Good day, and welcome to the Carpenter Technology Corporation fourth-quarter fiscal-year 2019 financial results conference call. [Operator Instructions] Please note this event is being recorded. Now, I would like to turn the conference over to Mr. Brad Edwards, investor relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal fourth quarter and year ended June 30, 2019. 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 in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2018, Form 10-Q for the quarters ended September 30, 2018, December 31, 2018, and March 31, 2019, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses 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 on Slide 4 and a review of our safety performance. Our total case incident rate or TCIR was 1.3 overall in fiscal year 2019, up slightly from 1.2 last fiscal year. When we drill down to the details, the PEP segment achieved 0.9 TCIR for this fiscal-year 2019, breaking through the 1.0 performance level while the SAO segment performed below the 1.0 TCIR level during the second half of the fiscal year. Our powder, CalRAM and distribution businesses achieved zero injuries for the fiscal-year 2019, evidence that a zero-injury workplace is possible. We continue to drive the deployment of our safety system in areas such as hand safety and hand injury currently represent 55% of our total recordable injuries. Given performance we're over 80% of our employees have been trained in this program and the hazard elimination and action tracking team. This program has increased engagement and will continue in fiscal-year 2020, focusing on implementing operators suggestions or improvement. Finally, the goal remains a zero-injury workplace. And through employee engagement, system improvement and leadership commitment, we will be successful. Now let's turn to Slide 5 and a review of our fiscal year 2019. Before we discuss the fourth-quarter results, I will take a few minutes to cover our impressive fiscal-year 2019 results. In terms of total company year-over-year financial performance, sales excluding surcharge increased 8%. Operating income increased 28%, the highest operating income in six years. Adjusted operating margin improved by 190 basis points and adjusted earnings per share increased 38%. In summary, the past year was one of the best in Carpenter Technology's history. As we delivered strong year-over-year earnings performance, consistent backlog growth and significantly strengthened our position as an irreplaceable supply chain partner…

Thank you, Tony. Good morning, everyone. I'll start on Slide 9, the income statement summary. As Tony covered in his comments, our results marked the best fourth-quarter operating performance since fiscal-year 2013. The recent fourth-quarter results reflect the continuous execution of our solutions focused commercial strategy, combined line with the strong demand environment in our key end-use markets and improvements in key operational processes. From a top-line perspective, net sales in the fourth quarter were $641 million, our highest quarterly sales revenue in seven years. Sales excluding surcharge were $533 million, representing a 6% sequential increase on 3% higher volume. On a year-over-year basis, sales excluding surcharge increased 8% on 4% lower volume due to double gains in our aerospace and defense and medical end-use markets. The strength and demand for our products can be seen our growing backlog, our total backlog grew 2% sequentially and 41% year over year. This quarter marked the 12th quarter of sequential backlog growth and the 10th quarter of year-over-year growth. SG&A expenses increased by $5 million on a sequential basis and were flat when compared to the fourth quarter of last year. Going forward, in fiscal 2020, we would expect SG&A expenses to be in the range of $55 million to $60 million per quarter as we increase our strategic efforts in growth areas like additive manufacturing. Adjusted operating income as a percentage of sales were 12.7% in the quarter, compared to 14.6% in Q3. For reference, the Q3 '19 operating income included an $11.4 million insurance recovery related to a fire at one of our Dynamet facilities in 2018. When normalizing for the insurance recovery benefit in Q3, operating income margin improved by 40 basis points sequentially. Year over year, adjusted operating income margin improved by 60 basis points. Our effective tax…

Thanks, Tim. As I noted earlier, we have worked diligently in the last several years to strengthen our established supply chain position and elevate Carpenter Technology as a complete solutions provider to our customers. Those efforts are clearly evident in our consistent year-over-year earnings growth, stronger product mix and deep collaboration with customers across all of our end-use markets. With that said, we must execute with an eye toward helping our customers solve their materials challenges, not just today but for years to come, particularly as key emerging trends disrupt the markets we serve. To that end, we have built a leading end-to-end additive manufacturing platform through strategic acquisitions and organic expertise. During the fourth quarter, we formally launched our Carpenter additive business unit, which offers our complete spectrum of products, services and capabilities to meet the growing additive market needs. These capabilities include highly engineered gas atomized powders, metal powder life cycle management solutions, finished component production offering and complete post-processing capabilities. It's worth noting, we are not standing still in the additive manufacturing space. For instance, a key development project we are currently executing on is a powder handling and characterization system that will improve the performance of an additive manufactured part, as well as deliver reduced production cost for our customers. Our leadership in this space was validated by our inclusion in GE additive manufacturing partner network, as well as the large number of partnering discussions we had with customers and industry participants at this year's Paris Airshow. During the event, we announced multiple strategic partnerships and we introduced a new 3D printed part for the aerospace market. Together with BMT Aerospace, we redesigned an aerospace pinion and then produced the part using our custom 465 stainless material. The result was an optimized and simplified manufacturing process…

[Operator Instructions] And the first question comes from Gautam Khanna with Cowen and Company.

