Good day, and welcome to the Carpenter Tech Fourth Quarter and Fiscal Yearend Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded and I'll 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 fourth quarter and fiscal year ended June 30, 2018. 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 report on Form 10-K for the year ended June 30, 2017, Form 10-Q for the quarters ended September 30, 2017 and December 31, 2017, and March 31, 2018, and the exhibits attached to those filings. Please also note that in the following discussion unless otherwise noted, when management discuss the 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 Tony.

Thank you, Brad, and good morning to everyone on the call today. Let's start on slide 4 and a review of our safety performance. For fiscal year 2018, we achieved a 45% reduction in our Total Case Incident Rate, or TCIR, improving to 1.1. Our progress toward an injury-free workplace is noteworthy with the vast majority of our employees working injury free. The progress in fiscal year 2018 is mainly the result of our efforts in three specific focus areas. One, shop for (00:02:43) leadership development; two, safety systems targeting specific injuries; and three, which I view as the most important, engagement of the entire workforce. On leadership development, we initiated training programs for supervisors covering core skills such as communication, conflict resolution and explain the why, behind initiatives during the daily interactions with their respective teams. In terms of targeting specific injury type such as hand injuries, actions including credible input from team members on developing solutions for these types of injuries in the future. This year alone, we deployed over 1,000 new hand safe tools designed by the team, which helped to drive hand injuries down 40%. In addition, we held safety performance reviews for each employee with special emphasis on multiple injury employees. Over 13,000 safety dialogs occurred contributing to a 65% reduction of injuries in our multiple injury employee population. From a safety engagement perspective, we implemented human performance training, hand safe teams, ergonomic teams and supervisory councils. Human performance training across Carpenter drove awareness, a skill-based mode errors (00:04:09) and introduced stop card criteria to improve safety. Over 5,800 stop cards were initiated and corrective actions put into place before work continued. The work done in this area will ultimately be the foundation for a true safety culture of interdependence where each employee has the…

Thank you, Tony. Good morning, everyone. Turning to slide 9 and the income statement summary. Our strong financial results for the fourth quarter and full-year reflect the continuous execution on our solutions-focused commercial strategy and the further implementation of the Carpenter Operating Model. This was our best fourth quarter and full-year operating income performance since fiscal year 2014. We delivered year-over-year revenue growth in all of our end-use markets. This further demonstrates that our focus on high-value solutions is resonating in the market and we continue to gain market share by deepening our existing relationships and adding new customers across our end-use markets. Net sales in the fourth quarter were $618 million, our highest quarterly sales revenue in six years. Sales excluding surcharge were $495 million in the current quarter, a sequential increase of $22 million on a 6% increase in volume. This increase reflects growth across almost all of our end-use markets. On a year-over-year basis, sales excluding surcharge increased 13% on a 11% higher volume, but by double-digit gains in aerospace and defense, energy and medical end-use markets. SG&A expenses increased by $4.7 million on a sequential basis mostly due to timing of certain expenses. Going forward in fiscal year 2019, we would expect SG&A expenses to be in the range of $50 million to $55 million per quarter as we increase our strategic efforts in R&D and specifically in additive manufacturing. Operating income as a percent of sales was 12.1% in the quarter, excluding pension EID. This was up from 9.7% in the third quarter and was effectively flat compared to the fourth quarter of fiscal year 2017. Our effective tax rate for the fourth quarter was 20%. The reported rate includes an income tax benefit of $700,000 in the quarter, resulting from our continued assessment of…

Thank you, Damon. Over the past several years, we have placed strategic emphasis on expanding our capabilities and value proposition in the additive manufacturing market as we seek to become a leader in this evolving disruptive technology and help facilitate its adoption across the industries, while at the same time becoming a complete solutions provider for our customers. We have long been a critical partner in the additive manufacturing space, mainly as materials provided for applications like the jet engine fuel nozzle. During fiscal year 2017, we began advancing our additive manufacturing strategy by leveraging our foundation in metallurgical processes and expertise to build on our leading position as an additive manufacturing feedstock supplier. Looking at the market potential and listening to our customers, we acquired Puris, a titanium power facility given its critical role in additive manufacturing. Shortly after this acquisition, we combined our expertise and feedback from our titanium power customers to create an additive manufacturing specific grade powder Puris 5+, which provides lower oxygen content and more designed flexibility in 3D printing. We also took the next step in the value chain by establishing a strategic partnership with Burloak Technologies, which allowed us to collaborate on materials and actual part design. As we learn more and the additive manufacturing industry continue to grow and advance, we took several critical steps during fiscal year 2018 to ensure we stayed at the forefront of this rapidly evolving technology. We opened an additive manufacturing technology center on our Reading campus, where we have focused on technology development across an array of different printing technologies. This facility allows us to better explore and design alloys that deliver the best solutions for our customers. This past year, we also entered into an exclusive license agreement for a meltless titanium offering that could…

