramp up of the new engine platforms. Our energy market continued to see ongoing signs of a recovery as the North American directional and horizontal rig count increased 30% on a sequential basis…

Thank you Tony, good morning everyone. Turning to slide 9, the income statement summary. As Tony noted we delivered a solid quarter and sequential net sales increasing across the majority of our end-use markets most notably our aerospace and defense segment which represents 54% of our net sales in the quarter. The performance in this end use market demonstrates the strength of our diversified aerospace product offerings and that we are also well positioned to take advantage of the ramp up in the new engine production in the years ahead. Overall net sales in the second quarter was $427 million or 367 million excluding surcharge. Sales excluding surcharge increased 8% sequentially reflecting a solid performance of our aerospace and defense market as well as the improving demand in our energy business from the increased order activity related to the industrial gas turbine replacement cycle. On a year-over-year basis net sales excluding surcharge decreased 13 million or 3% and 6% lower volume due to the decline in the oil and gas portion of our energy end-use market which had a volume decline of 31%. As well as the decline in our industrial and consumer end-use market driven primarily by its exposure to oil and gas markets. The year-over-year performance was also influenced by a decline in our transportation business primarily due to the demand trends in the heavy truck category. SG&A expenses were up $2.5 million on a sequential basis. SG&A expenses during the second quarter included a number of expenses related to our office and personnel relocations and other expenses that aren't necessarily incurred ratably throughout the year. Going forward, we would expect our SG&A to be more in line with our historical spend. Operating income as a percent of sales when excluding pension EID and special items was 5.7%…

Thank you, Damon. Moving to slide number 16, previously I have talked about our strategy to become a leading solutions provider to our customers, an irreplaceable partner in the supply chain. We are focused on multiple growth enablers that will support and accelerate this strategy. For example, on our Athens campus, we had a super alloy powder facility that is currently producing high quality powder metals. We are working on the qualification process for this facility necessary to achieve its intended purpose of producing disk quality powder for rotating components in aerospace jet engines. Also in Athens we continue to progress on the VAP qualifications. As planned we expect the submission of desired VAP qualifications to occur in calendar year 2017. The timing and pace of the OEM approvals will be dictated by our customers who are continuing to be actively involved. And today we announced our agreement to acquire the assets of Puris LLC, a leading producer of titanium powder for added manufacturing and other applications. This is a strategic transaction that provides us with immediate entry into the rapidly expanding titanium powder market. It advances our position and added manufacturing, a key future growth area for our industry and it strengthens our capabilities as a solutions provider for our customers. As a result of the transaction we will enter the titanium powder market significantly earlier than we previously planned and we will reduce our planned capital expenditures for the year as Damon discussed. The transaction brings industry leading technology and processes for the production of titanium powder, added manufacturing assets, a talented team, and attractive intellectual property portfolio, and established customer relationships across several of our key end-use markets. The immediate addition of titanium powder to our portfolio is significant given the current and anticipated demand expected to…

[Operator Instructions]. Our first question comes from Gautam Khanna with Cowen & Company. Please go ahead.

Hey thank you, couple of questions. First, with the aerospace business up quite a bit sequentially it sounded like not all the areas are picking up as you mentioned. So how much were engines up in the quarter and then are there any specific platforms you can attribute it to or what do you think explains kind of the surge?

Well good morning Gautam, this is Tony. The pickup was really across all of the platforms and I think I have said in my speaker notes in fact that engines were up significantly sequentially as well as year-over-year.

What do you mean by significantly, because if it was up 15% sequentially with the other pieces relatively down below that rate, what are you talking about, 30%, 40%?

Yeah, if you let interest go one by one. If you look at fasteners we had just a slight uptick on fasteners. If you look at some of the other markets we saw nice increases. On the engine side alone we saw -- we were up 31% on a sequential basis and 19% on a year-over-year basis.

Okay and do you think there's some just catch up of deferrals or what do you think actually is a sort of a sustained rate that we're going to be at. I'm talking -- I just wonder what kind of broke the logjam because if you look at production it hasn't really changed that much on a sequential basis?

Right, remember our sequential -- our sequential quarter was quite low so we came off a low bottom there. I think you're always going to have some ups and downs in the aerospace market but if you look at our next quarter, I would tell you that where I stand right now that engines will be higher in our next quarter then it were in this quarter that we just completed.

Okay. And then maybe just a NIT question, with all the pension changes what is the ongoing pension EID expense and if you could remind us of what the benefit to the segment average profit, the segment EBIT is in the various segments from the changes to the pension just sequentially?

I’m sorry Gautam, sure. Gautam the EID is going to as you know that will be remeasured every year at the end of our fiscal year so it's hard to give you a forecast for 2018 and beyond. Sequentially for us EID in the second quarter was just about $6 million. That'll be the EID component going forward for Q3 and Q4 as well. So you'll see no change there. Sequentially for the service cost or the defined benefit plan versus the DC that's about a $3 million sequential pickup in our third quarter versus our second quarter.

And is that mostly at SAO?

Yes.

Okay and so the 20% increase in operating income is that excluding the $3 million pickup at SAO just from pension?

No, that would include it.

Okay. And then just one other one on these acquisition that you announced, what are the immediate kind of opportunities that provides and can you talk a little bit about the company you're acquiring customer base, what kind of contracts they have either on GTF or what have you just, where are they, and if you're going to take it?

Yes, so it’s a relatively young company if you know anything about their peers, they are very solid group of owners. We will retain all of, basically all of the employees. Many of their customers today are customers of ours right now and the areas that you'll be looking at is primarily on additive manufacturing but also thermal spray, medical coatings, near net shape, etc.

