Good day and welcome to the Carpenter Technology Corporation First Quarter Fiscal Year 2019 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Brad Edwards, Investor Relations. Mr. Edwards, the floor is yours, sir.

Thank you, operator. Good morning, everyone and welcome to Carpenter's earnings conference call for the first quarter ended September 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 Tim Lain, 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 on Carpenter's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2018, and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discuss the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on operating income and sales excluding surcharge. I will now turn the call over to Tony.

Thank you, Brad and good morning to everyone on the call today. Let's begin with an update of our safety performance on slide 4. Our Total Case Incident Rate or TCRI was 1.7 in the first quarter of fiscal year 2019, up from 1.1 for the full fiscal year 2018. Our PEP business has continued to make exceptional progress toward a zero injury workplace with only one recordable injury in the first quarter. However, our SAO business took a step back in terms of safety performance. The results are unacceptable and our safety teams are using this as an opportunity to increase the level of engagement with employees and to develop and execute action plans to get us back on track. It's clear to me that every injury to-date could have been prevented. And we must regain the uninterrupted focus on hazard elimination and standardize work. As I've stated in the past and I'll say it again today, we will not be satisfied with our safety performance until we achieve a core value of a zero injury workplace. Now let's turn to slide 5 and review the first quarter. Our first quarter results reflect the ongoing execution of our solutions-focused strategy, strong demand patterns across our end-use markets and further market share gains. In terms of earnings, it was the best first quarter since fiscal year 2014. However, we did fall a bit short of our expectations that were communicated in last quarter's earnings call. I will address that now. In the SAO segment, we completed our planned annual preventive maintenance outage. With the robust market demand that we are experiencing, our equipment is running at high utilization rates and it is vital that we take critical operations offline to perform necessary preventative maintenance to ensure that the equipment continues…

Thank you, Tony. Good morning, everyone. I'll start on slide 8, the income statement summary. Our first quarter results represent a strong start to our fiscal year. In fact, as Tony mentioned, this quarter's results marked the strongest first quarter operating income in five years. Net sales in the first quarter were $572 million or $456 million excluding surcharge. Sales excluding surcharge decreased by 8% on a sequential basis on 10% lower volume. Historically, our first quarter sales relative to the preceding fourth quarter decline due to the timing of our planned annual preventative maintenance shutdowns at key work centers across our facilities. We continue to see signs of strength in our business, including increased demand across most of our end-use markets as we execute on our solutions-focused strategy. From the first quarter a year ago, sales were up 11% on 4% higher volumes. In addition, our backlog continues to grow, most notably in aerospace and defense with year-over-year backlog growth of 40% and sequential growth of 12%. SG&A expenses declined by $8.3 million sequentially to $47 million. The reduction is mostly attributable to the timing of certain costs in Q4 that did not repeat in Q1. Year-over-year SG&A expenses increased by $3.2 million due mostly to targeted investments in key areas. As an administrative note, given the current adoption of the recent accounting standard, operating income and the reporting we previously made related to operating income excluding pension EID are now one and the same and will simply be referred to as operating income. Prior period numbers have been recast to conform to the current year presentation. As a percent of sales, operating income was 9.9% in the quarter. Our margin declined as expected on a sequential basis compared to 12.1% in the fourth quarter due to lower volume.…

Thanks, Tim. Over the past several years, we have focused on expanding our capabilities in the additive manufacturing space and evolving our platform to ensure we are positioned at the forefront of this rapidly changing and disruptive technology. We strengthened our powder capabilities by acquiring titanium powder producer Puris. And then, last fiscal year, acquired CalRAM, which brought extensive additive manufacturing product design and part production capabilities. In addition, last fiscal year, we announced our investment in an Emerging Technology Center in Athens, Alabama, which will enhance our technical capabilities and scale. We have also mobilized over 30 engineers, scientists, operators and technicians, who specialize specifically in additive manufacturing technology. Having this expertise from feedstock (00:21:42) through design and component production positions Carpenter as an irreplaceable technical partner with our customers. During our last call, I talked about our collaboration with one of the major U.S. oilfield service providers to develop a unique 3D design and printed in-hole tool for the drill string. Overall, collaborations like this one are steadily increasing, as a growing number of customers are engaging with Carpenter Technology due to our end-to-end additive manufacturing solutions. Additive manufacturing technology maturation is now presenting commercial opportunities in advanced applications such as jet engine component, satellite structurals, down-hole oil and gas drilling systems, surgical instruments, medical implants and state-of-the-art defense platforms. And today, we took another meaningful step forward with the acquisition of LPW Technology to enhance the value proposition we offer customers in the additive manufacturing market and to build on our leading position in this space. The acquisition of LPW Technology strengthens our additive manufacturing platform through the addition of innovative and tightly controlled powder design, material optimization and lifecycle management solutions throughout the additive manufacturing process. LPW addresses a critical need in the metals additive manufacturing…

Thank you, sir. We will now begin the question-and-answer session. The first question we have will come from Gautam Khanna of Cowen and Company. Please go ahead. Jeff Molinari - Cowen & Co. LLC: Hey, good morning, Tony and Tim, this is Jeff Molinari on for Gautam. Thanks for taking my question here.