We'll now begin the question-and-answer session. Our first question today comes from Gautam Khanna with Cowen and Company. Please go ahead.

Yes. Thanks. Good morning.

Good morning.

I was wondering if you could talk a little bit about seasonality. I mean, you mentioned the Q1 guidance, but what about Q2? Do we expect kind of you to be working more during what's traditionally been a slow second half of December given the backlogs. And then if you could just comment on kind of the pace of ramp what you expect the Athens utilization to be exiting fiscal 2019 at, based on the approvals you have and expect to get? Thanks.

Good morning, Gautam. A couple comments to your first question. I see second quarter being at a normal run rate. As I've said to you before, it's really about the days available. I think seasonality has become less of an issue just because of the robust ramp in the engine build and the corresponding increase in airframe or (00:40:02) activity. So, I think you get through our normal preventive maintenance shutdowns in the first quarter and we're running every day in the second quarter. Concerning Athens utilization, that's a tough question as you know because it really depends on the OEMs and the urgency that we put into Athens and to getting that qualified and that urgency has increased significantly over the last couple of months. I assume that it will continue to be there but it's very difficult to project out four quarters of what the Athens utilization would be. My guess would be if I'd venture in that area that we would have significantly or substantially more qualifications than we do today. That just makes – there's just no reason to believe that you won't – won't because; number one, we have a process in Athens that is capable. We have a market that is robust, increasing backlogs, increasing lead times, increasing expedited orders. I can say when the team was in Farnborough here recently, there was a new state of urgency across all of our customers every one of our customers is asking for more. So, that combination would lead I think any reasonable person to say that Athens will be qualified at the most – the most urgent rate that the stringent policies would allow.

And do you have an estimate on what the unabsorbed cost will be and what it was, was it $34 million to $35 million in fiscal 2018 at Athens and venture to guess what it might be in fiscal 2019?

Yeah, Gautam, so for FY 2018 directionally you're correct, it was in call it in that low-to-mid 30s of unabsorbed cost headwind to SAO. As Tony alluded to, for FY 2019 it's very hard for us to know what the run rates are going to be or what the utilization rates for incremental production are going to be in Q3 and Q4. So, I think as Tony alluded to as we get additional qualifications as we migrate those over to the Athens facility the incremental utilization goes up that obviously will help into absorb some of that mid-30s sort of a headwind we were dealing with, but we don't have any specific guidance beyond that.

Thank you, guys.

The next question comes from Josh Sullivan with Seaport Global. Please go ahead.

Hi, good morning. Nice quarter here. Yeah, just on the comments, if we do see aircraft OEMs fill production schedules with some of the legacy aircrafts until some of the teething issues of some of the new engines are figured out, how does that impact Carpenter? Does it help you pare down an inventory at the legacy alloys? You mentioned that it wasn't a negative impact, is it a positive impact in any way?

I don't see any impact for the industry, if you're a specialty metals supplier on whether it's legacy or new platform, you have an industry that is at capacity. And as you move to the legacy platforms in many cases the content is higher. So, I think the pinch point only becomes more severe going forward, not less.

Okay. And then, just following up on the Athens questions, you mentioned you received seven approvals so far. What's the total number of VAPs you've submitted at this point?

Well, we have submitted the majority of all the packages to the OEMs, Josh. As you, I know are aware of each individual product and size is qualified independently. So, that number could be quite high.

Okay. And then just with regard to the soft magnetics investment here, have – have customers began to approach Carpenter for capacity or I guess another way to ask you know has any portion of the planned plant capacity been contracted at this point?