Just had a couple of questions. First, I was wondering, was there anything one-time in the SAO margins that was a positive that may not recur as we move into next year? Or was it just mix and performance?

This is Tim Lain. There is nothing to call out. No kind of one-time items in this quarter.

And then just as you look into the backlog and what have you, is there -- obviously, there's the sequential step down, we get that, but this is not -- if it were going to be potentially exceeding 20% as we move into the second half of next year? Or how do you feel about that today at SAO?

Gautam, this is Tony. I'm not sure, really, the specifics of your question. But as I said, I think 20% for SAO is the starting point. I mean we believe, as I said in my comments, there's more productivity we can get. I think we can do more with our relationships and our customers. Now will it be 20% every quarter going forward? Maybe not, but I think over a long trend, SAO has the potential to be at margin higher than 20%.

That's helpful. And then if you could just talk a little bit about any additional Athens part qualifications you received in the quarter and maybe what the pipeline looks like with respect to additional qualifications.

I mean, as you know Gautam, not every specific qualification is -- has the equal weight, right? Some have -- there's differences in volumes, there's differences in supply chain complexity. So this past quarter, although we didn't announce any qualifications, we achieve significant progress on what I'd call high-profile items that are critical to the success of Athens. So we did not have a specific qualification. But I'm very pleased with the activity we've had in the last quarter. In fact, I would say that was some one of the most highest-content activity in this quarter to date.

Thank you. And the next question comes from Chris Olin with Longbow Research.

Tony, in the beginning of your presentation, I believe you attributed three things to the better operating performance at SAO. It was like mixed, the Carpenter operating model and Athens. My question is, is there a way we could think about it in terms of the contribution from each and maybe in percentages or numbers?

Yes, Chris. This is Tim. I'll take that. I mean, I think as you know, that's a difficult question to answer. I think where we are in this environment with the activity as high as it is, capacity makes a big difference. So by bringing those incremental capacities both through the operating model and unlocking incremental capacity, as well as moving more materials through Athens. As we talked about, Athens is about increased pounds. So the more materials we can get through Athens, the better for us. And then, I think, just from a mix and top-line perspective, you can see the growth in sales, especially in aerospace where some of high mix exist. So like I said, to carve out each of those individually is difficult so it's a combination of all three.

This is Tony. Just to add, I think I'm very happy because we're following our strategy. We're implementing the Carpenter operating model, we're seeing increases in productivity. Not just from a cost reduction standpoint, but just as importantly, an increase in capacity. The commercial team is doing fantastic in this type of environment to cement long-term relationships. We've said from the beginning, four years ago, we were going to increase the richness of the mix, if you will. We are a specialty high-end company, and that is where we're going to live. So we have done that, we've improved our pricing in areas that it makes sense to do it. So listen, we bridge quarter over quarter, and I can tell you exactly what each one of the values were of those, but I don't think it's conducive really for us to get in to a habit of doing that quarter over quarter.

Okay. There was a point where we used to think about Athens as a separate entity with utilization numbers. That seems to be merging with the entire, I guess, portfolio. How do I think about now, capacity utilization and your ability to take on existing contracts. Is there a way we can frame up the success of Athens?

Well, Chris, you know we tried in the past to give a utilization number. I think that was more confusing than helpful. You're exactly right, we now operate this as a fully integrated mill. Some of the parts that they moved to Athens may or may not be in this VAP qualification mode. I think the key thing is to think, there is more capacity at Athens to come online, but this idea that at some quarter in the future, there is going to be this loud noise and Athens is going to be 100% utilized isn't going to happen. It is going to be incremental every quarter as we move a next tranche of tons to Athens. And last quarter and this quarter, you've see improvements because we have been able to increase our shipments, utilize Athens. And the last thing I will say is, from a customer standpoint, when you've talked before about lead times and those being pushed out. If you order a product through Athens today, the lead times are about 60% of what they are for a product going through the normal process of the production cycle. So hopefully, that helps.