Good morning, Jeff.

Good morning. Jeff Molinari - Cowen & Co. LLC: Good morning. So yeah, I know you talked a bunch about the normally season planned maintenance being an issue at SAO. Well, we're just wondering if there's anything else that kind of is dealing with this, are there any mix issues or other inefficiencies that could have amplified the sequential EBIT drop?

Well, Jeff, this was primarily due to the outage, our decision in some areas to extend that outage, demand was up across all of our end-use markets, backlog was up, so this was not a mix issue, this was not a demand issue, this is simply that we have equipment right now that is running at very high utilizations, and we have to take this equipment down to make sure we protect Carpenter for the long run, protect our customers for the long run, and it's easy to get caught up in that quarterly earnings cycle, where you make decisions that are hurtful to the business long term, and we're just not going to do that. So we had preventive maintenance shutdown. We took the time that was needed. And it impacted us versus the guidance we gave last quarter. But keep in mind that, the difference between our guidance and what we actually performed was as little as $5 million. So, it's a rather small amount compared to the fact that our markets are getting stronger and backlogs are increasing and we see next quarter being up significantly year-over-year. I think that's the real point. Jeff Molinari - Cowen & Co. LLC: Now that's definitely helpful and it makes sense. We just wanted to make sure there was nothing else kind of at play. We understand you don't want to have, you want to make sure you get those maintenance things completed. Just on one other question if you don't mind. Can you update us on the status of the repairs, recovery on the Dynamet facility. I know you said, expect to be completed in the next several months. Would you say that you're still meeting your delivery requirements. And as you said in the past, are you – would you say the issues, kind of like the cost associated with this are largely behind you?

Okay, Jeff. That's a good question. Thanks for asking. The new building now, I was just there about 10 days ago, it is now under roof and moving quickly, so we still have several months to go there to finish out the inside of that building. We are using alternative flow paths which are more costly to supply our customers. It's been tight with many of our customers. I think they would say that we've worked very well with them to get them material when they needed. But I'll honest, in many cases, it has been hand to mouth. So we think over the next couple of months, we'll continue to work around the clock to make sure those customers get what they need and hopefully here when the – by early spring, we could have that building complete. Jeff Molinari - Cowen & Co. LLC: Okay. Thank you.

Thank you.

The next question we have will come from Josh Sullivan of Seaport Global.

Hey, good morning.

Good morning, Josh.

Good morning, Josh.

Just as we think about the historical cadence of earnings through the year, given the results here in the outlook, essentially for the first half. Should we expect a similar historical bump in the second half at this point or just how are we thinking about the cadence for the year now?

Yeah, Josh. I think that's a fair assessment. Given the number of production days in Q2 versus Q1, there's not enough time to produce what we need to produce. And the second half, if you look at over a historical period, second half is generally stronger than the first for us.

Okay. And then, just on the preventative maintenance, you said you extended the outage, did you find something you didn't expect or did you do something extra just given the high utilization rates, which may, I guess, benefit you down the road?

Yeah, yeah, we didn't find anything that we didn't expect, there were no major issues. But we just want to make sure that everything is done appropriately. And there were some items that we wanted to – we just wanted to make sure that we had everything done exactly the way it should be. Some areas took longer quite frankly than we expected from a manpower standpoint, from a part standpoint, took a little longer. So, if you had all that in. In a market, where you can sell everything you make, even when you extend for a week in some work centers has a significant impact on the bottom line.

So I mean, I guess, next year, do you think we would expect similar type outages or was this a special event just given...

Well, we've done an annual outage at Carpenter for as long as I've been here and probably for decades and usually, do that in the August timeframe, just because that's when some of your customers, especially European customers take a little time off. I think we're always looking for ways to do this better and I would suggest that going forward, as opposed to taking one large outage, you could see us on more of a rolling schedule where we hit different points throughout the year and smooth that out a bit.