The answer is no. We were two years out from coming online, but I will say from a positive standpoint, we have – our customers have pulled us into that arena right. We are the leader now in soft magnetics in terms of APUs in aerospace and some in consumer electronics and avionics. But our customers are pulling us and saying that is the market that's going to get significantly bigger, if we remember we talked briefly about this on the last call. So, we put – we're investing money in this area because the customers are pulling us, not because it's one of those build it and we hope that the customer would come. So, no, not a specific order just because we're two years out, but yes, definitely associated with customer – interested customer pool (00:45:24).

Okay. Great. I'll join back in the queue. Thank you.

And our next question comes from Michael Leshock with KeyBanc. Please go ahead.

Hey. Good morning.

Good morning, Mike.

So, just looking at corporate costs they were a bit higher in this quarter than they've been historically. How should we think about corporate costs in Q1 sequentially versus Q4?

Yeah. Mike, what we said in our opening remarks was that we would expect the numbers to these in SAG (00:46:02) to be in the $50 million to $55 million range. If you're looking at the corporate costs that are in the press release that would sort of translate into a number of color around $18 million to $20 million per quarter.

Okay. Great. And then, could you touch a bit on what you're seeing in the supply chains for power gen and the electrical energy?

I would say, the power generation market is extremely depressed. It is 1% or less of our total sales. And in the near-term, we do not see any significant recovery.

All right. Great. Thank you, guys.

You're welcome.

The next question comes from Jeremy Kliewer with Deutsche Bank. Please go ahead.

Hey, guys, good morning.

Good morning.

Just a little bit more color on the SAO significant (00:47:01). You mentioned there was a lot of product – but is that product mix supposed to stay rich moving forward that was like the next-gen engine ramp or are you anticipating normalized as your legacy quarters or (00:47:16) Q1 through Q3 levels?

I do not expect our product mix to get worse going forward. I expect it to remain where we're at today or get better.

All right. And then on the free cash flow side, you guys generated some decent free cash flow this quarter and it appears to be likely going forward. So, can you just kind of put us on a prior list is it shareholder returns or is it M&A activity just following your soft alloy and all the other investments as you've already identified?

Yeah, Jeremy. I think as you see, we're allocating more capital to growth CapEx in fiscal year 2019, as we've alluded to especially in the areas of additive and soft magnetics. With that tax legislation change has resulted in lower cash taxes and we have redeployed that back in the growth CapEx. As we look at the balance sheet as I mentioned in my comments, we repaid the $55 million in short-term debt. So, we have no debt maturities until FY 2022 and we have no significant pension plan contributions until FY 2022 and even then that's only about $28 million, so it's not really meaningful. So, it gives us a lot of flexibility to really invest in our business, invest in the capabilities as we try to become more that's complete solutions provider. As we think about growing the business for the customers, we've done a couple of things as you've seen, we acquired Puris a couple years ago, we acquired CalRAM in February, we've done the soft magnetics. So, that's our focus. We'll continue to evaluate those types of actions as well as the balance sheet. And we'll look to maintain our investment grade as we've said in the past and then, we'll also compare that against incremental returns to the shareholders.

Okay. Thank you. Good luck.

Next question is a follow-up from Josh Sullivan with Seaport Global. Please go ahead.

Yeah. Just looking at the inventory levels, how should we think about turns going forward. I know you mentioned there's more to do under the Carpenter Operating Model. What are thoughts there?

Yeah. Josh, this is Damon. So, again for our inventory for fiscal year 2019, I think you've heard Tony and I talk in the past that we're going to continue to align our inventory with the opportunities that we see across our end markets. We're not going to risk current customer relationships. We're not going to turn away from new attractive customers that as we see – as we become a critical part of their supply chain. For us, we're going to carry the level of inventory we think is appropriate to service the customers and capitalize on those strong market demands. For us, FY 2018 inventory levels were flat compared to 2017. So, we did this at the same time of increasing revenue. So, again, effectively increasing our turns. And this is what we would have expected to happen as we continue to roll out the Carpenter Operating Model. For FY 2019, I don't have any specific guidance on inventory other than we don't expect it to be a material source or use of cash right now. But again if you go back to my comments, we're going to monitor that based on the market demands.

Okay. Thank you.

At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to Brad Edwards for any closing remarks.

Thanks, Brian, and thanks everyone for joining us today for our fourth quarter and fiscal yearend conference call. We look forward to speaking with all of you again on our first quarter call. Have a great day.

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