And do they bring like a position on any of these engines that are ramping right now, Leap 181b [ph] PW1000 [ph], etc?

No.

Okay, alright. Thank you. I'll turn it over. Appreciate it.

Thank you.

Our next call is from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Good morning Tony, Damon, Brad

Good morning Phil.

Congrats on the progress.

Thank you.

Had a question on the mix. I mean the mix in the second quarter was a lot higher than we were anticipating and maybe even you were anticipating probably a couple months ago. What really drove that and then in terms of the base pricing per pound particularly for SAO, should we expect that to moderate a bit as the sales growth becomes a little bit more broad based than your seasonal strength?

Yeah Phil, so two things really drove the increased mix. One is aerospace engines of course that was up as I told Gautam up 31% sequentially. The other thing was powder generation. So, we had higher powder generation sales than what we expected probably when we announced it the last time.

And in terms of your thought process whether it continuing into the back half year, should we expect the mix to normalize a bit maybe to where it was in the last couple of quarters or take an average of the last couple of quarters, just wondered how…?

Yes, I would probably take an average. I mean as we look forward I think the mix is going to be strong. Like I said earlier we see aerospace engines being up again next quarter. Basically you all know there's going to be some -- there's going to be some movement from quarter-to-quarter. But I think for the most part it will be close to where we're right now.

Okay and Damon, why is the interest expense poised to go higher into the end of the year based on where your full year guidance is?

Phil, we have a slop in there right now that we can't really record the benefit or the losses. In our 20 million last year we had games that reduced the underlying interest expense to the 28. Right now where interest rates are we can't forecast where it's going to be for the second half of the year. So, effectively if it stays where it is the interest expense will come down a little bit from the 32.

Okay and…

Phil, this is Tony again, if I can just follow up real quick when you talked about mix because you're hitting on a good point. I mean as we look forward, there's so many moving parts and it doesn't take a whole lot to move the mix in and that's why hopefully you'll see in our slides that Damon presented we gave a lot more guidance this quarter than we ever have in the past. And that's a primary reason to try to make sure we stay on course to what we think the next quarter is going to be and we don't leave you guessing about what the mix may or may not be

No, I appreciate that and a lot more helpful in terms of the details than the normal which we appreciate. A lot of good color in there. In terms of the acquisitions, I think you made a comment Damon that you're going to be balancing capital allocation between keeping the strong balance sheet but also wanting to keep an eye on some tuck ins and I think you just said acquisitions in general, are you thinking about tuck ins or something bigger. I mean how should we think about in terms of the size of the deals that you're going to be targeting?

Yes, so I mean there's nothing specific Phil that we're talking about. The statement more is for us as we look at the balance is as Tony talked about growing the business here, being more of a solution provider to the customers. We are looking at different product lines, we’re looking at different forms. We're looking at the build versus buy as you would expect us to do and Puris is an example of that that we had talked about the building of a titanium powder. But upon research we were able to identify a great company that gave us access to the market faster and it allowed us to buy that market place position bigger than building it. So we'll continue to do that. There's nothing specific that will point you today. But we're continually looking at those sort of opportunities as we look to grow the business longer-term.

Are you putting that titanium investment on hold right now or are you just trying to make a more kind of measured entry with that investment given the CAPEX is down?

No, we’re not doing anything at Athens. We had not started the construction of the facility down there so that plants is on hold right now.

Okay, appreciate that. Thanks so much.

[Operator Instructions]. Our next question comes from Jorge Beristain with Deutsche Bank. Please go ahead.

Hi guys, its Jorge Beristain with Deutsche Bank. Well good morning and congrats on the results. Had a question about the just the decision to buy versus build on the powder facility, could you give us any color on what kind of multiples were paid for that asset either on a trailing or forward basis?

You know Jorge we're not going to go into the transaction details more than what we have disclosed. For us we view it, it was an appropriate price for us to access the market over the timeline versus what we were investing to the build that we had talked about previously and the duration for us to get into the market with qualified powder but we're not going to go into any more specifics than that.

Okay, are you sensing that you're taking share in fasteners, we just had some color from another company that was saying fasteners were down, you guys were up a bit sequentially, is there anything to take away from that?

I think we're holding our own on the fastener side. We noted that it was up. It was only up slightly and keep in mind we have multiple customers and multiple product types. I mean we have titanium, nickel, and stainless. So depending on what you hear in the market it’s always not a one for one for us. But again I think it's important to note that this sequential increase was slight.

Okay and then just maybe last question on the aerospace revenue exposure you have, could you just kind of give us a big picture of what your exposure is on narrow body as a percent of that aerospace pie and specifically on next jet engines because clearly you guys are not showing the same destock effects we're seeing in the other parts of the supply chain and so just trying to understand how unique your leverages are to narrow and next gen engines? Thanks.

I would say Jorge we’re balanced for the most part on narrow versus wide body. We are across all the platforms. I think what might be helpful to you if you take a look at our aerospace revenues. The aerospace and defense only 40% is engines roughly. Now that's a long-term average. If you look at this quarter it was in the high 40%.

Okay, so then you've just benefited like you said for that surge in engines that was really of the next gen engines and that is the differentiator versus a lot of other supplies we are seeing that might be more airframe focused?

I guess you could say that. I mean we're very focused on the airframe as well. I mean we saw some increases on the structural side and what's very interesting is on the avionics side as well. So those are some good growth avenues for us also.

Okay, thank you.

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

Thanks operator and thanks to everyone for joining us today. Have a great day.