And then just one on Athens, where do you see the elbow in Athens contributions at this point? Is there a certain production rate on the 737 or A320 where we go above maybe 50% utilization at Athens?

Let me make sure I understand your definition of elbow. Are you saying when...

So just as you defined it, I mean, when can we – when do you think Athens really kicks in? I mean, is there a rate on the OEM side that we can tie it to, just how are you looking at Athens? And maybe, when we get above 50% utilization, when do you see that happening?

I think it's difficult to tie it to a specific rate. If you just look at what the engine manufacturers are going to do over the next year to 2x, sometimes more and just do some rough math based on the raw material supply, the nickel supply, you're going to need all of Athens to supply that engine demand. So whether that happens in the next six months or in the next 12 months, is still going to be governed by the qualification rate. And as I said, we had a significant uptick in the last quarter only as the ramp continues and these engine manufacturers who are managing a very, very large supply chain, works with us, understands the need, those discussions have intensified. Now with that said, and rightly so, we're not going to take any shortcuts on the quality side. The customers are not going to take any shortcuts on their qualification methods, and we don't expect that. But I can tell you every week, we get closer and closer.

Okay. Thank you. I'll get back in the queue.

You're welcome.

Next we have Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, Tony and Tim, how are you?

Good morning.

Hi, Phil.

Hey, Tony, question just on the input cost pressures, I think you made that comment, or Tim did, I can't remember, what input cost inflation are we looking at? Are you speaking about more of the staggered increase in electrode and refractories, and rolls (00:38:43) and lubricants, and things like that hitting more aggressively this quarter? Is that what we should read or is there other things that you're talking about?

I think, Phil, it's just more of a general sense of, there are inflation pressures out there. In the past, we did talk about electrodes, I think we've got the coverage there with the surcharge we implemented over the last 6 months to 12 months. I would say the input prices we're talking about now are more just as – you asked the supply and demand question, as scrap prices are out there, the availability and sometimes is lacking. So we're trying to be opportunistic about buying scrap on the open market at spot prices which maybe above what we hadn't anticipated maybe three or four months ago.

Okay. And the comments and color on the backlog growth, particularly in aerospace are obviously very strong, up double-digits, sequentially up 40% year-over-year. But the question I'm struggling with right now is, does the backlog growth mean anything in terms of whether or not the supply chain can actually effectuate that into getting the product to market. And so that's sort of the philosophical question, I think, people are trying to wrestle with is, can we deliver on some of these requirements? Can the build rates move forward or is everybody just so – effectively is everybody just so wrapped up with trying to get up the curve here?

So, Phil, let me let me try that one and come back with a follow-up question, if I don't hit the exact point you're looking for. I think the backlogs are meaningful. We know that that product is required. Lead times, for example – I don't think I mentioned this when I was speaking – in the last quarter has increased for us and we know for the other players in the industry, at least, 15% to 20% quarter-over-quarter. You have for engine material now, the lead time is approximately nine months. So that's real, that's real demand out there. That's why you see a lot of these expedited orders, people trying to move up in the queue. And we try to do that the best we can to take care of our customers. But this demand is real and I think it will – to be able to meet that demand, you'll have to see additional productivity improvements from the existing assets which we are doing, I talked about that, over the last couple of quarters, how we've been able to increase the productivity of our press units, as well as our melting furnaces. And then, it comes down to Athens, Phil, as I said earlier, Athens is required to hit those types of engine builds and to meet the demand that's out there in the market. Let me know if that hit on what you were going after.

No. That's very helpful and just the last one, if I could sneak it in here is, I may have missed it, but did you give any color in terms of what the jet engine revenue growth may have been either sequentially or year-over-year? That's all I have. Thanks.

Sure, thanks. Year-over-year, the aero engines growth on a sales basis was 17%, sequentially it was flat. But if you remember, the last three quarters, we've been at the top level as far as sales in the jet engines, probably record levels as far as the history of Carpenter and we've maintained that high level now the last three quarters.

Thanks so much.

Next we have Jeremy Kliewer of Deutsche Bank.

Hey. Good morning.

Good morning.

I was looking for a little bit more clarity on your SAO guidance, that 10% increase, is that inclusive or excluding the kind of extended maintenance impacts?

Jeremy, it would just be 10% over what's reported here in Q1.

Okay. So more of a kind of normalized flat rate then over your Q1 results?

Correct.

Assuming that there was a...

Given the number of production days in Q2 versus Q1 when we shutdown, yeah.