Okay. That does, actually. And then just lastly, and I get what you're saying on the 737 Max program, and you're a little bit unique in terms of like, it's a little bit tougher read. But what I'm trying to do is correlate near-term visibility with the communications that came from, I guess, Boeing yesterday or the day before. I guess, my question is when Boeing tells its suppliers to shift down to 42 per month or get in line with the master schedule, is there a way to think about it in terms of how that impacts you over the three- to six-month period? Like from a revenue point of view or anything like that?

Chris, I would look at it this way. There is a difference between production rate and booking rate. And with these products at these types of lead times, let's call them 35 to 40 weeks depending on the product, you're not going to change production rates just because, and also, I would say, we've had increases in expedite because of some issues in the supply chain elsewhere. So no one at this time is willing to get out of line, and that's why we're very bold to say that we have no plans of changing our production rates. Now, of course, if the 737 Max is not resolved, that's a different story. But I don't believe there's anyone in the industry that doesn't think that's, that think that's going to be the case.

Awesome. Thank you.

Thank you. [Operator instructions] And the next question comes from Josh Sullivan with Seaport Global.

Hey, good morning. Congratulations on the quarter. Just touching on PEP, medical side seems to be growing pretty aggressively here. But how is the aerospace side on the titanium fastener and how does that look over the next couple of years.

Well, for us, aerospace is strong whether it's in the SAO business or in the PEP business. Right now, we talk about Dynamet inside of our PEP business because the medical area is growing quite rapidly over the last couple of years. We're expanding our two facilities in Dynamet primarily because of the medical market. So maybe the aerospace speed to Dynamet goes a little bit unnoticed, but it is still a very strong driver for us.

And then within PEP, are there any franchises which don't necessarily fit the portfolio anymore? Or the strategies just moved away from?

Well, Dynamet, lets just go through each one of them. Dynamet is largest business inside of PEP. Where we are expanding, we're putting capital in to Dynamet and see a great future with that product in that business. It's very exciting that we just launched Carpenter Additives. So when I talked about that multiple times, that has a great meaningful growth story going forward. We have a distribution business that has, although they're dealing right now with the headwinds of tariffs, this has been a consisting operating income producing business for us. And it's a distribution business, maybe in name only because approximately 90% of the material that goes through that distribution business has some type of value add that we attach to it whether it is in cutting or whatever sizing we might do. The last business is Amega West. And yes, we struggled there. I think it's a good business. It makes sense to be inside of Carpenter, but we have got to find a way to break out and become more than a breakeven business. And we're looking now at some really pointed strategic actions we can do to enable that business, to be a real solid contributor to Carpenter for the long term.

And then just one on the soft magnetics opportunity. What's the ASP of the current soft magnetic offering that you're in relative to the overall portfolio? And then do you have any new proprietary alloys as you build out this new strip mill that might even drive that ASP higher over time?

I don't want to give -- the answer to your second question is yes. To the first one, we're not giving you any specific, the average selling price could be as much as 5x the normal price.

Thank you. And the next question comes from Phil Gibbs with KeyBanc Capital Markets.

Tony, just sticking with the engine discussion here and then I had a follow-up. Any color you can give us on growth and engine revenues either quarter over quarter or year over year?

I should have put that in my prepared remarks because I remember you asked me that every quarter. On the engine side, on sales, revenue was up 8% year over year and 9% quarter over quarter.

And then are there any opportunities for repricing of any of your legacy engine contracts over the next several months, call it, 12 to 18 months with either -- with any of the major OEMs?

The one-word answer is yes.

And then also help me reconcile something. I think maybe it was Tim mentioned there was a write down in the powder side of the business, and wanted a little bit of clarity on that given the fact that you're seemingly very bullish and very entrenched now and in the additive path to growth. So why was there a need to take a write down in the powder side of the equation?

Yes. Phil, I called that powder write down. I mean, that -- one is in there of our existing powder business, not necessarily in the additive side. And two, it's getting normal, I'd say, it's normal -- given that we missed on PEP, we've got a explain a lot of kind of smaller dollar amounts. So we're calling that out, and that's just kind of a normal -- I'd say it's normal year-end adjustment as we reconcile inventories and look at reserves and things like that. But not necessarily a big number to overall Carpenter, but big enough that we're talking about in the context of PEP.

So it's more -- it was more of an inventory obsolescence charge in PEP for some of the powder that you had? Is that the way to think about it?

Yes.

And as there are no more questions, I would like to return to conference to Brad Edwards for any closing comment.

Thanks, Keith. And thanks for everyone for joining us today on our fourth-quarter and full-year conference call. Have a great rest of your day and rest of your summer. Take care.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You many now disconnect your lines.