Okay. And then, regards to LPW, how should we view this on kind of an accretion standpoint, is that going to do anything for revenues or earnings or is this just more of a long-term, as you stated, kind of end-to-end powder capabilities and additive manufacturing capabilities?

Yeah. So, Jeremy, on the additive manufacturing side, all of these acquisitions that you have seen over the last year or two, the majority of them are not earnings positive. We're very early in this stage, in this development. Now, we look for companies that aren't significantly EBITDA losers, but that's where we're at today. And if you want to play in this market, now is the time for you to get in it, because two years from now, it is going to be priced exceptionally higher than what it is now. And I believe you're going to miss the boat. What's important with Carpenter and why we're so interested in additive manufacturing, because it has a direct line to our traditional business? As an alloy development company, we work with these customers on a day-to-day basis, and now, they are interested in taking the leap potentially in additive manufacturing in some of these specific applications that I mentioned earlier, like satellite, structural material, some jet engine components, oil and gas drilling systems, medical instruments, et cetera. So we can transition very easily from being a wrought (00:44:45) supplier, a solutions provider, and now, say, listen, we don't just make powder for AM, we develop that powder. We now have the ability to design additive manufacturing parts. We have the ability to actually do the part production, to do the post processing and now with LPW, you bring in an entirely new set of skills as far as the digital side of it, powder design, lifecycle management, recyclability. I would say from a raw materials supplier, there's no one that has what we have now where we can go from powder through design, which is critical and make the final part. And to be honest with you, we've made calls to some of our customers this morning with the LPW announcement and it has been absolute excitement that we've added this other piece to the puzzle and I think over the next couple of years, as additive manufacturing continues to grow, Carpenter will, in fact, be a primary player in that field.

Okay. Thank you and good luck.

Thank you.

Next we have a follow-up question from the location of Gautam Khanna of Cowen and Company. Jeff Molinari - Cowen & Co. LLC: Hi, yes, thanks for the follow up. This is Jeff again. I had a question on the aerospace fastener market. You mentioned that you were dealing with some inconsistencies in (00:46:19) demand patterns, and you're having kind of trouble with visibility. Can you just kind of expand on that? And also, specifically answer whether or not you're seeing spot demand and picking up business from others? Thank you.

Jeff, aerospace fasteners is a habitually inconsistent sub-market and it has been – I've been around for a long time, it has been as long as I've been in this industry and I think going forward, it will be as well. I think you're going to see stocking and destocking. Every time there's an acquisition, it's going to impact the demand. Every time there is a signal that says we're going to be potentially short, it's going to trigger overpurchasing at some time. The critical thing for Carpenter is that we are the broadest supplier of aerospace fasteners out there. We have our titanium supply, we have our nickel supply, we touch all customers. It's a very nice margin business for us. And I think we're just going to have to accept the fact that it will be inconsistent from quarter to quarter. Jeff Molinari - Cowen & Co. LLC: And would you segregate the titanium and nickel or would you kind of characterize them both the same characteristics?

I would say there are differences, but in totality, they are very similar. Jeff Molinari - Cowen & Co. LLC: Okay. Thanks. That's helpful.

The next question we have will also be a follow-up and this will be from Josh Sullivan of Seaport Global.

Yeah. Just how big is your powder business at this point with CalRAM LRW (sic) [LPW] (00:48:10) and your other operations? Just how big is the powder additive vertical at this point?

It's a good question, Josh. I think, I'd say it's – depending on the year and what volumes we're able to get out, it's roughly $100 million business top line.

And then on LRW (sic) [LPW] (00:48:31). Sorry, go ahead.

No, you go ahead, Josh.

I was just going say on LRW (sic) [LPW] (00:48:36) what percentage of it is software at this point, is it entirely software or you would...

No it's not. So LPW, it's not an entirely software company, I mean, they are very heavy into IP. They have developed the solutions that I talked about earlier, but they also optimize powder, they have one atomizer in place, with a second one on order. So if – even as a subset, they have become fully integrated as well where they produce the powder, they optimize the powder and then they sell to different service providers. LPW, in fact, has been customer of Carpenter in the past.

Okay. Thank you.

Well, at this time, we're showing no further questions. We will go ahead and conclude the question-and-answer session. I would now like to turn the conference call back over to Mr. Brad Edwards for any closing remarks. Sir?

Thank you, Michael. And thanks, everyone for joining us today on our first quarter conference call. We look forward to speaking with all of you again on our next earnings call. Have a great day.

And we thank you, sir, and also to the rest of the management team for your time also today. Again, we thank you all for attending today's presentation. At this time, you may disconnect. Thank you. Take care and again, have a great day, everyone.